Manufacturing and COVID-19: limiting the impact

COVID-19 RESOURCE HUB  |  Financier Worldwide

MANUFACTURING SECTOR

The manufacturing sector – under pressure in recent years due to uncertainty over Brexit, deteriorating global economic conditions and heightened trade tensions, among other factors – is grappling with a new adversary: the reality of coronavirus (COVID-19).

Prior to COVID-19, governments across the globe had introduced numerous initiatives designed to encourage the manufacturing sector – which accounted for nearly 16 percent of global GDP in 2018 – including Make in India and Made in China (MIC) 2025.

Launched in 2015 to encourage the production of goods in India, Make in India aims to reduce the country’s dependency on exporting nations by producing goods domestically. Since its launch, FDI in India has followed an optimal trend. During the period, April 2014 to March 2019, FDI inflow in India was $286bn, nearly 46.9 percent of the overall FDI received in the country since April 2000 ($592bn), owing to investment-friendly policies and opening of FDI allowance in several sectors.

As far as China’s MIC 2025 initiative is concerned, this is the first stage of a larger three-step strategy to transform the country into a leading manufacturing power. The initiative seeks to move China up the manufacturing value chain by utilising innovative manufacturing technologies or smart manufacturing.

However, following the outbreak of COVID-19, global FDI inflows witnessed a sharp decline. According to an estimation by United Nations Conference on Trade and Development (UNCTAD), COVID-19 could cause global FDI to shrink by 5 to 15 percent, due to the downfall in the manufacturing sector coupled with factory closures.

Further illustrating the depth of the crisis facing the sector is EY research – encompassing the views of more than 2900 executives in 45 countries, 70 percent of whom were chief executives, chief financial officers and other C-suite-level executives – which notes that: (i) more than half (52 percent) of global sector executives are taking steps to reconfigure supply chains as exposures were revealed, with 45 percent re-evaluating; (ii) most manufacturers (82 percent) expect hostile M&A activity to rise on the back of lower valuations; and (iii) a majority (53 percent) also expect a ‘U-shaped’ recovery extending into 2021.

In addition, EY notes that COVID-19 is also shaping global manufacturing leaders’ strategy when it comes to the management of people and processes. More than two-thirds (69 percent) are already taking steps to change the way they manage their workforce or are re-evaluating their current approach. At the same time, EY found that the speed of automation and digital transformation in the sector is set to increase considerably, with more than two-thirds of manufacturers evaluating or already taking steps toward transformation on both fronts (78 percent and 67 percent, respectively).

“Manufacturers are working rapidly to limit the impact of the already tragic human cost of COVID-19 on livelihoods,” says David Gale, global advanced manufacturing transactions leader at EY. “The first step is going to be tackling supply chains, which have been left dangerously over-exposed in many industries. As this unfolds, we can expect a shrinking of supply chains for the long-term, with more key components made locally. The term ‘unprecedented’ can be overused, but I think it is perfectly apt in this situation.”

The survey also shows an expectation that the crisis will reshape what is considered an attractive target, with nearly a third (32 percent) saying they will prioritise business resilience when evaluating a transaction. “M&A drivers on both sides of manufacturing deals are likely to be transformed in the post-COVID environment,” continues Mr Gale. “Sellers are looking to rebuild depleted cash reserves, while buyers may be looking for a bargain with valuations dropping.

“Any buyer, however, will be looking closely at the resilience of a business when it comes to assessing a deal in the post-COVID world,” he continues. “We can certainly expect a more hostile environment in the coming year, and perhaps beyond, which will see as much activity from private equity as it will from corporate buyers.”

While governments are looking at ending the COVID-19 lockdown with a gradual sector-by-sector approach that could see vital industries such as manufacturing get back to work before less critical ones like entertainment, the impact of the pandemic on manufacturing will nevertheless be felt for years to come.

Whatever the approach taken by governments, like so many sectors, damage limitation is the name of the game for manufacturers at present.

© Financier Worldwide

BY

Fraser Tennant