Weather, War & Manufacturing: What’s causing high insolvencies in manufacturing during 2024?

Europe's manufacturing woes

Disruptions in the manufacturing sector have significantly impacted Europe's top three economies, Germany, Italy and France. 

The sharp energy price hikes in 2022 hit the Germany’s manufacturing sector particularly hard, leading to significantly halted industrial production. Although prices have since fallen, they still remain high above the long-term average. Insolvency figures remained high in February 2024, yet of similar volume to February 2023. Industrial production was expected to further decline by 1.5% in Germany throughout 2024, which may result in a spike of manufacturers insolvencies.

Italy has faced a similar predicament. Mid 2023 Italy plunged into manufacturing recession after months of struggling with inflationary jumps, steep energy costs, and a sizable slowdown in consumer spending and investment.

A vicious cycle of worsening inflation led to slower demand and production, eventually resulting in a hiring freeze in the labour market that directly impacted Italy, Europe’s third-largest manufacturing sector. Eventually, this set off a downward spiral of production and manufacturing, contributing to over 9,000 insolvencies since February 2023.

The shrinking Italian manufacturing sector has also directly impacted neighbouring countries such as France, where we observed a sharp spike in insolvencies—up 35% in February 2024 vs the same time in 2023. France, being the Eurozone’s second-largest economy, has suffered similar blows to its GDP as Italy, resulting in slow purchase activity, drops in productivity, and a hiring freeze.

The enduring slowdown in the manufacturing sectors of Germany, France, and Italy, the three largest European economies, has sent shockwaves through many surrounding European regions and even all the way across the Atlantic.

Slow and steady relief to inflationary pressures in US markets

The small dip in US manufacturing insolvencies from 3,500 in 2023 to 3000 in 2024 is a reflection of the US’ current economic climate, where manufacturers may be experiencing momentary relief from the pressures of inflation. Still, they are not out of the woods yet – especially, as cost rise and interest rates aren’t likely to lower this year. 

On the surface, rising costs, new regulations, and geopolitical tensions right off the back of COVID-19 may appear to be the main drivers behind the painful squeeze in manufacturing margins in the last few years. However, in order to dig deeper into the myriad global shifts that contributed to the recent spike in insolvencies and what challenges may lie ahead, we spoke Assistant Professor in Operations and Supply Chain Management at Trinity Business School, Dr. Isilay Talay, who helped us to pinpoint the top global manufacturing risks to watch out for in 2024:

Over the past five years, flooding has emerged to be a significant business risk for many manufacturers, prompting them to relocate operations away from vulnerable, low-lying regions like South Asia and many parts of South America.

However, it isn’t just the physical climactic conditions that have shot up costs for manufacturers; the recent climate change policies that many countries have passed to combat emissions and preserve air quality have also equally impacted costs and particularly cashflow for manufacturers as well as their ‘tier-n’ suppliers.

“When new climate change policies are passed, it’s often the tier-n suppliers that suffer. Take for example, countries with large automotive manufacturing markets, that still don’t produce electric vehicles as competitively as the US or China, all the suppliers that are at the upstream of the supply chain suffer, when new emission policies are passed,” said Talay.

Dr. Talay points out a common cost-shifting strategy that large retailers use when costlier green technologies are introduced, or the cost of inputs begins to rise. Instead of increasing prices for downstream customers to pay up, they shift the costs upstream for suppliers to take the hit. However, with no cash going up the supply chain, it sometimes renders their own manufacturers and suppliers insolvent and backfires on them with a complete supply chain breakdown.

The ongoing wars between Russia-Ukraine and Israel-Hamas have prompted many manufacturing giants to shift production from these war-inflicted regions to safer, ‘friendlier’ regions closer to their shores or the countries that maintain harmonious trade agreements with their own – such as Mexico. 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.

‘Elephants fight, but it’s the grass that gets trampled’ is a common saying in Dr. Talay’s native language, Turkish, that poignantly captures how most manufacturers were adversely impacted by the war-related sanctions.

The use of economic sanctions is nothing new, but the sweeping degree and number of sanctions issued after the Russian invasion of Ukraine have left manufacturers exposed to the risk of accidentally working with sanctioned suppliers or unknowingly associating with sanctioned beneficial owners. Sanctions have not only become a growing compliance headache for many SME manufacturers who are finding it hard to fill the knowledge gap on sanctions but also for large manufacturers who manage complex supply chains and payment routes and can have a long-term impact on their suppliers when exposed to sanction breaches.

“Large manufacturers needn’t be insolvent to cause a spike in insolvencies. Even when they are impacted by a sanctions breach, and their profits and market shares decrease, it immediately creates a ripple effect on all of their various suppliers everywhere,” said Dr. Talay on how large manufacturers being exposed to penalties and reputational risks can cause a direct impact on SME manufacturing insolvencies.