Entering the second half of the year, many of the headwinds that have plagued manufacturers for years – including labor shortages, supply chain issues, the rising cost of goods and overall economic uncertainty – remain challenging.
The National Association of Manufacturers’ outlook survey for the second quarter of 2023 found the sentiment among business owners is the lowest it’s been since the third quarter of 2020. The survey found 67% of respondents felt either somewhat or very positive about their company’s outlook, down from 74.7% in the first quarter. Just over 56% of respondents are still expecting a recession to take place this year.
Amidst the uncertainty, Joe Jurken, managing director of The ABC Group, a Milwaukee-based supply chain management company, has seen more manufacturers moving production out of China and into other parts of Asia. It’s also become increasingly common for business owners to consider reshoring.
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Joe Jurken[/caption]
“We are fielding calls daily from people looking to do business in Vietnam and India,” said Jurken. “That has been the rally cry for the last six months, but it’s really intensified lately.”
He explained larger Wisconsin manufacturers have been sourcing products from China for decades. Now, the desire for smaller companies to create a footprint in Asia is due in part to a mix of higher import tariffs placed on manufacturers and an uncertain geopolitical climate.
In the past, a company’s back-up suppliers would largely be in China, according to Jurken. Now, companies are looking for back-up suppliers in other countries to diversify their supply chain and give China less leverage.
Mexico has become a less popular option for manufacturers as labor costs there have risen by 40% since 2018, according to a report from the Center for Economic Studies of the Private Sector.
“For years and years, China was the first and only stop when people were looking for outsourced manufacturing. Now, they’re looking for any place that’s available,” said Jurken.
To deal with economic uncertainty in the short term, he’s recommending clients look for creative ways to save out-of-pocket costs. This might involve a company looking at its office locations globally. Over the past decade, the need for a local company to have offices in Asia has plummeted, according to Jurken. It may have made sense to have employees on the ground in China when first opening a new factory several years ago, but keeping those teams on the ground could be an unnecessary expenditure.
“With the geopolitical situation, having a company-run office (overseas) is an expense and a risk,” said Jurken. “Having your own people utilize outsourced resources is cheaper and more efficient. For three years, nobody went to China and the world didn’t stop. I think we all learned a valuable lesson that all the time and money spent to send people over there wasn’t needed.”
The ABC Group also recommends clients consider an asset-light business model to gain greater supply chain flexibility and the ability to source materials at lower costs. An asset-light model involves outsourcing the production of some goods to other companies rather than owning and operating several production facilities.
“I think anyone that can cut costs with limited work, (those cuts) need to be done right now,” said Jurken.
All in on Asia
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Michael Weidokal[/caption]
There’s a reason why The ABC Group has seen such interest from clients in entering Asian markets. Asia has seen the most economic growth of any continent in the 21st century, said international economist Michael Weidokal during a recent economic update for manufacturers hosted by Sikich.
By 1950, Asia’s share of global economic output had fallen by two-thirds, but today Asia accounts for nearly 40% of all economic output. More than half of new global economic output is currently generated in Asia.
“If you don’t have a presence in Asia, you’re really missing the number one opportunity for growth from a geographic perspective,” said Weidokal.
As China’s relationship with the U.S. and other major economies continues to deteriorate, companies of all sizes are starting to consider other locations for their operations. Jurken said emerging markets such as Vietnam, the Philippines and Indonesia are expected to see continued growth.
“I think India is the future. I think India is going to give China a run for its money sooner rather than later,” he said. “People should act on their beliefs. If they think they shouldn’t be fully vested in China, then they should act on that.”
Persisting issues
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Rob Cowen[/caption]
The National Association of Manufacturers’ outlook survey also addressed the manufacturing woes that have been at the forefront of conversation since early 2020. Despite rising costs and the possibility of a recession, 39% of respondents expect their capital investment plans to remain the same, with 15% saying their plans will increase by between 5% and 10%.
Rob Cowen, chief executive officer of Milwaukee-based Badger Alloys Inc., a full-service castings manufacturer, said his outlook on the overall economy hasn’t changed much within the past year, but how he runs the business has.
“My opinions really haven’t changed. I’m cautiously optimistic,” he said. “I’ve probably been running the business more conservatively than I have in the past. I would say others within my industry, within different segments, are seeing a bit of a slowdown.”
Cowen is continuing to invest in the company at pre-pandemic levels so it can catch up from the slowdown caused by the pandemic and stay ahead of other companies in the future. Some upcoming technological investments include a new “cobot,” or collaborative robot.
Cowen doesn’t believe supply chains will ever return to pre-pandemic levels as clients continue to shrink their inventories, a strategy that will likely worsen if a recession does hit. NAM survey respondents anticipate their inventories will shrink by 2% over the next year, the most since the question was added to the survey in 2011.
“People become much more conservative in what they’re doing, and I think that slows down the economy more than we would like to see,” said Cowen.
Workforce development continues to be the biggest challenge for Badger Alloys as more tenured employees reach retirement age. This is in line with NAM’s survey, which found that attracting and retaining a quality workforce is the top-ranked difficulty for manufacturers (74.4% of respondents selected the issue).
As for what manufactures can expect for the rest of the year, Weidokal is forecasting GDP growth to be about 1.9%. The U.S. economy is expected to remain sluggish in the long term before a stronger recovery takes hold.
“I’ve been doing presentations like this for over 20 years, and I would have to say this is probably the year with the most uncertainty as to the direction of the economy,” said Weidokal. “Typically, we know when it’s going to be a difficult year or when it’s going to be a bounce-back year. This is a year that can really go in either direction.”
