The Advantages And Opportunity For Business And Financial Entrepreneurs

M e m b e r s o f t h e A n d i c e G r o u p o f C o m p a n i e s

2012

The New Frontier For: Business and Financial Advisors to SME’s in the Manufacturing and

Technology Sectors. Prepared by: Andice Integrated Funding Inc.

Within the next five years, the United States is expected to experience a manufacturing renaissance.

1 Andice Integrated Funding (AIF) VP Funding & Administrative Services Phone: 713-260-9636 [email protected]

www.andicefunding.com Members of the Andice Group of Companies.

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The Advantages And Opportunity For Business Advisors and Funding Entrepreneurs.

It’s no secret that the Great Recession had a devastating effect on the US manufacturing base. Between 2008 and 2009 more than one trillion dollars bled out of US companies that make everything from food to advanced aerospace and defense products. Lately things have begun to look a little better — the value of US manufacturer shipments was about $4.9 trillion in 2010 compared to $4.4 trillion in 2009. A $500 billion improvement is nothing to sneeze at, but another shot-in-the-arm may be on the way. Recent analysis by the Boston Consulting Group (BCG) suggests a flood of manufacturing activity may return to the US over the next five years or so. The impact of that activity could mean as much as $100 billion in increased output, two to three million new jobs, and a reduction in the non-oil trade deficit of between 20 and 35 percent. Fact Finding Overview: Regardless of the potential risks facing the world economy right now, the U.S. manufacturing expansion remains extremely strong. The latest ISM manufacturing data fell slightly, but from an extremely high level and remains strong. The current level suggests U.S. 2Q GDP growth of 4-6% according to Calafia Beach Pundit:

http://www.bcg.com/media/PressReleaseDetails.aspx?id=tcm:12-88775



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Within the next five years, the United States is expected to experience a manufacturing renaissance as the wage gap with China shrinks and certain U.S. states become some of the cheapest locations for manufacturing in the developed world, according to a new analysis by The Boston Consulting Group (BCG). With Chinese wages rising at about 17 percent per year and the value of the yuan continuing to increase, the gap between U.S. and Chinese wages is narrowing rapidly. Meanwhile, flexible work rules and a host of government incentives are making many states—including Mississippi, South Carolina, and Alabama—increasingly competitive as low-cost bases for supplying the U.S. market. As the below charts suggests, based on past relationships between this index and the growth of GDP, second quarter GDP growth is likely to be stronger than the 3% registered in the first quarter. Indeed, second quarter growth could be in the range of 4 6% if the past is any guide.

Note that JP Morgan's global manufacturing index, the Global PMI, also remains firmly in expansionary territory:



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All segments of the Global PMI are comfortably expanding (above 50):

Thus, global manufacturing activity, inclusive of the U.S., is still growing healthily. The pace of growth is slowing, but this was the expected case for 2010, i.e. that growth rates would be strongest at the beginning of the year, and then decline through the year, resulting in decent full-year global GDP growth of about 4%+. The U.S. itself has only been expected to grow by about 3% for 2010, factoring in a slow-down from the end of last year. With the S&P 500 at a similar price level as in December of 2003, yet with a far larger U.S. economy behind it than existed back then (~$14.3 trillion vs. $10.9 trillion back then), even meager U.S. GDP growth isn't too bad from an equity investor's perspective.



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Of course, Europe/China slow-down risk factors exist, but so far the global recovery is still proceeding. This should be factored into the pessimism we're being hit with these days.

AIF Summary Analysis All over China, wages are climbing at 15 to 20 percent a year because of the supply-and-demand imbalance for skilled labor. Our research reveals and we expect net labor costs for manufacturing in China and the U.S. to converge by around 2015. As a result of the changing economics, you’re going to see a lot more products ‘Made in the USA’ in the next five years.” And since wage rates account for 20 to 30 percent of a product’s total cost, manufacturing in China will be only 10 to 15 percent cheaper than in the U.S.—even before inventory and shipping costs are considered. After those costs are factored in, the total cost advantage will drop to single digits or be erased entirely. Of course, goods many industrial products, labor-intensive and those produced in high volumes, such as textiles, apparel, and TVs, will likely continue to be made overseas. Products that require less labor and are churned out in modest volumes, across almost every industry, from transportation, medical equipment, office automation, telecommunications and energy production and conservation production. As an example of the ever expanding universe of technology manufacturing companies would include: “smart” appliances, robotic technologies, computer hardware or medical equipment. Yes, with just a little imagination the lists of existing and emerging companies that may be in need of working capital appears endless, but let us not forget, for each of the possible thousands of products produced, there are also complimentary parts producers. In short, all this technology manufacturing is forecast and most likely to shift to U.S. production over the coming years. Just A Few Basic Market Drivers:

I. U.S. has highly skilled workers in many of our lower-cost states. By contrast, in the lower-cost regions in Asian countries it’s actually very hard to find the skilled workers.

II. U.S. workers and unions are more willing to accept concessions to bring jobs back to the U.S



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III. Support from U.S. State and local governments can tip the balance with tax incentives

IV. SME’s and their global counter-parts are now reexamining alternative funding model and the supply chain and labor costs

The following are excerpt from a recent survey by Ernest and Young:

“Cash on the chip US technology companies and

working capital management 2011.” http://www.ey.com/Publication/vwLUAssets/Cash_on_the_chip_-_US_technology_companies_and_working_capital_management_2011/$FILE/1104-1246882_Cash%20on%20the%20chip_A4_FINAL.pdf

Technology companies need to take a look at their operations to determine the value being lost to inefficient working capital management. Leaders, especially those in the upper quartiles, need to remain vigilant to prevent performance entropy. Others, especially those in the lower quartiles, should begin a systematic program to recover lost ground. Size in the way Certain segments of the technology industry feature a few dominant players, all serviced by numerous far smaller and somewhat obsequious suppliers. While this is common in many industries, it is important that companies both large and small are aware of how this relationship can get in the way of effective working capital strategies. Consider forecasting. Today, when a large company says it needs X delivered by Y, suppliers scramble — no questions asked. Because the large company always gets what it wants whenever it wants, it often fails to notice any flaws in the system. But in reality, the larger entity is paying for its failure to provide clearer insight into demand. Smaller suppliers, feeling the need to be ready at all times, will carry larger than necessary inventories. And, when orders suddenly spike, suppliers are forced to produce, often in less-than-optimized production runs. The result is higher costs within the system. Similarly, look at commercial terms. When the downturn of 2008 arrived, the most dominant companies in the value chain began extending their own payment terms, in many cases significantly. In the short term, working capital, at least for the dominant

http://www.ey.com/Publication/vwLUAssets/Cash_on_the_chip_-_US_technology_companies_and_working_capital_management_2011/$FILE/1104-1246882_Cash%20on%20the%20chip_A4_FINAL.pdf





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companies, is preserved. However, for others in the supply chain, such pain can quickly translate into financial distress. The resulting cost cutting and loss of focus can lead to lapses in quality or even failure to deliver. This is not to point fingers. Rather, the goal is to remind all that closer collaboration across a value chain can lead to greater optimization, lower costs and less working capital tied up unnecessarily in safety stocks or inefficient production runs. Smaller, less dominant companies, needing clearer windows into downstream demand, should speak up. Larger, more dominant companies should listen and where possible, respond. And all should seek opportunities for eliminating systemic inefficiencies and other drains on working capital. The battle over working capital is fought daily Companies tend to focus more closely on working capital in the lean times. But, when matters improve, focus is diffused and inefficiency returns. Given the quick turnaround for the technology industries, that risk is particularly strong today. Today, technology executives’ focus is on ramping up production and replenishing inventories to serve growing sales. In addition, cash is plenty, accounting for about 30% of the total assets and sales of our industry sample. There is now a danger that corporate attention will once again move away from balance sheet and working management in particular, shifting instead toward driving revenues and the bottom line, pursuing acquisitions and returning cash to shareholders. However, companies that allow their focus to shift in this way not only risk damaging their business performance, but they could also undermine the close business relationships and trust that they have spent many years building with customers and suppliers.



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The chief driver of the potential resurgence in US manufacturing is shifting socioeconomic factors inside China. Wages in China have been on the rise in recent years and some estimates peg wage increases in coastal Chinese cities at more than 1,000 percent in just the last year or so. Rising wages and an increase in the ranks of the middle class have eroded China’s powerhouse status as the global center for cheap manufacturing. Increased transportation costs and the complicated nature of geographically far-flung supply chains could lead many US companies to reassess the wisdom of offshore manufacturing in China. The BCG study contributes to the larger notion of “nearshoring” — the idea that it’s better to make a given item nearer to where it is intended to be consumed. Information technology and automation have dramatically improved the efficiency and productivity of US manufacturing over the last two decades. US productivity in the manufacturing sector, as measured by output-per-hour, increased 105 percent between 1990 and 2010. Concerns about labor costs just aren’t the same as they were when offshoring manufacturing operations emerged as a cheap way to lower the cost of doing business.

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http://www.thefabricator.com/news/industrytrendsanalysis/2011/10/24/industry-economist-says-nearshoring-strategy-will-boost-us-manufacturing-jobs

http://en.wikipedia.org/wiki/Nearshoring

http://bizmology.hoovers.com/2011/12/01/is-manufacturing-returning-to-the-us/factory-2/

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Press Release December 12, 2011 - USMTO News Release for October Manufacturing Technology Orders Manufacturing technology orders up 80.5% from 2010 October U.S. manufacturing technology orders totaled $463.32 million according to AMT-The Association for Manufacturing Technology and AMTDA, the American Machine Tool Distributors’ Association. This total, as reported by companies participating in the USMTO program, was down 22.4% from September but up 20.3% when compared with the total of $385.21 million reported for October 2010. With a year-to-date total of $4,529.11 million, 2011 is up 80.5% compared with 2010. These numbers and all data in this report are based on the totals of actual data reported by companies participating in the USMTO program. “Manufacturing technology orders through October have already surpassed the total value accumulated in 2007,” said AMT President Douglas Woods. “The beginning of 2012 will be a little slow as tax incentives pulled some orders back into 2011, which will likely make 2012 growth softer.” The United States Manufacturing Technology Orders (USMTO) report, jointly compiled by the two trade associations representing the production and distribution of manufacturing technology, provides regional and national U.S. orders data of domestic and imported machine tools and related equipment. Analysis of manufacturing technology orders provides a reliable leading economic indicator as manufacturing industries invest in capital metalworking equipment to increase capacity and improve productivity. U.S. manufacturing technology orders are also reported on a regional basis for five geographic breakdowns of the United States. Northeast Region



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At $64.11 million, October manufacturing technology orders in the Northeast Region were down 43.0% when compared with the $112.41 million total for September and down 34.1% when compared with October a year ago. The year-to-date total of $677.09 million is 44.5% more than the comparable figure for 2010. Southern Region October manufacturing technology orders in the Southern Region totaled $55.87 million, 28.4% less than September’s $78.04 million but 40.6% more than the October 2010 total. With a year-to-date total of $568.93 million, 2011 is up 60.7% when compared with 2010 at the same time. Midwest Region Midwest Region manufacturing technology orders in October stood at $149.95 million, 13.0% less than the September total of $172.26 million but up 30.5% when compared with last October. At $1,523.76 million, the 2011 year-to-date total is 105.4% more than the comparable figure for 2010. Central Region Manufacturing technology orders in the Central Region in October totaled $138.74 million, down 16.4% from September’s $165.98 million but up 49.3% when compared with the October 2010 figure. The $1,232.28 million year-to-date total is 85.3% higher than the total for the same period in 2010. Western Region Western Region manufacturing technology orders totaled $54.65 million in October, 19.9% less than the $68.25 million total for September but 35.3% higher than the tally for October 2010. At $527.05 million, 2011 year-to-date is up 88.8% when compared with last year at the same time.



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The Advantages And Opportunity For Business And Financial Entrepreneurs

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