2017 Global Manufacturing Outlook
Manufacturing will grow at a slow but slightly stronger pace in 2017. However, with global demand, commodity markets, and trade flows remaining weak, intense competition will depress both sales and profits and accentuate pressures to reduce costs. Companies and value chains investing in new technologies and the development of new and improved products and customer services will outperform industry averages.
Impact
Manufacturers will look to advance the digitization of products and processes within facilities and across value chains in order to lower costs, improve quality, and increase flexibility and speed. Data analytics will also create more revenue opportunities from new customer services. Value chains will continue to be reconfigured to incorporate new technologies and information services and provide speedier and more agile customer response. Merger and acquisition activity will also gather pace as manufacturers look to reduce excess capacity while securing access to critical technologies. Meanwhile, employment within the manufacturing sector will continue to decline as jobs growth shifts to those technical and services sectors supporting the industry.
Key trends
Manufacturing performance will be weighed down by slow growth in market demand, excess capacity, and depressed commodity production.
A strong dollar will erode U.S. exports but benefit companies selling goods into the U.S.
China’s economic restructuring will further depress infrastructure and commodity-related manufacturing activity worldwide.
Manufacturers will face a higher degree of domestic and international political risk.
Manufacturers will need to make significant cost reductions or develop new low-cost revenue streams in order to generate the cash required to finance the product and process innovations they require to sustain organic growth.
Slow growth ahead for manufacturing worldwide
Purchasing managers’ indices for manufacturing show the global slowdown that has taken place in manufacturing since 2014. (An index higher than 50 indicates growth and less than 50 contraction in manufacturing activity.)
Industry trends now point to a slow recovery in manufacturing output in 2017. With world manufacturing output up by an average of only 1.8 per cent in 2016, an overall growth rate of two per cent looks likely over the year ahead.
Slow growth in overall market demand will remain the paramount challenge facing manufacturers in 2017. Manufacturing performance will be subject to many of the same adverse conditions that recently prompted the IMF to downgrade its world economic growth forecast for next year to 3.4 per cent:
A slowdown in international merchandise trade flows;
Declining rates of capital investment;
Weak productivity growth;
Low commodity prices;
Weaker than expected growth in the United States;
The shift in China away from heavy industry, infrastructure investment, and export-led growth to a more consumer and services oriented economy;
Significant macro-economic challenges in Russia and Brazil;
High levels of corporate debt and associated credit market risks in China and emerging economies;
Uncertainty around the risks associated with Brexit, rising political discontent, and growing populist pressures on governments to adopt more protectionist policies worldwide; and now,
Uncertainty over the course of a Trump presidency in the United States.
On the positive side for manufacturers, interest rates will remain low in advanced economies, currency and commodity price volatility is diminishing, and labour market conditions in major world markets are improving.
Industry strengths and weaknesses
The outlook for global manufacturing will be determined by widely varied performance across industries, value chains, and regional economies.
The production of primary metals along with the broad range of goods and equipment used in mining, oil drilling, agriculture, and resource processing will remain depressed, weighing down heavily on the manufacturing economies of Sub-Saharan Africa, Russia, Brazil, Canada, Australia, and the United States.
China’s pivot away from infrastructure and export-led growth will lead to a further contraction in heavy industry and its global supply chain, while higher costs of production and a preference to move manufacturing further inland will transfer more high-volume, low-margin manufacturing of consumer goods to lower cost economies in Southern Asia.
Overheated housing and commercial property markets in China, Canada, and some parts of Europe will cool demand for construction materials. On the other hand, a rebound in U.S. housing starts will mean greater demand for North American wood and building products manufacturers.
However, slow growth can be expected for manufacturing in the United States where a strong dollar will hamper export growth and increase imports. The surge in chemical production that has helped buoy U.S. manufacturing performance over the past two years is also beginning to fade. Domestic demand for cars and light trucks looks like it has reached a peak, while heavy truck production is down as is manufacturing in other capital equipment sectors.
Manufacturers outside the United States will benefit from a stronger dollar, either because their exports are now more cost competitive in the U.S. or because they are realizing higher profits in domestic currency terms from their U.S. denominated sales. But, depressed demand for capital goods and increased competition in high-volume, low margin sectors will weigh heavily on European and Japanese manufacturing as well.
The strength in manufacturing in 2017 will come from two types of manufacturing activity:
Large manufacturers that recently have made new anchor investments that are in turn generating an expansion of local suppliers. The automotive and aerospace sectors in Mexico and the expansion of manufacturing activity in Poland, India and emerging Asia are cases in point.
Producers of more specialized, higher-value goods, equipment, technologies, and services for both consumers and industrial customers. There is a greater concentration of those manufacturers in food processing, consumer goods, medical devices, automation equipment, and other new technology sectors. The economies most likely to outperform on this criterion are Germany, Italy, and the United States.
Manufacturing adjustment
For manufacturing as a whole, slow economic growth has led to high inventory levels and excess production capacity, lethargic productivity growth, more intense competition, strong downward pricing pressures, compressed profit margins, and a greater urgency to reduce costs and build new revenue streams. Weaker profitability and economic and political uncertainty will continue to limit growth in overall levels of industrial investment. Meanwhile, cost pressures will result in further employment losses across the sector.
While inventory levels remain relatively high, they are being worked down, meaning that more output will be required to meet existing demand in the future. The wave of production closures that has depressed manufacturing performance over the past two years, especially in China, parts of Europe, and in many emerging economies, is also beginning to ebb. On the other hand, merger and acquisition activity is picking up, pointing to a greater degree of industrial consolidation. Productivity will improve as excess capacity is reduced.
The business of manufacturing is also adjusting to changes in its operating environment. Consumers and business customers have become more challenging, demanding speedier response to more specialized product and service requirements. The expectations of customers, governments, and public stakeholders alike are more stringent with respect to quality standards, regulatory compliance, environmental performance, and the social license to operate. Demographic changes are affecting the expectations of customers and employees alike, while manufacturers worldwide are facing the challenges of an ageing workforce, business succession, and a tight supply of qualified technical and managerial personnel.
Meanwhile, the rapid development and deployment of digital and other advanced manufacturing and materials technologies are disrupting markets, value chains, and production systems. They are creating even greater competitive pressures on manufacturers, but at the same time providing opportunities for new product development, more efficient, flexible, and highly responsive production and business processes, as well as a platform to generate new revenue streams through data-based customer service.
Manufacturing disruption
New technological capabilities are revolutionizing both products and customer expectations. Some of the key developments to watch in 2017 will be in the production of:
Intelligent vehicles;
Alternative energy technologies;
Automotive and aerospace parts and systems;
Medical devices;
Intelligent robotics and automation systems;
Nano-materials; and,
Digitized products and equipment enabling remote tracking, control, and data analysis.
Digitization will also continue to disrupt production and business processes. Products are increasingly being designed, tested, and engineered for manufacturing using three-dimensional software. 3-D printing is enabling rapid prototyping and the manufacturing of highly complex parts. Products are being made more frequently by smart machines in fully automated factories, allowing for greater customization, flexibility, and production efficiency. Software and data analytics are being more widely used to optimize manufacturing operations, value chain collaboration, and other business processes. And, interconnectivity is driving greater horizontal integration not only along the value chain from customers to manufacturers to their suppliers, but throughout the entire lifecycle of products.
The business of manufacturing is also changing as a result of new technological capabilities. Product development cycles are becoming compressed, forcing more manufacturers to prefer partnerships or acquisitions over in-house research and development in order to acquire critical technologies. Supply chains are being reconfigured more frequently as greater value is generated through technological knowledge, software algorithms, and data analysis than through more easily replicable production processes. Local, flexible automation facilities are now replacing long-distance suppliers.
Digitization is allowing manufacturers to cut costs, improve quality, and make better and speedier decisions. Above all, it is allowing them to develop more innovative products and offer new services for their customers. As products and processes become information platforms, new revenue opportunities are being generated through the analysis and application of the data they generate to provide solutions for customers that go well beyond the provision of products themselves.
Innovation and investment
Recent surveys of manufacturing leaders around the world point to a pessimistic assessment of the economic and political conditions facing their business, but on the other hand to a high degree of confidence in their own capacity to grow. It will be those companies that are able to deploy new technologies most effectively to reduce cost and generate new product and services-based revenues that will be best positioned maintain competitive advantage and grow in a slow-growth world economy.
