A Real Economy publication

Manufacturing industry outlook

May 31, 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: Priorities for manufacturers adapting to the new economic environment

Industrial companies face a shifting economic landscape, with higher costs of capital, long-run inflation, continued risks of supply shocks and globalization evolving into regionalization. The emergence of this new regime, alongside softer demand in certain manufacturing sectors, is forcing businesses to rethink how they create and sustain enterprise value.

Even though conditions may be improving, companies need to adapt to the new norm of higher rates, higher inflation, constrained resources and an overall higher level of economic uncertainty. These factors have led to persistent margin pressures, even as supply chain challenges and materials costs have eased. Strategic planning now requires integrating the higher cost of capital into decision making, emphasizing the need for more disciplined capital allocation, smart investment choices and increased focus on operational strategy and excellence.

Manufacturing trend #2: Aerospace manufacturing adapts to California’s GHG rule

The aerospace sector is navigating the shift toward carbon neutrality and an increasingly stringent regulatory environment against a backdrop of concerns surrounding recent aircraft safety failures during flights.

Aerospace manufacturers have faced escalating costs arising from labor shortages, IT investments and the need for higher-quality materials. Now, they have the added burden of adapting to regulations such as new California greenhouse gas emission rules and the Securities and Exchange Commission’s new climate-related disclosure requirements. This confluence of factors is exerting unprecedented pressure on the sector, setting the stage for a period of intense transformation.

Manufacturing trend #3: 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.

RSM contributors

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