Manufacturing & Distribution

Manufacturing & Distribution

Quarterly Industry Report

May 2019

Opportunity: US Manufacturing Activity Expands - US manufacturing activity increased in March 2019 according to the Institute for Supply Management (ISM). Overall, manufacturers reported faster growth in production, new orders, and employment. New export orders also rose, but at a slower pace. Of 18 industries surveyed by the ISM, 16 reported expansions in March, including printing and related support activities; textile mills; food, beverage, and tobacco products; petroleum and coal products; computer and electronic products; electrical equipment, appliances, and components; transportation equipment; fabricated metal products; and machinery. While the current US economic expansion seems to have peaked in the fourth-quarter 2018, the strong ISM indicators of growth of new orders in March could bode well for continued demand for US manufactured goods in the coming months.

Medium Growth Rating

Industry Growth Rating

Demand: Depends on consumer spending

Require efficient production and distribution

Risk: Economic downturns and import competition

Industry Impact - While the US manufacturing sector showed signs of expansion in March 2019, slower overall economic growth may prompt manufacturers to carefully weigh any changes to capital expenditure strategies.

Critical Issues

Highly Dependent on Consumer Spending - Production in the manufacturing sector depends on consumer spending and retail sales, and can change rapidly during an economic slowdown. For example, industrial production rose by about 2% per year on average between 2002 and 2007, but fell 10% between 2007 and 2010. In some subsectors, such as automobiles and primary metals, production dropped 25% or more during the late 2000s recession.

Competition from Low-Cost Imports - US imports of manufactured goods have increased, because products with large labor content can be cheaper to produce in other countries. To remain competitive, many US manufacturers have moved production facilities abroad or have shifted to products with higher technology content. In dollar terms, the US imports nearly three times the amount of manufactured goods from China as from Canada. In recent years Mexico has overtaken Canada to become the second-largest source of US imports.

Business Challenges

Large R&D Spending, Capital Expenditures Required - Manufacturing companies must make large investments in production equipment and computer systems to improve efficiency, and in R&D to develop new products. R&D expenses for US manufacturing companies are typically about 4 to 5% of revenue, but can be as high as 10 to 15%. Capital expenditures average about 3% of revenue.

Volatile Energy, Raw Material Costs - Scarcity of resources and long supply routes contribute to frequent changes in prices for energy and for many raw materials used by manufacturers. Steel prices, for example, can change by more than 30% from year to year. Crude oil and natural gas prices can also move more than 30% annually.

Extensive Government Regulation - To protect workers and prevent pollution, states and the federal government regulate many activities of manufacturing companies. Such regulations can add to the cost of production. Government regulations also affect imports and exports of many raw materials and manufactured products.

Industry Forecast

Revenue for the US manufacturing sector is forecast to grow at an annual compounded rate of 4 percent between 2019 and 2023, based on changes in physical volume & unit prices. Data Published: Jan. 2019

Manufacturing Industry Forecast Chart

Dependence on Few Large Customers - Because of consolidation in many parts of the US economy, and because of their own specialization, many manufacturers depend heavily on a small number of big customers for a large part of their revenue. In many cases, because no alternative market exists, manufacturers are essentially production arms of their customers. In some instances, the US government is a company's major customer.

Business Trends

More Automation, Less Labor - Productivity has steadily increased in manufacturing because of the increasing use of machines and, especially, computers. Generally, the US industries that have prospered in the past decade have been those where the most automation has been possible and where technology content is high. Manufacturing output per hour between 2008 and 2017 increased nearly 10%.

Outsourcing and Leasing - To increase operational efficiency by concentrating resources on primary production and marketing functions, many companies have outsourced services they previously did themselves, such as parts manufacture, maintenance, computer and payroll services, and benefits management. As product life cycles get shorter, building proprietary assembly lines becomes less practical. Contract manufacturers have made it possible for some companies to operate without owning any brick-and-mortar factories. Many manufacturers have also increased the efficiency of their assets by leasing, rather than owning, equipment and facilities.

More Service Required - The greater technological content of many machines and products requires more complicated support such as training, maintenance, operations, and services. Some companies, like IBM, sell more services related to their product than they do the product itself. Large-scale use of computers has created demand for IT services in many industries.

Manufacturing Globalization - The development of international logistics networks that can efficiently deliver raw materials and finished products to many parts of the world has increased the reach of US manufacturers and international competitors. US manufacturers in labor-intensive industries such as apparel now have most of their production facilities abroad. Factories are frequently located in countries for tax, labor costs, or political reasons, rather than proximity to raw materials or markets, as was once the case.

More Alliances, Strategic Investments - The large resources required for many business enterprises, especially in the international sphere, encourage manufacturers to ally with other companies. In some cases, partners produce different components for a product; in others, one partner makes the product while the other provides distribution. Relationships between manufacturers and their suppliers also often take the form of alliances, with strong integration of information systems and regular production consultations. Many large companies now hold "strategic stakes" in smaller companies that are developing new products or markets, enabling them to essentially farm out their R&D efforts.

Reshoring US Manufacturing - Rising wages in the developing world and the complications of far-flung supply chains are causing some US manufacturers to bring back jobs that had been outsourced to other countries. In 2017, US manufacturing jobs created by reshoring and foreign direct investment reached more than 170,000, according to the Reshoring Initiative. Between 2004 and 2016, China's manufacturing cost advantage over the US fell from 14% to about 1%, according to the Boston Consulting Group.

Industry Opportunities

Technology Innovation - US manufacturers use technology to lower costs, improve products, and optimize supply chain performance. The US manufacturing sector is evolving toward providing goods that either have a high technology component or are produced with technologically advanced equipment. Biotech and fiber optics are examples of rapid movement from research labs to production facilities.

Improved Logistics - To minimize inventories and speed distribution, many manufacturers invest in distribution technology and better logistics communication. Advancements include satellite communication links with delivery trucks, cargo containers with communication capabilities, specialized cargo ships that can be unloaded in hours, and radio frequency identification (RFID) tags that allow individual products to be tracked. Improved communication between suppliers and manufacturers eases production scheduling and product flow.

Business-to-Business Internet Communication - Many manufacturers can order parts and products through internet sites, speeding delivery and cutting out a layer of distributors. Internet auction sites let suppliers bid to fill supply contracts. The success of internet-based procurement is closely tied to the continuing growth and refinement of logistics networks, so suppliers can keep delivery costs low.

Improved Energy Use - Because many production techniques were designed in an era of lower energy costs, manufacturers can often redesign processes to reduce energy use. Some manufacturers use large amounts of energy in production. Due to the high cost of converting to energy-efficient systems, manufacturers are reluctant to approve such projects unless energy costs are projected to remain high.

Green Manufacturing Practices - In addition to investing in energy efficiency, manufacturers are also redesigning plants and processes to reduce emissions and the company's carbon footprint. These green investments can provide an attractive return and allow the company to market a positive environmental message to customers and investors. In recent years the EPA has created national emission standards for hazardous air pollutants.

Copyright 2019, Hoover's Inc., All Rights Reserved. This data cannot be copied, sold, or distributed in any manner without the written permission of First Research.

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