Over the next five years more than 50% of manufacturers plan to enter a new market and almost all plan to expand existing sites or open new facilities in countries with existing operations, according to a new study “Footprint 2020 Expansion and optimization approaches for US manufacturers” jointly conducted by Deloitte and the Manufacturers Alliance for Productivity and Innovation (MAPI).
While Asia and South America are expected to continue to experience a steady inflow of project investments, China and the United States are expected to receive the highest number of investments by manufacturers planning to optimize operations in countries with existing activities.
Locations emerging as targets for investment include South Africa, Turkey and Vietnam. These markets are increasingly drawing attention due to their growing middle class and rising spending power. Meanwhile, while some respondents appear to lag in terms of their entry into Brazil, China and India, many plan to expand their footprint into these markets in the coming years.
The decisions that will drive these moves in 2020 are expected to shift to access to technological advances and investment in the talent pipeline. Countries with a strong talent pipeline that can provide access to technological advances and educational infrastructure are projected to see increased investment, the report concludes.
“Many emerging markets are currently investing heavily to improve their technology infrastructure and boost their educational programs to support evolving manufacturing needs,” said Matt Highfield, director, Deloitte Consulting LLP and co-author of the report. “Ultimately, these efforts can allow them to become increasingly competitive on the global stage, especially at a time when developed economies continue to battle the challenges of an aging workforce.”
As manufacturers contemplate entering new markets, expanding existing manufacturing locations, or reshoring portions of their production, the optimization of their footprint strategy will necessitate flexibility. “Entering a new, up-and-coming market can be alluring, but single location expansion shouldn’t be considered in isolation,” suggests Jennifer Callaway, council director at MAPI and co-author of the report. “Manufacturers can better position themselves for success by making growth and expansion decisions within a dynamic strategy that encompasses their entire footprint.”
Considerations for Expansion
When addressing manufacturing enterprise footprint strategy, there are a few things manufacturers should keep in mind as they proceed with planned investments.
- Consider the benefits and risks of being a pioneer and an early adopter, instead of operating in proven locations: – Potential benefits: Lower cost structure, greater choice of real estate, access to economic development incentives designed to jumpstart the local sector – Potential risks: Talent availability (especially at experienced levels), underdeveloped infrastructure, weaker business ecosystem, less mature educational and training infrastructure, elevated need to rely on expatriate resources to stand the operation up.
- Make sure risks are understood including active mitigation and monitoring strategies in place around such things as cyber security, protection of intellectual property, managing corruption risk, foreign currency risk and other financial risks.
- Evaluate customers and consider potential biases they may have toward goods produced in certain locations. Are there perceived issues with manufacturing quality? Is there a social or cultural issue that might impact sales of product abroad?
- Determine whether the right leadership is in place to take on the challenge. One of the greatest impediments to global greenfield expansion is the availability of leaders to conduct knowledge transfer and run new facilities. The ability of existing executives and managers to commit time to the expansion must be carefully assessed as investments are planned and aggressive timelines set.
- Understand trade agreements and how the company might benefit, keeping in mind country relations are dynamic and the stability of trade treaties should be independently assessed.
- Consider cultural alignment. Many companies suffer false starts by simply misunderstanding the business culture in new countries. Selection of facility leaders must acknowledge the need for local expertise in navigating business culture, local regulations and workforce related nuances.
- Consider the right market entry strategy for each investment. If the company has limited experience with the local standard operating procedures, a Joint Venture (JV) can provide integration support. JVs may enable faster speed to market, lower upfront capital investment, and provide access to an established distribution/customer network. Contract manufacturers are also an option for manufacturers determining whether to make a significant capital investment in a particular country. Contract manufacturing may reduce the burden of labor attraction and management, upfront capital investment, and market exit flexibility.