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2020 manufacturing outlook: Seek opportunity, protect against downside risk

January 9, 2020 Article 8 min read
Authors:
Bryan Welsh
Significant opportunity exists for manufacturing and distribution businesses, but headwinds are starting to blow. Here’s our 2020 manufacturing outlook and key actions to take to futureproof your business for the coming year — and beyond.
Scenic image of a road, mountains and lake

Manufacturing industry leaders should remain cautiously optimistic about growth and profitability in 2020. The good news is the U.S. economy continues to remain strong, with the stock market still setting all-time highs, low unemployment and energy costs, and macroeconomic factors that have been overall positive for industrials. Yet, change is happening, and the rate of change is accelerating faster than it ever has before. What’s more, expansion may slow, and the economy could begin to contract.

One in three businesses don't know how to grow during an economic downturn. Don't be that one.

In fact, we’re already seeing headwinds: Capital spending is declining, and early-warning industries, such as tooling, electronic controls, and transportation, are slowing. Banks are reporting higher loan loss reserves. New hiring is cooling, and interest rates have been experiencing downward pressure, with negative rates in Europe and Japan, signaling that confidence in the global economy continues to wane despite expected growth to rebound. Recent U.S. tariff actions have structural costs and risks related to supply chain evolution that may strengthen the headwinds, and elections and unforeseen events could piggyback and act as recessionary triggers.

Business leaders learned a lot from the last downturn — which capital investments to make and not make, to exercise caution when pricing and paying for acquisitions, and not to overextend credit are a few examples. As we head into a new year, we believe now is an opportune moment to again reflect and strengthen in order to lessen potential future risk and make the most of what’s ahead.

Consider these five key areas as you futureproof your business for 2020 — and beyond

Manufacturing 4.0: Adopting new technologies is the only way to survive

Greater flexibility, efficient operations, and product customization continue to dominate industry 4.0 in 2020. Products are becoming more digital, and organizations must focus on using data to transform production models to improve quality, reliability, connectivity, and profitability.

Manufacturing leaders need to empower their staff to actively transform cross-functional processes to enable their business to improve operations across the entire product life cycle.

Manufacturing requires innovation and transformation. While most organizations recognize the opportunity, many remain behind the curve in terms of adoption. To accelerate the value of manufacturing 4.0 technologies, such as robotic process automation, internet of things, AI, and data analytics, manufacturing leaders need to empower their staff to actively transform cross-functional processes to enable their business to improve operations across the entire product life cycle, from design and manufacturing to assembly and logistics. In 2020 and beyond, manufacturers need to strive toward continued development of technologies for mass customization and personalization for customers.

2020 actions to take: Create an inventory map of the technologies used in your organization. Conduct a gap analysis, look for synergies among them and, importantly, understand how you can leverage data to improve connectivity, flexibility, and agility to optimize supply/demand matching and improve revenue gains.

International activity: Global strategy provides a competitive advantage

Over the next several years, we anticipate that more manufacturers will enter new markets and expand existing sites or open new facilities in countries with existing operations. Supply chains will also increase in complexity and continue to consolidate. Recently, many internationally active businesses have been challenged by tariffs and trade disputes, impacting raw materials sourcing, purchasing, and sales in addition to structural costs and overall profitability. Uncertainty is affecting current and future planning and decision-making. Moreover, we also see significant global expansion to other foreign countries and Mexico as companies pivot on their China strategies and footprint. Trade disruption might be the new normal, and there’s opportunity in uncertainty.

While a more global focus can expand your product portfolios and sales opportunities, it’s hard to make sound decisions about new investments in the face of flux. It’s not an easy place — pun unintended — to be.

2020 actions to take: Invest in the skill sets necessary to optimize your purchasing and supply chain; implement smart strategies for foreign currency exchange; don’t give up on China. When there’s a clearing in the recent trade issues, companies need to be prepared to renew and execute on their foreign strategies.

Mergers and acquisitions (M&A): A strategic purchase can accelerate market dominance

We anticipate that middle-market M&A activity will flourish in the first half of 2020 as dealmakers get a jump on the uncertainty of Election Day and its outcome. Look for companies to transform their business or acquire new capabilities and combined operational strength through ambitious, strategic acquisitions.

Challenges that could complicate M&A activity in 2020 include a slowing economy, geopolitical strains, regulatory demands, and skills gap. Despite those challenges, many larger corporations have significant cash reserves, and private equity investors have capital that must be deployed. In the event of softening we expect to see sector consolidation, particularly among niche manufacturers and manufacturing technology-related startups as they’re targeted by strategic buyers.

Evaluate if a strategic acquisition can help expand capabilities and accelerate your growth strategy.

2020 actions: Investors should consider strengthening and diversifying their portfolios in 2020. Survey the landscape in your vertical or sector. Evaluate if a strategic acquisition can help expand capabilities and accelerate your growth strategy. Likewise, if an exit might be in your future, strategic timing can help optimize value and allow you to act from a position of strength.

Leadership and succession planning: Identify leaders who can propel growth and preserve value

Skills are the new currency in the labor market. Now more than ever, organizations need to focus on building a "future-proofed" workforce equipped to adapt and thrive during disruption, shifting market dynamics, and economic fluctuation. Today, leaders need to be prepared to usher the digitally-led transformation of their business models. However, building an agile and strategic leadership pipeline is easier said than done. Understanding strategic business goals and preparing for future growth should drive the succession planning process. It's also essential to get the leadership team on board and maintain shareholder value.

Ask yourself: how long do you anticipate your current management team will want to continue to invest in and lead the company? What does your future plan look like in terms of near- and longer-term leadership transitions? Particularly if the economy softens, does your business have the leadership talent to navigate a downturn and strengthen trust with principal stakeholders? Or might now be a good time to think about an exit and identify a strategic buyer?

2020 actions to take: Take inventory of your leadership team, its skill sets, and experience relative to growth in turbulent times. Determine if your current leadership team has an innovative mindset to take your company forward. Dedicate some time to succession planning so that you can identify, acquire, and cultivate your future leaders.

Family businesses: Prepare to navigate the business life cycle

Family businesses are a significant player in the global economy and a sustained force to be reckoned with — think brands like Penske Corporation, Ford Motor Company, and Discount Tire. U.S. family business leaders expect to continue to generate more employment and economic output over the next few years, despite facing the unique challenges of impact investing, managing ownership and growth, and ensuring continuity for future generations. Nevertheless, we're anticipating an increase of family businesses reaching maturity and being sold or augmented by acquiring other family businesses. If your business is family-owned, consider how much of your net worth is held in the business versus in-cash or outside investments. How many family members and generations depend on the company? We often see challenges when owners become accustomed to recurring dividends and bonuses to maintain their lifestyle. Would a sale, dividend recapture, or debt recapitalization make sense? You may feel ready to sell your business, but is your business prepared to be sold?

2020 actions to take: If you're considering a sale, start exploring what life looks like post-sale for you and your family. Regularly look at how much net worth is tied up within and outside the business. In the event of softening, know how business performance would impact family members, private equity investors, an international parent, or lenders’ willingness to invest. Stress-test sales strategies and profitability thresholds against the financial picture of all parties.

Economic opportunity knocks in 2020

Businesses in strong financial positions, with sufficient liquidity reserves and access to capital, should be on the lookout for opportunity. Watch for promising acquisition targets and consolidation opportunities to gain key customers, technologies, and geographies. That said, markets currently are solid for M&A activity and sellers are commanding good prices. We’re at an inflection point, so carefully weigh the factors and be poised to act at the right time.

Also consider whether strategies in addition to acquisitions, such as aggressive pricing or a renewed focus on customer acquisition, make sense for growing your market share as weaker competitors falter. And keep your eyes peeled for management talent from key competitors or from other industries that can enhance skill sets for your business needs — people are starting to move around.

One in three businesses don't know how to grow during an economic downturn. Don't be that one.

We continue to see significant upside, but we also see headwinds and macroeconomic flags that suggest business leaders would be wise to take steps to protect against possible future downside risk.

Stress-test your financial performance and business health. If revenue drops, what will the implications be on the company’s cost structure? What changes will help maintain profitability? Consider the impact of an accelerated slowdown, and plan accordingly. But don't focus solely on reducing risk; be on the lookout for opportunity. Companies mustn’t wait until challenges already exist to make appropriate plans. Need help? Contact our manufacturing experts―we’re here to guide you through 2020 and beyond.

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