A renewed emphasis on product quality after a slew of high-profile safety recalls is likely to mean higher prices for manufacturers who get products from low-cost countries like China, according to a new study.

The study by Deloitte Consulting, which was obtained exclusively by Reuters, found 41 per cent of executives in developed markets like the United States and Europe consider cost increases very likely.

Among executives in emerging markets, 59 percent said so. "You'll see a fairly rapid increase in cost structure in the next five years," said Craig Giffi, Deloitte's US leader for consumer and industrial products.
"(Manufacturers are) going to get a direct cost hit in those current emerging markets they're sourcing from."

The vast majority of manufacturers surveyed said product quality and safety as well as environmental standards, have become more important over the last 12 months when choosing a supplier, according to the survey.

Their concerns follow recalls of tainted toys, pet food, car tires, batteries and toothpaste that have raised questions about the quality of manufacturing in China and other low-cost locations.

One-half of companies that experienced a recall in recent years said they saw "very significant" direct financial costs. Manufacturers who don't sell directly to consumers are as worried about the issue as their consumer-goods peers, because even a small component can lead to a product failure, Deloitte said.

As a result, most manufacturers expect to depend more on suppliers with stricter standards, and almost one-half expect to rely more on their own facilities in emerging markets.

That could lead to increased acquisitions of local suppliers or their production plants, especially in safety-minded sectors like automotive, food production, and life sciences.

For example, companies like Ford Motor Co. and H.J. Heinz Co may buy out local partners to increase control over their supply chains, Deloitte's Giffi said.

Ford, which spends about $3 billion a year in emerging markets, considers the expense of better standards cost-effective, considering the potential expense of a recall, Deloitte found.

Quality first

The survey polled 651 executives in such sectors as industrial equipment, process industries like energy and chemicals, and the car business.

About one-third were executives in developed markets, while the rest were manufacturers based in emerging markets, mostly China.

Product quality now ranks above cost, supplier reliability and other factors, Deloitte found. Among a list of criteria that developed country manufacturers considered extremely important, quality ranked far above delivery speeds, a supplier's environmental record or working conditions.

Greater monitoring of the supply chain will increase costs at a time when producers in emerging markets are already paying more for raw materials and labor.

How much of those costs suppliers will pass on is unclear, Giffi said, in part because suppliers in China increasingly compete with those in India, Thailand and Vietnam, and may be forced to accept thinner margins.

Deloitte recommends global companies look at their entire supply chain rather than just discrete components.

In some cases, moving operations back to North America, including Mexico, may be the best strategy, Giffi said. Longer term, within about 20 years, Africa may be the next destination for low-cost manufacturing.

"The next big development areas are going to be India and Africa," he said.-Reuters