5 Critical COVID-19 Risks for the Manufacturing Industry
COVID-19 is impacting every business in some way, but manufacturers are under unique pressure.
Though many have been forced to shut down, others have been called upon to help produce much-needed medical supplies.
All are facing challenges with supply chain management, security, and the continual obligation to keep workers as safe as possible.
Here are 5 risks facing manufacturers as they work through the pandemic:
1) Supply Chain Disruption
The most immediate and prominent risk facing manufacturers is supply chain disruption stemming primarily from the lockdown of factories across China.
Many companies rely on China for raw materials, including plastic products, textiles, electronics, medical devices and pharmaceutical manufacturers.
According to research by business analytics firm Dun & Bradstreet, every Fortune Global 1000 company has either a Tier 1 or Tier 2 supplier in impacted Chinese provinces. According to data published by the United Nations Statistics Division and summarized by Statista, China accounted for 28 percent of global manufacturing output in 2018.
Though recent reports suggest that China is beginning to lift some restrictions, there are no certainties concerning the rate at which facilities will be able to resume normal operations at full capacity.
Of course, China is not the only impacted country. According to the latest estimates from the World Health Organization, at least 204 countries, areas or territories have confirmed cases of COVID-19.
With most of the world under some kinds of economic shutdown, even manufacturers with no activity in China at all are likely experiencing the same struggles elsewhere.
The problem is made worse by the fact that most manufacturers run lean, with little backup inventory available. Without a steady supply of raw materials, most manufacturers will have no choice to halt operations indefinitely.
Coverage for business interruption losses is not guaranteed. In most cases, physical property damage is a requirement to trigger coverage, but some policies may contain wording specific to pandemic scenarios in which Federal or state-ordered shutdowns can also serve as triggers. The possibility of an insurance payout will depend on a manufacturer’s specific policy wording.
2) Economic Recession
An inevitable recession caused by the near complete shutdown of economies around the globe means that millions of people will lose their jobs, see the value of their investments shrink, and generally have to tighten the purse strings.
Demand for a wide range of goods and services will decline. Manufacturers of consumer goods will be hit hard.
It’s impossible to predict how severely COVID-19 will impact the global economy and for how long, but a look back at the Great Recession may provide some clues as to how manufacturers will fare.
During the recession beginning in 2008, U.S. manufacturing lost 20% of its output and 15% of its workforce. Total capacity utilization fell 8%. Production did not return to pre-recession levels until 2015.
It’s likely that recovery will not take quite as long this time around, but the short-term decline could be just as severe.
In a recent analysis outlining potential economic impact of COVID-19, McKinsey & Company confirmed this expectation — in the most likely scenarios, recovery takes either a V- or U-shaped curve, suggesting a sharp dive followed by a quick and full recovery.
Manufacturers, however, may struggle to ride this wave. The industry was already in the midst of a downturn in 2019, with production dropping 1.9% due in part to the impact of tariffs on foreign imports. A predicted expansion of the housing market was expected to boost output this year, but it seems increasingly likely that such an expansion will be delayed.
3) Vulnerabilities in Cyber Security
Increasing reliance on automation and advanced industrial control systems creates more exposure to cyber breach. The risks to manufacturers are more pronounced now as many functions are now being done off-site.
While assembly-line workers will have to continue showing up on the factory floor, many other employees have been shifted to remote work.
This also shifts reliance away from internal company networks and instead forces employees to use their home networks or VPNs. The more dispersed the network becomes, the more points of vulnerability are introduced.
Scammers and hackers are taking advantage of this vulnerability by tricking individuals into visiting fraudulent COVID-19-related sites which actually serve as conduits for malware.
Cyber criminals can now more easily gain access to internal company networks through employees’ personal routers and devices, placing intellectual property and other sensitive data at risk.
For manufacturers still in operation, this also means increased vulnerability to cyber attacks that directly impact industrial equipment, causing malfunctions that at best interrupt already tenuous workflow, and at worst place factory workers’ safety at risk.
4) Patent Infringement Liability
Several manufacturers have altered product lines to keep business going.
Automakers like GM and Ford, for example, have committed to helping medical device makers increase production of ventilators by acting as contract manufacturers. Textile and outdoor gear producers are making masks and protective gowns instead of apparel.
But switching gears so suddenly may introduce its own set of intellectual property risks.
Medical device manufacturers who have historically rigorously protected their device designs are now compelled to open them up to other players – largely automakers – who have pledged to help fill the ventilator supply gap.
Good will is helping to drive these partnerships forward, but what happens when the pandemic is over and that valuable intellectual property is no longer private?
Manufacturers shifting gears to produce medical devices could potentially face patent infringement lawsuits after the pandemic passes if they do not explicitly obtain authorization and consent from the patent holder in a contract.
The Defense Production Act does not waive that requirement. Even contracts compelled by the federal government cannot protect manufacturers from legal action if they do not obtain explicit permission from patent holders to make their product.
5) Widespread Worker Illness
Manufacturers able to maintain operation during the outbreak may mitigate the impact to their bottom line, but could present serious risk to the health and safety of their workers.
Companies can take common sense precautions such as eliminating “town hall” meetings; posting signs reminding workers to shield their coughs, regularly wash hands, and avoid physical contact; and even require workers to take regular temperature checks and submit a survey of potential symptoms.
Some manufacturers have reportedly installed plastic partitions between workers in an attempt to redirect airflow, or have taped the floor in 6-foot intervals to help workers keep their distance.
But these remedies don’t eliminate the risk of infection, and aren’t possible in every facility.
Manufacturers could quickly see decreases in productivity if workers become sick. They may also see a spike in workers’ comp costs, as any confirmed cases of COVID-19 among essential workers could very well be considered compensable.
There may also be reputational impact. Even if a manufacturer is attempting to do its part by supplying necessary medical equipment, it could still be lambasted for insufficient efforts to protect its workforce. Continuing to operate is a delicate balancing act between worker safety and productivity. &