Learning … and planning on growing

Nov. 14, 2011

Having learned a good deal from weathering the economic crisis a few years back, most of them [private companies] are well equipped to ride out this current rough patch. The real question is whether they will make the strategic decisions to distance themselves from their competition as the economy improves.” –Ken Esch, a partner with PricewaterhouseCoopers LLP private company services practice

A strange dichotomy is developing among private companies, according to a recent survey I came across the other day – but it’s a dichotomy that, when all’s said and done, helps paint a pretty good picture for freight in the not-so-distant future.

In a nutshell, this survey – conducted by global consulting firm PricewaterhouseCoopers (PwC) – finds that while optimism among private companies is hitting rock bottom, those very same firms expect their revenues to increase over the next year.

Another interesting mental “split” comes in terms of their investment strategy. The vast majority, for example, are looking to beef up their investments in information technology (IT) as a way to help them increase profits. But they are also looking harder and harder at ways to reduce more “traditional” business costs, especially in terms of labor, facilities, and supply chains.

For many private firms, especially in manufacturing, reducing such “traditional” costs is convincing many to relocate plants back to the U.S. – a move that will almost certainly result in a boost to freight volumes for the trucking industry over time.

The percentage of private companies concerned about profitability/decreasing margins as a barrier to growth rose seven points in the third quarter to 37%, according to PwC's latest Private Company Trendsetter Barometer. Overall, costs rose for a net 17% of companies in the firm’s survey, with prices rising only a net of 10%, while gross margins remained flat for a third consecutive quarter

Confidence in the U.S. economy dropped sharply among the 247 CEOs polled by PwC in this survey, with just 27% expressing optimism, down 16 points from the second quarter. Furthermore, the percentage of executives voicing uncertainty, meanwhile, continued to rise, increasing to 49%: up seven points from last quarter and still well above the percentage expressing outright pessimism (24%).

Despite this drop in optimism for the second straight quarter, revenue forecasts and planned operational spending remained strong, noted Ken Esch, a partner with PwC's private company Services practice.

The executives polled by the firm forecast a 7.2% average revenue growth rate for the next 12 months, with 78% of private companies expect continued growth over the next 12 months. On top of that, 30% are projecting double-digit growth and 48% are forecasting single-digit growth.

“On the face of it, the drop in optimism is significant because the reading hasn't dipped this low since a couple of years ago,” Esch pointed out. “But private companies are in a much different place now.”

He noted that, back in early 2009, outright pessimism among surveyed executives was considerably higher than what PwC seen this past quarter – largely because many companies were fighting for outright survival. This time, uncertainty ranks highest, with twice as many private companies registering that sentiment as those citing pessimism, Esch said.

Having made it through the economic crisis of 2008, he explained, these CEOs recognize the difference between the need to navigate a stop-and-start economy and being in survival mode. “And so rather than watching [these] companies retrench, we're seeing them continue to increase their operational spending and make strategic hires – a much different picture than in 2009,” he stressed.

Here’s the kicker: those concerns are helping fuel a “reverse outsourcing” shift of sorts, which is brining manufacturing – and thus freight – back to U.S. shores (a topic I’ve touched on more than few times in this space).

"Much of the concern around margins is tied closely to commodity prices and labor," notes Esch. "That includes labor abroad, prompting private companies to rethink the location of their manufacturing operations.”

While higher wages for workers in fast-growth markets like China and Brazil make those countries increasingly attractive places for Western companies to sell their goods and services, those locations simultaneously become less attractive as manufacturing sites – particularly when you combine higher wages abroad with foreign exchange issues and shipping costs, he said.

“We may start to see manufacturing for U.S. customers migrate back to the U.S. as a result of these pressures,” Esch pointed out.

That kind of strategy can only help the freight market here at home in the years ahead. But it’s also important to recognize this as a something that will bring benefits over the longer term; thus not overnight.

Right now, U.S. export volume – and the freight demand that goes with it – is being sideswiped by Europe’s growing debt crisis; a crisis that, if it gets any worse, could significantly impede the above scenario.

While exports now make up their largest share of the total U.S. economy in three decades, according to U.S. Department of Commerce figures – with exports volume rising 1.4% in September alone, to $180.4 billion in goods and services – U.S. exports to the 17-nation “Euro zone” contracted significantly, inching up a mere 0.5% in September compared to 5.9% in August.

Overall, exports now account for some 14% of total U.S. economic output, up from less than 10% in 2004, the Commerce Department noted. While this is good, it’s also important to realize that export volumes are significantly higher on average for other developed nations like us; with exports from France and the U.K. making up 30% of their respective economic outputs.

But again, if Europe can muddle through its debt crisis without too much collateral damage to the rest of the global economy and private companies stay on the “re-shoring” trend to bring manufacturing operations home to U.S., then trucks that haul freight to make ends meet could wind up with a very rosy future indeed.

A lot of “if’s” to be sure, but then “if” is the middle word in “life” now isn’t it?

About the Author

Sean Kilcarr 1 | Senior Editor

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