A Real Economy publication

Manufacturing industry outlook

Feb 19, 2024

Key takeaways

Chinese deflation may put pricing pressure on global industries such as steel, EVs and batteries.

Auto manufacturers are rethinking strategies to attract and retain talent amid labor disruption.

Manufacturers need to understand how new technologies can help them achieve ESG goals.

Manufacturing trend #1: Deflation in China

One way China is dealing with its softening economy is by exporting its massive excess production capacity of goods at lower prices to keep its economic engine running. The knock-on effect may further lessen inflation in the U.S. and other countries that import goods from China, but the impact may be muted.

Less-expensive Chinese exports to the world may not equate to a broad deflationary lever in 2024 for countries with higher inflation, considering those exports were not the principal cause of inflation. The ultimate price the consumer pays in an end market includes costs for transport, warehousing, tariffs, and wholesale and retail profits.

However, because China is a leader in so many sectors, Chinese deflation could put pricing pressure on certain global industries such as steel, electric vehicles, batteries and solar products wherever they may compete with imports. Middle market businesses should expect to see falling prices for some of these inputs and margin pressure wherever they compete directly.

Manufacturing trend #2: A changing labor landscape

Automotive manufacturers and their suppliers are grappling with labor shortages and increased union activity in the midst of a transformation towards electric vehicle (EV) production. The sector has faced various challenges in recent years, from supply chain disruptions to chip shortages.

Despite these hurdles, the labor market in the United States and Canada has remained resilient, with low unemployment rates. However, wage growth in the automotive sector has lagged behind other industries, leading to labor actions and strikes.

The transition to EV production adds complexity to workforce matters, including concerns about job security and the need to attract and upskill workers for new technologies. It also poses financial challenges as automakers shift from high-margin internal combustion engine vehicles to EVs.

Manufacturing trend #3: Technology and ESG

Middle market manufacturers are embracing advanced technologies to achieve environmental and sustainability goals. Cloud platforms offer scalability and emissions reduction potential, as data centers contribute to greenhouse gas emissions. Leading cloud providers, like Amazon Web Services and Microsoft, are committed to ESG goals. Sustainability is gaining attention from investors and regulators, making it crucial for organizations to measure and report on their ESG efforts.

Companies are also investing in AI-focused training programs to upskill their workforce and using AI in customer service to provide personalized experiences. These AI solutions have become a strategic priority in the energy sector, with many companies exploring their use through pilots and full-scale adoption.

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