In the wake of the economic effects of COVID-19, the focus for manufacturers is on the immediate pressure on global supply chains, according to the 22nd edition of the EY Global Capital Confidence Barometer (CCB).
The economic shutdown seen in many parts of the world has increased the urgency of supply chain for manufacturers. The survey found that more than half of manufacturing business leaders (52%) are already taking steps to change their supply chains, while 45% are actively re-evaluating their processes.
COVID-19 is also shaping global manufacturing leaders’ strategy when it comes to the management of people and processes. More than two-thirds (69%) are already taking steps to change the way they manage their workforce or are re-evaluating their current approach. Meanwhile, the speed of automation and digital transformation in the sector is set to increase considerably, with more than two-thirds of manufacturers evaluating or already taking steps toward transformation on both fronts (78% and 67%, respectively).
David Gale, EY Global Advanced Manufacturing Transactions Leader, says:
“Manufacturers are working rapidly to limit the impact of the already tragic human cost of COVID-19 on livelihoods. The first step is going to be tackling supply chains, which have been left dangerously over-exposed in many industries.
“As this unfolds we can expect a shrinking of supply chains for the long-term, with more key components made locally. The term ‘unprecedented’ can be overused, but I think it is perfectly apt in this situation.”
Post-crisis boost for manufacturing M&A
While boards continue to deal with the immediate situation, many are also looking beyond the crisis with more than half (53%) of all responding manufacturers expecting the global economy to enter a “U-shaped” dip that will extend into 2021.
In previous versions of the CCB, high valuations were called out as a barrier to M&A activity in the manufacturing sector. That is expected to change. The vast majority of those polled (82%) expect an increase in hostile and competitive M&A activity in the wake of the crisis. At the same time, 47% of respondents predict a drop in valuations, which is likely to increase competition for targets.
The survey also shows an expectation that the crisis will reshape what is considered an attractive target, with nearly a third (32%) saying they will prioritize business resilience when evaluating a transaction.
Gale says: “M&A drivers on both sides of manufacturing deals are likely to be transformed in the post-COVID environment. Sellers are looking to rebuild depleted cash reserves, while buyers may be looking for a bargain with valuations dropping. Any buyer, however, will be looking closely at the resilience of a business when it comes to assessing a deal in the post-COVID world.
“We can certainly expect a more hostile environment in the coming year, and perhaps beyond, which will see as much activity from private equity as it will from corporate buyers.”