2009 Industry Outlook: Challenging times, emerging opportunities

Deloitte

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2009 Industry Outlook Challenging Times, Emerging Opportunities
January 2009
Table of contents
2009 Industry Outlook: Challenging Times, Emerging Opportunities A sector-by-sector analysis • Aerospace & Defense • Automotive • Banking and Securities • Consumer Products • Energy & Resources: Oil & Gas, Power & Utilities • Health Sciences: Health Care Providers, Health Plans, Life Sciences • Media & Entertainment • Process & Industrial Products • Real Estate • Retail • Technology • Telecom • Tourism, Hospitality, & Leisure • U.S. Federal & State Government Contributors
2009 Industry Outlook Challenging Times, Emerging Opportunities
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2009 Industry Outlook Challenging Times, Emerging Opportunities
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Introduction
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2009 Industry Outlook: Challenging Times, Emerging Opportunities
This 2009 industry outlook features Deloitte’s insights, analyses, and projections for the following industry sectors: • Aerospace and Defense • Automotive • Banking & Securities • Consumer Products • Energy & Resources: Oil & Gas, Power & Utilities • Health Sciences: Health Care Providers, Health Plans, Life Sciences • Insurance • Media & Entertainment • Private Equity, Hedge Funds, and Mutual Funds • Process & Industrial Products • Real Estate • Retail • Technology • Telecom • Tourism, Hospitality & Leisure • U.S. Federal & State Government Through a series of in-depth interviews, Deloitte’s sector leaders and subject matter experts have detailed ...

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• Publié par: deloitte
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• Langue: English
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2009 Industry Outlook Challenging Times, Emerging Opportunities

January 2009

Table of contents

2009 Industry Outlook: Challenging Times, Emerging Opportunities A sector-by-sector analysis • Aerospace & Defense • Automotive • Banking and Securities • Consumer Products • Energy & Resources: Oil & Gas, Power & Utilities • Health Sciences: Health Care Providers, Health Plans, Life Sciences • Media & Entertainment • Process & Industrial Products • Real Estate • Retail • Technology • Telecom • Tourism, Hospitality, & Leisure • U.S. Federal & State Government Contributors

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Introduction

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 experts 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 U.S. 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.

1 As 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. 2 http://www.bls.gov/cps/

This 2009 industry outlook features Deloitte’s insights, analyses, and projections for the following industry sectors: • Aerospace and Defense • Automotive • Banking & Securities • Consumer Products • Energy & Resources: Oil & Gas, Power & Utilities   • Health Sciences: Health Care Providers, Health Plans, Life Sciences • Insurance • Media & Entertainment • Private Equity, Hedge Funds, and Mutual Funds • Process & Industrial Products • Real Estate • Retail • Technology • Telecom • Tourism, Hospitality & Leisure • U.S. Federal & State Government Through a series of in-depth interviews, Deloitte’s sector leaders and subject matter experts 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 which apply to most industry sectors and provide an opportunity to impart learnings and leading practices. Often, practices which 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 IFRS implementation. Economic Crisis 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

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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 by as much as four percent in the October-December 2008 quarter, meeting the classic definition of a recession (two straight quarters of economic contraction). 4 A New President and Congress The election of Barack Obama as the United States’ 44th President, along with a larger Democratic majority in Congress, herald a perceived mandate for change that could produce sweeping new programs and increased regulatory activity with implications for industry, federal and state agencies, and the general public. Tackling the nation’s overwhelming economic problems will be the number-one priority for the President, his administration, and the 111th Congress when they assume office in January 2009. This includes managing the initial asset distribution from the $700 billion Troubled Asset Relief Program (TARP), evaluating other industries’ requests for financial support, and developing and approving a comprehensive recovery plan that makes long-term investments in the country’s economic future. Less clear is how quickly the administration and Congress will address other issues from Obama’s campaign platform, such as broader health care coverage, clean energy, infrastructure improvements and education reform.

Several industries are expecting to see increased federal regulation and oversight in 2009, chief among them Banking & Securities and Private Equity/Hedge Funds/ Mutual Funds. Already, the government’s new position as an equity investor promises to change the way banks are managed. Also, the Democratic-led Congress is likely to eliminate the protections that the Hedge Funds industry has enjoyed over the last eight years. Other potential regulatory issues facing private equity firms, hedge funds and mutual funds include SEC regulation on the short- selling of financial stocks, prime brokerage exposure and counterparty risks, the stability of mutual fund investments, and retirement plan fee disclosure.

3 Rugaber, Christopher S., “Stocks gain, trouble lurks,” Associated Press, published in The Kentucky Enquirer, November 27, 2008

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Among the industries profiled in this report, the economic crisis has hit some harder than others. Banking & Securities, Insurance, and Private Equity/Hedge Funds/Mutual Funds 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

Similarly, the Energy & Resources industry is anticipating heightened and accelerated regulatory activity at both the state and federal levels, primarily in the form of stricter environmental mandates to reduce greenhouse gas emissions. Congress also could appropriate increased funding for alternative energy sources, excluding nuclear. In addition, the new administration has expressed support for reinstating the Windfall Profit Tax (WPT) on oil & gas companies. Finally, the President is expected to promptly issue an executive order to overturn President Bush’s policy on domestic drilling for oil and natural gas. From a manufacturing perspective, there are some concerns among Process & Industrial Products companies that the election results could foreshadow restrains on free trade, as well as increased regulations around factory emissions. Consumer Products companies could see new regulations around supply chain and food/product safety in the wake of last year’s e-coli-related recalls of tomatoes and salsa in the United States and continuing quality problems with products manufactured in China.

Although economic issues will take precedence, health care reform is expected to be a key agenda item for the new President and Congress, and this could benefit the Health Sciences industry. Initially, the President is expected to overturn President Bush’s policy on stem cell research. Later initiatives likely will address the meteoric rise in health care costs and America’s 47 million uninsured. In the next 36 months, the federal government is expected to lay the foundation for major changes in the nation’s health care system.

4 Ibid

brand reputation, and are depending on the g t’ overnmen 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 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

5 Galante, Joseph and Hoffman, Katie., “Global Corporate Profits to Drop in ’09; More Bankruptcies Loom,” Bloomberg.com (http://www. bloomberg.com/apps/news?pid=newsarchive&sid=aoQVPQW1bTnY).   Published January 5, 2009.

average premium increase for 2009 is projected to be just five 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, over-stretched and over-committed 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 M&E 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 5 .

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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 they are prepared to move forward when the economy turns for the better.

Greening/Sustainability 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. 6 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 (CO2) emissions.

6 Greening and Sustainability in Health Care and Life Sciences: Implementing a Strategic Response , Deloitte, 2008

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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. 7 Greening/sustainability is a critical business issue that is quickly becoming a requirement. Unlike other issues, however, greening is being shaped by drivers outside

7 All examples are from Greening and Sustainability in Health Care and Life Sciences: Implementing a Strategic Response , Deloitte, 2008

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 ROI data on greening investments is still emerging, organizations like the EPA have developed a model that indicates that corporate investments in greening can increase earnings per share. 8 The challenge to corporate and government leaders is to design and implement greening programs in a way that contributes to sustainability and growth. Globalization The domino effect of the U.S. economic crisis on other participants in the global economy leaves no doubt that we operate in an expanded, 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 Travel, Hospitality & Leisure 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 Travel, 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

8 http://www.energystar.gov/index.cfm?c=healthcare. _ _ _ bus healthcare biz case

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 U.S. 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 those regions began to curtail large infrastructure projects. 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

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work in tandem with care management programs to  Also, the Technology sector is continually increasing the support self-care for chronic disease management;  number and variety of product offerings that use energy Health Information Exchanges (HIEs) that facilitate the more efficiently. secure exchange, transfer and use of health information • Retailers are using Web 2.0 innovations such as to improve quality, safety, and efficiency; and the  social networking to sell, build brand identity, engage convergence of medical devices and diagnostics,  consumers in dialog, and obtain feedback. New which strengthens the connection between disease  technologies are enabling consumers and retailers to identification and treatment. Interestingly, many health-  access and communicate varied, rich information in real related technology advances are being pioneered by  time to transform key interactions and relationships. big names outside of the health care system, including Google, Intel, Microsoft, Verizon, and others. There are some important caveats to the application • U.S. automakers, who were caught short when they of technology in industry. While new advances are didn’t embrace innovations around fuel-efficiency and  proceeding apace, the rate of widespread adoption can alternative energy as quickly as their European and Asian be spotty, as evidenced in the Health Sciences industry by counterparts, are now exploring partnerships and other  some physicians’ reluctance to embrace electronic medical forms of collaboration to engineer technology advances records (EMRs) and other Health Information Technology such as alternative powertrains and global platforms, (HIT). Also, once they are implemented, technology which share components and substantially reduce costs  innovations can generate a host of associated operational and speed time to market. challenges. In the Media & Entertainment industry, for • The Telecom industry is using the decline of traditional example, new digital distribution modalities are requiring wireline voice communications to radically reinvent itself  companies to identify ways to protect their intellectual through technology innovations, especially data-driven  property, sustain historical revenue streams, and utilize wireless and the triple play of telephony, broadband and  and monetize emerging new platforms for traditional media services.  content. Finally, technology advances that positively impact • An exciting innovation that links the Technology, Retail one industry may have a detrimental effect on another. and Consumer Products industries is hyper-micro-  Case in point: In this increasingly electronic, digitized and marketing, which leverages global positioning system  online world, a continued slowing of demand for paper (GPS) technology and cell phones to alert consumers to products – from newspapers to packaging – is expected sales and other promotions when they walk or drive by  to extend into 2009. The resulting fallout could threaten a store.  newspapers’ very existence and exacerbate plant closings • The Aerospace & Defense industry’s use of product and and equipment mothballing in the Paper subsector of the process innovation in the development of the Boeing  Process & Industrial Products industry. 787 Dreamliner – the first major aircraft to use composite materials for most of its construction – has resulted in Talent Challenges the most successful aircraft product launch in aviation  It is ironic that even in a period of escalating history, as measured by number of aircraft ordered prior  unemployment – nonfarm payroll employment fell by to first flight.  240,000 in October 2008, and the unemployment rate • In response to fluctuating energy prices and tightened rose from 6.1 to 6.5 percent 9 – companies in many supplies, manufacturing-based industries such as  industries continue to have difficulty attracting and Automotive, Aerospace & Defense and Consumer retaining high-quality employees. Demographic changes Products are developing energy-efficient technologies  in the U.S. work force – including increasing numbers of and processes to lower their plants’ energy bills, Baby Boomer retirements and potential shortages of next- including onsite- or co-generation, solar and wind  generation talent – are elevating labor costs and requiring power, and energy-efficient, demand-side equipment.  employers to implement innovative programs to retain, 9 News release from the Bureau of Labor Statistics, U.S. Department of Labor,   http://www.bls.gov/news.release/empsit.nr0.htm, November 7, 2008 10

Building Brand Value Economic conditions are becoming more challenging by the day, so building and enhancing brand value will become an essential element of success in 2009, particularly for those companies in consumer-facing industries such as Retail, Consumer Products, Travel, Hospitality & Leisure, Telecom, Technology and Media & Entertainment. Other industries, such as Financial Services and Insurance, face an even bigger challenge: They must repair reputations that were damaged in the United States’ near economic collapse.

With credit availability and consumer spending expected to continue contracting in 2009, the competition for customers and market share should intensify. Companies that can clearly define and consistently deliver on a distinct brand promise are more likely to increase demand and build customer loyalty. For those industries in need of repairing their reputations, communicating regularly, consistently and clearly with key audiences is an important first step to help shape a more positive impression. This process includes identifying which tools and channels can be used to educate consumers and help reduce confusion and misperceptions.

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 workforce 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 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.

Shaping the consumer shopping experience is another important aspect of building brand value. All companies need to make their customers feel special and offer them a shopping experience that is enjoyable, informative, entertaining and easy. Beyond providing exceptional customer service and making sure that desired items are in stock, this includes influencing factors such as store layout and Web design, pricing, inventory management, and the ease and speed of the checkout process across all shopping channels.

The imperative for consumer-facing industries to increase demand and brand loyalty will likely require increased investments in marketing and sales during 2009, which may appear contrary to cost-cutting strategies that are typically imposed during tough economic times. However, strengthening the marketing and sales functions could generate welcome short-term revenue and lead to stronger customer relationships in the long run.

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. Tourism, Hospitality and Leisure (THL) may see a temporary dip in its traditional 50 percent turnover rate due to 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 workforce 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. 2009 Industry Outlook Challenging Times, Emerging Opportunities 11