January 26, 2013 Industrial Manufacturing 2013: What Will the New Year Herald?

Volume 16 | Issue 1

It looks to be a happier year, but businesses need to stay focused on challenges and developing newer, stronger more innovative strategic in

As industrial manufacturing companies move forward into a new year, they are targeting new growth strategies, observes PwC.

But they are taking cautious steps.

“In the current economic environment, manufacturers take a carefully measured approach, given several uncertainties,” says Bobby Bono, leader of PwC’s US industrial manufacturing group.

These uncertainties include tax-related issues, legislative issues and the pace of economic recovery, Bono points out. “One of the things that we see is weakened demand, especially as it involves China. So, the ‘measured’ approach means that companies are very much more conscious about elements such as cost control. They’re spending money, but spending more strategically. That means investment in research and development, but they are more disciplined about how they spend. What’s going to be the return on investment? That’s the big question. Uncertainty remains.”

PLACING DOLLARS WHERE THEY COUNT MOST
So, how to effectively spend? Forward direction, PwC observes, that companies will focus on takes is a geographic portfolio mix that takes in high-growth regions such as Asia (and don’t yet discount China), the Middle East, Latin America, and Russia.

Other focus areas in company plans, PwC observes, include:

• Restructuring efforts – as spin-offs, carve-outs, divestitures, and factory close-outs in slow-growth markets and cyclical segments persist;
• Utilization of cross-selling synergies – and well as full and timely integration of acquisition targets;
• Rebranding efforts (related to restructuring/business separation);
• Business portfolio transformation that focuses on aftermarket services and – where appropriate – highly engineered solutions in the energy, oil and gas, automotive, water, and mining end markets; and
• More simplified business structure – which translates into disciplined cost controls, strategic sourcing, and strong management of indirect expenses. The goal: better streamlining, greater synergizing of processes, and improved field support functionality.

Further, this involves within/without considerations: Within, fostering a more collaborative company culture; without, fostering stronger customer relations (to better understand clients’ requirements and, in turn, better respond to expressed needs). This could entail new industry standards, such as those related to fuel efficiency and emissions. For instance, fuel savings results in significantly reduced lifecycle costs.

CHALLENGES
Directional shift entails substantial challenges. Today, businesses tread a fragile environment. Once strong markets – such as those developed in Australia, Canada, Europe, and Japan – reveal a softness, PwC has witnessed. Indeed, growth pace is unusually weak in the recovery cycle. True, US lawmakers recently have addressed issues related to the “fiscal cliff” and evolving tax structure. But uncertainty remains. The uncertainty hampers supply chains and makes demand projections more difficult.

Other challenges, cited by PwC, include:

• The weakening demand from China and lack of clarity about what the next-generation leaders will do about global investments, as well as investments that will stabilize China’s economy;
• Negative impact of foreign currency translations;
• High restructuring costs and unfavorable dis-synergies from separations;
• Deferral of large capital investments from customers and execution delays on some projects related to acquisition integration.

STRATEGIC INITIATIVES
Foremost these involve manufacturing costs and productivity initiatives. As such, PwC observes that businesses should look at:

• Simplification efforts that include restructuring and disposition of less profitable, slower market growth facilities;
• A move from a business-unit centric to a regionally led strategy with a shift away from high price point western design products to a mid-price point product approach in an effort to better serve emerging markets;
• Disciplined cost control and cost structure improvements through consolidation of global sourcing and procurement, and strategic cost synergies from acquisitions;
• Hedging the impact of energy, metals, and other commodity prices as a tool to help earnings;
• Factory transformation toward gas-fueled manufacturing as a result of the abundance and favorable pricing of shale gas;
• Productivity savings primarily through Lean Manufacturing and Six Sigma programs;
• Technology leadership and a strategy of project selectivity with the goal of margin improvement;
• Focus on end user aftermarket strategies, commitment to localization, and improvements in time delivery, supply chains, and past due backlog; and
• Regimented pricing policies, project selectivity, and improvement in overall contract execution.

FINANCIAL INITIATIVES
As far as finance, in the business world, PwC observes advantages from:

• Dividend pay-outs, including a special, one-time dividend, influenced by the expectations for tax schedule changes in 2013;
• Share-repurchasing programs often aimed at retiring the shares issued before the financial crisis, and returning significant levels of cash to shareholders;
• Planned debt reduction and debt refinancing to take advantage of attractive debt markets and improved investment-grade corporate status; and
• Commitment to strategic, balanced, and disciplined capital deployment.

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