Global manufacturing networks require free markets
Dr. Gunther Kegel, CEO of Pepperl+Fuchs, on the subject of current challenges and the role that Asia plays
Does a global manufacturing network eliminate any exposure to regional market developments?
Our turnover split – 25 percent each in Germany, Europe, the USA and Asia – means that we are robust enough to withstand regional business cycle fluctuations. However, there is no cure for a global slow-down.
How risky do you believe that current trade tensions are?
What is disconcerting right now is the level at which current trade disputes are being conducted. Unfortunately, there are plenty of conceivable escalation levels. If protectionism, e.g. in the form of custom duties, is designed to protect an economy from imports, then a commercial business can live with that and adapt to those circumstances. If geopolitical interests result in direct blackmail in the form of supply and production bans for certain markets, and there are a whole lot more “torture tools” in countries’ arsenals, then dealing with that is a much tougher proposition. That jeopardises the structure of the international production facility network that we have built up during the last 20 years of successful globalisation. Global manufacturing networks cannot exist without free markets.
Does portfolio extension in specific locations represent a possible counter-strategy?
No, if you take the USA, after Germany our most important outlet market, which we supply from all our global manufacturing facilities. We and incidentally many of our industrial clients in that region also produce and supply goods for the global market from facilities in the USA. Producing everything that’s required locally in one specific market does not provide us with the “economies of scale” that we need to be competitive. And even if we wanted to, we can’t react in a short space of time and quickly alter our portfolios in each specific location.
How do you view the longer-term future?
These geopolitical disputes between the major trade zones will continue once the Trump era is over, let’s be clear about that. Balances of trade are not set to change so rapidly; you can’t decree more national value added and international demand to be created by imposing customs duties.
In this context what role does the South East Asia region play?
South East Asia is the global hub for our supply chain activities, we manage our international sourcing from there. We regard our locations in Indonesia, Vietnam and Singapore as a manufacturing network that is immensely competitive. Added to that is the logistics centre at Singapore with its massive container port and freight airport in the middle of the ASEAN region. But we also regard Singapore as a safe haven that is free of instability and legal uncertainty. We have 30 years’ experience of supply security and market access and can go about our business from this “Asian Switzerland”, which would not as feasible in the hectic and politicised market environment in China. Despite geopolitical tensions, “Made in Singapore” will enable us to supply most markets around the world. In this context we are not quite so sure about “Made in China”.
What corporate development responsibilities can this location take on?
We are also pursuing our digital strategies for the Asian market from our base in Singapore. Singapore’s tertiary education infrastructure is now world-class. Laboratory facilities tend to be better than in Europe, graduates from the six universities have a very high standard of education and it is transparent too. The Economic Development Board (EDB) is championing digitisation and investing in incubators and trend factories. Our Singapore-based engineers enable us to rig up technologies of the future, not in customizing mode but in sandbox format. This local market with its key core industries allows us to try out our own new ideas without our entire global brand being simultaneously affected. There are government support and incentive models available for this purpose. We are using this latitude in order to penetrate new automation market segments like the aerospace industry.
Industrial companies are also competing worldwide by applying new business models. What’s your take on this new race to innovate?
We as automation businesses are currently being faced with new technologies on an unprecedented scale, which are set to change demand from our clients very substantially. This process will not only alter our products but also our business processes, i.e. the way we provide our products and handle orders. However, nobody yet knows exactly in which direction these changes are headed. There are hundreds of ideas, but only a handful of them will be able to change the market in a formative way. There is pressure to do something.
Out of hundreds of innovative ideas, only a handful will be able to change the market formatively
Because companies do not know what options to exercise, they react like some plants – when they are stressed, they develop stress shoots and attempt to ensure their survival through a large number of buds. And so, companies invest in all sorts of things – here one hundred thousand or half a million for a great idea outside of their core business, there in purchasing a start-up or even a spin-off. They all worry about the fact that while their current business model still works, it is no longer generating growth. But given increasing cost pressures, not being able to participate in this new wave of growth is the road to disaster. We are all searching for a persuasive story that will enable us to continue on our growth path. So, we are all busy experimenting. Everybody is investing in digitisation, but it is difficult to say who is already earning money as a result of doing so.
What changes are in the pipeline at Pepperl+Fuchs?
We are migrating from the product via the system very much into the solutions business, which already accounts for a considerable portion of our turnover. As far as software is concerned, we are taking new approaches at many places within the company, in order to position ourselves in new segments of the market, offering new partial services. But we are not striving by hook or by crook to put new business models in place, only there where they provide new client benefits. It’s fascinating watching what approaches all the others are taking and, where appropriate, we are adopting successful formulas.
Maintaining a level of agility will be required, given the challenges ahead
To that end you have also entered into entirely new partnerships…
We have launched Digital Hub Rhein-Neckar GmbH together with SAP and BASF. This is an emerging collaborative venture, which we have not had previous experience of. We are now able to provide global players that are so much bigger than we are with key elements that dovetail with the issue of connectivity, which is one of our major strengths. New data, new logs, new architectures are now enabling new business models and partnerships with SAP, which we never would have previously dreamed of, despite a long period of good neighbourliness. Fortunately, we are also a company that keeps on successfully reinventing itself and does so relatively quickly. Maintaining and enhancing this level of agility will be required, especially given the challenges now ahead after a golden, record-breaking decade.