Helping Manufacturers Combat Inflationary Pressures and Rising Interest Rates Presents Opportunities for AI Solution Providers

Western markets are facing a period of high inflation, with the United States seeing an 8.3% increase over the last 12 months in August, Germany facing a 7.9% increase, and in the United Kingdom, the Consumer Price Index (CPI) rose by 10.1% over the past 12 months. Central banks in these markets are responding with sharp increases in interest rates, with the United States, Germany, and the United Kingdom hiking theirs to 3.08%, 1.25%, and 2.25%, respectively, a 6-month increase of 2.25% (United States), 1.25% (Germany), and 1.25% (United Kingdom). Overall, this significant market turmoil and the remaining uncertainty over how long high inflation will continue should drive manufacturers to assess their positions, related to both costs and capital investments.

High inflation and interest rates have significant impacts on manufacturers’ operations. Inflation presents significant cost increases, driven by both labor and raw materials. As the CPI increases, workers will demand more pay, and in order to retain their workforce, companies have to meet a reasonable bulk of these requests. The manufacturing sector is uniquely exposed to this problem at the moment, as the market is struggling to attract new talented workers, and combined with the current “great resignation,” labor is scarce. High wages were one of the main bargaining chips that manufacturers had to throw around to attract talent, and that cost is being driven ever higher.

Cost increases in raw materials also heavily impact manufacturers. Oil & gas prices, in this case, present significant drivers of increased energy costs, and as highlighted in a previous ABI Insight, “Russia-Ukraine Conflict and Its Drive of Higher Oil and Gas Prices Should Encourage Chemical Manufacturers to Further Engage with Digital Transformation,” this has an even more dramatic effect on manufacturers with operations that rely on oil & gas not just for energy, but as a feedstock as well. Extended supply chains serve to take on and compound these issues, with Tier One, Tier Two, and Tier Three suppliers all being hit with similar costs and increasingly being squeezed by Original Equipment Manufacturers (OEMs) struggling and trying to pass along costs. While manufacturers may aim to try and pass some of these costs on to customers, part of what is driving higher CPI rates in these Western countries, they will also have to swallow elements of these increased profit margin pressures.

Rising interest rates also create problems for manufacturers’ costs; however, these issues tend to be found more in the long run. High rates increase the cost of borrowing capital to fund investments in key new technologies that reduce operational costs for manufacturers. This presents a thorny issue for manufacturers. Do they borrow now, increasing costs in the short run, but ensuring better Overall Equipment Effectiveness (OEE) and lower costs once the technology is implemented, or avoid investing now, and risk losing their competitive edge and increased relative costs in the future. Manufacturers that have already invested in digital transformation investments against previously lower interest rates will currently be reaping the rewards of their early investment. Manufacturers that fail to invest now will only likely fall further behind and continue to increase the amount of investment required to catch up, even if that remains a possibility.

Investment in new, cost-saving technology is an excellent way for manufacturers to combat inflationary pressures. Not only does it allow for this cut in costs, but it also helps support companies’ growth ambitions for the future. This is particularly the case for technologies like AI that allow companies to remove labor and reduce human error, both of which serve to build the smart factories of the future. AI’s ability to automate labor-intensive production processes reduces labor costs and improves product quality, thereby reducing scrap and associated material costs. The AI vendor market currently abounds with companies providing defect detection and quality monitoring software, including companies like Aqrose, Instrumental, Landing AI, and Neurala. Similarly, companies like Sight Machine, Falkonry, and Presenso are using unsupervised Machine Learning (ML) for predictive maintenance functions (see more information on these companies and the market in ABI Research’s AI in Industrial Application report (AN-5119)), which saves significant man hours for manual checks and inefficiency in maintenance schedules. Overall, investment in AI can provide manufacturers with improvements in OEE and cut costs, which are essential tasks to effectively manage the impact of rising inflation.

This recommendation of investment in AI, however, should be addressed differently by manufacturers in two main groups: those that currently have access to large cash balances and those that don’t. These large cash balances are likely to be found in vertical markets that have had particularly strong years during, and following, the COVID-19 pandemic, such as pharmaceuticals and life sciences. Similarly, manufacturers that have traded well off recent geopolitical disruption, such as oil & gas verticals, are excellent targets for AI software vendors, particularly as their production processes have extensive benefits to be reaped from AI-enabled predictive maintenance and data analytics.

Suppliers need to prioritize those manufacturers with healthy balance sheets. With interest rates on the rise, these companies will have the opportunity to build significant advantages over their competitors, which will either have to cede operation efficiency capabilities or borrow against high interest to keep up with the digital transformation process and face high costs that might stunt future capital investment. This is all on top of the benefits in OEE and reduced costs from implementing such technology. Cash-poor manufacturers should carefully assess which investments can be made and do so, as falling behind in adopting comprehensive digital 4.0 technologies could lead to a significant lack of competitiveness in the years to come. Realistically, these manufacturers may have to prepare for even tighter margins now, while they invest in production capabilities in the face of high interest rates and inflation rises, in order to remain competitive in the short run, alongside securing future operational capabilities.

AI software vendors looking to provide manufacturers with this technology need to make sure they position their product correctly and drive home the point to customers of the long-term benefits of digital transformation, as well as the short-term OEE that can be seen from employing AI. This will be more attractive to manufacturers holistically as they look to reduce costs in the short run to counter inflation, but they also need to invest to remain competitive in the long run, despite the current increased cost of doing so. AI software vendors should also bear in mind that, given the current market climate, solutions that can be implemented quickly are critical, otherwise projects won’t be approved. Those with longer implementation timescales should prioritize delivering the solution in a series of smaller projects on a much shorter timeline, or else significantly risk not being considered.

While AI represents an attractive investment opportunity for manufacturers, other technologies can provide promising improvements in OEE for companies looking to invest. Smart manufacturing platforms and advanced analytics and data management software can provide quick Return on Investment (ROI) wins for manufacturers. Vendors offering these technologies should position their product in the same way as AI to manufacturers, highlighting how it effectively cuts costs and improves labor efficiency. Vendors can find out more about prospects for spending on digital technologies in ABI Research’s Digital Factory Data market data (MD-IICT-107).