The global COVID-19 pandemic has disrupted many industries in many ways, from labor safety to supply chain. Manufacturers and distributors are among those largely affected. While economies around the world are slowly starting to reopen, there is still uncertainty what the “new normal” will be in the future. Below is a summary of key findings on how the pandemic is expected to impact U.S. manufacturers and distributors in the near future and what the recommended responses may look like. Note that the impact will depend largely on the outcome of the virus containment efforts and each subsector will be impacted differently.
Impact on Manufacturers
Financial Impact: Liquidity, Closure and M&A
- Among the most immediate impact are financial implications. Earlier this year, the vast majority of U.S. manufacturers (78.3%) anticipated a financial impact on their business. The anticipation has indeed played out throughout the pandemic and will likely continue in the near future.
- A liquidity assessment of middle-market manufacturers and distributors by accounting firm Plante Moran shows that, “on average, respondents only have weak confidence in their ability to recover from the current crisis.”
- While companies may be able to weather liquidity issues for a few months, challenges such as parts shortages, factory shutdowns and increased freight costs have begun to create liquidity pressures on middle market industrial businesses. Compared to their larger counterparts, “middle market industrial companies appear to be better positioned to meet short-term obligations, but their debt levels have generally been relatively higher, which adds challenges to their longer-term liquidity outlooks.”
- According to a research by McKinsey & Company, small business manufacturing is moderately affected with moderate financial risk. See the figure below, where J represents manufacturing. Facing with the pandemic challenges, small businesses with existing financial risk may close permanently, according to McKinsey. In manufacturing, about 30% of small businesses reported moderate to large negative effect from the pandemic. However, the impact varies depending on the particular subsector of manufacturing. For example, 71% of small business apparel manufacturers reported large negative impact, as they had a pre-pandemic lower ratio of cash on hand to current liabilities than other subsectors. McKinsey projects that such small businesses will face the risk of permanent closure as the pandemic poses additional pressure.
- With downward pressure on demand, production and revenues, many manufacturers “are facing cash-flow liquidity challenges and difficulties in managing debt obligations.” PwC suggests that “the industry may see some manufacturers struggle to recover — and even declare bankruptcy — depending on how robust and effective any government intervention and support may be, and how long the COVID-19 crisis lasts.”
- As seen in the figure below, there is a lot of uncertainty for the future of manufacturing, compared to other sectors, with a large variation in projected recovery. If COVID-19 is contained, recovery may happen as early as in the fourth quarter of this year; thus, 2021 would see a “back-to-normal” scenario. Without successful containment, recovery may happen as late as beyond 2025.
- According to Ernst & Young (EY), “only essential spending is happening, and other than deals that might have already been in flight or were near closing, M&A in general is on hold. In some cases, even those close to completion are being tabled. We are, however, starting to see an increase in distressed M&A in the current and near-term environment.”
- Among the financial implications on manufacturers are falling valuations. According 22nd edition of the EY Global Capital Confidence Barometer (CCB) in April, 47% of “advanced manufacturing executives expect valuations to fall in the next 12 months.” Thus, the decline will continue well into 2021. As a result, hostile M&A activities are anticipated as in the pre-pandemic period high valuations were seen as a barrier to M&A in the manufacturing sector.
- “We can certainly expect a more hostile environment in the coming year, and perhaps beyond, which will see as much activity from private equity as it will from corporate buyers,” said David Gale, EY Global Advanced Manufacturing Transactions Leader.
Operations and Supply Chain
- The most immediate impact of COVID-19 on manufacturing operations is workforce safety as many jobs in the sector are typically done on site and cannot be done remotely.
- PwC projects that the sector will likely expect “a prolonged reduction in capacity and cost structure, which may translate into possible staff reductions and related measures, as economic activity and commercial aviation decline.”
- According to EY’s Advanced Manufacturing Quarterly, as remote work (where possible) has delivered higher levels of productivity than previously anticipated, leaders are recognizing the possibility of long-term change in manufacturing workplaces. However, while it may be a last resort, headcount reduction continues to be part of cost saving strategies for some.
- According a recent Thomas Industrial Survey of North American manufacturers, 56% of manufacturing companies have not laid off employees due to COVID-19 and 30% of companies are actively hiring. However, 16% expect layoffs. This suggests that some layoffs are anticipated in the near future. See the figure below.
- With the challenges facing operations, the pandemic may also lead to more automation in manufacturing. While only 7% of manufacturers have added or expanded automation in addition to the 20% that already have systems in place, 23% are considering automation. This suggests the coming year may see more adoption of automation. See the figure below.
- For manufacturers experiencing financial distress, making investment in automation may not be a viable option. However, in the long run manufacturers that prioritize automation will be able to lower costs, improve efficiencies, and reduce health risks in their workplace.
- Another impact of COVID-19 on manufacturers is disruption in supply chain. As a result, Thomas Industrial Survey finds that 64% of manufacturers “are likely to bring manufacturing production and sourcing back to North America,” a 10% increase from March.
- According to EY CCB, 52% of global manufacturing executives are taking steps to change their global supply chain in response to COVID-19.
- PwC projects “continued weakening links in [supply chain], as some vendors and suppliers will likely face operational or financial struggles of their own.” It predicts that there will be “continued supply chain bottlenecks both nationally and internationally, especially in those jurisdictions hardest hit by COVID-19.” Based on experiences in previous downtowns, PwC also projects that “the industry will likely move quickly to cut discretionary and capital spending to support operations.”
Impact on Distributors
- The most immediate impact of COVID-19 on distributors is in sales. According to COVID-19 Distributor Impact Survey of independent industrial and electrical, “about 30% of distributors lost 20-30% of sales, and another 30% are down more than 30%.”
- However, 20% of distributors–most likely serving “essential” clients or having a solid supply of products in high demand due to COVID-19 such as disinfectants–report an increase in sales by 20-30%. If the virus is contained by 2021, sales in this category will likely return to their normal levels.
- For the rest of the year, 36% of distributors expect sales to be down 0-10% from last year’s numbers, and 27% expect to be down 10-20%. This anticipation suggests that the negative financial impact will ease later this year as declines in sales are expected to be smaller than earlier this year. While nothing is certain, this could mean that recovery may begin in 2021, assuming that a potential new wave of infection in winter this year will not put the economy back in lockdown.
- The survey also finds that 77.8% have applied for a PPP loan and, of those who received a loan, 85.8% say it was very important although they could have made it while 9% say “It was nice, but we would have been fine without it.” None suggest that they could not have made it without the loan. This suggests that distributors will likely have the financial capability to weather the storm through the near future.
Operational Impact and Supply Chain
- The COVID-19 Distributor Impact Survey finds that 27.3% expect to return to normal within the next month, almost 36.4% expect to be back in the office within the next two months, and 27.3% expect it to take two months or longer, and 9.1% are not sure if the economy will ever return to normal. This suggests that the majority of distributors anticipate returning to business within this year. If this turns out to be true, 2021 will see distributors returning to normal operations.
- When asked about plans in moving forward, 63.6% of distributors mention a greater focus on marketing efforts, 45.5% reorganization of their sales team and 36% implementation of enhanced eCommerce solutions. This suggests in the coming there will likely continued efforts in marketing and sales, as well as a further rise in eCommerce.
- According to Michael Hollweck, Senior Manager QA Logistics Americas, there is a possibility where a distribution center is shut down completely since some distribution comes through third party and there is a possibility of outbreak in a distribution center. “That’s why we run through our business continuity plans often and execute them at least every six months. If one of our distribution centers gets closed for any particular reason such as COVID outbreak, we would absolutely be able to satisfy the business needs dealing with our other two locations. So can it be shut down? I’ll tell you right now with COVID, I am not doubting anything bad that can happen with our supply chain right now so I could absolutely see that and that’s where business continuity comes in,” he added.
- When asked about changes specific to pharmaceutical supply chain, Hollweck believes there will be “more robust supply chains and alternate routes in the event that a route has been taken away.” Because of the huge impact to specific industries like the airlines, there will be decreased service and increased costs. However, he believes “that the distribution center model has held up pretty well but that will be looked at to see how to prevent outbreaks at sites” and that “there was more impacted sites than people will recognize and that may come out in the future.”
- According to the American Journal on Transportation, “the Covid-19 impact on warehousing and distribution could well outlast the pandemic itself, as new sourcing options, altered supply chains and a new wave of warehouses and distribution centers closer to consumers emerge.”
- While disruption of supply chain has happened in the past, COVID-19 disruption is more intensified and the results will likely bring to light the changes needed even before the pandemic. “The pandemic has ‘put a spotlight’ on several major developments in supply chain management, as it impacts warehouses and distribution and fulfillment centers: the need for more warehouse automation and technology; a growing emphasis on e-commerce; a diversification of sources; and network redesign to accommodate all these.”
ADDRESSING FINANCIAL IMPACT
PwC provides the following steps to consider for addressing financial impact of COVID-19:
- Assess how profitability, loans, revolving credit and cash flow reserves can support ongoing operations in a low-revenue environment — in light of current (and forecasted) cash operating expenses, taxes and other cash expense items.
- Review capital and corporate cost budgets to identify not only marginal investments, but also discretionary items that can be cut.
- Consider divesting non-core or underperforming assets–or assessing M&A prospects–as a potential source of cash.
- Consider refinancing debt.
ADDRESSING OPERATIONAL IMPACT
PwC provides the following steps to consider for addressing impact on workforce:
- Ensure employees are safe and know how to protect themselves. Institute sanitation rules in the workplace, and assess mobility policies to encourage remote working, where possible and necessary. Instruct employees who are sick to stay home until they are better. Eliminate non-essential travel.
- Discuss change management and flexible work arrangements. Expect a learning curve as companies devise new ways of working that involve more remote workers and automation on the factory floors.
- Assess strategies and plans to retain and deploy the workforce during the slowdown, and establish risk mitigation programs for employees who still need to work on-site. Invest in education campaigns for front-line employees who have to be on-site to ensure they know how to minimize the spread of disease and what to do if they’re feeling ill.
- Gather necessary data on employees (geography, visa, etc.) and track movements during the crisis.
- Outsource functions that can trim operating costs.
PwC provides the following steps to consider for addressing impact on operations and supply chain:
- Immediately implement sanitation measures and reconfigure workspaces for safety. For example, stagger shifts, increase distance between workers and ban visitors on factory floors.
- Evaluate automation solutions to reduce the number of workers on the factory floor. Manufacturers that have piloted solutions should ramp them up carefully, while others should start exploring them. Focus on these three areas: autonomous materials movement (e.g., autonomous forklifts and cranes and high-payload drones); automation of repetitive tasks, including assembly (e.g., industrial robotics and mobile/collaborative robots); and predictive maintenance (e.g., using IoT and AI for predictive maintenance).
- Transfer new knowledge throughout the supply chain. Update best practices as the situation evolves and assist suppliers in implementing them. This requires increasing transparency in the supply chain through daily self-reporting with all critical suppliers.
- Gain a keener, real-time situational awareness of supply chains, especially those affecting critical materials and components. Identify potentially weak links in the supply chain–especially in regions already affected and those likely to be impacted by COVID-19.
- Prepare for supply chain pivots that could require identifying alternative suppliers.
- Prioritize cybersecurity and system resiliency. The significantly higher levels of remote access to core systems that will be required could make employees and management more susceptible to social engineering efforts in the midst of a crisis.
- Seek alternatives that allow you to preserve relationships, co-create solutions and sustain both businesses. It’s possible that a third-party provider could prove to be a critical point of failure in creating a response to COVID-19.