October 28, 2025 2026: 4 Key Trends in Manufacturing and Auto

Foresight, agility critical as myriad of challenges confront manufacturing leaders.

By Brian Higgins and Lenny LaRocca

As we look toward 2026, the manufacturing and automotive sectors are navigating a period of profound transformation. The landscape is being reshaped by a confluence of structural shifts, from workforce dynamics and trade complexities to energy constraints and supply chain reinvention. For leaders in these industries, staying competitive is no longer just about product innovation or market share; it’s about strategically addressing a new set of fundamental challenges. Anchored to four dominant themes—a looming labor crisis, the hidden costs of trade compliance, a widening energy gap, and the strategic imperative of a “proximity premium”—the path forward requires foresight, agility, and a fundamental rethinking of traditional operating models.

The Approaching Labor Storm

For the majority of manufacturers, labor has become one of the most significant and complex challenges. We are experiencing a nearly unprecedented confluence of stresses, creating a multifaceted labor challenge. An aging and shrinking workforce, compounded by shifts in immigration, is constricting the available talent pool. This scarcity is driving up the cost of labor while also demanding new and evolving skillsets to manage the integration of AI, automation, and advanced analytics into factory floors. The result is a growing complexity in managing a multi-generational workforce with divergent needs and career paths, all while battling record-high absenteeism in plant environments.

At the heart of this issue for U.S. manufacturers is a massive unit labor cost (ULC) challenge. ULC, the measure of labor cost per unit of output, has been rising steadily as wages and benefits outpace productivity growth. This “both” problem—higher wages and slower productivity—erodes competitiveness. While manufacturing wages in low-cost countries have also risen, the absolute gap remains immense; U.S. wages are still 5 to 10 times higher. Slower productivity gains are further exacerbated by lingering economic uncertainty, which has dampened corporate appetite for the large-scale investment in automation required to drive efficiency. The severity of this issue has been partially masked by a unique phenomenon where both the labor supply and the demand for manufacturing jobs have dropped in unison, creating a false sense of security. However, for labor-intensive, low-margin manufacturing, this escalating cost structure is simply unsustainable.

New Trade Landscape: The Hidden Cost of Compliance

While much of the discourse around the new global trade landscape has centered on tariffs, a significant “hidden cost” of compliance is emerging as a operational and financial consideration for manufacturers and OEMs. The evolving nature and complex dynamics of trade regulations requires companies to achieve a granular level of visibility into their supply chains that most currently lack. To comply with new policies, businesses must be able to identify materials at a bill-of-materials (BOM) level of precision, with complete traceability by product and country of origin.

This necessitates substantial investment in upgrading IT systems and enhancing data management capabilities to handle intricate customs documentation, export controls, and sanctions accounting. For many companies, achieving this level of operational visibility will come at a significant cost. However, there is a silver lining. The investments required to secure this extended visibility for compliance can be leveraged to drive broader operational and supply chain benefits. Enhanced transparency can lead to better inventory management, improved demand forecasting, and a more resilient supply network, ultimately offsetting some of the initial compliance-related expenditures and creating long-term value.

Addressing the Growing Energy Gap

Access to reliable and inexpensive energy has always been critical for the manufacturing industry, which accounts for approximately one-third of all U.S. energy consumption. Now, the very technological advances needed to regain competitiveness—AI, cloud computing, and advanced automation—are drawing on ever-increasing amounts of power. Compounding this, the trend of reshoring and expanding U.S. manufacturing presence will further exacerbate energy demand.

The challenge is a massive projected delta between the energy needs of the next decade and ability to generate that output. A critical “clock speed” timing issue exists: manufacturing facilities often take 2-4 years to construct, while new power generation capacity can take five or more years to come online. This discrepancy creates a near-term supply gap that threatens to affect industrial energy reliability, especially during peak demand in regions with concentrated manufacturing. To navigate this, companies must shift their mindset from being passive energy consumers to taking ownership of their energy provision. This involves creating a resilient energy portfolio that mixes grid power with on-site renewables and stored energy, as well as forging strategic partnerships. This has become a board-level imperative, requiring new skills and partners to ensure that energy availability does not become the primary bottleneck for growth.

The Rise of the ‘Proximity Premium’

Last but not least of importance, amid what can be described as compound volatility, a powerful strategic shift is underway: the rise of the “proximity premium.” Companies are increasingly placing a premium on shortening their supply chains and locating sources of supply as close as possible to their customers. The principle of “buy where you make and make where you sell” is no longer a niche strategy but a mainstream approach to building resilience and agility. This “local for local” strategy for both production and supply chain has proven to be effective in a sea of uncertainty.

However, this ambition confronts a reshoring dilemma. While a majority of companies believe it is feasible to bring manufacturing and operations back to the U.S., they are hindered by significant obstacles. Higher operating and labor costs are two factors that leaders often identify as the biggest impediments. Lingering economic policy uncertainty and wavering consumer sentiment have also caused significant delays in major capital investments, with companies increasingly reassessing or postponing plans. Ultimately, companies will continue to invest in U.S. manufacturing only as long as it improves their overall competitive position. This makes the return on investment the final arbiter. To make the equation work, companies are investing heavily in automation, rethinking supply chains, and prioritizing technology to protect margins and prepare for the longer-term shifts in cost structures, sourcing strategies, and global demand dynamics.

The Bottom Line

If there is one lesson to learned above all in the last handful of years it is just how unpredictable the future can be. From a worldwide pandemic to evolving geopolitical dynamics and emerging technologies, leaders across sectors, notably manufacturing and automotive have been challenged in ways few could have predicted. Looking ahead, those who are able to continue to effectively reassess their scenario planning to ensure they are navigating short term challenges while remaining on track to achieve their longer term objectives will be best positioned to navigate the year ahead.  

The views expressed are those of the authors alone and do not necessarily represent those of KPMG LLP.

About the Authors:

Brian Higgins is the KPMG U.S. Manufacturing Sector Leader. He is a principal in KPMG’s Advisory Services practice focused on Strategy and Operations management consulting. He has deep experience with competitive strategy and operational design and brings nearly 20 years of industry and consulting experience.

Lenny LaRocca is the KPMG U.S. Automotive Leader.  He has over 20 years of automotive experience and has led or been involved in some of the most important and transformational transactions in the industry.

Read more:

Connected, Not Just Autonomous: The Real Future of Transportation | The Fast Mode, August 2025

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