BDO Study: Cybersecurity jumps to the top of manufacturers’ biggest risks

More than nine in 10 manufacturers (92%) cite cybersecurity concerns in their SEC disclosures this year, according to a new report from BDO USA, LLP, a leading accounting and consulting organization.

That represents a 44% jump from 2013—and the first time in BDO’s analysis that cyber risk ranks among manufacturers’ top 10 risk factors. As data and connectivity transform the industry, the report suggests manufacturers’ intellectual property, data and products have become prime targets for cybercriminals. Smart, connected products and processes make for vast amounts of data and more network entry points for bad actors.

According to BDO’s 2016 Manufacturing RiskFactor Report, which analyzes the latest 10-K filings from the largest 100 publicly traded U.S. manufacturers across five key subsectors, 91% also cite operational infrastructure risk, including information systems and implementation of new systems and maintenance.

“As the industry races toward the next frontier, manufacturers must strike a balance between progress and security,” said Rick Schreiber, partner and national leader of the manufacturing and distribution practice and National Association of Manufacturers (NAM) board member. “Data analytics and the Internet of Things may spur the next industrial revolution, but with that comes increased exposure to cyber risk. Manufacturers still have some catching up to do to adequately protect their data, customers, products and factory floors.”

The following chart highlights the top 25 risks cited by the largest 100 publicly traded U.S. manufacturers:

Additional findings suggest manufacturers are racing to innovate amid industry consolidation and fierce competition.

Nearly all manufacturers—97%—cite competitive pressures this year. The push to get leaner and meaner and keep up with emerging technologies, like the Internet of Things, machine learning and virtual reality, appears to be contributing to related business risks. Ninety-one percent worry about inability to properly execute corporate strategy—including cost reduction, capacity expansion or improving efficiencies. And 87% report risks around their ability to develop and market quality products that meet customer needs.

These pressures could be propelling manufacturers to pursue M&A transactions in an effort to achieve scale and new capabilities. After a sharp drop in deal flow in the manufacturing sector at the end of 2015, strategic and financial buyers alike are exhibiting appetite for M&A, but remain cautious of lower valuations and still-challenging economic fundamentals. Ninety-two percent of manufacturers cite the inability to manage, complete and integrate current or future M&A or joint ventures this year, up from 88% in 2015.

BDO also reports turbulent international winds are blowing manufacturers back ashore.

While the U.S. market is still coping with some lingering economic weakness, the global landscape is more challenging. The strength of the dollar, which reached 12-year highs in November, is contributing to lower-than-anticipated profits and creating challenges for manufacturers looking to grow international business. Mirroring these trends, 94% of manufacturers note threats to international operations and sales, up from 93% last year and 87% in 2013. And 92% cite currency risk, including exchange rates and fluctuations.

Manufacturers with global operations are also growing more cautious of the international regulatory environment. Seventy percent of manufacturers worry about their ability to comply with the Foreign Corrupt Practices Act (FCPA) and other anti-corruption and bribery laws, a notable increase from just 45% in 2013. These global threats, along with a drop in U.S. labor costs since the recession, seem to be encouraging manufacturers to hire more and expand operations domestically.

The report indicates the regulatory and tax landscapes grow more complex.

Federal, state and local regulations are highlighted by 99% of manufacturers in their annual filings and are among the top two risks for the fourth year running. In particular, environmental regulatory risks are top of mind this year, cited by 95% of manufacturers. Forty-two percent mention regulations around emissions standards.

“Manufacturers are subject to various aspects of the regulatory landscape, but compliance and competitive advantage are not mutually exclusive,” said Dawn Williford, south region leader of BDO’s risk advisory services. “When done right, risk management can be more of a boon than a burden to manufacturers by reducing costly errors and enhancing the operational foundations of the business.”

View the full report here.