Enterprise Minnesota Magazine - February 2012
HELPING MANUFACTURERS GROW PROFITABLY
Enterprise Minnesota’s fourth annual State of Manufacturing® survey reveals manufacturing executives share a high level of confidence in the future of their firms. However, health care and government regulations continue to top their list of concerns, and finding qualified workers is becoming a more widespread worry.
BY ROB AUTRY
Much evidence in this survey suggests that Minnesota manufacturers continue to cast off the recession’s dark cloak, as confidence in their firms’ futures and solid revenue, profitability and capital expenditure projections hold steady for the second year in a row. Over two weeks in January, we conducted our fourth annual poll of 400 manufacturing executives from a diverse cross-section of Minnesota companies and locations. Here are this year’s findings.
The Mood: A Continued Sense of Calm
Manufacturing executives’ confidence in the future of their individual firms remains high. From a financial perspective, 82 percent of executives say they are confident about the future of their firms. This high confidence level is remarkably consistent with the data from 2011, and spreads across companies of all sizes, locations and revenues.
That being said, there are some signs that last year’s optimism has subsided a bit. When asked whether they anticipate an economic expansion, a flat economy or a recession, 32 percent of executives say they expect an economic expansion, down from 40 percent in 2011. Meanwhile, the percentage of executives who anticipate a flat economy has increased from 49 percent in 2011 to 55 percent in 2012.
On key projections, executives have certainly come a long way from where they were three years ago, when 32 percent of executives expected their gross revenues to decline, 34 percent expected their profitability to decline, and more than one in three (37 percent) expected their capital expenditures to decrease. This year, only 8 percent of executives anticipate a decline in gross revenues, and only 13 percent expect a decline in profitability. Less than one in four (24 percent) executives expect their capital expenditures to decrease.
However, projections on these three indices are slightly less rosy now than they were a year ago. Where 51 percent of executives anticipated an uptick in gross revenues and 32 anticipated an increase in capital expenditures in 2011, 47 percent anticipate increased gross revenues and 27 percent expect an increase in capital expenditures in 2012. The starkest contrast is seen in profitability projections. While 39 percent of executives expected their firm’s profitability to increase in 2011, only 31 percent expect it to increase in 2012.
A Chronic Condition
For the fourth year in a row, health care remains by far the top concern among a list of 11 different factors. Almost seven out of 10 (68 percent) manufacturing executives now say the cost of health care coverage is a concern for their firm. The next two most common concerns are essentially tied for second place, with 56 percent of respondents reporting worry over government policies and regulations, and 55 percent of respondents expressing concern over federal, state and local taxes.
Health care also rises to the top of the list when it comes to recruitment. Fully 50 percent of executives report that affordable health care is an important factor in attracting workers to their firm, up 11 percentage points from our first survey four years ago. Interestingly, the importance of salary and wage expectations as a recruitment factor has decreased over time: where 43 percent of executives ranked it as important in 2009, only 22 percent of executives feel the same way in this year’s survey.
Despite widespread agreement that offering an affordable health care plan is important for recruiting new workers, fewer firms appear to offer one at all. In December 2008, 63 percent of executives said their firm offers some kind of health care plan. That number has since fallen 12 percentage points to 52 percent this year.
Anxieties over health care costs are not inspiring more firms to pursue wellness programs or other initiatives, either. In fact, the percentage of executives who say their firms offer some type of wellness or health management program has decreased slightly, from 34 percent in 2011 to 31 percent in 2012.
Qualified Labor Gap
Though it ranked fourth on manufacturing executives’ collective list of concerns, worry over finding qualified workers has made a sizeable and significant jump, doubling over the past year. Fully 31 percent of executives say this issue is a concern for their firm, up from 14 percent in 2011. Firms of larger size and revenue are most likely to rate this as a concern.
Executives’ own experiences with recruitment echo their worries on the issue. Nearly six out of 10 (58 percent) ing qualified labor. The majority of firms across all sizes and locations appear to share this challenge. However, it is the larger companies in terms of revenue (more than $1 million) and size (more than 50 employees) that say it will affect their bottom line.
Logically, these larger firms are also more likely to have added to their workforce over the past year. Overall, 27 percent of executives reported workforce growth in the past 12 months. But among companies with $5 million or more in annual revenues, 56 percent reported workforce growth. Similarly, 54 percent of companies with more than 50 employees say they added new hires to their workforce. Many larger firms expect to continue this hiring trend over the next 12 months as well: 46 percent of executives at firms with $5 million or more in annual revenues and 44 percent of executives at firms with more than 50 employees expect their workforce to grow over the next year. It appears that companies going through the hiring process are the most likely to report difficulty in and concern over recruiting qualified talent.
Wages on the Rise?
There is some evidence to suggest that the widespread freezing of wages observed for the past few years is thawing out as the recession’s grip loosens. Close to half of manufacturing firms (43 percent) say their wages have increased over the past year. Moreover, the majority of executives (54 percent) expect their firm’s wages will increase over the next two years. The percentage of executives who share this expectation has increased steadily over the past four years, and is up 13 percentage points from December 2008, when only 41 percent of executives expected wages to increase over the next two years.
On a small but interesting note, though companies expect to be paying higher wages in the coming years, they do not plan to spend more on developing their employees. The large majority of firms (72 percent) expect there will be no change in employee development investment compared to 2011.
Credit Less Concerning
In 2009, credit constriction was a hot-button issue that many executives believed would affect their companies in 2010. They were right, as the percentage of executives executives say it is a challenge to attract qualified labor to their companies. This is a noticeable increase from 2011, when 45 percent reported difficulty in attract experiencing a constriction of credit increased threefold between those years, from 13 percent to 37 percent. Since 2010, that statistic has observed a slow but steady decline. Though we are not out of the woods on this issue, as 30 percent of executives say they experienced a constriction of credit this year, concerns about the constriction of credit have clearly peaked and are starting to subside.
Strong Supply Chain Relationships
Despite an unpredictable economic environment, twothirds (67 percent) of manufacturing executives report no change in their supply chain relationships over the past two years. This finding is consistent across all splits of company size, revenue, location and years established.
Following this data, home-sourcing—bringing supplier contracts back to the U.S.—does not appear to affect manufacturers’ industry today. Only one in four (27 percent) manufacturers say they have experienced homesourcing in the past few years, and another 12 percent have not experienced it, but say they have observed it in their industry. The majority of manufacturers (58 percent) have not experienced or seen home-sourcing occur at all. It will be interesting, however, to track this statistic over time.
The state’s manufacturing industry has hit a new high in the percentage of companies who say they ship internationally. Fully 47 percent of manufacturing executives now say their firm ships outside the U.S. Nearly one in five respondents (18 percent) says their firm ships more than 11 percent of its product overseas. Just three years ago, only 10 percent of manufacturers reported doing so. Of those who do export, nearly one-quarter (22 percent) report they are exporting more than they did one year ago.
Last year’s survey found that 83 percent of companies that export sent products to Canada, making it the top export destination of choice. However, this year’s survey finds Canada is not necessarily where they see the greatest potential for future business. There is a significant split in this data between smaller and larger exporters. Those who ship less than 10 percent of their product internationally— the “light” international shippers— see the greatest business potential coming from Canada, as 28 percent expected Canada would be the source of the greatest increase in prospective business, most likely because of its proximity to Minnesota. These smaller exporters also see Europe as having equal potential to China, at 16 percent and 15 percent, respectively.
However, those who ship more than 11 percent of their product overseas overwhelmingly see China as the place for the greatest prospective business, with 25 percent naming China, and 21 percent naming Latin America. Only 12 percent of these larger exporters believed Canada held the greatest prospective increase in business.
The Greening of Manufacturers
Manufacturing executives clearly see the importance of reusing and recycling materials in their manufacturing process. Seven out of 10 say it’s important, and close to one out of three say it’s very important. It doesn’t matter if it’s a firm with less than 10 employees or more than 50, or if they make under $1 million or more than $5 million, or whether they’ve been in operation 1 year or 100 years; the data is remarkably consistent across all types of firms.
When asked whether the level of green initiatives at their companies will increase, decrease or stay the same, three out of four firms (73 percent) say the level of green initiatives will stay the same for the upcoming year. Another 23 percent of executives expect it to increase somewhat.
The larger firms with more than 50 employees and more than $5 million in annual revenues are more likely to anticipate an increase in their green initiatives for 2012. Those same firms are also more likely to say that their reason for doing this is because it reduces costs, making them more efficient. They are not necessarily doing it for the environmental benefit—they are doing it for the bottom-line benefit it offers. This finding stands in stark contrast with the smaller firm (less than 50 employees) respondents, who say the best reason for pursuing green initiatives is because it’s the right thing to do for the environment. Most companies are not implementing green because the government is incentivizing it or because customers are demanding it. Instead, depending on the size of a company, green appears to be either a bottom-line issue or an issue of conscience.
Rob Autry is a partner of Public Opinion Strategies, a national political and public affairs survey research firm based in Alexandria, Va.
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