Clearer Skies in Sight
Our third State of Manufacturing survey reveals manufacturing executives anticipate bright futures for their businesses and an economic expansion in 2011. Difficulties and uncertainties surrounding health care costs and reform, however, continue to dominate worries.
BY ROB AUTRY
There is ample evidence in this survey to suggest that the dark (or, conservatively, the darkest) days may well be over for Minnesota manufacturers. Following two years of recessionary challenges, fears of a 2011 economic dip among manufacturing executives in this year's
survey have fallen almost completely off the map. In the three years we have conducted the survey, more manufacturers than ever are anticipating an economic expansion for the coming year. Over two weeks in January, we conducted our third annual poll of 400 manufacturing executives
from a diverse cross-section of Minnesota companies and locations. Here is what we found.
The Mood: At Storm's End
Two years ago, more than half of the executives surveyed believed we were heading into economic recession. Today, it's less than one out of 10 (9 percent) who say that's the case. 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; among firms with more than $5 million in annual revenue, and firms employing more than 50 employees, only 3 percent anticipate a recession. In fact, those who expect to see an economic expansion
have gone from 8 percent in 2008 to 26 percent in 2010 to 40 percent today--a sizeable and significant jump.
This optimism is likely having a dramatic impact on how manufacturing firms view themselves. On the key indices of gross revenues, profitability and capital expenditures, these executives are considerably more optimistic about their fortunes for 2011 than they were for either
2010 or 2009, with projected increases nearly doubling over the past two years in all three categories. More than half of Minnesota firms (51 percent) expect to see an increase in gross revenues this year, when only 23 percent predicted an increase for 2009. Positive readings extend
to profitability, where 39 percent anticipate an increase (up from a mere 17 percent in 2009), and even to capital expenditures, where one out of every three executives (32 percent) expects spending will increase in 2011.
The cautionary note within this data is the plurality of executives who believe the state remains on the wrong track in terms of being a friendly business location. A comparison to past surveys does show that optimism on this topic among executives has improved over time,
rising from 31 percent of executives who said Minnesota was on the right track in regards to being a competitive business location in 2009, to 33 percent in 2010, to 41 percent in 2011. However, 47 percent of manufacturers still believe the state is not moving in the right direction
when it comes to its competitiveness as a business location, reinforcing some structural concerns among executives that remain largely consistent with previous surveys.
For the third year in a row, the cost of health care coverage is the top concern for manufacturing executives, continuing to dominate the landscape of manufacturers' worries. The cost of health care coverage has not only remained the most pressing concern among manufacturers
as a group, but the percentage of manufacturing executives who rate it as a top concern has increased steadily as well, from 64 percent in 2009, to 68 percent in 2010, to 71 percent of executives listing it as a top concern this year. Rounding out the list of top worries, 61 percent
of executives are concerned about government policies and regulations, 58 percent report concern about the impact of President Obama's health care reform plan, and 56 percent of executives are worried about taxes.
Concern about health care reform is particularly prevalent among small business owners who express uncertainty about how they will be affected by the health care reform plan. This finding suggests that they do not trust the government to get health care reform right as it
pertains to manufacturing firms or businesses in general.
Interestingly, aside from health care, government regulations, health care reform and taxes, concerns about other issues affecting manufacturers are much less widespread. From 56 percent of executives who listed taxes as a top concern, we move down to only 25 percent of
executives who list the financial stability of key customers as a top concern. This shows that the top four concerns are truly the biggest worries for most manufacturers, with others reaching more of a nuisance status.
Worry over healthcare costs may stem in part from affordable health care's importance as a recruitment tool for manufacturers. Overall, affordable health care was ranked as the most important factor when it comes to attracting new employees, with 45 percent of respondents
saying they consider it "very important" in their hiring efforts. The next most important recruiting factor was a competitive benefits package, though only 31 percent of respondents considered it "very important" in attracting new workers.
Despite its importance for attracting workers, the percentage of firms that offer health care plans has remained largely stagnant since our first survey, ranging from 63 percent in 2009, to 52 percent in 2010, to 56 percent in 2011.
For three years running, the status quo has also been maintained in the prevalence of manufacturing executives who say their companies take an active role in the health of their employees by promoting health care consumerism or offering worksite wellness programs. In 2008, 33
percent of respondents said they were promoting health care consumerism to employees, whereas in 2011, that number only jumped to 36 percent of respondents. Likewise, in 2008, 33 percent of executives said they were offering wellness programs or other health-related activities to
employees, and in 2011 the number held steady at 34 percent. Though executives continue to worry about the cost of health care, this finding suggests that manufacturers do not yet see the savings potential in taking proactive approaches to improve employees' health and purchasing
More of the Same for Employees
This year's survey sees a dramatic drop-off in wages in comparison to 2008, when 66 percent of executives reported that wages had increased over the past two years. Of this year's respondents, only 41 percent of respondents reported that wages at their firms had increased over
the past two years, which is likely a reflection on the recent economic state.
Looking forward, however, there is some optimism among executives that wages could increase, with 53 percent of executives expecting wages to rise between 2011 and 2013. However, their projections still fail to match the 66 percent of executives who saw wages increase from
2006 to 2008. For now, there appears to be a widespread freezing of wages as companies continue to recover from recent recessionary woes.
A maintaining of the status quo is also apparent among executives when asked about investments in employee development, with almost three out of every four (71 percent) of company executives saying employee development investments will remain at the same dollar amount in 2011
as they were in 2010. Less than one out of 10 executives (8 percent) plan to invest more in employee development this year, and 18 percent plan to invest less than in 2010.
In large part, status quo also extends to the percentage of executives who say that it is difficult to attract qualified workers, with 45 percent experiencing difficulty. Though this is a slight uptick from 2010's 40 percent, it is still lower than the 55 percent of executives
who experienced difficulty in 2009.
This lack of increasing difficulty may relate to executives' forecasts for retirements among their work forces in 2011. Overall, executives expect 3.5 percent of their employees to retire this year, which is precisely in line with the same percentage of retirees that
executives predicted for 2010. As such, most companies (59 percent) are not yet turning to creative means to retain their employees, such as offering flexible hours or consulting-type positions. This number may change if difficulty in attracting qualified workers increases in
No Clear Consensus on Succession Plans
When asked if they have a plan for turning over leadership when the time comes, about half (47 percent) of the Minnesota manufacturers we talked to do have a plan and the other half (49 percent) do not. Companies with a plan tended to be higher revenue firms, making more than
$1 million per year in revenues. To that end, whereas only 33 percent among those with less than $1 million have a plan, the number jumps to 65 percent among those with revenues between $1 and $5 million, and 54 percent among those with revenues exceeding $5 million.
On an interesting note, according to what type of executive we talked to, the answers were different. Owners accounted for 43 percent of respondents, and the remaining 57 percent were other executives such as presidents, vice presidents, CEOs and CFOs. Among owners, 36 percent
said they have a plan in place for turning over leadership. But among other executives, 56 percent said they have a plan, leaving a 20-point gap between owners and those who perhaps would like to be owners in the future.
Credit Still Crunched
Continuing on the theme of maintaining the status quo, concerns about constriction of credit has remained largely the same as 2010, with 36 percent of executives reporting some type of credit constriction, similar to the 37 percent we saw in 2010. Among those who have
experienced a credit constriction, it is still having a significant effect on their businesses, though these numbers also remain largely the same as those reported in 2010. However, the numbersare considerably higher than numbers seen on our first survey in 2008. While the issue of
constricted credit manifested itself last year, it continues to hold to that same level into 2011.
To cope, manufacturers are largely turning to the same methods they used last year. Of those experiencing a credit constriction, most executives (64 percent) say their firms are turning to internal cash flow or personal resources, and six in 10 (60 percent) have either
eliminated or reduced expansion plans. Fully 43 percent of those affected by constriction of credit have explored alternative financing options, and one in five (20 percent) have eliminated or reduced product offerings.
In 2008, 10 percent of respondents shipped 11 percent or more of their products internationally. Today, 16 percent of respondents report shipping 11 percent or more of their products internationally. However, at the end of the day, less than one out of six executives (16
percent) are exporting 11 percent or more of their product outside the United States, and most companies (56 percent) do not export at all, which is comparable to responses in theprevious two surveys.
Of those who do export, 83 percent choose to export to Canada, making it the destination of choice for exporters in Minnesota's manufacturing industry. Western Europe is also a major export destination with more than half (55 percent) of companies exporting there, and Asia is
a close third at 48 percent.
Canada will also be a popular export location for those who are either thinking about starting to export for the first time, or expanding their exporting over the next few years, with fully 48 percent of executives saying they would be likely to increase their exports to
Canada. Western Europe is the second destination of choice, with 27 percent of respondents reporting they would be likely to start exporting their products there or to export more of their products there within the next few years.
It seems that manufacturing executives are very attuned to the advantages of broadband Internet. A whopping 85 percent say they have access to broadband Internet access, and nearly eight out of 10 firms (79 percent) have access and choose to use it. Among those who say they
don't use broadband Internet, most simply report a lack of need.
Software as a Service (SaaS) or Internet-based software, however, is not widely used at all. In fact, only 13 percent of executives surveyed work for firms that use it, and 7 percent of executives work for firms that plan to use it. More than half (56 percent) of executives
were not familiar with the term at all, driving the case that there is still quite a bit of growth to be had on the market with this technology.
Rob Autry is a partner of Public Opinion Strategies, a national political and public affairs survey research firm based in Alexandria, Va.