COVID-19 and industrial manufacturing

COVID-19 RESOURCE HUB  |  Financier Worldwide

MANUFACTURING SECTOR

COVID-19 has had severe financial and operational consequences for companies of all sizes – and industrial manufacturers have not been spared. The pandemic has forced manufacturers to rethink risk management, contingency plans, workforce safety protocols, labour practices and operating processes, among others.

In addition to these issues, manufacturers have also had to contend with material shortages. According to a McKinsey survey of manufacturers in Asia, for example, shortages were a common issue (reported by 45 percent of respondents), along with steep drops in demand (41 percent) and worker unavailability (30 percent).

It could be years before levels of activity return to pre-crisis levels. Following the 2008-09 global financial crisis, for comparison, it was three years before normality was restored.

Different subsectors of the industry will likely be affected in different ways, however. According to Daniel Kronenwett, a partner at Oliver Wyman: “Construction machinery and intralogistics equipment, for example, are likely to feel much less severe effects than they did during the financial crisis due to expected government infrastructure stimuli and an increase in e-commerce. On the other hand, companies in the machine tools, plastics machinery, and steel production equipment sectors will feel the effects much more strongly. The reasons for this are overcapacities that already existed before Coronavirus (steel) and the acceleration of disruptions (E-Mobility, sustainability), which are leading to restrictive investment behaviour, such as in the car market, which is important for machine tools.”

The story so far

In the first half of 2020 there was a huge contraction in industrial manufacturing activity. Across the EU-27 the total loss of industrial production between February and April amounted to 26.9 percent, according to Eurostat. By May, however, as economies began to reopen or loosen restrictions, production started to rise, and by September it had increased by 27.1 percent from April.

In the US, in January 2020, the manufacturing purchasing manager’s index (PMI) had moved into expansion for the first time in six months, according to Deloitte. But by April, it had dropped to 41.5, indicating significant contraction and the lowest levels of activity since the Great Recession.

US industrial production registered a month by month decline of 4.5 percent in March, followed by a deeper decline of 11.2 percent in April, as many factories were shut down or forced to operate at limited capacity. Based on the Oxford Economic Model, Deloitte expects US manufacturing GDP to decline by 14 percent in 2020.

From respond to recover

There is, of course, significant uncertainty about how long COVID-19 will be a factor in the global economy. Efforts to produce a vaccine are ongoing but it is likely to be some time before things get back to ‘normal’, if they ever do.

Nevertheless, the second half of 2020 is expected to see many manufacturers undertake recovery strategies in earnest. Though such efforts may be hindered by additional ‘waves’ of COVID-19, many companies will hope to enter the ‘next normal’ stronger than before, if possible.

Technology, particularly automation, may hold the key to reviving domestic manufacturing, at least in part. Digital technologies can help mitigate the effects of COVID-19 disruption in multiple ways, from boosting employee safety and operational efficiency, to improving asset productivity and product quality.

Rapid advances made in automation and robotics in recent years have drastically increased productivity across a number of manufacturing processes. This will assist the drive to revive domestic manufacturing. Industry 4.0 – which includes connectivity, advanced analytics, automation and advanced-manufacturing technologies – was already gaining prominence prior to the pandemic, and is expected to accelerate.

Supply chain management will be another key area of focus. According to a McKinsey survey of manufacturing and supply-chain professionals, 93 percent plan to focus on the resilience of their supply chain, while 90 percent plan to invest in talent for digitalisation.

Although during times of normality ‘just in time’ production processes enable manufacturers to keep costs to a minimum, global supply chains can be highly intricate and do not easily withstand critical disruptions such as those caused by COVID-19.

Historically, demand forecasting, supply planning, production planning, logistics planning, and sales and operations planning have been handled in separate silos. However, the prolonged interruption to global trade flows and value chains have required manufacturers to break these silos, according to McKinsey. “As a result, the potential impact from optimised planning is more evident. But it also requires a more sophisticated analytical approach, and collaboration across multiple functions and stakeholders.”

Manufacturing processes, by their very nature, require some degree of human oversight, such as machine maintenance or services provided by third parties. With social distancing and other health and safety requirements paramount, the adoption of remote diagnostic, management and collaboration tools is set to increase.

Without a crystal ball we cannot forecast exactly how the industrial manufacturing sector will be impacted by COVID-19, but it is surely entering a new phase. Incidents like the global financial crisis tend to have a profound affect lasting years. COVID-19 will be no different, and technology will likely form a core component of the new normal.

© Financier Worldwide

BY

Richard Summerfield