THE INDUSTRY & OBAMANOMICS

Welcome to our first annual State of the Industry issue. Given the current global economic malaise, how much more timely could it be to have the latest information on industry production and shipments to help you assess what’s hot, what’s not, and identify potential trends.

Then compliment that information with insights from executives in various market sectors who share their thoughts on the critical issues facing our industry, possible solutions to these issues, and what they foresee as potential disruptive forces, technologies or innovations coming in the near future.

In fact, more than 25 percent of the 201 U.S. companies recently surveyed by management consulting firm Homburg & Partner (Mannheim, Germany) pinpoint innovation as one of the top key success factors in the metal forming and fabricating industry for the next three years (see Chart 1).

“In times of dwindling funds, an economical management of innovation has become an absolutely crucial must-have,” reports H&P. “For prudential budgeting, innovation must be cost-oriented more than ever and driven by the market rather than by intrinsic engineering.”

Efficient automation is imperative when dealing with production costs and process management, regarded as the two most important key factors by 30 percent of the participants in the October survey. “Fueled by the opening of economies such as China, globalization’s pressure on U.S. companies is viewed ever more as a chance rather than a threat,” states H&P. “Nearly 15 percent of the surveyed companies see expanding into global markets as the key success factor.”

Most of the companies surveyed forecast growing markets. The metal forming and fabricating industry’s growth in the U.S. is estimated as 7 percent in 2009 and 10 percent in 2010. Worldwide, the industry’s growth is projected to be 12 percent in 2009 and 15 percent in 2010.

But participants with upper management titles generally held back a bit on these rates. “About one-third concur that the U.S. financial crisis will not render into a cash flow problem, yet it is commonly agreed that the financial crisis has a negative effect on growth rates for the metal forming and fabricating market,” explains H&P (see Chart 2). “While the crisis of the automotive producers is also seen as a threat, management perceives it less critically.”

However, H&P’s in-depth discussions reveal that top management of these market leaders predominantly disagrees with the highly positive growth rates of U.S. markets. Instead, they expect them to stay flat or perhaps increase just slightly positive, perhaps up 2 percent in 2009, depending on the regarded segment. Energy is the only segment expected to grow stronger.

The H&P survey comes at a time when General Motors, Ford and Chrysler are having a very hard year, global stock markets have lost immense value, some top investment banks cease to exist, and unemployment is escalating. This background of business turmoil has everyone anticipating what the policies of the new administration will be and how they will impact manufacturing.

Three themes will likely dominate how “Obamanomics” impacts U.S. manufacturers in the months ahead, according to Dr. Chris Kuehl, economic analyst for the Fabricators & Manufacturers Association, International (Rockford, IL), in the economic update newsletter Fabrinomics.

“Although President-elect Obama has only had a short time to start defining his approach, there are a few clues that bear monitoring,” says Kuehl. “In general, these are in the areas of trade, reactions to the recession and future regulations.

“Trade policies seem to reflect the Democratic Party agenda more than Obama’s, but he has yet to suggest that he will take a different position,” notes Kuehl. “The notion is that trade is not necessarily a good thing and that the U.S. has a right to engage in protectionism.” This position provokes some real concerns from trading partners in Europe and Asia, and some criticism from the likes of the WTO, IMF and various trade groups.

“Obama indicates he will look at all the current trade agreements and evaluate them, a statement that creates consternation among supporters of NAFTA, CAFTA, and those who seek better relations with Europe in general,” explains Kuehl. “The impact on manufacturing depends largely on where a given company stands. Those getting hammered by overseas competition may see some policies enacted that protect them, but those that started to discover the joys of export are likely to see some of those markets slam closed.”

Another area to watch is reaction to the current recession. According to Kuehl, initial thoughts from the Obama economic team are heavier on fiscal solutions than monetary ones. “In all fairness, the monetary approach has been pretty fully exploited at this juncture. There isn’t much left for the Fed to do,” he adds. “The IMF is urging countries all over the world to engage in fiscal stimulus, and many have reacted. China just dumped close to $600 billion into their own stimulus package and the U.S. is now considering what else can be done to bail out the auto industry.

“The Obama response to the economy will lean heavily on government spending programs, despite the impact this will have on the federal deficit and the U.S. debt position globally. The Democrats also seek to keep some of their campaign priorities on the table, but that may prove much harder to do,” states Kuehl. “A major government push on recession will likely take the shape of some kind of infrastructure development effort, and that could be a boon to the manufacturers serving that sector.”

Kuehl believes the third theme is the Obama push to “fix” the system once the crisis of a recession is past. He asserts that more regulation will be part of the system. “The Fed is already more engaged in the U.S. banking system than ever before, and that involvement will likely expand,” he says. “The Treasury Department is already a part owner of most of the major banks in the country, a leading insurance company, and perhaps, in time, the Big Three auto companies. That gives the U.S. government a major stake in the performance of its largest companies, which will mean direction and advice.”

So what else follows from this? “At the moment, the mood is waffling between micro-managing the economy and establishing more transparency, but leaving the markets to control themselves,” explains Kuehl. “The economic team Obama has assembled thus far has elements of both positions, but the dominant players seem to be more free-market than not. A more control-oriented approach will slow the recovery of the banks and money markets. It will make access to credit challenging in the months and years ahead.”

We recently polled our readers on three specific factors that relate directly to this theme of transparency and free markets. When asked how they felt Obamanomics will impact their business competitiveness through tax policies, union initiatives and health care programs, our readers were essentially split down the middle (see Chart 3).

Let’s hope that during the coming year we’ll see the impact of Obamanomics run right down the middle as well, and not too far to the left.

Homburg & Partner, 245 First Street, Cambridge, MA 02142,+1-617-444-8589, www.homburg-partner.com.