United States

McGladrey Survey: Industrial Sector Sees Regulation Health Care Reform and Other Policy Issues as Threats to Recovery

Executives are optimistic about growth prospects for their own companies, but remain skeptical about economic conditions and other external factors beyond their control


CHICAGO, IL – According to the 2013 McGladrey Manufacturing and Distribution Monitor, industry executives are optimistic about their companies' growth prospects, but see government regulation, health reform implementation, the federal deficit, and other policy-related pressures as the greatest threats to their continued recovery. The survey, which was conducted by McGladrey LLP - a leading provider of assurance, tax and consulting services focused on the middle market - includes responses of 1,067 industry executives, and provides an annual update on the state of middle market manufacturers and distributors.

According to the Monitor, manufacturers and distributors have high hopes for the next 12 months, with 85 percent reporting optimism about their growth prospects over the next 12 months. These companies have positive outlooks for both domestic and international sales in the next year, with 83 percent expecting increases in U.S. sales and 63 percent projecting sales increases in foreign markets. The employment outlook is also encouraging, with nearly two-thirds of the survey respondents expecting to add jobs in the next year.

Despite this general positive outlook, the survey suggests that manufacturers and distributors are considerably less optimistic about external forces beyond their control. At the same time, there are positive signs that a return to growth and improvement in the domestic economic outlook could bring more jobs to the sector. Key findings include:

Manufacturers and distributors see regulatory and policy-related roadblocks – including health care reform, the federal deficit, tax changes and others – as the biggest threats to future growth. While respondents were concerned about traditional business threats such as, materials pricing, credit availability and other operational considerations, far more respondents see regulatory and policy-driven pressures as the biggest threats to continued growth. The top four (out of 17) most commonly cited threats to growth were related to government policy. Government regulation in general was the most commonly cited threat, with nearly three-quarters (74 percent) of respondents indicating that they expected it to limit their growth over the next 12 months. Health care reform implementation was a close second (71 percent), followed by Social Security/Medicare payroll taxes (69 percent) and the federal deficit (67 percent).

  • Health care costs and reform impacts are of particular concern to manufacturers and distributors. Health care reform was the second-most frequently cited threat to growth, with 71 percent of respondents indicating that they expected implementation of the Affordable Care Act (ACA) to either limit or significantly limit growth over the next 12 months. Health care reform was the most frequently cited threat to "significantly limit" growth. In addition, 91 percent of respondents said they expected their employee health care costs to grow over the next year, with an average expected cost increase of 10 percent. Approximately one in 10 businesses expect health care costs to rise by 20 percent or more.
  • More than half of respondents expect the "skills shortage" to limit growth over the next year. Fifty-seven percent of respondents said their growth would be limited by a lack of skilled workers, demonstrating that this issue is more than just a theoretical problem and one that is having a significant impact on economic progress.
  • On-shoring has not caught on in the middle market. The "on-shoring" trend has not quite taken hold in the middle market. Only 14 percent of respondents said they are considering bringing overseas operations back to the U.S. over the next 12 months. At the same time, the survey also suggests that this trend could accelerate among mid-sized manufacturers and distributors in the coming years, as more than half (52 percent) said they believed it was important to have operations in close proximity to their customers, most of which are in the U.S. These indicators suggest that sourcing a product half way around the world might not be the best way to compete in the post-recession economy.

"The results from this year's Monitor make clear that manufacturers and distributors are feeling better than last year about the things they can control, but they remain concerned about what is going on outside of the walls of their factories and offices," said Karen Kurek, national manufacturing and distribution practice leader for McGladrey. "While this internal-versus-external dynamic is not new, the displacement of traditional concerns such as market conditions and materials pricing as top threats represents a major shift for the industry. While executives remain concerned about those issues, in this post-recession environment, they now see regulation and government policy as the greatest threats to future growth."

The survey also provides a number of insights into the important role technology is playing in post-recession business strategy for both sectors. Key findings include:

  • Companies are planning to invest more in information technology (IT) than in any other area. When asked about their investment priorities for the next 12 months, 79 percent of respondents said they intend to increase spending on IT – more than any other category of investment. In addition, manufacturers and distributors predicted a higher average spending increase on IT (12 percent) than in any other category of investment.
  • Executives rate their IT assets as effective contributors to a wide area of business processes and capabilities. When asked about the impact of IT on various capabilities and business imperatives, executives were most likely to give positive marks to internal information sharing (85 percent); improving customer satisfaction (73 percent); and improving company productivity and reducing costs (73 percent). However, a surprisingly high number of executives rated their IT systems as ineffective in aiding with external information sharing – with both customers (36 percent) and suppliers (44 percent).
  • Data security represents a particularly critical challenge. Despite the constant stream of news about web-based corporate espionage, more than two-thirds (68 percent) of manufacturing and distribution executives believe that their data is either at no risk (17 percent) or very little risk (50 percent). In fact, despite IT risk management being a widely recognized necessity in the corporate world, 35 percent of respondents reported that they either didn't have an IT risk management process in place (25 percent) or didn't know if they had one (10 percent).

"Like other industries, many manufacturing and distribution companies have postponed investing in their IT assets during the recession," said Jon Caforio, principal – technology consulting at McGladrey. "Every industry has information that some external entity wants, and new technologies make getting to that information easier than ever. It's concerning that so many manufacturers and distributors feel that their data is at no or very little risk, and that so many don't have an IT risk management process in place. These companies are opening themselves up to unnecessary risk, which could have a long-lasting negative impact on them and their customers."

About the McGladrey Manufacturing and Distribution Monitor
The McGladrey Manufacturing and Distribution Monitor surveys industry leaders to assess the current state of the industry and to determine what steps CEOs, CFOs and other executives are taking to grow their businesses and stay competitive. All data is collected online in response to invitations from McGladrey and from partnering associations and chambers of commerce across the United States.

About McGladrey
McGladrey LLP is the leading U.S. provider of assurance, tax and consulting services focused on the middle market, with more than 6,500 people in 75 offices nationwide. McGladrey is a licensed CPA firm and serves clients around the world through RSM International, a global network of independent assurance, tax and consulting firms. McGladrey uses its deep understanding of the needs and aspirations of clients to help them succeed. For more information like us on Facebook at McGladrey News, follow us on Twitter @McGladrey and/or connect with us on LinkedIn.

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