When global companies look for a place to manufacture they look for three things:
- A place that has got a significant market for their products
- Access to raw material
- A high-skilled workforce. So a place that has a good educational base and programmes is a good start. The company then invests in it and the individuals in that place to build capacity.
What about labour cost in determining the geography of manufacturing:
- Most bona fide companies value people skills more than people cost. Skills are important in competitiveness. Research shows that in most economies there is a mismatch between the skills that are required for modern manufacturing and the skills that are available.
What about the role of innovation:
- The most part about innovation, when it comes to what potential investors are interested in, is around how business models can be changed to unlock the value of that technology for a customer. A McKinsey interview with Timken CEO James Griffith best illustrates this point when he said:
“When we started our transformation, one of things we recognised was that our knowledge about mechanical power transmission was unmatched anywhere in the world. It’s based on a century of investments in R&D and technology. What we also recognised was that we had become rigid in how we took that knowledge to market. And so the majority of our innovation has been around how you change business models to unlock the value of that technology for a customer. The rail industry is probably the best example. We invented the wheel bearings for freight cars. We’ve incrementally changed them over time, but the fundamental design hasn’t changed for 50 years. And 50 years into that product line, you don’t make very much money making the product. In the middle ‘90s, we bought a company that remanufactures them. And, today 75% of the global revenue in our rail business is in remanufacturing – a service we provide to the customer that gives them a lower cost of use and greater security, or safety on the rails, but actually takes away the volume from our manufacturing base.”
What about risks and opportunities:
- One of the trends that are important to manufacturing is the increase of volatility and the need for companies to be more agile. Griffith has this to say:
“The issue of volatility is something we’ve worked incredibly hard to deal with. We do it with contractual terms, with our customers in the steel business, for example. They take the volatility of raw material prices, which we deal with. We deal with it in the way we structure our workforce. In all of our plants, we try to do a mix of what we call ‘fixed’, permanent Timken people and a contingent workforce that allows us to deal with it. And we’re open with our people. The other piece then, from a market portfolio point of view, is that we have worked very hard to move ourselves from an original equipment manufacturer (OEM) market. The capital goods market is what drives a lot of volatility of demand, whereas the aftermarket is much less volatile.”
Extract from a McKinsey interview with Timken CEO James Griffith: “Manufacturing’s new era.”