Global growth a compelling option for manufacturing
McGladrey partner Karen Kurek looks at the potential for growth—and the potential for growth to slow down
Karen Kurek, McGladrey’s national manufacturing and distribution practice leader, talks with Plant Engineering about how American manufacturing growth is poised in early 2013:
PE: With some of the federal issues resolved for the moment, how would you evaluate the growth potential for the U.S. manufacturing sector?
Kurek: According to participants in our recent McGladrey Monitor Update survey, conducted at the end of 2012, Capitol Hill’s efforts to avoid the so-called fiscal cliff significantly dampened optimism among business leaders heading into 2013 — and may yet damage corporate performance through the first half of the year.
While most executives expect some upward movement in key metrics such as net revenue and domestic sales, the percentage of executives expecting increases – and the size of their projected increases – across all key performance indicators tracked by the survey are down significantly.
For example, while in the spring of 2012, 67% of respondents reported that they expected to add employees, that figure dropped to 41% by the end of the year. Correspondingly, the percentage of those expecting a decrease in workforce rose significantly, from 11% in the spring to 21% at the end of the year. The drop in expected workforce increases is particularly concerning as the manufacturing sector has been a key contributor to the increase in employment across the U.S. over the past 18 months. This anticipated decrease in employment may have a pervasive negative impact on the overall economy in the coming months.
After respondents predicted an average increase in net income of 13.1% in the spring, the end-of-year projection dropped to an average of +1.3%. And the average projected change in U.S. sales fell from +8% in the spring 2012 to +2.5% at the end of the year.
Needless to say, middle-market manufacturers and distributors are approaching 2013 cautiously after a rough end to 2012. These companies remain vulnerable to the volatility and uncertainty that have come to define the post-recession marketplace. While it is still possible that last year’s impasse will have a negative impact through the beginning of the year, the American Taxpayer Relief Act of 2012 enacted in early January — specifically the R&D tax credit renewal — may help restore confidence and spur investment in innovation.
PE: How much of that growth is determined in the U.S., and how much is a matter of global manufacturing and economic issues? How would you assess the global health of manufacturing?
Kurek: The argument for going global remains compelling: Even in 2009, during the deepest point of the recession, our survey data indicated that internationally active companies tended to be less affected by the recession than domestic-only companies, showing fewer revenue declines and higher margins.
That said, non-U.S. sales are not expected to grow nearly as well as U.S. sales in the coming year. According to our year-end survey, the average projected change in non-U.S. sales also fell from +7.2% in the spring to +5.7% at year’s end. Some industry sectors — such as automotive and transportation, or industrial and commercial machinery — are expecting a slowdown in international sales growth, due at least in part to the economic situation in Europe.
But in any economic environment, executives at thriving businesses keep an eye on their own businesses. For these companies, targeting new business acquisitions and new markets are factors in their continued success. This means working on an international level. In our survey, the percentage of revenues attributable to products and services sold to customers outside the United States is small — representing a median of only 5% of the revenues of companies we surveyed. This means there could be a significant number of opportunities that are not being leveraged.
PE: What factors outside of government will continue to affect manufacturing in 2013?
Kurek: Not all executives blame the fiscal cliff for their woes. Many identify more conventional business factors restricting their organizations: limited capital to develop new products and grow revenues; challenges in finding qualified employees; excessive government regulations; emerging foreign competition; and volatile material and component prices.
Interestingly, executives at thriving companies are less likely to blame government or political factors for their performances, focusing instead managing for change and improvement regardless of external factors.
These executives note that their successes were achieved through a variety of initiatives, including investing in continuous improvement efforts; implementing new information technology applications and systems; diversifying product lines; opening up fresh markets and distribution channels; making new acquisitions; and securing inventory with the help of increased credit lines.