Reading the Wind: The Heads and Tails Ahead for Manufacturing
“The tree prefers calm, but the wind will not subside.” – Chinese proverb
In our 21st-century global marketplace, the overlap and interconnection of technological, social, political and demographic changes have buffeted the manufacturing sector like never before. I call this phenomenon the Six Winds—three headwinds that are the primary obstacles to fulfilling the promises of Industry 4.0, and three tailwinds that are thrusting U.S. manufacturers forward—at times, faster than they can comfortably manage.
Let’s look at the headwinds.
Demographics and talent. The pandemic exacerbated the need to find talent. The statistics are mind-boggling: Some 37 million people are expected to leave their jobs this year. Job openings in manufacturing have hovered near or above 800,000 for over half a year. Meanwhile, quit rates in manufacturing have been above 300,000 per month since November 2021. This is being driven by the younger generations in the workforce. While American millennials are the largest generation in the U.S. labor force, and there are only 9 million Gen Z currently working (age range is 9 to 24), the latter are a driving force behind the Great Reshuffling. According to LinkedIn data, Gen Z is changing jobs at a rate 134% higher than in 2019, which compares with millennials reshuffling 24% more, and boomers 4% less.
Supply chain disruptions. Supply chain issues aren’t new, but the disruption of the past year is different. According to the New York Federal Reserve’s newly developed Global Supply Chain Pressure Index (GSCPI), the world’s supply chain dysfunction of the past two years has attained all-time highs. And the estimated average annual cost to businesses is higher in the U.S. ($228 million per company) than anywhere else around the globe. Even as analysts were predicting slow but steady improvements in 2022, Russia’s invasion of Ukraine and China’s lockdown of Shanghai – the largest port in the world in terms of container throughput, where almost 500 ships were waiting to deliver their shipments in early May – once again knocked the global supply network back on its heels.
Cybersecurity. While networks have revolutionized factories and supply chains, they have also provided entry points that expose a company to the world’s bad guys. Three-fourths of businesses in a global survey see the risk-threat of financially driven cyber-attacks—such as ransomware, which rose 104% in North America last year—as catastrophic or critical to their operations. IBM Security’s annual X-Force Threat Intelligence Index showed that manufacturing has emerged as the most targeted industry by cyber villains. Phishing remains the most common kind of assault, but last year there was a 33% increase in attacks via unpatched software vulnerabilities—"a point of entry that ransomware actors relied on more than any other to carry out their attacks,” according to IBM Security. Indeed, IBM reports that vulnerabilities in Industry Control Systems rose 50% year over year – due to the acceleration of digitalization throughout the companies.
Fortunately, the winds are blowing in both directions. Here are the tailwinds.
Digital Transformation. New studies show that smart manufacturing adoption rates increased 50% over the past year, as two-thirds of manufacturers have adopted some elements of Industry 4.0, often starting with predictive maintenance of equipment. But manufacturers are also extending digitalization beyond the factory floor to “stay in touch” with their equipment post-purchase through data-driven advanced services. Analysts project the global smart manufacturing market in 2023 will reach $500 billion, more than triple the market size of 2017. The market for industrial robots is forecast to approach $100 billion this year, representing 2.7 million units worldwide, after two pandemic years of regression, and more than $150 billion within five years.
Artificial intelligence. Just as the assembly line accelerated automobile manufacturing in the second industrial revolution, AI is accelerating digitalization in the fourth. While surveys show that manufacturers use AI primarily for quality control, inventory management, and monitoring and diagnostics, this will change. Experts project that AI will soon open the door to automated product customization and automated experimentation. Perhaps most important, AI and machine learning are leading to the emergence of fully realized digitalization of the shop floor with self-adapting capabilities based on predictive and preventive maintenance opportunities.
Rise of the middle class. Ultimately, manufacturers make things so that people can buy them, and they can only do that if they have money. In the last decade, economists determined that more than half the world’s population had achieved the status of middle class, having discretionary income for consumer goods, especially durables. More recent analyses show that Asia is generating most of the new growth in the consumer class, with the Brookings Institute suggesting the middle class growth of 6% per year in China and India will dwarf the 0.5% growth this decade in the West. In fact, assuming the global economy rebounds from the pandemic, more than one billion Asians are expected to join the middle class by 2030. Middle class spending in the most rapidly expanding economies could achieve double-digit growth for years to come, with an expectation that this economic cohort will spend $29 trillion per year by 2030.
Stephen Gold is president and CEO, Manufacturers Alliance.
