Slowdown Predicted for System Integrators

Tim Finerty

The concern about an economic slowdown has permeated the news in the past few months. This has been punctuated by the Federal Reserve Bank’s recent decision to cut interest rates for the third time in 2019. While many interpret these moves as protection against a possible recession, there are other signs that a slowdown is coming. According to a proprietary survey jointly conducted by JP Morgan and the Control System Integrators Association (CSIA) entitled, System Integrator Survey, a slowdown is evident in the anticipated changes to demand levels and revenue growth over the coming year. There was also concern expressed about the impact of the U.S. – China trade tariffs and the impact on production. While the data does not sound an immediate alarm, it does reflect important changes industry companies need to be prepared for. To help clients, prospects, and others, Clayton & McKervey has provided a summary of the key findings below.

System Integrator Outlook

• Changes to Demand Levels – It appears there has been a change to the overall demand level in both expected revenue growth and overall order activity. While the results show very little change in order demand as stronger or weaker, there was an interesting shift in those ratings somewhat stronger or somewhat weaker. There were far fewer responses indicating expected demand would be somewhat stronger and an increase in responses indicating demand would be somewhat weaker. Concurrently, the expected strength in revenue growth for the next twelve months was also expected to decline. These findings suggest a market “softening” going into 2020.
• Order Backlogs – The amount of work in the backlog is a good indicator of demand. The results show that about three-quarters of companies have a typical backlog of fewer than six months, while the balance have a backlog of three months or less. About half of the same companies indicated that backlogs are at an expected level, while a quarter indicated it is stronger than normal. These results reinforce the notion that although a slowdown is expected, it will not be coming immediately but appear gradually.
• Impact of Tax Reform – Many of the changes ushered in through the Tax Cuts and Jobs Act of 2017 (tax reform) were encouraged to increase capital expenditures. The vast majority (over 70%) of companies indicated they have not seen any new business resulting from the changes. At the same time, a smaller number (about 20%) indicated they have seen new business from the change, while the balance is still waiting for new opportunities to materialize. This reflects a lack of investment with industry companies, which may have been an expected “boost” to revenue.
• Trade Tariffs – There has been a lot written about the impact of trade tariffs between the U.S. and China. A key concern is how these economic forces are impacting industry companies. The research shows that almost half see a small negative impact, while 15% a strong negative impact and the balance not seeing a material impact at all. The uncertainty arising from these disputes has fueled uncertainty about future order demand and revenue growth. The good news is many of these tariffs could be diminished or eliminated quickly if the two sides reach a trade deal.

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Although the long term growth of the industry is expected to reach a market worth of over $500B by 2025, it’s clear that economic and other factors will temper how quickly the growth occurs. This makes strategic planning essential to industry companies to ensure the financial vitality of the organization. If you have questions about the survey findings or need assistance with a tax, audit or financial analysis, Clayton & McKervey can help! For additional information call us at 248-208-8860 or click here to contact us. We look forward to speaking with you soon.