IIR Mid-Year Webinar: U.S., Canadian Manufacturers Adjust to 'New Reality' Amid COVID-19

Researched by Industrial Info Resources (Sugar Land, Texas)

"What we're facing now is a new reality," said David Pickering, Industrial Info's vice president of research for the Industrial Manufacturing Industry, on Wednesday. "Companies are going to have to decide, in each phase of their projects, how they want to recover from what they lost during the first five months of the year due to COVID-19." Pickering joined Mike Bergen, Industrial Info's executive vice president, to analyze the outlook for the Industrial Manufacturing Industry as part of the 2020 North American Industrial Market Outlook Mid-Year Update webinar.

Many companies will opt to slow the planning and engineering phases of their active projects to re-evaluate and perform any necessary redesigns, Pickering said. Will they need to operate differently from what was originally planned? Are new safety measures needed? Or new processes or procedures? Are additional projects needed?

"All in all, the [Industrial Manufacturing] Industry has managed to survive [the COVID-19 pandemic] quite well," Pickering said. "We did lose about $30 billion in total project spending in the U.S. and Canada," but "it looks like we're going to bounce back rather well from that."

Transportation Leads Global Investment Decline

When measured by sector, transportation projects have been the most affected in the Industrial Manufacturing Industry. It is not unusual to see big-ticket, multi-phase plans in this sector--such as commuter rail construction and airport expansions--face lengthy delays, but the total investment value (TIV) for transportation project kickoffs planned for 2020 have declined by a staggering 48%.

In January, the global TIV for 2020 construction starts in the transportation sector stood at more than $258 billion; today, it stands at about $134.6 billion, with most of the difference delayed until 2021 or later. Other sectors to see substantial declines in 2020 kickoffs include housing and furniture; heavy manufacturing; semiconductors and computers; automotive; and infrastructure for educational, hospital, prison, military and other government facilities.

Transportation systems also lead the January-to-May drop in North America alone, plunging more than 50% to $28.8 billion. But some sectors have fared better in North America than in the rest of the world: The automotive, heavy manufacturing, housing and furniture, and semiconductors and computers sectors each have seen an uptick in their number of 2020 project kickoffs since January, although their overall investment values are minuscule when compared with transportation systems.

North American project spending in the Industrial Manufacturing Industry for January vs. May, by sector.

Automakers Stay Busy, Look to 'Reshoring'

Industrial Info is estimating that automotive sales in the U.S. will drop from 16.7 million units last year to about 13.2 million units in 2020. Nonetheless, the estimate for 2020 U.S. and Canadian automotive project spending slightly increased from January to May, partly because companies like General Motors (NYSE:GM) (Detroit, Michigan) offered their facilities and manpower to help with the COVID-19 response, and partly because companies are keeping their facilities in shape to prepare for a post-pandemic increase in demand.

"I think it's one of those sectors that will bounce back pretty quickly," Bergen said. "If you've been out in this environment right now, you see that the dealer lots are anemic with vehicles for sale; the supply of those vehicles have not been moving from the manufacturers, which is putting some tight pressure on it. So I think we'll see an uptick in manufacturing, once all these facilities come back online, and the supply chains are back in operations." He added that low interest rates and customer incentives should bolster post-COVID sales.

The automotive sector also could see some of the most dramatic changes to its supply chain, Pickering said, as companies seek to "reshore," or bring back manufacturing capacity that had been based overseas: "If nothing else, COVID showed us you can't rely on foreign manufacturers for a lot of the parts that we use." As an example, he cited Fiat Chrysler's (NYSE:FCAU) (Amsterdam, Netherlands) Jeep Wrangler, which could not be sent to market without a part that was manufactured only in Wuhan, China.

Data Centers Cater to Changing Workplaces

Distribution, warehousing and data-center projects saw a decrease in spending, but a relatively small one. Data centers in particular have played a significant role as countless companies and educators turned to telecommuting and social media technology to keep their employees connected as office buildings closed: "They didn't really have time to look at doing more projects at their facilities, because they were so busy keeping us online," Pickering said.

Growing demand for cloud computing and storage is expected to bolster the data center market, fueled by the changing workplace culture and the need for next/same-day deliveries via e-commerce.

Similarly, the warehousing and distribution sector, which has grown significantly over the past 10 years, is likely to see its trend continue, "as the world has moved to more of an online marketplace," Pickering said.

One of the biggest variables emerging from the COVID-19 era is the newfound potential in remote working, which many companies see as a potential cost-saver going forward. This could result in companies selling off or leasing out unnecessary office space, particularly those in technological services, Pickering said.

"Between June of this year and May of next year, we're looking at about $537 billion in global [project] spending that is now in the planning stages," Pickering said. However, he stressed that many of these projects could be pushed out, and others still could be canceled outright.

"More than likely, we're going to see another $40 billion or $50 billion drop off that total as we get into 2021, because it's going to take another two to three years for the industry as a whole to adjust to the changes that had to be made in how they do business."