Business Climate Survey: A Stable Outlook

Although the latest economic forecasts for Asia, the US and Europe have increased growth estimates for next year, analytical instrument and laboratory product company executives are a bit less sanguine, but positive overall, according to the results of IBO’s latest Fall Business Climate Survey.

Signs of recovery abound worldwide, though caution runs high due to threats from inflation, government debt and the slowing of China’s economic stimulus plans. In September, the Asian Development Bank raised its 2009 growth forecast for Asia, excluding Japan, from 3.4% to 3.9% and predicts 6.4% growth in 2010. China is expected to grow 8.2% this year, while India will post growth of 6%. According to the National Association of Business Economics’ survey of 44 economists released this month, 80% of respondents think the US economy has stopped contracting. The survey predicts US GDP will grow at an annual rate of 2.9% in the second half of 2009. For the year, US GDP is expected to decline 2.5% and grow 2.6% in 2010. The International Monetary Fund recently announced that the euro zone and Britain’s recessions will end in the second half of this year, and upgraded its 2010 forecast for the euro zone to 0.3% and to 0.9% for Britain. GDP in the euro zone and Britain are expected to contract 4.2% and 4.4%, respectively, this year.

However, businesses remain conservative in their capital spending plans. Released in September, the Duke University/CFO Magazine Global Business Outlook Survey finds US and European CFOs reducing capital spending over the next year. CFOs surveyed at 657 US firms expect their firms’ capital spending to decline 3.2% on average over the next 12 months, and R&D spending to increase an average of 0.4%. CFOs at 270 surveyed European firms forecast their companies’ capital spending to decline 4.1% annually on average and R&D spending to fall 1.7% on average.

In contrast, CFOs at 414 Chinese companies surveyed expect 12-month capital spending for their companies to increase an average of 5.9% and R&D to rise an average of 4.8%. CFOs at the 196 Asian companies (excluding China) in the survey forecast their firms’ annual capital spending to rise 0.7% on average and R&D spending to grow an average of 1.7%. Survey results also show that CFOs’ optimism about their respective countries’ economies have increased on average from the second quarter, rising to 56 on a scale of 1–100 from 53 in May. Average optimism ratings for each of the four regions increased from the second quarter.

Similarly, optimism appears to have increased among respondents to IBO’s Fall Business Climate Survey. Forty-two percent of executives surveyed expect sales for the instrument and lab products industry to grow moderately in the next six months, up from 29% in the Spring Survey (see IBO 5/15/09). Those respondents who expect sales to remain the same increased from 38% to 42%. The survey of 24 instrument and laboratory product company executives was conducted in late September and early October by phone, email and fax. Companies participating in the survey have combined revenues exceeding a billion dollars.

Asked to rate on a scale of 1–5 (with 1 indicating no effect and 5 indicating a tremendous effect) the effect of the economic recession on their companies in terms of six factors, the survey respondents cited both delayed capital spending and a decline in sales as having the greatest effect (see graph, bottom left column). Both factors had an average rating of greater than three. However, no factor had an average rating of greater than 3.4, indicating that none of these factors significantly affected the surveyed firms. However, sales declines and delays in capital spending each received ratings of 5 from more than 20% of respondents.

Respondents were also asked what effect they think increasing merger and acquisition activities will have on the analytical instrument and laboratory products industry in general. The answer included five choices (faster expansion globally, greater innovation, less competition, less innovation and other) and respondents could choose more than one answer. Over a third of executives expect M&A activity to result in less competition. Twenty-two percent each expect it to result in faster expansion globally and less innovation. Five respondents expect it to result in greater innovation. Overall, the answers suggest that respondents do not view recent M&A activities as a positive for the industry in general.

Asked when they expect an economic recovery to affect instrument and lab product sales for the industry in general, a majority of executives surveyed expect a recovery next year. Asked when they expect an economic turnaround (excluding stimulus-related sales) to impact instrument and laboratory products sales, 42% of respondents selected the first half of 2010 from the four possible answers (fourth quarter 2009, first half 2010, second half 2010 and 2011). Thirty-three percent expect sales to recover in the second half of 2010.

Despite optimism about next year, a restrained outlook was evident among respondents when asked about six-month sales prospects in specific regions. The average rating for all nine regions was 3.2, indicating a forecast for overall stable demand. As in the Spring Survey, China was the region rated the highest on average for instrument and lab products sales in the next six months. But also like the Spring Survey, the region’s average rating was less than 4, down from the average 4.3 rating in spring 2008 (see IBO 5/15/08), the last time any region received a rating of more than 4. This result suggests that even where prospects are brightest, the outlook has still not returned to pre-downturn highs.

One region where prospects have dramatically improved since the spring, according to survey results, is Japan. The country had the lowest average rating in the Spring Survey, but was rated as the fourth-best prospect in the latest survey. One possible reason may be the return to growth for the Japanese economy in the second quarter. In fact, average ratings increased for all regions in this survey, except the Middle East, compared to the Spring Survey. However, the fourth quarter is traditionally a strong period for instrument and lab product sales due to spending of annual budgets at year end.

The same trend was not evident for six-month sales prospects for end-user markets. Compared to the Spring Survey, average ratings declined for three of the four highest-rated markets (academia, government and agriculture) and stayed the same for two markets (food, environmental). The average ratings for academia and government dropped to below 4. In contrast, sales prospects for the biotechnology, pharmaceutical, chemical, metals/mining and electronic/semiconductor industries increased notably from the spring. Prospects for the pharmaceutical, chemical and electronic/semiconductor industries rose to an average rating of greater than 3, indicating improved stability. Nonetheless, not one end-user market had an average rating of greater than 3.8, suggesting, as with the regional prospects, that for the next six months, sales will remain stable rather then experience dramatic improvements. The average rating for all 10 end-user markets was 3.3.

Chart: Executive Expectations for Instrument Sales for the Next Six Months

Fall 05 Spring 06 Fall 06 Spring 07 Fall 07 Spring 08 Fall 08 Spring 09 Fall 09

Decline 0% 4% 0% 0% 4% 0% 43% 33% 17%

Stay the Same 29% 38% 36% 58% 32% 41% 35% 38% 42%

Increase Moderately 67% 50% 56% 33% 56% 59% 17% 29% 42%

Increase Substantially 4% 8% 8% 8% 8% 0% 4% 0% 0%

Chart: Avg. Ratings Recession’s Effects on Companies (1=No Effect, 3=Some Effect, 5=Tremendous Effect)

Financing Harder to Obtain 2.3

Decline in Profitability 2.4

Credit Harder to Obtain 2.5

Layoffs 2.5

Decline in Sales 3.4

Delayed Capital Spending 3.4

Chart: Average Ratings for Instrument Sales Growth for the Next Six Months by Geography (1=Worsening, 3=Stable, 5=Improving)

Eastern Europe 2.8

Middle East 2.9

Western Europe 3.0

North America 3.1

Latin America 3.1

Japan 3.2

Southeast Asia 3.3

India 3.6

China 3.9

Chart: Average Ratings for Instrument Sales Growth for the Next Six Months by End-User (1=Worsening, 3=Stable, 5=Improving)

Metals/Mining 2.7

Chemical 3.1

Agriculture 3.1

Environmental 3.2

Elec./Semicon. 3.2

Pharma 3.3

Food 3.4

Biotech 3.4

Academia 3.7

Govt. 3.8

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