Challenges and Opportunities for the Manufacturing Industry in 2019

Written by Michelle Sanchez, CPA on February 22, 2019

2018 was a strong year for the manufacturing industry. Manufacturing companies have been adding to the economy, growing in job creation and increasing output and influence. Manufacturing is a large part of the world as we know it today. But, in light of advancements in technology, the need for manufacturing workers and the current business climate, what will 2019 have in store for this industry? How can manufacturing companies continue to succeed in the months to come?

According to the National Association of Manufacturers’ (NAM) fourth-quarter Manufacturer’s Outlook Survey, manufacturers’ optimism is the highest it has been in the last 20 years. This optimism was surely fueled by both tax and regulatory reform. Along with the optimism, however, there are concerns and challenges. In light of these factors and information provided in a recent survey by the Leading Edge Alliance (LEA), I’ve outlined three areas that will be of highest importance to manufacturing companies in the coming year.

Attract and Retain Manufacturing Employees

While there are many advantages for manufacturing today, the industry still struggles to recruit and retain employees. The NAM survey and the survey from the LEA both indicate that addressing the workforce shortage is a high priority in 2019 for manufacturers. According to the Bureau of Labor Statistics, the current unemployment rate is 4% in the United States. With full employment considered to be 5%, it is clear that the demand for skilled employees far outweighs the supply.

Companies may need to employ a variety of strategies to address the workforce shortage. One such strategy is to offer incentives for retirement-aged workers to stay with a company for more time. Doing this not only helps companies to retain skilled workers longer, but it also provides an opportunity for these skilled workers to mentor and train younger workers who will eventually fill their roles. Another strategy involves increasing outreach and vocational programs with schools. Offering internship and apprenticeship opportunities for high school and college students is a great way to get students interested in manufacturing jobs. A significant amount of knowledge comes from on-the-job learning, so internships and apprenticeships are a great way to spark interest in and teach manufacturing skills. Companies should not forget, however, about training and developing their current employees. With changes in technology comes the need for continued training. Loyal employees are more likely to stay with their company when it is investing in them by providing them with the training needed to take on new and additional challenges. With the workforce shortage, it is imperative that a manufacturing company’s employees feel appreciated and motivated.

Leverage New Technology while Remaining Secure

Another priority for 2019, according to the LEA survey, is improving profitability, and one of the largest challenges to increasing profitability is the expected increase in spending on technology. Sixty-two percent of survey respondents indicated they will increase their spending on technology in order to generate organic growth within the United States. For manufacturers, spending is expected to increase in areas like cybersecurity, the Internet of Things, blockchain, robotics and artificial intelligence and 3D printing.

According to an article from Forbes, the Internet of Things (IoT), “is the concept of basically connecting any device with an on and off switch to the Internet (and/or to each other). This includes everything from cellphones, coffee makers, washing machines, headphones, lamps, wearable devices and almost anything else you can think of. This also applies to components of machines, for example a jet engine of an airplane or the drill of an oil rig…The IoT is a giant network of connected ‘things’ (which also includes people). The relationship will be between people-people, people-things, and things-things.” IoT for manufacturing can be utilized to add online connectivity to machines and hardware, to remotely monitor and share data and to provide safe-checks in the case of equipment failure, among other applications. Leveraging IoT solutions may enable manufacturers to more efficiently monitor inventory, connect factory assets and enterprise resource planning (ERP) systems and monitor real-time operational intelligence for real-time visibility of key performance indicators. The IoT is still relatively new, so the cost is higher now than it is projected to be in three to five years. However, waiting three to five years to get into the automation world will leave organizations playing catch-up.

Grow Sales and Business Footprints through Mergers and Acquisitions

Finally, respondents to the LEA Survey indicated that focusing on sales growth is a key priority for 2019. Eighty-one percent of survey respondents in manufacturing expected growth in 2019. Growth is expected to come in many forms: joint ventures, introduction of new products and services and merger and acquisition (M&A) activity.

There are several key factors that are driving the recent uptick in M&A activity. First, Baby Boomers are causing a significant increase in M&A activity. As multiples continue to rise, this generation is continuously being enticed to come to market rather than leaving the business to their children. It is estimated that ten trillion dollars of wealth is going to change hands within this decade.

Second, rollups are happening in many industries at a rapid and aggressive pace. In almost every industry, there are multiple players with significant funds to invest that are trying to consolidate.

Third, tax reform has generally had a positive impact on M&A activity. When the reform was first enacted, lowered corporate rates had a positive impact on liquidity. However, the interest deduction limitations are beginning to cause private equity groups some concern. Whether this concern slows down M&A activity is yet to be determined.

M&A activity is expected to continue to be strong throughout all sectors, and manufacturing is no exception. In the months to come, manufacturing companies should keep an eye on tariffs. If tariffs are in play, then manufacturing input costs will continue to rise, which has a great impact on M&A activity. Tariffs have broken some deals and caused some completed deals to go south. This is happening across the board in the manufacturing space, so buyer beware. Despite the uncertain political climate, 2019 is still expected to be a great year for M&A activity. There is still a large amount of dry powder on the sidelines, both domestic and foreign, trying to buy businesses in the United States.

Manufacturers that can successfully address the challenges that will come along with workforce shortages, investments in technologies and M&A opportunities will continue to drive growth in the manufacturing sector. According to Jay Timmons, NAM president and CEO, “empowered by tax reform and regulatory certainty, manufacturers are keeping our promise to expand our operations, hire new workers and raise wages and benefits. But we face challenges, most seriously the workforce crisis.”

The majority of manufacturers still have a positive outlook of their business for 2019. In the end, we expect the challenges that will come this year for manufacturing companies will also become opportunities.

If you would like to learn more about the manufacturing industry or how Warren Averett can offer guidance for your manufacturing company, please visit our Manufacturing and Distribution page or contact us.

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