Growth and complexity
13/04/2008
In manufacturing, medium-size can be a tough platform for growth. Most midsize manufacturers are just as capital-intensive, and just as subject to global cost and price pressures as large enterprises.
In manufacturing, medium-size can be a tough platform for growth. Most midsize manufacturers are just as capital-intensive, and just as subject to global cost and price pressures as large enterprises. Yet they lack the resources of their bigger rivals to exploit revenue and sourcing opportunities around the globe. Smaller scale usually means greater flexibility, but many larger midsize producers suffer similar operational rigidities as multinational giants, which is problematic as customers demand ever-faster delivery and greater ability to customise products and orders. Many midsize manufacturers?particularly in Asia-Pacific?are nonetheless bullish about their growth prospects, even as economic clouds gather over key country markets. Well over half?61%?of executives of medium-size producers surveyed for this study expect their firms to achieve annual revenue growth of 15% or more over the next three years. Nearly as many?55%?see similar growth in profits. Rising costs and downward price pressure, however, are acknowledged as significant obstacles to the realisation of these plans. These are the among the main findings of a major programme of research, conducted by the Economist Intelligence Unit and sponsored by SAP, into the challenges and opportunities midsize manufacturers will face over the coming three years. Other findings to emerge from the research include the following: · Midsize manufacturers will seek to achieve growth mainly through better and faster product development. Capacity expansion is also a priority, but most expect to achieve this through improvements in operating efficiency. · Improving efficiency is also closely intertwined with the ability to accelerate product development. The majority of respondents (56%) view better operating efficiency, rather than revenue growth, as the key to meeting profit targets. "Lean" and "demand-driven manufacturing" and other improvement programmes will feature prominently in manufacturers' efforts to boost efficiency and achieve growth. · Consistent with this is a clear intention to grow by organic means, although for over one-third of firms in the survey, mergers and acquisitions (M&A) will be among the key growth vehicles they utilise. Given an expected tightening of financing, however, M&A is likely to an opportunistic rather than aggressive tactic, particularly for North American and European producers. About the survey The analysis presented in this report is based on a research programme conducted by the Economist Intelligence Unit from October 2007 to January 2008. At its core was the Midsize manufacturers survey, in which a total of 179 executives participated. The survey group was cosmopolitan: 31% of respondents were based in each of Europe and Asia-Pacific and 28% from North America, with the remainder hailing from the Middle East, Africa and Latin America. The sample was also senior: 46% of respondents were C-level executives such as CEOs, CFOs and CIOs, as well as owners. A range of industries was represented: 53% of executives were from process manufacturing firms in the chemicals, plastics, building materials, packaging, textiles and other sectors; 47% represented discrete manufacturers, including those in the industrial machinery, high technology, automotive and aerospace sectors. All the firms in our survey earn annual revenue of between US$20m and US$500m. For more detail on the sample and the results of the survey, please see the Appendix to this report. Still geared for growth Midsize manufacturers lead challenging lives. Globalisation and several years' running of strong demand growth in much of the world have opened up new markets and sources of supply. Yet their smaller scale often puts midsize producers at a disadvantage vis-à-vis larger rivals in exploiting these opportunities. Midsize producers are also facing the same demands from customers for flexibility, speed and service?and from owners and shareholders for profitability?as the big ones. Comparatively limited resources, however, often mean that smaller firms find it tougher to implement change programmes needed to develop such attributes. To make matters trickier, uninterrupted market expansion may no longer be taken for granted. The Economist Intelligence Unit, for one, expects significantly slower economic growth in most developed countries over the next 18 months, with knock-on effects in emerging markets. In the face of these pressures, executives of midsize manufacturing firms are a decidedly optimistic group. Fully 61% of global survey respondents (and three-quarters of those from Asia-Pacific) are confident of seeing annual revenue growth of 15% or more over the next three years. Almost as many (55%) see a commensurate growth in profit. These are remarkable objectives when considering that only five years of 15% growth would double the size of the enterprise. This is very nearly what Switzerland-based Enics AG is planning. Its president and chief executive, Reijo Itkonen, aims for the contract manufacturer of industrial and medical electronics to expand annual sales from US$370m in 2006 to US$500m in three years' time. "We have to be optimistic," says Mr Itkonen. "In our segment the growth in outsourcing will continue, and we expect to achieve 15% annual growth." Midsize manufacturers have not lost all sense of reality: they are immensely concerned with the twin pressures of rising input costs?particularly of raw materials, energy and services?and downward pressure on prices . The president and co-owner of a US mining and building products producer, with revenue of US$100m a year, expects steady and opportunistic expansion for his firm, but adds that "this does not mean we will not pay attention to asset utilisation and operating efficiency, as nothing is more risky in this business than losing track of your costs." Midsize producers nonetheless believe they are prepared to withstand these pressures and record strong growth. Over 80% of respondents report that their companies are "well positioned to meet their growth objectives", and a solid majority (59%) are convinced that the correct strategies and implementation plans are in place to guide them. Asian producers' enthusiasm is no surprise, given that regional demand for manufactured goods is expected to remain strong even if growth rates flatten elsewhere. Most manufacturers in the global survey will look to emerging markets to achieve the lion's share of their revenue growth, with half of them pinpointing markets in Asia-Pacific as their priority. PDFDownload the full report Growth and complexity: The challenges ahead for midsize manufacturers [PDF 250 KB].