Strong Competition Top List of Risks in Michigan Manufacturing Industry, According to BDO Study

June 2014

Ariel Kouvaras
Bliss Integrated Communication
[email protected]

CHICAGO - Michigan remains one of the largest manufacturing hubs in the U.S. While this reputation largely grew from the strong presence of major automotive companies, manufacturers outside of the auto sector also have an established footprint in the state. The inaugural BDO USA, LLP analysis of risk factors listed in the most recent 10-K filings of publicly traded U.S. manufacturers headquartered in Michigan found that 100 percent cite risks related to industry competition, consolidation, and pressure on pricing. Pricing pressure may be closely correlated with customer pricing demands, as some manufacturers primarily service large, influential customers, who are able to leverage their position to negotiate lower product and service costs. Competition is a particularly strong issue for Michigan manufacturers when compared to the industry overall, as BDO's national Manufacturing RiskFactor report found that 94 percent of manufacturers cite it as a concern.

Additionally, there is a clear focus on rebuilding the U.S. manufacturing industry. With the creation of a favorable regulatory environment, especially in strong manufacturing states such as Michigan, the objective is to entice manufacturers to reshore their operations, thereby boosting employment rates and U.S. exports as well as providing additional tax revenues. Yet, according to the BDO Manufacturing RiskFactor Report for Michigan, concern over federal, state and local regulations, including tax liabilities, is identified by 94 percent of Michigan manufacturers. This sentiment is likely driven by the concern over regulations in regards to labor, international trade and the environment. To that end, 76 percent of Michigan manufacturing companies cite labor concerns, including those related to pensions, post-retirement costs, benefit plans, healthcare, unions and immigration as risks. Similarly, risks related to environmental regulations, laws and liabilities are also noted by 76 percent of Michigan manufacturers.

"As the manufacturing industry undergoes a renaissance in the U.S., Michigan continues to be a state poised to benefit from the growth," said Fred Rozelle, Detroit-based regional managing partner and member of the BDO Manufacturing & Distribution practice. "But that is not without its challenges. Manufacturers will contend with strong competition as well as regulatory and labor challenges."

The following chart highlights the top 20 risk factors cited by publicly traded Michigan manufacturing companies:


2014 Rank Risk Factor Cited in 10-K Filing 2014
1. Competition and Consolidation in Manufacturing 100%
2. General Economic Conditions 97%
3. Federal, State and/or Local Regulations 94%
4. U.S. and Foreign Supplier/Vendor Concerns and Distribution Disruptions 88%
4t. Currency/Foreign Exchange Fluctuation 88%
6. Less Demand for Products 85%
6t. Threats to International Operations 85%
6t. Management of Mergers & Acquisitions 85%
6t. Legal Proceedings 85%
10. Restrictive International Trade Policies 79%
11. Environmental Laws, Regulations and Liability 76%
11t. Commodity/Raw Material Prices 76%
11t. Access to Capital 76%
11t. Labor Concerns; Underfunded Pensions 76%
11t. Failure to Properly Execute Business Strategy 76%
16. Intellectual Property Violations/Challenges 74%
16t. Product Quality Issues/Recalls 74%
16t. Health of The Major Industries They Serve 74%
19. Ability to Innovate to Meet Changing Customer Needs 68%
20. Loss of Key Management/New Management 65%
*t indicates a tie in the risk factor ranking

Supply Chain Challenges Underscore Product Liability Risks - Eighty-eight percent of Michigan manufacturers cite risks related to U.S. and foreign suppliers/vendors. While obvious factors such as natural disasters, geopolitical unrest and backlogs can lead to both long- and short-term revenue compromising supply chain issues, there are also other sourcing challenges that add a layer of complexity to the issue. In many instances, it is the U.S.-based manufacturer (distributor) who is liable for product failures and recalls, despite having not produced that particular component part. If the supplier or vendor is located outside of the U.S., there may be no recourse for the U.S.-based manufacturer. Additionally, it can be challenging to require and test that the same quality standards are being enforced by international suppliers. As a result, product quality and recall risks are identified by 74 percent of Michigan manufacturers.

Growth Drives M&A Risk - According to a recent White House release, "A consortium of 13 counties and more than three dozen municipalities in southeastern Michigan will receive a special designation that will give it a leg up in competing for $1.3 billion in federal manufacturing, economic development and research funds." With an increased focus on funding manufacturing growth in the state, coupled with an existing uptick in non-government backed general growth activity, there is greater potential for M&A opportunity. To that end, 85 percent of Michigan manufacturers note M&A as a risk, including an inability to manage, complete and integrate current or future M&A deals. Failed M&A transactions could negatively impact their growth business strategies and overall operations.

Concerns Over Intellectual Property Risks Are Paramount - Seventy-four percent of Michigan manufacturers cite concern over corporate copyright and intellectual property infringement. Intellectual property and the ability to license, trademark and secure that property allows for a strong competitive advantage. A violation can lead to lengthy legal battles. However, more immediate financial repercussions can be felt if the fraudulent products hit the market. Additionally, should a patent expire, allowing other companies to freely replicate a product or process, the manufacturer will be put at a disadvantage and could be exposed to pricing pressures. Further underscoring this risk for many manufacturers with international operations is a lack of regulatory oversight governing intellectual property infringement in foreign countries.

The BDO Manufacturing RiskFactor Report for Michigan examines the risk factors in the most recent 10-K filings of publicly traded U.S. manufacturers headquartered in Michigan. The factors were analyzed and ranked by order of frequency cited.

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