During the past several years, US industrial manufacturers have worked to strengthen their balance sheets, improve operating efficiencies and divest slower growth businesses. They have also expanded organically as well as through strategic acquisitions. As a result, many sector companies are now well-positioned to leverage growth opportunities on the world stage.
However, in light of the global economic uncertainty, including the ongoing Eurozone crisis, China’s slowing economy and the unfolding US political picture, executives are carefully considering their operational and business models while they evaluate their growth strategies in areas including operational investments, new product launches, hiring and M&A opportunities.
To get a pulse of the industry for the second quarter of 2012 and beyond, PwC interviewed 60 US-based industrial manufacturing executives as part of our quarterly Manufacturing Barometer. We asked executives about topics including their current business performance, the economy and their expectations for business growth during the next 12 months.
We found that most management teams remain optimistic regarding the growth potential of the US economy, as well as about prospects for their own companies. Executives also continue to invest in their operations to strengthen their competitive positions and build market share. In fact, spending plans have remained healthy, with a strong focus on new product introductions in the face of an increasingly competitive environment. Although they appear optimistic based on their responses, we found some moderation in planned R&D spending, as well as for geographic expansion, which may indicate a more conservative approach given worldwide economic conditions. Another reason for the conservative approach could be the reduction in gross margins that our respondents reported, with cost pressures declining and pricing increases narrowing.
US REMAINS A BRIGHT SPOT
Our findings show a clear difference in perceptions regarding the growth prospects of the US and international economies, and highlight the relative strength of US manufacturing companies.
It’s interesting that despite global uncertainty, particularly with regard to western European countries and their ability to navigate the ongoing debt crisis, US industrial manufacturers remain largely optimistic about the growth prospects of the domestic economy. For instance, while down from 70 percent in our first quarter survey, 52 percent of industrial manufacturers remain positive about the future growth of the United States. Perhaps even more telling, only seven percent are pessimistic, and 41 percent are uncertain.
In contrast, only 13 percent of manufacturers that sell products and services abroad are optimistic about the world economy, a decline of 31 points from our first quarter survey. Further, 20 percent are pessimistic and 67 percent are uncertain about worldwide business prospects.
The relatively positive sentiment regarding the US was also strong from a historical perspective. For example, in the second quarter, 57 percent of US industrial manufacturers noted there belief that the US economy was growing. While this reflected a decrease (11 points) from the prior quarter, it was nonetheless a healthy reading. Further, only five percent believed the US economy is declining, and 38 percent saw no change from first quarter 2012.
Views regarding the global economy were quite different. Only 18 percent of the panelists who sell goods and services abroad viewed the world economy as growing in the second quarter (off 18 points from the first quarter) while 34 percent believed it was declining, up 18 points from the first quarter.
Based on the responses to our survey, US manufacturing companies seem to be a bright spot in the midst of worldwide economic concern.
GROWTH PROSPECTS REVEAL CONFIDENCE
Our findings also showed confidence among sector companies regarding growth prospects for their companies. Nearly 90 percent of respondents expect positive revenue growth for their companies in the next 12 months. In fact, 13 percent forecast double-digit growth and 75 percent forecast single-digit growth. Only five percent forecast negative revenue growth for their companies, and seven percent forecast zero growth.
While the composite average growth estimates for own-company revenue in 2012 decreased slightly from six percent in first quarter 2012 to 5.8 percent in the second quarter, this is still a healthy number, especially considering anemic growth in GDP in the United States, the recession in Europe and slowing growth in multiple countries. In fact, a significant 85 percent of respondents said they had positive own-company growth, with 18 percent predicting double-digit growth and 67 percent single-digit growth. Consider that only seven percent were on the negative side, while eight percent had zero growth.
Looking ahead, the projected average revenue growth for the next 12 months among those surveyed remained at 5.6 percent, consistent with the first quarter survey, but below last year’s 6.5 percent estimate. International sales stayed about the same in the face of attitudinal concerns. In addition, the projected contribution from international sales among companies marketing abroad was 37 percent, relatively constant with the first quarter of 2012.
NEW CAPITAL INVESTMENTS PLANNED
While executives are taking extra stock in their operational investments, the majority of US industrial manufacturers are planning major new capital investments in the year ahead, up slightly from the first quarter of 2012, according to our Barometer.
The mean investment as a percentage of total sales remained moderately high at 5.3 percent, but below the six percent recorded in the first quarter. In addition, 87 percent of respondents plan to increase operational spending in the months ahead. Key investment areas cited by respondents include new products or services as well as information technology.
However, we did see a decline in plans to increase R&D spending, with only 35 percent of respondents indicating plans to do so. This is the lowest level since the second quarter of 2010, potentially reflecting a more conservative approach to R&D in light of the uncertain economic outlook.
Hiring plans slightly declined over last quarter, with fewer respondents confirming that they plan net new hiring during the next 12 months. According to our survey, the most sought after employees for those planning to hire include professionals/technicians and production workers.
We also surveyed respondents regarding operating capacity, which estimates the current level of permanent staffing and operations compared with what executives believe they need to achieve fullcapacity output. In the second quarter, the mean was 82 percent of capacity, slightly above the previous quarter’s 80 percent, with 42 percent of industrial manufacturers claiming to be at or near full capacity. This was a higher reading than the average for all of 2011.
Planned M&A activity during the next 12 months remained identical with the first quarter at 40 percent, with all respondents confirming that they are considering purchasing another business. Plans for new market expansion abroad came in at 37 percent, and plans for new strategic alliances rose to 42 percent. Thirty-two percent of respondents are planning new facilities abroad and 33 percent are considering new joint ventures.
BARRIER TO GROWTH: DECREASED PROFITABILITY
While M&A and joint ventures seem to be top of mind, many industrial manufacturing executives (28 percent) view decreased profitability a barrier to growth during the next 12 months, according to the Barometer. This is up six points from the first quarter. If these perceptions hold true, industrial manufacturers may increasingly take an even more measured approach to pursuing growth opportunities, as they focus on maintaining profitability and conserving healthy cash reserves.
In the second quarter of 2012, gross margins constricted, with only 27 percent of respondents reporting higher gross margins, off 18 points from the first quarter. While cost pressures declined during the period, pricing increases narrowed as well. Only 18 percent of respondents reported price increases during the second quarter, down 25 points from the previous quarter. This was the lowest level of reported price increases since the second quarter of 2010.
The results of PwC’s Q2 2012 Manufacturing Barometer highlight the cautious stance being taken by many US industrial manufacturing executives as they chart their strategic plans for the next 12 months. Uncertainty remains regarding the direction of the global economy. However, it is encouraging that most management teams remain largely optimistic regarding the growth potential of the US economy, as well as prospects for their own companies. Equally positive is that they continue to invest in their operations to strengthen competitive positions and build market share. The second half of 2012 represents a pivotal period for sector companies as they look for clarity regarding a host of macro-economic issues.
Author Bobby Bono is PwC’s US Industrial Manufacturing group leader. PwC’s Industrial Products (IP) practice provides financial, operational, and strategic services to global organizations across many industries – including aerospace and defense; business services; chemicals; engineering and construction; forest, paper, and packaging; industrial manufacturing; metals, and transportation and logistics. For more information, visit www.pwc.com/us/en/industrial-products.