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Expecting demand to remain muted in the near term, customers taking longer to make decisions on new orders, investment levels remaining weak – especially in India and China – and more stringent emissions rules causing higher capital expenditures are among a handful of challenges industrial manufacturers are likely to face in the months ahead, a recent PwC analysis suggests.

Consequently, industrial manufacturing companies will focus on three business strategic initiatives, says Bobby Bono, the U.S. industrial manufacturing leader at PwC. Those initiatives are:

  • Manufacturing costs and productivity initiatives;
  • Debit reduction, working capital management, and capital deployment;
  • R&D/product development/expansion

Likewise, areas of focus for 2014 for industrial manufacturers will center on:

  • Diversifying and improving the product portfolio mix to adapt to changing market conditions;
  • Acquisitions to further broaden capabilities and increase geographic reach;
  • Increasing effectiveness in the security areas;
  • Monetizing non-core assets and focusing on core business;
  • Customizing product and services around to customer needs.

In essence, when you put all of those elements into a cauldron and boil it up, several themes rise to the top, Bono says. Driving revenue, to no surprise, is the leading premise.

“And they’re doing that in a lot of different ways,” he tells Leo Rommel of Industry Today. “You’re seeing companies try to be creative with that.”

One way, he says, is they’re trying to better understand the customer’s needs – now and potentially in the future.

“What does my customer need today? How can I provide that to them most efficiently and cost effectively? Those are the questions being asked,” Bono says. “How can I anticipate or stay close to my customer? How do I grow dialogue with them, so that I know what they’re going to need tomorrow, next month, next year?”

Another way, he says, is that manufacturers are “refining their company structure, and I think it’s a little bit unique in how they try to do that now.”

While strong cost-cutting methods have been adapted over the last few years coming out of the downturn, manufacturers are now implementing a flexible structure that can take advantage of fluctuations in demand.

“If demand increases significantly, how can they flex and respond to that,” Bono says. “If the economy goes bad again, or if demand goes down again, how can they pivot and adjust?”

Call it something of an upward and downward structure, he adds.

“They’re trying to maintain this cost structure that they can pivot kind of up and down,” he says. “People are optimistic about the economy, but they’re being very cautious. They’re still investing, they’re still hiring, but they’re not going to leverage themselves too much. But they’re ready to capitalize on growth.”

Manufacturing executives are also looking into ways on how to better use technology, Bono says.

“Whether that’s big data, whether that’s robotics, whether that’s analytics, they’re looking more and more into how to capitalize on technology,” Bono says. “They understand the buzz out there about technology, but they want to know how to use that technology to grow revenue and better meet customer demands.”

In several cases, customers expect that manufacturers will leverage technology to provide easier access or better solutions to growing industrial needs. Chief among those needs, Bono adds, is improving security.

“In this use of technology how do I make sure that data is secure?” Bono explains. “The other side of it is making sure that it’s not just leveraging technology, but how do I also protect the use of technology and its data?”

Here is a bulleted-list summary of Bono’s manufacturing predictions for the remainder of the year, by category:

AREAS OF FOCUS

  • Growth in long-term attractive markets (particularly emerging markets) which adds long-term stability and strength to earnings;
  • Diversifying and improving the product portfolio mix to adapt to changing market conditions;
  • Acquisitions to further broaden capabilities and increase geographic reach;
  • Structurally improving operational performance across the enterprise;
  • Reassessing supply chain so that large projects are executed well;
  • Increasing effectiveness in the security area;
  • Conducting a majority of M&A work outside the U.S.;
  • Improving margins and cash flows, and generating strong shareholder returns;
  • Realigning efforts toward opportunities for future growth and improved profitability;
  • Monetizing (divesting) non-core assets and focus on core businesses;
  • Winning new customers around the world, while keeping a close watch on costs and asset levels;
  • Customizing products/services according to customer needs;
  • Modifying pricing to maintain or improve margins.

KEY CHALLENGES

  • Companies’ results are impacted by volatile currency movements;
  • Emerging markets are experiencing slowdowns in sectors such as mining, infrastructure, etc.;
  • Investment levels remain weak, especially in India and China, as projects see delays and cost overruns;
  • Declining commodity prices are starting to limit some of the investments;
  • Cautious consumer spending is causing slowdowns in some industries (e.g., electronics);
  • More stringent emissions rules are causing higher capital expenditures;
  • Pricing competition in low end products, especially in China and Europe;
  • Economic recovery is slow and is taking longer than expected;
  • Demand is expected to remain muted in the near term;
  • Customers are taking longer to make decisions on new orders;
  • Customers are trimming production schedules and tightly controlling their inventory levels.

In regards to the bullet detailing how customers are taking longer to make decisions on new orders, Bono says “that’s where you see all companies being cautious.”

That requires a more customized solution in some aspects, he adds.

“You really have to prove the value proposition on why they should purchase your product,” Bono says. “For the customers, the decision making is longer, and I think they expect more in the proposal process in terms of what you’re delivering to them.”

And this is not a new trend, he adds. It’s been developing over the course of the last few years, in light, of course, of the fallout stemming from the economic recession.

“People are still spending money, but with great caution,” Bono says. “Sometimes it’s because more high-level executives need to sign off on certain parts of the decision now than maybe several years ago, which leads to a longer lead time.”

STRATEGIC INITIATIVES

Manufacturing costs and productivity initiatives:

  • Initiatives to right size overhead costs for the current level of revenues;
  • Aligning structural cost to the slower pace of demand in the current environment;
  • Improving productivity and optimizing use of assets to control costs;
  • Restructuring actions aimed at reducing headcount and improving cost savings;
  • Optimizing supply chain to reduce costs either through higher supplier discounts or operational improvements;
  • Monitoring growth of costs vs. growth of sales;
  • Managing costs prudently with a sharp focus on select investments;
  • Aligning cost structure to better leverage the markets as they return to growth.

Debt reduction/working capital management/capital deployment:

  • Deriving more efficiencies with vendors and customers to drive working capital benefits;
  • Reducing leverage in the current environment, improving working capital conditions;
  • Prioritizing near-term cash redeployment toward debt reduction;
  • Optimizing inventory to reduce working capital needs;
  • Returning capital to shareholders through share buybacks and higher dividends;

R&D/product development/expansion:

  • Broadening the product base and vendor base to win new customers;
  • Adding more products to become a one-stop shop for customer supply chain needs;
  • Penetrating the value chain of the diversified, industrial end-user population;
  • Investing in innovation and product development opportunities that have expansion potential (from both a geographical and customer point of view);
  • Focusing on localizing products according to geographies;
  • Increasing spending on engineering and sales resources.

Bono says that, as a whole, the above forecast is very similar to last year’s. But there’s one key difference, he says: more company executives are more optimistic this year than they were at this same time last year.

“They’re still cautious, but they’re also more optimistic,” Bono says. “We’re also 12 months further away from what happened several years ago with the downturn. Manufacturing executives are starting to feel more confident, but we still haven’t hit that tipping point where their optimism is going to cause them to allocate a lot more resources and invest a lot more in capital and hiring.”

He adds: “Cautiousness is still there, and it’s not going anywhere anytime soon.”

About Bobby Bono
Bobby is the U.S. industrial manufacturing leader for PwC and is based in Charlotte. He has served a variety of clients from international, publicly-traded companies to emerging development stage companies. His experience includes significant involvement with multinational companies and SEC registrants in US GAAP accounting, Sarbanes-Oxley internal control and PCAOB auditing standards, financial reporting, SEC reporting, public registration statements, debt offering and comfort letters and mergers and acquisitions. He has instructed a variety of technical trainings include revenue recognition, stock compensation, business combinations and current accounting hot topics.

About the PwC Network

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Volume:
2
Issue:
5
Year:
2014


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