The manufacturing sector has continued to send mixed signals thus far in 2023. The May Manufacturing PSI®, as reported by the Institute for Supply Management registered 46.9, down 0.2 percentage points from the previous month. This is the sixth consecutive month of contraction after 30 months of expansion, dating to the early days of the COVID-19 pandemic. The manufacturing sector has been facing continued challenges from inflation, supply chain issues, labor shortages, and rising interest rates. Of the six largest manufacturing sectors, only Transportation Equipment showed growth in May.
Despite the above, many manufacturers continue to move forward with investments that will enhance their ability to respond to disruptions and stimulate growth. The 2023 BDO Manufacturing CFO Outlook Survey showed that 36% of the 125 companies polled will pursue Industry 4.0 investments and 38% will pursue Mergers and Acquisitions (M&A). Additionally, the survey reported that 69% of the manufacturers surveyed reported profitability and increased revenues in 2022.
Regardless, many manufacturing CFOs believe that a downturn could lead to significant financial issues.
In the face of the possibility of a downturn, manufacturers should consider strategies to insulate themselves from the risks associated with an economic decline. Some of the recommendations that the HBK Manufacturing Industry Group offers are as follows:
Investments in Industry 4.0 – It has been proven time and again that companies that are technologically advanced fare better in the face of an economic downturn. Manufacturers who maintain or increase their investments in Industry 4.0 will have the analytical tools to improve decision-making and identify problems earlier than those companies without these capabilities.
Identify and focus on high-value customers and products – Often referred to as a tiered service model, by prioritizing their highest-value customers and identifying the most profitable products in their portfolio, manufacturers can strengthen relationships with their best customers and increase customer retention while mitigating potential sales declines and promoting products with higher margins. The use of data analytics is critical to success in this area. We have had great success in helping clients use analytical tools to build dashboards to help them identify customers, products, and services that are most valuable to them.
Identify opportunities for tax benefits – Most tend to think of opportunities to realize federal tax benefits. While the Inflation Reduction Act does create and expand tax incentives for manufacturers to reduce their federal tax liability, manufacturers should not overlook state and local tax strategies and incentives.
Many states and municipalities offer tax credits and incentives to promote growth. These can be overlooked at times. Manufacturers should consider having a study completed that reviews all of the entity’s state and local filings to ensure that they are benefiting from available incentives and not overpaying taxes. In addition to state and local income taxes, manufacturers should ensure compliance in the areas of sales and use taxes and payroll taxes.
Manufacturers that are considering relocation plans should negotiate incentives with state and local authorities.
Consider M&A plans – Rising costs, inflation, supply chain issues, labor shortages, and rising interest rates will be major motivators for M&A in 2023 and the coming years. Manufacturers should begin formulating and enhancing M&A plans. Many family-owned manufacturing businesses are facing transition issues as their owners look to retire. These plans could be accelerated by the issues mentioned. This could present opportunities for manufacturers to buy these businesses at favorable valuations, allowing them to increase economies of scale, enter new markets and acquire new customers. Additionally, some manufacturers may look to spin off non-core business segments to focus on their most profitable segments. There are opportunities for companies to both expand or contract their business to allow them to meet their goals.
Investment from private equity or venture capital could help fund digital incentives or expansion into new products and markets.
Manufacturers should begin to prepare for the many scenarios that can play out in the near term to take advantage of opportunities and to develop plans to deal with obstacles that they are presented with. HBK Manufacturing Industry Group is uniquely positioned with a team of experts to assist your company as you navigate the waters ahead. To contact a team member, please call 330-758-8613 or email manufacturing@hbkcpa.com.
