Manufacturing Insolvencies in 2024: The Impact of Geopolitical Tensions, Economic Uncertainty, and Climate Change

There is cause for optimism; inflation is finally falling, and a global economic recovery is expected to begin in 2025. Digital transformation is poised to sweep across the industry as firms seek cost savings and efficiency gains. Additionally, an influx of funds and incentives from governments, combined with a drive towards net-zero emissions, has spurred a wave of investment in electrification and the decarbonisation of product portfolios.

Europe's manufacturing woes

Disruptions in the manufacturing sector were not siloed to the UK, they impacted Europe’s three largest economies.

German manufacturers faced severe challenges, halting production in response to a surge in energy prices caused by Russia’s tightening of gas supplies. This rise in energy costs has been exacerbated by interest rate hikes in the US and slowing growth in China, two of Germany's largest export markets. While insolvency numbers remained stagnant at around 1,000 businesses, it’s anticipated that Germany’s industrial sector will contract by a further 1.5%, potentially pushing many manufacturers to the brink of insolvency.

Italian manufacturers have endured one of their worst recessions on record, marked by a sixth successive monthly decline in output. Rising inflation, higher energy costs, and a slump in consumer spending and confidence have curbed economic growth, leaving the Italian economy in a state of limbo. The manufacturing industry has borne the brunt of this downturn, although the services sector and employment have seen growth due to a boom in tourism. Worsening inflation and decreased demand have led to a hiring freeze in Europe’s third-largest economy, contributing to over 9,000 insolvencies since February 2023.

Similarly, France has seen a significant rise in insolvencies, increasing from 4,000 in February 2023 to 5,400 in February 2024. As part of the Eurozone, France's GDP took a hit similar to Italy’s, resulting in hiring freezes and reduced output as consumers tightened their belts.

The small dip in insolvencies from 3,500 in 2023 to 3,000 in 2024 reflects the current US economic climate. Manufacturers have seen production rebound sharply and new orders increase as inflationary pressures subside.

Stabilising conditions in the UK & Ireland 

Worsening geopolitical tensions, new regulations and the cost-of-living crisis were the main drivers behind the margin squeezes in the last few years. But as global economic conditions stabilise, manufacturers are gearing up to face new challenges on the horizon.

To reflect on recent trends and insights, we spoke to industry expert Dr Isilay Talay, Assistant Professor in Operations and Supply Chain Management at Trinity Business School, with several key factors emerging as potential drivers of manufacturing insolvencies in the year ahead.

As global temperatures rise and extreme weather events become more frequent, manufacturing sectors face significant challenges, especially when resources are diverted to meet basic human needs. These challenges not only stem from the physical impacts of climate change, such as increased costs due to resource scarcity but also from the financial implications of climate change policies aimed at reducing emissions and improving air quality.

Countries globally are enacting laws to reduce emissions and preserve air quality. While crucial for sustainability, these policies impose severe financial burdens on manufacturers and their tier-n suppliers. Dr. Isilay Talay notes that these burdens often disproportionately affect tier-n suppliers, especially in industries like automotive manufacturing, where transitioning to competitive electric vehicle production lags behind leaders like the US and China.

Dr. Talay points out a common cost-shifting strategy employed by large retailers when faced with higher costs due to green technologies or increased input prices. Instead of passing these costs directly to consumers downstream, they shift the burden upstream to their suppliers. This tactic, however, can quickly strain supplier finances, potentially leading to insolvency and a breakdown of the entire supply chain.

To navigate these challenges, manufacturers should adopt proactive strategies like investing in sustainable technologies, building resilient supply chains, and fostering collaborative relationships. By doing so, manufacturers can mitigate risks, improve efficiency, and ensure long-term sustainability amid evolving climate and economic policies.

Creditsafe’s business report data enables manufacturers to build a resilient and robust supply chain by running enhanced due diligence checks on customer financial behaviour. By cross-referencing data points such as risk scores, days beyond terms, and credit limits, businesses can screen suppliers for financial risk before onboarding.

Recent geopolitical conflicts, such as the Russia-Ukraine and Israel-Hamas wars, have led manufacturing giants to reconsider their production strategies. Many are moving operations from conflict-affected regions to safer, more stable locations closer to home or with favourable trade agreements—like Mexico and Vietnam.

Similarly, with China’s deteriorating relationships with many global economies, Vietnam has gained a rising status as a host for production outlets for many US manufacturers of mining, quarrying and automotive parts.

The saying "Elephants fight, but it’s the grass that gets trampled," resonates deeply in discussions about the impact of war-related sanctions on manufacturing, as observed by Dr. Isilay Talay, drawing on her native Turkish perspective.

While economic sanctions are not a new phenomenon, the breadth and severity of sanctions imposed following the Russian invasion of Ukraine have significantly heightened risks for manufacturers. These sanctions expose companies to inadvertent engagement with sanctioned suppliers or associations with sanctioned beneficial owners. This not only poses a substantial compliance challenge for small and medium-sized manufacturers (SMEs), grappling with understanding and adhering to complex sanction regulations, but also large manufacturers managing intricate supply chains and payment networks face similar risks.

Navigating the 2024 challenges faced by manufacturers requires a multifaceted approach that incorporates advanced supply chain management strategies and the effective use of business intelligence data. Dr. Talay highlights that supply chain management extends beyond the mere physical flow of goods; it also encompasses the flow of funds and information. This holistic view is crucial for manufacturers to arm themselves against the predicted disruptions this year.

The ability to predict and manage supply chain disruptions hinges on how effectively manufacturers leverage business information. In an era where political tensions and conflicts are escalating, manufacturers' success or failure will largely depend on their use of business intelligence data to enhance supply chain transparency. Digital transformation, a trend gaining momentum across the industry, plays a critical role here. Technologies such as Artificial Intelligence (AI) and blockchain are not only simplifying processes but also making them faster, more accurate, and more efficient.