The COVID-19 pandemic is already ushering in a host of challenges to US industrial manufacturers, especially those that depend on workers whose jobs cannot be carried out remotely. About 80% of manufacturers expect that the pandemic will have a financial impact on their business, according to a recent survey of the National Association of Manufacturers (NAM). That is significantly higher than the 48% of cross-industry companies that are concerned about the same impact, which is based on CFO responses to a recent PwC survey.
The majority of those in the manufacturing sector (53%) expect COVID-19 to impact their operations, the NAM survey reported. Indeed, we’re already seeing these grim expectations become a reality in the sector, amid plummeting oil prices and demand, supply chain bottlenecks, spending slowdowns and jitters over the credit markets.
Some major industrial companies have closed facilities and are mulling the extent of layoffs to help curb the spread of the virus, as well as for economic reasons. Clearly, the manufacturing sector, which employs some 13 million workers in the US, is poised to be hit hard during this outbreak, primarily for two reasons: First, many manufacturing jobs are on-site and cannot be carried out remotely. Second, slowed economic activity has reduced demand for industrial products in the US and globally.
Safeguarding consumer and workforce health is priority number-one among businesses and governments. Plant closures (full or partial) could continue to be necessary for manufacturers in hard-hit regions for a prolonged period. For companies vulnerable to a viral outbreak within their ranks, this would be a critical time to explore a proactive deployment of automation technologies (e.g., collaborative robotics, autonomous materials movement, industrial internet of things) to decrease worker density throughout their operations.
Uncertainty surrounding the duration (or even a deepening) of these conditions clouds any insights into how a recovery could unfold for the industry. Indeed, many beleaguered companies in manufacturing could be eligible for government stimulus support. But there is a real possibility that the crisis will result in bankruptcy for some manufacturers, as declining demand, production and revenues, along with debt obligations, take their cumulative toll.
Most companies already have business continuity plans, but those may not fully address the fast-moving and unpredictable variables of an outbreak such as COVID-19. Typical contingency plans ensure operational effectiveness following events like natural disasters, cyber incidents and power outages, among others. They don’t generally take into account the widespread quarantines, extended school closures and added travel restrictions that may occur in the case of a health emergency.
The coronavirus outbreak is causing widespread concern and economic hardship for consumers, businesses and communities across the globe. The situation is fast-moving, with widespread impacts. We’ve prepared some general guidance on COVID-19: What US business leaders should know: crisis management and response, workforce, operations and supply chain, financial reporting, and tax and trade.
Here is our take on some issues that companies in your industry may face:
Manufacturers are facing continued downward pressure on demand, production and revenues as the COVID-19 pandemic intensifies. Additionally, many are facing cash-flow liquidity challenges and difficulties in managing debt obligations.
Therefore, the industry may see some manufacturers struggle to recover — and even declare bankruptcy — depending on how robust and effective any government intervention and support may be, and how long the COVID-19 crisis lasts.
The industry is especially vulnerable given that the bulk of its workforce is employed in on-site jobs that cannot be done remotely. Additionally, given the nature of the industry, manufacturers should be creating social distancing in workplaces that are typically worker-dense (e.g., manufacturing plants, warehouses, material movements and logistics, etc.)
Additionally, manufacturers should be prepared for major global supply chain disruptions. This will affect not only the OEMs, but will also likely ripple throughout the supply chain, affecting suppliers by driving reduced demand for materials and components. Supply chain partners may experience their own challenges and may not be able to fulfill orders on time — or at all — during the crisis.
Prepare for a prolonged recovery. Given the unknown variables of how the COVID-19 pandemic will play out and when containment will be achieved, industrial manufacturers should brace for a trying period and plan for a recovery that may not arrive for at least one year, based on prior crises the industry has experienced.
Manufacturers can expect to enter a new era of closer public-private coordination in order to strike the right balance between producing critical products and protecting public health.
If they haven’t done so already, manufacturers should put in place immediate and contingent safety measures for their employees, and should decide which functions can be carried out remotely, if an outbreak were to occur within their ranks.
The sector will also likely expect a prolonged reduction in capacity and cost structure, which may translate into possible staff reductions and related measures, as economic activity and commercial aviation decline. Airlines face not only travel restrictions, but also cautious travelers who are staying close to home.
Considering the widening outbreaks of COVID-19 affecting their workers, companies may need to outsource some corporate functions (e.g., moving IT to the cloud or shifting internal non-core operating functions to contractors). Such changes can reduce operating costs and eliminate maintenance capital.
Manufacturers should expect continued weakening links in their supply chain, as some vendors and suppliers will likely face operational or financial struggles of their own. Brace for continued supply chain bottlenecks both nationally and internationally, especially in those jurisdictions hardest hit by COVID-19.
The deeper into the supply chain, the greater the impact of the outbreak is likely to be. Manufacturers with global supply chains are likely to find that Tier 2 and especially Tier 3 suppliers are most affected by disruptions related to the pandemic. While many large manufacturers have instant online visibility into top-tier suppliers, the challenge grows at lower levels.
As with previous downturns, the industry will likely move quickly to cut discretionary and capital spending to support operations. A key question for all companies will be: Do you have the financial reserves to weather the storm — or potentially to capitalize on the tumult in the industry?
Disruption in the sector is expected to lead to numerous financial disclosure implications. Stakeholders are making it clear that they expect transparency from companies and disclosures about actual and anticipated impacts, and, most important, the risks and vulnerabilities to the business.
Manufacturers must respond to and plan for changes to supply chains and workforce global mobility due to COVID-19. Each of these changes requires careful consideration of potential tax implications, and companies ought to consider these implications now.
Some industrial manufacturers may be contenders for government-provided financial assistance. Extending lines of credit, reducing infrastructure costs, providing short-term funding, reducing the tax burden and offering supply chain assistance are all measures that governments are likely to explore.
Multinational companies should expect potential cash-flow constraints from overseas operations — including cash repatriation complications and irregularities. Cash could also be bottlenecked when goods are purchased but not supplied (or delayed and stranded). Such cash bottlenecks will likely occur in regions most affected by COVID-19.
As the COVID-19 crisis continues to expand, manufacturers are facing challenges on numerous fronts. At the outset of any major commercial disruption, companies will be looking for immediate measures to keep their workforces safe and their businesses solvent. But companies should also be looking to the future. Which assets, people, capabilities will they need or want then?
Manufacturers will also need to look beyond their own economic viability. They will need to coordinate closely with the public sector to forge plans that are essential to both public safety and the solvency of their workforce, while keeping the lights on in their operations. This will be relevant to manufacturers of critically important components, parts and finished goods in areas of importance to the nation — especially those supplying to critical infrastructures (e.g., energy and power, transport, communications, food and agriculture, etc.). Indeed, this will be an enormous load to carry, and, for many companies in the sector, it will mean taking every measure possible to survive now and thrive in the future.
Most companies in the sector will need to take concrete steps to succeed in this challenging climate. Some will be austere, but austerity measures should be tempered to preserve long-term objectives. The best approach is likely to include making surgical cuts, while balancing short- and long-term needs.