John Stewart, Founding and Managing Partner of MiddleGround Capital.
Automation has been making manufacturing more productive, cost-efficient, competitive and safe since the first Industrial Revolution. Today, tariff policies, the shift toward onshoring and reshoring, and the limited labor supply provide even more reasons for U.S. industrial manufacturers to adopt automated solutions—including intelligent interconnected systems or “Industry 4.0” solutions. Industry executives and investors alike should view automation as an essential tool for positioning businesses for long-term success and enhancing value.
Help Wanted: 3.8 Million Manufacturing Workers
For American manufacturers, investing in automation isn’t an option—it is a need. The manufacturing workforce deficit is growing more severe year over year. Manufacturers will need to hire an estimated 3.8 million skilled workers by 2033 to meet current demand. But nearly half of those jobs—around 1.9 million positions—are likely to go unfilled.
A Deloitte survey of manufacturing executives revealed that 92% believe smart manufacturing will be the main competitive driver for their companies over the next three years. The application of automation to key manufacturing processes can help companies to bridge labor gaps, improve output and better compete with global manufacturers, while enhancing conditions for workers.
We’ve seen the pace of automation accelerate dramatically since 2021, when industry leaders were confronted by the pandemic on top of an aging workforce, a growing need to upscale workers’ skills and the economic and competitive pressures of a quickly changing economy.
A Proven Path To Value-Creation
Major U.S. companies across the manufacturing spectrum are increasingly investing in automation. General Motors (GM) recently announced plans to invest $4 billion in its domestic manufacturing plants over the next two years to re-shore some production of gas and electric vehicles. GM also announced a partnership with Nvidia to develop artificial intelligence (AI) systems to enhance the automaker’s manufacturing operations, new vehicle architecture and overall safety. Additionally, GE Aerospace plans to invest nearly $1 billion in its U.S. factories and supply chain to strengthen manufacturing and increase the use of innovative new parts and materials.
While this trend is playing out at some of the largest manufacturers in the U.S., it is even more important for small and midsized manufacturing companies to adopt automation, both operationally and financially.
For example, one of my company’s portfolio companies, which makes performance parts for racing and auto sports, invested in a robotic solution to forge pistons. With this solution, the company was able to eliminate one process and reduce forge production downtime by approximately 15%, which, combined, is expected to produce the targeted return on investment (ROI) in 1.1 years. As another example, a supplier of precision equipment to the medical device industry—also part of my company’s portfolio companies—made investments in sensors and a more efficient drive mechanism to reduce the timing gap in its output of steel rods from nine seconds to essentially zero, increasing throughput significantly.
Based on my hands-on operational experience, here are some key considerations associated with automation.
Create an automation road map.
After working closely with management teams to identify safety concerns, critical challenges and opportunities, a detailed automation road map should be developed for improving major processes in the value-creation stream. The road map should determine the right approach to phasing in the automation, considering the current capacity/demand, the type of process and the required investment, along with highlighting the end goal. This allows us to, as Stephen Covey would say, “begin with the end in mind.”
Keep it simple.
While flashy technologies like robotics, AI or the Internet of Things increase the opportunity for automation drastically, automation does not need to be complex or expensive to be successful. It can be more productive to focus on simpler installations that can be duplicated across the business. For example, vision systems to aid with quality control or real-time monitoring solutions that report production stops immediately are easy to implement and have a real impact on productivity.
Create measurable value.
Automation investment decisions must be thoughtfully prioritized based on value-creation prospects. As investors and operators, we must look at the potential equity value that can be created by automating processes. When evaluating economic value to the customer (EVC) for a given automation solution, look at items that impact overall annual earnings before interest, taxes, depreciation and amortization (EBITDA), such as production throughput improvement, potential labor savings, scrap reduction and injury avoidance, along with the cash outlay impact and the company’s valuation multiple. This allows you to utilize a holistic approach to prioritizing automation solutions across your portfolio.
Engage the current workforce.
The objective of automation is not to eliminate jobs but to shift workers to higher-value tasks and fill skill gaps. When repetitive, simple processes are automated, workers can shift to skill-based roles that are harder to automate and are often more fulfilling. It is key to actively communicate with employees and train them to help deploy and maintain new equipment, which eases any job security concerns.
Addressing Automation Challenges
Automating a production line comes with challenges—like deciding where to start. For us, the first priority is resolving any safety or ergonomic issues that automation can correct, and second is repeatability across facilities and portfolio companies. But the key in this selection process is to be practical. Review the range of processes in your production line and determine which will have the greatest positive impact on the business, deliver meaningful ROI and have the highest likelihood of success.
To the extent that some affected processes may be customer-facing, managers will need to decide how to communicate changes to customers. It is also essential to gauge the human cost of automation to obtain employee buy-in to the project and create a triage plan for upskilling or reassigning affected workers. The first step to mitigating fallout among customers and employees is clear and proactive communication.
Return On Innovation
Many management teams don’t see the need to automate now. It is important to realize that the labor supply gap is only going to widen over time, implementation timelines will be stretched due to high demand and the cost of installing new processes will rise. Now is the time to start an incremental approach to automation, which will reduce the lump investment required, allow workforce skill sets to transition slowly and better future-protect the company for the looming labor crisis.
Given America’s culture of innovation, I believe automation will create opportunities to outperform operationally and financially, while improving conditions for workers across our manufacturing sector.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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