Cybersecurity Jumps to the Top of Manufacturers’ Biggest Risks — BDO Study

- Innovation Race, Global Turbulence Round Out Industry’s Mixed Bag –

CHICAGO--()--As data and connectivity transform the industry, manufacturers’ intellectual property, data and products have become prime targets for cybercriminals. More than nine in 10 manufacturers (92 percent) 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 percent jump from 2013—and the first time in BDO’s analysis that cyber risk ranks among manufacturers’ top 10 risk factors.

Smart, connected products and processes make for vast amounts of data and more network entry points for bad actors. 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, reveals that 91 percent 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 & 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:



  Risk Factor   2016   2015   2014   2013
#1   U.S. and foreign supplier/vendor concerns and distribution disruptions   100%   100%   100%   83%
#2   Federal, state and/or local regulations   99%   100%   99%   96%
#3   Labor concerns/underfunded pensions   97%   98%   97%   75%
#3t   Competition & consolidation in manufacturing   97%   96%   94%   92%
#3t   Commodity/raw material prices   97%   96%   96%   86%
#6   General economic conditions   96%   97%   96%   98%
#7   Environmental regulations, laws and liability   95%   96%   87%   86%
#8   Threats to international operations and sales   94%   93%   91%   87%
#9   Breaches of technology security, privacy, theft, computer crime   92%   86%   78%   64%
#9t   Currency risk, including exchange, fluctuation   92%   88%   88%   73%
#9t   Inability to manage, complete and integrate current or future M&A, joint ventures, divestitures or other transactions   92%   88%   89%   80%
#12   Ability to maintain operational infrastructure, including information systems, implementation of new systems   91%   87%   80%   75%
#12t   Business Interruption (natural disasters, war, conflicts and terrorist attacks)   91%   87%   88%   68%
#12t   Failure to properly execute corporate strategy   91%   91%   82%   74%
#15   Access to capital or liquidity   88%   89%   89%   78%
#15t   Less demand for products   88%   88%   86%   91%
#17   Ability to develop and market quality products that meet customer needs/innovation   87%   85%   78%   69%
#18   Legal proceedings, litigation   84%   95%   79%   57%
#18t   Restrictive international trade policies   84%   84%   77%   66%
#18t   Product quality or contamination issues, recalls   84%   79%   74%   54%
#21   Attract/retain/motivate key personnel and management   74%   74%   69%   62%
#22   Customer/vendor/partner’s ability to finance, access to capital   72%   67%   74%   53%
#23   Anti-corruption/anti-bribery laws and regulations, including FCPA   70%   68%   63%   45%
#23t   Intellectual property or trademark infringement   70%   65%   65%   55%
#23t   Insurance costs and potential losses due to uninsured liabilities   70%   73%   57%   54%
#26   Fluctuation in fuel/energy/oil/transportation costs   69%   70%   58%   40%
#26t   Accounting standards, including internal controls and financial reporting   69%   85%   87%   66%

Additional findings from the 2016 BDO Manufacturing RiskFactor Report include:

- Manufacturers Race to Innovate Amid Industry Consolidation and Fierce Competition

Nearly all manufacturers—97 percent—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 percent 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 percent in 2015.

- Turbulent International Winds Blow 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 percent of manufacturers note threats to international operations and sales, up from 93 percent last year and 87 percent in 2013. And 92 percent 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 percent 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.

- Regulatory and Tax Landscape Grows More Complex

Federal, state and local regulations are highlighted by 99 percent 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 percent 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.”

The 2016 BDO Manufacturing RiskFactor Report examines the risk factors in the most recent 10-K filings of the largest 100 publicly traded U.S. manufacturers; the factors were analyzed and ranked by order of frequency cited. View the full report here.

About BDO

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Bliss Integrated Communication
Kathryne Hunter, 212-600-2582


Bliss Integrated Communication
Kathryne Hunter, 212-600-2582