2009 Industry Outlook: Challenging Times, Emerging Opportunities
There is considerable debate as to whether the ancient Chinese proverb, “May you live in interesting times,” is a blessing or a curse. As Deloitte’s 1 leaders and subject-matter specialists sought to frame the top issues facing U.S. executives in 2009, it quickly became evident that we live in interesting times, indeed.
In 2009, the United States must deal with some of the greatest economic challenges it has encountered in two generations: Financial markets are in turmoil; prices for oil and other commodities are fluctuating wildly; housing, automotive and other industries are fighting for survival; more than 10 million people are unemployed 2 – the litany of woes continues as the United States and other nations slip into a global recession. Yet, even amid the economic upheaval, opportunities and positive signs exist: Medical and technology advances are continuing apace; greening initiatives are moving forward; a new president and Congress are taking office amid high expectations for change; and governments, corporations and citizens around the world are collaborating to identify real and lasting solutions to today’s and tomorrow’s challenges.
This 2009 industry outlook features Deloitte’s insights, analyses and projections for the following industry sectors:
- Aerospace and Defense
- Banking & Securities
- Consumer Products
- Energy & Resources
- Health Sciences
- Media & Entertainment
- Process & Industrial Products
- Real Estate
- Tourism, Hospitality & Leisure
- U.S. Federal and State Government
Through a series of in-depth interviews, Deloitte’s sector leaders and subject-matter specialists have detailed their anticipated, industry-specific challenges and opportunities for 2009, as well as provided suggestions to help executives weather the current economic downturn and position their organizations for recovery and future growth. In addition, our contributors have identified several shared trends that apply to most industry sectors and provide an opportunity to impart learnings and leading practices. Often, practices that originate in one sector can be leveraged in other sectors to create more effective business models. These shared trends include the economic crisis, greening/sustainability, globalization, the increased application of technology to industry, talent challenges, building brand value, and International Financial Reporting Standards (IFRS) implementation.
No one, it seems, is immune to the economic meltdown afflicting the United States and countries around the world. What started as a credit issue in the small, subprime part of the mortgage market quickly extended to all corners of the economy. As of this writing, consumer spending had sunk by the most since 2001, jobless claims were at recessionary levels, factory orders continued to fall and new-home sales were at a nearly 18-year low. 3 Economists expect the economy to shrink in the October–December 2008 quarter, meeting the classic definition of a recession (two straight quarters of economic contraction). 4
Among the industries profiled in this report, the economic crisis has hit some harder than others. Banking & Securities, Insurance and Asset Management are at the center of the maelstrom: Many companies have suffered crippling asset losses, are shedding jobs by the tens of thousands, have suffered serious damage to their brand reputation and are depending on the government’s $700 billion Troubled Asset Relief Program (TARP) and other initiatives to help them survive.
In the Automotive industry, the crisis has manifested itself in very tight global credit markets for original equipment manufacturers (OEMs), dealers and consumers. This, in turn, has had a dramatic impact on consumer demand, with double digit year-over-year sales declines leading to sales levels not seen since the early 1990s. The U.S. government reached a decision in late 2008 to provide financial assistance to the industry. Overall, however, the impacts of the liquidity crisis at the Detroit 3 could have a negative cascading impact across all OEMs and the supply chain.
In one clear sign of recession, orders for manufactured items plunged 6.2 percent in October – the biggest drop in two years – signaling continued trouble for the Consumer Products and Process & Industrial Products industries. The crisis’s impact on the global economy is slowing demands for energy and pushing down prices for crude oil and natural gas, a trend that is expected to continue impacting profits in the Energy & Resources sector in the coming year. However, lower energy costs could be a stimulant to profitability in sectors which are heavy users of energy, such as airlines or manufacturers.
Global credit problems that began in the U.S. residential subprime market have spilled over into the commercial Real Estate industry’s debt markets, resulting in suppressed transaction volumes and limited access to financing. The Retail industry is clearly feeling the effects of the consumer cash and credit crunch, as many retailers find themselves confronted by liquidity issues, reduced consumer spending, and weak credit market conditions. In fact, after what may have been the worst holiday-shopping season in 40 years, analysts estimate earnings at U.S. retailers will fall 20 percent in 2009. 5 In the Health Sciences industry, health care providers are experiencing the continuation of a worsening capital situation, with higher interest and debt costs, and lower endowments, contributions and investment returns. Health plans are similarly stressed: The average premium increase for 2009 is projected to be just 5 percent and enrollment growth is anticipated to be zero, as increasing numbers of people lose their jobs and Medicaid benefit reductions mirror state budget cuts.
Increasingly, overextended corporations and anxious citizens are looking to the government for solutions to address the nation’s economic troubles. Yet, overstretched and overcommitted budgets and ever-growing requests for assistance will present tremendous challenges in 2009 for U.S. federal and state governments.
In a bit of good news, some industries appear to be weathering the economic storm fairly well – at least for the foreseeable future. For example, the 2009 budget for Aerospace & Defense is already set and the commercial aircraft order backlog stands at six years. Similarly, Life Sciences companies are somewhat more resilient to current economic conditions because sales of prescription drugs and medical devices tend to hold up better than nonessential goods during economic downturns. Digitization and the convergence of media, telephony and technology are producing growth opportunities for participants in the Telecom, Technology and Media & Entertainment industries. The Media & Entertainment sector, in particular, tends to be somewhat resistant to traditional economic downturns because its products and services are among the few affordable pleasures left to consumers in a tight economy.
As difficult as it can be to see the forest for the trees, organizations in all industries must look to the future even as they battle to survive the current reality. Signs of hope are emerging: President Barack Obama has pledged to have a major economic stimulus package in place early in his presidency, and he has assembled a team of top economic advisors. He also has said a top priority will be to enact a stimulus package with a goal of creating 2.5 million new jobs over the next two years. In late November, the government announced an $800 billion effort to encourage more consumer lending in the form of auto loans, credit cards and mortgages. 6
It is impossible to say how far into 2009 this economic downturn will last; however, forward-thinking companies should focus on right-sizing their organizations, maintaining margins, aggressively pursuing cost and operational efficiencies, optimizing their supply chains, and evaluating their current situation against long-term objectives so that they are prepared to move forward when the economy turns for the better.
Greening and environmental sustainability are expected to continue in 2009 as high-profile trends that will require organizations in every industry to invest strategically and programmatically to conserve natural resources and create a healthy environment for customers, employees and the communities in which they operate.
For many industries, greening has been a longstanding challenge: Automakers and air pollution, chemical manufacturers and waste disposal, power-generation plants and air quality are just a few of the issues that have generated public concern, produced regulatory oversight and prompted industry action. Among current focus areas are water usage, carbon emissions, product composition (nanotechnology, hazardous materials), product and package labeling, and performance reporting. 7
In response to increased investor activism and media attention, changing consumer demands and a stepped-up regulatory environment, organizations in Health Care, Retail, Process & Industrial Products, Automotive, Energy & Resources and other industries will likely continue to incorporate sustainable business practices into their operational strategies in 2009, although some large-scale programs may be slowed by lack of capital. In fact, some companies have already signaled their commitment to greening by naming chief sustainability officers to guide their initiatives. Others are evaluating their regulatory strategies and compliance programs in anticipation of a push for stricter regulatory and environmental mandates to reduce greenhouse gas (CO 2) emissions.
Sustainability programs are as diverse as the industries and companies that implement them. A leading software company eliminated nearly 25,000 miles of car traffic per day for its employees and reduced the company’s overall carbon footprint by initiating employee bus transportation. All products produced by a U.S.-based, global consumer packaged goods manufacturer undergo an environmental risk assessment related to “fate research,” or determining where a product goes in the environment after use, and how much goes there. A major financial services company launched a Web-based global environmental database to serve as a repository for its environmental performance data, and trained facilities managers worldwide to use the database to track the performance of its buildings over the course of the year. In addition, the company makes significant purchases of green power, further reducing its carbon footprint. 8
Greening/sustainability is a critical business issue that is quickly becoming a requirement. Unlike other issues, however, greening is being shaped by drivers outside of many companies’ control. Multiple stakeholders – shareholders, suppliers, regulators, consumers and others – are demanding that companies address sustainability, which indicates that it will be impacting all industries for years to come. Fortunately, greening offers companies in industries such as Retail, Automotive, Consumer Products and Technology growth opportunities through new products and marketing. Also, greening efforts that begin as short-term regulatory compliance measures have the potential to morph into long-term value-generators. While specific return on investment (ROI) data on greening investments is still emerging, organizations such as the Environmental Protection Agency (EPA) have developed a model that indicates that corporate investments in greening can increase earnings per share. 9 The challenge to corporate and government leaders is to design and implement greening programs in a way that contributes to sustainability and growth.
The domino effect of the U.S. economic crisis on other participants in the global economy leaves no doubt that we operate in a global, connected world. Increasingly, U.S. companies in industries such as Consumer Products, Retail, Real Estate, Life Sciences, Technology, Telecom, Media & Entertainment, Process & Industrial Products, Energy & Resources, and Tourism, Hospitality & Leisure (THL) are looking outside the United States for new revenue opportunities and sources of capital.
U.S. telecom carriers, for example, are looking to expand their global footprints in markets such as India, Africa and South America through direct ownership, partnerships or joint ventures. As part of this expansion, however, companies will need to rethink their product offerings and pricing structures. To offset a sluggish U.S. economy, Consumer Products companies are focusing on the "BRIC" countries of Brazil, Russia, India and China, where retail sales and disposable income are growing at double-digit levels.
Much of the current and anticipated growth in the Tourism, Hospitality & Leisure market is expected to come from outside the United States. THL companies view expanding their global footprint as an effective way to increase market share, build brand awareness and spread risk over the long term. In Life Sciences, an increase in cross-border mergers and acquisitions (M&A), licensing and partnering could help to fuel U.S. companies’ entry into emerging markets such as India. As part of this expansion, however, companies will need to remain alert to potential supply chain and product integrity issues. Finally, the Real Estate industry in 2009 expects to see investment capital continuing to enter the United States as Sovereign Wealth Funds (SWFs) and other private investors take advantage of relatively inexpensive U.S. real estate opportunities. Conversely, U.S. real estate companies with healthy balance sheets are likely to continue expanding their international investments, although some companies are refocusing attention on domestic properties because they carry less risk.
Increasing globalization also has its downside. In the latter half of 2008, Process & Industrial Products manufacturers saw their exports to Europe and Asia slow as the economies in these regions began to slow. That trend is expected to continue into 2009 and negatively impact companies in this industry. Globalization is also creating highly complex, geographically diverse, and expensive product supply chains, which can be plagued by quality issues – as illustrated by China’s tainted-milk scandal and numerous recalls of products manufactured in that country – and strain companies’ resources and capabilities. A renewed emphasis on supply chain optimization and product quality is prompting some U.S. companies to bring back manufacturing (and jobs) that they lost to overseas competitors, and to localize their supply chains, particularly in the area of product sourcing. Increasingly, in-country or near-country sourcing and local warehousing will become important links in revamped manufacturing and retail supply chains.
Increased Application of Technology to Industry
Innovation will be an important operational theme in 2009, as organizations seek to develop products and services that can help them bolster balance sheets or grow market share in a shrinking economy. Increasingly, the application of technology within and across industries is the springboard to innovation and enhanced performance. Examples are numerous and varied:
- The Health Sciences industry is seeing the introduction of disruptive innovations that are helping to enable anytime, anywhere, all-the-time health care delivery. Examples include in-home monitoring devices that work in tandem with care management programs to support self-care for chronic disease management; Health Information Exchanges (HIEs) that facilitate the secure exchange, transfer and use of health information to improve quality, safety and efficiency; and the convergence of medical devices and diagnostics, which strengthens the connection between disease identification and treatment. Interestingly, many health-related technology advances are being pioneered by big names outside of the health care system, including Google, Intel, Microsoft, Verizon and others.
- U.S. automakers, who were caught short when they didn’t embrace innovations around fuel-efficiency and alternative energy as quickly as their European and Asian counterparts, are now exploring partnerships and other forms of collaboration to engineer technology advances such as alternative powertrains and global platforms, which share components and substantially reduce costs and speed time to market.
- The Telecom industry is using the decline of traditional wireline voice communications to radically reinvent itself through technology innovations, especially data-driven wireless and the triple play of telephony, broadband and media services.
- An exciting innovation that links the Technology, Retail and Consumer Products industries is hyper-micro-marketing, which leverages global positioning system (GPS) technology and cell phones to alert consumers to sales and other promotions when they walk or drive by a store.
- The Aerospace & Defense industry’s use of product and process innovation in the development of the Boeing 787 Dreamliner – the first major aircraft to use composite materials for most of its construction – has resulted in the most successful aircraft product launch in aviation history, as measured by number of aircraft ordered prior to first flight.
- In response to fluctuating energy prices and tightened supplies, manufacturing-based industries such as Automotive, Aerospace & Defense and Consumer Products are developing energy-efficient technologies and processes to lower their plants’ energy bills, including onsite- or co-generation, solar and wind power, and energy-efficient, demand-side equipment. Also, the Technology sector is continually increasing the number and variety of product offerings that use energy more efficiently.
- Retailers are using Web 2.0 innovations such as social networking to sell, build brand identity, engage consumers in dialog, and obtain feedback. New technologies are enabling consumers and retailers to access and communicate varied, rich information in real time to transform key interactions and relationships.
There are some important caveats to the application of technology in industry. While new advances are proceeding apace, the rate of widespread adoption can be spotty, as evidenced in the Health Sciences industry by some physicians’ reluctance to embrace electronic medical records (EMRs) and other Health Information Technology (HIT). Also, once they are implemented, technology innovations can generate a host of associated operational challenges. In the Media & Entertainment industry, for example, new digital distribution modalities are requiring companies to identify ways to protect their intellectual property, sustain historical revenue streams, and utilize and monetize emerging new platforms for traditional content. Finally, technology advances that positively impact one industry may have a detrimental effect on another. Case in point: In this increasingly electronic, digitized and online world, a continued slowing of demand for paper products – from newspapers to packaging – is expected to extend into 2009. The resulting fallout could threaten newspapers’ very existence and exacerbate plant closings and equipment mothballing in the Paper subsector of the Process & Industrial Products industry.
It is ironic that even in a period of escalating unemployment – nonfarm payroll employment fell by 240,000 in October 2008, and the unemployment rate rose from 6.1 to 6.5 percent 10 – companies in many industries continue to have difficulty attracting and retaining high-quality employees. Demographic changes in the U.S. work force – including increasing numbers of baby boomer retirements and potential shortages of next-generation talent – are elevating labor costs and requiring employers to implement innovative programs to retain, develop and motivate high-quality employees.
Automotive, Process & Industrial Products, Consumer Products and other manufacturing-based industries are faced with a depleting U.S. talent pool – a huge shortage of engineers is forecasted in coming years – and global challenges around recruiting and retaining management talent. Also, the manufacturing work force is older than that of other industries, so its replacement timetable is shorter. Finally, manufacturing companies often suffer from an image problem and must compete with aggressive recruiting efforts by more “glamorous” industries.
The Aerospace & Defense (A&D) sector is also experiencing ongoing talent challenges. In the next five years, 27 percent of A&D employees will be eligible for retirement – and many of them are coveted science, technology and engineering (ST&E) workers. Unfortunately, the A&D industry may not be able to attract sufficient new talent to make up the deficit. A lower percentage of U.S. college students are pursuing ST&E degrees, and foreign nationals by law can’t hold U.S. defense jobs.
Among U.S. service industries, Health Care Providers are coping with a continued talent shortage, especially among nurses, as well as high (and increasing) levels of unionization in provider facilities. The Insurance industry’s recruiting efforts are being hampered by the public’s current negative perception of the industry – at least in the short term – adding to an already challenging employment situation. THL may see a temporary dip in its traditional 50 percent turnover rate because of current economic conditions, but the industry must still manage ongoing immigration and unionization issues.
In 2009, virtually all sectors will need to balance their long-term talent demands with short-term needs to right-size their work force in an effort to offset the economic downturn. Of great importance is developing innovative programs to tap into a new generation of employees. Companies should emphasize flexibility, training and career-life balance if they hope to attract and retain desirable talent.
As 2009 progresses, companies in every U.S. industry will be seeking – with increased urgency – a greater understanding of the changes, opportunities and challenges associated with managing the transition from U.S. Generally Accepted Accounting Principles (GAAP) to the new IFRS.
Since the 1930s, technical accounting for most U.S. businesses has been governed by GAAP, while other countries have had their own sets of local accounting standards. However, the globalization of business practices and capital markets created a need for – and the development of – a single set of global accounting standards that can be used across borders. Today, more than 100 countries, including those in the European Union and parts of Asia and Latin America, have adopted IFRS. In the United States, the adoption process is under way: By 2009, some public companies will have the option of IFRS reporting; mandatory use of IFRS is likely to begin in 2014.
The global trend toward IFRS represents a significant change – and opportunity – for many investors, companies, and capital markets. IFRS may provide benefits such as greater transparency and comparability of financial information across countries, simplified reporting, reduced operating costs, and improved access to capital. Equally important, some companies see their competitors already embracing IFRS. That’s why momentum toward IFRS adoption has been steadily building, even before the standards are required.
IFRS conversion is quickly becoming a priority for U.S. companies now that the Securities and Exchange Commission (SEC) has proposed an IFRS road map and rules changes. For many organizations – particularly those that compete globally – an early transition to IFRS has appeal. By beginning the process in 2009, businesses can get ahead of the crunch and ensure a smooth, orderly conversion. Also, early adopters could realize potential benefits before their competitors.
IFRS is an inevitable and historic trend. The full transition – which for many companies will take at least three years – will require leadership, vision, and a comprehensive action plan to address the organizational and IT changes required to support IFRS. Deloitte firms have produced a number of publications that offer guidance to U.S. companies implementing IRFS. They are available at www.deloitte.com/us/IFRS.
The Opportunity for Leadership
One possible interpretation of “May you live in interesting times” takes its lead from the Chinese saying "时势造英雄"(pin-yin:shi shi zao ying xiong), which means heroes (leaders) are made over turbulent times. 11
Anticipated challenges of 2009 will provide ample opportunities for executives, government officials and citizens to demonstrate leadership, determination, collaboration and foresight as they develop solutions to spur the United States’ economic recovery and future growth.
Learn More about the 2009 Industry Outlook Program
Main Industry Library: 2009 Industry Outlook
Sidebar: 2009 Industry Outlook - A New President and Congress
Sidebar: 2009 Industry Outlook - Building Brand Value
Overview: Meet the Deloitte 2009 Industry Outlook Contributors
1As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.
3Rugaber, Christopher S., “Stocks gain, trouble lurks,” Associated Press, published in The Kentucky Enquirer, November 27, 2008
5Galante, Joseph and Katie Hoffman, “ Global Corporate Profits to Drop in ’09; More Bankruptcies Loom,” Bloomberg.com. Published January 5, 2009.
6Rugaber, Christopher S., “Stocks gain, trouble lurks,” Associated Press, published in The Kentucky Enquirer, November 27, 2008
7 Greening and Sustainability in Health Care and Life Sciences: Implementing a Strategic Response , Deloitte, 2008
8All examples are from Greening and Sustainability in Health Care and Life Sciences: Implementing a Strategic Response, Deloitte, 2008
10 News release from the Bureau of Labor Statistics, U.S. Department of Labor, November 7, 2008