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Manufacturing Trends

2009 and beyond

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Frost & Sullivan

The Growth Partnership Company

– Founded in 1961, 47 years of industry experience

– Over 1,700 Consultants/Analysts across 32 global locations

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A 360 degree view of Business

• Economic• Competitive• Customer• Technology• Integrated Industry• Best Practices

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AEROSPACE & DEFENSE

HEALTHCARE ICTAUTOMATION & ELECTRONICS

AUTOMOTIVE & TRANSPORTATION

CHEMICALS, MATERIALS &

FOOD

ENERGY & POWER SYSTEMS

ENVIRONMENTAL & BUILDING

TECHNOLOGIES

Cross Vertical Industry Expertise

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The Economy

Manufacturing Trends

Agenda Future Manufacturing

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Economic Outlook

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Overview of the current global economy

The current global economic environment is indeed bleak: the ramifications are huge and widespread in terms of geographies and industry sectors.

Expected write-down of assets by banks:

$10 trillion

Enormous repercussions

Volvo order book (trucks-Europe):

3Q 2007: 41,970

3Q 2008: 115

Impact across industries

MSCI Emerging market index:

Impact across geographies

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SARS 2?SARS 2?

SEVERE AMERICAN RECESSION SYNDROMESEVERE AMERICAN RECESSION SYNDROME

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A recession is a significant decline in economic activity spread across the economy

• lasting more than a few months

•normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales

The R word

National Bureau of Economic Research National Bureau of Economic Research

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De-coupling – myth or reality?

The world IS much flatter than we would like to believe

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Europe, 34%

North America,

30%

Latin America & Carribean,

4%

Asia Pacific, 27%

Africa, 1%

Composition of World GDP, 2007

Global GDP is estimated at $ 40.57 trillion in 2007. Contribution of emerging countries has been increasing Emerging markets Increasingly contributing to growth United states and Euro Area still the major engines of global growth China, India and other emerging markets becoming equally important despite low global share

The World Economy

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Contribution to Global Growth

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06

Period

Valu

e

0.0

0.2

0.4

0.6

0.8

1.0

G3 non-oil imports (% change) Developing Asian exports (% change) Correlation

Correlation between Developing Asia Exports and G3 Imports

• Developing economies especially Brazil, Russia, India and China still derive a significant amount of their growth from the G3 Economies of USA, Europe and Japan

• The G3 economies effectively constitute close to 70% of the global economy and are the biggest destination markets for end products

• The G3 economies are also the biggest source of foreign direct investment and portfolio investments and debt market for raising capital.

• A slowdown in these economies at the same time will definitely drag growth in emerging and developing markets down.

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2008 2009

World 3.7 2.0

Europe 1.2 -0.5

USA 1.4 -0.7

China 9.7 8.5

India 9.3 7.5

ASEAN5 5.4 4.2

Projections 2009

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Low Projections 2009

3.5%3.5%

-1%-1%

5.1%5.1%

4%4%

3.7%3.7%

6.5%6.5%

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Potential scenarios for the global economy

There is disagreement about the extent of the impact of the recent events.

Scenario 1: Quick

recovery (1 year)

Scenario 2: Short

gloom (1-3 years)

Scenario 3: Prolonged

recession (5-10 years)

• Falling oil prices• Capital infusion• Lower interest rates• Concerted bail-outs

• Consumer sentiments take longer to recover as a result of recent wealth destruction

• Geo-political uncertainty • Faster contagion• Supply constraint

Possible Scenarios

Driving Factors

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Strategies for Growth in Economic Downturn

67%

58% 58%53%

48%

40%

30%27%

14% 13%11%

3% 2%

0%

10%

20%

30%

40%

50%

60%

70%

AgrressivelyLook forGrowth

Opportunities

StrategicPartnering

Expand NewMarkets

New ProductLaunch

Invest inTalent

ConserveCapital

Outsource Reduce staff

Status Quo

DecreaseR&D

Market Focus & Position

Mergers & Acquisitions

Change Supply Chain/

Distribution

CEO Survey: Strategy for Growth in an Economic Downturn

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ManufacturingTrends

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Impact on Manufacturing

FinancialCrisis

• A slowdown in the growth of Retail lending is expected to lead to lower purchases by consumers

• This in turn is expected to lead to lower output.

• Curtailing of working capital and also trade is expected to lead to lower production as producers do not wish to stock large inventories.

• A lack of trust between banks leads to a slowdown in global trade because letters of credit are not being issued.

• The collapse of the Baltic Dry Index indicates this.

• Tightening of Credit Markets leads to higher cost of working capital.

• This is due to the tightening up of corporate bond markets

• Higher Capital Cost is expected to Defer investment plans

• Globally, firms are staggering their capital investments already planned.

• Rising Capital costs is expected to adversely impact bottom lines.

Working Capital

Trade

Investment

Production

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Manufacturing in USA

0102030405060

Sep-07

Oct-07

Nov-07

Dec-07

Jan-08

Feb-08

Mar-08

Apr-08

May-08

Jun-08

Jul-08

Aug-08

Sep-08

Oct-08

Period

Val

ue

-4.0

-3.0

-2.0

-1.0

0.0

Perc

enta

ge C

hang

e

PMI Index Growth in Non Farm Payrolls

Steps to Combat Crisis• Bailout Plan of $700 Billion• Fed window totaling $1 Trillion• Capital Infusion in Key Firms• Fed enters corporate Bond Market• Aggressive interest Rate Cuts

Current Scenario• Unemployment at 6.5% • Falling Non Farm Payroll growth• Retail Lending shows rapid decline• Companies are unable to raise working

capital

The Outlook for 2009 looks grim, with US unlikely to come out of slowdown, and consumers cutting back on spending. Liquidity is expected to continue to be an issue and a ballooning fiscal deficit can exert a downside pressure on the dollar in the latter half of 2009 and 2010.

• Capital Goods viz Oil & Gas and Power may remain unaffected, other sectors are likely to freeze expansion plans

• Manufacturers of final goods and raw materials may notice a sharp drop in sales.

Source: St Louis Fred

Industrial Output And Employment (2008)

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Euro Zone Manufacturing Outlook

-10

-5

0

5

10

April May June July August September

2008

Period

% C

hang

e

Total Industry Intermediate Goods Capital Goods Consumer Durables Consumer Non Durables

Exposure to Emerging Markets as % Of GDP

• Austria 85%• Switzerland 50%• Sweden 25%• UK 24% • Spain 23%• USA 4%

Steps to Combat Crisis• Finally a common approach is being attempted• UK has nationalized banks • Germany has unveiled a stimulus package

worth $700 Billion • Blanket guarantees of bank deposits by almost

all nations. • Rapid interest rate cuts following the steps of

the US Federal Reserve.

Current Scenario• Germany, Spain, UK, Portugal and Greece

are in an slowdown• Consumption is falling and so is production• Eastern Europe is facing a currency crisis,

leading to stress on western European Banks

• Credit tightening has curtailed consumption and trade

The Outlook for 2009 looks grim, with the largest European Economies slipping into a slowdown. Exposure to emerging markets could trigger a second wave of the crisis in Europe as the non performing loans increase. The economy is not expected to turn the corner before middle of 2010

Source: ECB

Industrial Output Eurozone(2008)

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Manufacturing In China

China is Structurally Vulnerable to External Environment

• Export Driven Economy• Dependent on Foreign Capital

inflows • High level of migration –

imperative to maintain high growth momentum

• US is main destination for China’s exports

15.417.8

15.7 16.0 16.0 14.7 12.8 11.48.2

02468

101214161820

Febr

uary

March

April

MayJ u

ne J uly

Augu

st

Sept

embe

r

Octobe

r

Month (Year 2008)

Gro

wth

Rat

e (%

)

Steps to Combat Crisis• Announced a $ 600 billion bailout. • Focus on developing infrastructure to create

jobs and revive economy • Government easing lending to stem fall in

house prices • Coordinated Interest rate cuts to boost

liquidity. • Exports slower due to lack of export credit

Current Scenario• Small and Medium manufactures struggling

with lack of credit• Falling real estate prices could adversely

impact the banking sector. • Retrenchment could lead to lower domestic

consumption • Export growth has been lower than

anticipated

China is poised for a hard landing at present, and is expected to recover by the middle of 2009, when consumption in China recovers. Export oriented growth leaves China highly vulnerable to external forces. Questions on efficacy of the stimulus package also remain.

Source: National Institute of Statistics

Industrial Output China (2008)

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Manufacturing in India

Rupee, Real Estate Key Issues• Real Estate boom for past few

years, with prices cooling off now• Rupee has depreciated

considerably against the dollar, leading to loss of corporate profits

• Small and medium enterprises hit by weak consumption environment.

4.80

1.42

7.37

5.53

4.37

6.22

5.47

9.52

0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00

February

March

April

May

June

July

August

September

Month

s (

Year

2008)

Growth Rate % (YoY)

Steps to Combat Crisis• Central bank has cut interest rates • Ensuring the stability of the rupee against the

dollar to prevent a rapid depreciation of the rupee• Proposals being discussed to ease the norms for

foreign investments in local economy. • Small manufactures are requesting sops manage

rising costs.• Stimulus package announced but inadequate

Current Scenario• Fall in consumption off take especially

consumer durables• High inflation plaguing the economy for the

past 6 months. • Rapid movements in the rupee has

impacted corporate profits.• Overseas acquisitions have been plagued

credit crunch

India is set to record lower growth between 6.5 and 7.5 percent for the year 2008 and a even lower growth for 2009. Infrastructure development could be adversely affected by the current scenario.

Source: CSO

Industrial Output India (2008)

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Overview of the current global economy

Expected impact on certain sectors

BFSI

Airlines

Automotive

ICT

Government

Entertainment

Healthcare

Basic Foods

Education

Most Commodities Advisory ServicesMedia

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Future Manufacturing

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Manufacturing is IMPORTANT

Share of Manufacturing (Value Added in Const Prices)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

ECO - 4 ECO - 10 Asia World

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Manufacturing is IMPORTANT

Manufacturing R&D outpaces other sectors

R&D Investments 2006

Manufacturers are technology leaders

Manufacturing leads economic recovery – USA 2006

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Key business issues for manufacturing companies

Growth(new products, new

geographies, innovation)

Growth(new products, new

geographies, innovation)

Security(driven by regulations,

initiatives to maintain

business continuity)

Security(driven by regulations,

initiatives to maintain

business continuity)

Global Capability(source, make and sell

globally)

Global Capability(source, make and sell

globally)

Flexibility/ Scalability(Clients need to respond to

changing market dynamics)

Flexibility/ Scalability(Clients need to respond to

changing market dynamics)

Greener Manufacturing(Energy, Environment,

Social Corporate

Responsibility)

Greener Manufacturing(Energy, Environment,

Social Corporate

Responsibility)

Seamless: Systems

and infrastructure(to support complex global

manufacturing & supply

chains)

Seamless: Systems

and infrastructure(to support complex global

manufacturing & supply

chains)

Visibility(Minimum inventory,

accountability)

Visibility(Minimum inventory,

accountability)

Agility(Shorter time to market and

product life cycles)

Agility(Shorter time to market and

product life cycles)

Risk management (to minimize the impact of

fluctuating currencies,

supply chain disruption)

Risk management (to minimize the impact of

fluctuating currencies,

supply chain disruption)

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Key manufacturing trends

1. Emerging economies - the need for manufacturers to deliver on a global scale, but to execute locally

2. Digital convergence - need for manufacturing organizations to provide employees with access to business information any time at any place, and on any device.

3. Growing power of consumers - In the new business model, consumers are becoming active participants

4. Sustainability and the rising impact of the environment

5. The influence of complex regulations

6. Changing demographics

Source: Microsoft

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Future Manufacturing - Sustainable

Capitalizing on global markets

while preparing for increasing

environmental challenges

Understand your clients also have

challenges: meet their needs, and

capitalize on those solutions

Being aware that the competition may be making inroads, or just

“green washing”

Investing, producing, operating green in a

way that makes financial sense

SustainablSustainable Growthe Growth

SustainablSustainable Growthe Growth

Source: Frost & Sullivan

Separate the hype fromthe opportunities

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Future Manufacturing

Resource Intensive Knowledge Intensive

Mass Production Mass Customization

Growth through higher volumes Growth through Innovation

Focus on Local Capabilities Global Sourcing-Global Markets

Long Product Life Cycles Short Product Development Cycles

Global locations Globalized Networks

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Future Manufacturing: Innovation

• US$2000 price tag

• Clean slate approach to making a car – 34 patents!

• Outsourcing of assembly to small business

• Web 2.0 site to help consumers give feedback and design their own car

• Extensive use of advanced computing to design and develop the car

Tata Nano

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Future Manufacturing - IT enabled

Knowledge IPR handling,

semantics, creativity,re-use

DesignHolistic design environments,

co-design of product/process/service

Adaptability &reconfigurability

Mass customization,wireless shop floor

reconfiguration

HMI leveraging shop floor skills,

humans commandingmachines, robotics,

usability

Modeling product behavior,

supply chains, processes

Manufacturing

… towards the atomic levelNano-scale design & modelling,

heterogeneous technologyintegration

Networked products Lifecycle management,

‘wireless’ logistics

CognitionSensors/actuators & mechatronics

for machine self-calibration, -verification, -correction

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Global growth will ease to 3.7% in 2008

Exciting future Technology and Growth Sectors will include

• Biotech• Green Energy• Industrial Wireless• Bioplastics• Nanomaterials• Water• Security and Tracking• Advanced Transportation• Personalized Medicine• Pervasive Computing

New Sectors will drive growth

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Key Takeaways

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Key takeaways

Downturn will get worse before it gets better

Shifts in market position/share happen in an downturn environment

Status Quo is not an option. Positive thinking with positive action

Protect your strategic investments

Manufacturing is important. Invest in improvement.

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“Would you tell me, please, which way I ought to go from here?,” said

Alice.

“That depends a good deal on where you want to get to,” said the Cat.

“I don’t much care where,” said Alice.

“Then it doesn’t much matter which way you go,” said the Cat.~ A discussion between Alice and the Cheshire Cat from

Lewis Carroll's Alice in Wonderland.

Thank You

For any queries:Satish Lele

slele@frost.com