Economic concerns driven by accelerating inflation in energy and commodity costs have drastically eroded confidence in most manufacturing and wholesale distribution segments in the U.S., according to the RSM McGladrey 2008 Manufacturing and Wholesale Distribution (MWD) National Survey.
Conducted this spring, the third annual MWD survey represents the views of more than 960 executives representing 911 companies of differing segments and revenue sizes on current business conditions, growth strategies, innovation, cost management, technology initiatives, operations, globalization and more.
Economic Conditions Driving Pessimism
Overall, business conditions for most industries responding to the survey have eroded since 2006. Only 38% of 2008 survey respondents describe their business as "thriving and growing" -- nearly 20% fewer than in 2006. This negative view extends to economic conditions. Nearly 80% of respondents were pessimistic about prospects for the U.S. economy -- an increase from the previous two survey years.
Concerns about inflation contribute significantly to these declines. More than 80% of companies in the survey expect cost increases exceeding 6% in energy, raw materials, operating labor, freight and benefits. Health care costs once again are projected to increase on an average exceeding 10% -- meaning that health benefit expenses have tripled since the 2006 survey.
While the survey points to more difficult conditions, it also indicates emerging realities about global business conditions, challenges and opportunities that manufacturers and distributors should consider as they seek avenues to continued growth.
Evolving Global Markets Key to Growth
As in previous years' surveys, this year's findings underscore the central role that an effective international strategy plays in revenue growth. When asked about expected domestic and international growth, 12% of respondents report expecting "considerable" growth internationally compared to 8% expecting "considerable" growth domestically. Similarly, 12% of companies expect domestic sales to decline while only 2% report expected international sales declines.
While international activity remains vital to growth, current economic conditions are changing international strategies. Overseas relocation of production or service operations declined by 20% from last year's survey, indicating that foreign inflation, increased transportation costs, and currency fluctuations have eroded previous off-shore cost advantages. Yet these same conditions create an improved market for American exports. Companies looking to prosper in the global market place cannot afford to focus only on driving down production costs; they must also focus on penetrating foreign markets through exports or through local efforts.
A disturbing trend in the survey is that, even though companies with global strategies are more likely to report growth and have higher margins than those with purely domestic strategies, the number of companies reporting a global strategy remained unchanged at 45%. Too many companies are failing to realize that active participation in the global economy is vital to success.
This year's survey also uncovered a surprising employment trend. While Americans are bombarded with claims that companies that increase employment overseas are eliminating American jobs, the MWD survey finds that companies with foreign operations are twice as likely to add jobs in the U.S. than companies with purely domestic structures. That trend is especially pronounced among middle-market companies. Effective participation in the global economy builds stronger companies, and that increases employment overseas and in the U.S. Companies cannot afford to hide from the reality of a global economy -- but they and their employees can profit from it.
Counterintuitive Strategies, Overlooked Opportunities
The survey also found surprising strategic reactions to declining business conditions. Acquiring new customers was the most commonly reported growth strategy in this year's survey, with 75% of respondents planning on building their market share. New product line developments were reported by more than half the responding companies, and 46% reported innovations in their processes.
These strategies require increased investment instead of the retrenchment more common in declining business climates, yet survey respondents continue to overlook key opportunities to improve their financial performance. As in the previous two survey years, fewer than half of the respondents were taking full advantage of a variety of tax planning opportunities widely available to manufacturers and wholesale distributors. In addition, only 18% of respondents are taking advantage of government programs.
Effective tax management directly improves cash flow, and government programs are available to help companies with exactly the kinds of growth strategies companies have identified in the survey. Companies looking to continue growth in today's more difficult conditions can ill afford to overlook these tactics to improve their results.
Staying in the Black by Going Green
This year's survey asked what manufacturers and distributors are doing in terms of green initiatives. According to the survey:
- 46% of business have adopted at least one green initiative
- Approximately half of these businesses attribute the green initiative as a response to customer requests
Green initiatives are tied directly to lean manufacturing. Lean manufacturing is focused on eliminating waste -- including wasted energy and commodities. As companies implement lean to improve efficiencies and control costs, green improvements are inevitable. Green is not only just about the environment, it's about the bottom line.
This year's survey clearly indicates a tough year ahead for manufacturers and wholesale distributors. However, through more effective participation in the global marketplace and by focusing on all opportunities to improve their bottom lines, companies can weather these tighter conditions and even continue to grow.
To learn more about The RSM McGladrey 2008 Manufacturing and Wholesale Distribution National Survey, go to www.rsmmcgladrey.com/2008survey
Tom Murphy is an Executive Vice President at RSM McGladrey, which is a professional services firm providing accounting, tax and business consulting. www.rsmmcgladrey.com