Manufacturers Struggle with Multiple Global Challenges
A broad group of global manufacturers in diverse markets from Ford to Samsung have seen their inventory levels swell as consumer demand weakens in the wake of surging inflation and destabilizing economic conditions, according to a new analysis by the Nikkei. According to their research, global manufacturing inventories have swelled to $1.8 trillion, a record total that is the highest measured manufacturing inventory level in the last ten years.
Learn more about rising manufacturing inventory levels
Strata-gee reported a couple of weeks ago that Samsung had cut its procurement processes in the face of slackening consumer demand and rising inventory levels. This was a surprising turn of events from a company that had for the last year-and-a-half or so been scrambling to fill surging consumer demand during the COVID-19 lockdowns of 2020 and 2021.
Now I have discovered a new research report documenting this rising inventory issue as a global phenomenon. The Nikkei studied data covering 2,239 global manufacturing companies and discovered that their inventory levels have recently begun building to record levels, a troubling sign of potential economic turmoil to come.
A $97 Billion Surge
According to the report, manufacturing inventory levels surged an astonishing $97 billion in just the last 90-days. With this surge, total manufacturing inventories were driven to a collective total of $1.8 trillion. Not only is that figure the highest level of manufacturing inventory in the last 10 years, but it is also greater than the total GDP of South Korea and Canada. And this inventory surge is happening at a time when most economists believe we are staring down the barrel of an economic slowdown…if not an outright recession.
While slackening demand was one factor mentioned for the buildup, other factors also contributed, according to the Nikkei report. For example, some companies have experienced inventory increases as a result of supply chain-related transportation issues. Others have intentionally built up inventory, stocking their warehouses to guard against future potential shortages. Also, some companies had built up inventory in anticipation of a continuing increase in consumer demand – such as from economies reopening after COVID disruptions.
All 12 Manufacturing Sectors Had Inventories Increase
A buildup of inventory raises the specter of manufacturers being forced to cut production, shutter factories, and lay off employees. Actions such as these could serve to “exacerbate an economic deceleration that is already underway,” the Nikkei noted.
Their report tracked 12 different manufacturing sectors, all of which registered an increase in inventory. However, just 3 sectors were responsible for more than 60% of the total inventory build. These sectors were electronics, automobiles, and machinery.
Electronics Hit the Hardest
Electronics, in particular, saw the biggest increase, with inventory increasing by $26.7 billion, or 6%, to a total carried inventory of $457 billion. As far as inventory type – the biggest gains were in raw materials and work-in-process inventory.
The report identified a few of the key players impacted by softening sales leading to increased inventory.
- Samsung Electronics – Samsung reported flat first quarter sales and a 13% increase in inventory. While the company has yet to announce any production cutbacks, it has cut its procurement and asked suppliers to delay orders and hold back on parts shipments, as I reported a couple of weeks ago.
- ASUS – Taiwanese computer maker Asus reported a first quarter sales decline of 9% which led to an increase in inventory of 18%. The company says sales in Europe, in particular, have been impacted by the war in Ukraine.
- Ford Motor Company – Ford saw first quarter sales drop 8% and a concerning increase in inventory of 21%. The company’s inventory grew $14.8 billion in the quarter and now stands at $273 billion – its highest level of inventory in 25 years, according to the report. And sitting in that inventory is 53,000 vehicles they are unable to complete due to the global chip shortage. The company’s CFO says this inventory buildup is hurting the company’s cash flow.
- Mercedes-Benz – Mercedes CFO Harald Wilhelm told the Nikkei that they too are experiencing a buildup of unfinished cars due to a “lack of components.” He also says the company is finding business in Europe difficult due to shipping problems “amid the Ukraine crisis.” The company is struggling to rework forecasts with any degree of accuracy amid such global uncertainty.
Cash Cushion Helps, But Situation Could Change Quickly
The report concludes by noting that – at this point – manufacturers are still in a good cash position and therefore not in any immediate danger. But this can change quickly if the economy continues to deteriorate. Some economists are concerned the U.S. economy is nearing a tipping point which could lead to a recession in late 2022 or early 2023.
Should a recession happen, that could change everything.