Industrial Manufacturing top risks forecast

Advanced manufacturing industries are at the front line of strategic competition between economic rivals. This comes with both risks and opportunities. On the positive side, the increase in trade barriers has usually been met with increased domestic investment in manufacturing capabilities. On the downside, though, these barriers can lead to disputes over access to key resources such as energy, minerals and rare earth inputs that are necessary for efficient global manufacturing supply chains.

KPMG’s Top risks forecast takes a close look at some of the many geopolitical risks that threaten the world order. In this article, we delve into the three that are most likely to impact the industrial manufacturing sector and make recommendations for how businesses can manage these risks.

The outcome of the US election could have significant implications for industrial manufacturing, as changes in administration often lead to shifts in trade and economic policies. The former Trump administration, for instance, implemented tariffs on a range of goods, impacting global trade and manufacturing. The Biden administration, on the other hand, has signaled a more multilateral approach to trade, which could ease some of these restrictions. However, it has also proposed increasing corporate taxes, which could impact manufacturers’ profitability.

As China's domestic economy slows down, Chinese companies are now looking outward toward European and North America to boost exports and growth prospects. Amidst fears of trade deficit and allegations of dumping, the US has enacted additional tariff increases on a range of China-made products and many expect a new round of retaliatory trade wars to heat up ahead of the US elections and beyond. The EU has also announced new tariffs on electric vehicle imports from China, believed to threaten European car makers. Such measures are likely to continue to complexify manufacturing supply chains and increase costs in targeted sectors.¹ Manufacturers operating in China or working with suppliers in China will need to watch and scenario plan carefully.

Critical minerals, such as rare earth elements, are essential for many manufacturing processes. They are used in a range of products, from electronics to military equipment. For instance, many resource-rich countries see an opportunity to leverage their position in critical minerals to attract investment, create jobs and gain foreign policy influence. These include established players such as Australia, Canada, Chile, the Democratic Republic of Congo, Indonesia and Zambia, as well as countries with mineral deposits in sub-Saharan Africa, South Asia and the Middle East. Some of them have enacted and might increase export measures on raw mineral ores that could exacerbate market inefficiencies and raise alarms in importing countries who need to ensure a secure supply of such minerals that sit upstream of virtually every sector, including green energy and semiconductors. This has led to increased efforts by other countries to secure their own supplies of these critical minerals, leading to potential conflicts and disruptions in the supply chain. More recently, governments have also been taking similar protectionist stances on software and technology — leading to growing competition for industrial software pre-eminence.

KPMG’s Financial Performance Index distills a range of market and financial performance indicators into one index, covering nearly 40,000 public companies worldwide. The index scores companies on a scale of  0 to 100. Zero indicates serious distress, while 100 is the best performing.

FPI scores for the manufacturing sector have been relatively steady the last few years, ranging between 94.17 and 94.78, with the IM subsector showing continued overall strength by displaying a similar range of scores. Pakistan, India and Saudi Arabia have been the best performing countries. However, there is some weakness emerging in certain subsectors and regions — Automotive in the Americas, Industrial Manufacturing in parts of Europe, and Electrical Equipment manufacturing in the Nordic States.

On the manufacturing sector, the FPI team says: “With geopolitics affecting traditional trade, the agnostic countries are outperforming, and the FPI team expects to see this trend continue. Countries that have high FPI and should continue to be watched include Switzerland (97.00), India (96.96) and Pakistan (96.77), especially if they can grow market share of politicized new age electrical equipment manufacturing.”

• Geopolitical intelligence: The KPMG network and research capabilities enable us to provide timely and relevant geopolitical intelligence. KPMG firms’ specialists can help you stay informed about geopolitical developments, assess their impact on your organization and develop proactive strategies to navigate risks.
• Supply chain optimization: KPMG can help you optimize your supply chain by identifying alternative sourcing options, evaluating risks and implementing strategies to enhance resilience. KPMG supply chain professionals can help you diversify your supplier base and develop contingency plans to mitigate disruptions.
• Positive stakeholder impact strategy: KPMG firms can assist in navigating complex stakeholder relationships by providing guidance on effective engagement strategies. KPMG firms’ professionals can help build strong relationships with public entities, industry associations and local communities to navigate geopolitical challenges collectively.