5 key trends shaping the manufacturing industry

For midsize companies, booming times bring big uncertainties

 

9 minute read

Key takeaways

  • Amid strong economic growth, many manufacturers are feeling optimistic about the future.
  • Yet high demand has come with shortages of labor, raw materials and components—and higher costs for all three.
  • To cope, companies are building resilience through bigger inventories, automation, reshoring, sustainable operations and more.

In normal times, keeping up with surging demand is a problem most companies would love to have. But these times, of course, are anything but normal.

 

Manufacturing is a key barometer of U.S. economic health, and the depth and breadth of the manufacturing rebound after the pandemic shutdowns suggests an economy moving from recovery to extended growth. Yet companies also face historic challenges as costs rise and raw materials, components and labor are harder to come by. Here, Abhijit Bhide, Managing Director, Diversified Industrials Investment Banking, at BofA Securities, discusses five essential trends driving the manufacturing industry, and how midsize companies are responding.

 

#1 Economic growth

 

Among manufacturers, high consumer demand has buoyed both the “winners” and “losers” that emerged during the pandemic. The companies that thrived—makers of indoor air quality equipment, healthcare, personal protective equipment, residential building products and materials—continue to see strong demand, while those that suffered—such as commercial construction, aviation and automotive—are benefiting from pent-up demand as workers return to offices and travelers return to the skies. As orders rise, manufacturers are increasingly confident that growth in a post-pandemic economy, despite uncertainties, will be prolonged. 

Almost nine out of 10 midsize manufacturers are optimistic about their company’s outlook, according to a recent industry survey.1

#2 Inflationary pressures

 

High demand and pandemic-related supply chain disruptions have created shortages of components and raw materials, affecting the makers of everything from computers and electronics to fabricated metals and automobiles.2 That has pushed up expenses for manufacturers, who also must deal with surging shipping costs.3  To lock in more predictable prices and ensure that their businesses remains a priority should supply disruptions persist, some manufacturers are signing multiyear contracts with suppliers. And many are passing along higher costs to their customers. In place of the traditional once-a-year pricing review, some are approaching customers multiple times throughout the year as conditions demand.

 

Labor costs are increasing, too. Manufacturers find themselves paying higher wages and benefits to attract scarce workers as the economy approaches full employment. And while the materials shortage could ease when pandemic disruptions end, a study by the Manufacturing Institute and Deloitte forecasts a continuing labor squeeze, with more than two million unfilled manufacturing jobs by 2030.4 Beyond providing better wages, many manufacturers are now offering signing bonuses for new workers, as well as retraining existing employees in “multi-skilling,” enabling them to serve in multiple roles.

 

#3 Technology investments

 

Robotics and automation may provide a longer-term answer to the labor problem, enabling manufacturers to maintain or increase productivity with fewer workers. Investment in automation is rising in subsectors such as automotive and aerospace components, refrigeration equipment and tool manufacturing, as the price of technology drops and the ability of machines to handle complex tasks increases. Mindful of budgets and of the need to keep production lines humming, midsize manufacturers are adopting robotics selectively. In existing factories, they may automate one strategic part of a production process at a time, focusing on complex assembly or welding tasks, and shifting skilled workers to other areas. Then, when the time comes to build a new factory or warehouse, or replace an old one, companies may take the opportunity to implement robotics more fully across the operation.

 

Meanwhile, investment in more advanced areas such as artificial intelligence and the industrial internet of things (IIoT) may be further down the road. Though the global IIoT market is expected to surpass $106 billion globally by 2025 (up from $76.7 billion in 2021), that growth is largely among major manufacturers.5 Midsize companies are watching closely, but most are waiting until prices come down and technology evolves to meet their specialized needs.

 

#4 Reshoring, insourcing and rethinking “just in time”

 

To stay resilient and productive in a post-pandemic economy, many companies are retreating from the low costs and convenience of the “just in time” supply chain model that flourished amid the rise of the global economy. Instead, they’re prioritizing resilience by maintaining larger inventories of crucial components and raw materials while also moving production closer to home. 

 

As many large U.S. companies “reshore” factories from Asian to North American locations, midsize manufacturers that can supply components to them may benefit. In a 2021 survey, 83% of manufacturers said they planned to add North American suppliers in the next year, compared with just 54% that had such plans in 2020.6 But midsize companies are also changing. Rather than buying subcomponents such as wiring or battery separators inexpensively overseas, many are making these subcomponents in their own factories—a process known as insourcing.

 

 

#5 Sustainability and a net-zero economy

 

Led by the United Nations, the World Economic Forum and other organizations, businesses, along with governments and nonprofits, are coalescing around the idea of a global economy that achieves net-zero carbon emissions by 2050.7 For a manufacturer of, say, lawn care equipment, this transition may mean retooling for electric motors rather than gasoline engines.

 

To help maintain business partnerships and financing, even companies that don’t need to rethink entire product lines are now looking to define clear environmental strategies and demonstrate measurable progress in conserving natural resources and reducing emissions. Large manufacturers increasingly demand that their suppliers adhere to environmental standards similar to their own. Open lines of communication with these partners can help manufacturers stay current as environmental standards evolve. And companies may be eligible for tax credits, rebates, government subsidies and other benefits by retrofitting existing plants or building new ones with equipment that runs cleaner and uses less energy.8       

To help maintain business partnerships and financing, even companies that don’t need to rethink entire product lines are now looking to define clear environmental strategies and demonstrate measurable progress in conserving natural resources and reducing emissions.

Looking ahead

 

While optimism about the future is widespread, capitalizing in a time of accelerating change will require careful planning, as well as closer communication with business partners. For example, while manufacturers may have previously relied on past orders to guide their planning, today they are likely to speak with their business customers more frequently, requesting demand forecasts looking six months or even a year ahead. Indeed, communication across operations has never been more important. Among the greatest lessons of the pandemic has been the need for flexibility. Manufacturers’ continuing conversations with their bankers could help ensure that they have the liquidity and capital they need to respond quickly to rapidly evolving challenges and opportunities.   

Abhijit Bhide | Managing Director, Diversified Industrials Investment Banking, BofA Securities