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Manufacturing is doing great!

So maybe it’s time to prepare for a slowdown

RFP
Manufacturing is doing great! The year 2018 was a great one for manufacturers, with exports of U.S.-manufactured goods rising steadily and heading toward nearly $1.4 trillion overall by the end of the year — the best reading since 2014. Exports for the first three quarters were up 5.4% over the previous year, with exports to the top nine markets climbing. Yet even as the U.S. economy has surged, top economists have noted signs of a weakening global market — and that could mean challenges ahead. Changing U.S. trade policies and new tariffs remain top concerns.

According to a November 2018 National Association of Manufacturers report, worldwide manufacturing dropped in October 2018 to the slowest growth rate since November 2016. Among the findings:

  • New orders and output slowed even as hiring rose somewhat.
  • Exports contracted slightly for the second straight month, while international trade had become more uncertain among top markets for U.S.-manufactured goods.
  • Three of the top markets for U.S. goods — Hong Kong, Italy and Taiwan — contracted in October and showed slippage in growth rates for the following few months.
  • Many of the same markets that showed the fastest manufacturing growth in October (e.g., the Netherlands, Switzerland, the United Arab Emirates and Australia) continued to slow.
  • The raw material price index had exceeded 60 in most of the past 14 months. Although this figure indicated robust growth, it also highlighted elevated global cost pressures as the U.S economy prospered while financial conditions elsewhere tightened.

So what’s a smart manufacturer to do?

Be proactive Before another economic slump occurs — these drops tend to be cyclical — you may want to assess what you learned from the Great Recession, and take measures to lessen the impact. No one wants to experience what happened then, when the industry lost 20% of its output and 15% of its workforce.

“There’s no doubting the economists’ current sentiment; however, the likelihood of negative economic growth at this point seems likely to differ from the shock and awe of the Great Recession,” said Jeff French, Grant Thornton’s national managing partner, Consumer and Industrial Products, and leader of the Manufacturing practice. “A decline may not be sudden or steep, but may result from a gradual decline in confidence or the persistent tightening of credit, thus being difficult to predict or detect. That’s all the more reason for businesses to prepare by remaining disciplined when it comes to current investment.”

Manufacturers that cautiously worked through recovery previously took certain steps, some of which were surprising: adopting a careful approach to debt, investing in R&D, upgrading equipment, investing in automation that could carry them through future lean times, and retaining the right — and the right number of — employees, to avoid lacking talent just when a rebound occurred.

Said French: “Preparing for negative economic growth doesn’t mean shutting off all the water at once; it’s more like a football team that’s winning late in the third quarter and changing its game plan for the fourth quarter to maintain possession of the ball and grind out the clock without taking unnecessary risks. The team still moves forward and picks its options, but doesn’t risk losing it all with a strategy to blow the opponent out quickly.”

More tips for a softening economy
  • Examine how prerecession economic trends compared with trends occurring now. Review industry data and broader studies. Take what you learn, think about your business today and make decisions accordingly.
  • Keep a close eye on fixed costs like infrastructure, inventory and talent.
  • Be prepared to reduce inventory if prices weaken. Having capital tied up in inventory can be distressing or worse, as many manufacturers learned when the Great Recession hit. After that experience, some manufacturers adopted a zero-inventory approach, opting instead to make and ship on demand.
  • Consider lowering prices now as a way to promote customer loyalty in hard times.
  • Assess and/or adjust your capital investment strategy to highlight strong short-term returns.
  • Get leaner. This may entail meeting a portion of demand through outsourcing or contractors instead of hiring new workers. If feasible, consider renting rather than owning physical facilities.
  • Solidify lending arrangements — such as credit, and lengths and terms of loans — while you’re in a stronger position. Better yet, pay down debt if you can.
  • Maintain an “emergency fund.”
  • Similarly, try to negotiate extended terms with your supply base.
  • Don’t be fooled by a false sense of security. Even as a business contracts, for example, you may experience a positive cash flow when higher revenues from past months come in, but beware that they won’t last.

“Managing working capital effectively can really be the greatest tip, by ensuring you have a little more cushion to sustain a downturn, said French. “Businesses should assess if they are as lean as they can be, and they should challenge investments more rigorously, perhaps raising their hurdle rate for investment returns. Don’t be that team that tried to put the game away quickly only to find that the risky plays cost them a victory.”

Contact:

Jeffrey French Jeff French
National Managing Partner
Consumer & Industrial Products
T +1 920 968 6710