Tough Times for Capital Equipment Companies & Industrial Manufacturers

Ed Marsh | Aug 10, 2016

Everybody is hesitant

There's a lot of uncertainty weighing on capital equipment sales. Some companies have seen sales fall. Others have maintained revenue but seen declines in key indicators of upcoming quarterly sales.  

There are two key factors:

  • low levels of capital investment
  • enormous political uncertainty

Add to that the normal summer lull in anticipation of the fall industrial trade show season - when buyers often delay decisions until they can meet multiple vendors at a single time & place to decide - and we are likely to see some very soft months of sales among capital equipment manufacturers.

Capital investment stalls

One of the most important factors holding back the U.S. economy is weak business investments. In other words, companies are not investing in plants, property, and equipment. The Fed had already expressed concern about this problem in the past.
And now the most recent data has confirmed this could continue to hurt the economy. The GDP data showed the economy experienced the largest drop in business investment since the end of the Great Recession. Daily Pfennig, 7 August 2016

Although growth in earnings has recently started to slow, companies have reported robust results for the last several years - but they haven't rushed to invest in their production capacity. Monetary policy (unnaturally low interest rates for an extended period of time) has impacted the composition of revenue as well as companies' decisions around allocation and nature of investment.

In many cases short and medium term priorities have inclined companies to target financial investments (e.g. share buybacks) instead of investments in capital stock. That's one factor contributing to declining productivity - a different but related challenge for manufactures. (One that just fell .5% showing deterioration for the 3rd straight Qtr1, and that recent McKinsey research2 indicates may accelerate downward with an aging workforce unless capital investments are vigorously undertaken to prevent it.)

And the decline in capital investment cascades. As the F500 build fewer plants they install less capital equipment. As machinery builders see inconsistent demand they in turn purchase fewer components and hesitate to upgrade their own manufacturing infrastructure. And as they buy fewer motors and welders, their suppliers purchase fewer forklifts and related equipment.

It does "roll downhill" as the saying goes.

Presidential & political uncertainty

Every presidential election is fraught with some uncertainty. This one particularly so.

I enjoyed an interesting presentation by Omar Nashashibi of industrial manufacturing lobbying firm The Franklin Partnership on August 6th at the National Tooling & Machining Association (NTMA) Southwestern Conference.

He laid out the number and pace of significant regulatory changes currently pending (labor, environmental, safety) and predicted that more profound changes hinge on the election outcome. He predicts that we could see substantially more activist executive agencies including EPA, OSHA, NLRB, IRS/tax code and even DoJ prosecutorial partnerships with agencies.

Regardless of one's political inclinations, the list of pending and projected regulatory changes was sobering for it's clear impact on business finances and therefore decisions. The implementation of the hourly/salary & overtime law alone will not only create individual angst for many later this year, but will likely substantially increase business labor costs.

Dry spell or drought?

Even in a recession people still eat Cheerios, listen to music, repair their cars and buy diapers for their kids. They may eat out a bit less or set their thermostat a bit more conservatively, but they continue to spend.

After all, a negative growth rate of 2% is a noteworthy recession - and that means the economy is doing 98% of what it was a couple quarters earlier.

The duress that industrial manufacturers often feel during a recession is a function of combined factors including leverage and cash flow. And often the key factor is duration. That's what tough to predict - particularly given the interest rate environment, falling corporate profits and profound political uncertainty.

Prudent companies will assume that uncertainty will persist through Q1 '17 - and they'll plan for the contingency of an extended duration. How they weather the dry spell in the interim will depend on their approach to marketing and sales. 

An emphasis on their solution (machines, product & features) will likely yield limited success. However, companies under pressure to run more efficiently (their prospects) will continue to seek and invest in solutions to their problems. Machine builders and industrial manufacturers that build their B2B marketing and complex sales capabilities around helping others will continue to generate leads and orders.

It's going to be important to invest in those capabilities. Download our guide on the economics of industrial internet marketing for insights.

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1 - Market Watch Productivity Declines 

2 - McKinsey Global Growth