RSM McGladrey 2008 Manufacturing & Wholesale Distribution National Survey

Survey Finds Companies Underutilizing Globalization Strategies; Challenged by Economic and Inflationary Conditions

MINNEAPOLIS - (July 9, 2008) - According to the third annual RSM McGladrey Manufacturing and Wholesale Distribution National Survey (MWD) released today, companies reporting their business conditions as "thriving and growing" declined by nearly 10 percent in the past year. However, business remains good for more than a third of survey participants within the following industry segments: food and allied products, medical devices, industrial equipment, metal fabrication and electronics.

More than 960 industry executives - representing 911 companies - responded to questions on current business conditions, growth strategies, innovation, cost management, technology initiatives, operations and globalization.

Growth Prospects Sink on Rising Inflation
The survey showed 80 percent of respondents are pessimistic about U.S. economic growth prospects, and the percentage of respondents describing their business as "declining" has tripled in the past two years. Building materials, transportation equipment, plastics, and printing and publishing are the industry segments most impacted by the housing crisis, reduction in consumer discretionary spending and high energy costs.

Inflationary pressures are largely to blame for dampened expectations, with 80 percent of companies expecting cost increases exceeding six percent in energy, raw materials, operating labor, freight and benefits. Healthcare costs once again are projected to increase on an average exceeding 10 percent in 2008 - the third year in a row of double-digit increases in healthcare benefit expenses.

However, many respondents still remain optimistic about their company's growth prospects. With the exception of transportation equipment and building materials, more than 60 percent of respondents across all industry segments are optimistic about their company growth in 2008.

"Confidence about company growth may indicate belief that the economy is bottoming and will begin to rebound later this year," says Tom Murphy, RSM McGladrey's executive vice president of manufacturing and wholesale distribution.

Offshore Activity Good for U.S. Employment and Drives Need for Skilled Labor
Companies with foreign operations are hiring U.S. workers at nearly twice the rate as their domestic-only counterparts. The RSM McGladrey survey suggests the possibility that offshore operations can make U.S. companies more robust - driving need for more U.S. workers - than domestic activity alone. This trend, which runs counter to the common perception that foreign activity eliminates U.S. jobs, is especially pronounced among middle-market companies.

While demand for skilled labor among survey respondents has decreased over the past year, more than 20 percent report a need for skilled workers.

"One in five companies cannot find the skilled workers they need for today's advanced technology manufacturing and wholesale distribution environments," said Karen Kurek, managing director and business line leader of RSM McGladrey's manufacturing and wholesale distribution practice in the Great Lakes region. "As baby boomers retire, demand for labor will certainly increase - irrespective of economic conditions. The industry is challenged with properly training displaced workers and bringing jobs where workers are located."

Counterintuitive Strategies, Overlooked Opportunities
The survey also found surprising strategic reactions to declining business conditions. Seventy-five percent of respondents plan to build their market share through new customers. New product line developments were reported by more than half the responding companies, and 46 percent reported innovations in their processes.

These strategies require increased investment instead of the retrenchment more common in declining business climates. Yet, survey respondents continue to overlook key opportunities to improve their financial performance. As in the previous two survey years, fewer than half of the respondents were taking full advantage of a variety of tax planning opportunities widely available to manufacturers and wholesale distributors.

"Tax incentives and strategies are key components to improving cash flow," says Kurek. "This should be extremely important to companies now more than ever with the economic downturn. Tax incentives are available to assist with these critical steps that will enhance cash flow."

Globalization Strategies Remain Underutilized
While cost advantages of globalization are shrinking - respondents moving production or services offshore since 2007 has declined 20 percent - opportunities to benefit from participating in the global economy remain underutilized. U.S. manufactured goods are in demand globally due to the weak dollar, timely delivery and innovative products. Becoming internationally active in order to serve markets abroad is a sound strategy for companies seeking to increase revenues.

Companies that indicated they are pursuing a global strategy - which remained flat in 2008 at only 45 percent overall - report a 4 percent higher gross margin than those with no global strategy. Also, 12 percent of respondents report expecting "considerable" growth internationally compared to the 8 percent expecting growth domestically.

"This is a clear indication companies need to capture every potential advantage available to them by participating actively in the global economy including export opportunities driven by the high demand for U.S. products," says Murphy.

Green Revolution
This year's survey asked what manufacturers and distributors are doing in terms of green initiatives. According to the survey:

• 46 percent of businesses have adopted at least one green initiative
• Approximately half of these businesses attribute the green initiative as a response to customer requests; it is likely that customers and end users - along with industry early adopters like construction and real estate - will drive demand for more environmentally friendly products and processes

Murphy says that manufacturer's and wholesale distributor's green gains are tied directly to lean manufacturing. "Lean manufacturing is focused on eliminating waste - including wasted energy and commodities. As companies implement lean to control costs, green improvements are inevitable. Not only is it about the environment; it's also a great way to improve the bottom line."

Overwhelming Majority of Manufactures Fail to Take Advantage of Government Programs
More than 75 percent of survey respondents do not take advantage of any government programs. More respondents are familiar with government programs than in 2007, but companies are still not taking advantage of available programs that could help their business in an economic downturn.

Research Methodology
In the spring of 2008, RSM McGladrey distributed its third annual manufacturing and wholesale distribution survey to industry executives across theU.S. This survey was designed to assess the current state of the industry and to ascertain what steps CEOs, CFOs and other executives are taking to grow their business and stay competitive. More than 960 surveys were completed, providing a strong, statistically representative sample of responses.

The complete RSM McGladrey 2008 Manufacturing and Wholesale Distribution National Survey is available at www.rsmmcgladrey.com/2008survey.

RSM McGladrey:
RSM McGladrey is a leading professional services firm providing accounting, tax and business consulting. RSM McGladrey operates in an alternative practice structure with McGladrey & Pullen LLP, a partner-owned CPA firm that delivers audit and attest services. Through separate and independent legal entities, they work together to serve client's business needs. Together, the companies rank as the fifth largest U.S. provider of accounting, tax and business consulting services (source: Accounting Today), with 8,000 professionals and associates in more than 100 offices. RSM McGladrey Inc. and McGladrey & Pullen LLP are member firms of RSM International, an affiliation of independent accounting and consulting firms. RSM McGladrey is the official accounting, tax and business consulting firm of The PGA of America.