Over the last couple of months we have seen a contraction of IT spending (both in 2008 spending and anticipated expenditures in 2009). This has caused us to lower our spending projections for 2009 from an average growth of about 5.8 percent down to 4 percent. This is a result both of tightened credit markets and reduced consumer confidence.
Manufacturers fund IT spending through a combination of credit and cash from operations. So, if credit is tougher to come by and operating performance is depressed, spending will drop off. The staggering drop in reported year-on-year automotive sales in October is certainly a sign of consumer confidence as we move into 2009. The same goes for the most recent domestic jobs report that showed a net loss of more than 200,000 in the same period.
We expect the new president to favor legislation to protect consumers, incentives to reduce job losses to low-cost manufacturing regions, investments in infrastructure/public works and a continuation -- of recent defense spending levels. The administration's view on free trade is a little less clear. During the primaries, Obama aggressively criticized NAFTA, yet softened his stance subsequently and has now named Rahm Emanuel as his chief-of-staff -- a man who played a key role in the passage of NAFTA during the Clinton administration.
The consumer goods industry is understandably anxious about the transition in Washington, D.C., but much of the anxiety is the result, not of the election, but of the public's increasing focus on climate change and the environment. At the same time, global competition, energy prices and the financial crisis are squeezing the industry's profits. With public opinion generally come regulations and other government-related initiatives that attempt to change behavior -- these would include taxes or tax breaks, import or export fees, and so on. And those efforts are likely to cost manufacturers more money at a time when costs are a major source of frustration -- and a primary motivation for outsourcing/off-shoring. With a new administration comes the inevitable turnover of political appointees and staff that could bring dramatic changes to regulatory agencies, including the EPA. But most manufacturers also recognize there are opportunities in this new political environment.
We have also seen some quite dramatic consumer shifts to value and private-label brands, and broad devaluing of individual stock prices during recent months. We do expect to see some modifications to IT spending levels in 2009, with a greater focus on cost-reducing along with trade promotion optimization, consumer-centricity efforts and a continued investment in supply chain modernization. Other areas of investments will also be in the areas of global trade management, governance/risk/compliance, product lifecycle management and collaborative applications to support the complexity of extended organizations and encourage faster, more efficient innovation and better decision-making.
Both presidential candidates talked extensively during the campaign about the need to stem the exodus of U.S. jobs. We do expect to see new incentives from an Obama administration in an attempt to stem the loss of domestic jobs, although we do believe fundamentally in the free-market system that looks at total-cost in global sourcing decisions. President-elect Obama's campaign platform included ending tax breaks for firms that move jobs outside the United States, and award tax credits to those that increase the ratio of U.S. to non-U.S. workers. But, jobs are sent overseas for many reasons, and we see tax breaks as having only a limited affect on overall off-shoring.
The fact is consumer goods manufacturers are moving operations to other countries because of workforce costs and/or customer growth outside of the United States. This is a balancing act in the product lifecycle and the supply chain -- where should companies locate research & development (R&D), design, manufacturing or service, and what are the implications for the supply chain? Perhaps a better approach is to look at each of these elements separately and encourage the right ones to be located in the United States. Given Obama's interest in promoting science and technology, this could be a good reason to argue R&D and design remain in the United States, without penalizing these companies for moving other elements outside if the decision makes sense given other factors such as cost and sustainability.
Larson note: Sitting back letting Obama do his “thing” Basically I like NAFTA or the overall concept of it but need to put in some “fairness teeth, into it. If we look at Mexico, we need higher wagers south of the boarder as well as Mexican Truckers given the right to drive more than 100 miles across the boarder.
As stated a month ago in this column I like the Obama proposal of giving tax credits to companies keeping jobs in America rather than outsourcing them. Heck I would rather see a change in immigration policy to let these companies transfer these potential workers into the USA with full rights rather than transfer the jobs out.
I like this public works project idea what was released in yesterday’s newspaper and will be looking deeper into what that really does entail. That, roads, bridges and the like is a good use for government spending.
I am both excited and apprehensive with Obama taking over. And to answer a quick question, yes I am from Illinois. Being a lazie-fare capitalist I really don’t like regulation and government interference
Larson & Associates
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