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September 2010 
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Challenges And Opportunities In The North American Manufacturing Sector |
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Pauline Renaud, May 2009 |
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In recent months, demand for manufactured products has significantly declined. Rising prices for raw materials, combined with tight credit conditions, volatile markets and a lack of financing options have put North American manufacturing companies under tremendous pressure as they scramble to survive. According to government data, US industrial production fell by 1.5 percent in March, not only the fifth consecutive monthly fall, but also the lowest overall level seen in a decade. The downturn is particularly severe in the automotive industry, with year-on-year sales down by almost 50 percent. Figures are no better in Canada, where one in seven manufacturing sector jobs has been lost between 2004 and 2008. “The last 12 months have been challenging not just because there is a downturn, but because of the perception that the depth and length of the downturn may be different than past cycles,” explains Chris Besant, a partner at Baker & McKenzie.
“That makes forward planning, both to survive the downturn and for profiting from the eventual upturn, much more difficult than in past recessions.” Therefore, most companies now have no other solution but to implement drastic cost-cutting programs, in the face of looming bankruptcies. The less fortunate have simply been forced to liquidate.
Manufacturing in survival mode
Although some industries fare better than others in bad times – including food, cosmetics, staples and pharmacy – most segments of the manufacturing sector have been affected by the global economic downturn. According to the US Federal Reserve, the decline in production was led by decreases in consumer goods, including furniture and electronic goods, and by business equipment, such as computers and communications gear. Mining production also fell by 3.2 percent in March when compared with February, and by 6.9 percent when compared with production in March 2008. Furthermore, thousands of job cuts have been announced in recent months, including those made by Goodyear Tire & Rubber Co., flash memory maker Spansion Inc. and Deere & Co, the world’s largest maker of farming equipment. However, the sector’s plight has not gone unnoticed. In March, President Barack Obama signed a $787bn stimulus package of spending and tax cuts, which he says have started to “generate signs of economic progress”, while warning of “pitfalls” ahead. According to a recent study by the Institute for Supply Management, 36 percent of the manufacturers surveyed indicated that their industry will benefit from the stimulus package, while 34 percent said it would directly benefit their companies. But for most experts, recovery is still far in the future.
In the meantime, solutions are limited and usually consist of aligning manufacturing capacity and cost structures with reduced demand. This means lowering operational costs, closing plants, outsourcing operations and instituting lay-offs, as well as negotiating revised pay and benefit packages with employees and unions. The transformation facing American manufacturing has indeed encouraged the union movement in pushing its agenda, making the environment even more challenging. In addition to those cost-cutting measures, eliminating non-profitable assets is another widely used solution. “Strategies being utilised include refocusing all activities and resources on the profitable, core business segments that represent the remaining competitive advantage for the company,” confirms James Loughlin, a principal and managing director at Loughlin Meghji + Company. “This allows the company to reduce costs and harvest cash from segments now deemed to be non-core and no longer strategic.” This approach is reportedly being considered by General Motors (GM), which may split the company into a ‘good GM’ and a ‘bad GM’.
Experts also recommend that companies should focus on communication to manage stakeholder expectations, but also evaluate tools to reshape the company, such as out of court workouts, in court solvent reorganisations, and in court formal bankruptcy restructurings. Mr Besant also advises companies to make “a list of what obligations, businesses, assets, liabilities and personnel need to be shed to achieve that vision, and what assets businesses and capabilities need to be acquired to get there. That is the critical step for success,” he insists, adding that incremental change is a mistake. “Downturns are opportunities for radical revitalisation, and the ultimate winners are those who change deeply and quickly.” But given the extent of the current turmoil and the subsequent rapidity of the drop in demand, many are finding it difficult to reduce their fixed cost footprint in order to clean their balance sheets and rid themselves of excess debt.
This is particularly relevant to the automotive industry, which has been hit head-on by the downturn. Rapidly rising oil prices in 2008, pricing pressure from raw material costs, competition from the public transport sector and changes in consumer buying habits are putting most automakers and their suppliers at risk. In the US, bad business practices at the Big Three automakers have also been blamed for their financial difficulties. After being bailed out by the US government a few months ago, both GM and Chrysler were recently given tight deadlines to come up with aggressive restructuring plans. A failure to do so will mean bankruptcy for one or both of the giants, and will consequently impact the whole sector, explains James H.M. Sprayregen, a partner at Kirkland & Ellis LLP. “The US domestic automobile industry is dependent on the status of the Big Three, and the potential effects of a Big Three bankruptcy, or bankruptcies. Some suppliers may benefit from a government supplier support program that went into effect in early April, which gives suppliers access to cash. Very significant unknowns still exist and the above conclusions may change substantially, based upon an increased or decreased level of US government involvement in the US auto industry,” he warns.
Things are already quite shaky. In spite of the US government’s efforts to seek a comprehensive financial solution, a recent study by CIBC World Markets predicted that half of the nation’s 51 light vehicle plants are expected to permanently close in the coming years, leading to the loss of another 200,000 jobs in the sector, on top of the 560,000 already lost this decade.
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