Few industries have played a larger role in the evolution of the American economy than manufacturing. From the Lowell mills to Henry Ford's assembly line, manufacturing has formed the foundation of the American economic engine. In recent decades, overseas labor, technological advances and the emergence of new economic powerhouses such as China and India have challenged the continued profitability of this sector.
The economic downturn has also taken its toll. Although manufacturing has seen a decrease in business failure rates, the industry continues to have the highest percentage of businesses with severely delinquent vendor payments, followed by the automotive and telecommunications industries.
According to the United Nations, the U.S. is still the largest manufacturing country in the world, and as we come out of the Great Recession we are seeing some encouraging signs.
Take the U.S. automotive industry for example. The recent Chrysler commercial, which aired during the Superbowl, crystallizes the aggressive and proud stance of an industry that was in dire straits in October 2008. But times are changing and according to The New York Times, February 2011 sales reports show positive trends for the market: GM and Toyota sales are up by 46% and 42% respectively, and Chrysler is up by 13% and Ford is up by 10%.
According to former President of the National Association of Manufacturers, Jerry Jasinowski, the outlook looks promising in other manufacturing sectors as well. In a recent blog post on The Huffington Post Jasinowski asserts, "Today, U.S. manufacturers can compete with anyone in the world in both quality and price. The corporate landscape abounds with lean, profitable firms on the cutting edge of technology that are among the best in the world -- Apple, Caterpillar, Danaher, Proctor & Gamble, Intel, Boeing, Cisco Systems, 3M, United Technologies; the list goes on and on. These are our nation's most influential economic champions, and they are more than holding their own in the international marketplace."
On March 11th, the Labor Department announced that 13,000 new manufacturing jobs were created in January 2011. According to Dun & Bradstreet, manufacturing failure rates declined by 25% from December 2009 to December 2010, compared to the previous 12 months. Despite positive trending, macro-economic factors continue to impact the industry.
In 2010 the manufacturing industry moved from second to first place for the highest level of payment delinquency rates in comparison to other industries. Delinquency rate levels can be used to determine the true health of an industry as it can be linked to the number of business failures. While court filings can tell us the number of bankrupt businesses, it does not include the number of failed businesses, many of which simply close their doors or cease to operate without going through the bankruptcy process.
Why the Manufacturing Industry Isn't Recovering Faster
Some of the largest issues that continue to weigh on the U.S. manufacturing industry are directly tied to consumer confidence, including high levels of unemployment and the housing market slump. A recent report from the U.S. Bureau of Labor Statistics (featured in The New York Times) observes that today there are five unemployed workers for every available job. Two years ago the ratio was about seven workers for every job opening.
While we're seeing improvement, unemployment rates are still higher than prior to the Great Recession and economists expect the unemployment rates to remain high, around 9.1%, throughout 2011. Moreover, a recent MarketWatch report predicts the housing market slump may not recover until 2017.
High levels of unemployment and an unstable housing market contribute to reduced consumer confidence and spending -- impeding the recovery of the consumer-demand fueled manufacturing industry. As such, the manufacturing industry continues to have the highest percentage of businesses with delinquent dollars according to Dun & Bradstreet; a clear indicator the industry is not out of the woods yet.
The Financial Health of Manufacturing -- Industry by Industry, State by State
The varied states of financial health within manufacturing are tied to the breadth of the industry which encompasses a variety of subsectors, including everything from petroleum refining to paper products. All sectors have not fared equally in recent months.
According to Dun & Bradstreet, in 2010 the paper and allied products sector had the highest business failure rate of 0.89% -- nearly twice the overall manufacturing industry failure rate of 0.57%. This should not come as a surprise, given that it also has one of the highest percentages of businesses with severe delinquent payments. However, it is important to note that the paper and allied pProducts sector is showing signs of improvement. Compared to other manufacturing sectors, paper and allied products had the largest drop in severe delinquency rates, a 53% decrease from December 2009 to December 2010, and now has the lowest severe dollar delinquency rate -- less than one percent.
Conversely, the petroleum and refining related industries sector had the lowest business failure rate in 2010, 0.33%, a 60% drop from 2009. However, the sector experienced a 33% increase in severe dollar delinquency over the same year. This can be attributed to the steady increase of the price of petroleum and growing concerns over oil reserves.
Within the manufacturing industry Arizona and Nevada have the highest percentage of businesses with severe delinquent payments, 25.1% and 24.8% respectively. Those states also have the highest failure rates among manufacturing businesses and are still feeling the effects from the housing market fallout. The Southeast has begun to show signs of improvements in the manufacturing industry as Georgia, Louisiana, Mississippi and Florida have the largest decrease in percent of businesses with severe delinquent payments.
As we look to the future and begin to think about recovery, it becomes increasingly important for businesses to examine both failure and delinquency rates when making fiscal and credit decisions. While failure rates are static and can only tell us what businesses are now defunct, delinquency rates provide a fluid view of the economic state -- providing indicators for how sectors are doing, enabling business leaders to make informed decisions as they shape the future of the manufacturing industry.
Five Steps to Recovery
Despite the slow recovery, the manufacturing industry is performing inline with most other industries and we are seeing a decrease in failure rates across the board. So the question is: how can you protect your company?
- Monitor Delinquency Rates
Processes and programs geared to monitor clients' delinquency rates and balances past due enable executives to anticipate clients' future financial standing and potential to grow or fail. Such tools are indispensible for maintaining a business' financial health, especially during a tight credit market.
- Be Proactive
While failure for some clients is unavoidable, taking a proactive approach to working with clients will help companies make informed preemptive decisions when the indicators appear.
- Take Action Immediately
When a customer or business partner begins to trend negatively, you can take steps to mitigate financial risk. Collecting outstanding accounts receivable payments on a more regular basis can increase a client's ability to make payment. Pricing products to reflect the current financial state of an industry or region can also help to mitigate a downward trend.
- Exploit Growth Opportunities
Tracking a client's financial health can also open doors for business growth. When a customer or business partner shows stable or positive trends in delinquency, expanding their credit line and encouraging revenue growth can help develop their financial security and that of your company. Looking for new products and services that might expand a client relationship can also help build a client's financial health.
- Look at the Metrics and Data
Taking the guess work out of clients' financial states enables companies to make informed and intelligent business decisions. The best companies are not successful on luck alone -- they take a proactive approach to their financial health by monitoring and responding to clients' metrics and industry trends.
While the sector will not likely see a dramatic recovery in 2011, there are resources available that can help inform manufacturing companies' financial decisions -- and those that do business with them. Smart choices made now are an investment in companies' and the industry's active recovery and successful future.
Bill Groves is the senior vice president, Global Analytics, Dun & Bradstreet .