COVID-19: What it means for industrial manufacturing

Practical steps for responding to the coronavirus crisis

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.

Possible issues:

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.

Steps to consider:

• Assess how profitability, loans, revolving credit and cash flow reserves can support ongoing operations in a low-revenue environment — in light of current (and forecasted) cash operating expenses, taxes and other cash expense items.
• Review capital and corporate cost budgets to identify not only marginal investments, but also discretionary items that can be cut. 
• Consider divesting non-core or underperforming assets — or assessing M&A prospects — as a potential source of cash.
• Consider refinancing debt.
• Work closely with municipal, state and federal governments to coordinate plans on worker and consumer safety, while keeping mission-critical productions running.

Possible issues:

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.

Steps to consider:

• Ensure your employees are safe and know how to protect themselves. Institute sanitation rules in the workplace, and assess mobility policies to encourage remote working, where possible and necessary. Instruct employees who are sick to stay home until they are better. Eliminate non-essential travel.
• Discuss change management and flexible work arrangements. Expect a learning curve as companies devise new ways of working that involve more remote workers and automation on the factory floors. 
• Assess strategies and plans to retain and deploy the workforce during the slowdown, and establish risk mitigation programs for employees who still need to work on-site. Invest in education campaigns for front-line employees who have to be on-site to ensure they know how to minimize the spread of disease and what to do if they’re feeling ill. 
• Gather necessary data on employees (geography, visa, etc.) and track movements during the crisis.
• Outsource functions that can trim operating costs.

Possible issues:

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?

Steps to consider:

• Immediately implement sanitation measures and reconfigure workspaces for safety. For example, stagger shifts, increase distance between workers and ban visitors on factory floors.
• Evaluate automation solutions to reduce the number of workers on the factory floor. Manufacturers that have piloted solutions should ramp them up carefully, while others should start exploring them. Focus on these three areas: autonomous materials movement (e.g., autonomous forklifts and cranes and high-payload drones); automation of repetitive tasks, including assembly (e.g., industrial robotics and mobile/collaborative robots); and predictive maintenance (e.g., using IoT and AI for predictive maintenance). 
• Transfer new knowledge throughout the supply chain. Update best practices as the situation evolves and assist suppliers in implementing them. This requires increasing transparency in the supply chain through daily self-reporting with all critical suppliers. 
• Gain a keener, real-time situational awareness of your supply chains, especially those affecting critical materials and components. Identify potentially weak links in the supply chain — especially in regions already affected and those likely to be impacted by COVID-19.
• Prepare for supply chain pivots that could require identifying alternative suppliers.
• Prioritize cybersecurity and system resiliency. The significantly higher levels of remote access to core systems that will be required could make employees and management more susceptible to social engineering efforts in the midst of a crisis. 
• Seek alternatives that allow you to preserve relationships, co-create solutions and sustain both businesses. It’s possible that a third-party provider could prove to be a critical point of failure in creating a response to COVID-19.

Possible issues:

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.

Steps to consider:

• Broaden disclosures to go beyond what’s required in financial statements. For example, disclose management’s analysis of the current and future impact of liquidity and credit crunch on the business.
• Consider both direct and second-order effects. Industrial manufacturers are suppliers to critical parts of the economy, including hospitals, utility providers and emergency responders.
• Plan for disclosures about risks, such as how recent events may impact current and future judgments and estimates inherent in financial reporting (e.g., inventory obsolescence, receivables collectability, debt covenants, impairments).
• Proactively communicate with lenders and other stakeholders, preventing surprises and enabling potential rescheduling of debt or alternative financing sources.

Possible issues:

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.

Steps to consider:

• Take into account the tax and tariff implications of any changes to the supply chain. Everything should be on the table, including changes to design and materials when possible and as required. Planning should go deeper than merely identifying alternate suppliers. Implications could include customs and duties, as well as transfer-pricing considerations if the substitute components or materials are internally sourced.
•  Address mobility and immigration issues for employees moving in and out of areas affected by COVID-19. Consider the tax implications of mobility. Depending on where you temporarily host employees, the company — and the employees — may face unintended tax consequences.
• Prepare and plan for various types of support governments may extend — from emergency funding to state guarantees of new loans to tax incentives or deferrals.
• Plan strategically. Operations in one jurisdiction may be more favorable — both tax-wise and operationally — than another during this crisis. 
• Assess the countries in which your company is most vulnerable — both in repatriating cash and in stranded assets. Monitor and reassess other geographies on an ongoing basis and adjust your cash-flow strategies as needed.