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COVID-19- IMPACT ON THE MANUFACTURING & INDUSTRIAL SECTORS

COVID-19- IMPACT ON THE MANUFACTURING & INDUSTRIAL SECTORS

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Welsh Consultants examines- As we work through our new normal amidst this global pandemic, we have been forced to reconsider how we operate our businesses and daily lives. Any changes have ripple effects across our communities and local-economies.Change is needed to survive, and so we adapt. Crisis is the ultimate disruptor, change facilitator, and accelerant. Companies that were perhaps reluctant to embrace changes are now obligated to prepare and deliver new services. Innovations become abundant and creativity thrives. Areas like AI, Automation, IoT, and PropTech are areas we can’t ignore as we also explore a pandemic response strategy. The first question is: “Will the crisis prompt manufacturing companies to carry out a top- to-bottom review of their global supply chains with an eye towards reducing risks?” This paper examines the issue in detail.

Welsh Consultants examines- As we work through our new normal amidst this global pandemic, we have been forced to reconsider how we operate our businesses and daily lives. Any changes have ripple effects across our communities and local-economies.Change is needed to survive, and so we adapt. Crisis is the ultimate disruptor, change facilitator, and accelerant. Companies that were perhaps reluctant to embrace changes are now obligated to prepare and deliver new services. Innovations become abundant and creativity thrives. Areas like AI, Automation, IoT, and PropTech are areas we can’t ignore as we also explore a pandemic response strategy. The first question is: “Will the crisis prompt manufacturing companies to carry out a top- to-bottom review of their global supply chains with an eye towards reducing risks?” This paper examines the issue in detail.

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COVID-19- IMPACT ON THE MANUFACTURING & INDUSTRIAL SECTORS

  1. 1. THE IMPACT OF COVID-19 ON THE MANUFACTURING & INDUSTRIAL REAL ESTATE SECTORS FOREWORD As we work through our new normal amidst this global pandemic, we have been forced to reconsider how we operate our businesses and daily lives. Any changes have ripple effects across our communities and local economies. Change is needed to survive, and so we adapt. Crisis is the ultimate disruptor, change facilitator, and accelerant. Companies that were perhaps reluctant to embrace changes are now obligated to prepare and deliver new services. Innovations become abundant and creativity thrives. Areas like AI, Automation, IoT, and PropTechare areas we can’t ignore as we also explore a pandemic response strategy. SUPPLYCHAIN IMPACTS The first question is: “Will the crisis prompt manufacturing companies to carry out a top- to-bottom review of their global supply chains with an eye towards reducing risks?” Manufacturing and industrial organizations continually evaluate their supply chain for cost savings and risk reduction. As market shifts occur, the evaluation process becomes even more focused. The COVID-19 pandemic has ramped up the evaluation process to levels likely not seen in the past and Supply chain adjustments are ongoing and date back to the tariff war. COVID-19 will actually enhance those adjustments. We now have a significant need to better understand the financial solvency of their key supply line vendors. Any impacts seen in manufacturing and industrial organizations have been dependent upon product, company size,laborrequirements,andlocationofoperations.Itwould make sense to believe that the primary supply chain-related focus for COVID-19 is to reduce the risk caused by COVID-19 contamination. However, the reality is not that simple. Vendors and contract providers of raw materials are the lifeline of manufacturing organizations and ensuring that the vendors are able to remain financially solvent is of utmost importance. When a vendor shuts down operations, organizations are then required to find replacement firms, or they must take control of the processes themselves. The full impact of COVID-19 on supply chains is still unknown, with the most optimistic forecasts predicting “normalcy” in China returning by April. However, one thing is for certain—it will have global economic and financial ramifications that will be felt through global supply chains, from raw materials to finished products. China’s role and importance to global trade has grown significantly—as a primary producer of high value products and components, as a large customer of global commodities and industrial products, and as a very attractive consumer marketplace. Wuhan specifically is very important to many global supply chains. While it has been a traditional base for manufacturing for decades, it has also become an area of modern industrial change. Major industries include high technology (opto-electronic technology, pharmaceuticals, biology engineering, and environmental protection) and modern manufacturing (automotive, steel and iron manufacturing). Putting that into context, over 200 of the Fortune Global 500 firms have a presence directly in Wuhan. 163 of the Fortune 1000 have Tier 1 suppliers (those they do direct business with) in the impacted area, and 938 have one or more Tier 2 suppliers (which feed the first tier) in this same impacted area. Visibility to only Tier 1 suppliers will likely be insufficient for most organizations looking to manage supply disruption risks. However, very few organizations can trace their supply chain beyond their Tier 1 suppliers, and advanced digital solutions are generally required to trace supply networks reliably across the multiple tiers that are required to fully understand supply-side risk. The domino effect of plant closures and supply shortages across the extended supply network can quickly lead to significant supply chain disruption. W
  2. 2. THE IMPACT OF COVID-19 ON THE MANUFACTURING & INDUSTRIAL REAL ESTATE SECTORS A MANUFACTURING RETURN? As adjustments are made, will manufacturing return to areas that lost factories to lower cost production sites? Automation will require the right facilities and an educated workforce. In general, China is no longer cheap and hasn’t been.ThosethatmanufactureinChinahavespecificreasons and have known the risks. As many countries rush to develop products and services to take advantage of potential opportunities, the competition for the United States will always remain steep. U.S. based companies needto consider more than economics when ascertaining the risks with items such as antibiotics of which 90%+/- are manufactured in China.Isareduced profit margin an acceptable consequence to ensuring that the world has a steady supply of antibiotics? An investment in automation would likely enhance a company’s existing technologies and help avoid many multi-layered risks. But additional risks such as regulatory issues and environmental shifts open up new production opportunities in countries normally off the radar. How will that impact manufacturing in the U.S and abroad? NAFTA countries most certainly will be examined more closely. Mexico still has political instability and Canada has a higher cost of labor, but each will be of greater interest. Furthermore, there are concerns with Mexico regarding their unsettled political environment. This concernpotentiallycouldoffsetthebenefitsassociatedwith Mexico including geography and the fact that the majority of all large U.S. manufacturers already have a presence in Mexico. Canada on the other hand has a more stable political environment, but overall, the labor costs are relatively high in Canada in comparison to many other countries. U.S. companies will need to decide if these concerns are low enough to risk adding additional portions of their supply chain from China to NAFTA countries. Foreign countries will continue to “recruit” U.S. based companies, and this will most certainly include some “off the radar” countries. One final question posed during this challenge addressed whether governments will begin to offer new financial incentives to attract industrial jobs and investments as they see opportunities to capture projects that might have previously gone offshore and enable a more stable, controllable supply chain. Asanation,weoutsourcealargeamountofproduction.Willthe governmentallowthistocontinue with pharmaceuticals and other medical products? What we do not know is how the regulatory environment is going to adjust and what consumer preferences will be as a result of the pandemic. Tax changes will certainly impact decisions moving forward and are believed to be a potential result of the COVID-19 crisis. Governments, including state governments in the US and foreign governments, have recruited companies with financial incentives for decades. Incentives will need to encompass the full spectrum of real estate development (real estate tax, employee tax, low or free rent, etc.) to offset potential risk issues. Activities such as reshoring will be dictated by the United States’ threshold for stockpiling essential items while minimizing risk. There is a strong belief that firms will begin controlling the risk of their supply chain exposure by investing in automation.Asorganizationscontinueto evaluate overall risk during the pandemic, the supply chain concerns have been foremost in the thoughts of C suite executives across the globe. Overall, COVID-19 has been a wake- up call to many organizations related to their supply chain, while to others it has only highlighted how well their supply chains have been organized. Each and every organization needs to first and foremost decide on an acceptable level of risk. The risk level will vary greatly to each and every organization, but overall it is apparent that economics of manufacturing overseas will be evaluated by more than the ultimate cost of the product. The risk of government response to pandemics, the infrastructure of shipping and transportation, and the sustainable health and well-being of the work force must be evaluated as well as the production cost. W
  3. 3. THE IMPACT OF COVID-19 ON THE MANUFACTURING & INDUSTRIAL REAL ESTATE SECTORS FINAL THOUGHTS • There will not be a wholesale change that occurs in the supply chain process. All of this is industry specific. • There will be a quick onshoring of pharmaceuticals • Supply chains will be scrutinized now more than ever with a new focus on audits of suppliers and customers. W

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