Bill May | May 10th, 2016 | MMG
The manufacturing sector of the U.S. economy hovers around 12 percent of gross domestic product. Two decades ago, it accounted for approximately double the current figure, or 23 percent of GDP; however, U.S. manufacturing companies will likely experience a substantial uptick in the next three to five years, as three substantial manufacturing trends converge.
Mid-market manufacturers and financial institutions should consider how to respond to the opportunities that present themselves. By understanding these trends and implementing appropriate strategic changes, such as modifying how they assess potential clients, businesses will have the opportunity to reap huge economic rewards.
Below is an overview of three major manufacturing trends on the horizon.
Shortage of Technical and Managerial Resources
The manufacturing sector has been shrinking for nearly two decades, as indicated by its share of GDP. Offshoring, lower labor rates abroad, and explosive growth in the Asia Pacific region have led to a downward spiral of the domestic manufacturing sector. The recession in 2007 further exacerbated the situation by decimating small to medium-sized manufacturing enterprises.
Meanwhile, the prestige around manufacturing jobs has waned and millennials have sought careers in other industries, damaging the pipeline of new workers for manufacturing. In an effort to combat the shortage, manufacturing entities reach down into smaller manufacturers to replenish their dwindling workforce. Small and midsize manufacturers that can deal with the shortage of talent will continue to grow.
At a recent roundtable event of small to medium manufacturers, many of the owner-operators spoke of the how they’re addressing attrition of capable employees. Some are creating their own in-house apprenticeships and employee training programs; others are searching for ways to create entry-level jobs without negatively impacting their already slim margins, allowing them to evaluate how new employees assimilate to the manufacturing environment.
One way to create entry-level jobs is to apply simple low-cost automation, allowing businesses to alter the work structure and increase output per employee; create relatively simple tasks (e.g., loading machines, cleaning a factory, etc.); and provide a way to evaluate and train new employees. Owners of midsize manufacturing companies must not only focus on how to be competitive now, but how to continue to be competitive into the future. Not a small task!
Transition of Baby-Boomer Owners
The demographic shift occurring as baby boomers age will dramatically impact small and middle-market manufacturers over the next several years as owners retire.
Some estimates indicate that nearly $1 trillion of ownership equity will change hands annually over the next 10 years. Other experts foresee a significant liquidation of small companies with minimal exchange of equity—the outcome is likely somewhere in between. Almost assuredly, the number of manufacturing ownership transactions will grow exponentially.
If prepared, financial institutions, banks, private equity and transactional services organizations will flourish in this environment. Understanding the specific needs of mid-market manufacturers is critical. Building relationships with owners, and understanding their personal connection to their businesses and how to meet their specific needs will be essential to your success. Merger and acquisition opportunities will be numerous for manufacturing entities—if they’re prepared to deal with the intricate nature and complexity of the midsize manufacturers. For an owner, turning over a business he or she has built from the ground up is like giving up a child, and clear thinking may be difficult.
North American Manufacturing Growth
North American manufacturing growth is not guaranteed, but socioeconomic and political pressures are increasing. A shift in mindset will need to occur relative to the social and economic status quo. The most likely outcome will be a renewed focus on manufacturing.
Historically speaking, manufacturing jobs have a multiplier effect on the economy. According to the Economic Policy Institute, a Washington, D.C., think tank, manufacturing provides a nearly 3 to 1 multiplier relative to job creation, which trickles over into other sectors beyond manufacturing.
Today, the manufacturing sector has a wage premium of nearly 11 percent for workers with less than a college education. Data indicate that 19 percent of millennials have a college degree (or, put differently, 81 percent do not), placing members of this generation in a position to benefit from growth in the manufacturing sector—ultimately a boon to the American economy.
What Does the Future Hold?
Opportunities for improved margins and organic growth in small and midsize manufacturing businesses will explode, and manufacturing economic activity will flourish. As the U.S. manufacturing sector grows relative to GDP, the domestic manufacturing sector will begin to look more like that of Mexico (18 percent of GDP), Japan (19 percent) or Germany (23 percent).
Small to medium-sized manufacturing entities must have a plan to deal with all three of the mega-trends described above. Financial institutions, banks, private equity investors, merger and acquisitions advisers and transactional services firms must also ramp up and prepare for this economic shift.
The indicators that this socioeconomic transition is coming are already visible, and the economic and political climates are set. Is your organization prepared to exploit these opportunities?
Bill May is the founder and president of High Value Manufacturing Consulting. HVMC is based in Tennessee and provides extensive manufacturing consulting experience, helping to serve small to midsize manufacturers through quick response solutions that net high value manufacturing results.