by Ryan Burke
EY is an IMA B2B Partner
We may be entering a period of renewed uncertainty, but you wouldn’t know it based on the growing confidence middle-market executives have in their prospects for 2019. Geopolitical issues? Trade tensions? A forecast economic downturn? These issues do not appear to be slowing middle-market executives down.
It’s not that they’re ignoring them. In fact, they identify a potential economic downturn as one of the key risks they face. Yet, they prefer to remain positive as they take advantage of ongoing global and local economic growth, opportunities to leverage M&A judiciously, and using technology to improve agility and gain a competitive edge.
Middle-market executives push full-steam ahead with double-digit growth plans
According to the EY Global Capital Confidence Barometer, 58% of middle-market executives surveyed say that their companies expect double-digit growth in 2019 — more than double the percentage in 2018. Their confidence sits atop a foundation of positive economic growth and strong macroeconomic fundamentals — more than 90% expect global and local economic growth to increase over the next 12 months; while more than 80% anticipate confidence in corporate earnings, short-term market stability and credit availability to improve.
Are the markets peaking? Are we at the summit with tougher times ahead? Certainly, there are signs that have economists and analysts expressing concern, but even so, middle-market executives are taking a full-steam ahead approach for now.
Interestingly, the smaller the middle-market company, the higher its confidence. 71% of growth companies between US$100m and US$250m say they anticipate double-digit growth, 42% of those suggest they see a growth rate of 16% or more in the coming year.
Geographically, the winds have shifted in the US’s favor, with 80% of US middle-market companies expecting double-digit growth. This contrasts with our 2018 survey, where the geographic drivers of growth tilted East, and the Asia-Pacific region led the way in growth opportunities. In our recent survey, only 39% of middle-market executives in the Asia-Pacific region have double-digit growth plans. Europe, meanwhile, sits in the middle, with 57% saying they expect growth in the double digits.
Middle-market executives are clear-eyed about the risks that lie ahead
For all of their confidence in their growth opportunities in 2019, middle-market executives acknowledge that there are also risks. While the percentage of middle-market executives concerned about a slowdown in economic activity impacting their growth plans has dropped (from 42% in 2018 to 33% in 2019), executives still see it as a top priority risk. The IMF downgrade of its growth forecast for the fourth time in 12 months (3.9% in July 2018, 3.7% in October 2018, 3.5% in January 2019 and most recently 3.3% in April 2019), may certainly be playing a role in keeping an economic slowdown on their risk radar.
Meanwhile, where many middle-market companies have traditionally viewed geopolitical risk simply as a cost of doing business, 19% now see geopolitical risk as a threat. Equally, 19% see as a key risk supply chain disruption, which may stem from global trade tensions and for example, from the retaliatory tariffs between the US and China, and the US and the European Union. According to EY’s Trade Barrier Impact Survey (October 2018), “84% of US executives impacted by tariffs are reviewing or have already made changes to their procurement strategy, global manufacturing footprint or global warehouse strategy/network design.”
Unsurprisingly, technology-driven competition has middle-market companies worried as well, with 31% identifying disruption from technologically-advanced competitors or competition from new entrants as significant challenges to growth. As sectors converge, and disruption from unexpected competitors continues to escalate, we expect these technology-focused competitive concerns to continue.
Middle-market companies invest in technology to improve agility and resilience
As a hedge against technology-driven competitors, and to improve their agility and resilience against risks that could negatively impact their growth plans, almost all middle-market companies (97%) indicate that they are planning a significant investment in technology in the year ahead. Investment spend appears to be split between acquisition and in-house development however when it comes to artificial intelligence (AI), the emphasis is now definitely on the latter.
Two years ago, when we asked survey respondents about their intended use of AI, 74% said they would never adopt it. One year later, 73% expected to deploy it within two years and now, in our most recent survey, more than 70% say they are planning to develop and deploy AI in-house.
Part of the push towards in-house AI development may be the need to come up with bespoke solutions that integrate with legacy systems. However, middle-market companies also see in-house AI as a means of gaining competitive advantage.
The emphasis of this technology development is spread equally across multiple priorities — creating new products and services, improving internal efficiencies, enhancing the customer experience and bolstering data access and analysis — the one area that stands out is risk reduction (including cybersecurity). In 2018, only 7% of middle-market executives said they would be investing in technology that reduced risks. This year, the percentage has more than doubled, with 19% now looking to invest in technologies that can help them manage and mitigate their cyber risks.
Middle-market executives turn to M&A to tackle disruption and accelerate growth
For many middle-market executives, M&A appears to be a means to acquire capabilities, tackle disruption and exploit fast-growth opportunities. 47% of middle-market executives say they expect their companies to pursue M&A over the next 12 months, with 90% anticipating that the M&A market will improve during the same time frame.
Looking at where middle-market companies are planning to invest their money, again, geographic appetite has tilted from East back to West with middle-market executives identifying the US as their top destination, followed by the UK, despite the ongoing uncertainty around Brexit. Perhaps to hedge their bets against a still possible, if now unlikely, hard Brexit, middle-market companies also see Germany and France as top destinations of choice. However, despite mixed recent economic indicators, China still appears (at no.4) in the top five most attractive destinations for M&A investment.
In terms of sector focus, technology companies (54%) seem to have the biggest appetite for dealmaking, followed by telecommunications (49%) and industrials (49%).
Looking ahead, middle-market companies will continue to build resilience even as they keenly pursue fast growth
As we look ahead, we anticipate that middle-market executives will focus on achieving their ambitious growth plans through a combination of seizing fast-growth opportunities through M&A, and strengthening financial discipline, managing their supply chains and implementing AI.
In finding the right balance between growth and investment, middle-market companies could achieve their aggressive growth rates, improve their agility and build resilience while navigating uncertain times ahead.
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