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Small Manufacturers Must Concentrate on Global Strategies
Reprinted from the Manufacturing News
Small- and medium-sized manufacturing companies in the United States are not doing a very good job of taking advantage of fast-growing overseas markets, according to RSM McGladrey. Companies that have a well-defined global strategy, which includes both sourcing products from overseas and selling there as well, are experiencing revenue growth in their foreign operations. Companies that haven’t adopted such a strategy aren’t doing as well.
In its annual survey of small- and medium-sized manufacturing companies, RSM McGladrey found that the bigger the company, the greater the chance of it having a global strategy. Fifty-nine percent of companies with revenues of more than $500 million said they had a global growth strategy, with 56 percent of them indicating they were experiencing revenue growth through exports. Among the mid-sized companies, 47 percent said they had a global growth strategy, with 42 percent saying they had revenue growth in foreign markets. Among the smallest manufacturers with less than $15 million in sales, 41 percent said they had a global strategy, but only 33 percent were seeing revenue growth.
“The smaller the company, the more difficult it is to export and import globally,” says Thomas Murphy, RSM McGladrey’s executive vice president of manufacturing and wholesale distribution. “Companies need to take a look at that strategically because if they’re not engaged globally, they’re missing an opportunity.”
About 30 percent of respondents indicate they are moving production and services offshore to serve international markets, according to survey results. “More than half say they will move neither.”
Companies have to confront barriers to international growth such as financing, finding local expertise and partners, protecting intellectual property and dealing with language and cultural issues. “They have to figure it out because the way this thing is going, it’s going global and they have to think globally, “says Murphy, whose accounting firm specializes in services to mid-sized companies.
The global shift might not bode well for U.S. manufacturing workers in some industry segments “because as a result there may be less people working on making products here,” says Murphy. “But if you can take advantage of the opportunities that new markets provide to you, you can increase your volume. Volume doesn’t solve all problems, but it helps. As new markets become accessible and as the standard of living in those countries grow, there is more demand for U.S. products.”
U.S. manufacturing companies have done a good job of cutting costs and improving margins, but they have not done as well improving revenue through developing new products and services, modifying existing products and penetrating new markets.
RSM McGladrey asked companies if they had independent audit committees, an internal audit function or if they prioritize high-risk areas. Fifty-four percent of companies said they had not implemented any of those strategies and that they were comfortable with their management of risk. “What it means is companies that are risk adverse do not take a lot of risk and so they are not exposed to a lot of risk,” says Murphy. “That becomes crucial when you’re talking about developing a global strategy because it is going to be risky. They can keep their company going in the United States and it’s pretty good, but over the course of time it might not work out so well.”
Many small- and medium-sized manufacturing companies are also not taking advantage of many tax breaks offered to them through the federal tax code. The federal Domestic Manufacturers’ Deduction of 6 percent for companies making products in the United States “is better than a tax cut – it’s a tax provision already in law,” says Murphy. Yet only slightly more than 40 percent of manufacturers use the deduction.
Fifty-eight percent of small- and medium-sized manufacturers are taking advantage of the R&D tax credit, but there are still 42 percent that aren’t. “Some aren’t doing any R&D, which includes both new products and processes; some are losing money so they don’t even waste their time; and others worry that they will get denied if they claim the credit because what a manufacturer thinks is R&D the IRS might disagree,” says Murphy.
Similarly, small- and medium-sized manufacturing companies are not taking advantage of government programs in place to help them compete in international markets. The Commerce Department’s International Trade Administration “is a great resource” that is not being utilized, says Murphy. “There are breakdowns between the public and private sectors. The SBA has programs, states have programs, the Departments of Labor and Commerce all have programs, but the utilization rates are not as high as one would think they should be.” When asked why they were not engaged with government agencies created to help them, most of the companies said they are not familiar with the programs, are not interested in government involvement, aren’t sure how to get started and don’t have enough people or resources to pursue such opportunities. For those companies that do avail themselves of government programs and tax breaks “it pays off,” says Murphy.
Small- and medium sized manufacturing companies are also concerned about finding qualified workers. Over the next 18 months, 63 percent said they plan to expand their workforce. “There is an overall need for labor, and the entry level need is about the same as the specialized need for engineers,” says Murphy.
But manufacturing companies don’t have very good relationships with those providing trained workers. Only 24 percent of companies said they have a recruiting relationship with a two-year school, and 48 percent of those who do said that relationship was ineffective, which means only 12 percent have any luck hiring people out of two-year schools. Only 17 percent of small- and medium-sized manufacturing companies had a relationship with a four-year college, and 57 percent said it was ineffective. “Even though a lot of people are working quite hard to figure out what skill sets are needed for industry, we haven’t gotten there yet,” says Murphy.
Companies that were most optimistic about their growth prospects in the future were medical devices (95 percent optimistic), electronics (86 percent), chemicals and allied products (78 percent), metal fabrication (77 percent), industrial equipment (75 percent), plastics (72 percent), printing and publishing (67 percent), building materials (63 percent), and transportation (58 percent).
Murphy says that over the long-term, U.S. manufacturers should be able to regain their footing, due in part to the exploding cost of energy. It won’t make economic sense to ship heavy items across oceans. “Manufacturing will be regionalized and the countries with the raw materials will drive a lot of manufacturing investment,” he says. “Energy will be a key driver of what is located where.”
[PRINTER FRIENDLY VERSION]
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