Assets Shifting From Manufacturing to Fast-Growing Services

 Print Article

Conference Board report projects future of the economy
RISMEDIA, June 14-Corporations are moving assets into high-growth sectors, pulling out of manufacturing and into services and out of non-technology manufacturing into technology manufacturing, The Conference Board reports.

?Manufacturing companies that are pursuing a ?stand alone? strategy are behind the curve,? says Gail Fosler, The Conference Board?s executive vice president and chief economist, in StraightTalk, from the The Conference Board.

The average size of the firms in the asset-gathering sectors ? including most services and technology ? are three, four and five times greater today than they were a decade ago. Assets in financial services climbed 353% from 1992-2002, rose 312% in information and media services, was up 246% in technology and soared 367% in education and health services.

?Restructuring assets is critical, as information and communications technology opens more options than ever before,? says Fosler. ?This makes it possible for traditional companies not only to integrate up and down the supply chain but also to increase customer value or offer adjacent services such as finance or Internet/media services to meet customer needs. Increasing stores of cash will make these strategic options doable, and stock market values will demand action. Many firms will have to decide whether to be an ?integrator? or an ?integratee.??

There appears to be a threshold growth rate in the manufacturing sector of about 5% or 6% a year, below which it is difficult to be profitable on any basis. Manufacturing companies perform less well than companies in other sectors, because the costs of sales, marketing, research and development, and general administration appear to grow faster than revenues, eroding overall performance.

Stock Market Still Has Opportunities

?Although the stock market has deteriorated over the past month, this down trend could be an opportunity in disguise,? says Fosler. ?Strong earnings over the next two years will put a floor under the markets and companies that perform better, especially in favored sectors, will have more currency.?

Three other key findings in The Conference Board analysis:

The U.S. stock market appears to have limited downside over the next two years. Higher interest rates and other factors may keep the stock market from rising, but strong corporate earnings will keep it from falling, Fosler says.

Consolidation is emerging as a powerful strategic option, especially in manufacturing, not so much to capture increasingly-difficult economies of scale but to redeploy assets in faster-growing business sectors.

Many companies may find attractive acquisition opportunities during the next two years. While pulling off ?good? acquisitions is difficult and carry an often large premium, the timing may be right for a wide range of firms.

History Doesn?t Provide a Definite Answer

The reallocation of capital and labor to higher-growth and more productive industries is the hallmark of a successful and prosperous economy and a process that has served the U.S. well over the past 20 years. But the jury is still out on how these various sectors will fare during the current expansion. Technology manufacturing did well during the early recovery phase of the 1990s expansion ? but it was a much smaller sector and still in a dynamic phase. Back then, technology was only about 8% of the size of the rest of the manufacturing sector, compared to close to 20% today. Despite the obviously abysmal conditions associated with the so-called ?tech-wreck? in 2001-2002, the returns to technology assets in 2002 were also held down by the fact that the overall size of the earning asset base had grown so rapidly.

Growth Does Not Always Yield Return

While information and media services ranks first in sales and profit growth, return on investment in these industries ranks only in the middle, both in 1992 and 2002. Leisure and education and health services, also fast-growing sectors, improved their relative return performance between 1992 and 2002 (despite the fact that both of these were difficult business years), while financial services and trade and transportation held their own. The return on assets in business and professional services, also one of the faster-growing service sectors from a sales perspective, declined by more than 50%.

The performance shifts in manufacturing were much more dramatic. In 1992, manufacturing generally ranked high on the list, with technology at the top. In 2002, manufacturing excluding technology was number three, but technology ranked at the bottom and manufacturing overall near the bottom. This shift in the relative performance of technology and other manufacturing obviously relates to the near-depression conditions in the technology sector in 2001 and 2002, in the aftermath of the technology bust?but may also call into question how robust the manufacturing sector is after this cycle.

RISMEDIA welcomes your questions and comments. Send your e-mail to:
editorial@rismedia.com