Re-shaping manufacturing: RSM and Aequitas’ investment outlook in turbulent times

Post by RSM

RSM has partnered with Aequitas Investment Partners, a specialist asset consultant and investment manager, to assist RSM’s advisers in developing investment portfolios and managing them through the turbulent economic environment.

This article gives an overview of how RSM and Aequitas view the outlook for manufacturing from the perspective of a long term investment manager. After several decades of manufacturing moving offshore, the stage is set for a reversal of this trend. But this will require continued investment from manufacturers, and growing profitably will require careful management from business leaders.

Supply chain vulnerabilities have been thrust into the spotlight by the COVID-19 pandemic. Manufacturers worldwide experienced disruptions due to factory closures, transportation restrictions, and shortages of critical components. This has prompted businesses to reassess their supply chain strategies.

Emphasising diversification and incorporating resilience measures will be essential for mitigating future disruptions and maintaining a steady flow of production. “Just in time” production might be put aside in favour of “just in case” stockpiling of critical components and more extensive inventories.

And when selecting suppliers, businesses will consider proximity and the simplicity of transport links rather than assuming that goods can flow around the world freely. Manufacturers can reduce lead times, enhance quality control, and better serve local markets by bringing production closer to home or regionalising operations.

In developed countries, including Australia, we expect manufacturing to grow more rapidly than it has over the last few decades as reshoring brings some production home from emerging markets.

The continued pace of technological change supports this trend. The manufacturing sector is no stranger to technological improvements: productivity growth in manufacturing has always been strong, and continuous improvement is a way of life for most companies in the sector.

But the high level of automation that factories are capable of now has eroded the labour cost advantage that emerging markets have had for many years. And as developing countries grow their services sectors and shift from production to consumption we expect to see production move closer to the consumer, or to be concentrated in regions with expertise in a particular niche, rather than simply flowing to emerging markets.

Technological improvements also support the customisation and personalisation of products. Many manufacturers can now cater to individual customer needs, increasing customer satisfaction and loyalty.Digital manufacturing and additive technologies have made this achievable, but we would argue that improved order management systems and websites or interfaces that allow customers to specify their requirements precisely are just as important.

Environmental sustainability is starting to become a major force in the economy. This is most evident in energy where, after nearly thirty years of lip service and broken agreements from governments, reduction in fossil fuel use and the electrification of the economy is rapidly becoming a reality.

Most manufacturing businesses consume electricity; for many it is a major cost. We expect electricity prices to rise in the medium term as the costs of the energy transition are passed on to consumers in one form or another. In the longer term, renewable energy should lead to cost reductions, particularly for businesses that can manage their loads to take advantage of cheaper pricing. However, process industries that use fossil fuels for heating could find the transition much more costly.

We expect government support and tariff-like arrangements will somewhat level the playing field between countries leading the transition and those that are lagging, but much of the cost will still be borne by industry. Those businesses that produce products required for the energy transition will likely have strong demand growth over the next decade.

The downside is that to capitalise on these opportunities businesses must invest in technology and people. The supply chain and production issues that are making reshoring more attractive are also making it harder to obtain new equipment, and rising interest rates mean that upgrades need to pay for themselves sooner.

In addition, high tech equipment takes a range of specialist skills to install, manage and maintain, and there are many skill gaps across the economy in key areas. Manufacturers will need to continue to build the skills of their staff or develop relationships with external contractors or consultants. The right mix will vary depending on the business but will require financing and time regardless.

The manufacturing industry is confronted with challenges and opportunities. Embracing advanced technologies and investing in workforce development will be crucial for manufacturers to grow in these dynamic times. But managing costs and choosing opportunities carefully will be necessary for businesses to thrive. The manufacturing sector remains an exciting space for investors, offering promising prospects for long-term returns driven by the resilience and adaptability of companies in the face of evolving trends.

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