December 6, 2021
By: Lyat Avidor Peleg
A Look Backward – and Forwards – at Process Manufacturing 2021/2022
While 2020 was a truly unprecedented year, the past 12 months have been no less tumultuous. The problems that appeared in 2020 didn’t disappear with the new year, plus new challenges arose as the world reopened. Changes are still reverberating across various industries and geographies, and process manufacturing plants are coping with how to respond.
Interestingly, it seems the pandemic itself is no longer considered the biggest threat to industry, although new variants mean that the economic landscape hasn’t settled. Multi-pronged issues that were sparked and/or accelerated by the pandemic are top of the agenda for most manufacturing companies. The reaction to the pandemic is still underway.
The State of Process Manufacturing 2022
The outlook for process manufacturing over the next year or so is generally positive. Deloitte’s projections anticipate GDP growth in manufacturing to average around 4.1% for 2022, which is a record high. The Conference Board, which is a leading non-profit organization for economic forecasting, similarly predicts that world growth will expand at an average rate of 3.9% in 2022; with growth across all mature economies expected to rise by 3.9%.
For the US and China, both leading global economies, 2022 is likely to bring fast growth at rates slightly above normal – 3.8% and 5.5% respectively – through 2026, with growth expected to fall back to normal levels starting in 2027.
While the global outlook is optimistic, there’s still a range of growth rates expected across different geographies and industries.
Process Manufacturing in Europe
According to reporting from the EU, and as shown in the table below, industrial production in that area rose by 1.4% in July 2021, compared with the previous month, and total production levels are now 1% above those of February 2020, the month before COVID-19 hit Europe.
Process Manufacturing in the US
The outlook is generally positive in the US as well. The National Association of Manufacturers’ report for Q2 2021 shows a 4th consecutive quarterly rise in market optimism among participants, with executives feeling more optimistic about future revenues than they did in Q1 2019, the previous high.
Among survey respondents, 48.5% said their revenues had recovered by the end of the first quarter of 2021; 75% anticipate that revenues will be back to pre-pandemic levels by the end of 2021; and a total of 88.7%, or close to 9 out of every 10 companies, expect to have returned to pre-pandemic levels by the end of 2022.
Process Manufacturing in China
As reported by the United Nations Industrial Development Organization (UNIDO), thanks to its swift and strong response to the outbreak, 2020 saw process manufacturing in China bounce back faster than anywhere else, with the country returning to a YOY growth rate of 9.4% and regaining its pre-crisis growth trajectory by Q4 2020.
UNIDO noted that emerging and developing economies such as those in Southeast Asia recovered relatively fast, while more industrialized countries took longer to bounce back.
Growth Variations Between Process Manufacturing Verticals
This year’s economic recovery benefited all manufacturing industries to some extent, with the EU reporting that total industrial production from manufacturing verticals increased by 8.3% overall between July 2020 and July 2021. Nonetheless, there have been broad variations between different vertical industries, as depicted in the graph below.
While most industries saw at least some growth in the 12 months between July 2020 and July 2021, pharmaceutical production outstripped every other vertical, rising by more than 30%. At the other end of the spectrum, metal ore mining, motor vehicles and trailer production, and clothes manufacturing contracted at rates of -9.9 %, -9.0%, and -4.6% respectively.
Threats to Ongoing Manufacturing Growth
This rosy prospect is not guaranteed. A number of threats remain which could undermine growth, including the pace of digital transformation which is likely to dictate the path of recovery.
Deloitte warns about ongoing high risks and instability, notably due to labor shortages, supply chain disruptions, and the rising prices of raw materials, as well as repeated COVID-19 variants, cyber attacks, and worries about tax rises and climate change.
In a similar vein, the Conference Board notes that global supply chain issues, labor issues, and poor tech investments are the biggest risks to growth in the markets, and a survey by the National Association of Manufacturers (NAM) found that rising costs for raw materials, labor shortages, and supply chain challenges are the top 3 concerns worrying manufacturing executives.
A couple of more minor, but nonetheless significant, issues that manufacturers are still grappling with include a rise in demands for sustainability and the ongoing issue of resilience. Deloitte reports that 95% of manufacturing executives expect their organizations will invest more in ESG areas in 2022 than in 2021.
Resilience was pushed even further into the spotlight in 2021, as plants had to pivot swiftly from zero to high demand, and many needed to add product lines and/or change their offering.
Digital Transformation Is the Foundation Stone for Success in 2022
As widely observed, the pandemic triggered an enormous acceleration in digital transformation in the process manufacturing industries and beyond. Craig Hayman, CEO of AVEVA, summed it up thus, “What a year it has been! We’ve seen five years of digital transformation in this sector.”
A KPMG study reported that 96% of CEOs in the manufacturing industry speeded up digitization projects following the outbreak of COVID-19.
The Harvard Business Review (HBR) found that close to 40% of manufacturers have increased CapEx in Q2 of 2021, and more than half have kept it steady, with most investments earmarked for digital transformation.
Nor has the wave of digitalization slowed down. Those lagging behind are working to catch up with the frontrunners, while the leaders are uncovering new use cases and applications for new technologies, and building upon the changes they already made to introduce more advanced tools and processes.
For example, in 2022, 45% of manufacturing executives surveyed by Deloitte expect further increases in operational efficiency from investments in Industrial Internet of Things (IIoT), while investments in artificial intelligence (AI) are predicted to see a CAGR of over 20% through 2025. Discrete manufacturing is among the top three industries expected to invest most heavily in AI, primarily in quality management and automated preventive maintenance use cases.
The most advanced plants are already shifting from isolated tech implementations to whole-plant convergence and machine-to-machine (M2M) communications, with the ultimate goal of building smart factories. This chimes with KPMG’s findings that the primary areas of focus for digital transformation projects are 5G for IIoT, AI, autonomous operations, virtual reality (VR), and 3D printing, all of which lay the foundations for smart factories.
Their efforts are fully justified by the overarching importance of digital transformation. Far from being just another response to the pandemic, digitalization is a key foundational issue that affects manufacturing companies’ ability to contend with all the other challenges that lie before them.
For example, UNIDO found that by the end of 2020, high and medium-tech industries had recovered faster than low-tech ones. Manufacturers told HBR that a lack of transparency and appropriate analytics, together with siloed data, is making the supply chain crisis worse, driving them to invest in analytics and data. Deloitte’s survey similarly revealed that 53% of companies intend to enhance data integration for supply-and-demand visibility and planning for the same purposes.
Digitalization is also an important strategy for coping with the prolonged labor shortage in process manufacturing. Digitalization tactics such as automation, predictive maintenance, and digital twins enable plants to remain fully operational even with a reduced workforce, as well as permitting experienced engineers, who may be wary about returning to work in person, to resolve issues remotely.
Shakeup in the Workforce
The accelerated pace of digital transformation brought with it increased automation and more sophisticated tools, which in turn provoked a need for a workforce with more sophisticated and advanced digital skills.
At the same time, the pandemic revealed the risk of relying on streamlined teams with narrow skillsets; when COVID-19 hit, plants had to pivot to a different product mix and often to manage with different combinations of workers on site, emphasizing the need for diversified skillsets.
KPMG reports that a talent shortage is one of the key threats to growth over the next three years, while Deloitte estimates a shortfall of 2.1 million skilled jobs by 2030, and predicts that this could limit higher productivity and growth. The lack is due to a number of factors: more workers than expected retired during the pandemic, at the same time as younger workers grew more picky about the positions they accept.
As mentioned above, plants are investing in digital transformation to close the labor and skills gap and improve productivity. Digitally advanced companies are the most appealing to young workers, who also have the skills to drive digital adoption, and attracting new workers is the top strategy for resolving workforce issues. Companies are reducing entrance requirements for new employees and wages are rising, but there’s still a lag while new employees are onboarded and trained, and plants need advanced tech tools to compensate for the gap in expertise.
Reskilling is another priority tactic, plus companies expect to offer hybrid and flexible work models as part of an overhaul of plant labor practices.
The Supply Chain Crisis Hasn’t Cleared Up
Another of the main challenges for process manufacturing, and one which has gotten worse rather than better during 2021, is the supply chain. The most recent Institute for Supply Management® report shows that supplier deliveries were at their slowest since April 1974, with order backlogs and customer inventories hitting new (and undesirable) records. The prolonged semiconductor chip shortage is also playing a part since it takes time for new fabs to get up and running, and many items of equipment rely on semiconductor chips.
“The greatest threat to manufacturers’ growth over the next 3 years, apart from the pandemic, is risk to the supply chain,” notes KPMG, with Deloitte observing that a lack of supply chain integration could stall smart factory initiatives for 3 in 5 manufacturers by 2025.
Previous disasters were regional, but the global pandemic has provoked a change of attitude. The World Economic Forum (WEF) reported that the America and Asia Pacific regions rely on China for 20-35% of intermediate products, rising to over 80% for key components for pharmaceuticals, a situation that is now recognized as a strategic weakness. Companies are looking to reshore or nearshore suppliers, and location is now a more significant factor when rating suppliers.
KPMG found that 66% of CEOs had to rethink their supply chains in order to become more agile, bring production closer to home, and make their supply chain more robust. Deloitte reports that 41% of executives will add or diversify suppliers, and 24% are considering moving operations closer to end customers in different regions in 2022.
As mentioned above, technology plays an important role here too, with process manufacturing plants advancing supply chain data and analytics to open up more visibility into supply chain issues.
The Challenges of 2021 Could Pave the Way for Success in 2022
As 2021 draws to a close and process manufacturing companies prepare for 2022, there’s a general sense that the pandemic brought a number of challenges, but the end result will be an improvement on the “old normal.” As the saying goes, every crisis is also an opportunity.
In Fictiv’s 2021 State of Manufacturing Report, most participants acknowledge that the manufacturing industry will never go back to prepandemic norms, but they expect it will be more resilient, more agile, and more sustainable as a result of the changes that have been thrust upon them.
2021 was as challenging a year as 2020, if not more so, but those companies that used the challenges to advance digital transformation, reshape their workforce, and apply tech to improve visibility into the supply chain, are now in a better position than they were. “The implication is clear. A stronger, better prepared and more resilient organisation is likely to thrive, once the pandemic has passed.” observes Stéphane Souchet, Global Head of Industrial Manufacturing at KPMG International.