5 manufacturing trends to watch in 2020
Technology and trade are among the trends worth watching this year
INSIGHT ARTICLE |
A slowing global economy, volatile trade agreements and ongoing labor shortages are creating headwinds for manufacturers—especially on the sales front. Nevertheless, innovative technology, stable overall U.S. economic growth and a focus on driving value to stakeholders offer multiple prospects for sustainability and growth. Looking ahead, manufacturers will need to thread the needle between uncertainty and opportunity:
1. The inevitability of digital transformation
80% of manufacturers say that digital transformation has become a higher strategic priority in the past three to five years.1
There is strong agreement that digital transformation is critical for remaining relevant, competitive and viable. Success requires acceptance that digital transformation—or, as some put it, digital evolution—is an ongoing project requiring a significant change-management effort, active top senior management buy-in and enterprise-wide participation.
Enabling adoption, assessing returns on investments, predicting future needs and aligning legacy systems are the most challenging considerations for middle market manufacturers, according to a recent digital transformation survey conducted by RSM US. Despite understanding the advantages of technology, many manufacturers are hesitant to change course or do not have a clear picture of the ROI. Yet more than 80% felt that their digital priorities will change over the next three to five years, setting the stage for challenges to strategic investment priorities.
Data is critical; running a business without product segmentation and profit analysis is like guiding the Costa Del Mar cruise ship. To meet their digital needs, a plurality of manufacturers are hiring experienced specialists as well as developing apprenticeship and certification programs as their leading enablement strategies in the digital space.
2. Headwinds for supply chains and logistics
In spite of a challenging trade and tariff environment, revenues and earnings remain strong for middle market companies, with domestically focused industrial companies experiencing greater growth than those that sell on the global market.2 Moreover, coupled with a stabilization of commodity and input prices, domestic producers had a clearer picture of costs. This trend is expected to continue through the first half of 2020. Rising import and raw materials costs may force some companies to assess their global strategies.
Many companies have made changes in their global supply chains, finding new suppliers in lower tariff countries, such as Mexico, and considering producing more in the United States. However, labor challenges and the uncertainty of future trade deals made management of supply chains much more difficult in 2019. Heading into 2020, there is little clarity regarding when trade deals with China, Mexico, Canada and others will be resolved.
Adding complications to the trade front, on Jan. 1, 2020, the new Marpol Annex VI fuel regulation will go into effect. The regulation addresses air pollution from ocean-going ships, establishing limits on emissions of sulfur and other contaminants. The concomitant demand for compliant, low-sulfur fuels is expected to increase their prices. Additional costs are expected to be incurred by shipping companies retrofitting their fleets to accommodate the new fuels. While the ultimate impact is uncertain, the costs associated with the new regulation pose a risk to profitability.
In addition, the labor shortage, combined with new regulations such as the electronic logging device mandate, has put increasing pressure on trucking—the industry sector that moves nearly 71% of all freight tonnage in the United States. A driver shortage is expected to reach more than 200,000 by 2022, according to the American Trucking Association.
3. Technology and the workforce of the future
Innovation is driving profound change on the factory floor as mechanical and electrical processes are increasingly being managed by sensors and robotics. Manufacturers, ever mindful of cost structure, are increasingly taking advantage of production analytics to streamline their operations and, ultimately, to save money. Taking advantage of these innovations will require a newly skilled and flexible workforce.
This puts workers at risk. In fact, a 2017 Ball State University study found that approximately half of American jobs across the income and educational spectrum are at risk for automation, particularly among low-wage, low-skilled workers.3
Manufacturing openings continue to hover around 500,000 unfilled jobs, with unemployment at 20-year lows. Finding skilled workers has been a challenge with so many competitors for an increasingly limited talent pool and fewer people choosing manufacturing as a career option. Over the next decade, 4.6 million manufacturing jobs will likely be needed—just over half of which are expected to go unfilled due to the skills gap, according to the National Association of Manufacturers.
Apprenticeship programs are gaining in popularity, but only with less than 40% of manufacturers. Smaller-revenue companies often do not have the means to hire skilled talent or create training programs; to advance their digital goals, only 7% of manufacturers develop a training manual for employees. When it comes to the cutting-edge offerings necessary to attract and retain the best and the brightest, middle market manufacturers cannot afford to lag behind their larger competitors.
Companies are also looking to partnerships, outsourcing via contract management and retraining existing employees to address the skills shortfall.
4. Tariffs and the uncertain regulatory environment
44% of middle market executives said new tariffs posed one of the biggest risks to their business.1
Manufacturing growth will continue to be challenged by the significant uncertainty surrounding ongoing trade negotiations with China. In addition, the USMCA trade deal with Mexico and Canada is limping toward passage, with finalization uncertain in late 2019. To make matters worse, there are additional tariffs on auto and other imports that continue to create cost pressures on U.S. manufacturers and distributors.
Due to multiple rounds of tariffs on selected goods, U.S. tariff revenues set a record-high $50 billion for customs duties in 2018, according to the American Farm Bureau Federation. Furthermore, as of April 2019, the U.S. government collected $22 billion in tariffs for the year, an increase of 78% from prior years.
Not surprisingly, some companies are holding off new investments due to the increasing costs and lack of clarity created by the dispute. This was on display in July 2019, when U.S. imports of capital goods fell to their lowest level since 2017, along with new orders for capital goods, which posted their first year-over-year decline in three years.4
Some companies have passed along tariff costs and others have negotiated lower costs with their foreign suppliers to absorb some of the increase. However, in many cases multiple changes in tariff rates have caused profitability to suffer. Instead of focusing on future challenges and opportunities, companies are devoting a disproportionate amount of management time to address very real, but current, issues regarding sourcing, selling prices and margin management.
5. Slowing global trade
According to the RSM US Middle Market Business Index, as overall global economic growth has slowed, the manufacturing sector has continued to contract. Tariffs are affecting business results. Forward-looking indicators in the survey’s subindices denote some risk for middle market businesses in the months ahead.
Among the G-20 countries—which represent approximately 74% of global gross domestic product—as of November 2019, around 70% have a PMI registering below 50, the benchmark for expansion. The ISM index treaded into contraction during four straight months in late 2019 in the United States as well as in Europe, which, after Canada and Mexico, is the largest regional market for the U.S. industrial sector. The European market remains compromised by weakness in German manufacturing.
Industrial companies are struggling through extremely uncertain times amid the volatile global geopolitical and macroeconomic climates. The global slowdown in economic activity may ultimately harm them even more than the new tariffs. Coupled with a weaker U.S. growth forecast for 2020, companies are using technology to drive connectivity with customers and generate incremental sales growth. In prior years, we’ve noted that global companies have more opportunity for revenue growth. Given the uncertainties today, U.S.-focused companies may be better positioned to drive revenues than those investing in foreign markets. That will likely change at some point, but exactly when the tide will shift is not clear as we head into the next decade.
1 RSM US Digital Transformation Survey, 2019.
2 E. Altman, “Earnings in the U.S. Middle Market grew by more than 13% in Q3 2019” (Q3 2019) Golub Capital Middle Market Report.
3 “How Vulnerable Are American Communities to Automation, Trade and Urbanization?” (June 19, 2017) Ball State University Center for Business and Economic Research, the Rural Policy Institute’s Center for State Policy.
4 R. Pickert, “U.S. Trade With China Fell in July Despite Truce in Tariff War” (Sept. 4, 2019) Bloomberg.