This document focuses on a number of topics that pertain to the machine tool/manufacturing industry as a whole, including the President’s push to manufacture electric vehicles, common problems in the industry, the growth in machine tool orders, Amazon’s plans to increase spending with U.S. suppliers, and the impact of supply chain problems on consumers. It also includes a brief commentary on the outlook for the manufacturing industry.
Biden Drives Auto Industry to Make Electric Vehicles Half of Sales by 2030: On August 5, the White House announced that President Biden will sign an executive order setting an ambitious new target to make half of all new vehicles sold by 2030 electric or zero-emissions vehicles. The goal is supported by major automakers like General Motors, Ford and Stellantis, all of which released statements supporting the initiative. The companies announced non-binding goals to make 40-50% of their U.S. sales come from electric vehicles by Biden’s target date.
Transportation is currently the largest contributor to U.S. emissions (around 29% in 2019). Cutting emissions is crucial if Biden is to deliver on his ambitious climate goals, and switching from fossil fuel-burning engines to electric ones is a core component of the president’s strategy. Biden has committed to cutting greenhouse gas emissions in half by 2030, in line with the Paris climate agreement, and to reaching a net-zero economy by 2050. Currently, electric vehicles make up only around 1% of the vehicles on America’s roads. Electric cars can, however, be a hard sell since they can be costly, require specialized (often expensive) infrastructure, and some consumers may just not want them. In addition, the pollution issue will remain, although in a lessor capacity, if the electricity required to charge them does not come from a clean source. Also, since the commitments made by the major automakers are voluntary and unenforceable, some believe they carry about as much weight as a New Year’s weight-loss resolution. That remains to be seen.
Four Common Problems in the Manufacturing Industry: The manufacturing industry is the fifth largest employer in the U.S. It’s also experienced a period of rapid growth over the last few decades. However, like every other sector, manufacturing faces its fair share of challenges. Four common problems that those in the industry must overcome to be successful today and beyond are as follows:
1. The Manufacturing Skills Gap. One of the biggest manufacturing challenges U.S. businesses face today is the growing skills gap. The manufacturing sector desperately needs skilled, younger workers to counteract the aging workforce. It is expected that approximately 22% of existing skilled manufacturing workers will be retiring by the end of 2025 and currently there aren’t enough workers to fill these roles. According to the Manufacturing Institute, there could be as many as two million unfilled manufacturing jobs by 2025. Nonetheless, there are several possible solutions as to how the industry can tackle this problem:
Partnering with Educational Institutions — This can ensure that more young people are aware of the benefits of a career in manufacturing. In fact, more and more manufacturing companies have been doing this. In reality, 32% of Generation Z has had a manufacturing career suggested to them, compared to only 18% of Millennials.
Embracing a More Flexible Way of Working — More and more people want to work into their retirement years. Manufacturers can ease the process by offering flexible work hours, as well as the ability to work remotely.
Upskilling Existing Lower-Skilled Employees — Companies can encourage a culture of learning with in-house mentoring and training programs. This could serve to optimize talent by moving people into new roles as they gain the necessary skills.
Implementing Programs Like Internships and On-the-Job Training — Doing so can entice Millennials and Gen Xers in other industries to make the leap to manufacturing. There’s no one-size-fits-all solution to bridging the manufacturing skills gap. Rather, smart manufacturers will implement a multi-pronged approach to addressing the issue.
2. Inventory and Supply Chain Management. Managing supply chain and inventory is crucial to any manufacturing business. As companies look to ramp up production, they also need better, more agile manufacturing processes. As such, manufacturers have begun embracing the need for digital transformation. Inventory management is a common problem in the manufacturing industry that has been accentuated by the outbreak of the Coronavirus. Holding too little inventory can hurt both profits and the relationship with customers. Keeping too much inventory can be costly to store and difficult to sell. So, investing in the right software and processes to track and manage inventory can save manufacturers time and money.
3. The Internet of Things (IOT). The IoT is opening up a world of opportunity for consumers and manufacturers alike. The popularity of fitness trackers and smart home devices shows no signs of slowing down. More and more customers expect to be able to connect their devices to products like fire alarms, doorbells, refrigerators and medical devices that let people monitor and manage their health. The IoT has also created opportunities for manufacturers. Connected machines on the shop floor let manufacturers collect real-time data. They even let companies complete remote machine diagnostics and repairs. Manufacturers that want to stay ahead will need to identify how they can use the IoT to its full potential to maximize efficiency and meet operational targets.
4. Incorporating Robotics and Automation. Automating production lines can help increase production rates, reduce safety risks, improve product quality, and increase customer satisfaction. Although implementing automation and bearing the upfront cost of robotics pose specific challenges, those challenges are more than outweighed by the benefits. Automation also has a valid place in the strategy to reduce the manufacturing skills gap. Companies can upskill lower-skilled workers whose roles would normally be replaced by automation.
These common problems faced by the manufacturing industry are also opportunities to strengthen the sector. Over the next decade, it’s the organizations willing to meet these challenges head-on that will not only survive, but thrive.
Machine Tool Orders Up More than 40% at Midyear: In response to the growing demand for valves, hardware, and other high-volume parts, manufacturers are preparing for continued expansion. New machine tool orders from U.S. manufacturers rose to $490.3 million during June, up 8.9% from May and 41.7% from June 2020. Even more encouraging, new manufacturing technology orders grew to $2.5 billion during the first half of 2021, up 48.6% from same period last year. In fact, manufacturing technology orders now exceed the pre-pandemic trend.
“The manufacturing technology industry has rebounded from the pandemic-induced recession in a phenomenal way,” stated Douglas K. Woods, president of AMT, the Association for Manufacturing Technology. “The first half of 2021 is only 3% below 2018, when orders were at a two-decade high. Not only has the industry recovered from the 2020 slump, but orders are now exceeding the pre-pandemic trend.” The data comes from AMT’s monthly U.S. Manufacturing Technology Orders Report, a forward-looking index to manufacturing activity that presents actual data for capital investments in new machine tools.
In May 2021, manufacturers experienced an increase in orders for metal valves, followed by a significant increase in orders for hardware, springs, screws, nuts, and bolts in June. These low-complexity, high-volume parts can be shipped within weeks of a machine being delivered. The production of these parts appears to be an effort by U.S. manufacturers to diversify their supply chains in response to global material and shipping constraints. “In addition to metal parts, demand for petroleum products up and down the supply chain has driven the price of crude oil to the highest level since October 2018,” Woods continued. “In order to meet this need, manufacturers of oil and gas field equipment have also increased orders dramatically.” Woods further described the growing demand for parts required for medical technology, with orders up almost 60% compared with the first half of 2020. He cited research indicating a rising backlog for knee- and hip-replacement surgeries, concluding that manufacturers of those parts will enjoy steady demand.
Amazon Planning Significant Increase in Spend with U.S. Suppliers: Amazon plans to increase its spending with U.S. suppliers by 20% this year as the Delta variant of the COVID-19 virus threatens to create more uncertainty for businesses. On August 12, the e-commerce giant said it’s on track to buy more than $120 billion in supplies and services from more than 200,000 U.S. businesses, including electric vehicle manufacturers, cardboard box producers, construction and engineering firms, and providers of office supplies and equipment. According to Amazon, most of these suppliers are small and medium-sized enterprises. The 20% increase in spending does not include the companies that sell on its website, but rather companies that provide supplies and services that allow Amazon to operate.
“Millions of families rely on us to deliver what they need every day. Delivering for our customers takes teamwork, we can’t do it alone. We rely on strong partnerships with hundreds of thousands of American businesses, from our forklift manufacturer in Kentucky to the construction company in Texas that builds our delivery stations. Today is about renewing our commitment to these businesses and betting big on them,” Dave Clark, CEO of Worldwide Consumer at Amazon, said in a statement. Citing a report from Keystone Economics, Amazon noted that the 2021 spending is estimated to support 840,000 American jobs across construction, transportation, manufacturing, and hospitality.
Most U.S. Consumers Experiencing Supply Chain Problems: Americans have clearly felt the global supply chain disruptions brought about by COVID-19, with most reporting difficulty in receiving goods this summer. According to a July Gallup survey, 60% of U.S. adults have been unable to get a product they wanted because of shortages, and 57% have experienced significant delays in receiving products ordered. Overall, seven in 10 Americans have had at least one of these issues, while 46% have had both. The same poll found that 83% of adults have experienced “significant price increases”, another byproduct of the COVID-19-related economic disruptions to manufacturing, shipping and labor supply.
As expected, given the systemic nature of today’s supply chain problems, similar percentages of Americans in all regions of the U.S. report having experienced the above challenges. Americans in upper-income households (i.e., those earning $90,000 or more) are more likely than others to report experiencing significant delays in product shipments. This may indicate a greater likelihood on the part of wealthier adults to shop online. However, higher-income adults are no more likely to report being unable to get a product or noticing price increases.
From the toilet paper shortage at the beginning of the pandemic to the car shortage today, Americans have experienced firsthand what it means when production constraints or a shortfall of critical manufacturing components means retailers can’t keep up with demand. Not only have supply chain disruptions contributed to rising prices and inconvenienced consumers, some healthcare and military supplies have also been affected, thereby posing a threat to national security. U.S. policymakers across the political spectrum have taken note of the supply chain vulnerabilities exposed by COVID-19 and are trying to correct them through renewed focus on U.S. manufacturing and trade policies. This could include “friendshoring,” which would involve developing new supply chains with Central and South America to replace or supplement those with China. In the wake of the pandemic, Americans may have a whole new perspective about such global trade discussions, recognizing the risks to national security that come with global interdependency as well as to their own way of life.
Manufacturing Industry Outlook
Manufacturing companies and suppliers continue to struggle to meet increasing levels of demand. Record-long raw-material lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments of the manufacturing economy. Worker absenteeism, short-term shutdowns due to parts shortages, and difficulties in filling open positions continue to be issues that limit manufacturing-growth potential.
Despite the above factors, expectations within the manufacturing sector remain upbeat, reflecting performance during recent months and hopes of further boosts to client demand over the coming year. In June, manufacturing performed well for the 13th straight month, with demand, consumption and inputs registering growth compared to the prior month. In fact, all of the six largest manufacturing industries — Computer & Electronic Products; Chemical Products; Fabricated Metal Products; Transportation Equipment; Food, Beverage & Tobacco Products; and Petroleum & Coal Products, registered moderate to strong growth.
In July, although the Institute for Supply Management (ISM) manufacturing index dropped to 59.5 from 60.6 in June, it remained well-above the 50-threshold that separates expansion from contraction in the manufacturing sector. July’s slightly weaker expansion was the result of slower growth in new orders and production. Even so, employment levels rose significantly from the previous month. At the same time, input prices continued to rise on the back of higher raw material prices, but at a slower rate compared to the month prior. FocusEconomics Consensus Forecast panelists currently expect industrial production to rise 4.6% in 2021, which is down just 0.1 percentage point from the June forecast. In 2022, panelists see industrial production rising 3.5%.
Looking ahead, there are four areas on which manufacturers will need to continue to focus their attention to strive to be disruption-proof, and to be successful:
1. Solving forecasting challenges.
2. Digital investments in technologies.
3. Options to drive supply chain resilience.
4. Workforce agility.
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