Episode 51: Manufacturing industry outlook

In this episode of The Sound of Automation podcast, we talk to Wipfli partners Mike Devereux and Laurie Harbour as they discuss the challenges and uncertainties faced by business owners, particularly in the manufacturing sector, due to recent political and economic changes. They emphasized the significance of the Republican sweep in the recent election, suggesting it would lead to decisive action. Laurie and Mike also emphasized the importance of strategic planning and staying informed to navigate uncertain times.  

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Transcript

EPISODE_051_MIKE_DEVEREUX_LAURIE_HARBOUR

Transcript

Mike Devereux 00:00

Don't get me wrong, there's pockets of exceptions to those rules. I visited with a company about a week and a half ago that they were having record month after record month. That said, those tend to be some of the exceptions today as opposed to the rule. Optimism, I think, is there, at least from a feelings perspective.

Whether they were happy with the results of the election or not, the fact that it's behind us is a big deal. The fact that there was a Republican sweep, I think, is even a bigger deal because then they're going to have action, right? There's going to be action. 

Podcast Intro Narrator 00:33

Welcome to The Sound of Automation, brought to you by Wipfli, a top 20 advisory and accounting firm. 

Bryan Powrozek 00:53

Hello and welcome to The Sound of Automation. I'm your host, Bryan Powrozek, and joining me today are two of my colleagues from Wipfli, Mr. Mike Devereux and Laurie Harbour, from our tax and advisory practices. Mike, Laurie, how are you guys doing today? 

Mike Devereux 01:06

Really good, how about you, Bryan? 

Bryan Powrozek 01:07

Doing well, doing very well.

So we felt it was kind of apt for this time of year to focus on planning that business owners can be doing going into year end. And I think probably one of the biggest words that can be used to describe things recently is uncertainty, right? There's a lot of uncertainty leading up to the election.

Now we're through the election and there's more uncertainty about what the new administration is gonna bring. And so how does a business owner plan for the coming year and growing their business and being successful when there is so much uncertainty out in the market?

So, you know, I think to maybe kind of set the stage first, Laurie, your team has completed their recent pulse survey and kind of has a temperature of kind of what manufacturers are seeing out there in the world. So can you give us just some insights that we've seen from that survey? 

Laurie Harbour 02:01

Yeah, absolutely. It's a little bit of the same of what we saw at kind of the end of the second quarter and now probably a little bit deeper pain even as we look at third quarter going into fourth quarter. So, you know, demand is still very, very low, many companies down 10 to 40%, depending on the market they're in.

It really doesn't matter what you're in, stamping, molding, die casting, pretty consistent. Utilization of capacity is pretty low, 55%, 60% on average across all different process types and, you know, just kind of way off forecast. Big markets like Automotive are down, you know, the Automotive forecasters have taken a million units of production out of their forecast in the last six months.

So, we were supposed to do 16.4 million units, probably going to be closer to 15.4.

But interestingly enough, a lot of companies, about 50% of companies in this third quarter are expecting revenue to be flat or down, yet they think their profits are going to be up next year, which I always tend to, you know, our team chuckles at that, you know, I always kind of start out the year really optimistic, like we're going to grow in profit, yet they don't think revenue is going to be up.

So, a lot of people tend to just, you know, have a little bit of a, there's off in their forecast planning or not realistic. Most people are on average about 2% growth in revenue, so basically flat, right? So, it's, people are holding kind of steady with labor, but, you know, it's a tough market out there.

I mean, I just left a company that was supposed to do 110 million in revenue, and they're barely going to break 90. So, it's a tough situation, a lot of burning off of inventory, you know, overbuilding through the year, and now you get to the back half and you go, hmm, I guess we don't need as much.

So, it's a tough, it's a tough space, and although I do have a, you know, more optimistic view of the back half of next year, I think the first half's going to be tough. 

Bryan Powrozek 04:02

And Mike, is that, uh, you know, kind of similar to what you're hearing talking with your clients guy. I was on a call earlier today with a, with another association who basically echoed the couple points Laurie talked about their members have excess capacity. You know, therefore their sentiment has dropped here at the end of the year. Cause they're, they're wondering what people are going to be doing.I guess curious to see what you're seeing within your client base. 

Mike Devereux 04:25

Absolutely. The same thing. Don't get me wrong. There's pockets of exceptions to those rules. I visited with a company about a week and a half ago that they were having record month after record month. That said, those tend to be some of the exceptions today as opposed to the rule.

Optimism, I think, is there, at least from a feelings perspective, that whether they were happy with the results of the election or not, the fact that it's behind us is a big deal. The fact that there was a Republican sweep, I think, is even a bigger deal because then they're going to have action, right? There's going to be action. There's talk about immigration reform. There's talk about tax reform.

Extension of the Tax Cuts and Jobs Act. There's talk of tariffs. There's all kinds of things that are going to be implicating or it's going to impact the manufacturing sector. They just have a lot of things coming at them all at once, it feels like. 

Bryan Powrozek 05:23

Yeah, you know, there was an economist I was speaking to a while back, leading up to the election. And that was, that was kind of his comment, right, as, as he's looked across it. And again, I think you can find an economist to give you whatever answer you want to hear.

But the his assessment was just that that regardless of party, having consistency in the more, you know, having one party control at all, gives indications to business owners and markets that there is going to be some movement. And so, you know, kind of aside from the politics on it, their their position was that it's it's having decision having a way forward.

And then that takes some of this uncertainty we're about to talk about out of the equation. So I guess let's let's kind of dive into things that business owners should be keeping an eye out for Laurie, Laurie touched on the one thing, right? Should we're kind of seeing a slower start to 25. But hopefully it picks up by the end of the year.

So you know, what are some of the major policy matters that the business owners should be keeping an eye on as they kick off the year, Mike, I'll let you take a first shot at this as you might guess my 

Mike Devereux 06:27

My head goes to taxes, Bryan, and as many of you probably know, the Tax Cuts and Jobs Act had a number of very manufacturing favorable provisions in it, and many of those provisions are set to expire at the end of 2025. Tax rates are supposed to go back to where they were prior to 2018. The flow through deduction for S-corporations and partnerships would be gone.

The salt cap would be gone, and then there's these other provisions that were part of the Tax Relief and America's Families and Work Act that never made it to law. What happened was last year, the House passed a bill called the Tax Relief for American Families and Works Act, and what that did is it fixed the research expenditure issue.

It impacted the limitation on interest expense limitations, and it extended bonus depreciation, 100% bonus depreciation. I'm not seeing that going to happen in a lame duck, so that's going to bowl over into the 119th Congress, in which case that'll be also part of the Tax Cuts and Jobs Act provisions. That all are all kind of domestic issues.

There's international issues that are going to be dealt with as well, so if you've got international operations, there's certainly going to be something to pay close attention to because that's certainly going to be part of the mix as they look to extend, enhance, and change the Tax Cuts and Jobs Act throughout 2025, and there's optimism, right?

Jason Smith was Chairman of the Ways and Means Committee in the current Congress. He's expected to be Chairman of the Ways and Means Committee in the next Congress. He's already had a number of committee meetings. He's actually set up a number of different working groups in order to help draft some of this legislation, so I think they're going to hit the ground running.

Do I think we're going to get a bill in the first 100 days? No, I don't, but I think we're going to have a framework within the first 100 days of the next Congress. 

Bryan Powrozek 08:15

And I guess, Mike, based on what you're seeing and reading, I mean, is that, you know, would the idea be we get the framework in the first 100 days with the plan that, hey, this is passed and goes into effect at the end of 25 to prevent all these things from expiring, or do you think it could potentially happen sooner? 

Mike Devereux 08:31

I think it'll happen before the end of 2025. How soon is kind of yet to be seen? You know, there's a lot of details to be worked out still. I mean, just take one issue like the research expenditure issue. Do they fix it retroactively? Is it a three-year fix? Do they have some form of permanency? How does the manufacturing community feel about that? What would they prefer?

I think Congress would like to hear from the manufacturing community and to give input into that. Take bonus depreciation. Are they going to continue to allow qualified improvement property to be written off in the year that it's placed in service? Things like that. There's a lot of wrinkles and things you can kind of dive into the details on.

And it has an impact on policy because the thing of it is, is they're not going to have 60 votes unless they get Democrats to come and vote along with this bill, in which case they're going to have to use budget reconciliation, meaning it's going to have to be revenue neutral over a 10-year period. That's not impossible. That's what they used to get the tax cuts and jobs act passed.

That's what was used to pass the Affordable Care Act when the Republicans didn't vote against that. Democrats used it to pass the Affordable Care Act. So it is possible to use that vehicle as a means of getting tax legislation across the finish line, but it's going to get a lot of work out of it. 

Bryan Powrozek 09:43

Mike, you touched on something there. You mentioned the international aspect of which comes into play here in a lot of different areas. Let's look at it from a trade and tariffs perspective here. And Laurie, I'd be curious to get your take on this. I mean, I've heard, I was actually on a call with a client today who does a lot of work for solar fields.

And he was just talking about how his business would be decimated if they put the 100% tariff on solar panels, that there would just be, although contracts that already bid don't have that taken into account. So Laurie, what are you kind of seeing and hearing on the trade and tariff front? 

Laurie Harbour 10:17

Yeah, I mean, it's a ton, right? And there's a lot to unpack about the, it just, I mean, every day, something new that comes out of the current, you know, the new administration. And positives and negatives, right? So we've got to look at it from both sides.

I mean, my comments to my clients right now are study it all, understand it all, because it's going to have positive and negative effects depending on who you are, where you are, and what you're doing. You know, the positive pieces of it obviously are, we do have to renegotiate USMCA and this administration.

And frankly, the USMCA deal that was put into place opened up the door for what we're seeing, which is a tremendous amount of foreign investment in Mexico that is then attacking the industrial base of the US. And it's been very negative for a lot of manufacturers in the US. So by considering a tariff on Canada and Mexico, you're certainly addressing some of that issue.

And he's working to look at, how do I limit the foreign investment that then comes across the border over here? I have a little bit of concern about the Canadian piece. We get a lot from Canada. We're good trading partners with Canada. Again, positive and negative effects. It could help my US tool base because a lot of tools suppliers are in Canada. It's going to hurt our trade with Canada.

And then you got to attack it from, do we even have capacity? If we tariff all this stuff, right? 100% tariffs on China changes the game for a lot of stuff that's coming out of that country and coming here. My biggest concern is, do we have any industrial base to take over that capacity? So my caution or my counsel, I should say, to my clients is both, right?

This could be super really good for a lot of companies, but boy, oh boy, you better be able to ramp up. If all of a sudden a General Motors says, hey, I'm moving a bunch of part production over here or 100% tariff on tools. We have lost $700 million of tooling capacity in this country for automotive tools. We don't have the capacity to take it on if he puts 100% tariff in place. Do I want it?

Absolutely. Like I love some of these discussions, but we also have to be looking at, is our supply base ready? So if you think about a typical Wipfli customer, which is that middle market space, do you know what your tool suppliers are? Do you know what all your other suppliers are? Do you know where you get all your material from? We have to be preparing in the new year.

He has to do something now on day one and he has that executive order capability. Will it be 100? Will it be 10? Will it be 50? Who knows, right? So there's just a lot to unpack and you have to study it, understand the information that we provide at Wipfli, understand the information that our lobbyist partners provide so that they can be prepared. Cause this has to go into your strategy.

You know, there's two things that hurt companies, too much growth and not enough. So they've got to be able to balance both sides of the equation. There's a lot of good that will come with more increased tariff and trade discussion, but we also just have to be careful. It could also put us into a very tenuous position with our low cost country already in geopolitical conflict in Asia, right? 

Bryan Powrozek 13:40

I think like everything, you know, over the last year leading up to the election, right? Everybody tried to paint these things with broad brushes, and if this happens, this is going to happen, and that happens, it really is going to depend.

And so understanding how this is going to impact your business, your end customers, you might be selling into automotive, and this is going to be an impact on some of this, but you're selling into another industry that maybe isn't as negatively or positively impacted. So making sure you've kind of deciphered all this and processed it. Mike, anything you wanted to add on to what Laurie said? 

Mike Devereux 14:15

Yeah, I mean, just to kind of complicate things more, there's going to be different changes from a regulatory perspective, right? We talked about tariffs, and we talked about taxes. We talked about tariffs, and now, of course, regulations. Overall, you think this administration, like he was in the first time he was in office, will be kind of a deregulation perspective.

But you have to wonder where we're going to fall on things like the OSHA heat rule. Is that going to be rolled back at all? The CMMC rules that were just published in October, and effective December 16th, a couple weeks from now, is when the CMMC 2.0 rules take effect.

So if you're a DOD contractor or subcontractor that's handling protected information, whether that's federal contract information or controlled unclassified information, you've got to have controls in place to be able to protect that information, and you have to show that in order to even bid on work. That sector within the manufacturing community has got a whole new set of rules.

And it's not necessarily news, as these things have been in the works for almost four years now, but the final rule is just being published and to be effective here right around the corner. Companies are going to have to really kind of get prepared to make sure that they can continue to compete for those items. 

Laurie Harbour 15:34

Just one quick thing to add about it. We also have to think, as we talk about these regulations and tariff issues, is we're in an environment of very high cost already in terms of doing business inflation interest rates, right?

If we don't have capacity to support some of these markets and we still have to buy from some of these countries with tariffs on them, it increases the cost to the average consumer, which puts more pressure on the economy. Again, I'm not against tariff. Don't misunderstand me.

It's just in the balance that's appropriate to be able to drive our economy is part of my concern because high cost of doing business is why volumes are down right now. Consumers can't afford it because we're still in an inflationary market. So if the economy begins to turn, then that helps the balance of that tariff and trade as well, right? 

Bryan Powrozek 16:24

Yep, and Mike, I like that you brought up the CMMC because I know that that's gotten a lot of conversation within our team of late, and that's one of those great examples, right, of on one hand it could be negative, right? If your business has a lot of DOD revenue and you don't have that, you know, now you can't go after that work anymore.

Conversely, if you're one of the ones that's figured it out and understands how to play in that area, now you've got all these other opportunities that you can go after and focus on for your business. So that's another great example of something to be on the lookout for.

All right, so I guess, you know, and I know both of you spend a ton of time on the road at different events, different speaking engagements, with clients, you know, talking to them about their business. You know, what's kind of your final word of advice for business leaders as they're approaching the end? Hopefully, it's December now, hopefully the strategic plan has already started.

You're kind of polishing it up and getting it done for the year here. But I guess, Laurie, what's your advice to business owners out there? 

Laurie Harbour 17:32

Well, as I said earlier, I mean, I'm still pretty bullish about where the market will go in the next 12 to 18 months. I do think you'll start to see some, I don't think you see a ton of new demand until sort of third quarter, fourth quarter next year, but it's going to come back. We're not in any deep recession. So it's the planning piece. It's control what you can control, right?

I mean, all the things we just talked about could create some very positive things for people's business. Some, I do think we're going to see some real reshoring if we see some of this tariff stuff go into place. And I love that for our country, but be prepared, right? What does that mean? What do I take on?

How do I cost and quote that in my business so that I get the pricing and the bet right upfront? How do I manage labor and automation? What's my technology roadmap? I mean, we at Wipfli do a lot of consulting on technology from everything from cybersecurity to ERP to machine monitoring and industry 4.0. What does that look like for me so that I can manage the labor side?

Manufacturing's changing regardless and it will always be competitive. So how do we control the things that we control and make sure that we're making the right investments, the right continuous improvement and use of labor appropriately?

Obviously all the things that Mike talked about related to tax and R&D and making sure we're managing our financial side of the house appropriately, but we can't rely on other people to bring sales. We got to control the things we can control and sales is one of those. We've got to go get creative. We got to reinvent the sales process, kind of do a reboot and go after work again.

Get out and talk to customers or find out where the opportunities are. As Mike said, there's a lot of pockets of really strong companies right now. So the business is there, but we got to go search for it. We got to go do the hard work again and do that planning that's important because there's a lot of great opportunities in front of us. 

Bryan Powrozek 19:45

Yeah, there was a presentation I attended one time where that was kind of the crux of the presenters whole talk was that, you know, times like now where where it's a little slower, you got some excess, all those, those wishlist items, right, that you've never had time to get to, you never got to focus on getting those done, right?

Reevaluate your sales strategy, reevaluate your it, like it, get all that stuff sorted out so that when q3 comes, and if things start to take off, you're ready to jump and you've got everything in place and you're ready to go after it. So I think it's a great advice. So Mike, how about you final word? What's what are you telling clients when you're when you're out meeting with them? 

Mike Devereux 20:24

In today's environment, I think it's have reliable sources of information to help you better manage your business, whether that's understanding where you sit amongst your peers within your sector, where you sit amongst your supplier base, understanding how you work with their suppliers. I mean, that can go a long, long way to driving profitability.

It's not just thinking about it from the customer's perspective, but what's that relationship with your supplier's information? What information are you relying upon to run your business? Is it real time? Is it dated in some way, shape, or form? Those are the things that I think about from a managerial perspective, especially in times of uncertainty.

And that was, as you started up today, just kind of the theme of we have this uncertainty and how you navigate that through the remainder of this year and in the next. I think you just need to focus on information and as to Laurie's point, what can you control with that? 

Bryan Powrozek 21:26

Excellent. Well, Laurie, Mike, I appreciate you both coming on, as always. I think you're turning into two of my most frequent guests, but that's in part because of all the knowledge you guys have and what's going on in the manufacturing world. And maybe we'll have to bookmark December of 2025 and reconvene and see how close our conversation was to what actually happened next year. 

Podcast Intro Narrator 21:49

Thank you for tuning in. Don't forget to like us, subscribe, and share on social. To learn more about Wipfli, visit us at Wipfli.com. That's W-I-P-F-L-I dot com. Perspective changes everything.