4 Ways Manufacturers Can Build Resilience in an Economic Downturn
The manufacturing industry is foundational to today’s modern global economy. Without an efficient, high-performing manufacturing sector, life would not be the same today.
However, manufacturing, among other industries, is subject to the natural market cycle, which includes economic downturns and recessions. Manufacturing tends to experience severe consequences during these instances, making it challenging to stay afloat and reach a recovery point once the scale tips in the other direction.
The country may face an economic downturn and a potential recession. How can manufacturers navigate this environment?
The State of the U.S. Economy and the Possibility of a Recession
Inflation is soaring to unprecedented levels, and the stock market is not performing well. As a result, many financial experts believe that a recession or economic downturn could be on the horizon. A recession may not be likely, but rather inevitable.
A country enters a recession when the gross domestic product (GDP) drops in two consecutive quarters. In the first three months of 2022, the U.S. GDP reportedly declined by 1.4%. Later this month, the National Bureau of Economic Research (NBER) will meet to determine if the economy is officially in a recession.
In a recent European Bank Forum, Jerome Powell, Federal Reserve Chairman, addressed the potential risk of the country facing a recession. According to a recent CNET article, Powell also said that a recession shouldn’t be considered the biggest economic risk. Instead, he believes that failure to restore price stability could be worse.
Fears of a recession are ramping up nonetheless. In response, U.S. industries must begin planning for a potential slowdown. However, some companies may feel overwhelmed with a looming recession and have questions about navigating one.
How Manufacturers Can Build Resilience During an Economic Downturn
One positive thing manufacturers can look forward to if there is a recession is that manufacturing often bounces back quicker than the overall economy. According to Deloitte, the durable goods sector is highly sensitive to recessions but is usually followed by relatively quick recoveries during post-recession periods.
Every recession in history varies in length, severity, and consequences. For example, it’s typical to see layoff rates skyrocket and upticks in unemployment during recessions. It’s also common to see an increase in entrepreneurship, as seen in 2009 during the Great Recession.
If the country does enter a recession in the next few months, it’s expected that companies will recover more rapidly due to the anticipated technology boom. Considering these factors, what can manufacturers do to prepare?
First, it’s important to understand that planning and preparation must occur before the economy officially enters a recession. A manufacturing company that is ill-prepared may face more challenges during recovery or may not be able to come back at all.
Here are some tips to help manufacturers build resilience during an economic downturn or recession.
1. Analyze Costs and Identify Assets to Protect
Some manufacturers will have a knee-jerk reaction if a recession hits. Instead of taking a reactive approach, they should be proactive and look at their costs and assets ahead of time.
Many companies believe an economic downturn requires them to cut back on everything, from research and development (R&D) to sales and marketing. However, it’s better to take a hard look at what assets must be protected and determine which costs can be reduced if a recession occurs. In other words, break down flexible and fixed expenses to decide what is necessary to run the business — then take time to cut out the rest.
2. Manage Liquidity and Balance Sheets
Manufacturers should be mindful of liquidity and managing balance sheets before the economy enters a recession. Being aware of cash flow is more than just thinking about profit and loss.
The goal right now is to increase cash flow and identify which types of investments will offer the highest returns. Any significant investments should be aligned with the company’s strategic vision and desired outcomes.
3. Invest in New and Emerging Technologies
It’s commonly understood that a recession eventually ends and the economy can recover. Because of this trend, manufacturing companies should consider investing in critical technologies that could transform their future operations.
Identify which technologies will be indispensable for the business in the next three to five years. Making these investments before a recession or downturn allows manufacturers to accelerate their recovery and fuel growth on the backend of the recession.
4. Consider Researching Potential Mergers and Acquisitions (M&A)
Another way for manufacturers to swiftly navigate a tough economic situation in the future is to research potential merger and acquisition (M&A) opportunities.
Recessions often lead to lower company valuations, which makes M&A look more advantageous for all parties involved. Suppose manufacturing companies have the chance to take part in a merger or acquisition. In that case, it’s worth analyzing the market now to identify which new opportunities they can dive into.
No company can stop a recession or avoid operating in a poor economic state, but they must prepare well in advance. A recession may be in the country’s future, so now is a great time for manufacturers to plan and strategize.
Manufacturers: Plan and Adapt for a Potentially Challenging Economic Environment
Determining when a recession will occur is challenging because recessions, by nature, come with various uncertainties. Manufacturers often fear an economic downturn or recession because they can have devastating consequences. Avoid facing those adverse effects by taking time now to plan for a potential slowdown and keep it top of mind.
* This article is written by Devin Partida. Devin is a tech writer with an interest in IIoT and manufacturing. She is also the Editor-in-Chief of ReHack.com.