www.pwc.com Manufacturing Barometer Business outlook report October 2012
Contents 1 Quarterly highlights Page 1.1 Key indicators for the business outlook 5 1.1 Manufacturing current assessment and outlook indices 6 2 Economic views 2.1 View of US economy, this quarter 9 2.2 View of US economy, next 12 months 10 2.3 View of world economy, this quarter 11 2.4 View of world economy, next 12 months 12 3 Company performance 3.1 Company revenue growth, calendar year 14 3.2 Industry growth, calendar year 15 3.3 International sales 16 3.4 Changes in gross margins 17 3.5 Changes in costs and prices 18 3.6 Inventory movement 19 3.7 Level of operating capacity 20 4 Business outlook, next 12 months 4.1 Revenue growth, next 12 months 22 4.2 International sales, next 12 months 23 4.3 Percent planning to hire 24 4.4 Percent planning to hire by type of employee 25 4.5 Percent planning major new investments of capital 26 4.6 Percent planning to increase operational spending 27 4.7 Expected barriers to business growth 28 4.8 Plans for M&A and other business initiatives 29 5 Special topic: Supply chain 5.1 Production facility concentration 31 5.2 Redundancy of main production facilities 31 5.3 Number of critical suppliers involved in risk 31 5.4 Concentration of supply base 32 5.5 Frequency of assessing supply chain risks 32 5.6 Plans for supply chain improvement 32 5.7 Initiatives to mitigate supply chain risk 33 5.8 Additional initiatives planned 33 5.9 Regions generating international sales 34 6 Survey demographics and research methodology 35 PwC 2
Quarterly highlights Key findings: In the third quarter of 2012, PwC interviewed 57 US-based industrial manufacturing executives about their current business performance, their views on the state of the economy, and their expectations for business growth over the next 12 months. We then compared their responses with results from prior quarters to see how the panel s 12-month outlook has changed. Overall, industrial manufacturing executives lowered their own-company 12-month revenue growth forecasts by a point, from 5.6 percent to 4.6 percent as uncertainty about the US economy s prospects increased (to 54 percent) and attitudes toward the global economy s prospects improved somewhat but also remain largely uncertain (54 percent). Lack of demand rose sharply as the chief potential headwind to growth over the next 12 months (up 19 points to 67 percent). More panelists companies plan new hiring, although some uncertainty exists in terms of the number of new hires, and composite workforce growth was slightly lower on a quarter-to-quarter basis. International sales in 3Q 2012 revealed an offsetting pattern with 34 percent increasers offset by a higher number of decreasers (27 percent). Yet the overall contribution of international sales forecasted to total revenue remained constant, at the 38 percent level. Finally, margins were flat in 3Q 2012, with costs and pricing moderately higher. Optimism toward US economy drops off. Optimism among those surveyed about the US economy s prospects over the next 12 months slipped back from 52 percent to 37 percent, off fifteen points. The majority of industrial manufacturing executives are uncertain (54 percent, up 13 points), yet relatively few are pessimistic (9 percent). These attitudes are notably better than a year ago, when optimism was at a lowpoint (5 percent). Optimism toward the global economy s prospects is still low at 29 percent, but rose 16 points quarter-to-quarter. The majority of those selling abroad remain uncertain (54 percent), and 17 percent remain pessimistic (off 3 points). Company revenue forecasts lowered a point. The projected average growth rate for own-company revenue over the next 12 months is 4.6 percent, off a point from a 5.6 percent pace in the prior quarter. A year ago, revenue targets among industrial manufacturer panelists was a slightly higher 5.0 percent. Looking ahead, 82 percent expect positive revenue growth and most, 69 percent, forecast single-digit growth. Only 9 percent forecast negative revenue growth for their own companies and 7 percent expect zero growth. Two percent were not reported. International sales on pace, but offsetting quarter. While industrial manufacturers marketing abroad expect their international sales to remain about the same and contribute 38 percent of their total revenue over the next 12 months, the 3Q 2012 findings revealed an offsetting pattern: 34 percent of industrial manufacturers reported an increase in the international sales in 3Q 2012, but 27 percent reported a decrease (up 9 points). The remaining 39 percent were about the same. Compared to 3Q 2011, the negative side or decreasers have grown from 8 percent to 27 percent, while increasers dropped from 48 percent to 34 percent. Demand rises as the chief potential barrier to growth. Concern about lack of demand rose 19 points, from 48 percent to 67 percent, and is clearly the chief potential barrier to own-company growth over the next 12 months. In contrast, oil/energy prices as a headwind dropped 15 points to 33 percent, and concern about legislative/regulatory pressures dropped off 14 points to 44 percent. Taxation policies are also off to 23 percent, nearly half its level a year ago. Decreasing profitability dropped off to 21 percent, while lack of qualified workers rose five points to 23 percent. New hiring broader. More industrial manufacturing panelists are planning net new hiring over the next 12 months, up five points to 47 percent. A year ago, it was at 38 percent. Only 7 percent plan to reduce the number of fulltime equivalent employees, and 46 percent will stay about the same. Overall workforce projections are a slightly lower 0.7 percent, down from last quarter s 0.9 percent, as some employers that intend to hire were uncertain about the number of new hires. Spending plan continuity. Forty-nine percent of US industrial products manufacturers surveyed plan major new investments of capital over the next 12 months, slightly below last quarter and a year ago (55 percent). However, their mean investment as a percentage of total sales is a 5.8 percent, above last quarter and similar to a year ago. Operational spending increases are reported by 83 percent, with focus on new products or service introductions (46 percent) and research and development (46 percent), followed by information technology (30 percent, off 20 points), business acquisitions (30 percent) and facilities expansion (30 percent). Geographic expansion was off to 28 percent. Plans for marketing and sales promotion were low, 14 percent (off 6 points). Plans for M&A activity over the next 12 months continued at the 37 percent level, with 35 percent planning purchase of another business and 12 percent (up 4 points) planning a sale of part of their business. On the debit side, plans for expansion to new markets abroad (23 percent) and new facilities abroad (16 percent) were notably lower a pattern to be watched carefully in the following quarters. Margins tighten. Gross margins in 3Q 2012 were flat: 26 percent were up and 23 percent were down (6 points higher), for a net plus 3 percent, which is 7 points below the prior quarter. Costs and prices were moderately higher. Looking ahead, 21 percent now view decreased profitability as a barrier to growth over the next 12 months, off 7 points quarter-to-quarter. A quarter-over-quarter comparison of key indicators shows the business outlook for the next 12 months and how the views of the panel have changed each quarter (see chart 1.1). The pages that follow provide a detailed look at each question for the past five quarterly surveys. PwC 3
Special topic: Supply chains Production facility concentration. Overall, the main production facilities of industrial manufacturing panelists are concentrated in 58 percent of these companies primarily located in one geographic area (28 percent) or concentrated in several geographic areas (30 percent). Thirty percent are located in different geographic areas. Redundancy of main production facilities. Overall, 42 percent of main production facilities of these industrial manufacturers produce the same products. Different products are produced in the main facilities of 40 percent of these companies. Number of critical suppliers involved in risk. Typically, these industrial manufacturers have 3 to 5 critical suppliers that could cause unacceptable loss or damage in case of default or disruption (33 percent). Twenty-three percent have fewer critical suppliers, 1-2; and 19 percent have more than 5 critical suppliers. Concentration of supply base. Thirty-nine percent of the industrial manufacturing panelists surveyed have a concentrated supply base with more than 50% coming from one specific region. Another 35 percent say that 25-50% come from one specific region, and 12 percent say only 10-25% come from one specific region. Frequency of assessing supply chain risks. Overall, 62 percent of these industrial manufacturers frequently collaborate with suppliers to assess and mitigate supply chain risks due to default, disruption, or disaster. Only 9 percent wait until after a default or disaster occurs, and 7 percent only when adding a new supplier to their network. Plans for supply chain improvement over next 12-18 months. Overall, 76 percent of these industrial manufacturers are planning to make improvements in the companies supply chain management over the next 12-18 months. Forty-four percent will be making moderate/major improvements and 32 percent will be making minor improvements. Only 7 percent have no plans. Initiatives to mitigate supply chain risk. A wide array of initiatives are currently used by these companies to mitigate supply chain risk. Highest mentions were business continuity and disaster recovery plans (81 percent), and multiple suppliers for key, process critical materials (77 percent). Supply chain insurance is cited by a minority (25 percent). Additional initiatives planned. Seventy-nine percent plan additional initiatives over the next 12 months to mitigate supply chain risk focused on these activities: Internal sourcing/vertical integration (61 percent); developing business continuity and disaster recovery plans (58 percent); and forming relationships with alternative suppliers for key, process critical materials (56 percent). Few are planning to purchase supply chain insurance (9 percent). Regions generating international sales. Most of the industrial manufacturing companies surveyed report international sales are generated in North America (51 percent) and Western Europe (50 percent). A large share is also generated in China (29 percent), Southeast Asia (14 percent), and other Asia (16 percent). And one-fifth (21 percent) were not reported. PwC 4
Key indicators for the business outlook Chart 1.1 Key indicators for the business outlook A quarter-over-quarter comparison of the survey s key indicators shows how the 12-month outlook has changed each quarter. The change column indicates the movement of opinion of those surveyed over the past two quarters. Business outlook, next 12 months among industrial manufacturers 2011 2012 Change Page 3Q 11 4Q 11 1Q 12 2Q 12 3Q 12 2Q 12 3Q 12 Optimistic about US economy 5% 30% 70% 52% 37% 9 Optimistic about world economy 7% 16% 44% 13% 29% 11 Expect positive revenue growth 75% 83% 92% 88% 82% 22 Average growth rate expected 5.0% 4.4% 5.6% 5.6% 4.6% 22 Planning major new investments 55% 67% 53% 55% 49% 26 New investments as a % of sales 5.9% 4.2% 6.0% 5.3% 5.8% 26 Planning to hire 38% 37% 50% 42% 47% 24 New workers as a % of workforce (net) -0.2% 0.7% 0.8% 0.9% 0.7% = 24 Expected barriers to growth Lack of demand 57% 47% 47% 48% 67% 28 Legislative/regulatory pressures 55% 50% 40% 58% 44% 28 Oil/energy prices 55% 47% 53% 48% 33% 28 Monetary exchange rate 33% 37% 32% 35% 23% 28 Competition from foreign markets 33% 37% 33% 30% 23% 28 Taxation policies 40% 33% 20% 30% 23% 28 Lack of qualified workers 17% 20% 17% 18% 23% 28 Decreasing profitability 35% 18% 22% 28% 21% 28 Capital constraints 13% 15% 20% 15% 18% 28 Pressure for increased wages 22% 22% 17% 15% 7% 28 Higher interest rates 10% 18% 13% 12% 5% 28 PwC 5
2004-4Q 2005-1Q 2005-2Q 2005-3Q 2005-4Q 2006-1Q 2006-2Q 2006-3Q 2006-4Q 2007-1Q 2007-2Q 2007-3Q 2007-4Q 2008-1Q 2008-2Q 2008-3Q 2008-4Q 2009-1Q 2009-2Q 2009-3Q 2009-4Q 2010-1Q 2010-2Q 2010-3Q 2010-4Q 2011-1Q 2011-2Q 2011-3Q 2011-4Q 2012-1Q 2012-2Q 2012-3Q PwC global manufacturing current assessment and outlook indices The current assessment of manufacturing executives improved in the third quarter with higher results for pricing and capital spending. However, their outlook remains uncertain as employment expectations was the only outlook index component to improve in the third quarter. As the economic recovery has decelerated, and in some regions turned back into recession, more executives generally indicate recent strength in pricing, even as they are more bearish in their revenue outlooks. In addition, fewer manufacturers are currently experiencing gross margin improvement. This is likely due to a combination of both commodity and direct labor cost pressures, as well as fewer low-hanging fruit in the form of more obvious cost reduction opportunities that were available directly after the financial crisis. As the recovery continues to mature in some regions, and perhaps remains in recession in others, it seems unlikely that the assessment of margins will improve significantly in the near-term. Recent levels of new hiring had driven improvement in the current assessment index for the last several quarters but edged downward this quarter, while expectations for adding new workers in the future have moved slightly upward. In addition, current levels of capital spending (as a percent of revenue) increased somewhat but remain slightly below the post-recession average. This contrasts with executives outlook for lower capital and operational spending over the next year, possibly indicating more caution in spending plans. In summary, executives are seeing slightly more improvement in current conditions but are uncertain about the future. Going forward, we would expect the outlook index to show more change than it has in the past two quarters. In general, outlooks are more volatile than current assessments, given the higher degree of uncertainty inherent in predicting the future. But both indices have given somewhat mixed results, which is generally in line with economic indicators in several major economies that have shown narrow expansions and contractions of manufacturing activity over the last several months. Clearly, there remain some reasons for optimism in these results, but also the justification to be cautious. 90 80 70 60 50 40 30 20 10 0 Global Manufacturing Current Assessment Global Manufacturing Outlook PwC 6
PwC global manufacturing current assessment and outlook indices Background/methodology PwC has surveyed global manufacturing executives since 2003 with the results published in our Manufacturing Barometer publication. The responses to these survey questions have been used to measure the sentiment of manufacturers by creating current assessment and outlook indices. The Global Manufacturing Current Assessment Index measures current trends in pricing, margins, employment, and capital expenditures; while the Global Manufacturing Outlook Index measures expectations for revenue, employment, operational spending, and capital expenditures. These results are calculated as a four-quarter moving average of diffusion indices which measure the degree to which their equalweighted components move in the same direction at the same time. The indices are scaled between 1 and 100 with above 50 indicating more positive sentiment and below 50 indicating more negative sentiment. PwC 7
Economic views
Economic views View of the US economy, this quarter Which best describes your view of the US economy this quarter? Chart 2.1 View of the US economy, this quarter In third-quarter 2012, 46 percent of US industrial manufacturers surveyed believed the US economy was growing, off 11 points from the prior quarter s 57 percent. Nine percent believed it was declining, and 45 percent saw no change from second-quarter 2012. Industrial manufacturers 100% 80% 7 28 68 57 46 Growing Unchanged Declining 60% 80 40% 64 45 20% 32 38 0% 13 8 0 5 9 3Q '11 4Q '11 1Q '12 2Q '12 3Q '12 PwC 9
Economic views View of the US economy, next 12 months Looking at the next 12 months, how do you feel about the prospects for the US economy? Chart 2.2 View of the US economy, next 12 months Looking ahead, 37 percent of respondents expressed optimism about the 12-month outlook for the US economy, off 15 points from the prior quarter s 52 percent. Nine percent were pessimistic (up 2 points), while the majority, 54 percent, were uncertain. Industrial manufacturers 100% 80% 5 30 52 37 Optimistic Uncertain Pessimistic 60% 77 70 40% 57 54 41 20% 0% 27 18 13 3 7 9 3Q '11 4Q '11 1Q '12 2Q '12 3Q '12 PwC 10
Economic views View of the world economy, this quarter Which best describes your view of the world economy this quarter? (international marketers only) In third-quarter 2012, 25 percent of the panelists marketing abroad viewed the world economy as growing, up 7 points from the prior quarter. More, 37 percent, believed it was declining, up 3 points from the second quarter, and 38 percent said they saw no change. Chart 2.3 View of the world economy, this quarter Industrial manufacturers 100% 80% 7 Growing 16 18 25 Unchanged 36 Declining 60% 56 48 48 38 40% 48 20% 37 36 34 37 16 0% 3Q '11 4Q '11 1Q '12 2Q '12 3Q '12 Note: In 3Q 2012 those marketing abroad = 52 PwC 11
Economic views View of the world economy, next 12 months Looking at the next 12 months, how do you feel about the prospects for the world economy? (international marketers only) Looking ahead, 29 percent of US-based industrial manufacturers who market abroad are optimistic about the prospects for the world economy over the next 12 months, up 16 points from the prior quarter s 13 percent. Seventeen percent are pessimistic (off 3 points), while the majority, 54 percent, are uncertain. Chart 2.4 View of the world economy, next 12 months Industrial manufacturers 100% 80% 60% 40% 7 Optimistic 16 13 Uncertain 29 Pessimistic 44 72 64 67 54 45 20% 0% 21 20 20 17 11 3Q '11 4Q '11 1Q '12 2Q '12 3Q '12 Note: In 3Q 2012 those marketing abroad = 52 PwC 12
Company performance
Company performance Company revenue growth, calendar year What is your company s estimated revenue growth rate for the calendar year? The composite average growth estimate for owncompany revenue in the calendar year 2012 decreased from 5.8 percent in second-quarter 2012 to 3.9 percent in the third quarter. Seventy-seven percent of respondents said they expect positive own-company growth, with 14 percent with double-digit growth and 63 percent single-digit growth. Fourteen percent were on the negative side (up 7 points), while 7 percent had zero growth, and 2 percent were not reported. Chart 3.1 Company revenue growth, calendar year Industrial manufacturers 100% 80% 60% 40% 10% or greater 19 27 23 18 14 Between 0 and 10% Zero Negative Not reported 63 48 68 67 65 20% 0% 15 7 10 5 3 8 14 0 8 0 7 2 7 0 2 3Q '11 4Q '11 1Q '12 2Q '12 3Q '12 Mean +5.6% +5.3% +6.0% +5.8% +3.9% PwC 14
Company performance Industry growth, calendar year What is your industry s estimated growth rate for the calendar year? Industry growth estimates for calendar-year 2012 declined from 4.0 percent in the second quarter to 2.7 percent in the third-quarter. Seventy-five percent of panelists expect positive industry growth for 2012, with 14 percent on the negative side (up 9 points), 9 percent reported zero growth this year, and 2 percent were not reported. Chart 3.2 Industry growth, calendar year Industrial manufacturers 100% 80% 60% 40% 13 12 18 10 9 57 66 71 73 72 10% or greater Between 0 and 10% Zero Negative Not reported 20% 0% 17 9 13 9 3 12 14 0 8 0 5 2 5 0 2 3Q '11 4Q '11 1Q '12 2Q '12 3Q '12 Mean +3.6% +4.4% +5.3% +4.0% +2.7% PwC 15
Company performance International sales Are international sales up, down, or the same compared with three months ago? (international marketers only) Chart 3.3 International sales US-based industrial manufacturers that sell abroad reported offsetting movement in international revenue in third-quarter 2012, with 34 percent reporting an increase in sales (up 8 points), but 27 percent reporting a decrease (9 points higher). The remaining 39 percent said sales stayed about the same quarter-to-quarter. Industrial manufacturers 100% 80% 36 48 48 26 34 Up Same Down 60% 56 39 40% 44 58 44 20% 0% 27 18 8 6 8 3Q '11 4Q '11 1Q '12 2Q '12 3Q '12 Note: In 3Q 2012 those marketing abroad = 52 PwC 16
Company performance Changes in gross margins Are gross margins up, down, or the same compared with three months ago? In third-quarter 2012, gross margins were flat. They were higher for 26 percent of panelists (off 1 point) and lower for 23 percent (up 6 points), for a net plus 3 percent, 7 points lower than the prior quarter s plus 10 percent. Chart 3.4 Changes in gross margins Industrial manufacturers 100% 80% 30 27 26 38 45 Up Same Down 60% 40% 48 47 42 56 51 20% 0% 22 23 15 13 17 3Q '11 4Q '11 1Q '12 2Q '12 3Q '12 Net +8% +23% +32% +10% +3% PwC 17
Company performance Changes in costs and prices Are costs up, down, or the same compared with three months ago? prices? In third-quarter 2012, costs and prices were moderately higher. Thirty percent of US-based industrial manufacturers reported higher costs (same), and 14 percent reported lower costs, for a net plus 16 percent higher, 1 point above the prior quarter s 15 percent. On the price side, 28 percent raised prices (up 10 points) but 18 percent lowered them (plus 13 points), for a net plus 10 percent reporting higher prices (off 3 points). Chart 3.5 Changes in costs and prices Industrial manufacturers Costs 100% Up 80% 38 32 30 30 50 Same 60% 52 53 55 56 Down 40% 42 20% 10 15 8 15 14 0% Net +28% +17% +42% +15% +16% Prices 100% 80% 28 30 43 18 28 60% 40% 54 62 77 54 50 20% 0% 18 8 7 5 18 3Q '11 4Q '11 1Q '12 2Q '12 3Q '12 Net +10% +22% +36% +13% +10% Up Same Down PwC 18
Company performance Inventory movement Are finished inventories as a percent of sales up, down, or the same compared with three months ago? Chart 3.6 Inventory movement Inventories as a percentage of sales grew for 32 percent of US-based industrial manufacturers in the third quarter, up 12 points from the prior quarter. Levels were down for 24 percent, for a net plus 8 percent increasing (up 8 points), indicating some inventory increases in third quarter 2012. Industrial manufacturers 100% 80% 21 28 33 20 32 Up Same Down 60% 40% 55 56 46 60 44 20% 0% 17 23 21 20 24 3Q '11 4Q '11 1Q '12 2Q '12 3Q '12 Net +11% -2% +12% = +8% PwC 19
Company performance Level of operating capacity What is your organization s current operating capacity? Chart 3.7 Level of operating capacity Operating capacity is an estimate of the current level of permanent staffing and operations compared with what is needed for full-capacity output. In the second quarter, the mean was 77.7 percent of capacity, down from the previous quarter s 82.0 percent, with only 28 percent of industrial manufacturers surveyed claiming to be at or near full capacity (off 14 points). Industrial manufacturers 100% 80% 38 37 47 42 28 Near full About 3/4 capacity About 1/2 capacity Not reported 60% 40% 55 53 41 48 61 20% 0% 7 10 12 0 0 0 10 9 0 2 3Q '11 4Q '11 1Q '12 2Q '12 3Q '12 Mean 81.3% 81.8% 80.0% 82.0% 77.7% PwC 20
Business outlook, next 12 months
Business outlook, next 12 months Revenue growth, next 12 months What is your organization s estimated revenue growth rate for the next 12 months? The projected average revenue growth rate over the next 12 months among respondents dropped a point to 4.6 percent, and is below last year s 5.0 percent estimate. Eighty-two percent expect positive revenue growth for their own companies, with 13 percent forecasting double-digit growth and 69 percent forecasting singledigit growth. Nine percent forecast negative growth, 7 percent now forecast zero growth, and 2 percent were not reported. Chart 4.1 Revenue growth, next 12 months Industrial manufacturers 100% 80% 60% 40% 12 22 17 13 13 53 71 69 75 75 10% or greater Between 0 and 10% Zero Negative Not reported 20% 0% 20 10 3 7 3 7 9 5 0 7 0 2 5 0 2 3Q '11 4Q '11 1Q '12 2Q '12 3Q '12 Mean 5.0% 4.4% 5.6% 5.6% 4.6% PwC 22
Business outlook, next 12 months International sales, next 12 months What percent of your business s total revenue over the next 12 months do you expect to be derived from international sales? (international marketers only) Of respondents selling abroad, the projected contribution of international sales to total revenue over the next 12 months remained relatively constant, at the 38 percent level (up 1 point). A year ago, it was at the same 38 percent level. Chart 4.2 International sales, next 12 months Industrial manufacturers 40% 30% 20% 38 38 35 37 38 10% 0% 3Q '11 4Q '11 1Q '12 2Q '12 3Q '12 Note: In 3Q 2012 those marketing abroad = 52 PwC 23
Business outlook, next 12 months Percent planning to hire Do you plan to add or reduce the number of full-time equivalent employees over the next 12 months? Chart 4.3 Percent planning to hire Forty-seven percent of industrial manufacturers surveyed plan to add employees to their workforce over the next 12 months, up 5 points from second-quarter 2012 estimates. Only 7 percent plan to reduce the number of full-time equivalent employees, and 46 percent will stay about the same. The net workforce projection is plus 0.7 percent, down slightly from last quarter s plus 0.9 percent, a sign of similar new hiring in the manufacturing sector, since some employers reflected uncertainty about the number of new hires. Industrial manufacturers 100% 80% 60% 40% 38 37 50 55 60 43 42 51 47 46 Add Same Reduce 20% 0% 7 3 7 7 7 3Q '11 4Q '11 1Q '12 2Q '12 3Q '12 Net -0.2% +0.7% +0.8% +0.9% +0.7% PwC 24
Business outlook, next 12 months Percent planning to hire by type of employee What types of employees do you plan to add over the next 12 months? Among the 47 percent of respondents planning to hire within the next 12 months, the most soughtafter employees will be professionals/technicians (33 percent), production workers (25 percent), and skilled labor (21 percent). Chart 4.4 Percent planning to hire by type of employee Industrial manufacturers 3Q 11 4Q 11 1Q 12 2Q 12 3Q 12 Planning to hire (net) 38% 37% 50% 42% 47% Professionals/technicians 28% 28% 32% 30% 33% Production workers 27% 13% 37% 28% 25% Skilled labor 23% 23% 32% 18% 21% White collar support 18% 12% 18% 17% 11% Sales/marketing 10% 10% 15% 10% 7% PwC 25
Business outlook, next 12 months Percent planning major new investments of capital Are you actively planning any major new investments of capital over the next 12 months? If so, what percentage of total sales do you expect to invest? Overall, 49 percent of US industrial products manufacturers surveyed plan major new investments of capital during the next 12 months, off 6 points from the prior quarter s 55 percent, and 6 points below a year ago. The mean investment as a percentage of total sales was slightly higher than the prior quarter s 5.3 percent, at 5.8 percent indicative of continued spending among a near majority of panelists businesses. Chart 4.5 Percent planning major new investments of capital Industrial manufacturers 70% 60% 50% 40% 30% 20% 67 55 53 55 49 10% 0% Mean investment as a % of total sales 3Q '11 4Q '11 1Q '12 2Q '12 3Q '12 5.9% 4.2% 6.0% 5.3% 5.8% PwC 26
Business outlook, next 12 months Percent planning to increase operational spending Over the next 12 months, where do you expect to increase spending? Looking at the next 12 months, 83 percent of respondents plan to increase operational spending, off 4 points from last quarter. Leading increased expenditures were new product or service introductions (46 percent), research and development (46 percent), along with information technology (30 percent), facilities expansion (30 percent), business acquisitions (30 percent), and geographic expansion (28 percent). Plans for increased marketing and sales promotion remained low at 14 percent, and advertising remained low at 7 percent. Chart 4.6 Percent planning to increase operational spending Industrial manufacturers Percent planning to increase spending (net) New product or service introduction 3Q 11 4Q 11 1Q 12 2Q 12 3Q 12 85% 90% 82% 87% 83% 43% 57% 52% 52% 46% Research and development 48% 40% 37% 35% 46% Information technology 42% 50% 47% 50% 30% Facilities expansion 30% 38% 42% 38% 30% Business acquisition 37% 40% 37% 37% 30% Geographic expansion 37% 38% 42% 33% 28% Marketing and sales promotion 27% 15% 18% 20% 14% Advertising 15% 5% 8% 7% 7% Internet commerce 5% 3% 3% 7% 5% PwC 27
Business outlook, next 12 months Expected barriers to business growth Chart 4.7 Expected barriers to business growth Over the next 12 months, will any of the following represent barriers to business growth? Lack of demand rose sharply, up 19 points to 67 percent, and is the leading potential barrier to growth over the next 12 months. Next are legislative/regulatory pressures (44 percent) and oil/energy prices (33 percent), both off sharply this quarter. Decreased profitability dropped to 21 percent, while lack of qualified workers rose 5 points to 23 percent. Lack of demand Legislative/ regulatory pressures Oil/energy prices Monetary exchange rate Competition from foreign markets Taxation policies Lack of qualified workers Decreasing profitability Capital constraints Pressure for increased wages Higher interest rates Industrial manufacturers 23 18 17 20 17 18 15 20 15 13 7 15 17 22 22 5 12 13 18 10 23 35 32 37 33 23 30 33 37 33 23 30 20 33 40 21 28 22 18 35 67 48 47 47 57 44 58 40 50 55 33 48 53 47 55 3Q 12 2Q 12 1Q 12 4Q 11 3Q 11 PwC 28
Business outlook, next 12 months Plans for M&A and other business initiatives Over the next 12 months, do you expect to participate in any of the following new business initiatives? The number of respondents planning M&A activity over the next 12 months was off slightly to 37 percent. Of that number, 35 percent are looking at purchasing another business and sale of part or all of own business rose to 12 percent. Plans for expansion to new markets abroad dropped off sharply to 23 percent, and new facilities abroad was down to 16 percent. New strategic alliances was cited by 32 percent, and new joint ventures by 32 percent. On the debit side, net reductions abroad were noted by a net 14 percent. Chart 4.8 Plans for M&A and other business initiatives Industrial manufacturers 3Q 11 4Q 11 1Q 12 2Q 12 3Q 12 New business initiatives (net) 62% 70% 65% 73% 58% M&A activity (net) 35% 38% 43% 40% 37% - Purchase another business 35% 38% 42% 40% 35% - Sell part/all own business 3% 7% 8% 8% 12% - Equity carve-out/spin-off 2% 3% 3% 2% --- New strategic alliance 32% 35% 35% 42% 32% New joint venture 30% 40% 28% 33% 32% Expand to new markets abroad 40% 40% 35% 37% 23% New facilities abroad 28% 32% 33% 32% 16% Close/reduce facilities abroad 10% 8% 8% 8% 9% Reduce activity in markets abroad 7% 8% 10% 15% 7% PwC 29
Special topic: Supply chains PwC
Special topic: Supply chains Supply chains Are your company s main production facilities concentrated in specific geographic areas? Overall, the main production facilities of industrial manufacturing panelists are concentrated in 58 percent of these companies, primarily located in one geographic area (28 percent) or concentrated in several geographic areas (30 percent). Thirty percent are located in different geographic areas. Chart 5.1 Production facility concentration Facilities are: Primarily located in one geographic area Concentrated in several geographic areas Located in different geographic areas 28% 30% 30% Not reported 12% What is the level of redundancy at your main production facilities? Overall, 42 percent of main production facilities of these industrial manufacturers produce the same products. Different products are produced in the main facilities of 40 percent of these companies. Chart 5.2 Redundancy of main production facilities Most of the main facilities produce: The same product 42% Different products 40% Not certain/not reported 18% How many critical suppliers do you have that could cause unacceptable loss or damage in case of default or disruption? Typically, these industrial manufacturers have 3 to 5 critical suppliers that could cause unacceptable loss or damage in case of default or disruption (33 percent). Twenty-three percent have fewer critical suppliers, 1 to 2; and 19 percent have more than 5 critical suppliers. Chart 5.3 Number of critical suppliers involved in risk 1-2 23% 3-5 33% More than 5 19% 32% None 11% Not certain/not reported 14% PwC 31
Special topic: Supply chains Supply chains (cont d) How concentrated is your supply base from a geographic perspective? Thirty-nine percent of industrial manufacturing panelists have a concentrated supply base with more than 50% coming from one specific region. Another 35 percent say that 25-50% come from one specific region, and 12 percent say only 10-25% come from one specific region. Chart 5.4 Concentration of supply base Percent of supplies coming from one specific region: More than 50% 39% Between 25% and 50% 35% Between 10% and 25% 12% Less than 10% 0% Not reported 14% How often does your company collaborate with suppliers to assess and mitigate supply chain risks due to default, disruption or disaster? Overall, 62 percent of these industrial manufacturers frequently collaborate with suppliers to assess and mitigate supply chain risks due to default, disruption, or disaster. Only 9 percent wait until after a default or disaster occurs, and 7 percent only when adding a new supplier to their network. Chart 5.5 Frequency of assessing supply chain risks Once a year Multiple times a year Only after default/disaster Only when adding new supplier to network Not certain/not reported 7% 9% 7% 15% 62% Looking ahead, do you plan to make major, moderate, minor, or no improvements in your company s supply chain management over the next 12 to 18 months? Overall, 76 percent of these industrial manufacturers are planning to make improvements in the companies supply chain management over the next 12-18 months. Forty-four percent will be making moderate/major improvements and 32 percent will be making minor improvements. Only 7 percent have no plans. Chart 5.6 Plans for supply chain improvement over next 12-18 months Major Moderate Minor None Not certain 4% 7% 5% 32% 32% 40% Not reported 12% PwC 32
Special topic: Supply chains Supply chains (cont d) Which of the following initiatives does your company currently use to mitigate supply chain risk? A wide array of initiatives are currently used by these companies to mitigate supply chain risk. Highest mentions were business continuity and disaster recovery plans (81 percent), and multiple suppliers for key, process critical materials (77 percent). Supply chain insurance is cited by a minority (25 percent). Chart 5.7 Initiatives to mitigate supply chain risk Business continuity and disaster recovery plans Multiple suppliers for key, process critical materials (dual source parts) Multiple locations for key production facilities Internal sourcing/vertical integration 68% 63% 81% 77% Multiple transportation and logistics partners 63% Increased inventory safety stock levels Duplicate sets of tooling 47% 46% Supply chain insurance None used 25% 12% What additional initiatives are you planning to pursue in the next 12 months? Seventy-nine percent plan additional initiatives over the next 12 months to mitigate supply chain risk focused on these activities: internal sourcing/vertical integration (61 percent); developing business continuity and disaster recovery plans (58 percent); and forming relationships with alternative suppliers for key, process critical materials (56 percent). Few plan to purchase supply chain insurance (9 percent). Chart 5.8 Additional initiatives planned Internal sourcing/vertical integration Develop business continuity and disaster recovery plans Form relationships with alternative suppliers for key, process critical materials (dual-source parts) Form relationships with alternative transportation and logistics partners 32% 56% 35% 61% 58% Increase inventory safety stock levels 23% Open another location for key production facilities 19% Procure duplicate sets of tooling 14% Purchase supply chain insurance 9% PwC None planned 21% 33
Special topic: Supply chains Supply chains (cont d) Which of the following regions generate the majority or a substantial amount of your company s international sales? Most of industrial manufacturing companies international sales are generated in North America (51 percent) and Western Europe (50 percent). A large share is also generated in China (29 percent), Southeast Asia (14 percent), and other Asia (16 percent). And just over one-fifth (21 percent) were not reported. Chart 5.9 Regions generating international sales North America (Canada, Mexico & Central America) Western Europe China Majority of Sales 8% 31% 21% 37% Substantial Amount 29% 14% 19% 51% 50% Southeast Asia 14% 14% Other Asia 10% 6% 16% Eastern Europe 2% 6% 8% Other Regions 6% 4% 2% Not reported 21% 32% PwC 34
Survey demographics and research methodology Demographics Who Senior executives of US-based, industrial manufacturing organizations Interview dates July 26, 2012, to October 08, 2012 Average number of employees 7,613 Industrial manufacturers (57) Average business unit revenue Average enterprise revenue Market capitalization $2.67 billion $8.07 billion $6.17 billion Industry sectors Products 100% Manufacturing 100% Methodology PwC s Manufacturing Barometer is a quarterly telephone survey conducted by the independent research firm BSI Global Research Inc. Our regular survey panel consists of senior executives from a geographically balanced sample of large companies in the United States. Ninety-five percent of the panelists hold titles such as president, CEO, CFO, VP of finance, treasurer, controller, internal audit director, or other related title. PwC 35
www.pwc.com/manufacturing Industry contacts: Robert Bono US Industrial Manufacturing Leader +1 704 350 7993 Jennifer Flunker US Industrial Products Senior Manager +1 614 227 3236 About the research: The Manufacturing Barometer is one in a series of quarterly business outlook surveys from PwC. The survey provides a view on the 12-month outlook for revenue growth, new investments, new hiring plans, emerging business barriers and more. In addition to the business outlook, we hear from our panelists about special issues they face as the business climate changes. Results of the quarterly business outlook surveys and special issue surveys are available at www.barometersurveys.com. Visit: www.barometersurveys.com Mobile: wap.barometersurveys.com Email: barometer.surveys@us.pwc.com PricewaterhouseCoopers has exercised reasonable professional care and diligence in the collection, processing, and reporting of this information. However, the data used is from third-party sources and PricewaterhouseCoopers has not independently verified, validated, or audited the data. PricewaterhouseCoopers makes no representations or warranties with respect to the accuracy of the information, nor whether it is suitable for the purposes to which it is put by users. PricewaterhouseCoopers shall not be liable to any user of this report or to any other person or entity for any inaccuracy of this information or any errors or omissions in its content, regardless of the cause of such inaccuracy, error or omission. Furthermore, in no event shall PricewaterhouseCoopers be liable for consequential, incidental or punitive damages to any person or entity for any matter relating to this information. 2012 PricewaterhouseCoopers LLP. All rights reserved. "PricewaterhouseCoopers" and PwC refer to PricewaterhouseCoopers LLP or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.