The trends are Parker Hannifin Corp.’s friends.
Speaking after the Cleveland-based industrial products conglomerate reported its first-quarter profits, CEO Jennifer Parmentier said the company’s new multi-year goal of organic growth between 4% and 6% is within reach in part because of the manufacturing investment wave driven by electric vehicle and battery projects as well as the longer-term dynamics of electrification and aerospace growth.
“We're there when they're prepping the land, we're there when they're building the factory and we're there when they're putting all the equipment in the factory,” Parmentier told analysts about the headline-grabbing projects planned or already underway. “Between mega-capex projects and secular trends, it's the reason we feel so confident about those targets in the future.”
To be clear, Parmentier and Parker Hannifin are in something of a luxury position: The Fortune 250 company has built a multi-pronged, $20 billion business over more than a century where thriving divisions can provide a cushion to others looking to regain momentum. But her comments and her optimism about manufacturing investment trends over the medium term are emblematic of other parts of the industrial sector.
Even though the Institute for Supply Management’s widely watched Manufacturing PMI index is on a seven-month streak of contracting (and new orders have been trending down for nine months), a lot of manufacturing leaders are entering the second half of 2023 confident about what’s beyond the next quarter or two.
“Clients don’t seem to care” about the ISM readings or other so-so indicators, said Matt Dollard, a management consulting principal and industrials senior analyst at accounting and advisory firm RSM. “They’re still planning capital spending, they’re still planning to borrow, they still think sales are going to grow and they’re still hiring.”
Not that manufacturers are insouciant about what’s coming, Dollard said. They recognize the burden of higher interest rates, the weight of pandemic-era inventories that haven’t been worked down and the ongoing struggle to find qualified workers. The top priorities for many leadership teams are clear, he added: Protect margins and, relatedly, improve operations—hence their investments in automation and other technological tools.
Of particular interest among clients, Dollard said, are predictive analytics tools that help leadership teams anticipate nasty sales or supply chain surprises. RSM, he added, is often layering external data onto customers’ past experiences to find correlations that can help leaders reduce working capital and better see what’s ahead.
“They’re not stopping investments in technology,” Dollard said. “They can’t get the bodies.”
But, according to a recent report from Forbes and accounting and advisory firm Crowe LLP, manufacturers think they can get their arms around what’s needed to thrive in the coming years. The study, which focuses on sources of current and expected volatility, showed that manufacturing leaders are more optimistic than their peers across the economy:
- While financial risks such as top-line growth and access to capital are expected to become more precarious among all of the 1,001 large-company executives surveyed between now and 2025, only 31% of industrial leaders see them being problems in two years versus 44% of all respondents.
- Similarly, today’s crucial pain points of talent and supply chains—57% of manufacturing leaders cite each as sources of volatility—are expected to quickly recede: Only 23% of manufacturing respondents expect labor to be an issue in 2025 (versus 43% among all respondents) and 29% (versus 41%) think the supply chain will still be a headache then.
“Manufacturers tend to be more optimistic because they’ve seen this type of thing before,” said Andrea Meinardi, managing partner of the manufacturing group at Crowe. “They’ve had to reinvent themselves—often with small tweaks—but there’s never a steady state.”
Like Dollard, Meinardi said that evolution today is being powered by technology investments as well as by paying greater attention to the little things that lift efficiency. Whereas some companies might have deferred some maintenance pre-COVID, she said, keeping equipment running at its best or investing in machine upgrades where possible are top priorities now.
“I’m seeing more goal-setting now, more attention being paid to metrics,” Meinardi added. “People are much more conscious about things like deferred maintenance.”
Dollard noted that the sharper focus on efficiency and excellence is an echo of manufacturing’s emergence from the Great Financial Crisis and 2008-09 recession. With demand then returning only tentatively and haltingly, running as lean as possible was the mantra of many a team.
Case in point: Parker Hannifin.
“We have a lot of levers we pull on an ongoing basis and we performed well in the last couple of downturns,” Parmentier said on her team’s earnings call last month. “And as I mentioned before, we’re very well-positioned for what’s going on today and into the future.”
As we near the midpoint of 2023, it appears she’s not the only manufacturing CEO to think that.
