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Industry Shutdowns Take Their Toll on U.S. Manufacturing:  U.S. manufacturing activity declined in March as businesses were shut down and supply chains disrupted as a result of the coronavirus.  The Institute for Supply Management (ISM) manufacturing index dropped a full point from 50.1% to 49.1% and nearly 30,000 private jobs were lost within the industry between mid-February and mid-March as the pandemic became more prevalent in the U.S.  According to the March ISM Report, supplier deliveries slowed at a faster rate, customers’ inventories decreased, and prices fell for the month.  In addition, contractions were seen in backlogs, raw material inventories, exports and imports.  “The coronavirus pandemic and shocks in global energy markets have impacted all manufacturing sectors,” said Timothy Fiore, chair of ISM’s Manufacturing Business Survey Committee.  “Among the six big industry sectors, food, beverage and tobacco products remain the strongest, followed by chemical products.  The transportation sector was among the weakest in March as it was hit by slumping travel demand amid border closures and flight cancelations.  Fiore said this was also because assembling transportation-related equipment is “close work” where social distancing is a challenge.  Overall, new orders declined 7.6% to 42.2%, and prices fell 8.5% to 37.4%.  Moreover, employment continued to contract, falling 3.1% 43.8%.

Manufacturing represents a small but symbolically important share of the world’s largest economy, but the sector also struggled throughout 2019 due to President Trump’s multi-front trade war and the confrontation with China.  The coronavirus pandemic has rewritten the rules of the American economy and seems set to continue for weeks, if not months.  Through this challenging period, President Trump remains optimistic.  In his daily briefing on March 31, President Trump stated, “We face a difficult two weeks as we approach that really important day when we’re going to see things get better.  And it is going to be a burst of light.”

Boeing Moves to Shut Down Airliner Production:  On April 6, Boeing announced it is closing its 787 factory in South Carolina until further notice.  This move, which takes effect April 8, brings a complete halt to the airline’s assembly of commercial aircraft as it struggles ro deal with the impact of the coronavirus pandemic.  “We are working in alignment with state and local government officials and public health officials to take actions that best protect our people,” Brad Zaback, general manager of the 787 program, said in a statement.  The move follows an earlier announcement that the Chicago-based company is extending indefinitely a two-week shutdown of its factories in the Puget Sound area of Washington State, which accounts for the bulk of its commercial airplane production.  That shutdown had also been due to take effect April 8.  Despite these actions, work will continue at Boeing factories that manufacture commercial aircraft parts in Oregon, Utah, Canada and Australia.

Airbus has also halted production at most of its factories, as both plane makers work to reduce the risk of coronavirus transmission on the assembly line, but that’s far from the end of their problems.  The pandemic is causing a steep drop in travel that’s devastating their airline customers.  With a recovery in air travel expected to take years, airlines will need far fewer new planes, and analysts expect that will lead to postponements and cancellations of plane orders, as well as large production cuts.

Six workers at Boeing’s factory in North Charleston, S.C., and 135 workers company-wide have been diagnosed with COVID-19.  The spread of the disease has hurt Boeing’s ability to serve one customer in particular that’s eager to support it: the U.S. military.  The closure of the Puget Sound facilities has halted assembly of the KC-46 tanker and P-8A Poseidon maritime patrol aircraft, and initiated a two-week shutdown of the Philadelphia-area factory where Boeing manufactures military rotorcraft.  On April 2, Boeing said it will seek to reduce its headcount by offering workers buyouts as it starts to adjust to a new reality of a smaller market after the end of the pandemic.

U.S. Companies are Leaving China:  U.S. companies are leaving China thanks to the trade war.  Now, even more may be leaving thanks to the pandemic.  Last year saw companies actively rethinking their supply chains, either convincing their Chinese partners to relocate to southeast Asia to avoid tariffs, or to opt out of sourcing from China altogether.  According to Patrick Van den Bossche, a partner with the Kearney global consulting firm, three decades ago U.S. producers began manufacturing and sourcing in China for one reason: lower costs.  The trade war then brought a second dimension into play as tariffs and the threat of disrupted imports from China prompted companies to weigh the reliability of supply more fully against costs.  COVID-19 brings yet a third dimension more fully into the mix and that is resilience, the ability to foresee and adapt to unforeseen systemic shocks.  The main beneficiaries of this are the smaller southeast Asian nations, led by Vietnam.  Also, thanks to the passing of the U.S. Mexico Canada Agreement, Mexico has become a favorite place for sourcing.

The coronavirus has literally closed the economies of the Western world and created a public relations nightmare for China.  Due to factory closures there, companies were unable to get supply online in February and early March and that stalled business in the U.S.  Kearney believes a return to China trade pre-pandemic levels is unlikely and that companies will be compelled to go much further in rethinking their sourcing strategies and their entire supply chains.  The firm expects companies will be increasingly inclined to spread their risks, as opposed to relying solely on China as this pandemic has exposed them.  Some U.S. senators are characterizing the extent of our nation’s current reliance on China as a national security issue.  China’s days as the go-to manufacturing hub for the Western world may very well be over.  However, the only way for the U.S. to make itself attractive to corporate investment is to get its costs on par with China.  While it cannot compete on labor costs, the U.S. can compete on corporate taxes, an abundant and qualified blue-collar labor force, and by implementing environmental regulations that don’t force companies to overspend on technologies and consultants that eat into their profits.

Automakers Push to Reopen Plants:  Global automakers reeling from the COVID-19 pandemic are accelerating efforts to restart factories using safety protocols developed for China.  However, these safety measures differ from manufacturer to manufacturer.  For example, Ferrari plans to offer voluntary blood tests to employees who want to know if they have been exposed to the virus.  On the other hand, Jim Glynn, General Motors’s head of workplace safety, said GM is not persuaded blood tests are useful.  Glynn said GM has studied and adapted measures taken by Amazon to protect warehouse workers, such as temperature screening to catch employees with fevers before they enter the workplace.

Automakers and suppliers are converging on a consensus that temperature screening, daily health questionnaires, assembly lines redesigned to keep workers 3 to 6 feet apart, and lots of masks and gloves can enable large-scale factories to operate safely.  “We know the protocols to keep people safe,” Gerald Johnson, GM’s executive vice president for global manufacturing, told Reuters in an interview.  GM has relaunched vehicle plants in China and kept factories running in South Korea, he said.  GM has not said when it will reopen assembly plants in the U.S.  Other automakers are publishing dates even though health officials and federal and state policymakers are wary of lifting lockdowns too soon.  By setting public dates to restart production, they are signaling suppliers to get ready to ramp up.

The COVID-19 pandemic has thrown the global auto industry into the worst tailspin since the 2008-2009 financial crisis.  Consumer demand for vehicles has collapsed as governments have enforced lockdowns in China, Europe and the U.S.  For the Detroit automakers and their suppliers, the shutdown of profitable truck and SUV plants in North America has choked off cash flow.  In Europe, major automakers have said they hope to begin building vehicles again in mid-to-late April.  In the U.S., several big automakers, including Fiat Chrysler Automobiles, Honda and Toyota, are aiming to restart production during the first week of May, while some non-union automakers hope to restart vehicle plants as soon as April 13.  At the same time, the Trump administration has said people should continue to practice social distancing until April 30.  For the Detroit automakers, the UAW will play a key role in deciding when and how plants will restart.

Manufacturing Industry Outlook

The United States Manufacturing PMI serves as an indicator of the prevailing direction of economic trends in the manufacturing and service sectors.  It summarizes whether market conditions, as viewed by purchasing managers, are expanding, staying the same, or contracting.  The index provides information to company decision makers, analysts, and investors about current and future business conditions.

In March, the PMI was lowered to 48.5 points from a preliminary estimate of 49.2 points, and below the 50.7 points reported in February.  The March index pointed to the worst contraction in the manufacturing sector since August of 2009, reflecting weak domestic and foreign demand following the outbreak of the coronavirus.  Output dropped at the sharpest pace in over a decade as factories shutdown and client demand plunged.  New orders fell at the fastest speed since June of 2009, as firms experienced a solid downturn in new export orders.  In addition, manufacturers cut their workforces at the sharpest rate since October of 2009, while input prices rose only slightly.  Finally, uncertainty surrounding the longevity of shutdowns and a slow recovery anticipated afterwards have led to the lowest level of confidence since data collection began in July of 2012.  Looking ahead, analysts estimate the PMI to be positioned at 47.0 in 12 months.  In the longer term, econometric models show the PMI is projected to trend around 50.0 points in 2021 and 51.0 points in 2022.

As the coronavirus pandemic continues, some of the largest manufacturers of heavy equipment have already signaled they are in for a rough year.  This is also reflective of an industry trying to recover from a trade war.  Some analysts have slashed their earnings forecasts for Caterpillar and Deere due to a series of abrupt production closures and the broader economic shutdown, and both companies have already pulled their financial forecasts for the year.  A slump in spending from the mining and construction industries could be particularly painful for Caterpillar, and Deere has been especially hurt as farmers spend less on new equipment because of lower crop prices.

At the time of this writing, nearly all thoughts, actions, and communications are related to the COVID-19 pandemic.  The coronavirus shutdown is an extreme situation for the global economy and is hitting the manufacturing industry particularly hard.  Although there is huge uncertainty, we can be sure of one thing: falling into a state of shock is the most dangerous reaction to this unfamiliar condition and is therefore not an option.  Instead, Irontrax believes the best way to counteract the problem is with a mix of resilience, optimism, and solidarity.

As we progress out of this crisis, the manufacturing technology industry will be critical in scaling up the products and equipment our economy needs going forward.  The coronavirus may turn out to be a short-term disruptive agent, but it is likely that machinery production in the three major regions—Europe, the Americas, and Asia-Pacific—could be lower than initially forecast for 2020.  And while production and machinery investment are expected to instantly ramp up once factories are given the green light to resume operations, market recovery this year is going to be an uphill battle.  Nonetheless, there is optimism that the manufacturing industries will start to improve in the third and fourth quarters of this year before growing in 2021.  However, such an outcome will depend on how well the virus is contained around the rest of the world.