According to Michael Bechara, managing director of Granite Consulting Group Inc., there are five major threats facing manufacturers, defense contractors and distributors this year.
“2010 is likely to be another tumultuous year. In this hurricane of the Great Recession, we have recently been enjoying some calm as the eye of the storm passes above us, but by late 2010 we will enter the full fury of the other side,” said Bechara.
Bechara placed an emphasis on five major themes he sees emerging to threaten government contracting and the associated industry.
The first issue is energy price volatility. “As the price of oil creeps back towards $100 per barrel, long supply chains have once again come under strain,” Granite reported. “Will oil continue its advance or collapse again?”
There is also a threat from frail credit markets. “This theme has received much attention in the media and many believe this phase is behind us,” the firm said. “Not so. As the residential and now commercial real estate markets continue to deteriorate, banks will be faced with shrinking capital ratios and will likely tighten credit further.”
Structural changes are also dangerous. “The rules of the economic game will change with more frequency and at a quicker pace,” the company said. “As the unsustainable patterns of behavior (overpriced real estate, dependence on consumer spending, etc.) continue to unwind there will be calls to implement structures to maintain the unsustainable. A failure to confront new realities quickly by management will be a significant handicap.”
There has also been an increase in equity market pullback. “With the DOW breaking through 11,000 many experts are warning of a sharp pullback or even another collapse,” said Granite. “Companies that are considering public offerings or that depend on equity ratios for bank covenants should be considering this in their calculations.”
Finally, the issue of process degradation. “The recent spate of restructurings and layoffs have taken their toll on company business processes,” the firm said. “Staffs have already been cut and the only way to increase productivity and effectiveness is through process redesign and efficiency. Companies that risk process breakdowns may stumble during the most competitive part of the race.”