The State of Manufacturing 2010

Rob Autry, a national pollster for Public Opinion Strategies, finds that Minnesota manufacturers think the worst economic news may be behind them. But they are still wary about health care.

BY ROB AUTRY

Following a year dominated by bad economic news—including federal government bailouts, business closures and rising unemployment—manufacturers are noticeably more optimistic about the economy and their companies in 2010.

In January 2010, we conducted our second annual poll of 400 manufacturing executives from a diverse cross-section of Minnesota companies and locations. Here are this year’s highlights.

The Mood: Sunshine on a Cloudy Day

Although most manufacturing executives described a difficult business environment in 2009, fear about future recessionary woes has waned dramatically. More than a quarter (26 percent) of executives are anticipating economic growth in 2010, and only 19 percent foresee a continued recession.

This finding is remarkably consistent across all types of manufacturers, though larger firms—in terms of revenue and employee size—are much less worried about a recession this year. For companies with $5 million or more in annual revenues, concern about a bad economy dropped from 62 percent in December 2008 to 15 percent in January 2010.

Compared to a year ago, executives are reporting that key business projections are up as well. Not surprisingly, manufacturers are more confident about their own firms from a financial perspective. Last year, executives anticipated decreases in gross revenues, profitability and capital expenditures for 2009. This year, 44 percent of the executives surveyed say they expect their firm’s gross revenues to increase in 2010—nearly twice as many as last year’s projection (23 percent). Projected increases are not insignificant, either. Nearly a third of executives expect their gross revenues to jump in excess of 10 percent this year.

Profitability expectations also have improved across the board. Last year, manufacturing executives expected their firm’s profitability to see a net decrease: 17 percent expected an increase while 34 percent braced for a decrease. Today, executives are aiming for a net increase with 36 percent predicting an increase and only 17 percent anticipating a decrease. Even capital expenditures appear to be holding steady.

Yet, when it comes to making Minnesota a more competitive business location, executives believe more can be done at the state level. Despite the rosier projections about their own firms, many believe the state has yet to turn the overall business climate around. A majority of executives (54 percent) still believe the business environment is off on the wrong track. This finding was identical to the result in last year’s survey, when 55 percent of executives expressed this sentiment.

Continued Health Care Woes

Last year’s survey revealed the cost of health care as manufacturers’ No. 1 concern, despite a teetering economy. This year, worry over mounting health care expenses continues to be the top concern, with more than two-thirds (68 percent) of manufacturing executives saying they remain concerned about health care costs. The group of executives expressing they are “very concerned” has grown to 42 percent, up 6 percent from last year’s survey. One focus group participant put the situation’s severity into perspective when he stated, “My health insurance bill is bigger than the mortgage on my building.”

For some, fear of rising health care costs has been realized as more companies have been forced to drop employee coverage. The percentage of manufacturing firms who say they offer some variety of health care plan dropped 11 points over the last year, from 63 to 52 percent. This drop in coverage seems to be hard on many executives, the majority of whom agree that affordable health care is among the most important factors when it comes to retaining existing employees. Four out of 10 executives believe affordable health care for employees is important for work force retention.

Executives also rank health care—along with competitive wages—as a top recruitment factor for attracting new workers. However, some report that finding qualified workers has been difficult over the last year, indicating a slight softening of the job market across Minnesota’s manufacturing industry. Should finding qualified workers become a larger challenge in a rebounding economy, even more companies may move affordable health coverage to the top of their lists.

Despite the increased importance placed on health care, firms do not appear to be proactive about its challenges by promoting health care consumerism, or by offering wellness programs or other preventive health care initiatives at work. While one-third of firms surveyed in December 2008 said they offered wellness programs or other initiatives, only a quarter claim to do so now.

Executives do not expect government reform to remedy the health care challenge, either. Solid majorities of executives said they believe the reform bill being considered by Congress is a bad idea, and that will leave them paying even more in health care costs. This negative reaction represents the majority of responses across all types of manufacturers regardless of size, revenue, location or age of their businesses.

Credit Crunch Hits Home

In one of last year’s focus groups, a focus group participant predicted that while credit was relatively easy to obtain at the time, it would become a concern within 12 months’ time.

The participant was right. While last year’s survey found credit constrictions a rare experience among manufacturing firms, this year has seen a remarkable decrease in the availability of credit. In fact, the percentage of firms who say they experienced a constriction of credit has increased threefold since last year’s survey, from 13 percent to 37 percent.

Among those manufacturers who experienced a constriction, most say it is having a significant impact on their business. Nearly seven out of 10 (69 percent) of those who experienced a credit crunch say they came up with the necessary funds through internal cash flow or personal resources. Relying on funds from state-based organizations seems to be rare, as one out of 10 respondents indicated receipt of services or financial assistance from the Department of Employment and Economic Development (DEED).

With these points in mind, it is not surprising that availability of credit has risen the most among a list of 12 concerns between this year and last year. While 23 percent of respondents expressed concern over credit in last year’s survey, 32 percent of respondents now claim that the availability of credit is a concern for their businesses.

It’s (Not So) Easy Being Green

While executives believe in the importance and long-term value of taking measures to protect the environment, they do not always believe eco-friendly actions are necessary for their own companies. Nearly two out of three manufacturing executives say it is important that the industry plays a role in protecting the environment. However, executives are split on whether green practices are important to their business, expressing mixed sentiments on the importance of green initiatives to their customers or employees.

Twin Cities-based firms are slightly more likely than firms across the rest of the state to see environmental measures as important to their businesses (53 percent vs. 46 percent).

Newer firms, along with smaller-sized and smaller revenue businesses, also place a tad more importance on green practices. Nearly a third (30 percent) of companies in business for 15 years or less believe environmental stewardship is important to employees. The same percentage of those companies also believes green practices are important to their customers. Businesses with less than $1 million in annual revenues showed similar commitment with 29 percent saying they believe green practices are either extremely or very important to employees, and 27 percent believing their customers also consider green practices of significant importance.

For most executives, implementing green measures is not primarily seen as a cost-saving initiative. Less than one in five executives (18 percent) see reducing costs and improving efficiencies as the primary reason to pursue green initiatives. Instead, 54 percent of executives believe the main reason for eco-friendly efforts is for each business to “do its part to protect the environment.”