United States

2019 Annual Industrial Products Industry Spotlight


"For most manufacturing clients, the most significant impacts resulting from the recent two trade deals have yet to materialize, as most of the tariffs affecting industrial products remain unchanged." - Hong Nguyen, Director, Transaction Advisory Services, RSM


“For middle market manufacturing companies, capital expenditure (capex) is a key factor to determining the success of the business, which executive teams are still focused on from both maintenance and growth perspectives,” says Nguyen. Nevertheless, neither historically low interest rates nor the tax reforms rolled out across the United States over the past two years have proven other than short-lived in their ability to stimulate further spending on capex. According to the RSM Middle Market Business Index, only 46% of executives surveyed increased their capex spending in the fourth quarter and have plans to do so over the next six months. But the need to invest in new technologies could not be greater with the manufacturing sector in recession. “Even though the tax reform has helped companies increase cash reserves for investment, we have not witnessed our clients spending on investments in capex driven by this extra cash on hand,” says Nguyen. For many manufacturers, the challenge remains the importance of balancing current and future needs. But confidence is key to investing in capex, as manufacturers must align near-term spending with long-term growth plans, and persistent trade tensions have largely prevented clients across the middle market from feeling sufficiently confident in making those plans.

Big picture

Mergers and acquisitions (M&A) across the industrial products (IP) space posted another strong year in 2019. Although deal value and volume fell across Europe and North America in the fourth quarter, nearly 3,000 transactions closed last year for $333 billion in aggregate. But the upward trends in both value and volume, which have spanned most of the past decade, remain in doubt while no consensus has been formed around the phase one trade deal between the United States and China and the recently ratified USMCA. “For most manufacturing clients, the most significant results from the recent two trade deals have yet to materialize, as most of the tariffs affecting industrial products remain unchanged,” says Hong Nguyen, a director with transaction advisory services at RSM US LLP. One consequence of this uncertainty over the past 18 months has been the slow slide into recession for U.S. manufacturers. Another consequence has been the sustained diversification of supply chains. “We continue to see our clients diversify their customer and vendor bases and move their exposures from China to different countries such as Mexico or other Southeast Asian countries such as Thailand, Vietnam and Malaysia,” says Nguyen. She adds that the trade agreements are heading in the right direction to eliminate trade tensions, but it is hard to determine if they have materially reduced uncertainty in the current environment.

Looking ahead

Capex represents just one approach to improving capacity and overall performance for manufacturers confronting uncertainty from ongoing trade tensions. Going forward, clients anticipate taking more proactive measures, including upping their investment in training, which has already demonstrated success across the middle market on several fronts:

  • Better training for employees across manufacturing processes/functions in order to maximize labor efficiency levels
  • Balancing the workforce between internal labor and temporary labor to leverage the salary cost pool and line up with the seasonality of their business
  • Adopting measures to improve morale and the working environment to support employees, as small things can go a long way to boost productivity and efficiency

Financial sponsors in the IP space continue to explore a variety of initiatives to improve employee engagement and overall productivity. For example, KKR’s industrials private equity (PE) team adopted a management buyout structure in 2011 that makes all employees shareholders of the business. The move has made value creation more a matter of employee engagement and morale, which has led to improved performance. Likewise, there are other strategies to improve performance that clients are increasingly considering. These strategies include using a more diversified and stable vendor base to mitigate any negative effects from the current economic and political environment, utilizing different purchasing policies to take advantage of commodity prices such as spot, hedging or forward contracts, and using purchasing power to negotiate more favorable terms.

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