Published on 2016-09-19

Keeping pace with the breakneck speed of change in the manufacturing industry isn’t a small feat. BDO USA’s annual examination of the business risks beating down manufacturers’ doors reveals threats that range from old standards like supply chain disruption and M&A to emerging risks around cybersecurity, regulatory change and early inroads to Industry 4.0.

The 2016 Manufacturing RiskFactor Report analyzes the risk factors in the most recent 10-K disclosures from the 100 largest U.S. manufacturers and uncovers year-over-year trends on the top industry risks.

Read on for more on this year’s findings.

Cybersecurity no longer an afterthought
For the first time in our analysis, cybersecurity ranks in manufacturers’ top 10 risk factors. More than nine in ten cite security breaches as a risk this year—a 44 percent jump from 2013. Ninety-one percent also mention operational infrastructure risk, including information systems and implementation of new systems and maintenance.

Smart, connected products, processes and factory floors beget more data and more network entry points for bad actors. And it only takes one chink in the security chain for cybercriminals to gain unauthorized access and corrupt a product, feature or infect the entire supply chain, meaning security must be considered from design to distribution. More hackers are turning their attention to exploiting intellectual property for financial gain and political intelligence, which has made manufacturing the second-most targeted industry behind healthcare in frequency of attacks.

Although manufacturers recognize these cybersecurity hurdles, the BDO-sponsored MPI Internet of Things Study found only eight percent of respondents are very confident in their ability to prevent a breach. Bridging this preparedness gap will be critical for manufacturers of all sizes and across all sectors to stay competitive.

Striving to get leaner and meaner
Almost all manufacturers (97 percent) cite competitive pressure this year, and as a result, are fighting to do more with less. The ability to execute corporate strategy—including reducing costs, expanding capacity or improving efficiency—is cited as a key risk by 91 percent this year.

Manufacturers’ efforts to achieve scale and generate efficiencies have resulted in a healthier M&A pipeline after a slow start to the year. Strategic and financial buyers are showing continued interest in deals, but lower valuations and a mixed bag of economic fundamentals are tempering their optimism. Ninety-two percent of manufacturers cite challenges around managing, completing and integrating current or future transactions, which is up from 88 percent in 2015.

Manufacturers are also competing fiercely to win over a new generation of workers to fill today’s technologically sophisticated jobs. Ninety-seven percent of manufacturers cite labor concerns this year, and 74 percent mention attracting and retaining key personnel while pointing to the importance of assembling the right leadership team and recruiting top talent.

Global turbulence pulls manufacturers back stateside
The global business landscape is fragile for manufacturers with international operations. Two indicators of manufacturing activity in China weakened in June, indicating sluggish Q2 growth. And the ongoing strength of the dollar has hampered export activity and contributed to greater challenges for manufacturers looking to increase their global footprint. This summer’s Brexit vote could also escalate global business challenges for manufacturers as exit negotiations proceed. While long-term implications are uncertain, market and currency volatility will likely persist in the short term, and manufacturers with operations in the U.K. may need to consider the impact of currency volatility on their hedging strategies and financial reporting.

Amid these concerns, 94 percent of manufacturers note threats to international operations and sales, up from 93 percent last year and 87 percent in 2013. Ninety-two percent cite currency risk, including exchange rates and fluctuation, which is up from 88 percent last year.

Manufacturers with global operations also worry about compliance with the Foreign Corrupt Practices Act (FCPA), which prohibits bribery of foreign officials, and other international anti-corruption and bribery laws, cited this year by 70 percent of manufacturers. Following heightened enforcement activity, FCPA risks have escalated since 2013, when just 45 percent cited it in their annual filings. After the industry witnessed 2014 FCPA enforcement action against a mid-sized firearms manufacturer, it became clear that global giants aren’t the only manufacturers subject to scrutiny. Any manufacturer with business overseas, whether through direct sales or distributors, falls under the FCPA’s purview.

Mounting regulatory and tax complexity
Manufacturers aren’t just tackling regulatory risk overseas; they’re facing significant challenges domestically, as well. Federal, state and local regulations are cited by 99 percent of manufacturers, ranking among the top two risks for the fourth consecutive year of the analysis. Regulation may be top of mind due to the election year, which has spotlighted plans to invest in manufacturing and create jobs from both sides of the partisan aisle.

Accounting risks, including internal controls and financial reporting accuracy, are cited by nearly seven out of 10 manufacturers. Over the next year, the industry will need to work toward adopting the new accounting rules from the Financial Accounting Standards Board (FASB). In particular, manufacturers that lease equipment will need to pay close attention to the FASB’s lease accounting standard, which was finalized earlier this year.

For more on top manufacturing business risks, read the full 2016 BDO Manufacturing RiskFactor Report and infographic here.

About Rick Schreiber
Rick Schreiber, partner and leader of the Manufacturing & Distribution practice at BDO USA, LLP, has more than 23 years of public accounting experience. He has significant experience with initial public offerings (IPOs), secondary debt offerings, and mergers and acquisitions. In addition to leading and managing financial statement and internal control audits, Rick oversees advisory engagements such as internal control outsourcing, SOX compliance, business process optimization and enterprise risk management. To contact Rick, email him at rschreiber@bdo.com.


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