Uncertainty about the U.S. and global economy was mixed with continued optimism for their own companies in the Q3 2011 Manufacturing Barometer released by Pricewaterhouse Coopers (PwC). Only 5% of the 54 U.S. manufacturers surveyed said they are optimistic about the prospects for the U.S. economy over the next 12 months. But manufacturers remain upbeat about their own companies and have plans to spend accordingly.
Some 75% of manufacturers polled are forecasting revenue growth 53% by single digits and 22% by double digits. Another 20% expect zero growth while only 5% expect sales to decline. The projected average growth rate for own-company revenue over the next 12 months fell to 5% from 6.5% in the second quarter.
Still, that 5% figure was quite a bit higher than the fourth quarter of 2008 when optimism was at an equivalent low, said Barry Misthal, global industrial manufacturing leader for PwC. 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.
Uncertainty reigns among manufacturers about both the U.S. and world economy. Some 77% of manufacturers said they were uncertain about the outlook for the U.S. economy and 72% said they were uncertain about the prospects for the world economy. Only 5% said they were optimistic about the U.S. economys prospects for the next 12 months while 7% expressed optimism about the global outlook.
U.S.-based industrial manufacturers that sell abroad continued to see upward movement in international revenue in the third quarter of 2011, as 48% 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, noted Misthal.
Over the next 12 months, 55% of U.S. 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 7% in the second quarter to a lower, more typical 5.9%, which PwC said is indicative of moderate spending.
Operational spending is also expected to increase, with 85% of respondents 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 the survey. 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, said 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 & 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%, 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%.
Its 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, said 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, the PwC survey shows, off 14 points from the second quarter. Some 55% will stay about the same while 7% plan to reduce the number of full-time equivalent employees. The net workforce projection is -0.2%, down from last quarters plus 0.3%, a sign of new hiring flatness in the manufacturing sector.
Industrial manufacturers reported investing in customer-facing processes such as customer experience (69%), sales and marketing systems (61%) and customer analytics (59%), with nearly half also investing in customer strategy and segmentation (48%). Some 61% of manufacturers surveyed 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% 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 dont 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.
Listen to IndustryWeek's audio interview on the results of PwC's 2Q survey