11 February 2022
Pandemic Created Industrial Winners And Losers
Adrian is a 20+ year veteran of technology research and has pioneered many data analysis techniques that are used widely by analysts today. He brings his expertise to many technology markets from industrial automation products to semiconductors.
We discuss Covid, manufacturing, and supply chains with Adrian Lloyd, CEO of Interact Analysis.
Adrian, what’s the most interesting thing you’ve seen in your current manufacturing research?
It’s the shape of the recovery. Which I can only describe as elongated and lumpy. There were winners and losers during the pandemic and, on first glance, it all looks a bit random. It’s not random in reality, of course: there’s a reason for everything. But in this downturn the outcomes were highly unpredictable.
Normally a downturn has a negative effect across the whole economy. But with the pandemic, that wasn’t the case. Some industries saw soaring growth, such as consumer electronics, and some went into meltdown. Some, like automotive, initially collapsed in a way one might expect given lockdowns. But then bounced back almost immediately in a most unexpected fashion. Others, such as aerospace, will take much longer to recover. Without specialist insight, the global manufacturing sector during Covid looks like a child playing with a mixing deck: randomly pushing some dials up and some down.
Additionally, recovery at a regional level has been dependent on government responses to the pandemic. Again, it’s been a bit unexpected. Countries that stayed open in the name of putting the economy first, such as Brazil, have recovered slowly. Countries that immediately shut down their economies, such as China, are now booming.
It’s fascinating, and a challenge, to model these dynamics.
You’ve got decades of experience consulting for industrial companies. So, what’s going on with supply chains?
Supply chains are by far the biggest issue facing manufacturers. The just-in-time model was always fragile. And Covid broke it. I think we always knew just-in-time had the potential to be weak, but Covid highlighted massive problems, and it’s going to be difficult for them to be overcome.
The most notable weakness has been shipping. In early 2020 shipping firms did the predictable thing. They laid off workers, cancelled over 1,000 voyages in March-July 2020, decommissioned containers, and cut back on orders for new kit. What they didn’t anticipate was the boom in e-commerce as locked down workers disposed of spare cash online. We saw the emergence of a phenomenon known as ‘coiled demand,’ where, as money in the pockets of consumers grew, demand for goods ‘coiled’ while uncertainty in the economy persisted.
Shipping firms faced a major capacity issue: a problem that is still with us. Container prices are through the roof, at 8–9 times the pre-2020 rate. And it’s interesting to note that the global shipping industry is quite consolidated, with 75% of the market dominated by 7 companies. The resulting lack of competition has led to the archaic scenario where purchasing a spot on a ship does not guarantee a spot on that ship. Instead, you get bidding wars between freight agents. It’s an anachronism in an otherwise finely-tuned global supply chain.
What can you tell me about reshoring?
There’s been a lot of talk about reshoring being the solution to the supply chain crisis we face right now. It isn’t. The supply chain crisis needs short term solutions. Reshoring is a long-term thing. But that doesn’t mean it isn’t a real trend in some sectors.
One aspect driving reshoring is political pressure and the green agenda. With more food, for example, being produced and consumed locally. New techs such as vertical farming may well facilitate this. In other industries, there may be some targeted reshoring. I’m talking about ‘strategic’ industries, such as semiconductors, where the West has hitherto been pretty much totally reliant on supplies from Asia. The EU recently committed $43 billion to boost semiconductor manufacturing in the region, following the US’s lead.
But beyond strategic sectors, the case for reshoring is much weaker. The only reason that large scale reshoring would happen is ultimately economic. The World Trade Organization has been transformational, and it’s totally integral to supply chains. So reshoring will only make economic sense if something happens to make global trade impossible. Is anyone going to launch a war big enough to do that? I would bet against it.
What should companies in the manufacturing value chain be looking out for right now?
My advice to people in manufacturing, particularly equipment providers or component vendors, is to be mindful that fears about shortages will result in overordering. Companies are playing safe. They are placing multiple orders and then cancelling them. It’s artificial demand and it can quickly go from a boom to a bust cycle. Stockpiling can also be an issue. All this distorts demand cycles and ultimately causes slumps down the line.
How is 2022 looking?
2022 is going to be a growth year because of the elongated recovery. When it comes specifically to machinery, I call it the ‘square root recovery’. We’ve seen a huge dip in machinery sales, and now we’ll see a slow, protracted return to growth. Our partners ITR economics are predicting a slowdown in the US economy in the 2nd half of 2023, but not a massive shock. We’ve had our ten-year event, and now we’re into a more stable phase.
Do you want to know more? Contact Adrian today: email@example.com