It’s the end of a quarter, and I’m flooded with manufacturing market reports. One set of reports I look forward originates from England and Interact Analysis. Below I’ve summarized three recent reports—a market report and two insights from CEO Adrian Lloyd. I have talked with Lloyd about methodology—something I’m sort of anal about. I don’t detect the usual sloppy thinking in the way they go about compiling data.
- Manufacturing output set for slow 2021 recovery, after unexpectedly small 2020 contraction
- Freight shipping costs increased 5-fold over the past year
- Semiconductor and electronics machinery market grew 8% during 2020
The research shows that recovery in 2021 will be muted, following a far smaller contraction in 2020 than had initially been predicted. Meanwhile, the ongoing semiconductor shortage, coupled with the continued spread of the delta variant, rising freight costs, and growing worker shortages; will create ongoing problems for all manufacturers.
The semiconductor shortage can be attributed to several factors, but the biggest impact comes from the automotive industry. As automotive manufacturers scaled back production in preparation for an expected collapse in demand for vehicles, they reduced their orders for microchips. But the automotive slow-down was not as severe as had been feared, leaving vehicle factories unable to meet demand because their stocks of semiconductors were depleted. Demand for semiconductors then boomed as car factories suddenly ramped up orders, and now Interact Analysis predicts that the semiconductor market will suffer a steep dip in 2023 as the supply situation normalizes.
Rising freight rates have also significantly impacted the manufacturing sector. And the cost of shipping a 40-foot container from China to the US east coast in July 2021 increased by 5 times compared to July 2020, reaching a high of $20,000. There are multiple reasons for this, including staff shortages, saturated ports, soaring demand in certain sectors such as electronics, and delta variant outbreaks. With no end in sight to inflated freight rates, manufacturers are likely to look for solutions that are closer to home in the long run.
The global machinery market took a damaging hit during the pandemic as factories cut back on investment, with the hardest hit sector being machine tools, which slumped by 18% in 2020. However, many machinery sectors fared better, with the market for semiconductor and electronics machinery growing by 8% in 2020. By 2025, all manufacturing sectors will have recovered to 2019 levels, and some segments, such as the metallurgy machinery market, will reach the 2019 mark this year.
One of the market insight reports
Labor Shortages A Major Barrier To Recovery For Manufacturers
The struggle to recruit into manufacturing is unexpectedly hitting some big players
According to the latest available data we have at our disposal, specific regions have been hit hard by labor shortages. The USA heads the list, with the US Bureau of Labor Statistics reporting over 800,000 vacancies in manufacturing alone. Meanwhile, it has been reported in Germany that there are close to 150,000 job vacancies in the manufacturing sector, and 68,000 in the UK. France, on the other hand, reported a mere 5,995 vacancies. So what is going on? The answer is a perfect storm of factors, which vary for each country, but the common denominator is always the pandemic.
The temptation is to look at the USA first, where vacancies have sky-rocketed, but Germany is perhaps more interesting. Traditionally the manufacturing powerhouse of Europe, Germany is currently struggling to reboot its manufacturing sector following the COVID shock. A recent report describes Germany (population – 83 million) as a country with an ageing population, low birth rates, and in desperate need of skilled immigrant labor, much as it was at the time of the Gastarbeiter (guest worker) program in the 1960s, though then the reach-out was for cheap labor.
The pandemic had a major part to play here, slowing migration and significantly reducing the numbers of skilled immigrants entering the workforce. The coalition government has taken some measures to reform the process of recognition of foreign professional qualifications, but they have been described in some quarters as being paltry and nowhere near sufficient to satisfy demand.
Across the pond from Europe, in the US, those 800,000+ job vacancies reported in May and June 2021 constitute double the number of vacancies for a similar period going right back to 2011. This problem has been exacerbated by the high use of unemployment insurance benefits rather than job retention schemes (see here). But pandemic unemployment benefits are scheduled to stop in Q4 of 2021, so we expect many vacancies to be filled. However, as in Germany, there has been a historical shortage of skilled manufacturing labor owing to an ageing workforce. That’s because the US has historically experienced difficulties in attracting younger people into this sector. [Note: I take issue with Lloyd here. Studies I’ve seen point to several additional constraints, and states that ended the payments early have seen no great influx of new workers.]
Finally, we turn to the UK as the third major economy where job vacancies are high. The twin shocks of COVID and Brexit have taken their toll here. For either or both reasons, many EU workers have left the UK and do not intend to return, or indeed cannot return owing to new post-Brexit immigration policies. There has been a resultant serious shortage of haulage drivers – 100,000 being an oft-quoted figure, including 25,000 EU drivers – and a shortage of factory workers. The result has been a disruption of supply chains, particularly in the food and beverage sector. The CBI has reported that general stock levels are at the lowest they have been for 40 years.
Recovery Is Slow, But Global Manufacturing Industry Is Limping In The Right Direction
A perfect storm for semiconductor supply
The long running semiconductor shortage saw strains on supplies caused by booming sales in electronic devices at the height of the pandemic. Additionally, the automotive sector has been a major contributor to the shortage because, as vehicle manufacturers anticipated a slow-down in demand for new vehicles, so they put the brakes on production and reduced orders for microchips. But when the slow-down in demand didn’t happen, car companies couldn’t get chips fast enough, leaving factories full of chip-less cars.
The slowness of supply chains for semiconductor chips – it can be 7 to 8 months between order and delivery – means that this isn’t a problem which is going to go away anytime soon. Not good news for industries that have already taken a battering. The approval of COVID-19 vaccines – a cause for celebration for most of us – has further exacerbated the chip shortage because vaccine vial production caused huge demand for the same raw silicon that is used in microchips. All-in-all, it’s been a perfect storm. The current boom in demand for semiconductors means we are predicting that the market will see a downturn in late 2023 or early 2024, because the glut of orders from manufacturers will inevitably diminish as their chip inventory builds up once more.
Over the long term, one impact of this has been big conversations at government level in the USA and the EU about the need for onshoring of some semiconductor production. If it happens, this will be a long-term trend, and so will do nothing to solve immediate problems. But, for example, Intel has announced that it will invest $20bn in two new chip plants in Arizona, and TSMC is also investing $12bn in a chip production facility in the same state.