Product Quality and Intellectual Property Risks Drive Concern Across Michigan Manufacturing Industry, According To BDO Study

June 2015

Zoe Proom
Bliss Integrated Communication
(212) 584 - 5485

Chicago – June 1, 2015 – Michigan’s manufacturing industry, recently fueled by positive job growth and increased product development, continues to accelerate. The sector’s renewed momentum may be spurring more competition across the state, which could be causing Michigan manufacturers to more carefully consider the quality and protection of their products. According to a report issued by BDO, USA, LLP, a leading accounting and consulting organization, 77 percent of Michigan manufacturers cite risks related to product quality or contamination issues, including recalls, up from 74 percent in 2014. Faulty products, which may result in recalls, can lead to costly legal proceedings and reputational damage.  
The 2015 BDO Manufacturing RiskFactor Report for Michigan, which analyzes the risk factors listed in the most recent SEC 10-K filings of publicly traded U.S. manufacturers headquartered in Michigan, finds that risks concerning intellectual property violations and copyright challenges are cited by 74 percent of Michigan manufacturers. Intellectual property, which provides manufacturers with considerable competitive advantages, can pose issues both domestically and overseas, where there may be less regulatory oversight regarding such issues.  
“As Michigan’s manufacturing industry continues to pick up speed, manufacturers are feeling the pressure to deliver innovative, quality products to their customers in order to stand out from the competition,” said Fred Rozelle, Detroit-based regional managing partner and member of the BDO Manufacturing & Distribution practice. “This environment may foster the opportunity for more manufacturers to develop and market new products; however, they will have to strategically navigate through certain business risks and operational hurdles while forging a path forward.”
The following chart highlights the top 20 risk factors cited by publicly traded Michigan manufacturing companies:
2015 Rank Risk Factor Cited in 10-K Filing 2015 2014
1. Federal, State and/or Local Regulations 100% 94%
2. Competition and Consolidation in Manufacturing 97% 100%
3. General Economic Conditions 94% 97%
4. Currency/Foreign Exchange Fluctuation 90% 88%
5. U.S. and Foreign Supplier/Vendor Concerns and Distribution Disruptions 87% 88%
5t. Threats to International Operations 87% 85%
5t. Management of Mergers & Acquisitions 87% 85%
5t. Less Demand for Products 87% 85%
5t. Commodity/Raw Material Prices 87% 76%
10. Failure to Properly Execute Business Strategy 84% 76%
11. Legal Proceedings 81% 85%
12. Restrictive International Trade Policies 77% 79%
12t. Product Quality Issues/Recalls 77% 74%
12t. Beaches of Technology Security 77% 53%
15. Intellectual Property Violations/Challenges 74% 74%
16. Labor Concerns; Underfunded Pensions 71% 76%
16t. Health of The Major Industries They Serve 71% 74%
18. Environmental Laws, Regulations and Liability 68% 76%
18t. Access to Capital 68% 76%
20. Ability to Innovate to Meet Changing Customer Needs 65% 68%
20t. Loss of Key Management/New Management 65% 65%
20t. Ability to Maintain and Implement New Operational Infrastructure, Including IT Systems 65% 62%
20t. Natural Disasters, War, Conflicts and Terrorist Attacks 65% 62%
*t indicates a tie in the risk factor ranking
**2015 and 2014 percentages are out of 32 and 34 companies, respectively
Cyber Security and IT Risks on the Rise. As increasing numbers of companies fall victim to cyber security attacks, Michigan manufacturers, who rely heavily on IT systems, networks and services, are paying close attention to this growing risk. In the event of a potential attack, a manufacturer’s intellectual property, trade secrets, client data and stakeholder information are all at risk. This may explain why 77 percent of Michigan manufacturers this year cite breaches of security, privacy, theft and computer crime as a risk, up from 53 percent in 2014. According to the 2015 BDO Manufacturing RiskFactor Report, 86 percent of the largest 100 publicly traded U.S. manufacturers list the same risk. Additionally, 65 percent of Michigan manufacturers note the ability to maintain operational infrastructure, including IT systems, as a concern, up from 62 percent the year before. If IT systems are damaged or cease to function properly, manufacturers can experience extensive business interruptions.
Growing Concerns Over International Operations. Eighty-seven percent of Michigan manufacturers cite threats to international operations and sales as a risk, up from 85 percent last year. With the dollar reaching 12-year highs in the first quarter of 2015, manufacturers may approach global expansion more cautiously. Additionally, international business and exports may lessen if foreign customers further limit their spending. Intensifying this risk is exchange rate fluctuations on cross-border transactions, with 90 percent of Michigan manufacturers citing currency risks as a key concern this year, up from 88 percent the year before. Furthermore, restrictive international trade policies can harm the results and financial condition of domestic manufacturers, which are heightening worries over international business. This may be why 77 percent of Michigan manufacturers listed trade policies as a risk this year.
Tax and Regulations Issues are Top Priority. Similar to the previous year, risks associated with federal, state and local regulations, including tax liabilities, are top of mind for Michigan manufacturers with 100 percent citing it as a risk this year, up from 94 percent in 2014. Contributing to this concern may be the state’s MEGA tax credit program. Originally created to aide auto plants and prevent massive layoffs, the program unexpectedly created $9.4 billion in potential tax liability for the state and, as such, was recently limited by two bills, according to Associated Press. These bills may cause uncertainty around future available tax credits for manufacturers. This sentiment is underscored by BDO’s Tax Outlook Survey, which revealed that 75 percent of respondents, tax directors at $1 billion-plus companies, say the cost of compliance within the tax and financial regulatory landscape has risen over the past three years. Additionally, 45 percent note that uncertainty around foreign, federal and state tax legislation is the primary tax issue they currently face.
The 2015 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.
BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through 58 offices and more than 400 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a global network of 1,328 offices in 152 countries.

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.