In 2Q 2008, PricewaterhouseCoopers interviewed 60 USbased
industrial manufacturing executives about their current
business performance, the state of the economy, and their
expectations for business growth over the next 12 months.
We then compared their responses with the prior quarter's
results to see how the panel's 12-month outlook changed.
The final step was to compare their views with a wider panel
to show how the industry differs from the broader population.
Overall, US-based industrial manufacturers are continuing to
adjust to a slower-paced domestic economy. The drain of
higher oil/energy costs is becoming more difficult to offset and
will continue to be a challenge as it spreads across the
general supplier and customer base in the second half of
2008. The strength of international sales will be of increasing
importance.
Key findings:
- The majority are pessimistic about the US economy.
Ninety-two percent of senior executives surveyed are either
pessimistic (52 percent) or uncertain (40 percent) about the
US economy's prospects over the next year. Only 8 percent
are optimistic the US economy will grow. Among those
marketing abroad, 37 percent are optimistic the world
economy will grow. Those who have a pessimistic outlook
about the world economy rose to 27 percent, and
uncertainty rules the remainder.
- International sales climb.
Of those marketing abroad, 66
percent reported an increase in international sales, and only
4 percent reported a decrease. Over the next 12 months,
international sales are projected to be 38 percent of total
revenue, three points higher than in 1Q 2008.
- Growth looks positive but slow.
Own-company 12-month
revenue growth projections dipped, from 4.6 percent in 1Q
2008 to 3.7 percent in 2Q 2008, a 20 percent drop. Most
believe revenue will grow, with 18 percent expecting
double-digit growth and 50 percent single-digit growth. Few
expect negative growth (5 percent).
- Oil/energy prices are a drag.
More than three-fourths (78
percent) view oil/energy prices as the leading potential
barrier to own-company growth over the next 12 months –
up 10 points to a new high for the survey. This oil/energy
vulnerable segment projects a 1.4 percent rate of revenue
growth over the next 12 months versus 11.1 percent
projected by those who say they are not oil/energy
vulnerable. Fifty-three percent of the oil/energy vulnerable
view profitability as a potential barrier to growth over the
next 12 months, indicative of a harmful profit-squeeze.
Costs were higher for 83 percent of this segment, prices up
for 60 percent, and gross margins were tighter in 2Q 2008.
- Other barriers emerged.
Three other strong headwinds
were cited by 50 percent or more of industrial
manufacturers: concern about lack of demand; decreasing
profitability; and pressure to increase wages.
- Investments, M&A plans steady.
Despite the difficult
times, plans for major new investments of capital are
continuing. Half are planning new investments, but the rate
of investment is a lower mean at 5.4 percent of sales.
Operational spending increases also are in line with the
prior quarter, with an important focus on new product or
service introductions, research and development and
geographic expansion. M&A activity plans also held up
quarter-to-quarter.
- Overall, quarterly gross margins turned negative.
Pricing is chasing higher costs but continues to fall behind
for many industrial manufacturers. Gross margins were up
for 18 percent but down for 43 percent for a net negative 25
percent. Costs were higher for more firms: 80 percent
reported costs were up, 7 percent down, for a net 73
percent with higher costs. Yet fewer raised prices: 55
percent reported prices were up, 13 percent down, for a net
of 42 percent.
- Few workforce additions are planned.
In line with 1Q
2008, 32 percent plan net new hiring, and only 17 percent
expect to reduce their workforces. Composite new hiring is
flat, averaging a plus 0.1 percent.
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