Chain of Thought

The Guts to Spend vs. the Brains to Invest

Despite fears about the effects of legislative and regulatory efforts like Obamacare, not to mention taxation policies and consumer reaction to them, it looks like U.S. businesses are finally tired of cowering. According to PwC’s latest “Manufacturing Barometer” business outlook report, more than half of the U.S. industrial manufacturers they surveyed remain positive about the U.S. economy in the near term—55 percent, to be precise. That’s up seven points from their fourth quarter report. Bobby Bono, U.S. industrial manufacturing leader for PwC, is being careful not to let these numbers elicit too much exuberance, however.

“Management teams are taking a more conservative approach to forecasting top line performance for the year ahead, given the moderate recovery underway and uncertainty pertaining to fiscal policy,” he stated in PwC’s press release.

The executives he studied were more upbeat about the U.S. business climate than that of colleagues in other countries. Only 36 percent were optimistic about the international business climate and 45 percent expressed uncertainty.  In addition, the projected contribution of international sales to total revenue over the next 12 months declined to 32 percent, as compared to 38 percent in the fourth quarter of 2012.

As a material handling and logistics guy, I wanted to know what all these statistics could mean to our disciplines. I contacted Bono and asked if our audience, which is responsible for acting on the plans of the executives he surveyed, will be given the power they need to do that. In other words, will they be allocated money to invest in their operations?

“We’re seeing fewer who are planning to increase operational spending,” he answered.

So let’s break down what he means by “operational spending.”

“We see some sharp decreases related to facility expansions and geographical expansion as well as business acquisition,” he continued. “That looks to me like they’re focusing on their core operations and aren’t looking to invest capital in expanding either geographically or facility-wise. They’re really focusing on what they do and how to do it better.”

That’s where MH&L's audience comes in. That means making a more efficient supply chain by improving material handling. Right Bobby?

“They’re trying to figure out what their customer will need six months from now, 12 months from now and how will I make adjustments today so when they need that product I have it to sell to them,” Bono answered. “Industrial manufacturing companies have a strong cash position, yet with that position they’re being very careful how they use it because of the uncertainties we see in the macro environment.”

Maybe what’s more important than what they’ll spend is how they’ll finance it. One of the regulatory uncertainties still spooking those executives is how the accounting rules pertaining to financing and leasing will change over the next few years. Right now leased equipment doesn’t have to show up on a balance sheet as an asset. Under the new rules being hammered out by the Financial Accounting Standards Board, that would no longer be the case.

“So they’ll have to make an operational decision on ‘Is it worth me paying these financing costs or should I just use my cash and buy it?,’ Bono said. “So if they’re no longer forced to lease because of a cash flow issue I think you’ll see companies rethink that decision.  Those rules are several years away, and sometime this year they’ll issue another exposure draft on it.”

What happens in the long term leases that people enter into now?

“The current way the standard is written it would require retrospective application, meaning you have to recast your balance sheet as if the standard was in play the whole time,” Bono answered. “Potentially they could do shorter term leases so they can get out of them before then. It typically takes companies a couple years after a standard comes out to fully change their business practice, while others are early adopters.”

If PwC is right, this could be a good year for making improvements in plants and distribution centers. And that efficiency will come in handy, because it doesn’t look like many more dollars will be spent on hiring. Fewer (45 percent) of the industrial manufacturers surveyed plan to add employees to their workforce over the next 12 months, which is off 13 points from fourth-quarter 2012 estimates. 52 percent will stay about the same.

Here’s hoping your company pulls in more business this year—and that your execs recognize you as the muscle making it possible.

 

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