When consulting firm KPMG International (www.kpmg.com) asked 230 large manufacturing companies from around the world what's most important when deciding where to locate their production, they responded:
- labor costs,
- proximity to key sales markets, and
- transport infrastructure.
For all companies responding to KPMG's study on globalization and manufacturing, the trend in production for the next three years shows a 65% increase in production in China, a 13% decline in North America, and a 14% decline in Western Europe. However, when asked where they will invest in new manufacturing capability, North American firms say in North America (54%), Western European companies say in Western Europe (59%), and Asian companies say Asia (78% — 22% in China, 27% in India, and 29% in other Asian countries).
One difficulty in interpreting the Asian responses is the fact that all Asian companies are lumped together, and the geographical area covered by Asia-Pacific is quite vast compared to North America or Western Europe. But even when all of the company results are combined, the number saying they will invest in new production in China in the next three years is under 20%, an indication that the China boom may be moderating.
If the China expansion indeed is slowing down, one factor driving that could be risk management strategies that call for more diversification. In fact, larger companies see greater "country risk" and more regulatory and compliance risk than their smaller counterparts. Large manufacturing companies also rank macro economic and financial risk as their top concern.
Profit growth will come from increased demand for their products, much of it from developing economies which will provide new markets. However, some of the greatest perceived risks lie in the macroeconomics and geopolitical issues affecting relationships in those evolving markets. While manufacturers place their hopes in what will come from the continued strength of their existing markets and growth in the new markets, they are focusing heavily on controlling costs. This isn't always viewed as directly relying on low-cost labor, but it is largely dependent on finding low cost suppliers.
Controlling costs (48%) is the biggest challenge for manufacturers over the next three years. And when it comes to admitting what will help them accomplish their goals in that environment, 36% say increasing availability of low-cost suppliers. However, lower labor costs and outsourcing production are at the bottom of the solutions list at 20% and 22%, respectively.
Manufacturers indicate they're shifting the responsibility for innovation and efficiency improvement to their suppliers. They put controlling costs at the top of their list of challenges, followed by acquiring skilled employees and making the organization more responsive. They only mention acquiring and retaining customers as their fourth most significant challenge. Viewed against their top strategic priority — penetrating new markets — and the earlier response that stronger demand is the most significant driver of profit in the next three years, the respondents-express a need to focus their attention on internal matters while they depend on a strong global economy and rising demand to drive their own profit growth.
The manufacturers did express a fair degree of confidence in their ability to manage complex supply chains, though some of the responsibility for managing the supply chain is clearly in the hands of third parties.