Jul 19, 2017   SOURCE: BusinessWire

Next-Generation Manufacturing Reveals Next-Level Risks - BDO USA Report

Ready or not, the next generation of manufacturing has arrived. The forces of technological disruption, international trade turmoil, and the digital industrial revolution are all set to shape the industry’s way forward.

While BDO’s 2017 Manufacturing RiskFactor Report reveals how manufacturers are confronting this wide array of risk, there’s ample reason to believe that 2017 is primed for a manufacturing renaissance. Manufacturers are feeling the promise of the fourth industrial revolution and the new administration’s vocal support for the industry—and their confidence is at an all-time high, according to the National Association of Manufacturers.

“While manufacturing companies are riding a wave of optimism propelled by the Trump administration’s stated focus on regulatory reprieve, the feasibility and speed of potential reform is still murky,” said Rick Schreiber, leader of BDO’s Manufacturing & Distribution practice and National Association of Manufacturers board member. “There’s hope in the industry that a solid level of balance will be reinstated between the greater good some regulations seek to achieve and the high costs of compliance.”

The following chart ranks the top 20 risk factors cited in the 10-K filings of the 100 largest manufacturers in the fabricated metal, food processing, machinery, plastic and rubber, and food manufacturing sectors:

                     

Top 20 Risks for Manufacturers

      2017     2016     2015
Supplier, vendor or distributor disruption       #1   100%     #1t   100%     #1t   100%
Federal, state and local regulations       #2t   98%     #2t   99%     #1t   100%
Labor costs, retention and outsourcing       #2t   98%     #3   97%     #3   98%
General economic conditions, including disruptions in the financial markets       #4   97%     #6   96%     #4   97%
Competition & pricing pressure       #5t   96%     #3t   97%     #5t   96%
Environmental regulations and liability       #5t   96%     #7   95%     #5t   96%
Cybersecurity breaches       #5t   96%     #9   92%     #17   86%
International operations       #8t   94%     #8   94%     #9   93%
Failure to execute growth or efficiency strategy       #8t   94%     #12t   91%     #10   91%
Foreign currency exposure       #10t   93%     #9t   92%     #12t   88%
M&A, joint ventures and partnerships       #10t   93%     #9t   92%     #12t   88%
Operational infrastructure, including information systems and technology       #10t   93%     #12t   91%     #15t   87%
Loss of demand for products or services       #10t   93%     #15t   88%     #12t   88%
Commodity, component and raw materials costs and availability       #14   92%     #3t   97%     #5   96%
Natural disasters, terrorism and geopolitical events       #15   90%     #12t   91%     #15   87%
Access to capital, financing and liquidity       #16   89%     #15t   88%     #11   89%
International trade policies       #17   87%     #18t   84%     #20   84%
Innovation & meeting consumer needs/preferences       #18   82%     #17   87%     #18t   85%
Litigation & legal proceedings       #19   81%     #18t   84%     #8   95%
Product contamination & recalls       #20   80%     #18t   84%     #21   79%
                   

Additional findings from the 2017 BDO Manufacturing RiskFactor Report include:

Major Votes Rock the Status Quo

As businesses wait to see how domestic and foreign campaign rhetoric will play out in enacted policies, manufacturers seem to be feeling uncertainty around economic priorities and spending. And while it’s too early to tell the full scope of changes to come, regulatory easing was a major theme throughout the Trump campaign.

  • 20% mention risks associated with the new administration
  • 19% point to infrastructure spending & commercial construction, from 14% in 2016
  • 30% mention the UK’s “Brexit” vote to leave the EU
  • 98% point to federal, state and local regulations
  • 11% cite Dodd-Frank, a decrease from 22% in 2015

Byte by Byte: Strengthening Cyber Defense in Industry 4.0

Implementing and maintaining systems that preserve the integrity of production processes without the same level of human oversight remains one of the main challenges to Industry 4.0 implementation.

  • 96% worry about cybersecurity breaches, up 50% from four years ago, making them one of manufacturers’ top 5 risks for the first time
  • 91% point to challenges implementing and maintaining information systems and operational infrastructure

“With the nation’s eyes on the manufacturing industry, companies can’t afford to take chances with their cybersecurity measures,” said John Riggi, Head of BDO’s Cybersecurity and Financial Crimes Practice. “It’s safe to assume a breach is always a possibility, so to avoid manufacturing interruptions, losing valuable intellectual property and taking a reputational beating in the event of a cyberattack, manufacturers should regularly test their incident response plan to ensure it’s ready to deploy at a moment’s notice.”

Staffing the Next Industrial Revolution

Manufacturers are still working out the kinks when it comes to finding, retaining and engaging the next generation of engineering, technology and factory floor talent.

  • 98% point to labor costs, retention and outsourcing challenges
  • 2/3 of manufacturers mention strikes or work stoppages
  • 75% say attracting and retaining their key management personnel is a risk

Capital Concerns: If You Allocate it, will it Come?

Amid unprecedented innovation and change in the industry, many manufacturers have one question: How will we fund it? There are huge opportunities to deploy capital, but concerns over access and liquidity—not to mention the potential for rate hikes—persist.

  • 89% note concerns over access to capital
  • 71% cite indebtedness and lack of flexibility, up from 61% in 2016
  • 52% cite challenges with seasonality and cyclicality, up from 45% in 2016

A New Compass for Trade

Major decisions on global trade by the Trump White House could have broad implications for supply chain operations, growth markets and labor. While re-shoring has been on the industry’s radar for several years, 2017 could be the year for acceleration.

  • 94% cite threats to international operations and sales
  • 87% are concerned by restrictive trade policies

For more information on the 2017 BDO Manufacturing RiskFactor Report, view the full report here.

The 2017 BDO Manufacturing RiskFactor Report examines the risk factors in the most recent 10-K filings of the largest 100 publicly traded U.S. manufacturers in the food manufacturing, transportation, fabricated metals, machinery, plastics and rubber segments; the factors are analyzed and ranked by order of frequency cited.

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