kpmg manbenchsurv c11 · exception considered that it security was paramount, while average...

INDUSTRIAL MARKETS

Global manufacturing benchmark surveyHow manufacturing corporations preserve and create value

KPMG INTERNATIONAL

KPMG International commissioned HPI to undertake this research on our behalf.

Contents

Preface 02

Executive Summary 04

Introduction 06

Regulation and Compliance 12

Risk 18

New Markets 24

Operations and Efficiency 28

Conclusion 34

2 Global manufacturing benchmark survey

Companies often ask KPMG member firms to helpthem compare themselves with their peers. This globalmanufacturing benchmark survey is designed to meetthat need. This survey compares value creation andpreservation in 250 leading manufacturing companieswith global operations and allows each participatingcompany to generate an insightful comparison of theirperformance with that of peers in their own industry as well as across industries.

Preface

We think this survey achievessomething new. Financial andoperating performance benchmarkingby the numbers is relativelystraightforward. Equally, looking atwider issues of concern to strategistsin a single company is also relativelysimple. But benchmarking issues ofconcern to strategists is morechallenging.

This is what this survey is designed todeliver. We assess the value-relatedissues that are taking most topmanagement time in leadingcompanies, and compare the resultsacross businesses worldwide. Theresult is that companies can begin tomatch what they are thinking aboutwith what others are thinking.

And the results are surprising. Whenwe look at financial and environmental

regulation, we find not only that thecost implications of the growingburden of compliance varies wildlybusiness by business, but thatcompanies have very differentconcepts of how to manage andameliorate that cost. When wesurveyed the risk issues, we find thatcompanies are much less concernedwith external risk factors than might be expected in a period of economicslowdown and financial volatility, andmuch more concerned with the qualityof their processes and relationships. In the area of new markets, there is perhaps more caution thanexpected, but also more optimism for the long term.

And, finally, when it comes to the keyvalue issue of operational efficiency,there are surprises for anyone whothinks that high-level benefits from big

IT investments are easy to obtain(respondents say they are not), or thattax efficiency is now the big companynorm (our results suggest that is farfrom the case).

The companies in this survey weredrawn from several closely relatedsectors: industrial manufacturing;component makers and originalequipment manufacturers; and metalscompanies. We would like to thank thesenior managers – most of them CFOsor CEOs – who gave up their valuabletime to take part in the research andoffer their thought-provokingresponses.

Bill KimbleGlobal Chairman, Industrial Markets

Uwe AchterholtGlobal Chairman, Automotive

Global manufacturing benchmark survey 3


Executive summary

KPMG’s 2007 global manufacturing benchmark surveysuggests that the globalization of manufacturingcontinues, and as a result manufacturers, wherever they are located, share many fundamental concerns.Differences emerge mainly in differing attitudes to overallgrowth prospects (with companies in mature economiesmore concerned with the potential impact of economicslowdown) and to the risks of rapid expansion (withcompanies in emerging economies more concerned overthe need to grow rapidly to meet customer demands).Companies in ‘low-cost’ economies are also somewhatmore concerned with cutting operational costs than arebusinesses in mature economies.

Regulation and compliance

Overall the companies surveyed aremore concerned with the managementburden of compliance than they arewith its cost. This burden is increasedby the rate of change in regulation, say companies:

• High-performing companies* are the most likely to make investmentsinternally and externally to meetfinancial and environmentalcompliance demands: they are morelikely to add staff, and also morelikely to outsource some functions.

• High performers are more likely to report a higher cost impact of

compliance, suggesting a moreintensive compliance effort amonghigh performers.

• Companies making cross-borderacquisitions are more likely thanothers to be concerned with financialcompliance costs.

Risk

For manufacturing companies theperception of risk remains firmlyfocused on relations with customersand suppliers. Particular risk issuescommonly cited in interviews reflectthe increasing integration of globalmanufacturing supply chains, whichbrings with it supplier-customer

relationships that are ever morecritical. Companies with globalmanufacturing processes remain highlyconcerned about currency risk.

• High performers tend to be more confident about internallymanageable risk areas (for example,no high performers consideredintellectual property risk as theleading risk area) and less confidentabout external risk areas.

• High performers were more likely to be concerned by financial risk, ITand tax risk, and most markedly bymacro-economic risk; they are lesslikely to be concerned by labor risk.

* High-performing companies are defined as companies surveyed with operating margins greater than 15 percent and predicted growth of greaterthan 15 percent.


Where IT risk was cited as a leadingrisk issue, high performers withoutexception considered that IT securitywas paramount, while averageperformers cited a wide range ofinternal IT management issues askey. High performers that cited taxrisk as a leading issue were mainlyconcerned with the complexity of tax regulations.

New markets

Two issues dominate corporateconcerns regarding sourcing from ormanufacturing in low cost economies:cost and quality. While companies with manufacturing operations inintermediate cost locations report very positive results on both cost andquality, manufacturing in low cost eastAsia and especially China is seen asmore problematic, although severalcompanies argue that quality failingsare more often a management failurethan a location failure:

• Few companies cite the entering of new markets as a businessgrowth strategy: companies aremuch more likely to focus on gaining new customers in existing marketsand on selling more to existingcustomers.

• Wholly owned investmentapproaches in new markets arefavored by the majority of companies

surveyed; most stress that theyprefer not to form manufacturingjoint ventures in new markets.

Operations and efficiency

Many companies report difficulties in profiting fully from IT investment,saying that while process automationhas yielded great benefits,management reporting benefits aremore difficult to win. Companies weresharply divided between those that feltthat potential tax-planning benefitswere great and those who felt theywere minimal:

• Responses suggested that high-performing companies have beenmore cautious than most when it comes to extending criticaloperations into low-cost economies;some interview comments suggestthis may be because they haveproprietary technology they wish toprotect by keeping it close to home,and because they have high levels of automation which cannot easilybe reproduced in low-costenvironments.

• High-performing companies weremore likely than others to achievetheir optimal effective tax rate, and if they were not achieving it theywere more likely to have plans in place to do so.


Today, companies are focused on the increase of value– both present-day valuation in corporate asset marketsand value in terms of ability to deliver sustainable profitsin the markets and businesses of the future.

Introduction

Corporate value is a large and elasticconcept, embracing most if not all ofwhat a business does and how it doesit. This survey concentrates on value in four specific areas.

The first area where value is at stake is regulation and compliance. As global companies recognize, theburden of compliance has risen sharplyin recent years, and continues to be an element of doing business globally.In particular there are two areas wherethere have been systematic and costlyrecent alterations to the regulatoryframework for business. One is theintroduction in the United States of the Sarbanes-Oxley Act (SOX) thatregulates the reporting and broadcorporate governance functions of U.S. corporations as well as non-U.S.businesses that list in the U.S. The second alteration has been theintroduction of International FinancialReporting Standards (IFRS) in Europeand in many other countries, and

the continuing effort to harmonizeIFRS with U.S. Generally AcceptedAccounting Principles (GAAP). Theseregulatory innovations have imposed a cost on companies, but like allregulatory innovations they also offeropportunities: opportunities for bestpractice in communicating withshareholders and their representatives,how a business can secure existingvalue and build future value, as well as opportunities for superior control ofthe management costs of compliance.And there are more regulatorychallenges to add to SOX and IFRS: in particular the ever-growing list ofcompliance requirements in carbonand other environmentally sensitiveemissions, in labor rights and inproduct liability.


Secondly, we look at the managementof risk: not just financial risk but alsothe risks that need to be quantified andmanaged if companies are to securethe value derived from currentoperations and make informeddecisions concerning the risks ofinvestments for the future. Someareas of risk concern have alwaysbeen at the heart of business decision-making – areas like macroeconomicrisk, labor risk and financial, taxationand currency risks. Others have beenmoving up the risk agenda for sometime: these include the increasing

profile of IT risk as ever more criticalfunctions move to digital and onlinemanagement systems, and supplychain risk as operations growincreasingly global and in many casesmuch more complex. There are alsosome risks that many companies haveonly recently begun to quantify andmanage, such as intellectual propertyrisk in the context of global businessoperations.


The survey also considers the valueimplications of entering new markets,a critical area of concern to allcompanies in the survey group.Companies are well aware that newmarkets offer business opportunitiesthat may be irresistible, especiallywhere emerging markets are showingexponential growth. But they are also aware that high potential returnalways carries high actual risk: manycompanies now depend on expansionin new markets for much of theirexpected growth in value, but theharsh reality is that many businesseshave already found that present valuecan be destroyed by new marketventures, while future value remainsno more than a prospect. How cancompanies limit the risk of valuedestruction while improving theprospects of value creation? Thesurvey looks at these issues in termsof corporate approaches to thechallenges of managing business innew market environments, whetherthrough wholly owned, joint venture or third party approaches.

Finally the survey rates the valueimplications of current businessperformance and efficiency. This part of the survey concentrates oncost management in sourcing andlabor cost, as well as IT and taxeffectiveness. The survey ratescompanies on the significance andeffectiveness of low-cost sourcing and also on businesses’ understandingof the challenges of cost-effectivesourcing in terms of a wide range of risk factors. The value of ITinvestment is rated in terms of itsability both to minimize and automatetransactional operations and freemanagement time.


There is no generally accepted methodof comparing businesses in terms ofowners’ value. Although very manycompanies now position themselvesas ‘value-focused’ businesses, there isno agreement as to how ‘value’ shouldbe defined or even as to who ownsthe value that is at stake.

The lack of an accepted measure of corporate value means thatcomparative measurement ofcompanies is problematic. Hardly twocompanies agree on precisely whatconstitutes corporate value. Manyagree that shareholder value is a keyvalue, but they may measure this interms of total return to shareholders,or on a measure based on marketcapitalization, or perhaps on return oninvestment, or enterprise value. Also,some companies do not focus

exclusively on owners’ value butconsider corporate value to embracevalue to employees, to suppliers, and to wider society.

Clearly, measuring corporate value on a like-for-like basis that will beacceptable to a large corporate surveyis not viable, since a precisely definedvalue measure is liable to excludemany companies. For that reason, in this survey we have chosen not todefine corporate value itself but ratherto measure a number of underlyingperformance and operational indicatorswhich together form a database from which companies can drawconclusions about value creation and preservation.

A note on methodology


How do manufacturing businessesview the balance of risk andopportunity in value creation in 2007?

KPMG’s global manufacturingbenchmark survey suggests thatwherever companies are located, and whatever their background and cultural setting, the similaritiesbetween companies are very muchgreater than the differences. Whethera company has its roots in Beijing or Boise, Mumbai or Manchester,manufacturers across the world sharemany concerns. In itself this is notsurprising: for most companiessurveyed here manufacturing is now a global process. Many of the samepressures that concern a U.S. orEuropean business also concernmanagers in emerging economies.

But there are differences. Thesedifferences emerge in attitudes to overall growth prospects:unsurprisingly companies in the U.S.,where the economy is clearly slowingin late 2007, are much more alert to the macro-economic threat thancompanies based in emergingeconomies, where growth showsabsolutely no sign of impairment. As a result even companies in mature

economies that expect to benefit fromemerging economy growth tend tosound a cautious note about currentprospects. “We are in a period where both risk and opportunity areincreasing,” says a large Europeanindustrial machinery manufacturer.“There is more growth at the globallevel than in the past, but if thatgrowth is not managed well, itbecomes a risk.”

The imperative to build corporate value through very fast growth is alsorecognized as a risk by some emergingeconomy companies. Many companiesin Asia say that while they know thatthey have to grow considerably inorder to gain the critical mass that theircustomers demand, the acquisitionpath that this growth demands isfraught with risk. “When it comes toacquisitions we worry about everythingand particularly size, systems, andculture,” says one leading Indian auto parts manufacturer. “It is veryimportant for us to avoid going intomindless acquisitions. But if we don’tacquire the risk is that we may end uptoo small. There is always the risk thatthey want more growth from us thanwe can manage.”


Perhaps surprisingly, there is alsosome evidence that companies in low-cost economies are somewhat moreconcerned with cutting operationalcosts than are businesses in matureeconomies. In interviews companiesthemselves suggest that this may bethe legacy of long operation inprotected domestic economies wherecost control is a secondary concern.Typically, an Asian auto suppliercomments that “cost cutting is themost important part of our valuestrategy. We don’t want to pursuerevenue growth at the expense of ourcost-cutting focus.” Companies inmature economies by contrast tend tobe more concerned with extractingvalue from innovation: a U.S.-basedauto supplier, says “the danger iswhen you are cutting costs you losesight of product innovation. You haveto focus on your proprietarytechnology.”

In both survey and interviewresponses very few companies citedrisks connected with the direction ofbusiness policymaking. The oneexception to this was the concern ofsome U.S. companies that the comingU.S. presidential election may result ina more isolationist trade policy. Typicalis U.S. construction equipment makerCaterpillar. CFO Dave Burritt says “thebiggest risk on the policy side is therisk of the U.S. moving to a moreisolationist position. Our fear is that ifunemployment were to rise sharply inthe U.S. it would encourage a retreatfrom free trade and then the whole ofthe U.S. economy will suffer.”

12 Benchmarking global manufacturing

The burden of compliance with agrowing body of regulatory demands isa concern for companies in our survey,both in terms of cost and managementtime. Of the two, companies are moreconcerned with the managementburden than they are with cost: typicalis a leading auto parts manufacturerwhich says “for us, compliance ismore an issue of managementdiscipline than it is a cost issue.”

While all companies interviewed said that they were concerned with thecost of financial compliance regulations,many said they were most concernedwith the rate of change in regulations.“IFRS is costing us a lot,” says aEuropean auto supplier. “It would notbe an issue if you didn’t have anychanges to the regime – the problem is that there are continual changes.” Inthe case of environmental compliance,there was a sharp distinction betweencompanies selling directly to final usersand supplier companies. Manufacturersof final products were more concernedwith the burden of environmentalregulation; suppliers tended to see it asan issue that impacted on operationsboth upstream and downstream oftheir own manufacturing.

“This is something that is essentiallydriven by customers,” says Korea’sleading auto supplier Mando. “Forsuppliers like us environment is not a big overriding issue, it is more of atactical issue that just has to be dealtwith as it arises.” European autosupplier Rieter Automotive agrees:“even with 20 manufacturing plantsacross the world the environmentalissue does not affect our ownmanufacturing operations, but it doesaffect customers. We have to supportcustomers who need to reduceemissions.”

Part 1Regulation and compliance

Benchmarking global manufacturing 13

Companies were asked whetherthey needed to comply withSarbanes-Oxley financialoperations and if so how theyhandled that compliance.

Survey results suggest that effectiveSarbanes-Oxley compliance requiresnew compliance capacity. Mostcompanies in the survey (over 70 percent) handle Sarbanes-Oxleycompliance as part of their wider in-house compliance functions. High-performing companies are more likelythan the overall sample to build newfunctions to handle compliance: theyare more likely to add staff to existingcompliance functions and also morelikely to outsource compliancefunctions (barely 2 percent of thesample does this, compared with 20 percent of high performers).

Companies were asked how theyhandle overall compliance withfinancial regulations and corporategovernance.

When it came to overall compliancewith financial regulations and corporategovernance requirements, theapproach of high-performingcompanies were not markedlydissimilar from the approaches of theoverall sample, with the exception thatagain high performers were muchmore likely than average performers tooutsource compliance functions.

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How does your company handle compliance with Sarbanes-Oxley?

Source: KPMG International 2007


14 Benchmarking global manufacturing

Companies were asked which are the most significantenvironmental regulation issuesthat they currently facing or arelikely to face in the next few years.

The survey supports the view thatcosts related to carbon emissionscurrently have less impact on businessperformance than might be supposed:while over 60 percent of the totalsample cite carbon emissions as aleading issue, that falls to just over 20 percent for high-performingcompanies. High performers aremarkedly more likely to be concernedwith water usage issues, andmarginally more likely to be concernedwith labor issues such as workplacehealth and safety and also withproduct liability, than are averageperformers.

In the interviews several companiesexpressed the view that long-termplanning for environmental demandswas challenging, saying that publicopinion and public policy onenvironmental matters was liable to develop much faster thanmanufacturing responses, and thiscould leave companies with expensiveinitiatives to meet issues that haddisappeared from view. “Issues can behere today and gone tomorrow – whatyou need to be able to do is judge thelongevity of an issue,” says a

European machinery manufacturer.“The way we see it is that all ourbusinesses use energy, and energy-related issues are the ones most likelyto remain issues.”

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Companies were asked toestimate the cost impact ofenvironmental compliance as apercentage of total sales and thecost impact of financial/corporategovernance compliance as apercentage of total sales.

The survey results for cost ofcompliance for both environmental andfinancial and corporate governanceissues were significant. Results for theentire survey show that a majority ofcompanies believe that the cost impactis less than 1 percent of sales, andthat very few are willing to concede a total in excess of 2 percent of sales.For high-performing companies theresult is quite different: there wasmuch more variation in responses from high performers which put thecost of compliance at anywherebetween 1 percent and 10 percent of sales. Overall, high performers aremore likely to report a higher costimpact of compliance, suggesting a more intensive compliance effortamong high performers.

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In interviews most companies citedfinancial compliance as their biggestcost concern, although somecompanies commented that this mightbe in part due to the difficulty ofquantifying the burden ofenvironmental compliance. Also,companies with U.S. listings weremarkedly more concerned about thecompetitive impact of costs related toSarbanes-Oxley compliance.Companies operating under lessonerous regimes were more sanguine:A Korean automotive suppliercomments “for us the big financialregulation costs were the cost ofsoftware, the cost of consultants andthe cost of a manager to run theprocess. It is not a big ongoing cost.”

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Companies with growing globaloperations identified particularconcerns with financial compliancecosts. “There are many differencesbetween IFRS and local GAAP that wesee compliance as a very significantongoing cost,” says FriedhelmSchwarten, CFO of global automotivesupplier IAC. “It is difficult to cap thatcost especially if like us you aremaking acquisitions – we made twoacquisitions in the last year and in each case there are big costs inbringing the new businesses into our IFRS accounting.”

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For manufacturing companies theperception of risk remains firmlyfocused on relations with customersand suppliers. Very few companies say they are concerned about macro-economic risk. Despite the slowing ofthe U.S. economy and the increasedvolatility of financial markets in 2007,most manufacturers appear to betaking a long view through theeconomic cycle. A global automotivesupplier is typical: ‘we are vulnerablebecause of over-dependence on onecustomer, and that is our main risk.True, people might stop buying cars,but there is really very little we can doabout that.’

Particular risk issues commonly citedin interviews reflect the increasingintegration of global manufacturingsupply chains, which brings with itsupplier-customer relationships thatare ever more critical. When askedabout leading risk issues in interviews,companies commonly cite customerdiversification (“our main businessstrategy,” says an East Asian autosupplier), achieving critical mass (“tomeet our customers’ global needs weneed to be at least double our presentsize,” says an India-based industrialmachinery manufacturer), and risks

related to the supply chain (“this is ahuge risk for us, maintaining the rightpeople and the right processes rightacross the world, because if you don’tachieve perfect timing it gets very,very costly,” says a European autoparts group).

Companies were asked whichareas of risk they considergreatest, and which areas aresecond and third in importance.

Responses produced few variationswhen viewed either by industrycategory or by business performance,with one significant exception: wherecompanies rated an externally drivenrisk area as significant, high-performingcompanies rated that risk with greatersignificance. High performers weremore likely to be concerned byfinancial risk, IT and tax risk, and mostmarkedly by macro-economic risk. The only risk area that high performerswere less concerned by was labor risk.The responses suggest that highperformers tend to be more confidentabout internally manageable risk areas(for example, no high performersconsidered intellectual property risk asa leading risk area) and less confidentabout external risk areas.

Part 2Risk


Companies were asked to identifythe key elements of the risk areasthey had selected.

When companies answered questionsabout the key elements of the riskareas they believe to be mostimportant to their businesses, somestriking differences emerged betweenaverage- and high-performingcompanies. Where companiesspecified regulatory risk as a leadingissue, the high performers consideredfundamental issues as most important:they cited the lack of standardoperating procedures, functionalbarriers within the organization and thedifficulty of using information as keyelements. Average performers weremore likely to consider communicationand corporate resources as key.

Where financial or liquidity risk werecited as leading risk areas, highperformers were concerned withefficiency and financial assessment ofpartners, while average performerswere more likely to be concerned withfinancing costs. In the interviews,companies with extensive exportbusinesses were particularlyconcerned with currency risk.

“The problem is not volatility, theproblem is when currencies just movein one direction over time as ishappening with the U.S. dollar,” saysone European industrial machinerymanufacturer. In particular Indianmanufacturers, long used to operatingbehind high tariff walls, are particularlyconcerned about dealing with multiplecurrencies: “managing currencies istop of the risk list,” says one Indianauto supplier. “For a long time wewere used to operating in only onecurrency, but now we are operating ineuros, yen, rupees, everything. All thisis entirely new for us.”

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Where IT risk was cited as a leadingrisk issue, the high performers thatselected it considered that IT securitywas paramount, while averageperformers cited a wide range ofinternal IT management issues as key.

Of the high performers that cited taxrisk as a leading issue, the focus wason a single issue, in this case thecomplexity of tax regulations(reflecting perhaps the tendency ofhigh performers to have significantoperations in high-growth marketswhere taxation is complex). Averageperformers by contrast cited a widerange of tax risk elements.

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1 High performers whoanswered this questionchose Security.

2 High performers whoanswered this questionchose Complexity ofregulations.




The greatest differential between theviews of high performers compared toaverage-performance companies wasin the rating of macro-economic risk,which is cited by 50 percent of highperformers as a leading risk issue.Those high performers that cited thisrisk factor were most likely to considerthat inflation and foreign exchangepolicy were the key elements ofmacro-economic risk: significantly no high-performing company cited thethreat of nationalization as an elementof risk, although some average-performing companies did so.

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Part 3New markets

Two issues dominate corporateconcerns regarding sourcing from ormanufacturing in low-cost economies:cost and quality. Some companies alsovoice concerns about the challenges of managing through joint ventureapproaches, but these are in theminority as most companies reportthat low-cost manufacturing theyconsider critical is alwaysaccomplished through wholly ownedsubsidiaries. In interviews companiesrepeatedly stressed that the quality of management of sourcing andmanufacturing in low-cost locations is critical. “Low-cost countrymanufacturing has to be hands on,”says a U.S. auto componentsmanufacturer. “The difficult part of it is not running the manufacturing, it is establishing and maintaining therelationship. You have to be there, you have to know people by name, it is the only way to make it work.”

Companies with manufacturingoperations in intermediate-costlocations such as economies on theEuropean periphery frequently reportvery positive results on both cost

and quality. For example, autocomponent manufacturer RieterAutomotive, which has manufacturingplants in Portugal and the CzechRepublic, says “costs are rising butyou have to factor in productivityimprovements in low-cost countrieswhich outweigh direct cost increases.Plus you have more labor flexibility and often a superior work ethic.” A European industrial machinerymaker, adds: “we have more qualityissues in high-cost countries than inlow-cost. We make all our criticalcomponents in places such as theCzech Republic and Portugal where we have low cost and the highestquality.”

Manufacturing in low-cost east Asia –especially China – is more problematic,although several companies argue thatquality failings are usually the fault ofthe manufacturer rather than thelocation. Says one European industrialproducts manufacturer: “achievingquality from low-cost markets isentirely dependent on how long you have had to manage the issue.”


Nevertheless, companies areconcerned about both quality and therising cost of what only recently wereultra-low-cost manufacturing locations.“Manufacturing in China used to belike living in a duty-free zone,” saysone Asian industrial productsmanufacturer, who adds “that iseroding rapidly – both in terms ofcurrency and in terms of the scalingback of the duty incentives. The partyis over there. Wage levels have alreadyovershot Indian wage levels.”

Nevertheless many companies saythat the long-term value potential oftheir Chinese investments outweighscurrent cost and quality concerns. “You may not be able to get theresults you want today in China,” says Dave Burritt, CFO of constructionmachinery manufacturer Caterpillar.

“But the point of being there is this:whoever wins in China in the next fiveyears will win in the next 100 years.”


Companies were asked what theirbusiness growth strategies werefor the next five years.

The survey suggests that among awide range of companies attentionmay now be shifting somewhat awayfrom primary investments in newmarkets and towards improving thereturn of existing investments. Allcompanies were less likely to cite theentering of new markets as businessgrowth strategies, and more likely tocite gaining new customers in existingmarkets and selling more to existingcustomers. That pattern was evenmore apparent in the case of highperformers, who exhibit a clearpreference for gaining new customersin existing markets, followed by sellingmore to existing customers.

Companies that did plan to enter new markets were askedhow they planned to accomplishthat strategy.

The survey showed that joint venturesin new markets are not in favor. Whilethe survey group as a whole preferredwholly owned approaches to jointventure and third party approaches to new markets, there was a clearpreference among high-performingcompanies to acquire existingoperations as wholly ownedsubsidiaries or to approach new

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Main business growth strategies over the next 5 years*

Preferred strategies for entering new markets*

* Respondents couldselect more than oneanswer.




markets through third parties. No high-performing companies favored jointventure approaches.

“For us managing a JV would be verydifficult on the quality front,” saysRobert Meese, CFO of Korean autocomponents maker Mando. “If youhave a JV that you do not control it isnot really your product, so our generalapproach is to avoid JVs, although if it is a small market a JV may work forthe time being.” Friedhelm Schwartenof IAC agrees, saying “my personalview of JVs is that I dislike them. The agreement process takes far toolong. You have to make too manycompromises. And often enough theoutcome of the JV is not what youexpected or need, and not just interms of product quality – with JVsthere are likely to be problems withthe quality of the whole process. 100 percent ownership is better initself, but that does take more timeand more cash.”

Those companies that did favor joint venture approaches to new markets were asked tocite the top three challenges inparticipating in, and successfullyoperating, joint ventures.

Companies that favored joint ventureswere far more concerned with thenature of their JV partner than withoperational issues. Identifying the right JV partner was cited as theleading challenge, followed closely by establishing shared objectives. It is significant that there are no high performers among this group of companies.

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Major challenges in executing a joint venture approach



Part 4Operations and efficiency

How can companies build value by reducing the cost of existingoperations? KPMG’s globalmanufacturing benchmark surveyasked companies what cost-cuttingopportunities they found in areas likelow-cost sourcing, IT implementationand tax planning.

The prospects for easy cost reductionthrough low-cost sourcing wereviewed skeptically and cautiously bymany companies. An Asian industrialsupplier was typical: “some peoplethink you can just move operations toChina and make the same stuffcheaper, but unfortunately that is nothow it works. It actually takes a hugecommitment to develop a capacity in alocation like that. But this is somethingthat creates a lot of tension in a lot ofcompanies. The president of thecompany will say ‘you have to buymore from China and cut costs’, whilethe purchasing guy says ‘I’d love to –but how can I find the quality?’”

The value of IT-driven cost reductionwas also questioned by manycompanies in the survey. One factor

that limits value is resistance to theimposition of common IT standardsacross a decentralized group, saysGerman auto supplier IAC. “Our ITcost is relatively low but in my opinionits effectiveness is poor,” says CFOFriedhelm Schwarten; “The problem isalways that the system should supportentrepreneurship, but entrepreneurswant to be independent and there isresistance in the different plants andlocations to the imposition of onecommon system.” A large proportionof companies in our survey considerthat their implementation of processautomation has yielded great benefits,but that management reportingbenefits are more difficult to win. For example, a European industrialmachinery manufacturer concedes thathigh-level benefits from new ITimplementations can take a long timeto emerge, saying that three yearsafter implementing SAP, “the benefit isstill ahead of us. I think that if we wereto do anything differently we shouldhave stopped after the first round ofimplementation and optimized whatwe had, rather than just pressing on.”Many companies add that well-planned


implementation of IT platforms thataffect the whole business is important.One auto component company thatrecently implemented SAP said “for usthe lesson was, plan, plan and plan.Don’t worry too much about execution,everything will follow if you plan well.”

On the value of tax planning,companies were sharply dividedbetween those that felt that tax-planning benefits were enormous andthose that dismissed the exerciseoutright. This difference may well bedue to the nature of some supplierbusinesses: as one European autosupplier says, “we are constrained, likemany suppliers. We have givencustomers, and we have to locatewhere those customers are whateverthe tax implications are of that.”

Companies were asked whetherthey were engaging in, orconsidering, low-cost countrysourcing for raw materials,components or production.

High-performing companies from oursurvey were overall somewhat lesslikely to have engaged in long-termlow-cost country sourcing for rawmaterials, components or production,although they were more likely to be

considering low-cost sources and more likely to have made recentcommitments to sourcing rawmaterials and production from low-costsources. The results suggest thatsome high-performing companies havebeen more cautious than most when itcomes to extending critical operationsinto low-cost economies. Corporateresponses in interviews suggest thatthis may be because some highperformers have proprietarytechnology they wish to protect bykeeping it close to home, and becausethey have high levels of automationwhich cannot easily be reproduced in low-cost environments.

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Low-cost country soucing of raw materials, production or components



Companies were asked whetherinventory levels were too high,too low or where they shouldhave been over the last year.

While almost 70 percent of companiesin the overall survey believed theirinventory levels were appropriate, highperformers were marginally less likelyto be satisfied with inventory levels,with a larger number of highperformers than average performersciting both excessively high andexcessively low inventory levels. One European auto componentmanufacturer believes that inventorylevels are always too high, adding “it is something that you have to work on constantly. The distributed supplychain is making it more challenging tomanage inventory than it was in thepast. Customers ask for the security ofextra inventory. And the more contentyou have in cars, the more difficult itgets.” An Asian auto manufacturerargues that whether too high or toolow, inventory is not as fullymanageable as manufacturers wouldlike. He says, “What if your customergoes on strike? Suddenly you have toomuch inventory. What if you go onstrike? Suddenly you are too low.”

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Companies were asked to ratethe effectiveness of their IT interms of operational needs andmanagement reporting activities.

KPMG’s global manufacturingbenchmark survey suggests that high-performing companies are morefocused on the effectiveness of ITinvestments than average-performingcompanies. As noted earlier, highperformers were more likely thanaverage performers to cite IT risk as a leading risk concernfor their businesses; asked about theeffectiveness of their IT functions,somewhat fewer high performers than average performers expressedpartial reservations about their ITeffectiveness, and 30 percent of high performers were confident thatthey had maximum return from ITcompared to 15 percent of averageperformers. No high performers rated their IT as lacking integration to the detriment of managementdecision making. The inescapableconclusion is that IT excellence is a key supporter of outperformance.

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Effectiveness of IT – operational needs and management reporting activities



Companies were asked whetherthey were achieving their optimaleffective tax rate (ETR) and if notwhether they had plans in placeto achieve their optimal ETR.

Our survey suggests that high-performing companies are morefocused on tax effectiveness thancompanies with average performance.For example, when asked about thechallenges of sourcing raw materials,components, or production from low-cost locations, high-performingcompanies were much more likely

than other companies to cite thechallenge of using tax incentives andother tax-related benefits (one otherarea where a clear differential betweenhigh performers and others emergedwas in the rating of supply chainmanagement, an area which highperformers were less likely than othersto consider problematic). Also, morehigh-performing companies thanaverage performers believed theywere achieving their optimal effectivetax rate (ETR) and of those companiesthat believed they were not achievingtheir optimal ETR, all high-performing


companies had plans in place toachieve this. The inescapableconclusion is that strategic tax planningis a key element in outperformance.

Companies are divided. An Asian autosupplier says “frankly we believe youcan’t do much through tax planning.There are hardly any tax incentives left.And if I need to spend money on anew investment I will do it – thosekinds of decisions are never driven by tax.” Yet a U.S. automotivemanufacturer believes “the benefit of tax planning is enormous: over thelast ten years we have achieved areduction in our total tax rate of aboutten percentage points.”

These differences may be partlyaccounted for by the differentconstraints businesses operate under,according to whether they are tied to customer locations. But RobertMeese, CFO of a Korean auto partssupplier, believes that companiesshould take a larger view of thepotential of tax planning. “Before I came to this company nobody hadheard of tax planning,“ he says,

adding, ‘Now we are looking at taxplanning in terms of structuring legalentities, reorganizing our inter-company transactions, dealing with ourintellectual property. All of these giveopportunities to generate tax savingsand increase our net income. Cash isalso important: you have to make sureyou don’t end up with cash that istrapped in a certain location for taxreasons. It is not so much a matter of relocating operations but relocatingactivities.”

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Part 5Conclusion

In all four of the areas on which thissurvey concentrates companies voicespecific concerns about the challengesof preserving and creating value. In thearea of regulation, the cost ofcompliance with new financial andenvironmental rules is a leadingconcern. “Even in Korea where therules are less onerous than Sarbanes-Oxley it generates a significant cost,”says Robert Meese, CFO of Koreanauto components supplier Mando. Buthe adds “it can be much worse thanthat – I helped implement Sarbanes-Oxley in a U.S. company and theadministrative and cost burden therewas absolutely mind-boggling.” Yetcompanies also point out thatregulation offers opportunities as wellas costs. Says Hartmut Reuter, CEO ofRieter Holding, a global industrialmachinery manufacturer, “for us thereis a value creation opportunity inenvironmental issues and regulation,but only if you can achieve changewithin a realistic timeframe. Otherwiseit becomes a value destruction issue.”The challenges of meeting compliancerules can also be turned to advantage,says Robert Meese of Mando:

“we realize we are not yet verysophisticated about monitoringcompliance from a risk point of view.As a result of that I’m starting a review that looks at the risks andopportunities on the tax side, and then I’m going to go on to use thatreview to manage tax compliance on a global basis”.

It is in the area of risk that companiesshow the most marked differences in approach according to theirgeographical location. Whilecompanies everywhere cite supplierand customer risks as very significantconcerns, it is striking that labor risknow plays a diminishing part in thethinking of companies located in theOECD industrial economies, largelybecause their competitive position isfounded on a high level of automation.A U.S.-based auto componentcompany says “we manufacturearound two million brake drums a year, all on two highly automatedproduction lines. Each one of thoselines is run by six people, so labor cost is a very small part of ourequation.” Manufacturers located


in low-cost countries are much morelikely to cite labor cost as their leadingrisk concern: an Asian componentmanufacturer says “our labor costs arerising and that means that a hugeadvantage is becoming a smalleradvantage. Even for a company thathas a large labor pool to draw upon, it is still an emerging problem.” Suchcompanies concede that the pace ofautomation and productivity increasewill prove critical, although manybelieve that the falling cost ofautomation and the widespreadintroduction of business processmanagement approaches gives them the opportunity to meet thiscompetitive risk. A leading Indian

auto supplier says “overall our laborcosts are not increasing. The cost per person is increasing, but so isproductivity, so overall there is no cost increase.”

Manufacturers’ attitudes to using low-cost new markets for sourcing or formanufacturing were surprising in thatthe KPMG survey revealed that high-performing companies were morecautious than others about the benefitsnew markets offer. It appears thatbusinesses located both in emergingmarkets and mature industrialeconomies take the view that ‘lowcost’ is not always what it seems. Onelarge Asian manufacturer of auto and


industrial components says “low-costcountry sourcing is certainly importantbut you have to look at the total cost –there is now doubt the benefit isdecreasing.” Erwin Stoller CEO ofSwitzerland’s Rieter Automotive,agrees: “we talk about ‘low-costcountries’ but it is not really fair just to focus on cost. You have to look atflexibility. Switzerland for example hasthe highest wage in Europe, but laboris flexible.” Many companies also citethe continuing challenge of ensuringquality in low-cost locations. “There isno doubt that quality is the biggestchallenge in low-cost country sourcing,and getting and keeping the right skillsis the next most difficult issue,” saysone large Asian componentmanufacturer.

In the area of increasing operationalefficiency, many companies cite twoleading issues as their main valueconcerns: the need to increasebenefits from their IT investments, andthe relentless pressure to take costsout of their manufacturing operationsto meet customer demands for pricereductions. On IT, many companies

report that automation of transactionsis well advanced; equally many reportthat expected higher-levelmanagement reporting benefits haveyet to materialize. This large Indianauto component manufacturer istypical: “in IT we have achieved agreat deal in terms of automation ofprocesses. In terms of managementreporting we still need to achieve a lotmore.” And on customer demands forprice reductions, a large number ofcompanies cite this as their leadingvalue concern. Says one Germanautomotive component manufacturer:“the biggest challenge we face overallis in meeting customer demands for‘give backs’ whenever you get neworders. Customers continually demandprice reductions. That is why a lot ofcompanies in the auto supply businessare in the red zone right now.” TheCEO of another European auto supplieragrees: “customer demands on costmean that we have to take 80 to 100million euro out of our cost structureevery year. The only way you can do that is to treat your supplierrelationships as critical.”


All companies in the survey do agreethat building long-term value is the keyto long-term survival. Is there a conflictbetween building value forshareholders and value for otherstakeholders such as customers,employees, or suppliers? Many arguenot. Says Hartmut Reuter, CEO ofindustrial machinery manufacturerRieter Holding: “there is nofundamental conflict. You mightimprove value for shareholders in theshort term, say by cutting back onR&D – but soon you will find you haveno customers. You might improvevalue for customers by reducingprices, but soon your share price willbe collapsing. You can always makelife nice for a lot of people in the shortterm, but that won’t build value in thelong term.”

In fact, it may be just a timing issue –short-term decisions do not alwaysyield long-term benefits and stability.Yet as our survey and interviewssuggest, building value is a challengethat belongs to the whole business,not just the executive board.

Compliance demands have to be metand their costs controlled. Risk has tobe identified and managed – not justwithin the company, but also withinthe supplier and customer network.New market opportunities have to be grasped with a clear understandingof where investment will find realreturns, while existing operationsdemand a continual cycle of efficiencyimprovements and cost reductions.

The foregoing survey results present a detailed picture of how companiesare meeting all of these demands. And while results differ company by company due to many factors, one result is common: for allcompanies the rate of changecontinues to increase.

kpmg.com

The information contained herein is of a general nature and is not intended to address the circumstances of any particularindividual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that suchinformation is accurate as of the date it is received or that it will continue to be accurate in the future. No one should actupon such information without appropriate professional advice after a thorough examination of the particular situation.

The views and opinions expressed herein are those of the interviewees and do not necessarily represent the views andopinions of KPMG International or KPMG member firms.

© 2007 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMGnetwork of independent firms are affiliated with KPMGInternational. KPMG International provides no clientservices. No member firm has any authority to obligateor bind KPMG International or any other member firmvis-àvis third parties, nor does KPMG International haveany such authority to obligate or bind any member firm. All rights reserved. KPMG and the KPMG logo are registered trademarks ofKPMG International, a Swiss cooperative.

Designed by RoundelPublication name: Global manufacturing benchmark surveyPublication number: 310-059Publication date: October 2007

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KPMG’s Global Industrial Products and Automotive Contacts

Bill KimbleGlobal Chair, Industrial Markets KPMG in the [email protected] Tel: +1 713 319 2148

Uwe Achterholt Global Chair, Automotive KPMG in [email protected] Tel: +49 89 9282 1355

Michele Hendricks Global Executive, Industrial Markets KPMG in the [email protected] Tel: +1 212 872 3641

Roland Schmid Global Executive, Automotive KPMG in [email protected] Tel: +49 89 9282 1147

Fiona SheridanSenior Marketing Manager, GlobalAutomotive and Industrial ProductsKPMG in the U.K.+44 20 7694 [email protected]

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