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In Recovery

A global survey reveals that companies are prepared to invest in growth — one careful dose at a time.

5Jun

Ready, set, grow? Such is the mind-set of finance executives around the world as they shift from a cash-hoarding mentality to preparing to blaze new paths to expansion in a slowly reviving economy. It’s an unmistakable, if unevenly distributed, sentiment that emerged from the sixth annual “Global Business and Spending Monitor,” which CFO Research produced in collaboration with American Express.

The report is based on an online survey that drew responses from 519 senior finance executives at large companies, 70% of which posted annual revenues of more than $1 billion. Survey respondents were based in several geographic regions, including North America, Asia/Pacific, Europe and Latin America. CFO Research also conducted in-depth interviews with 14 senior finance executives.

Finance executives’ economic expectations collapsed in 2009, then inched upwards until 2012, when they took a modest decline. Now, global economic expectations are on the rise again, boosted in particular by optimism in South and Latin America and in the Asia/Pacific region. In this year’s survey, 68% of respondents predict that their local countries’ economies will expand during the next year, up four percentage points from last year (see Figure 1). This overall increase occurs despite flat or waning expectations in North America and Europe, a sign that the concentration of global growth power resides squarely in emerging economies.

Prospects appear brighter in developing regions of the world than in more mature economies. In South and Latin America, 81% of survey respondents anticipate economic expansion over the next year. Similarly, in the Asia/Pacific region, four out of five respondents (80%) expect economic expansion within their countries over the next year — a substantial increase from last year, in which 63% of respondents in the region predicted expansion.

By contrast, companies rummaging for revenue in Europe face a far more fundamental, and daunting, challenge: the scarcity of potential customers. “The economy is in bad shape right now,” says one senior finance manager at a large construction company based in the United Kingdom.

Between these two extremes rests North America, which survey results suggest is experiencing slow and steady growth. Although more than two-thirds of North American survey respondents (69%) expect their respective countries’ economies to grow over the next year, this figure represents a slight decrease from last year, indicating the continuation of a very gradual recovery. And while this recovery may be slower so far than is typical, that doesn’t necessarily diminish its promise in the long run. The signs are there.

“It’s not that I have the orders on hand, but when you hear the rumble — you hear there is more activity happening at the end user, and you also hear the sales force being more active with those clients — that tells you that there is more activity coming to you from that sector,” says Bill Velasco, controller for the Engineered Products Division at Flowserve, a global supplier of industrial and heavy machinery.

Putting a High Value on Investment
As more CFOs around the world begin to hear the rumble of activity that heralds the promise of growth, survey results predict an uptick in spending and investment. A solid majority of survey respondents worldwide (83%) say that their companies are likely to increase real spending and investment over the next year. As new spending and investment dollars spill forth, finance executives will focus on ensuring that the money is directed only toward the most value-enhancing projects.

Daniel Pereyra, CFO and director of finance at the Argentinean subsidiary of PSA Peugeot Citroën, a European automobile manufacturer, sums up a prevailing mind-set among his finance peers: “People aren’t restricting their spending, but they are being more careful.”

Spending more, but spending carefully: such is the essence of value discipline, a mentality that surfaced in last year’s study and now seems to be pervading the way business is done worldwide. A solid majority of survey respondents (83%) agree that their companies are operating in a “value economy” (see Figure 2). Respondents say that over the next year, extending their competitive edge will depend on improving their ability to both deliver more value to customers and extract greater value from their supply chains.

The increasing focus on value discipline seems to be, in part, the product of a familiar pay-it-forward effect: customers worldwide are demanding more value for the same or less money, pushing down prices and forcing companies to make similar demands of their own suppliers and vendors. A majority of survey respondents (62%) confirm that their companies are experiencing more downward price pressure now than they were five years ago (see Figure 3). They expect the trend to continue: 60% of survey respondents worldwide say that their companies are likely to experience even more price pressure over the next year (see Figure 4).

The result of this trend is an emerging movement toward a “back to the basics” approach. For example, a director of financial planning and analysis at a large manufacturer based in Luxembourg says “choosing the right projects to invest in” will be the greatest contribution the CFO can make to enabling growth over the next two years.

Worldwide, competitiveness will be defined by selectiveness — by each company’s ability to choose the right goals, rather than trying to stretch its resources to satisfy a jumble of disparate goals. The key is discipline. Velasco says that Flowserve is maximizing value by building on “the pillars of our offering. … That for sure is not changing, but is being reinforced.” In a tough-to-read marketplace, a solid foundation serves to remind a company where it stands.

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