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“There has been a significant shift away from optimism for the U.S economy among U.S. industrial manufacturers over the past three months," said 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% in the second quarter, 75% of panelists expect their companies to grow over the next 12 months. Of those expecting growth, 22% forecast double-digit growth and 53% single-digit growth, while 20% forecast zero growth and only 5% 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%, were uncertain while 18% 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%, are uncertain and 21% 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%, dramatically lower than the current 5% average level,” noted 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%. 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% of surveyed U.S. industrial manufacturers saw no change in the U.S. economy from the second quarter, while 13% believed it was declining. Only 7% believed the U.S. economy was growing, down 50 points from the prior quarter. Similarly, the majority of respondents (56%) that market abroad viewed the world economy as unchanged in the third quarter when compared to the second quarter. Only 7% of the panelists noted the world economy was growing, down 34 points from the prior quarter while 37% 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 8% 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% from 36% in the second quarter, the second consecutive quarterly increase.
“More than 90% 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,” added 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% 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%, which is indicative of moderate spending.
Operational spending is also expected to increase, with 85% of panelists planning an increase, down slightly from 88% in the second quarter of 2011. Operational spending plans are led by research and development, which was cited by 48%, 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%), information technology (42%), business acquisitions (37%) and geographic expansion (37%). 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,” added 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% 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% in the second quarter but up 10 points from the same period in 2010. The number planning new strategic alliances dipped to 32% from 37% as did plans for new joint ventures, which went from 38% to 30%.
“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,’” added 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% will stay about the same. The net workforce projection is minus 0.2%, down from last quarter’s plus 0.3%, a sign of new hiring flatness in the manufacturing sector.
Lack of demand climbed 17 points over the prior quarter to 57% 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%. Taxation concerns dropped 13 points to 40%, and pressure for increased wages was off 10 points to a lower 22%.
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.”
Industrial manufacturers are all virtually investing in customer-facing processes such as customer experience (69%), sales and marketing systems (61%) and customer analytics (59%), with nearly the majority also investing in customer strategy and segmentation (48%). From the 54 U.S. industrial manufacturers surveyed, 61% view the collected customer information as extremely relevant to their R&D processes, compared to the 22% who view it as somewhat relevant and 10% who view it as not very relevant or not at all relevant.
The PwC survey indicated a majority (56%) 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%, followed closely by Twitter at 63% and LinkedIn at 50%. However, 50% of industrial manufacturers are uncertain if these channels are adding value in terms of knowing about their customers.
Digital customer engagement programs such as email, web, social media and mobile are also being leveraged by industrial manufacturers. While 76% of panelist companies are currently investing in them, a majority (59 %) 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,” said 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.”