Special Report: Turbulent Times for Global Manufacturing
The global manufacturing sector is becoming accustomed to volatile market conditions, a result of wild swings in demand and commodity prices over 2005-2011. Having overcome the global economic downturn of 2008-2009, manufacturing continues to face a number of challenges. While the global shift in production presents strong opportunities for savvy businesses, traditional consumer markets are forcing out manufacturing industries to more cost-effective locations.
- Manufacturing is a key component of global industry, responsible for a large share of employment and investment, with its fortunes directly linked to consumer confidence. In 2010, total global manufacturing production made up 57.0% of the world’s total GDP;
- The impact of the global economic downturn of 2008-2009 sent global manufacturing production tumbling, with world output falling by 12.5% annually in real terms in 2009 as consumers toned down their expenditure and demand plummeted. However, over 2005-2010, real global manufacturing output actually expanded by over a fifth;
- Although all regions saw a real annual fall in manufacturing production in 2009, Eastern Europe was particularly hard-hit, with its manufacturing as a percentage of total GDP falling from 17.0% in 2008 to 15.7% in 2009. By contrast, Asia Pacific’s manufacturing sector rode out the global economic downturn relatively well;
- 2010 saw a solid recovery in manufacturing as the global economy improved, with annual world real GDP growth reaching a healthy 5.2%. The great manufacturing shift from advanced to developing economies continues unabated, with China leading world total manufacturing production in 2010. Consumers, meanwhile, have benefitted from market diversification, greater competition and a wider array of low-cost goods and services;
- However, a series of fiscal and supply-chain shocks over 2011 have brought greater volatility to commodity prices and consumer demand, resulting in dampened, albeit still positive, forecast annual global manufacturing growth in 2011. The outlook in Western Europe is especially fragile, although economic tremors can spread globally should the eurozone debt crisis worsen.
Manufacturing and the global economic downturn of 2008-2009
- Manufacturers were already being squeezed by increasing raw materials prices before the economic downturn as the global economy was overheating. For example, in September 2006 the Metals Price Index expanded by 67.0% over the same period the previous year amongst a general surge in commodities demand. This was reflected in rising consumer prices on resource-heavy goods, such as automobiles and construction materials;
- As the global economic downturn unraveled and Western markets were hit by the credit crunch, global annual consumer expenditure declined by 5.8% in real terms in 2009 as demand fell across the world’s consumer markets. As a result, global manufacturing production, which had seen average annual growth of 8.0% in real terms over 2005-2008 due to booming economic growth, collapsed in 2009 as businesses adjusted their supply needs;
Real Manufacturing Production by Region: 2005-2011
Source: Euromonitor International from national statistics/UN/OECD
Note: Figures are in constant terms; fixed 2010 US$ exchange rate. 2011 figures are forecast
- This collapse was exemplified by dramatically falling production in key markets. Germany’s production of machine tools declined by 31.2% in real terms year-on-year (y-o-y) in 2009, while Japan’s production of parts and accessories for automobiles fell by 26.6% y-o-y in real terms. Unlike the financial system bailouts, governments provided little fiscal assistance to industry, allowing market forces to take hold and wean out inefficient producers;
- Eastern Europe’s manufacturing production suffered the greatest worldwide, as its output declined by over a third in annual real terms in 2009, largely due to plummeting demand for the region’s goods. Asia Pacific, meanwhile, recorded the smallest fall in real annual manufacturing production of 0.5% in 2009, as domestic demand in large emerging markets such as India and China boosted domestic production, while worldwide desire for cheap goods buoyed Chinese manufactures. Diversified businesses with brand presence in these markets fared better throughout the crisis;
- The fact that businesses were forced by the financial crisis to deal with cost challenges and unpredictable demand flows potentially strengthened the global manufacturing industry, with weaker or inefficient businesses eliminated. Diversification into new markets, the tightening of input costs, greater innovation and process standardisation have also been positive offshoots. Consumers have benefitted from a greater assortment of products and a larger emphasis on market proximity, with shorter supply-chain links resulting in reduced prices.
Manufacturing trends and a 2010 recovery
- The manufacturing sector stabilised in 2010, with all regions seeing positive real growth in total manufacturing production y-o-y. Perhaps surprisingly, the strongest rebound was witnessed in Latin America, as Brazil drove regional output rates through its traditional industries of metal plants and automobile assembly. The continued expansion of the nation’s manufacturing offers strong potential investment opportunities in a growing consumer market;
- China, having overtaken the USA in 2007, is the world’s largest manufacturer as of 2010, with its total manufacturing production expanding by 107.9% in real terms over 2005-2010 to reach US$10.2 trillion. While rising inflation and tightening of liquidity provision by the country’s central bank remain constraints on production, China still offers the most cost-effective manufacturing solutions for businesses;
- China’s rise has been reflective of a general manufacturing shift away from advanced economies to emerging markets. Economies of scale, cheap labour and a greater focus on services have pushed more manufacturing capacity to emerging economies, with more Western businesses outsourcing production to developing nations. In 2005, developed countries controlled over two-thirds of global manufacturing production; by 2010 this had been cut to just over half. Offshore manufacturing benefits consumers as lowered labour costs are passed down in reduced prices of goods, but small and medium-sized businesses that do not possess the capital to outsource production abroad lose competitive edge;
- As manufacturing shifts eastwards so does demand, as more Western producers rely on large Asia Pacific markets for sales, whether to consumers or retailers. A growing focus on services by consumers in advanced economies is resulting in falling demand for actual goods, pushing more manufacturers into value-added segments. However, the rise of Internet retailing is providing strong opportunities for manufacturers, with retailers able to cut rental-space and staff costs and thus increase manufacturing orders;
- Manufacturing decline continued in some developed economies such as Greece, Spain and the USA into 2010, impacting domestic labour markets. Paid employment in manufacturing in the USA contracted by 7.7% over 2005-2010, seeing a decline every year, while manufacturing as a percentage of total GDP fell from 12.7% to 10.8% over the same period. While the country’s troubled automotive and steel industries are of particular concern to related businesses and workers, USA still easily topped global Foreign Direct Investment inflows in 2010, providing hope that continued liquidity will boost manufacturing.
Five Largest Markets Worldwide by GDP from Manufacturing: 2005-2010
Source: Euromonitor International from national statistics
Global manufacturing shocks in 2011
- Although 2010 promised to be the start of a prolonged recovery in both global economic growth and manufacturing output, a series of global shocks during 2011 threatened global supply chains and pegged back optimistic manufacturing growth estimates. Resulting increases in input costs and production delays will likely be passed on to consumers in the form of rising prices, especially in the much-affected automobile and electronics segments;
- The earthquake and tsunami that hit the Tohoku region, home to a number of car and electronics manufacturing plants, in Japan in March 2011 caused severe supply-chain delays worldwide, especially in terms of semiconductors and auto parts, of which Japan is a major global supplier. Global manufactures will likely suffer from lowered Japanese demand, as a frugal tone sets over the country, with annual consumer expenditure set to decline by 0.3% in real terms in 2011;
- Record floods in Thailand over July-November 2011 paralysed Thai manufacturing capacity. Thailand is a major car and electronics manufacturing hub in Southeast Asia. In late October 2011, the government estimated that around 10,000 factories had shut down. Global supply chains were disrupted, with several US and Japanese plants forced to slow production;
- However, potentially eclipsing these natural disasters are the US and eurozone sovereign debt crises that escalated throughout 2011. Falling consumer confidence and an insecure business environment are forcing producers to rethink their quotas and lower output in preparation for declining demand in 2012. Car manufacturers Renault, Peugeot Citroen and Ford Motor already stated over Q4 2011 that operations will be suspended for short periods in France and Spain in 2012, putting jobs under threat;
- Nonetheless, some manufacturers can benefit from recession. Falling global demand is reducing commodity prices, especially in base metals like copper, providing solid opportunities for businesses able to take advantage of lower input costs. Businesses with diversified portfolios should benefit from still-strong demand in emerging markets such as Brazil and India, even though advanced economies are struggling.
According to most manufacturing measures, including a number of international purchasing managers’ indices (PMI), an indicator that illustrates financial activity by purchasing managers in the acquisition of goods and services, global manufacturing contracted month-on-month during Q4 2011, with the eurozone region and the UK seeing especially strong declines. China, meanwhile, saw the first monthly contraction in its official manufacturing PMI in November 2011 for almost three years, according to national statistics, leading to speculation of the spreading impact of the eurozone debt crisis going into 2012.
Nonetheless, total global manufacturing production is expected to expand by 7.7% in real terms in 2011 annually. Most of this growth will come from Latin American and Asia Pacific, although Western Europe is expected to improve on its 2010 manufacturing output. However, with a number of Western European nations languishing well below 100.0 in the Manufacturing Production Index (1995=100) in 2010, the macroeconomic and manufacturing shift from advanced economies to emerging markets will likely continue. As a result of Arab Spring disruptions across 2011, Middle East and North Africa is projected to see greatly reduced manufacturing capacity in the short term.
Notable manufacturing strategies have been implemented in both Brazil and China. Brazil’s government launched the “Bigger Brazil” plan in August 2011, which is set to enhance the business environment for manufacturing businesses through subsidies and tax cuts. China’s 12th Five-Year Plan (2011-2015), announced in March 2011, focuses on developing sustainable, high-tech manufacturing industries while downgrading its low-quality goods production, with potentially long-reaching consequences for global exports. This may provide opportunities for other emerging nations to take over China’s mantle as a major cheap goods producer in the long run. However, a potential increase in protectionist policies in 2012, if there is a sharper than anticipated global slowdown, will also weigh on the global manufacturing industry.