It has been 21 months since the World Health Organization declared the Covid-19 outbreak a pandemic, but it has felt like eons longer. That’s in large part because we keep reliving the same story lines again and again. Business operations and air travel are getting disrupted yet again by a spike in Covid cases and the emergence of the omicron variant. Americans just keep buying boatloads of physical stuff, overloading logistics infrastructure. I recently looked back at some of my early pandemic columns: The virus has solidified overly globalized supply chains “as a liability” and should “accelerate the unwinding of far-flung parts networks” and boost the adoption of industrial software to guard against unplanned downtime, I wrote in February 2020. The observation would be just as pertinent today.
So as this year finally draws to a close, what should we expect for manufacturers in 2022? Much like Covid itself, the key themes of 2021 aren’t going away, from supply chains to increased automation and a bevy of breakups. The industrial economy is entering a new stage of the recovery, though, and that has implications for everything from capital spending to equity valuations. Here’s what I’m watching:
Logistics Logjams Are Here to Stay, But So Is Demand
There are some encouraging signs that the supply-chain congestion in the US may be easing as freight rates moderate from record highs and ports chip away at container pileups. Nothing is fixed, though: “The problem is really severe, and it will remain severe for at least another year,” Sanne Manders, chief operating officer of Flexport Inc., said in an interview last week. But barring a shutdown of the West Coast ports because of coming labor negotiations, manufacturers have most likely already seen the worst of the supply-chain crunch — and the larger companies have generally managed just fine. While disruptions and rising costs have pinched margins and near-term sales at the edges, pricing power is off the charts and orders just keep climbing. There’s no guarantee that the sales manufacturers couldn’t complete in 2021 because of supply-chain challenges will still be there for the taking in the future, but bloated backlogs help support the narrative that the challenging operating environment isn’t eating into demand — at least not yet. Even businesses with shorter production cycles such as Fortive Corp.’s Fluke test and measurement unit have backlogs. Concerns about over-ordering and an eventual glut of inventory linger, but manufacturers including Dover Corp. say they’re selling everything they can supply right now.
No Place Like Home
Outside of the still-beaten down aerospace sector, sales at many industrial companies are already running ahead of pre-pandemic levels. But there’s reason to think the sector is due for more than just a run-of-the-mill recovery. The globalized supply chain isn’t vanishing entirely; it still makes perfect sense for certain business models. But the pressures of Covid have forced companies big and small to reevaluate how resilient their manufacturing operations truly are, and many have concluded they need to have factories closer to home. For the most part, the blockbuster North American factory announcements remain heavily concentrated in the semiconductor and electric-vehicle industries as the US government scrambles to rectify its over-dependence on Asia for these crucial next-generation technologies. But the chip factory announcements amount to at least $50 billion so far. Remember that semiconductor plants also need lights, air conditioning and roads. Bank of America Corp. analyst Andrew Obin estimates the new chip factories alone will add 1.8 percentage points of growth to the pace of capital expenditure expansion in the US over five years. There are also signs the spending is spreading. Danish medical-device maker Ambu A/S, Chinese furniture maker Keeson Technology Corp., industrial conglomerate Boyd Corp. and toymaker MGA Entertainment are among those setting up factories just across the border in Mexico to shrink their supply chains, as detailed by my Bloomberg News colleague Thomas Black.
Spending Boom
One reason there haven’t been more announcements like this at the mega-cap level is that most large industrial companies have long oriented their supply chains to put the final assembly process near the end customer. But if growth is going to be as robust as some of these companies are saying, they’re going to need more capacity. Schneider Electric SE, for example, is adding three new North American plants to boost production of circuit breakers, switchboards and other electrical equipment. Big capital spending increases were limited among large industrial manufacturers in 2021, in part because of challenges getting the materials and people necessary to build new factory lines. But plans for 2022 have started to take shape, and the early read from companies such as Rockwell Automation Inc. and Deere & Co. that have already given guidance indicates a big step up in spending, according to an analysis by Melius Research analyst Scott Davis.
It’s also not free to go green. Reaching carbon neutrality as a manufacturer means investments in more efficient equipment, development of more environmentally friendly technologies, analytics to measure progress and perhaps an electric vehicle fleet. Plastic-container maker Berry Global Group Inc. aims to spend $800 million on capital expenditures in fiscal 2022, double pre-pandemic levels. 1 The outlay is meant to help the company keep up with robust demand and prioritize faster-growing markets — one of which is recycled plastic, CEO Tom Salmon said in an interview last month. Meanwhile, rising wages and difficulties filling jobs in a tight labor market will likely accelerate adoption of industrial automation, fueling yet more spending on equipment. Robots are the great equalizer when it comes to geographic assessments of supply chains; they cost about the same no matter where they are in the world. The International Federation of Robotics projects that North American robot installations will grow 17% in 2021 and that a “post-crisis boom” will continue to fuel low double-digit growth rates in 2022 and beyond.
Bloomberg
