Survey Finds Industrial Manufacturers Poised For Growth

But high energy prices could hinder further growth; spur manufacturers to source from low-cost countries

U.S. industrial manufacturers are gearing up for growth, projecting an average revenue increase of  8.1 percent for the next 12 months, according to PricewaterhouseCoopers' most recent Manufacturing Barometer.

Executives surveyed also expressed continued worries about energy prices, and 61 percent noted they were either already sourcing from low-cost countries or seriously considering doing so.

Industrial manufacturers' predicted growth rate of 8.1 percent is higher than last quarter's projection of 7.8 percent -- and significantly above the 6.5 percent forecasted a year ago. On another positive note, only 13 percent of respondents cited decreasing profitability as a potential barrier to growth, down from 22 percent last quarter.

Pass-through price increases have provided an opportunity for these companies to test their pricing power and maintain gross margins. While costs have increased for over half  (53 percent) of the companies, nearly as many have boosted their prices (45 percent).

At the same time, 40 percent of those surveyed increased their gross margins. These strong margins are enabling the majority of manufacturers (60 percent) to make major new capital investments over the next year, with 57 percent planning increased investment in new products or services, and 49 percent and 47 percent, respectively, expecting to make added investments in information technology and research and development.

"Industrial manufacturers are responding to the challenges of increased costs in a healthy way, ensuring their -- and the market's -- continued growth and success," said Jorge Milo, leader of  PricewaterhouseCoopers' U.S. industrial manufacturing practice. "If these companies can continue to effectively deal with increased energy costs, the industry should continue to experience positive growth."

Energy prices are the driving force behind rising costs, with 65 percent of executives viewing them as a barrier to growth. This represents a slight increase over the 63 percent who named higher energy costs as a barrier to growth last quarter; however, it is far fewer than the 80 percent who saw it as a concern last year.

The Manufacturing Barometer also found that 61 percent of manufacturers are either using or considering using low-cost sourcing from abroad to reduce supply chain and sourcing expenses. Those who are either using or considering low-cost sourcing tended to be larger companies, with enterprise revenues averaging $7 billion (versus $4.3 billion for those not using or considering low-cost sourcing).

Additionally, users or those considering low-cost sourcing expected slower revenue growth over the next year – 7.7 percent. Companies not using or considering low-cost sourcing projected revenue growth of 10.4 percent. Users or those considering low-cost sourcing appear to have less price flexibility and expect a greater share of their total revenues to come from sales abroad.

"Competition is tight across the globe," said Milo. "Industrial manufacturers looking to control rising costs often need to rely on low-cost country sourcing in order to maximize international supply chain efficiency."

China was the leading country cited for low-cost sourcing, with 82 percent of those using or considering low-cost sourcing likely to set up operations here. Following China were India (50 percent), Mexico (42 percent) and Eastern Europe (32 percent). China and India lead the way as likely destinations (both with 16 percent) among companies seriously considering low-cost sourcing overseas in the near future.

On the hiring front, 58 percent of industrial manufacturers plan to expand their workforce over the next 12 months, an increase over the 43 percent who expected to hire more employees a year ago. However, overall composite hiring for the industry remains flat at -0.1 percent, likely due to cutbacks at large firms.

Industrial manufacturing executives expressed optimism about the global and domestic economies, with 63 percent reporting optimism about the U.S. economy, and 64 percent about the global economy.

The findings from PricewaterhouseCoopers' Manufacturing Barometer, a quarterly survey, are based on interviews with 62 senior executives of large, U.S. industrial manufacturers about the business climate. This release summarizes results for Q2 of 2006, from interviews conducted through July 12, 2006.

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