Manufacturing in 2020 research report determines what manufacturing companies expect the world to be like in the year 2020. How will manufacturers do business? Where will they seek new opportunities? What steps need to be taken now in order to meet the goals of the future? Manufacturing companies from China, France, Germany, India, the Netherlands, Sweden, the UK and the US were interviewed. Respondents answered questions regarding the way they expect to do business in 2020 in the areas of research and development, manufacturing, supply chain and logistics, and sales and marketing, and how this compares with their current operations. Based on the responses and current industry trends, we have drawn a picture of what manufacturing operations will look like in 10 years’ time and where companies will need to focus in the next few years if they are to succeed going forward. The forces of globalisation that are already well established in the sector are set to continue. Accelerated competition at home and the growing sophistication of developing markets will have driven manufacturers to increasingly source, manufacture and sell internationally. By 2020, around 80 per cent of manufacturers expect to have multi-country operations, whereas currently just over half do. Ten years from now, manufacturing will have become more collaborative in nature, with companies involving suppliers and customers to a greater degree at all stages of the manufacturing process. The majority expect suppliers and customers to be involved earlier, although co-design with suppliers is already the norm for over 90 per cent, notably UK companies. Supply chains will have adapted by changing shape: half the companies surveyed said they will be using fewer suppliers by 2020, and 40 per cent expect to be using more distributors as increased competition drives them to reach new markets.
In the developed nations, supply chains will be more complex, according to the majority of respondents, so as to cope with input from customers and suppliers at all stages of the product lifecycle: from R&D to disposal. Supply chain systems will be called on to provide more accurate information on costs and logistics planning. However, companies from emerging nations expect their supply chains to simplify as they consolidate suppliers. On emission reduction, the survey shows that manufacturers will not have done as much as might be expected to mitigate the risks of climate change and to exploit the opportunities by providing products and services that minimise the impact on society. Beyond the big picture, regional differences will persist between manufacturing industries in the developed and emerging economies. For example, companies from developed nations believe they will have moved away from mass production towards greater specialisation as they seek to find more profitable ground higher up the value chain, whereas companies from emerging economies will have moved from low-profit localised manufacture to become the new masters of standardisation. Additional differences exist from one developed market to another. For example, answers from French companies often stand distinct from their neighbours in the UK, Germany and Sweden. And there are marked differences between the responses given by Chinese and Indian companies as to where they expect to be by 2020, with Chinese companies seeing themselves moving closer to the manufacture of finished goods, but Indian companies moving towards raw material production. While this topline review provides a summary of key findings from the study, the sections that follow offer more in-depth data and analysis. Engineering, research and development Looking at the responses from the companies as a whole, the trend is for manufacturing to become significantly more collaborative by 2020. In this section, we examine where in the process collaboration will have the most impact and answer questions such as how much will companies allow ‘what they make’ to be driven by their customers; and how much will they allow ‘how it is made’ to be driven by their suppliers.
Customer collaboration First, let’s look at collaboration with customers. By 2020, collaboration will tend to occur earlier in the product lifecycle than it currently does, according to the majority of respondents. Although the majority of collaboration with customers is still in connection with refinement of features, implying involvement once a product concept has been fixed, it is closely followed by an expectation to involve customers at product concept and development of major features. This shows an openness to allow customers to be more involved in driving the direction of product development in the future.
Traditionally, customer input is sought only once a product has been on the market for some time to garner ideas for introducing new functionalities or refining existing features for subsequent versions of the product. However, the methods used to produce software and products (where beta testing and prototyping are essential) have set the trend for customers to be involved much earlier in the product lifecycle in some classes of products. When we consider the use of virtual reality tools such as simulators and ‘fly-throughs’ for highly complex products, the rapid growth of official and unofficial communication channels between a company and its customers afforded by web-based social media tools, the foundation is already laid for customers to gain an increasing share in product concept. One respondent from the Netherlands sums up the attitude behind the trend, saying, “We invite customers to think with us.” The research shows that Indian companies claim they will lead the pack in customer collaboration in 2020, a position they already say they hold. All the responding Indian companies say they already collaborate with customers at the R&D level. This could reflect the historical lack of manufacturing in India and a strong national desire to ‘catch up’. The majority of companies from all countries expect customer collaboration in R&D to increase by 2020, except the UK where the majority of respondents expect it to stay at the same levels, probably because there is already a very high level of collaboration in UK firms: 60 per cent say they already collaborate with customers at the R&D level. Supplier collaboration While collaboration with customers is a relatively new phenomenon in mass-market manufacturing,
collaboration with suppliers is already de facto in some sectors.
The research shows a clear trend towards collaboration with suppliers growing throughout manufacturing operations, with 50 per cent of respondents predicting this for 2020. For the majority of manufacturers, refining features is and will continue to be the reason why suppliers are brought in at R&D. However, developing major functions and even conceptualising products will show a growth in popularity by 2020. More than 90 per cent of responses from UK companies indicate that for supplier collaboration it is business as usual. In this respect, UK companies appear to be best in class and much more willing to collaborate with suppliers than with customers. All manufacturers are already part of sophisticated supply chains stretching from raw material extraction to product end use. Subcontracted and subassembly manufacturing is well established in many sectors where the end product is highly complex, such as the automotive sector. Multi-tiered distribution is also commonplace for majority ofmanufactured goods. Furthermore, advanced engineering projects, such as in aerospace and automotive, increasingly involve suppliers in product design, where their detailed knowledge of vital subassemblies contributes to overall product performance. The pharmaceutical sector also has a track record of outsourcing R&D and manufacturing (the latter comprising mostly capsule packaging), often with only marketing and distribution remaining under the control of the brand owner. The more complex a product is, the more collaboration is required, and this grows proportionally when outsourcing is involved. Few companies have the scale or desire to go it alone. Designing and manufacturing complex products for localised markets across the globe requires knowledge of local tastes, preferences and utilisation practices. Thus, the current trend for collaboration with both customers and suppliers is set to increase by 2020. Product lifecycle management Closer collaboration with customers at an earlier stage in product development is one area that could help manufacturers cope with shrinking product cycles and get their innovations to market more quickly in 2020. Product lifecycles are estimated to have halved over the last 10 years. According to Capgemini’s recent study ‘Collaborating for Innovation’, although the trend is accepted by only a slim majority of respondents (52 per cent) in this research.
From the research, companies in Sweden, China and Germany seem most aware of this trend. Of those respondents that expect shrinking product lifecycles to affect their industry, the majority anticipate that they will shrink between 25 per cent and 50 per cent to 2020.
Yet large numbers of companies seem to be doing little to prepare for this future: 35 per cent are doing nothing and 6 per cent say they will deal with it as it happens; 20 per cent intend to work faster. Not many seem to have a clear strategy for developing new products or relationships with customers. In part, reducing product lifecycles is driven by the comparative price of labour versus capital. For example, in rural India, where labour is cheap, capital goods such as trucks and buses are rarely replaced when they break down. Rather, there is at least one repair shop, often several, in every village, which thrive on keeping vehicles roadworthy. In such an environment, products have a very long lifecycle indeed. However, they have a much shorter lifecycle where the labour cost of repair is high as compared to the capital cost of the goods, such as with electromechanical goods in developed markets. In part, the phenomenon of shrinking product lifecycles is also driven by the modularity and standardisation of products, which brings down their capital cost or the cost or replacement versus the cost of repair. The complexity of some goods also dictates whether they are replaced or repaired. Few would attempt to repair microelectronic goods: their purchase price is miniscule compared to the cost of equipment such as clean rooms required for effective repair.
The trend toward shrinking product cycles is further exaggerated in the electronics sector by the rapid development of component technologies, which generally follow a curve described by Moore’s Law (the number of transistors that can be fabricated into a single square centimetre of silicon roughly doubles every 18 months). This inevitably drives down the price of a range of hardware goods, such as digital cameras, mobile phones, media players and PCs. To compensate, manufacturers of these goods tend to progress at a product refresh rate of more than one generation a year. This has profound implications for manufacturers of sophisticated consumer electronics goods that could previously rely on a three- to five-year tail of sales, recouping high R&D costs over millions of standardised units. Shrinking product lifecycles have rendered this business model redundant. A mobile phone now has to make profit for its manufacturer within the first few months of its introduction. This puts inevitable strain on manufacturing to ramp up the volume of supply, and marketing and distribution to ramp up the volume of demand and sales. The companies which get their innovations past R&D to manufacturing and distribution ahead of their competitors stand a much better chance of winning greater market share.However, firstto-market is no guarantee of winning: witness Apple’s iPod, which quickly dominated the MP3 player sector despite being preceded by players from the likes of Creative. The increasing number of consumer electronics devices and the use of microelectronics in other products (domestic white and brown goods and even automotives) is likely to infect other sectors with this same phenomenon to a greater or lesser degree. However, differences in product lifecycle also vary by virtue of software content. For example, in high-end business software, the norm is for customers to pay for an ongoing maintenance contract allowing for regular product updates rather than for an outright replacement.
Manufacturing The role of digital technologies in manufacturing is set to increase significantly by 2020, with the technologies adopted depending mainly on what is being made rather than where. Integration of production systems from head office to shopfloor and from design to quality monitoring, encompassing computer-aided design, computerised numerical control, enterprise resource planning and product lifecycle management, is predicted to be the main emphasis of developed nations generally,with the exception of French companies, with the strongest proponents being German companies. Chinese companies predict factory layout and planning will be their biggest digitisation effort.
Multi-plant harmonisation scores low overall. There is a debate over whether a manufacturer’s plants should be standardised across the world to achieve economies of scale or flexible enough to meet local requirements. From these results, it could be concluded that the respondents favour the latter approach. Globalisation If the trend towards digitised manufacturing is not clear, the progress of globalisation is more certain.Manufacturing will become increasingly internationalised by 2020 with more companies manufacturing for global markets and operating manufacturing plants in a greater number of countries. The biggest change will be a shift from manufacturing in one country to manufacturing in many. There are wide regional differences in whether companies see their future in further standardisation or specialisation of manufactured goods, with a tendency to use subcontractors to localise products for specific markets.
Most companies indicate an aspiration to move along the supply chain from extraction of raw materials towards finished goods. Only US companies expect to stay in the same position in 2020 and only Indian companies expect to move marginally closer to the raw materials end of the supply chain. Respondents in all other countries expect to move closer to finished goods, with the biggest changes expected from Dutch and Swedish companies. Currently, manufacturing is moderately internationalised with 46 per cent of the responding companies concentrating their operations in only one country. By 2020, this picture will have changed radically to an 80:20 split in favour of internationally-based operations, with all responding companies from the Netherlands and Sweden expecting to manufacture on a multinational basis, and almost all UK respondents. However, in the US, a substantial group expects to move against the trend. On the other hand, a small proportion say they see a future where they will have withdrawn from international operations to manufacture in one country alone. It’s not clear from the responses as to why this would happen: we can only surmise that these people feel that by 2020, the advantages of production in lower-cost countries will have been eroded, and been replaced by greater concerns about the side effects of multinational manufacturing on domestic employment and the environment. All companies, except a few in France, will manufacture for international markets in 2020. Currently, all but a few in France and the US do so. Many sectors have already subcontracted manufacturing to regions with cheaper labour. While manufacturing labour wage differentials between developed and emerging economies are showing some signs of erosion, parity is unlikely to happen by 2020. However, low-cost labour is not the only driver. Proximity to new markets also matters. The rapid development of countries such as Brazil, Russia, India and China (BRIC nations) as industrialised nations has brought billions of consumers to the global market. Other drivers for globalisation include proximity to raw materials, as the volatility of fuel prices impacts the cost of transport. Local infrastructure and capital investment schemes also play their part. Business leaders such as Bill Amelio of computer-maker Lenovo, Lakshmi Mittal of steel firm Arcelor, Carlos Ghosn, chief executive of Renault and Nissan, and Sam Palmisano, chief executive of IBM, now talk of global companies that have transcended their national origins. They talk about the internationalisation of companies as having three phases. First, a company manufactures at home and sells its goods through sales agents based in other countries. Then it sets up subsidiaries in overseas markets. These are clones of the mother company, which is still headquartered in the country of origin, from where it controls the subsidiaries. Finally, the national headquarters dissolves and operations are based where the company deems they are best suited, depending on a number of factors such as costs, capital investment incentives, proximity to principal markets, and access to talent and other resources such as raw materials. Standardisation versus localisation Overall, there is a fairly even split between companies that believe they will produce standardised products and those that will localise them in 2020, which reflects a very similar picture to today’s world. However, this average masks large regional differences over the last ten years.
Indian companies see themselves migrating heavily from standardised products to localised ones,presumably as their knowledge of individual market requirements matures beyond traditional one-sizefits-all mass production. Companies from Germany and the UK see a similar trend, although to a lesser degree than Indian companies. Chinese companies expect the proportion of standardised products they make to double by 2020, implying a significant increase in mass production capability.  Companies in the other developed nations predict a trend away from localisation and towards standardised international products by 2020, excepting for companies in Sweden, which predict no change. Subcontracting If products are to be made for an increasingly international audience, then many will have to be tailored to each regional market. But who will do the tailoring—the manufacturer or subcontractors? By 2020, the balance will have tipped in favour of using subcontractors to help localise products for international markets. This fits with the general trends towards the internationalisation of manufacturing.
The biggest change will occur among Swedish companies, which predict that they will move to a model where 75 per cent of localisation work is done by a mix of subcontractors and their own efforts, a reversal of the current model where 75 per cent of localisation is done in house only. Currently, on average there is a roughly 60:40 split in favour of a manufacturing company localising products for international markets themselves, rather than using a mix of subcontractors and their own efforts to do so. But by 2020, companies localising products themselves without the help of subcontractors will have shrunk to less than half (46 per cent) while the number of companies relying solely on subcontractors to localise products will have almost doubled (from 7 per cent to 12 per cent). Swedish and Dutch companies will lead the charge of relying on subcontractors alone. On average, 55 per cent of companies surveyed subcontract manufacturing and responses broadly point to an expansion of subcontracted manufacturing to 2020. The same proportion of companies expect subcontracting levels to stay the same as predict the levels will increase, but few expect subcontracting to shrink in the next 10 years. While regular visits to subcontractors outweigh on-theground management by a factor of 7:2 on average, Chinese and US companies are as likely to deploy local management as they are to use regular check-ups. Anecdotal evid nce suggests a heightened awareness of the need to manage subcontractors well. The majority of executives see their management policy in 2020 as unchanged. A few will visit more frequently, fewer still will deploy local management and one or two will attempt control through their ERP systems. Low-cost labour The large labour-cost differentials that proved so attractive in encouraging companies from developed nations to shift or outsource manufacturing to emerging economies are already showing some signs of erosion. So looking to the long-term, where will companies be manufacturing in 2020?
Respondents seem uncertain. Asked to name a possible source of low-cost labour in 2020, many executives stayed with countries that are already well-established, such as China and India. Conditions for setting up manufacturing units in the entire continent of Africa varies region-wise beacuse of reasons like existing infrastructure, political stability and encouragement of inward investment. Very few mentioned South or Central America as possible regions, which is surprising given that Mexico and Brazil are two economies tipped by economists to benefit from such inward investment. However, South American countries are far from ideal manufacturing locations: Brazil is known for its complicated tax environment and Mexico can already be considered high-cost as compared to China and India. Several respondents mentioned individual developing countries, such as Cambodia, where some manufacturing already exists (in Cambodia’s case, it is mostly garment manufacture), which could be a suitable location for low-cost manufacturing. Thailand is also considered as an option. However, there seems to be a lot of uncertainty among manufacturers. Even in cases where executives had identified a new location, when asked what they were doing to prepare, many admitted to doing nothing. The results also show a degree of dissimilarity as to what factors will affect the rise of the next manufacturing base. Low-cost labour inevitably scores high, but there are other contributory factors such as the stability of the political regime, infrastructure, ease of capital investment and the educational level of the population. (To be continued) Courtesy: Capgemini and IDG Global Solutions |
