New markets-cost-insight-opportunity

INDUSTRIAL MARKETS

New Markets Cost, insight and opportunity

KPMG INTERNATIONAL

“You may not be able to get the results you want today in China, but the point of being there is this: whoever wins in China in the next 5 years will win in the next 100 years.” – CFO, a U.S. industrial and construction machinery maker.

New Markets: cost, insight and opportunity 1

Foreword

How do companies seek to increase and secure value from operations in new markets?

Companies often ask KPMG

member firms to help them compare

themselves with their peers. The

Global Manufacturing Benchmark

Survey was designed to meet this

need. This survey compares value

creation and preservation in

269 manufacturing companies with

global operations and allows each

participating company to generate

a unique comparison of their

performance with peers in their own

industry, as well as across industries.

As part of a recent wide-ranging survey

of large manufacturing businesses

across the world1, KPMG International

created a new objective score of

how corporate value is derived from

new markets, as seen by CEOs and

CFOs at some of the world’s biggest

manufacturers. Using an extensive

series of telephone surveys and

personal interviews with companies

in the automotive and industrial

products sectors, executives at 269

manufacturing companies were asked

to cite their key concerns about new

market operations – whether selling

in, manufacturing in, or sourcing from

new markets – and then go on to

break down these areas of concern

into detailed specific management

challenges over the next five years.

Today, companies are focused on the

increase of value – both present-day

valuation in corporate asset markets,

and value in terms of ability to deliver

sustainable profits in the markets and

businesses of the future. The survey

concentrated on value in four specific

areas: risk, regulation, compliance,

and new markets. In the absence

of a commonly accepted definition

of corporate value, the survey does

not define ‘value’ itself. Instead it

measures a number of underlying

performance and operational indicators

which together form a database from

which companies can draw conclusions

about value creation.

Bill Kimble Global Chair, Industrial Markets KPMG in the U.S.

1 KPMG’s Global Manufacturing Benchmark Survey, 2008

Uwe Achterholt Global Chair, Automotive KPMG in Germany

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2 New Markets: cost, insight and opportunity

New Markets: cost, insight and opportunity

Companies surveyed report that responding to the challenges of new market competition and the opportunities of new market production and sales are top of the business agenda now and for the foreseeable future.

Manufacturing companies agree that

the reason for that interest is growth:

the big four new markets (Brazil,

Russia, India and China, – the ‘BRICs’)

are growing at between two and five

times the rate of growth in the older

industrial economies – while many

manufacturing companies are positive

about manufacturing in Brazil, India and

China, they remain cautious or neutral

on the prospects for manufacturing

investment in Russia. The view of a

European industrial products group

is typical: “for us Brazil is expanding,

China is expanding. India probably

will be expanding. Russia is a maybe.

The issue with Russia is that Russian

customers need to make a technology

leap if they are going to buy from us”.

Companies report that their growth

strategies are more concentrated on

winning new customers and new

business in existing markets than on

entering new markets. However, in

interviews, companies stress that in

many cases they are already active

in new markets, and therefore count

Companies were asked: which of these is

the main business growth strategy for your

company over the next five years?

100% 90% 80%

Automotive equipment70% Automotive components60% Industrial manufacturing50% Aerospace40% Metal industry30% Other20%

10% 0%

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exis

ting

cust

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Source: KPMG International 2008

Brazil, Russia, India and China as

existing markets (as suggested by

the above graph).

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

100%

Ente

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Gai

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Automotive equipment

Aerospace

Automotive components

Metal industry

Industrial manufacturing

Other

0

20

40

60

80

100


Two issues dominate corporate

concerns regarding sourcing from or

manufacturing in low cost economies:

cost and quality. Some companies

surveyed also voice concerns about the

challenges of managing through joint-

venture approaches, but these are in the

minority as most companies report that

the manufacturing that they consider

critical is almost always accomplished

through wholly owned subsidiaries.

New Markets: quality challenges Many companies surveyed remained

concerned about the achievement

of quality in emerging market

locations. However, companies

with manufacturing operations in

intermediate cost locations – such as

economies on the European periphery –

frequently report very positive results

on both cost and quality. “We have

more quality issues in high-cost

countries than in low-cost countries,”

says one European industrial machinery

maker. “We make all our critical

components in places such as the

Czech Republic and Portugal: we have

low cost and the highest quality.”

And this company adds: “achieving

quality from low-cost markets is entirely

dependent on how long you have had

to manage the issue”.

Manufacturing in low-cost east Asia –

especially China – is more problematic,

although several companies argue that

quality failings are often the fault of the

manufacturer rather than the location.

The CFO of one large east Asian auto

components maker says that his

company remains reluctant to commit

to manufacturing in China on quality

grounds: “quality is very important to

a manufacturer in our business.

We make things like brakes – these

are critical components that lives

depend on. We would do a lot more

manufacturing in low-cost locations if

we could be sure of the quality”.

Companies were asked: are you engaging in,

or considering, low-cost country sourcing for

A large Indian auto parts maker with

global auto customers adds that

“on quality, we consider India to be

as good as it can be. China is not so

good, but training and investment will

push that quality up. There is no doubt

that quality is the biggest challenge in

low-cost country sourcing, and getting

and keeping the right skills is the next

most difficult issue”.

production?

70%

60%

50%

40%

30%

20%

10%

0%

Automotive equipment Automotive components Industrial manufacturing Aerospace Metal industry Other

Cons

ider

ing

Enga

ged

in –

but o

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Enga

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in –

for

seve

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Nei

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enga

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50%

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30

40

50


Many companies report that achieving

quality from low-cost manufacturing

depends less on location and more on

recruitment, training and error correction.

“The fact is people always want to

improve: look at manufacturing in a

location like the Czech Republic, and

how passionate they are about achieving

quality levels,” says a European

industrial products group. “You must

never underestimate the work ethic

and the motivation of your partners.”

New Markets: cost and productivity challenges Almost without exception, companies

report that productivity rather

than direct labor cost is the key to

profitable manufacturing operations

in new markets. “Labor costs are

not increasing,” says a large Indian

auto components maker with global

customers. “The cost per person is

increasing, but so is productivity –

so overall there is no cost increase.”

Some companies, especially those

domiciled in emerging markets, are

concerned about the relative rise in

emerging market direct labor costs.

“The rise in Indian labor costs means

that a huge advantage is becoming

a smaller advantage,” says an Indian

automotive components group.

“Even for a company that has a large

labor pool to draw upon, it is still an

emerging problem.” For companies

domiciled in western Europe and the

U.S., relative cost increases are of

Companies were asked how significant

low-cost country sourcing was in terms

of cost and quality on a scale of 1-5

50%

40%

30%

20%

10%

0%

less concern. “Labor costs may be

rising in low-cost countries, but the

absolute differential between low-cost

and high-cost is still increasing,” says

a European industrial and automotive

products group. “For us it is still the

case that Germany is seven times

more costly than the Czech Republic.”

Cost Quality

1 N

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KPMG comment

Beyond low-cost manufacturing Companies should treat low-cost

manufacturing solutions as part of

a larger strategy that embraces

the total supply chain. Low-cost

manufacturing is not a strategy that

should be pursued in isolation: today

companies need to understand that

as their operations grow increasingly

global, the risk and opportunity profile

of their supply chain operations has

grown correspondingly complex.

Companies surveyed for this report

say that new market access is more

important than low labor costs; that

there is no obvious correlation between

labor cost and quality; and that there

are no hands-off management solutions

in new markets. These are just some

of the indicators of the fundamental

challenge of globalized operations.

Operating with a global footprint

can increase risk very significantly.

Companies should find new ways

of understanding and managing

those risks.

How should companies integrate low-

cost manufacturing into a larger total

supply chain strategy?

KPMG firms believe there are three

critical issues for global managers.

Identifying true cost. Traditional

manufacturing operations do

not represent the greatest cost

or risk areas for companies that

see themselves primarily as

manufacturers. People often assume

that manufacturers’ greatest costs

are in labor, whereas in fact, the

greatest costs are associated with

distribution and logistics. These are

also areas which are most likely to

be fully outsourced, which itself

creates risk. Companies should ask

themselves whether they understand

the true risks in distribution and

logistics.

Choosing and using information. When companies expand operations

globally, managers need access to a

much wider base of information than

when they operate in tried-and-tested

markets. How companies gather and

collate and analyze information is

becoming a critical issue. This is not

a technology challenge. The issue is

knowing what it is that companies

need to know, being able to analyze

it and act on it.

Implementing corporate social responsibility. The global networks

of manufacturers are getting more

complex, and more challenging

to manage. One dimension of

this complexity is the difficulty of

implementing the corporate social

responsibility agenda. Companies

that focus on manufacturing costs

alone without considering the impact

on their CSR agenda are not truly

optimizing costs or managing risks.

Driving the efficiency of processes

through lean manufacturing or Six

Sigma is fine, but companies need

to take a broader and multi-faceted

approach that sees operations in the

global context.

Companies that do understand the

wider risk and cost implications of

globalized operations can be shown

to achieve a higher level of profitability.

But taking the holistic view is not easy.

Many companies can find it difficult to

step outside their own world. However,

when you are committed to a path that

inevitably leads to greater complexity,

you should also have internal and

external perspectives if you are going

to manage that complexity.


However, in interviews, companies

said that labor availability, flexibility and

productivity in emerging markets were

more important than direct labor cost.

“Labor is not an issue for us,” says an

Indian industrial products manufacturer

with global clients. “In Hyderabad

we have flexible hiring – we can hire

somewhere between three times

and five times our current workforce

without difficulty, tomorrow if we want

to. That is the essential advantage in

being in a location like this.”

A European industrial products and

automotive group concurs, saying “it is

not really fair just to focus on cost –

you have to look at flexibility. When

it comes to low-cost countries’ labor

cost increases, you have to factor in

the greater impact of productivity

improvements in those countries,

that outweigh direct-cost increases.

Plus you have more labor flexibility

and often a superior work ethic”.

However, in interviews some

companies caution that localized

skills shortages will continue to

inhibit investment in certain large

emerging economies: one large U.S.

headquartered global automotive

manufacturer comments that

localized skill shortages in Russia

remain so acute that some large plant

investments remain on hold. This view

is supported by research from the

World Bank2, which shows that despite

Russia having one of the world’s most

highly educated workforces, industry-

specific skill shortages remain the

second most important constraint on

growth (after tax levels) according

to 1,000 large and medium sized

companies surveyed by the World

Bank.

Intellectual property in new markets Is there a special threat to companies’

intellectual property (IP) in emerging

markets? Some companies believe so:

“I think there is an issue with intellectual

property rights in China, and also in the

Czech Republic and in Poland,” says

one European automotive components

manufacturer. Such concerns are

shared globally. A Korean automotive

manufacturer also comments “there is

no question, we are concerned about

intellectual property when it comes to

outsourcing manufacturing. That is

why manufacturing that is critical from

a business point of view is kept

in-house. And when we go overseas

to manufacture, we go with someone

that we know”.

However, one U.S. construction

machinery maker considers

that industrial and automotive

manufacturers can protect their

intellectual property more easily than

other businesses. “The Chinese are

very entrepreneurial, and there is a real

competitive threat there,” says the

CFO of this company. “But we are less

worried about the intellectual property

issue than say a consumer goods

company – it is pretty difficult to

hide a big tractor factory.”

When asked in KPMG’s Global

Manufacturing Benchmark Survey

about overall new market risks, supply

chain management, transport and

quality assurance were assigned

more importance than IP by the full

sample of surveyed companies. Those

companies that did identify intellectual

property as challenging, considered

that understanding intellectual property

protection and formulating intellectual

property protection were the leading

challenges.

2 Skills Shortages and Training in Russian Enterprises, World Bank May 2007.

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KPMG comment

Intellectual property protection remains unfinished business Companies that participated in our


Survey did not assign intellectual

property (IP) a very large weighting

relative to other concerns. However,

companies should be aware that public

policy lobbying as well as IP protection

strategy remain important issues for

companies with global manufacturing

operations.

Companies extending operations

into new markets still need to ask

themselves whether it is reasonable

for them to expect their intellectual

property rights to be respected. IP

issues are becoming more important

as supply chains have become more

globalized. Companies should be

seeking global consistency on IP,

and it does not appear they are

there yet.

Companies concerned about IP risks

cite China and some eastern European

locations as new markets where risks

are highest. Businesses entering Asian

markets should be aware of a higher

level of IP risk, especially when it

comes to manufacturing outsourcing.

In Asia there is not necessarily the

same transparency, and everyone

feels that they have a right to profit.

It is true that there are many cases

where companies do not understand

the terms of contracts, but there

are also many cases of intentional

misreporting.

But while many companies do

achieve a measure of IP protection

by pro actively pursuing infringements

of their property rights, public policy

lobbying is also valuable. This is not

just an issue for the courts, it is a broad

governance issue. If companies do not

all tackle the acceptance of IP violations,

then business may just degenerate

into a free for all, where only the fast

followers’ are rewarded.

Companies can also work to reduce

IP risks by building rewards for

IP compliance into contracts with

manufacturing partners. There is

already a recognition in Asia that lack

of transparency can be an obstacle

in developing business relationships.

Some companies grade their suppliers

on issues like transparency, and

suppliers are aware of this.

The combination of public lobbying,

private enforcement actions, and

incentive-based management of

IP sensitive relationships can ameliorate

risks to intellectual property for

manufacturers. As emerging economies

become more mature, they are drawn

into the global business network and

respect for law and intellectual property

tends to improve. But companies have

to remember that it is up to them

to ensure that respect for IP makes

business sense to their partners.

QB4


New Markets: managing operations Companies surveyed agree: the

quality of management of new

market operations is critical. “Low

cost country manufacturing has to be

hands-on,” says a U.S. automotive

components maker. “The difficult part

of it is not running the manufacturing,

it is establishing and maintaining the

relationship. But if you don’t do it

yourself and rely on a third party, you

are likely to fail. You have to be there,

you have to know people by name –

it is the only way to make it work.”

Some executives interviewed

for the Global Manufacturing

Benchmark Survey commented that

underestimation of the management

challenges of successful low-cost

country operations is common,

especially in China. For example, a

Korean auto components maker says

“some people think you can just move

to China and make the same stuff

cheaper, but unfortunately that is not

how it works. It actually takes a huge

commitment to develop a capacity for

quality in a location like that. This is

something that creates a lot of tension

in a lot of companies”.

100% 90% 80% 70% 60% 50% 40% 30% 20% 10%

0%


Companies may also underestimate

customer risk when manufacturing

for local customers. “The challenge in

China is not to do with manpower,”

says a European industrial products

group. “It is customer risk –

establishing what customers want to

buy and then actually being able to

deliver it. The customer may place an

order in good faith, but when it comes

to shipping it they may suddenly not

have the money – often because of

some government policy change.

It is not a question of how you

manufacture, it is all a question of

how you serve the market.”

Companies were asked: which are the biggest risks

or challenges in low-cost country sourcing?

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However, the same companies agree

that the risks and challenges of long-

term investment in new markets, and

especially in China, are justified by the

potential returns. “You may not be

able to get the results you want today

in China,” says the CFO of one U.S.

industrial and construction machinery

maker. “But the point of being there

is this: whoever wins in China in the

next five years will win in the next

100 years.”


QC7

High performers

QA10 TAX SAV

did favor this approach cited market Source: KPMG International 2008

access and learning from the joint

venture partner over increased speed

of operation, dealing with regulatory

requirements, or the opportunity to

share technology.

comes when you want to do some

major expansion.”

When asked what are the main

benefits of a joint-venture approach in

new markets, those companies that

process takes far too long. You have

to make compromises. And often

enough the outcome is not what you

expect or need, especially in terms of

product quality.” And this company

adds that quality problems go beyond

the product itself: “with joint ventures

there are likely to be problems with

the quality of the whole process. One

hundred percent ownership is better

in itself, but that takes more time and

more cash”.

Other reservations about joint venture

approaches included the reduced

potential for rapid expansion of the

business, or rapid exit from the market.

“The issue is not cost, the issue is

people and control,” says an east

Asian automotive components maker.

“Without full ownership it is really just

too much of a headache when the day

New Markets: investment approaches Results show that most companies

in the survey sample prefer wholly-

owned investment approaches to

joint ventures or entering through

third parties.

These results were confirmed in

detailed interviews. “My personal

view of joint ventures is that I dislike

them,” says a European automotive

components group. “The agreement



Companies were asked: what are the main

benefits of participating in joint ventures?

100% 90% 80% 70% 60% 50% 40% 30% 20% 10%

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Companies were asked: how do

you plan to enter new countries?

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KPMG comment

The return of the joint venture? The majority of companies interviewed

or surveyed for this report say they

prefer not to engage in joint ventures:

they consider that joint ventures

have a higher risk of failure than

either acquisition or wholly owned

investment. Yet experience suggests

that the relative advantages of a joint-

venture approach may be increasing.

The joint-venture approach to new

market expansion has suffered a marked

decline in popularity over the last six

years, but nevertheless it has remained

an important part of the strategic

armoury. The number of such deals

peaked in 2000 at the height of the

dotcom boom, with 3,391 global joint

ventures announced. By 2004 the figure

had fallen to 810, but thereafter the total

began to rise once more. By 2007 the

total had risen to 1,759 deals in the year.1

The low cost of capital during this

period was one factor behind the

relative decline of the joint venture.

Companies were able to raise the

finance for takeovers and greenfield

investments without difficulty.

However, low-cost capital alone cannot

explain the joint venture trend. Debt

remained freely available during the last

three years, yet the total of announced

joint ventures rose in the three years

from 2005.

Data from Thomson Financial shows

that the recent increase in joint

ventures is not just a result of greater

cross-border activity overall. When

taken in conjunction with the number

of strategic alliance deals announced,

the total of joint venture and strategic

alliance activity has been reasonably

flat for six years, hovering between

4,000 and 5,000 deals. In the latter

three years though, joint ventures have

been steadily gaining on their strategic

alliance counterparts and now account

for 36 percent of the total, as opposed

to the low point of 19 percent in 2004.

In terms of their involvement with joint

venture and strategic alliance deals,

the U.S., Japan, U.K., Canada, China,

Australia, India, Germany, France and

Hong Kong have been the top 10 most

active countries over an eight-year

period. Japan dropped out of the top

five for the first time in 2007, while

Russia has seen the biggest increase

in joint venture formation in recent

times, breaking into the top 15 for the

first time in 2006. The U.S. remains the

single biggest participant in the joint

venture market, responsible for 404

joint ventures in 2007 alone.


1 Thomson Financial, 2008.

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These figures suggest that companies

are increasingly choosing joint ventures

out of both necessity and choice.

That is because joint ventures offer

certain advantages in themselves,

a well as in the context of current

financial conditions.

Financial conditions are tighter. Access to cheap debt may have

been removed for now, but the

vocal demands from activist

investors to realize or release

shareholder value have not

gone away. As more proposed

transactions collapse due to an

inability to raise mezzanine and

senior takeover debt, then the smart

money should be on a significant

increase in joint venture activity.

Joint ventures are relatively simple, and relatively cheap.Many joint ventures involve matching

existing assets and corporate

networks – they do not have to be

built (as in the case of a greenfield

investment) or reconciled (as in

the case of an outright acquisition).

Assets, market know-how and

market access are pooled, and there

may be no cash component at all.

As well as securing strategic market

goals, the joint venture means that

a company may avoid having to

obtain debt financing for, say, general

goodwill – or the takeover premium

which may have been required if

it went for an outright acquisition.

In the absence of cheap debt, the

potential benefits should be clear.

This year on year increase in announced

global joint ventures is likely to

continue in 2008. Despite everything

happening in the world economy,

growth opportunities still remain

especially in the emerging markets – yet

companies risk missing out. In times of

falling corporate debt issuance, a joint

venture can be very powerful in quickly

achieving exposure to new technologies

and products, distribution channels and

markets and all with limited capital

investment. The joint venture may

suddenly find itself back in vogue.


New Markets: tax planning In interviews, many companies

appeared unaware of the risk dimension

of global tax compliance, and also

appeared unfamiliar with the concept

of structured tax planning.

A common comment was that in

industrial manufacturing, client

demands dictated location – so

opportunities for tax planning

were limited.

For example, a European diversified

industrial products maker comments

“you may be able to get a lower tax

rate, but that might be negative in

other ways. If you start to make your

business dependent on tax decisions

you will start to go wrong. You see a

lot of companies that concentrate on

financial restructuring and then start to

lose focus on operations. And the tax

advantages you may get are marginal”.

One of the largest Indian automotive

component makers agrees. “Frankly

we believe you can’t do much through

tax planning,” says the CFO. “Even

within India there are hardly any tax

incentives left. And if I need to spend

money on a new investment, I will do

it – those kinds of decisions are never

driven by tax.”



One exception was an east Asian

automotive component maker: the

CFO of this company says “before

I came to this company nobody had

heard of tax planning. But now I am

starting a process that looks at what

structural tax planning opportunities

we have – in terms of structuring

legal entities, reorganizing our inter

company transactions and dealing

with our intellectual property. All of

these factors give opportunities to

generate tax savings and increase our

net income. Cash is also important: you

have to make sure you don’t end up

with cash that is trapped in a certain

location for tax reasons. It is not so

much a matter of relocating operations

but relocating activities, such as

purchasing”.

Yet where companies do engage in

formal tax planning projects, they say

the benefits are great. A European auto

components group with operations in

Europe’s emerging markets says that it

began a tax planning review to address

uneven profitability and uneven tax

liabilities across the group. The CFO

of the company says “we went into

an overall tax review process to tackle

this with the help of tax advisors –

and we think we have solved it in a

way that will be acceptable to the tax

authorities. If we had to do this all over

again, we would do it more quickly; and

we would do it earlier”.

0 10 20 30 40 50 60 70 80


Many companies comment that tax

planning seldom influences location

decisions directly, not least because tax

breaks associated with direct inward

investment have all but disappeared.

For example, a south Asian industrial

products manufacturer says that

“there are no specific tax advantages

in manufacturing in China for us. You

might get certain duty free advantages,

but those are eroding rapidly – both in

terms of currency and in terms of the

scaling back of the duty and incentives.

The party is over there”. The company

adds, that in emerging markets – as in

all markets – companies are concerned

more with sourcing efficiency than

they are with tax barriers. “Tax is just

an overlay of the complexity of the

market,” says the company. “Today

it is possible to import anything and

everything into India. That means that

sourcing efficiency has become not

only possible, but also a vital element.”

To gauge the importance companies

attach to tax planning they were asked

in survey questions whether they were

achieving their optimal effective tax

rate – and if not, whether they had

specific plans in place to remedy this.

Companies were asked: are you currently

achieving your optimal effective tax rate,

and if not do you have plans in place to

remedy this?

Achieving your No optimal effective Yes tax rate Don’t know

No Do you have Yesplans in place?

Don’t know

0% 10% 20% 30% 40% 50% 60% 70% 80%


•

•

•


KPMG comment

Manufacturers should revisit tax planning Companies participating in the KPMG


Survey were divided as to the benefits

of tax planning in manufacturing. Some

held that tax planning offered extensive

benefits to manufacturers with globally-

distributed operations and profit levels,

but others believed that allowing

manufacturing strategy to be driven

by tax concerns was a mistake.

We believe that the latter view is

based on a misapprehension. In the

manufacturing business, tax directly

or indirectly, is a pertinent factor in

many aspects of the business that tax

planning should be part of the strategy

process. While it would be quite wrong

to let tax purposes dictate the location

of a major manufacturing plant, it is

also wrong to exclude the tax function

from the manufacturing strategy.

Tax planning is not about locating for

tax purposes, but rather about seeking

to manage the effects of tax rates.

Many companies in the survey say they

want to achieve their optimal effective

tax rate: KPMG member firms can

find that they cannot effectively do

that unless the head of tax is closely

involved in commercial decisions and

in the formation of strategy. Many

heads of tax will tell you that their job

is to manage the tax rate – however

– according to a survey conducted

by KPMG in the U.K., compliance

and reporting activities continue to

dominate the tax department’s time

– nearly 60 percent, while only 11

percent is spent providing tax input

into business decisions2. A survey

conducted by KPMG in the U.S. found

similar results: “The tax department

will spend most of its time on

accurate, timely financial reporting and

compliance versus effective tax rate/

cash tax savings”.3

What determines successful tax

planning can vary between companies,

but some themes emerge consistently,

KPMG member firms can find:

Tax planning should embrace all potential tax issues. Heads of

tax do not appear to be sufficiently

aware of all the dimensions of tax.

They tend to be primarily concerned

with managing corporation tax. But

do they understand the full impact

of sales taxes, do they understand

customs issues? It should all be

brought into the strategic process.

Tax can be a tool for mapping functions and risks. Manufacturing

is a very wide term, embracing all

kinds of activities. It may be fully-

fledged manufacturing; it may be

contract manufacturing; it may be toll

or ‘screwdriver’ operations. All these

operations imply different levels

of risk, and thus different levels of

profitability – and that makes tax

planning important.

A global approach can confer advantage. Consistency and stability are important in effective tax planning. First, that’s because

you are unlikely to get the best

returns if you are constantly chopping

and changing on the fundamental

issue of what is driving your profits.

Secondly, because tax authorities

can often take comfort in a globally

consistent approach.

Effective tax planning can also

influence a manufacturer’s standing

with investors and cost of capital.

Financial analysts are extremely

interested in the after-tax returns your

strategy is getting. Companies that

don’t have a tax planning dimension to

their manufacturing strategy are more

likely to be rated down.

2 The Tax Function – Facing up to the Changing World. KPMG in the U.K., 2006.

3 Six Highlights of the Tax Function for 2008. KPMG 2008 Tax Department Survey. KPMG in the U.S., 2008.



Conclusion

The globalization of manufacturing has

been one of the great transformational

trends of the last quarter century.

KPMG’s Global Manufacturing

Benchmark Survey seeks to gauge

both the present progress and future

direction of this trend.

The survey finds that expansion into

new markets is reaching a mature

phase. Manufacturers are now

primarily concerned with consolidating

their existing market presences –

winning new customers and new

business – rather than on further new

market entry. KPMG International

believes this reflects the fact that for

many of the companies interviewed

entry into the most important emerging

growth markets has already been

achieved. Maturity is also evident in

the increasingly sophisticated view

that companies take of new market

opportunities. Low direct costs are no

longer the most important component

of the new market strategy: rather

companies are concerned with the

longer-term management challenges

of finding and retaining skills, and

optimizing productivity and flexibility.

The structure of global manufacturing

operations has also changed rapidly.

Joint venture approaches to new market

manufacturing have largely given way

to wholly owned subsidiary approaches,

a change that is symptomatic of an

expansion phase in global operations

(companies report that joint ventures

can be typically difficult to expand

rapidly). However, higher cost of capital

is likely to dictate some revival of the

joint-venture approach.

The survey also reveals other limiting

factors. While approaches to new

market manufacturing structures

and management have evolved fast,

concerns over intellectual property

vulnerabilities remain. Many companies

report continued caution over their

intellectual property exposure in

markets lacking a strong tradition of

intellectual property protection, and this

factor is likely to limit the value achieved

in new market manufacturing. KPMG

International also finds that a strategic

understanding of the tax implications

and opportunities of increasingly

globalized manufacturing operations

remains limited, and it seems likely that

the elimination of many direct national

tax subsidies has led companies

to underestimate the continuing

opportunities in tax planning.

Although current conditions impose

higher investment costs on companies,

coupled with the likelihood of

somewhat slower growth in global

demand, the fundamental drivers of

globalization of manufacturing remain

in place. Manufacturers report a

continued need to cut costs year on

year, and a continued expectation

that most of the growth in their

businesses will come from fast-

growing new markets. The question

for many manufacturers participating

in the KPMG Global Manufacturing

Benchmark Survey is not whether

they will continue to globalize their

manufacturing operations, but how

profitably they can do so.

-

kpmg.com

KPMG’s Global Diversified Industrials and Automotive contacts

Bill Kimble Global Chair, Industrial Markets KPMG in the U.S. [email protected] Tel: +1 713 319 2148

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

Michele Hendricks Global Executive, Diversified Industrials KPMG in the U.S. [email protected] Tel: +1 212 872 3641

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

Fiona Sheridan Global Senior Marketing Manager, Automotive KPMG in the U.K. [email protected] Tel: +44 20 7311 8507

Dan Coonan Marketing Manager, Diversified Industrials KPMG in the U.K. [email protected] Tel: +44 20 7896 4823 Tel: +49 89 9282 1147

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No-one should act upon 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 and opinions of KPMG International or KPMG member firms.

© 2008 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. Printed in the U.K.

KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

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Publication name: New Markets: cost, insight and opportunity

Publication number: RDL 1855

Publication date: November 2008

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