Date: January 12, 2016

Author: JT

Tags: , , , , ,

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Brewing 2015’s Tea Leaves Makes ’16 a Stiff Brew

Early December, some of my colleagues seemed oblivious to our economic surroundings, focused on ending the quarter. They wondered why customers were sitting on their hands, slow even to spend end of year budget funds, and not yet looking toward the next quarter. Let’s survive the current one, it seemed. My concerns were less current-quarter (Q4), it’s outcome had been already determined, and more looking toward future quarters into 2016.

Planning for my own product line’s direction, questions start to flow: Why are we seeing this? How do we compare to our competitors, better, worse? Why are deals taking longer to close, if they close at all? Why are some customers abandoning us for our competitors? Why are some coming to us?

There have been no clear answers. There have been exceptions to what we were seeing. Why are some in the market place struggling to drive run-rate revenue, while others are killing their numbers (20-40% year over year growth)? How does it compare to where we view ourselves? What does it mean for my own product line?

Start to Answer the Question

clip_image002For some time, I have been watching the tea leaves, as it were. Looking at the global economy, exchange rates, de/growth in national GDPs, interest rates, consumer and capital spending, manufacturing indexes, and so on. Taken holistically, they have been telling a story for at least a year now.

December 1st, the Wall Street Journal had a long feature article that does a good job discussing everything in context. I encourage you to read the entire piece. You can find it online or internally.

The crux of the issue is not just that U.S. business investment is fizzling out, it is understanding why, how it impacts us, our customers, and what to do about it.

The crux of the issue is what to do about it!

Economic recovery since the latest recession has been tepid. Growth in business investment has been about 15% over the past ~6 years. That compares to around 30, 35, 110% in the prior 3 recessions over their 6-10 year recoveries.

Various indicators have repeatedly hinted at a more-promising recovery being just around the corner. Much of that may be simple wishful thinking viewed at more short-term, tactical, micro levels.

Let’s Look at a Few Global Considerations

clip_image004China

For nearly a decade, the world was accustomed to China having insane run-away GDP growth. After China faltered in 2008, it showed renewed growth in 2010. Many casual observers stopped paying attention at that point, believing China’s torrid growth was resuming.

The reality is, this year, China is now back to the level of economic performance it had before the latest cycle started back in ’98.

The global growth China fueled, last decade, no longer exists now. And, even since I originally wrote this piece to share with my colleages in early December, China’s outlook has turned even more dour.

Strong U.S. Dollar

Another consideration is the US Dollar’s strength. Already strong, the U.S. and its Dollar spurred investment simply because the U.S. was the best of the worst. When everywhere else looks bad (Brazil looking to continue spiraling downward; Greece; Europe, flat lined at best; Japan struggling…), the U.S. looks like a fabulous place to invest your capital.

The challenge though: a strong dollar makes exports more expensive; harder for foreign purchasers to afford our products. Our sales in PLM Products are contractually constrained to the U.S. and Mexico, contractually. However, many of our customers use our tools to develop products which they will export. We are indirectly exposed, just one step removed, from the international economic climate.

Interest Rates & Central Banks

The question is not If, but When the U.S. Federal Reserve is going to raise interest rates. Fed Chairman Yellen seems to be chomping at the bit to raise rates. Problem is, historically, when central banks, such as the Fed, raises interest rates a recession within 12-24 months is not uncommon.

Why? I’ll highlight just two reasons. First, it takes money out of the economy. Less money to spend, less investment possible, sales revenues fall. Second, in the current global economy, it makes the U.S. Dollar an even more attractive currency to invest in, contributing to an even stronger Dollar. Again, not a positive impact.

Energy

Declining Energy costs have a very strong impact as well. As a consumer, it puts money back in your pocket. If you spend less on gas, you have more to spend elsewhere. That helps us as consumers drive the economy.

From an industrial perspective, it can have another impact. For those in the Energy industry, investment has come to a screeching halt in the past 18 months. Much of the technology enabling today’s energy glut, was fueled by higher energy costs, making it profitable to develop. Now, the technology is enabling an expanding glut of supply even as, through increased efficiency and economic sluggishness, we fail to see demand increase. If you sell products to anyone related to the Energy industry, odds are your revenue’s been severely impacted.

Indicators Pointing the Way

Opportunity Cost is defined as the relative gain from other alternatives when one alternative is chosen.

From a Sales perspective, this is why maintaining sales velocity can be so important. The longer the deal is allowed to live, the more time the customer has to contemplate other, better ways of spending their money. That money may go to a competitor making a better ROI argument. It may go to fixing the roof instead of buying your product. Or, it could go into the ‘bank,’ either literally or in the form of stock buybacks.

Public firms are most visibly measured by their earnings per share, dividends… or simply stock price. Using money to buy back stock means each remaining share becomes more valuable and the company’s performance may be viewed as increasing. If you’re an exec, you have money to burn, a stock buyback program is a safe way to improve stockholder value with little risk.

Some analysts say the buybacks are evidence companies see little prospect of achieving good returns through capital investments

The fact many companies—our customers—are choosing to deleverage themselves, to put money back into the bank (up 10.4% Q3 YoY), simply shows where they believe the greatest value exists. Is the Opportunity Cost of investing in what you’re selling going to net them a higher ROI compared to the bank? Are you sure? Can you convince them?

Consider:

  • Falling oil prices and stronger dollar hammering investment categories
  • Spending on mining and oil-field equipment fell 46% from a year earlier
  • Outlays on railroad equipment, to move the oil, fell even more…
  • Spending on farm tractors declined 42%
  • Fastenal’s CFO declares, “The industrial environment’s in a recession. I don’t care what anybody says.

Here’s the kicker:

Because of the market demand, we do not need to add capacity [you] now,” said Martin Richenhagen, chief executive of AGCO Corp.

What are all these indicators pointing toward? They’re telling us that if you play in a commodity space (e.g. ‘just sell CAD’), if you do not add real value beyond the tangible price of your products, the bank may be a safer place for their money.

Nothing suggests it’ll get easier in 2016. Consider this: In the past 48 hours, one of our partners has announced another generous year-end incentive program in addition to an already rich sales promotion; and, announced no price increases for at least the next 18 months.

So What Do We Do About It?

Moping, woeing, croaking, and dying, is not an acceptable strategy.

Every company needs to figure out what they stand for, what they want to become really, really, good at. And do it. They need to be efficient, add value, beat the bank.

‘Generic’ revenue, selling low value-add offerings, no longer offers attractive revenue growth; finding new areas of growth are required (i.e. specialty applications).

Does the bulk of your company’s revenue come from ‘generic’ product or service offerings? Generic, as in: commoditized low-value add. Generic is generally not the kind of thing that makes you rich. Not unless you’re moving huge unit volumes with extremely low transaction costs. Sound like you? No, not me, either.

Find Your Diamonds

Hopefully your company has a few diamond, either polished or in the rough. These are the areas companies must refine, polish, focus on, and become known for. Doing so serves to develop higher value-add than the competition.

There is a strong tendency to focus, simply, on improving what a business already does. Let’s get really good at selling generic stuff. Wishing will not make it so. Real change, sharpened focus in an area where you and your business already have strengths is important. Initially, change will not seem readily obvious. I think many would agree, regardless of how long it may take, the time to act is here. If you do not know what your diamonds may be, meet with your existing customers. Ask them. Do not assume. Ask them why they buy from you. The answers may not be at all what you expect. And those reasons may make it very clear where to focus your efforts.

Last Words. For Now.

The core focus of this message has been to put the tea leaves together. Help everyone see them for what they are. And for everyone to appreciate that doing business ‘way we always have’ isn’t going to get anyone where they need to be. Where they want to be. Repeatedly having quarterly meetings with the words “Disaster Recovery” in the subject line is decidedly, not, fun.

Stickiness. Once you figure it out, make sure you and your company stick to the plan. Not for 2-3 months. Indefinitely. It also must done in such a way as to be persistent, able to survive any individuals’ departures.

Get everyone on board. If you do, you’ll not only get there. You’ll get there sooner.

Image Credits:

1st chart – Wall Street Journal
Clay Tea Pots – lekyu

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