Middle market manufacturers help drive the U.S. economy and have been an important part of the economic recovery over the past few years.
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In fact, the 7,500 middle market manufacturers in the U.S. contribute about two percent to national economic output and generate about three million jobs, according to a recent HSBC report on middle market companies, Hidden Impact: The Vital Role of Mid-Market Enterprises.
Middle market manufactures, like many middle market companies, bring new innovations and products to the market and compete with large incumbents, increasing standards and competitiveness. They contribute more to GDP per employee than small companies, and employ and train more staff. They export more than their smaller counterparts, and often invest more in research and development than larger companies.
Like other middle market companies, middle market manufacturers also have an important multiplier effect. In the U.S., middle market companies contribute an extra $2.2 trillion in economic output through indirect benefits to the wider economy through demand generated in supply chains and induced economic impacts from wage-financed consumption by their employees.
However, as part of the broad middle market company segment, middle market manufacturers are sometimes underserved, some might even say neglected. They are too small to have influence, but too big to benefit from the interventions, incentives and support afforded to smaller businesses. That’s why more resources are needed to better understand and service this vital sector segment at a time when encouraging sustainable long-term growth is at the top of national and global agendas.
To understand what kind of support would best help middle market manufacturers achieve their full potential, it’s first vital to understand them. And though there can be a broad span in their annual revenue, there is one characteristic that they all share no matter where they are based. It is not a measure of annual revenue or the number of people employed, but a reflection of their stage of development as a business. They reach a point where, having grown successfully for some time, they have to change the way do things if they want to grow further. To progress, they must evolve.
Managing Growth Among Top Concerns
While middle market companies, including manufacturers, cite economic conditions and volatility as the top concerns for their business, managing growth is also high on the list. Some aspire to move from a national to a regional stage, or following a period of being a disruptive new entrant, they want to become sector leaders. Some have mastered a particular product or technology, and seek to branch out into new fields.
As they change the way they do things, they encounter challenges they have never faced before.
Take going international. Some mid-market manufacturers reach the point where there is no more market share to capture in their home country, but they have no experience of doing business overseas. Which market should they target? How can they set up overseas? Do they want a subsidiary, a distribution center, a sales office or a production site?
Additionally, many U.S middle market manufacturers are privately-owned, but the next stage of growth calls for a professional management team rather than the more common owner-manager model. A lack of necessary financial skills could constrain growth, so an experienced treasurer or CEO might be required. The owner could continue his or her focus on sales, succession planning, developing internal talent, and attracting investors, particularly if the next generation shows limited interest in the business.
Most middle market manufacturers have also typically grown with the support of bank lending, but with interest rates in many countries at low levels relative to historical averages, private equity, insurance companies and pension funds are in search of yield. Are these forms of nonbank funding appropriate for a particular middle market manufacturer? And, if so, how can a company best access them?
Powering the Middle Market Manufacturing Growth Engine
One way middle market manufacturers can get help is from a bank, such as HSBC. For example, Jim Goltz, President of Retech Systems LLC, a leading supplier of metallurgical equipment worldwide, worked with HSBC to better compete. As part of a global group of companies, Retech needed a global banking solution that would connect it to its other businesses and that would support its expanding export sales. With limited in-house resources, HSBC helped Retech gain even footing with larger competitors by providing credit facilities and working capital lines of credit to support domestic working capital needs, which in turn have helped Retech expand its revenue as well as headcount.
Many middle market manufacturers also look to us for advice about the sourcing of goods and services from other countries, whether it is smarter procurement or moving production sites closer to key suppliers or customers. For example, China is often on the minds of many of our U.S. middle market manufacturing clients who are looking to go international. They want information about how to connect with suppliers and buyers there, guidance on regulatory changes, and support on operational matters, such as dealing in renminbi, China’s growing currency.
As middle market manufacturers consider participating or are already engaged in cross border business, effective and efficient capital management also becomes critical. Having access to insight and trusted advice specifically tailored to each of the local markets in which the manufacturer operates can help ensure smooth transactions, including payments.
If middle-market manufacturers feel neglected or overlooked, it’s a missed opportunity. We should celebrate them. Understanding their characteristics, the choices and the challenges they face is the first step towards helping them flourish and grow.
Derrick Ragland is Executive Vice President and Head of U.S. Middle Market Corporate Banking, HSBC Bank USA, N.A.