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Manufacturing in Focus

INTRODUCTION

The way in which investors are assessing the risks and benefits of manufacturing overseas is changing, with cost no longer eclipsing all other factors that influence decision-making. This new reality is especially true for the luxury sector, where consumer expectations are particularly high and the erosion of the perceived quality of a product or brand can have a material impact on the business.

Our survey of more than 200 U.S.-based investment professionals shows that investors rank the luxury sector as more exposed to overall reputational risk from overseas manufacturing than six other sectors. Moreover, a majority of investors place as much emphasis on reputational risk as they place on cost when making luxury sector investment decisions. These results suggest that luxury companies should take a holistic look at their manufacturing operations to determine the right geographic balance for their brand. Convincing investors that a thoughtful strategy is in place requires identifying where product advantages can be realized from manufacturing at home, and where the cost-benefit of producing overseas may outweigh the reputational risk. Regardless of the precise market mix, it is important to articulate the benefits of products made in home markets while proactively minimizing reputational risk in complex political and social ecosystems in other corners of the globe.

Susan GilchristGroup Chief Executive, Brunswick Group LLC

As investors place equal emphasis on reputational risk and

cost, companies should take a holistic view of their

manufacturing strategies to determine where significant brand

or product advantages can be realized from manufacturing at home,

and where the cost-benefit of producing overseas may outweigh the

reputational risk. A thoughtful strategy that considers

the right balance for your brand will be viewed by

investors as an asset rather than a liability.

RESEaRCh IMpLICaTIONS

Investors want to know that companies are deriving brand and business benefits when manufacturing at home and taking proactive steps to manage reputational risk overseas. aT hOME

• Defineexcellence.Tout the benefits of highly skilled craftsmen that deliver superior quality products.• Displayyourheritage.associations with strong heritage can deliver brand benefits and marketing

opportunities that increase customer loyalty and perceived value.• Protectyourassets.an established and familiar legal system allows for close control over

intellectual property.

OvERSEaS

• Beyourownwatchdog. Devote more resources and have an active presence in areas where risk is higher to ensure that quality and safety are tightly controlled.

• Buildrelationshipswithacrosssectionofstakeholders.Regularly engage with local NGOs, government and labor groups to understand the complexities of the market, better anticipate issues and solidify relationships before an issue arises.

• Engagewisely.assess the landscape of stakeholders to understand the centers of influence and identify contentious players.

• Collaboratewithpeers.Working together facilitates a more productive dialogue with local stakeholders and gives you a stronger collective voice.

Supply chain risk is a top consideration for investors

and a majority place equal weight on

reputational risk and potential cost savings

associated with overseas manufacturing when

considering luxury sector investments.

Factors Driving Investment Behavior

Over the last 12 months, have you made an investment decision about a company based on any of the following factors?

potential costsavingsfor luxury goods companies as they move manufacturing operations overseas

potential reputationalharmfor luxury goods companies as they move manufacturing operations overseas

Which ONE do you consider MORE when making investment decisions?

Commodity prices

Eurozone Crisis

Supply Chain Risk

China Not Delivering on Growth

Sector Fragmentation

Climage Change

Factors Driving Investment Behavior

Investors believe luxury is among the top sectors

exposed to significant risk on the issues of quality control

and protection of intellectual property rights, and is

considered most exposed of all sectors on overall

reputational risk when manufacturing overseas.

Risk Exposure for the Luxury Sector

Which ONE of the following sectors is exposed to the most ______ through overseas manufacturing?

Technology Consumer Goods

Luxury Consumer Goods

healthcare products

Consumer Durable Goods

heavy Industrial Goods

Non-Luxury Consumer Goods

healthcare products

Luxury Consumer Goods

Technology Consumer Goods

Consumer Durable Goods

Non-Luxury Consumer Goods

heavy Industrial Goods

Luxury Consumer Goods

healthcare products

Consumer Durable Goods

Technology Consumer Goods

Non-Luxury Consumer Goods

heavy Industrial Goods

QUALITYCONTROLRISK INTELLECTUALPROPERTYRISK REPUTATIONALRISK

Eighty percent of investment professionals see

the reputational risk from overseas

manufacturing beginning to outweigh

potential cost benefits, but moving manufacturing

to home markets is not a silver-bullet solution for

the luxury sector.

On-Shore vs. Off-Shore Manufacturing

Do you agree or disagree with the following?

The reputational risk associated with off-shore manufacturing is beginning to offset the cost savings for luxury goods manufacturers...

What is the biggest risk that luxury goods companies face when manufacturing in U.S. and European home markets?

aGREE

DISaGREE

“[Luxury companies] have got to protect their

name…that is the key to their competitive

success. I think they just don’t recognize the breadth

of some of the threats that they can face.”

— University Academic on Luxury Sector Risk

ABOUTBRUNSWICK

Brunswick Group is an international corporate communications partnership that helps businesses and other organizations address critical communications challenges. We started in London in 1987 and have grown organically into a private partnership of 21 cities around the world. Today we have around 90 partners – senior professionals from a range of industry backgrounds – and a total staff of more than 600. We offer our clients a range of specialist capabilities – by issue, transaction, sector or audience – designed to deliver the desired outcome. Brunswick operates as a one-firm firm, offering a seamless service across international boundaries.

www.brunswickgroup.com

Read The Brunswick Review, a journal devoted to communications and corporate relations, at www.brunswickgroup.com/review

ABOUTBRUNSWICKINSIGHT

Brunswick Insight is the Group’s opinion research practice, specializing in assessing global business issues and corporate reputation. Operating globally, we use a range of qualitative and quantitative research techniques in order to help companies and organizations inform and measure their communications and policy strategies.

ABOUTTHESURVEY

Brunswick Insight fielded this survey among 205 U.S.-based professional investors on both the buy-side and sell-side at investment banks, hedge funds, and private equity firms. The data was collected online between January 3rd and 7th, 2013. The survey has an overall margin of error of ± 6.8% at the 95% confidence interval.

BRUNSWICK OFFICES

BRUNSWICK OFFICES

New YorkWashington, DCDallasSan FranciscoSão Paulo

LondonBrusselsStockholmFrankfurtBerlinMunichViennaParisMilanRome Abu Dhabi

DubaiJohannesburg

BeijingShanghaiHong Kong

For more information, contact:

Susan Gilchrist, Group Chief Executivesgilchrist@brunswickgroup.com

+1 212 333 3810

Katie Foley Ioanilli, Director, New Yorkkioanilli@brunswickgroup.com

+1 212 333 3810

Sparky Zivin, Director, Brunswick Insight, Washington, DCszivin@brunswickgroup.com

+1 202 393 7337