Issues Facing Industrial Manufacturers: Staking a Claim in Emerging Markets

1. Staking a Claim in
Emerging Markets
Issues Facing Industrial Manufacturers

2. Table of Contents
Introduction.................................................................................................................................... 3
Challenges in Emerging Markets................................................................................................. 3
Intense Competition......................................................................................................................... 3
International Business Risk .............................................................................................................. 3
Shortage of Skilled Manufacturing Labor.......................................................................................... 4
Achievable Solutions..................................................................................................................... 5
Build or Buy Production in New Markets........................................................................................... 5
Improve the Return on Investment of Capital Equipment................................................................... 5
Win the War for Talent....................................................................................................................... 6
Use Foreign R&D to Create New Products........................................................................................ 7
Conclusion..................................................................................................................................... 8
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Issues Facing Industrial Manufacturers

3. Introduction
Industrial manufacturers have enjoyed surprising economic resilience and business growth in
an extremely difficult global economy. Looking into the future, as developed economies in North
America and Europe continue to struggle with low- or no-growth economies, emerging markets
offer bountiful resources and new consumers who introduce new demands.
Once viewed mostly as a source of low-cost labor for global manufacturing, many emerging
markets now have a rapidly growing middle class, robust business generation, and a developing
economy. As businesses open to meet demand, they require viable suppliers. Many new
multinational corporations are choosing to headquarter within the emerging world. From 20052009, the number of new multinational businesses founded annually in China nearly tripled.
PricewaterhouseCoopers (PWC) predicts India will overtake China on this score by 2018 (Billings
and McEvoy, p. 1).
Positioning a business to meet
the growing industrial demands
prevalent in the emerging
markets of China, India, Brazil,
Russia, Eastern Europe, and
Central America is a key
challenge for manufacturers.
Positioning a business to meet the growing industrial demands prevalent in the emerging markets
of China, India, Brazil, Russia, Eastern Europe, and Central America is a key challenge for
manufacturers. These young, burgeoning markets represent huge opportunities to develop new
products and new customer bases, if manufacturers can leverage best practices to establish
strong footholds. This paper explores some of the complex challenges involved in engaging new
markets as well as creative solutions for improving operational efficiencies that manufacturers should
consider when creating global strategic plans.
Challenges in Emerging Markets
Intense Competition
The potential for great gains comes with fierce competition. There is much opportunity in emerging
markets—nearly one-third of the world’s people live in China and India alone. But these markets
are also being pursued by every major player in the manufacturing industry, including many new
companies starting up within the respective domestic markets. While multinational businesses may
have access to more capital, domestic companies may have advantages in creating local supply
lines, finding talented employees and partners, making the most culturally appealing sales pitch, and
developing the right product fit.
International Business Risk
Deciding which emerging markets to enter and how to serve them is the most critical decision that
multinational industrial manufacturers will have to make. A myriad of factors determine the business
risk involved for each country, and these factors must be taken together and then weighed against
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Issues Facing Industrial Manufacturers

4. other prospective countries. Though not an exhaustive list, manufacturers should consider these
aspects of any potential market:
• Environmental regulations
• Economic regulations
• Political stability
• Government incentives to attract foreign business
• Quality of capital markets
• International trade agreements
• Intellectual property and contract law
• Product liability law and litigation risk
• Sovereign debt levels and currency fluctuations
There are signs of a currency skirmish breaking out on a global scale as countries attempt to
contain banking liquidity crises through currency easing and hold down the relative value of their
currencies to increase the competitiveness of exports. If every country follows suit, this could be a
zero-sum gain with no one gaining a clear advantage. Multinational businesses will have to monitor
these developments very closely (Sivy, 2013).
Shortage of Skilled Manufacturing Labor
Industrial manufacturing is increasingly technical and technology-driven, requiring intelligent,
specially trained workers. At the same time, there is a worldwide shortage of skilled manufacturing
labor. The World Economic Forum predicts that “talented human capital will be the most critical
resource differentiating the prosperity of countries and companies” and estimates that there are
10 million global manufacturing jobs that cannot be filled today, due to a “growing skills gap”
(Moavenzadeh et. al, p. 4).
There are 10 million global
manufacturing jobs that cannot
be filled today.
In emerging economies, there are fewer college graduates and less experience with complex
manufacturing processes. In developed countries, manufacturing is often misperceived as a lowervalue career. Many of the new jobs being created around the globe are in manufacturing, so the
“war for talent” is heating up to become a key competitive threat.
Another potential HR challenge comes from rising labor costs. As emerging markets mature, wages
for manufacturing workers are rising, and workers are demanding more benefits and working
concessions. Increasing wages contribute to growing economies—good news for multinational
companies looking to sell to consumers in emerging markets. But increases in wages and benefits
may also offset the savings associated with manufacturing in these locations.
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Issues Facing Industrial Manufacturers

5. Achievable Solutions
Build or Buy Production in New Markets
Many industrial manufacturers are already operating in emerging markets. For these companies, the
question is not how to get started; the question is how to change a model that traditionally viewed
emerging markets as a place to produce to now view them as a place to produce and sell.
For firms looking to enter a new emerging market, a decision must be made about how to establish
a presence. Choices include acquisition of an existing business, forming a joint venture partnership,
and building infrastructure from scratch. Questions to consider include:
• Acquisition: Can you get a jump start on a new market by purchasing an existing smaller
manufacturer already doing business in the region?
• Partnership: Would partnering with a local business provide advantages in terms of
navigating the permits and regulations required to conduct business there and understanding
the local customer base?
The question is not how to get
started; the question is how to
change a model that traditionally
viewed emerging markets as a
place to produce to now view
them as a place to produce
and sell.
• Building New Plants: Where will the new plants be sited? PWC recommends comparing total
costs of each potential site, including “logistics, manpower and wage, utilities, construction, tax
structure, and financing” and even more in order to get a complete picture (Graeme and McEvoy,
p. 6). While lower labor costs may have been the main driver in choosing a particular market,
surveys show that companies pay more attention to urban infrastructure (Internet access, roads,
and police) than wage rates to determine where to place a plant in China (Zimmerman, 2012).
Manufacturers that decide to build new plants and manage their own construction may benefit
by putting fixed asset management software in place prior to the build. It can keep track of an
expensive plant and equipment that has not yet been placed in service and monitor budget to
actuals for fixed assets during construction in progress.
Improve the Return on Investment of Capital Equipment
Entering new markets and building new manufacturing plants is expensive, so it is critical that
manufacturers reduce costs wherever they can. Better fixed asset management is easy to achieve
and results in savings that can be redeployed immediately in other areas of the business. Aberdeen
Group discovered that by employing best practices in enterprise asset management, the best
performing manufacturers reduced maintenance costs by 30% and achieved a 20% higher return
on assets vs. plan (Ismail and Pacquin, 2012). Among the best practices noted, Aberdeen found
that 68% of best-in-class manufacturers provided access to on-demand asset lifecycle information,
including status and history.
Fixed asset management software can help manufacturers improve the return on their capital
equipment in several ways. First, fixed asset management software provides an organized method
for tracking essential information about equipment maintenance, including warranties, photos, and
repair records. Implementing a more effective system of preventative maintenance for fixed assets
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Issues Facing Industrial Manufacturers

6. can lengthen the life of expensive equipment in existing plants—allowing for more equipment
purchases in new plants.
Fixed asset management software also accurately calculates depreciation of fixed assets according
to the latest tax laws and depreciation rules. After comparing tax laws in the domestic and foreign
markets, manufacturers may discover tax advantages in moving fully or mostly depreciated
equipment from plants in North America to the newer plants abroad. Manufacturers can then
replace that equipment with new fixed assets in North American plants, starting a new cycle of
depreciation and taking advantage of any bonus depreciation rules if the asset qualifies. In addition
to calculating and tracking depreciation, manufacturers can conduct inventories with fixed asset
software in order to get an accurate picture of equipment before plant moves and determine the
best assets to reallocate to any new plants.
After comparing tax laws in
the domestic and foreign
markets, manufacturers may
discover tax advantages
in moving fully or mostly
depreciated equipment from
plants in North America to the
newer plants abroad.
Finally, keeping an accurate inventory of fixed assets enables manufacturers to get rid of assets
that are broken or are not being used. Typically, midsized companies overpay property taxes and
insurance by thousands of dollars due to out of service ghost assets—equipment that is broken,
lost, or stolen—that remain on the books. Conversely, zombie assets are in-service assets that
are not on the books—possibly uninsured and definitely not properly depreciated. Fixed asset
software provides an up-to-date inventory and a “check-in/check-out” capability that will enable
manufacturers to know the location and condition of all equipment to eliminate both ghost and
zombie assets.
Win the War for Talent
There is a global shortage of skilled manufacturing talent, so it is essential that manufacturers
recognize human resources as an essential part of the business and create a strategic plan for
human capital as well as dedicate technology resources to the process. Some emerging markets,
such as China or Brazil, have already experienced a boom in manufacturing; in these established
manufacturing centers, manufacturers may be able to find skilled workers to staff new plants,
but competition for the best talent will be fierce. In other emerging markets, it will be necessary
to find good people and train them in manufacturing skills. In either case, it will be necessary to
have a solid recruiting program, a positive corporate reputation among workers, and an effective
onboarding, training, and development program. Since over 50% of human resources’ time is
spent processing employee information and answering questions, in order to successfully execute
on these initiatives simultaneously, human resources should be complemented by technology. An
integrated software solution for automating and managing core workforce administration including
payroll, benefits, attendance, and compliance is key to free up time for human resources to work
on more strategic initiatives. Also, investing in tools that can increase retention and transform
good employees into excellent employees can significantly impact your bottom line by decreasing
employee turnover.
Developing a best practices recruiting program should not be seen solely as a talent management
strategy; it is also a competitive strategy. Manufacturing firms should consider proactively recruiting
key players such as researchers, engineers, top sales professionals, and good managers from
competitors. Another good way to disrupt competitors is to hire their best recruiters! Additionally,
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Issues Facing Industrial Manufacturers

7. this process is strengthened by technology-enabled tracking, record keeping, and online
integration. Luring top talent away from key competitors leaves the hiring manufacturer stronger
and its competitor weaker. The employees of direct competitors cost less to train—they’re already
familiar with the industry, manufacturing processes, and product markets (Johnson, 2011). The
competitor is also forced to spend time and resources finding and training a replacement employee.
Manufacturers should use appropriate caution with this strategy to stay on the right side of any laws
regarding anticompetitive practices, as well as to avoid starting an all-out retaliatory recruiting war
with a competitor.
Another potential solution to a global shortage of talent is the relatively recent but growing trend to
reshore manufacturing production for U.S. markets. Surveys conducted in 2012 by MIT and Boston
Consulting Group revealed that about 40% of American manufacturing firms surveyed had plans or
were actively considering moving production to the U.S. By producing the goods sold in the U.S.
market domestically, manufacturers can dedicate foreign workforces and plants to producing goods
in emerging markets. Shipping and transportation costs can be reduced that way, too.
In the U.S., there are trained, available manufacturing workers who have lost positions over several
decades of downsizing. Several federal initiatives are providing training and other incentives to
improve the job skills of manufacturing workers (Selko, 2013). Additionally, global trends in labor
costs are converging to make U.S.-based labor more affordable. Labor costs are rising in emerging
markets; Chinese manufacturing workers enjoyed double-digit annual wage growth from 2000-2010
and benefit from a 2008 labor law that addresses contracts and worker concerns (The Economist,
2013). By contrast, American manufacturing wages declined, and many U.S. states adopted rightto-work laws to eliminate labor unions. In aggregate, these factors are starting to make a U.S. labor
force more attractive for some U.S. and foreign manufacturers—especially to manufacture products
that will be sold in North America.
40% of American
manufacturing firms
surveyed had plans or were
actively considering moving
production to the U.S.
Use Foreign R&D to Create New Products
Multinational manufacturers should invest in local research and development organizations within
important emerging markets. Traditionally, firms have brought products to emerging markets by
modifying them to suit the preferences and culture of customers in each marketplace. This process,
called glocalization, should theoretically make products invented in developed economies attractive
to consumers in emerging markets (Billings and McEvoy, p.8-9). But it doesn’t always work, and
increasingly, manufacturers are recognizing the value of starting from scratch to solve problems for
customers in emerging markets.
R&D teams in emerging markets innately understand the challenges and product needs of
businesses in their own countries. They approach problems differently in an attempt to build things
more quickly and at lower cost. This is very likely to produce more desirable products and can also
lead to breakthroughs in manufacturing processes.
GE is investing heavily in a novel R&D strategy that it calls reverse innovation. This occurs when a
product developed by an emerging market R&D team opens up new markets in the U.S. economy.
For example, after studying the needs of rural healthcare in China and India, GE’s local R&D teams
determined that the company’s traditional electrocardiogram and ultrasound machines were too
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Issues Facing Industrial Manufacturers

8. expensive and not portable enough. The Indian team started from scratch and developed a $1,000
handheld EKG device that was much better suited to emerging markets (van der Boor, 2012). In
China, the R&D team developed a $15,000 ultrasound machine that sold for less than 15% the
cost of a traditional ultrasound from GE (Immelt et al., 2009). By being small and inexpensive, these
devices have also created new opportunities for GE Healthcare to sell them directly to doctors’
offices in the U.S.
Conclusion
For industrial manufacturers, emerging markets have long been a source of low-cost labor and now
offer exciting opportunities for growth. Competition to sell to businesses in these countries will be
intense, and manufacturers will have to carefully consider many factors—including labor availability
and cost, local business laws and regulations, international trade agreements, and partnership
opportunities—in order to determine the best markets to establish themselves. Before attempting to
build a foothold in a new market, it is imperative that firms find extra capital by achieving their best
possible operational efficiency.
Manufacturers will need to employ many solutions in order to establish themselves in new emerging
markets. Firms looking to gain a stronger market presence and globalize must win the war for talent,
develop profitable products, and operate with tremendous efficiency. Getting a better return on
property and equipment can quickly raise capital and identify fixed assets that can be redeployed
in emerging markets. It is relatively easy to extend the useful life of fixed assets, maximize the value
of tax depreciation, and save money on taxes and insurance using affordable, easy-to-deploy
fixed asset management software. By better leveraging the investment in property and equipment,
manufacturers can improve both the cost and efficiency of North American operations while freeing
up cash and personnel to focus on boosting global competitiveness.
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Issues Facing Industrial Manufacturers

9. References
1. Billings, G. and McEvoy, E. (2011). PWC Manufacturing Excellence: Capturing Growth Markets.
www.pwc.com.
2. Immelt, J. R., Govindarajan, V., and Trimble, C. (2009). How GE Is Disrupting Itself. Harvard
Business Review. September 21.
3. Ismail, N. and Paquin, P. (2012). Aberdeen Group.
4. Johnson, H. (2011). Secrets to Stealing Employees from Competitors. BusinessInsider,
March 3.
5. Moavenzadeh, J., Philip,R., Giffi, C., and Thakker, A. (2012). The Future of Manufacturing:
Opportunities to drive economic growth. World Economic Forum in conjunction with Deloitte
& Touche.
6. N.A. (2013). Reshoring Manufacturing: Coming Home. The Economist, January 19.
7. Selko, A. (2013). Federal Initiatives to Support Reshoring. IndustryWeek. March 15.
8. Sivy, M. (2013.) Is the World on the Brink of a Currency War. Time. February 21.
9. van der Boor, P. (2012). The Emerging Market Era. Stanford Social Innovation Review.
10. Zimmerman, J. I. (2012). How U.S. Companies Decide Where to Locate Their Factories in
China. The Atlantic Cities. March 6.
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Issues Facing Industrial Manufacturers

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