Manufacturing sees robust rise in orders

Despite expansionary mood, supply chain tsunami continues disrupt sector says Bank of Ireland’s head of Manufacturing Conor Magee.

Manufacturing expansion slows as Supply Chain Pain and Cargo Gridlock Persist

Manufacturing indicators for September 2021 while still in positive expansion territory continue to drop as supply chain and cargo chaos continue to disrupt manufacturing output.

Bank of Ireland Industry Pulse for September was 93.5 down from 95.5 in August while AIB Irish Manufacturing Purchasing Manager’s index (PMI) for the manufacturing sector came in at 60.3 down from 62.8 in August. Both indicators reflect continued robust expansion in orders intake and production output. This is mirrored in EU PMI data which registered 58.6 in September, down from 61.4 in August.18

“Looking forward it is likely to be well into 2022 before the crisis eases and a new equilibrium between supply and demand is reached”

The supply chain tsunami of disruption continues to wreak havoc across manufacturing with delays and shortages at unprecedented levels. Shortages and bottlenecks are cropping up across a seemingly endless kaleidoscope of critical manufacturing inputs. Semiconductors, CO2 gas, HGV drivers, container gridlock at sea outside major ports, skilled labour shortages, and energy supply difficulties are all increasing lead times and component inflation. Apple recently joined the growing list of manufacturers including Toyota, GM, OPEL, and Samsung who are now being forced to close down output capacity because of supply chain shortages.

chart showing decline in Irish manufacturing activity.

Aside from manufacturing output constraints, getting the components to point of consumption continues to be hampered by cargo gridlock at major ports due in part to HGV shortages.

Maritime parking lots outside US and China ports recently totalled as many as 100 ships waiting to dock

Looking forward it is likely to be well into 2022 before the crisis eases and a new equilibrium between supply and demand is reached. Factors that will help include acceleration of digitalisation to support real time supply chain data and also the global rollout of Covid-19 vaccines. Vaccine doses globally continue to be very uneven whereby doses per 100 people in developing countries who are often crucial to supply chain security are less than half those of richer nations (The Economist, 9 October 2021).

In short the so called shortage economy will prevail in the medium term and with it the threat that GDP growth and prosperity will be undermined. Inflation continues with September 2021 hitting a 13 year high of 3.7pc driven by energy, transport, and housing costs. The ECB has revised upwards its HICP forecast for Q4 from 2.6pc to 3.1pc and 2022 from 1.5pc to 1.7pc. Given all the turbulence described above, this writer feels this outlook to be somewhat understated.

Out and about – great optimism across Irish manufacturing

I have had the pleasure and privilege to visit and meet a number of manufacturing SMEs over past weeks as the economy reopens. While the common themes of supply chain, labour shortages and costs inflation dominate, all share a common optimism about future growth and navigating in a creative way the current headwinds. Indeed, the recent survey by Enterprise Ireland of 700 companies showed that 56pc have higher YOY exports in 2021, with just 11pc signalling a decrease, and a massive 91pc indicating a further increase in 2022.

Manufacturing is all about problem solving and Irish players have shown their resilience and creativity in stepping up to the challenges coming from every direction during 2021. Manufacturers have de risked their supply chain exposures through a mixture of higher stock levels, direct transport routes, supplier substitution, and acceleration of technology.

Long supply routes from Asia are been replaced with regional ones. Talent shortages are in part being addressed by overseas remote workers. The learning dividends are huge and will only serve players well going forward as they make their businesses more resilient to future shocks which will continue to be a part of everyday business.

Sectors Development Insights October 2021
Conor Magee
Conor Magee is head of Manufacturing at Bank of Ireland.