By Alan Whitman
September 3, 2009
The economy is showing signs of gradual recovery, but manufacturers are still waiting for a rebound in customer demand to revive their fortunes. However, the winners and losers are already becoming evident, with many firms forced to close their doors while others emerge leaner but still healthy.
Baker Tilly, an independent member of Baker Tilly International, the world’s 8th largest accountancy and business advisory network, recently surveyed manufacturing executives across the nation to gain additional insights on the state of the industry during the worst downturn since the Great Depression (survey results may be found at www.bakertilly.com/manufacturing-survey).
What are the common traits for those firms that have survived the recession? As you would expect, we have found working with our clients that the survivors have been aggressive yet flexible in managing staffing and cutting costs. Many manufacturers in Detroit and across the country have right-sized their operations by now. The survey found that manufacturers plan to delay any additional layoffs as long as possible, but they will need to find a way to aggressively cut costs if customer demand does not rebound soon.
But we have also found that the survivors have embraced creative growth strategies to position their organizations for future success. In fact, our survey found that 65 percent of executives are considering increasing the diversity of products or customers in response to the economy.
In the Detroit area, component manufacturers in particular, have become more creative with their production capabilities to generate revenue and are now starting to serve new client bases never considered before.
Lack of customer demand a challenge
Slightly less than half (47 percent) of executives expressed optimism in the survey about the outlook for the manufacturing sector. The key factor dampening the outlook is the lack of customer demand, which was cited by nearly half of respondents as the greatest challenge to the expansion of their company.
Other issues cited as the greatest challenge include the availability of loans and credit (14 percent), business taxes (10 percent), trade policy and foreign competition (9 percent) and complying with government regulation (6 percent).
About half of executives (49 percent) said they expect their firm’s performance to decline, with 12 percent of those executives saying their firm is in danger of failing. Executives from small firms (14 percent) were much more likely to report a danger of failing than those from medium (2 percent) or large firms (3 percent).
Manufacturers take action
Over the next year, executives are considering a wide range of actions in response to the current economy. These include:
-¢ Reducing operational costs (80 percent of executives)
-¢ Looking for tax advantages (66 percent)
-¢ Increasing diversity of products or customers (65 percent)
-¢ Seeking price reductions from suppliers (65 percent)
-¢ Reducing labor costs (51 percent)
-¢ Reducing production (41 percent)
-¢ Reducing marketing and advertising (21 percent)
-¢ Seeking a business partner or investors (18 percent)
Consider global expansion
Large and medium U.S. manufacturers are increasingly looking to global markets to diversify their customer base as the economy continues to be unpredictable. This trend is expected to accelerate as manufacturers focus even more on emerging economies.
Among executives whose firms derive some revenue from outside the U.S., more than one in four executives (27 percent) from large manufacturers plan for most of their new customers to come from outside the U.S. during the next three years.
Executives from large and medium firms said the poor economy has spurred them to consider global expansion. Four in ten executives from medium and large companies said the economic downturn has caused them to look for growth opportunities overseas and 42 percent of large firms are investing in foreign manufacturing capabilities.
Executives involved in overseas activities said they plan to focus primarily on China (selected by 44 percent of executives) and Mexico (40 percent). Other markets that were cited in the survey include Eastern Europe (27 percent), India (23 percent), Japan (19 percent), and Brazil (18 percent).
About the Survey
KRC Research conducted the national telephone survey of 300 senior executives of U.S. manufacturing companies in June 2009 on behalf of Baker Tilly. More survey information may be found online at www.bakertilly.com/manufacturing-survey.
Alan Whitman, CPA, is a partner and the international services lead at Baker Tilly. He specializes in providing cross-border operational, structuring and expansion solutions to the firm’s clients. He may be reached at [email protected].