Talent Shortage Grows as Risk for the Manufacturing Industry, Reveals BDO Study

May 2015

Emily Dell
Bliss Integrated Communication

CHICAGO – May 26, 2015 – While the manufacturing industry is in resurgence, concern over the industry’s talent shortage is escalating. Findings from the third annual BDO USA, LLP analysis of risk factors listed in the most recent 10-K filings of the largest 100 publicly traded U.S. manufacturers reveal that challenges persist when it comes to closing the industry’s skills gap. Ninety-eight percent of manufacturers mentioned risks related to labor concerns, up from 97 percent in 2014, and 75 percent in 2013, according to the 2015 BDO Manufacturing RiskFactor Report.
Manufacturers face a one-two punch of struggling to attract workers, while their talent on the factory floor and in the C-suite is increasingly approaching retirement. It is estimated that by 2030, more than 20 percent of Americans are projected to be aged 65 and over, compared with 13 percent in 2010 and 9.8 percent in 1970, according to a recent study from the U.S. Census Bureau. Amid the retirement of leading innovators and strategists, 74 percent of manufacturers mentioned concerns around attracting, retaining and motivating key personnel and management, up from 69 percent in 2014 and 62 percent in 2013.
With many jobs to fill now and in the future, the manufacturing industry is feeling the pinch to properly execute business strategy, as well as create next-generation product. Risks related to the implementation of corporate strategy are mentioned by 91 percent of manufacturers, up from 82 percent in 2014 and 74 percent in 2013. Continued product innovation is also a growing risk, mentioned by 85 percent of manufacturers, up from 78 percent in 2014 and 69 percent in 2013.  
“Thanks to the resurgence, manufacturers are on even economic footing and as a result are
growth-focused.” said Rick Schreiber, Partner, Manufacturing & Distribution, BDO USA. “However, the challenge remains of filling their talent pipeline in order to pursue these expansion goals and drive the innovation that is needed to remain competitive in a global economy.”
The following chart highlights the top 20 risk factors cited by the 100 largest publically traded U.S. manufacturing companies:
2015 Rank   2015 2014 2013
#1 U.S. and foreign supplier/vendor concerns and distribution disruptions 100% 100% 83%
#1t Federal, state and/or local regulations 100% 99% 96%
#3 Labor concerns; underfunded pensions 98% 97% 75%
#4 General economic conditions   97% 96% 98%
#5 Commodity/raw material prices 96% 96% 86%
#5t Competition & consolidation in manufacturing   96% 94% 92%
#5t Environmental regulations, laws and liability 96% 87% 86%
#8 Legal proceedings, litigation 95% 79% 57%
#9 Threats to international operations and sales (business, economic, political, tax) 93% 91% 87%
#10 Failure to properly execute corporate strategy (ex. growth), including capacity expansion projects, improve efficiencies, cost reduction strategies, etc. 91% 82% 74%
#11 Not adequate access to capital or liquidity b/c interest rates, credit markets, changes to credit rating, etc. being a capital intensive business 89% 89% 78%
#12 Inability to manage, complete and integrate current or future M&A, joint ventures, divestitures or other transactions 88% 89% 80%
#12t Currency risk, including exchange, fluctuation 88% 88% 73%
#12t Less demand for products 88% 86% 91%
#15 Business Interruption - natural disasters, war, conflicts and terrorist attacks 87% 88% 68%
#15t Ability to maintain operational infrastructure, including information systems, implementation of new systems 87% 80% 75%
#17 Breaches of technology security, privacy, theft, computer crime, etc 86% 78% 64%
#18 Maintaining adequacy/effectiveness of internal controls, financial reporting and SOX, accounting standards/regulations changes and compliance 85% 87% 66%
#18t Ability to develop and market quality products that meet customer needs; innovation 85% 78% 69%
#20 Restrictive international trade policies 84% 77% 66%
#21 Product quality or contamination issues, recalls 79% 74% 54%
#22 Attract/retain/motivate key personnel and management 74% 69% 62%
#23 Self insurance, credit insurance, insurance costs and potential losses due to uninsured liabilities (incl. product liability) 73% 57% 54%
#24 Fluctuation in fuel/energy/oil/transportation costs 70% 58% 40%
#25 Anti-corruption/anti-bribery laws and regulations, including FCPA 68% 63% 45%
#25t Loss or slowing rate of purchases from a major/significant customer 68% 54% 53%
“t” indicates a tie in the risk factor ranking
Further findings in the 2015 BDO Manufacturing RiskFactor Report:
Extreme weather and natural disasters expose cracks in manufacturers’ supply chains. The most cited risk for manufacturers continues to be supply chain concerns, including disruptions or issues from suppliers and vendors. For the second year in a row, the risk is mentioned by 100 percent of manufacturers. It should come as no surprise, given that manufacturers’ supply chains were put through their paces with the West Coast port strike and record-breaking snowfall on the East Coast, among other extreme weather conditions. Business interruptions, including natural disasters, are also cited by 87 percent of manufacturers. To help mitigate the risk of extreme weather and natural disasters the EPA is working to strengthen industry environmental regulations; however, many manufacturers are concerned about the impact that these regulations will have on their businesses. Ninety-six percent of companies mentioned this risk, up from 87 percent in 2014, and 86 percent in 2013.
Ever-evolving regulatory landscape demands that manufacturers create reporting efficiencies. Risks related to federal, state or local regulations, including tax laws, are mentioned by 100 percent of companies, up from 99 percent in 2014, and 96 percent in 2013. These findings align with BDO’s inaugural Tax Outlook Survey of 100 tax directors at $1 billion-plus public companies where 45 percent of respondents reported uncertainty about foreign, federal and state tax legislation as the primary tax issue they faced. Intensified state enforcement and the push to generate state revenue could be driving this concern as there appears to be increased scrutiny of manufacturers’ reporting, specifically around unclaimed property. And manufacturers are not just concerned about domestic regulations. As more manufacturers conduct business abroad, especially in high-risk markets, their mention of risks related to anti-corruption/anti-bribery laws and regulations, including FCPA, is increasing. Sixty-eight percent of companies cite these risks, up from 63 percent in 2014 and 45 percent in 2013.

Strengthening dollar drives concerns around international expansion and business. The dollar’s climb to 12-year highs in the first quarter of 2015 has stimulated U.S. production and domestic spending, but manufacturers should be wary of an impending “chill.” It is possible that international business and exports could suffer as foreign buyers pull back. There may also be a more cautious approach to expansion by manufacturers that service international companies. Threats to international operation and sales are mentioned by 93 percent of companies, up from 91 percent in 2014 and 87 percent in 2013. Restrictive international trade policies, such as import quotes, capital controls and tariffs, also experienced an increase, cited by 84 percent of companies, up from 77 percent in 2014 and 66 percent in 2013. Currency risk, including exchange and fluctuations, remained a concern for 88 percent of manufacturers.

IP protection heightens data security risks. High-profile data breaches at large companies, including Home Depot and Sony Pictures, have catapulted risks related to IT infiltrations to the top of manufacturers’ list of concerns. Research firm Gartner predicts that information security spending will grow this year to $76.9 billion from $71.1 billion a year ago. Ensuring the security of IT systems is especially important for manufacturers, as they must protect their IP in order to prevent infringement. Eighty-six percent of manufacturers cite risks related to data security this year, up from 78 percent in 2014. Moreover, the protection of intellectual property and rising concerns around security are also likely contributing to the spike in manufacturers citing litigation risks (95 percent, up from 79 percent in 2014).
The 2015 BDO Manufacturing RiskFactor Report examines the risk factors in the most recent 10-K filings of the largest 100 publicly traded U.S. manufacturers across five sectors including fabricated metal, food processing, machinery, plastics and rubbers, and transportation equipment. The factors were analyzed and ranked by order of frequency cited.
About BDO
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 52 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 1,264 offices in 144 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.