Optimism about the prospects for the U.S. and world economy over the next 12 months hit all-time lows among U.S. industrial manufacturers, according to the findings of the Q3 2011 Manufacturing Barometer released by PwC US.
While only five percent of U.S. industrial manufacturers are optimistic about the prospects of the U.S. economy over the next 12 months, the lowest since the fourth quarter of 2008, a vast majority are uncertain, rather than outright pessimistic. Despite those uncertainties, U.S. industrial manufacturers over the next 12 months expect positive own-company growth, are planning major new investments of capital and are forecasting international sales to more heavily contribute to their bottom lines.
"There has been a significant shift away from optimism for the U.S. economy among U.S. industrial manufacturers over the past three months," says Barry Misthal, global industrial manufacturing leader for PwC. "Yet they aren't pessimistic, which aligns with how they positively view their own revenue prospects and are positioning and driving their businesses for growth in the next 12 months. The findings of the Q3 Barometer suggest that the strategic investments and plans being made by U.S. industrial manufacturers are strengthening their company's potential in the face of an uncertain economic environment."
While the projected average growth rate for own-company revenue over the next 12 months fell to five percent from 6.5 percent in the second quarter, 75 percent of panelists expect their companies to grow over the next 12 months. Of those expecting growth, 22 percent forecast double-digit growth and 53 percent single-digit growth, while 20 percent forecast zero growth and only five percent expect negative growth.
Looking ahead, only five percent of respondents expressed optimism about the 12-month outlook for the U.S. economy, down 43 points from the second quarter. The vast majority, 77 percent, were uncertain while 18 percent were pessimistic. Prospects for the world economy over the next 12 months echoed similar trends for the U.S. economic outlook, with only seven percent of U.S.-based industrial manufacturers who market abroad being optimistic about the prospects for the world economy over the next 12 months, down 31 points from the prior quarter. The majority, 72 percent, are uncertain and 21 percent are pessimistic.
"Looking back to the fourth quarter of 2008 when optimism was at an equivalent low but pessimism prevailed, the average 12-month forecast was minus 2.4 percent, dramatically lower than the current five percent average level," notes Misthal. "In contrast, the current forecasts remain pretty strong for U.S. industrial manufacturers—albeit a bit lower than the calendar year 2011 revenue growth forecasts of 5.6 percent. This may suggest that U.S. industrial manufacturers are more concerned with future growth beyond 2011 and potential softness in 2012, which will make comparisons to this year more difficult."
In the third quarter of 2011, 80 percent of surveyed U.S. industrial manufacturers saw no change in the U.S. economy from the second quarter, while 13 percent believed it was declining. Only seven percent believed the U.S. economy was growing, down 50 points from the prior quarter. Similarly, the majority of respondents (56 percent) that market abroad viewed the world economy as unchanged in the third quarter when compared to the second quarter. Only seven percent of the panelists noted the world economy was growing, down 34 points from the prior quarter while 37 percent believed it was declining.
U.S.-based industrial manufacturers that sell abroad continued to see upward movement in international revenue in the third quarter of 2011, as 48 percent reported an increase in sales and only eight percent reported a decrease over the past three months. Forty-four percent said sales remained about the same. The projected contribution of international sales to total revenue over the next 12 months rose two points to 38 percent from 36 percent in the second quarter, the second consecutive quarterly increase.
"More than 90 percent of respondents noted international sales were either up or the same compared to three months ago and projections continue to rise, demonstrating that they are finding good opportunities to expand their businesses overseas to confront concerns over a retrenching U.S. economy," adds Misthal. "At PwC, we've been very active helping our U.S. industrial manufacturing clients explore various global expansion strategies that will help boost their revenues while making sure they understand and mitigate the risks associated with entering new markets."
Over the next 12 months, 55 percent of U.S. industrial products manufacturers surveyed plan major new investments of capital, a three-point increase over the second quarter and 12 points higher than the same period of 2010. While this is the sixth consecutive quarterly increase in spending projections, the mean investment as a percentage of total sales fell from seven percent in the second quarter to a lower, more typical 5.9 percent, which is indicative of moderate spending.
Operational spending is also expected to increase, with 85 percent of panelists planning an increase, down slightly from 88 percent in the second quarter of 2011. Operational spending plans are led by research and development, which was cited by 48 percent, an increase of eight points over the second quarter of 2011 and the highest percentage for research and development during the tenure of this survey process. This was followed by an expected increase in new product or service introductions (43 percent), information technology (42 percent), business acquisitions (37 percent) and geographic expansion (37 percent). Plans for marketing and sales promotion and advertising remained low.
"Operational spending on R&D and IT has been very limited over the past three years as U.S. industrial manufacturers took a conservative spending approach in the face of poor economic conditions," adds Misthal. "The uptick is not surprising given the importance of funding initiatives to build the pipeline of new products and continuing need to expand information technology processes and systems to better enable operational effectiveness and customer information."
Sixty-two percent of respondents expect to participate in new business initiatives, with 35 percent planning merger and acquisition (M&A) activity over the next 12 months, a decline of 10 points from the second quarter. Of that number, all are looking at purchasing another business. Plans for expansion to new markets abroad remained high at 40 percent, down slightly from 45 percent in the second quarter but up 10 points from the same period in 2010. The number planning new strategic alliances dipped to 32 percent from 37 percent as did plans for new joint ventures, which went from 38 percent to 30 percent.
"It's no surprise that U.S. industrial manufacturers are looking at M&A to drive revenues and offset any weaknesses in organic growth, especially when you have every respondent planning on being a 'buyer versus a seller,'" adds Misthal. "That 'go it alone' approach is backed up when you factor decreases in respondents' plans for alliances and joint ventures, and demonstrates that U.S. industrial manufacturers are feeling good about their own businesses moving forward."
Thirty-eight percent of respondents plan to add employees to their workforces over the next 12 months, off 14 points from the second quarter. Only seven percent plan to reduce the number of full-time equivalent employees, and 55 percent will stay about the same. The net workforce projection is minus 0.2 percent, down from last quarter's plus 0.3 percent, a sign of new hiring flatness in the manufacturing sector.
Lack of demand climbed 17 points over the prior quarter to 57 percent of panelists now citing this as the leading potential barrier to growth over the next 12 months. Concerns about demand had declined for two consecutive quarters prior. A majority also cited oil/energy prices, which was the leading barrier for the previous two quarters, and legislative/regulatory pressures, both coming in as the second leading barrier, cited by 55 percent. Taxation concerns dropped 13 points to 40 percent, and pressure for increased wages was off 10 points to a lower 22 percent.
According to Misthal, "There is a direct correlation between a majority of respondents citing a lack of demand as the biggest barrier to growth and their staff levels staying the same. When there are concerns about the trend of customer orders, companies are generally cautious about bringing in additional workers."
Investing in customer-facing processes and venturing into social media channels
Industrial manufacturers are all virtually investing in customer-facing processes such as customer experience (69 percent), sales and marketing systems (61 percent) and customer analytics (59 percent), with nearly the majority also investing in customer strategy and segmentation (48 percent). From the 54 U.S. industrial manufacturers surveyed, 61 percent of them view the collected customer information as extremely relevant to their R&D processes, compared to the 22 percent who view it as somewhat relevant and 10 percent who view it as not very relevant or not at all relevant.
The PwC survey indicated a majority (56 percent) of panelists are deploying social media channels to learn about their customers, whereas 31 percent have not deployed resources on these platforms. Of those that are, Facebook received the highest usage among the industrial manufacturers with 83 percent, followed closely by Twitter at 63 percent and LinkedIn at 50 percent. However, 50 percent of industrial manufacturers are uncertain if these channels are adding value in terms of knowing about their customers.
Digital customer engagement programs such as e-mail, web, social media and mobile are also being leveraged by industrial manufacturers. While 76 percent of panelist companies are currently investing in them, a majority (59 percent) are uncertain if they are helping to reduce cost of service.
"A majority of industrial manufacturers are embracing new techniques to understand their customers, including using social media and new forms of communications," says Misthal. "However, the reality is they don't have a full understanding of the value, return on investment or goals to maximize those platforms. These are critical questions that need to be fully planned in order to realize a full understanding of your clients in this quickly evolving communications world."
About the Manufacturing Barometer
PwC's Manufacturing Barometer is a quarterly survey based on interviews with 60 senior executives of large, multinational U.S. industrial manufacturing companies about their current business performance, the state of the economy and their expectations for growth over the next 12 months. This survey summarizes the results for Q3 2011 and was conducted from Aug. 1 through Oct. 12, 2011.
To view the complete Manufacturing Barometer report, visit www.pwc.com/manufacturing-barometer.
Source: PricewaterhouseCoopers LLP