Top geopolitical risks 2025: Industrial Manufacturing insights

Overall, regulatory risk ranks relatively low on the priorities of CEOs surveyed for our 2024 Industrial Manufacturing and Automotive CEO Outlook.² According to respondents to our 2024 Global Metals and Mining Outlook, some of the regulations that create the biggest risk for their organizations are labor laws and workforce regulations, water management laws, and clean air.³

The metals and mining subsectors are together responsible for more than 50 percent of industrial greenhouse gas emissions worldwide.⁴ Decarbonization is, consequently, a major priority, and companies need to keep abreast of a range of evolving regulations — although the US government is rolling back many ESG requirements.

Leading companies in the International Council on Mining and Metals have set a collective goal to reach net zero by 2050 for their Scope I and II emissions.⁵ However, only around half (52 percent) of respondents to the KPMG 2024 Industrial Manufacturing and Industrial manufacturing CEO Outlook are confident their organizations can meet their net zero goals by 2030,⁶ which could lead to lack of compliance in regions where the green transition is being pursued strongly — like Europe.

The EU’s Green Deal and CBAM means higher costs for carbon-intensive steel and aluminum imports, as well as incentives for hydrogen-based steel and low-carbon aluminum production. However, the new EU Omnibus legislation aims to foster a more favorable business environment, reduce regulatory burdens, and help companies transition to a sustainable economy, aligning with the EU's Green Deal objectives.

In the US, current regulations associated with permitting and site selection create significant barriers to building new domestic manufacturing facilities. The cry from US manufacturers for regulatory rebalancing is strong, and the government is promising to respond, as it seeks to increase onshoring.

The EU Omnibus proposal aims to simplify sustainability reporting and due diligence obligations and, ultimately, improve the region’s competitiveness by reducing reporting burdens without undermining policy objectives.

Constant monitoring of regulatory and tax developments can help industrial manufacturing companies align their production and supply chain strategies with emerging trends in the markets in which they operate. To manage compliance effectively, respondents to our 2024 Global Metals and Mining Outlook feel their organizations should improve compliance prediction through AI and scenario planning (56 percent) and integrate compliance into business strategy (53 percent). The same survey also suggests that the best way to meet decarbonization objectives is to integrate decarbonization objectives into the overall corporate strategy.⁷

Investing in the circular economy and recycling can also help to adapt to regulations and increase efficiency, including increased investment in electric arc furnaces for steel recycling, and boosting secondary production of aluminum to meet sustainability goals. In Europe in particular, circularity, and use of green energy, are a higher priority for industrial manufacturing companies such as steel producers, to meet regulations on carbon emissions and waste.

There remains a strong supply of funds for well-designed decarbonization projects. AI-driven energy management reduces emissions in steel and aluminum, while smart manufacturing solutions ensure compliance with ESG policies.

Technology — notably generative AI (Gen AI), automation and robotics — offers huge promise for the industrial manufacturing sector and its use is accelerating across the world, from US and Europe to China, Japan and South Korea. Executives surveyed for the 2024 Global Metals and Mining Outlook say the biggest business opportunity over the next five years is likely to transform the cost-efficiency of operations through technology investments.⁸ The steel and aluminum industry is using AI-driven supply chain forecasting to enhance procurement efficiency and reducing material wastage and improving energy efficiency through automation. With intellectual property moving around the world quickly due to social networking, keeping ahead in technological innovation is getting ever harder.

Subsectors like A&D are especially subject to national security concerns over technology, which is creating shifting alliances and challenging the notion of a global IT infrastructure. The need to retain trust in data may influence where industrial manufacturing companies form their technology partnerships. Geopolitical competition in AI and other technologies (such as quantum computing) is creating technological blocs around the US and China, jeopardizing international cooperation and access.

Regulators are struggling to keep pace with new Gen AI solutions, and a rolling back of regulations could leave AI models heavily under-managed. Ethical challenges and a lack of regulation are considered the two biggest challenges in implementing Gen AI, according to respondents to our 2024 Global Industrial Manufacturing Executive Survey.⁹

Many industrial manufacturing businesses are global and are accustomed to working with technology providers from around the world. They have an opportunity to absorb among the best of technological developments in different regions and regionalize their operations — so long as these countries are ‘friendly’ from a political perspective. IT infrastructure should be modular and adaptable, enabling companies to choose appropriate vendors. Robust ethical and regulatory frameworks for AI help to prevent misuse, bias and ethical breaches, strengthening trust and promoting responsible development and use. Companies need to balance safe, secure development of AI and other technologies with speed to market. Thus, increasing concerns over security and privacy could make true trust in data a competitive advantage.

Our paper, Turning the tide in scaling renewables, notes that global demand for minerals indispensable to a low-carbon economy, such as copper, lithium, cobalt, nickel and graphite, is expected to increase four-fold by 2040.¹⁰ But availability of such materials could be hindered by geopolitical tension, trade protectionism, conflict, disruption to key shipping choke points, competition for resources, cyberattacks, and climate events.

According to our Industrial Manufacturing and Automotive CEO Outlook, supply chain risk is considered the single biggest threat to growth over the next three years.¹¹ This poses significant problems for other industries reliant on key minerals for batteries and other products. A&D companies are under less threat, as their supply chains tend to be regional to meet national security demands. Heavy metals also have localized supply chains to reduce transportation costs.

The COVID-19 pandemic proved a wake-up for many companies’ supply chain management, emphasizing the need for resilience. With its localized and shortened supply chains, industry manufacturing companies are in a relatively strong position to cope, taking advantage of the shift to nationalized manufacturing — such as ‘America First’ or ‘China for China’.

Scale is a major advantage in industrial manufacturing, enabling businesses to invest in local facilities and on-the-ground R&D, sales, and customer service to compete effectively. This sets a foundation for satisfying local needs and tastes; German customers, for example demand quality and durability. As companies look to diversify their supply chains to spread the risk, strong compliance and ‘know your supplier’s capabilities (including a good understanding of their financial health) can help them adapt quickly and build a more robust network of sourcing partners.  

There is also an imperative to make assets more resilient to wind, flooding, forest fires and drought, by strengthening existing infrastructure, building new constructions in safer locations, and increasing the use of climate modeling. Circularity can help, by re-using materials, to reduce dependency on sources that may be impacted by geopolitical volatility. 

In our Global Metals and Mining Outlook, executives from these sectors say skills shortages (47 percent) are the single greatest challenge to implementing the latest technology.¹² Such findings reflect the demographic pressures of large-scale retirement in the sector, allied with a lack of younger people electing for a career in metals. Engineering graduates are in high demand, and national competitiveness in industrial manufacturing could be influenced by the number of young people studying STEM (science, technology and math) subjects at university.

Another significant factor, noted by respondents to our Industrial Manufacturing and Automotive CEO Outlook, is the widening expectation gap between older and aging employees compared to the next generation. Younger employees are more likely to desire a greater work-life balance, change jobs and advance at a faster pace, and have opportunities to learn new skills and gain experience in other parts of the organization.¹³

Creating a value proposition that suits a new generation of worker can boost recruitment, retention and productivity. Industrial manufacturing companies have an opportunity to modernize their image for prospective job candidates and present a compelling vision of a career at the cutting edge of technology — especially AI and automation — as well as contributing to the green energy transition.

In our paper Future of work, we discuss how an internal talent marketplace can help companies to match skills to tasks, rather than simply focusing on specific jobs.¹⁴ And, there is an increasing trend to work with partners that possess key skills, as part of a wider strategy to balance technology with people to boost productivity, innovation and worker satisfaction.