Safety fears to push up manufacturing costs

NEW YORK (Reuters) - 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 LLP, which was obtained exclusively by Reuters, found 41 percent 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 U.S. 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 (F.N: Quote, Profile, Research, Stock Buzz). and H.J. Heinz Co (HNZ.N: Quote, Profile, Research, Stock Buzz) 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.  Continued...