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Not surprisingly, the economic environment took center stage in discussions around our predictions for 2008. We took the position that our core clients, large manufacturing firms, would weather the storm pretty well and wouldn't impede IT spending plans to any great degree. This conclusion was based on the fact that manufacturing firms in the large enterprise class took between 60% and 70% of their revenue from outside their home country. This proportion was particularly important for US manufacturers (still the most important influence on overall manufacturing activity) because the weak dollar would make their products more price competitive in foreign markets and help stem the impact of rising raw material and energy costs.
For manufacturing companies in other mature regions like Japan and Western Europe, the global nature of their revenue mix was also important because they were not as dependent on their home markets or the US market for their success. The central question was whether an economic slowdown in the states would metastasize into a worldwide problem. We believed that the global economy had evolved to the point where it was no longer the case that when the US sneezed, the world got a cold and that the phenomenal growth in emerging regions would continue--not necessarily unabated, but certainly not stopped.
There were some exceptions to this relatively sanguine outlook for 2008. Anything too closely tied to the downward vortex of the economic situation, residential construction, would have tough times including materials, small tools, and capital equipment. The automotive industry, always one of the first segments impacted by tough economic times, was saddled with the wrong inventory and the wrong production capacity as consumers shifted their preferences to fuel economy. We also predicted that smaller manufacturing firms, those tied to domestic activity in particular, would be hurt most deeply and this forecast has been borne out by a draconian reduction in IT spending in that demographic. Excuse the self-congratulatory tone, but these predictions have largely played out as we discussed to this point. However, there is a palatable unease about where the economy goes from here and, as such, a genuine reluctance to commit to fully executing on 2008 spending plans. Companies are stuck in a "stay or go" quandary and are further paralyzed by mixed economic signals. Manufacturing Insights believes that companies should ignore most of the data they are being inundated with and focus on three key areas to make their determinations:
1. First in, first out. Housing and automotive went into decline early in this downturn. If historic patterns are any guide, they will also be the first industries to recover so watching these two segments is important. The June housing numbers showed a 21% reduction in home inventory which is encouraging but could be a one-month "dead cat bounce". If the inventories continue to drop, average prices should recover, and, at some point, new housing starts will begin to turn positive. That is the point that will signal the beginning of a recovery. Auto sales in the US may have found a bottom in June with seriously negative results even at Toyota (down 21%, 39.5% in truck sales). We will need to see at least three consecutive months of gains before we can talk about the beginning of a recovery.
2. Purchasing power. There is much hand wringing over inflation and it is the first order of priority for regulatory bodies like the Federal Reserve. Tracking total cost of living expense increases, including energy and food, in the context of wage levels and overall employment levels is important. With producer price indexes on the rise and a new heating oil season on the horizon, lost consumer purchasing power is perhaps the most serious threat to recovery.
3. The health of foreign markets. Growth has remained good in emerging regions, which as helped bolster-manufacturing firms across all segments. However, inflation could be the rain on the parade here as well. Even the official government numbers from China show significant annual increases. Watch this situation closely for signs of inflation impacting consumption.
In a recent article in The Times of London, Anatole Kalensky opined that the US is having a financial crisis rather than an economic crisis, pointing to generally positive data in consumer spending, trade deficit levels, and GDP. This perspective is interesting and raises an important opportunity for manufacturing firms who, generally, are sitting on historically high levels of cash. Manufacturing Insights sees it this way--a relatively weak native currency means that there is more incentive for companies to invest those dollars in capital projects that can bring returns that stay ahead of declining currency values while the financial crisis inflicted credit crunch means that smaller or less cash rich competitors can't keep up by using leveraged funding. Not all manufacturing companies will take advantage as some will have a bunker mentality that drives them to continue to hoard cash in fear of not having debt vehicles available if needed. These "rainy day" strategies will fail as those cash reserves lose purchasing power. Winners will put that cash to work in projects that outpace inflation and IT has a proven track record of delivering tremendous productivity benefits to the manufacturing industry.
Even if companies move ahead and spend their full 2008 budget, that doesn't necessarily mean that the areas of investment need to also hold according to plan. In fact investment should shift from hygienic (e.g. laptop refreshes) to the value producing like:
1. Business intelligence investments that improve and speed both decision making and corrective action. These investments will be critically important in improving the reaction time to unforeseen market changes.
2. Supply chain execution applications particularly transportation, for offsetting rising fuel costs, and global trade management, to support rising exports. These investments should include an element of modernization--integrating advanced data acquisition technologies like RFID, Sensors, and GPS.
3. Product lifecycle management applications with an emphasis on better data management and more streamlined collaboration. Remember the objective is to improve decision-making, no just to automate processes.
4. Digital manufacturing investments that allow for greater global visibility and more flexible production capability. With credit tight, it is important to make your existing assets perform at higher levels.
5. Revenue management for improved pricing, promotion, and channel management. The industry environment, even in emerging regions, is not about a revenue land grab, but about intelligent growth.
Our summary advice to technology buyers may be counter intuitive to some. Don't stop or slow your 2008 investment plans as the productive use of capital will be a critical success factor for your company. And, if the three economic indicators we discussed show signs of real recovery, we would recommend that investment be accelerated. Manage your IT investment portfolio and spending in the context of being in a financial crisis, not an economic one and, if your company has the cash reserves, invest accordingly.
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