Chain of Thought

CFOs and Consumers Share Reluctance to Spend

“Companies Fret Over Uncertain Outlook.” That was a front-page story in this morning’s Wall Street Journal. It reported findings of a WSJ survey of 50 S&P companies that it said echo the findings of a CFO Magazine survey of chief financial officers. Last year’s great expectations for 2013 capital spending have been downgraded. The story quoted Dow Chemical’s chief executive as blaming ongoing uncertainty for this year’s “slow growth environment.”

That’s not to say companies didn’t make money last quarter. Indeed, MH&L did its own reader survey to assess plans for investment in capital equipment, and more than half of the respondents indicated they were enjoying between 5-10% business growth compared to last year at this time. Nevertheless, two-thirds of them told us what WSJ’s survey respondents told them: they’re concerned about another recession.

All of this translates into a predominant “wait-and-see” attitude toward investment in material handling improvements this year. As we report in MH&L’s February cover story, seventy-two percent of our respondents don’t plan on any system improvements, indicating they’re waiting for better economic stability. Those who do plan on investment cited a mix of conveyor, forklifts and robotics.

In the same issue we have an automotive industry report, and it’s interesting that WSJ cited a major player in that industry that is planning on increasing its spending on capital equipment. Ford will invest $7 billion, up from the $5.5 billion it spent last year, to accommodate growth in new products. While researching MH&L’s automotive industry report, Shanton  Wilcox, principal of supply chain management for Capgemini Consulting, told me that the capacity of suppliers to meet the automotive industry’s growth plans is a huge concern. Apparently many of them are harnessing their capital spending too.

“There’s a hesitation there from the tier ones’ perspective to invest in capacity because it was overcapacity that killed the whole industry in terms of pricing pressure,” Wilcox told me. “They have a lot of money invested in capital, they have to keep the utilization up, then they have union labor contracts that say they have to pay workers anyway even if they idle a plant. So now that they’ve redefined their cost structure I don’t think a lot of them will be eager to add to that vs. being able to charge a premium or charge variable costs via overtime to the OEMs. That’s why I think there will be a lag in the investment in new capital equipment among the suppliers to meet that new demand.”

Wilcox echoed what many respondents to our reader survey indicated: that they would fix and improve what they already have before they’ll look at any new equipment investments.

“They want to drive more flexibility and efficiency out of their existing footprint,” he added. “Whether that means creating flexible manufacturing lines with different abilities to provide line side delivery and track that with auto ID, that would be the first wave of investment before they went with a new plant or added new locations in different geographies.”

That’s good news because it means companies aren’t closing plants and moving them to Mexico. The beauty of material handling technology is its adaptability and flexibility—and its ability to get the best out of an existing labor force. That’s why Wilcox anticipates an increase in the expansion of automatic identification technologies and whatever else will increase the skill and productivity of the labor force.

That focus on flexibility is wise, considering consumers will probably be just as conservative in their spending plans as those CFOs surveyed by the WSJ are. As the new year plays out and the April IRS tax bite gets closer, consumers whose spending power is diminished may decide to hang onto and maintain their cars for another year or two. That will have a huge impact on the volume that comes out of the OEMs’ plants—and the CFOs’ pockets.

 

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