As we did in Q1, Supply Chain Matters once again takes a quarterly snapshot of the downstream, upstream and transportation component areas of global supply chains. The goal of this three-part series has been to assess trends and determine how major supply chain participants are currently experiencing and viewing 2010 business levels, and how the general post recessionary recovery is manifesting itself among industry supply chains.

In Supply Chain Matters Q2 Global Supply Chain Snapshot-Part One, we commented on Q2 results of some of the lower-tier downstream industries and bellwether companies that supply various other upstream supply chains. In this Part Two posting, we will focus on some bellwether global based and diversified manufacturers to ascertain Q2 trends. As noted in our initial posting, we certainly do not pretend to be trained economists, and please do not view these postings as a basis to plan for the remainder of the year. It is, however, interesting to put information points into a context from the first half of 2010, and begin a commentary on what lies in store for the remainder of 2010.

Similar to our observations of downstream companies, major globally focused manufacturing companies continued to demonstrate impressive results in revenue and profitability growth.  However, beyond the financial numbers, indices of manufacturing and order activity at mid-year are reflecting a noticeable slowdown as the second-half begins.   The Wall Street Journal noted, with 70 percent of companies in the S&P 500 having reported, Q2 earnings were averaging 42% higher than a year ago, even though revenues were up only 9 percent on average. Clearly, a continued focus on aggressive cost cutting and productivity continue to payoff for global based manufacturers.  Sales volumes generated outside of the U.S. clearly were the fuel for continued revenue growth, as export related markets continue to be robust. A prime example to these trends are the contrasting Q2 business results reported by General Electric as opposed to more export-driven Siemens.

As we enter the second half, consumer confidence remains down, and any products directly associated with direct consumer purchases, with the exception of food, fuel, or the latest high-tech goods such as Apple’s iPad or iPhone, remain tepid at best.

In Q2, manufacturing growth in China and much of the rest of Asia slowed for a second straight month in June, with PMI indexes for Australia, China, India, South Korea and Taiwan all reflecting slower growth.  While growth in these regions is slowing, these declines are modest thus far.  As we pen this commentary, The JPMorgan Global Manufacturing Purchasing Managers’ Index for July posted a 54.3 reading, its lowest reading in eight months. While raising a cautious note, it is still consistent with a solid rate of expansion. Also in July, China’s PMI dropped for the first time in over a year to 51.2, coming closest to the reading of 50 that determines contraction or expansion.

In U.S. related activity, the Institute for Supply Management July PMI was recorded as 55.5, down 0.7 from the 56.2 reading in June, and somewhat down from the 60.4 reading recorded at the end of Q1.  The new orders index dropped almost 5 points from June to July, and basically level with the level reported in April.

Our quarterly snapshot of key global based diversified manufacturers indicates the following:

Caterpillar

  • Q2 revenues up 31 percent (year-over-year) compared to drop of 11 percent in Q1
  • Q2 profits up 91 percent
  • Manufacturing costs improved by $316 million; continue aggressively managing costs and driving better cash flow
  • Agreed to acquire Electro-Motive-Diesel for $820 million
  • Bulk of sales and profitability growth occurred outside the U.S.
  • Noted a 400 percent increase in excavator production capacity within China
  • Machinery sales up 55 percent; engine sales up 3 percent
  • Again raised full year outlook for revenue and profitability expectations

Cummins

  • Q2 revenues up 32 percent (year-over-year), much higher performance than in Q1
  • Profit quadrupled after surging to $149 million in Q1; Q2 had highest quarterly earnings as a percentage of sales in more than 25 years
  • Significant productivity gains in manufacturing
  • Gross margin slightly declined to 23.5 % from 24.3% recorded in Q1, but remains higher than 18.3% noted in Q4-2009
  • More than half of Q2 revenues (64 percent) generated from markets outside of the U.S.
  • Engine and Components businesses each recorded 45 percent sales increases; Power Generation segment sales increased 16 percent
  • Again increased revenue and profitability guidance upward for remainder of 2010

General Electric

  • Q2 revenues down 4.3 percent
  • Profits rose 16 percent (year-over-year)
  • Orders rose 7.3 percent from year earlier
  • Sales in equipment, services for aviation, rail transport and wind segments all reported as weak
  • Order backlogs flat for second straight quarter
  • Noted that troubles in the supply chain for electronic components cost the company $50 million in Q2 sales

Hyundai Heavy Industries

  • Q2 revenue up 0.1 percent from a year ago. 0.9 percent higher than Q1
  • Q2 operating profit up 44% (year-over-year)
  • Revenue from offshore projects and construction offset decreases in shipbuilding
  • Noted significant increased construction equipment sales generated from China
  • New orders increased 197.8 percent from year earlier
  • Cost of sales reduced 7.8 percent from year earlier levels

3M

  • Q2 revenues up 18 percent coupled with 25 percent growth recorded in Q1
  • Profit increased 43 percent coupled with 79 percent increase noted in Q1
  • Sales improvements noted in all businesses and geographic regions with strongest noted as emerging markets, up 32 percent vs. 47 percent growth in Q1
  • Operating margins of 23.7 percent
  • Industrial and Transportation business segment up 23 percent in Q2, with previous 29.2 percent growth cited in Q1
  • Display and Graphics segment up 30 percent in Q2, with 42.4 percent growth noted in Q1
  • Electronic and Communication segment up 32 percent in Q2, with 38.6 percent growth noted in Q1
  • Again increased revenue and profitability financial guidance upward for remainder of 2010

Samsung

  • Q2 revenues up 17 percent (year-over-year) coupled with 21 percent increase noted in Q1; Q2 revenues were 4 percent higher than Q1
  • Q2 profits up 83 percent, 9 percent higher than Q1
  • Consumer product divisions (mobile phones, TV’s) recorded declines due to price competition and increased marketing expenses
  • Semiconductor segment up 55 percent in Q2 coupled with 57 percent increase noted in Q1; division noted a 30.8 percent profit margin
  • Memory segment up 74 percent coupled with 76 percent increase noted in Q1
  • LCD segment up15-20 percent in Q2 coupled with 40 percent increase noted in Q1; unit sales price increase were up 3 percent in Q2 and operating margin increased to 11.3 percent from 4.2 percent noted a year ago
  • Again revised upward its full-year operating profit forecast

Siemens

  • Fiscal Q3 revenues up 4 percent (year-over-year) vs. decrease of 3.8% recoded in Q1
  • Profits up 40 percent, couple with 32 percent profit increase noted in Q1; all three major business segments showed profit gains
  • Orders and revenue both benefitted from positive currency effects
  • All product segments reported double-digit growth; Energy up 18 percent; Healthcare up 10 percent; Industry up 7 percent
  • Order volumes up 22 percent in the quarter vs. decline of 15% noted in Q1; 35 percent increase in new orders from China. 51 percent increase in orders from the U.S.
  • Highest order backlog in the company’s history
  • Still profiting from a significantly improved cost structure
  • Slightly increased year-end 2010 financial guidance

Whirlpool

  • Q2 revenues up 8.7 percent vs.20 percent increase noted in Q1; First-half revenues up 13.8 percent
  • Profits up 146.9 percent in Q2; year-to-date profits up 91 percent
  • Gross margin up 3.5 points to 16.8 percent
  • Geographic breakdown: Asia up 42.5 percent in Q2 vs. 60 percent in Q1; Latin America up 23.7 percent in Q2 vs.65% in Q1; North America up 5.7 percent in Q2 vs.7 percent in Q1;  Europe down 6 percent in Q2 vs. 6 percent increase in Q1, but profitability increased due to cost reduction
  • Noted 63% volume growth in Q2 and 11.6 percent increase in volume growth year-to-date
  • Cited continual favorable impacts from cost reduction and profitability initiatives
  • Expects industry-wide shipments of appliances in North America to increase 3.5% this year
  • Key priorities in 2010 remain cost, balanced market execution and increased product innovation
  • Increased financial guidance upward for remainder of 2010.

Our capsule snapshot of global manufacturers in Q1 noted an overall tone of positive resurgence but cautionary notes.  That seems to have continued with this capsule snapshot of Q2. Global manufacturers however now sense a more decreased level of momentum in the second half of 2010.  There does not seem to be high concern for a “double-dip” recession this year, but more of a tone of slow but steady growth

Demand for manufactured products was fueled by a noticeable inventory replenishment and economic stimulus cycle in the first-half, and there are open questions as to whether end-consumer and general business demand will sustain itself for the remainder of 2010.  Clearly, global manufacturers that have established a presence in the developing regions have handsomely benefitted in revenue growth thus far, and large cost reduction and productivity investments also continue paying impressive results in profitability growth.  Spot shortages of select, but critical supply components are occurring as noted by the GE admission, as some suppliers have not been able to keep-up with spot demand increases. The global supply chain pipeline remains active, order rates remain positive, but warning signs are evident in overall inventory management for the remainder of the year.

As in Q1, we did not include major high tech and consumer electronics manufacturers such as Apple, Cisco, HP, LG and others since it is clearly evident that these companies are experiencing their own very positive recovery in most geographic regions, and they would tend to bias our overall outlook. We will however take a separate look in the coming weeks as to whether there are significant other supply chain trends occurring in this sector.

In our third posting, we will focus on a snapshot of the major transportation carriers that service and support all of the various tiers of global supply chains.

In the meantime, feel free to add your own observations in the comments section noted below this posting.

Bob Ferrari