2023: Recession or Disruption? An industrial sector perspective.
A cursory review of the daily news over the past few months, suggests that the world is about to sink into a deep recession. Indeed, we are living in an era of profound change, and nothing is the same since before 2020. Does this mean that we are in a recession already or heading towards one? The answer to this is not that simple but let us briefly explore this topic from an industrial sector perspective.
Given the exponential growth in electric car and consumer electronics manufacturing across the world, rare metals like lithium and silica are in high demand, and will remain in demand, and therefore the mining sector in these areas is expected to be strong.
The current energy crises, as a direct consequence of the war in Ukraine, resulted in governments across Europe, and for that matter, across the world, to invest heavily in alternative sources of energy, with the renewable energy sector a significant benefactor. Even if the war in Ukraine would cease tomorrow, the focus on renewable energy and a more sustainable future will remain. In general, the energy sector is booming. The supply chain for domestic and commercial solar panels for example, is completely clogged up with orders. Residential owners are scurrying to improve the insulation of their homes as well, resulting in a boom for companies in that sector as well.
In this area I see no signs of recession. Yes, wheat is in short supply globally, and consequently food manufacturers have been sourcing alternative products to supplement wheat such as soy and other sources of protein. European food producers are for example increasingly exploring the viability of large-scale insect farming as a source of protein. The food flavours industry is also booming as consumer demand for alternative products is exploding. Food shortages due to the rapidly rising global population has also resulted in a boom in alternative agricultural models.
This sector is facing the perfect storm of rising fuel prices, the continuous shortage of semiconductor chips leading to significant delays in manufacturing, and stagnating demand. Many consumers are reconsidering purchasing new cars due to rising costs, and increasingly considering a move to carpooling / ridesharing, but the resurgence of demand from fleet operators are offsetting the slowdown in consumer demand. The increase in fuel process across the world have also had a major impact on the shift to electric cars. Consequently, electric car and electronic parts manufacturers are experiencing a major boom, and therefore I do not see any sign of recession in this sector currently. Companies that produce exhaust systems for combustion engine vehicles on the other hand, are slowly but surely facing the end of the road. Unless of course, and probably they are, retooling for electronic parts production.
Notwithstanding the tremendous increase in demand for and production of electric cars, we all know that electric cars do not mean a cleaner environment, as the manufacturing of batteries for the electric car industry remains a major cause of contention for environmentalists. Subsequently, this, and of course the increase in electricity prices across the world, have seen more major automotive manufacturers exploring hydrogen options, which means that there is and will be a significant financial investment in these areas for the foreseeable future.
Oil & Gas
This will continue to be a relevant industry for many years to come as it will take a generation to move away from the demand for oil and gas and to move away to alternative sources of energy. The major challenge facing this industry is the fact that more and more people do not want to work in an industry which is perceived to be dirty. But then who will operate this, what some people call a dirty industry? Alternatives will take 15-20 years to be partially ready (not globally) so we will continue to rely on the good old-fashioned car with a combustion engine and rely on the steady flow of petrochemicals. Of course, the pandemic also played a major role in this as people have become less interested to take up jobs in remote areas far away from home, and this has had a direct impact on the oil and gas industry. This is a setup for a perfect storm, but if you are an oil & gas engineer and ready to work – maybe even remotely – you will see no recession at all.
COVID and Asia
For 3+ years, whilst COVID was raging across Asia, and many countries in that region were locked down for extended periods of time, 80 million or so people from that region, who used to travel extensively abroad on a regular basis, did not travel and did not consume. Many economies who have traditionally relied on tourists from Asia directly felt the absence of these tourists in their economies during and post-COVID. Now that those markets are open again and tourists have started to emerge, the demand for consumer goods will increase significantly in the near term. This also means that companies who produce consumer goods, and those in the hospitality sector and its entire supply chain, will see significant growth over the next year or two as tourism from Asia resumes.
Industrial sector talent
The talent that the industrial sector would need over the next 10 years do not (or partially does not) exist currently. Yes, I see increased robotisation in the industry, but this also means the industry needs a lot of people with new skills to produce and ultimately maintain these robots. Even at the basic level, our clients across the world are reporting significant talent shortages, and this is unlikely to be resolved any time soon due to a shrinking and aging population, and many economies still not being open to migrant workers to address short term production issues. The solution to most of these issues is that people need to start stepping out of their comfort zones and retraining, and companies will have to compete for people who need to be trained to meet the demand for new skills. Some people say there is a recession because people are not buying because of cash shortages, yet we see many examples of people taking up second jobs to enjoy life-life balance. Anyone ready to work in the industry and actually work, will see neither recession nor cash shortage.
It is no surprise that, since the outbreak of the war in Ukraine, economies across the world have suddenly reconsidered their annual defence spending budget. Consequently, this is an industry that is currently living through a significant period of growth. Perhaps not since the Second World War have arms and ammunition manufacturers seen the increase in demand as they are today, and given the current political landscape around us, the dust is unlikely to settle any time soon, which means that this sector will flourish for several years to come. The speed with which the armaments industry is turning out sophisticated equipment today, is surely the envy of any automotive producer out there.
Since the global financial crises between 2007 and 2008, economic cycles, as we know them, have had its ups and downs. But there were two events that shifted the global landscape and life as we know it: COVID, and the outbreak of the war in Ukraine one year ago. Together, these two events have completely reshaped the world around us in every aspect. Are we currently facing a global recession? From an industrial perspective, no. Are we experiencing a period of profound DISRUPTION? Hell yeah!
Disclaimer: the views expressed in this article are my own and not necessarily the views of the company.
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