April 26, 2015 Issues That Will control the State of Manufacturing

Volume 18 | Issue 2

After a long period of economic turmoil, manufacturers in the United States are finding reasons to be optimistic. Demand is up and companies

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By most measures, the United States economy is gaining strength. In 2014, nonfarm job growth rose an average 246,000 per month, with creation of high-wage jobs often outpacing low-wage jobs. According to the 2014 McGladrey Manufacturing & Distribution Monitor Report, a survey of more than 1,100 mostly privately held manufacturers and distributors, 67 percent of middle market manufacturers and distributors who participated in the survey expected an increase in profits before interest and taxes over the course of the coming year; 57 percent expected to increase their workforce.

The Monitor also noted that 36 percent of participating executives described their businesses as thriving, a significant difference from 2009, when only 9 percent were bold enough to say in the middle of the recession that they were doing more than just holding steady.

To maintain this positive trajectory, a number of industry and economic stars need to align.

The Automotive Industry Must Remain Strong
Middle market manufacturers, who serve as the supply chain for auto production, have been performing steadily. But rates of production and hiring must remain consistent or increase in 2015 for the momentum to continue. So far, this appears to be the case. Auto production is robust, and small- and mid-size firms are leading the way in hiring in this sector.

Demand for autos through the end of November 2014 increased at a 17 million annualized pace. With owners holding onto their cars longer than usual (The average age of a U.S. car is just under 11 years.), as well as policies such as “cash for clunkers” that were put in place after the economic crisis, excess inventory was taken out of the system. Despite some sales fluctuations that can be attributed to severe weather across the country, demand is expected to rise over the next several months to replace worn out stock.

Nevertheless, industry executives remain cautious. Although most manufacturers anticipate sales in the United States to increase by an average of 8 percent in the first half of 2015, they expect only increasing their workforce by an average of 5 percent. If hiring doesn’t keep pace with demand, the current workforce pinch will only tighten, assuming markets continue to improve. Monitor results show that the availability of skilled workforce personnel is expected to limit or significantly limit growth at 50 percent of companies.

According to the National Association of Manufacturers, “manufacturers in the United States are the most productive in the world, far surpassing worker productivity of any other major manufacturing economy.” Those who supply the auto industry will need to sustain their production status to keep up with demand.

Middle market manufacturers must steadily bring production back to the U.S. According to McGladrey’s Monitor, production is expected to return to the U.S. in coming years.

Many Companies Have Brought (Or Are Considering Bringing) Operations Back To The U.S.
A number of issues factor into these on-shoring decisions: cycle times, customer demand and product quality, among others. But each company’s supply chain is unique, and analysis of current spend, total-cost data, and emerging supplier opportunities contribute to onshore and offshore decisions, as do the efficiencies to be gained by having activities physically closer to the customer. Approximately 36 percent of Monitor participants feel it is important to have their operations in physical proximity to their supply chains — and, in fact, have made it a competitive advantage.

On-shoring investments are bringing much-needed jobs to communities, reducing assembly and delivery cycles, and boosting local economies. Customers’ perceptions also play a role in deciding supplier locations: 75 percent of executives report that it is important to their brand that their products are made domestically, and 34 percent believe that domestic demand increased because products were made domestically.

Notably, some participants pointed out that products made in the U.S. enjoy a reputation for quality around the world. Depending on the market, the value that customers place on these products can translate into premium prices and profits.

Unfortunately, companies that have an operations presence or joint venture offshore find it can be cost-prohibitive to leave a country. In China, for example, it can be difficult just to get physical materials and equipment out of the country — and the severance costs can be quite high.

Energy Must Be Affordable
Since manufacturers consume about a third of all energy in the United States, reduced energy costs are vital to the financial success of U.S. manufacturers.

With low fuel prices generating cash savings, companies are using that money to make much-needed capital investments in software and technology, equipment, research and development, and other areas.

With U.S. industry capacity at around 80 percent — a level considered full utilization — the reasons behind plant expansions and investments in new equipment become obvious: manufacturers and distributors are racing to keep up with rising demand after years of potential underinvestment. Lower energy prices are allowing companies to redirect capital into areas that allow them to stay competitive, rather than simply holding steady.

There Must Be Tax Reform In The Middle Market
Approximately 70 percent of all manufacturers in the United States are pass-through entities, and are therefore taxed at the individual tax income rate – one of the highest tax rates in the world. As such, any rise in taxes on a personal level or for investment income lowers profits that might otherwise be used for hiring or capital investments.

The tax environment in Washington, D.C., and across the country is especially vexing to manufacturers and distributors, and can be summed up in one word: uncertainty. In this environment, companies cannot plan what they need to do to improve their business, or where and how they want to invest. At the federal level, for example, executives find it problematic to wait on tax credit extensions that might or might not materialize. Although an extension was given to more than 50 expired tax breaks, including a research tax credit, in December 2014, the extension was for only one year. At the same time, many state tax agencies have become increasingly aggressive in levying and collecting taxes, such as those for unclaimed property, or asserting that a nexus has been established within the state’s jurisdiction.

Education should be affordable. As manufacturing companies look to expand their workforces, employees must have access to affordable education to heighten their skills.

The differentiator in today’s competitive landscape is people. Keeping people motivated, knowledgeable on industry changes and committed to corporate strategy is analogous to success. Approximately 43 percent of manufacturers with improved productivity report that workforce education and training is a critical factor.

Training isn’t just for the shop floor: 37 percent of these same companies report that leadership and management development is a key training area. Talent management is crucial today as baby boomers retire and companies look to replace their skills and knowledge.

To address the need to attract and retain a skilled and younger workforce, many firms are collaborating with local colleges, trade schools and high schools on training programs. Some school districts have dedicated education centers with programs specifically designed to encourage trade careers. Many companies are finding skilled workers among those who recently retired from the military.

State governments are acknowledging the need for and benefits of training. In the fall of 2014, the Ohio Development Services Agency announced it will be accepting yet another round of applications for its Ohio Incumbent Workforce Training Voucher Program, which is designed to create an exceptional state workforce with advanced skills that can meet the present and future demands of a changing economy. Under the program, eligible employers can apply to receive direct financial assistance, up to $4,000 per employee per fiscal year.

Maintaining the Momentum
Financial conditions in the U.S. remain solid, wages and jobs are on the rise, demand is high and low fuel prices are encouraging spending. But if we have learned anything since 2009, conditions can change rapidly. Company executives and government officials need to remain vigilant to address the issues under their control and adjust to factors beyond their authority.

The 2015 Monitor survey launches in late March, with reports scheduled to be released during the summer. To learn more, visit www.mcgladrey.com/manufacturing.

Karen L. Kurek is a partner with McGladrey LLP, the nation’s leading provider of assurance, tax and consulting services focused on the middle market. As national head of its industrial products practice, she oversees the audit, tax and consulting services to the firm’s manufacturing and distribution clients. She has provided financial assurance services to scores of manufacturing and distribution companies, as well as to enterprises across a broad spectrum of industries. Kurek is also on the board of the National Association of Manufacturers.

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