Even before the outbreak of the coronavirus, the manufacturing sector was looking a little shaky. While the service economy was in a boom, underlying secondary production looked weak. Some called it a nominal recession.
Now, the situation looks even more severe, with entire supply chains shutting down, particularly in the world’s most productive countries.
Manufacturers, therefore, face considerable risks. The current crisis is just one example of the types of things that can go wrong. Startups in the sector, however, face a raft of risks with which they must deal. It’s not as simple as just getting through the next 90 days. There are many more factors that they need to consider if they want to thrive over the long term.
Tariff And Trade Wars
Until this year, manufacturing was an international affair. Companies outsourced their production to countries in East Asia, particularly China, and then just imported the required goods. But with the current political climate, that model looks like it could come to an end. Western companies are starting to realize that they can’t rely on certain communist dictatorships in the far east to facilitate the production that they need. Stability is becoming more critical.
Add to that the threat of tariffs, and you have an explosive and damaging situation in the making. Firms will increasingly need to consider repatriation – bringing production back to domestic shores.
The old model of international and global production is probably going to die over the next few years. It will no longer make strategic sense for companies to outsource in the way they have for many years. We’re looking at a wholesale reversal in the trend towards globalization, and it is going to happen fast.
Startups, therefore, need to be wary of this risk. Tariffs on goods could expand rapidly following the fallout from the coronavirus epidemic. We could see the US administration enacting policies that attempt to bring more critical production onshore. And that could lead to a fearsome Chinese response, the likes of which we haven’t seen before, bringing more misery to businesses and families already struggling to cope.
The Lack Of Talent
Typically companies don’t think of a lack of talent as an operational risk. Still, for manufacturing startups, it is a real issue. Finding people with the skills that you need to thrive is more of a challenge than you might expect. Most university graduates don’t want to go into manufacturing. They want to go into other fields. That’s what they’ve been taught to do. Changes in the economy, however, are going to force their hand – and yours. You’re going to have to hire people with less education and experience than you’d like and train them up. Getting people who understand your processes will probably be too expensive.
The economy will likely need around 3.5 million new manufacturing jobs through 2025. The level of demand, therefore, will be high – and that will put upward pressures on wages.
The manufacturing industry, like oil and gas and agriculture, poses significant risks to the environment. Startups can’t just lay waste to the natural world in their efforts to create products and get off the ground – they have to abide by environmental regulations.
If you run a startup, therefore, you must take precautions from the outset to prevent your company from becoming a hazard to the natural world and the community in which you work. If your enterprise relies on any dangerous processes, ensure that you adopt industry best practice before undertaking them at scale.
You should also build relationships with hazmat incident response services just in case you experience a disaster. It would help if you had people on hand, ready, and willing to go, in the event of a catastrophe.
The Pace Of Change
Manufacturing has always had to deal with the march of progress to some degree. Over time, companies in the secondary sector automated and moved jobs overseas, changing the nature of production.
Today, though, the pace of change is ramping up again. Not only do we see the repatriation of industry on a massive scale, but we’re also looking at technological change on a level unprecedented in history. Top of the list of disruptions includes AI, industry 4.0, and cybersecurity.
McKinsey and others estimate that new technologies could cause the productivity growth rate of the economy to double over the next fifteen years.
Not all firms, though, will be able to keep up. Some will struggle to wrap their heads around the profound changes that are underway right now. Others will see the writing on the wall but won’t be able to source the talent that they need to make the transition to new modes of production.
Issues In The Supply Chain
For years, firms in manufacturing have been able to rely on their supply chains. But with the closing of manufacturing facilities all over the world, it is now eminently clear that they’re not impervious to disasters. A virus outbreak in China forced the economy to shudder to a halt in a matter of weeks. We went from a booming enterprise to weak demand and supply. The turnaround was incredible.
Issues in the supply chain are likely to plague startups for several years to come. It will take time for people in the economy to reorganize themselves to reflect the new realities and risks. Things are tough right now, and they will probably remain so for the foreseeable future. There are no easy answers here.
Managing supply chain risk will mainly involve finding domestic suppliers and maintaining backup relationships, just in case a primary vendor fails.
Speaking of which, this is another risk – something that the most prominent manufacturers in the world have to deal with right now. South Korean car giant Hyundai, for instance, is currently having to deal with a situation where parts suppliers from China cannot fulfill or ship its order. The just-in-time delivery model might be coming to an end as we know it. That changes the nature of doing business in the industry forever.