Manufacturers prepare for risks, both known and unknown
INSIGHT ARTICLE |
Manufacturers always face risks at home and abroad, whether geopolitical, business, tax or cybersecurity. Yet 2017 promises to bring even more challenging policies and laws—including potential changes in U.S. trade, regulations and tax policies—creating new uncertainty and new risks.
Entering overseas market can give rise to fears that the company’s bottom line will suffer, particularly given economic and currency fluctuations, the complexity of foreign regulations and the difficulty of managing operations overseas. Entering new markets brings increased competition, not just from traditional, large manufacturers, but also from entrepreneurial micromanufacturers that have arisen with the advent of online collaboration and the ready availability of innovative software and hardware. The impact of fraud and data security breaches can be profound at small and midsize companies, and not just for the bottom line: The costs to a company’s reputation can be significant.
Risks may be found in customer relationships, reliance on certain vendors, production challenges, material pricing fluctuations; the list is long. Addressing risks only when they become problems is too late. A company must make an assessment of their potential risks and implement strategies to manage them. Executives must continually plan for and anticipate emerging risks so they don’t interrupt growth and profitability plans—or threaten their companies’ survival.
The latest RSM Monitor survey found that the top barriers to international business for U.S. manufacturers in 2016 were currency fluctuations, the global economy and foreign regulations (Figure 1).1 But factors that were less worrisome in 2016 could prove far more dangerous in 2017.
For example, if the new U.S. administration makes good on promises to reduce imports via tariffs or tax law, U.S. manufacturers with global portfolios could face closed markets at home and abroad. The impact would be dramatic: U.S. manufacturers sold on average 29 percent of their goods outside the country in 2016, and purchased an average 35.5 percent of their goods and materials from non-domestic sources.2 The Petersen Institute for International Economics found that of the top 1 percent of importers (around 1,300 firms):
- 96 percent also export
- 53 percent are in the top 1 percent of exporters
- Account for 60 percent of U.S. exports and employ almost 13 million people3
U.S. manufacturers may also experience fallout from the new political landscape, as foreign markets and governments react to U.S. regulatory and diplomatic decisions. Even in placid times, manufacturers are challenged by shifting global compliance and reporting requirements; the pace of change in regulation and trade policies will likely quicken in 2017. The new White House administration wants to encourage increased production of manufactured goods within the United States. Legislation could positively or negatively affect individual manufacturers or certain sectors depending on the volume of goods imported for sale or for use in manufacturing processes.
Manufacturing executives can mitigate or even prevent many business risks. For example, they can hedge against volatile commodity pricing with futures and forward contracts, although some executives are hesitant to do so, due to pricing and demand volatility. They can secure talent by offering competitive compensation packages and pursuing unique ways to connect with potential employees. And they can establish supply chain monitoring and audit policies to ensure vendor compliance to regulatory and customer requirements.
Yet without a strategic plan to identify and minimize business risks—including market disruptions, rising health care costs, and supply chain breakdowns—many manufacturers are vulnerable. The RSM Monitor found that only 29 percent of U.S. manufacturers say that business risk mitigation initiatives are likely in the next 12 months.4 As noted earlier, risk mitigation cannot occur when you have a problem; alternative solutions need to be well thought out in advance.
Research by insurance and asset-management firm Allianz found that business interruptions (including supply chain disruption and vulnerability) and market developments (including volatility, mergers and acquisitions, and market stagnation) are among the top risks for 2017.5 Any manufacturer affected by the California port strike in 2015 understands the risks inherent in an extended supply chain.
Tax risks in 2017 may be balanced by tax opportunities. Import taxes could hurt U.S. exporters, yet benefit those preparing to make asset or facility decisions—i.e., by building capacity domestically rather than in other countries. Potential revisions to the U.S. tax code—including closed loopholes for overseas operations—will make capital-investment decisions a top agenda item for manufacturers this year and next.
U.S. manufacturers are weighing the impact of other potential tax modifications, too. A reduction of the corporate tax rate from 35 percent—highest among industrialized countries—could provide a boost to earnings. An expansion of research and development tax credits would also lift bottom lines and improve cash flow. How manufacturers leverage these changes in 2017—through increased investments in facilities, product development, or mergers and acquisitions—may determine corporate growth trajectories for years to come. While tax reform will take time and may include phased-in provisions, it will ultimately affect companies of all sizes—with even greater effect on those operating internationally.
A cybersecurity breach is not a question of “if,” but when. Yet only 35 percent of U.S. manufacturers report that cybersecurity risk mitigation initiatives are likely in the next 12 months. This is especially troubling given that 33 percent of U.S. manufacturers have already experienced unauthorized access of company data and systems—or don’t know if unauthorized access occurred. Many U.S. manufacturers have not taken common actions to enhance information technology and data security, and 10 percent have taken no actions (Figure 2).6
Every company should have plans to minimize cyberattacks: restricting digital access to those roles and functions that require it; defining procedures and processes that make unauthorized access less likely (e.g., bring-your-own-device policies); and updating technologies to stay ahead of hacker capabilities. Technology assessments must extend beyond enterprise systems to plants and warehouses, including internet of things technologies that communicate confidential production and shipping data across the supply chain.
Equally important are plans to rapidly detect breaches and for business continuity following an incident, including forensic analysis, meeting post-breach regulatory requirements, and notification of business partners and third parties (whose systems and policies may have contributed to the breach).
Risks are an integral part of business growth, but not all risks are created equal. Management and mitigation efforts must be calibrated according to the likelihood of exposure and the potential downside from an incident. An enterprise risk management framework can help to strategically weigh risks while also:
- Identifying and quantifying risks
- Engaging senior executives and board members in risk identification and management
- Establishing rigorous risk-management processes
- Applying risk-management technologies
- Evaluating changing risk environments
A robust risk management program allows manufacturers to mitigate or avoid losses by facilitating decision-making in the face of emerging risks. Most important, it helps executives to quickly identify emerging risks—and appropriate responses.
1. RSM Monitor, 2016.
3. J. Bradford Jensen, “Importers are Exporters: Tariffs Would Hurt Our Most Competitive Firms,” Peterson Institute for International Economics,” analysis of 2007 U.S. Census Bureau data, Dec. 7, 2016.
4. Rated 4 of 5 on a scale of 1-5 where 5 equals “Highly likely.”
5. Allianz Risk Barometer, Top Business Risks 2017, Allianz Global Corporate & Specialty, January 2017.
6. RSM Monitor, 2016.