Manufacturing and Distribution: A View of 2025

Challenges and Improvements in 2024 

As we enter 2025, we leave behind another year that had many challenges for businesses involved in manufacturing and distribution. While there definitely have been improvements in most of the supply chain, there are still lingering impacts for many companies.  

A bridge collapse in Baltimore and the port strike along the East and Gulf Coasts also caused havoc for some businesses. 2024 also saw continued labor challenges involving shortages, lack of skilled labor, and increasing compensation. While the rate of inflation has declined significantly, costs are still significantly higher than a few years ago.  

Interest rates, while relatively consistent with historical amounts, are still burdening many entities, given the meteoric rise in recent years. This has also impacted the merger and acquisition market, though 2024 was much improved over 2023. And, of course, there was a Presidential election that would lead to policy changes. 

Opportunities and Predictions for 2025 

Tariffs and Supply Chain Adjustments  

Tariffs were a key topic during the election and are resulting in discussions around the world. While it may be a U.S. negotiating tactic, tariffs appear part of a long-term strategy. While the potential tariffs on imports from China are often the main headline, our industry will also be impacted particularly by tariffs on goods imported from Mexico, Canada, and Europe.  

A businesses’ supply chain has a major impact on its exposure to tariffs. Many companies have relocated from China to other countries, such as Vietnam, for various reasons, including tariffs. Other companies have also made significant investments in manufacturing facilities in the US that will allow for more processing to be performed in the United States, reducing imports and the exposure to tariffs. Consequently, by continuing to review and strategically alter its supply chain, a business will be able to improve its competitive position and positively impact its bottom line. Changes in an international supply chain may also affect existing transfer pricing policies. 

Taxation Changes and Impacts  

2025 will also be consequential for taxation. First, entities and individuals will be impacted as various provisions of the Tax Cuts and Jobs Act (TCJA) are scheduled to expire. During the campaign, various proposals were also put forward regarding making the 20% deduction for qualified business income permanent, exempting overtime pay and tip income from taxation, and reducing the federal tax rate to 15% for certain US manufacturing entities. It will also be interesting to see if Congress can assist in stimulating investment in the United States by finally reversing the tax policy on research and development, which has been punitive in recent years compared to prior tax policy.  

Technological Advancements and Workforce Concerns  

In a recent survey of our clients, we noted that AI, Data Analytics, and Automation were key areas of interest. While this topic has been of interest for a number of years, it is apparent that many companies have familiarized themselves with their needs and spent considerable time in the validation phase. It now appears that companies are closer to advancing to the implementation phase to improve efficiencies. Other key areas of interest are cybersecurity and technology risk, as well as governance and compensation studies. 

Impact of AI and Automation on Jobs  

The increasing interest and near-term potential for AI and automation to provide technological gains in efficiency has elevated workers' concern about the impact this may have on jobs. For example, this was a key negotiating point in the agreement between the International Longshoremen’s Association and the United States Maritime Alliance related to dock workers on the East Coast and Gulf Coast ports. In other cases, we have heard of workers resisting the use of automation techniques as well as reports of sabotage by workers. 

Energy Costs and Inflation  

Energy costs are expected to increase over the next several years, affected by the energy demands associated with increased technology and automation use. Companies will need to balance the cost of investment in technology and operations with the potential for savings from efficiencies.  

Further, what will be the impact on inflation for US consumers if tariffs are increased on our imports? Immigration and potential deportation were also highlighted during the election. It would seem logical that a reduction in the workforce would lead to continuing employee shortages and increasing wages, which will again create the need for balance with investment in technology.  

Supply Chain Priorities and Nearshoring  

The supply chain will also continue to be a priority in 2025. While the port disputes have been settled for now, there are always challenges and changes in the transportation and logistics of moving products around the world. As time passes and more clarity on potential tariff changes is known, the sourcing of supplies will also be impacted.  

We also expect continued discussion on nearshoring and reshoring. Many states and local jurisdictions are aggressive in attempting to attract both capital investment and employees, albeit with somewhat more stringent requirements than in the past. It will also be interesting to see any changes in the regulatory environment that may simplify domestic capital investment and expansion. 

Positive Indicators for Mergers and Acquisitions  

Finally, with the expectation of lower interest rates in 2025 and a decrease in inflation compared to the prior year, many positive indicators exist for the mergers and acquisition environment in 2025.  

Key Areas for Manufacturers and Distributors to Focus on in 2025 

It will be another interesting year with many challenges and opportunities. Focusing on the following key areas will lead to a better financial result in 2025: 

• Continuous focus on the supply chain to manage costs and availability of resources 

• Be prepared for M&A, whether it be the acquisition of a business or the sale of your business 

• Invest the time to understand tax strategies and tax incentives 

• Human capital drives the success of your business. Make sure that your strategic plan focuses on managing and maintaining key employees while addressing future efficiencies through continued investment in technology and automation.   

Ready to navigate the challenges and seize the opportunities in 2025? Contact us today to learn how we can help your organization thrive.