2015 Industrials Trends
Companies
in the industrial sector continue to do well, but they must use their cash to
boost digitization efforts and expansion strategies.
Although
the global economy is still struggling to find its footing since the recent
recession, the gathering strength of the industrial sector around the world has
been one of the most positive developments. More productive and cost-efficient
manufacturing techniques, increased M&A activity, and the “reshoring” of factories
as low-cost manufacturing countries become less competitive primarily drove the
sector’s newfound resurgence. We expect further growth as the demand for parts
escalates from robust industries, such as airlines, automotive, energy, and
building products.
Of
the major economic zones, the U.S. appears to be among the healthiest. And the
performance of the nation’s industrial sector is a significant part of the
improvement. The numbers for the first half of 2014 are revealing. Revenue
growth for the sector — which includes subsectors as varied as construction and
materials, industrial machinery, and industrial transportation — was up 3.2
percent compared with the same period in 2013. Net income margins rose to 7.3
percent in the first half of 2014 from 6.9 percent for all of 2013.
Perhaps
most importantly, industrial capacity stood at 78.9 percent in October 2014,
almost a full percentage point ahead of the previous year — despite a 3 percent
increase in available capacity. It marked the fifth consecutive year of gains,
putting companies in a position of being able to turn down less profitable
projects.
Even in Europe, which has been wrestling with
erratic economic growth, industrial companies are holding their own. According
to a 2013 PwC survey (pwc.com), the
leading global industrial companies achieve impressive EBIT margins of 17.3
percent on average. And in China, the number of industrial firms have more than
doubled since 2000.
We believe the industrial sector will
continue to prosper in 2015, but precisely how much individual companies will
keep growing will depend on the efficacy and boldness of their investments in
three key areas: digitization, expansion, and people
The
digital transformation
Far
too many industrial companies make the mistake of believing that new digital
technologies are best suited to consumer-oriented companies. Thinking that way
is fast becoming a losing proposition. From essential needs such as accurate,
resilient supply chains to enhancements in product design and production,
digital tools have already become critical differentiators.
Consider
the degree to which digitization is improving how industrial companies
integrate their activities with their partners and customers. Thanks to new
tools, manufacturers are collaborating more closely with key suppliers on the
codevelopment of parts and systems and gaining better insight into the supply
chains that feed manufacturing and distribution. Advanced analytics are aiding
in the understanding of market trends and improving demand planning while
simultaneously communicating product changes throughout the supply chain.
Industrial
firms are investing in digitization opportunities within their sales
operations, as well, equipping their field sales teams with mobile devices and
visual tools rather than printed brochures. These technologies are helping
sales forces quickly configure products as customers require, while providing
those customers with greater insight on prices and lead times.
By incorporating into products digital
advances such as sensors and other machine-to-machine (M2M) technologies —
otherwise known as the Internet of Things (IoT) (strategy+business)
— some industrial companies offer such capabilities as real-time performance
monitoring, quality management, and rapid response to product failures.
Companies
moving quickly on this front have been able to distinguish themselves from
competitors, even as they take these technologies to the factory floor, where,
combining IoT developments with robotics and other advanced techniques, they
can now better monitor and control all kinds of manufacturing activities.
In
addition, 3D printing offers the potential of bringing dramatic change to the
factory floor, reshaping operations on a scale similar to the IoT. Although it
is still early in 3D printing’s development, industrial firms should pay attention
to its implications — both the risks and opportunities. It is critical to
anticipate the way 3D printing will interact with other plant machinery and the
degree to which it needs to be integrated into new manufacturing equipment.
Many
are also investing in digital back-office systems for managing products in the
marketplace. Business intelligence systems, for example, can help companies
better understand just how profitable their different product lines are,
content and knowledge management technologies can improve the management of
intellectual property, and data analysis and synthesis capabilities can help
companies cope with the mountains of data generated by the sensors embedded in
their factories and the products they build.
Expansion
strategies
The
industrial sector has seen a burst of M&A activity over the past several
years. More than 1,900 deals were completed in 2013 in the United States alone,
for a total of almost US$70 billion, and 2014 will likely reach similar levels.
Deal valuations, too, were sky-high, averaging 11.7 times EBITDA in 2013. And
that doesn’t count the number of proposed acquisitions that were rejected by
sellers seeking even higher multiples. We expect M&A transactions to
increase markedly, given how cash-rich the sector is as a whole.
Industrial firms are already bulking up their
corporate development staffs to take advantage of all the activity. Whether
their expansion strategies and operational capabilities are tightly aligned
with the nature of the markets they may be hoping to enter, however, is a
different story. Diversification merely for its own sake is not a winning strategy (strategy+business),
and the list of companies that have found themselves adrift and losing money in
unfamiliar markets is long.
Indeed,
in many cases, consolidation is the best route to expansion for industrial
companies, because it involves zeroing in and doubling down on what they do
best and on what differentiates them from their competitors. For this strategy
to succeed, however, companies must concentrate fully on those capabilities and
products that distinguish them in their chosen markets, while minimizing their
investments in other activities.
A
firm focused on small-batch, high-performance materials products, for example,
would do better to consider buying or merging with firms that similarly have
strong research and development capabilities and the ability to price
competitively; both of those factors can make the most of the intrinsic high
gross margins in their sector.
Deals
that might help such a firm build a supply chain cost reduction capability that
saves mere pennies would likely destroy firm value. For high-volume,
large-batch manufacturers supplying stable long-term contracts, the reverse is
true. But those in the middle must think carefully about how and where to
invest, because if they make the wrong bet, they are unlikely to survive.
Moreover,
industrial firms should be more aggressive in adopting new methods for reaching
out and understanding new markets or targeting specific customers (for example,
OEMs) and their product sets; these methods include rich information accessible
through market research tools such as online surveys and social media. When combined
with input from industry experts and deep research into the sector, these tools
can help create a mosaic of insights into unknown markets for different
products, different customer bases, and new territories.
Finding
the people
The
industrial sector is already struggling to find and keep the skilled people it
needs, both on the shop floor and in the office. In the U.S. the unemployment
rate in the sector decreased to 4.5 percent in September 2014, down from 6.9
percent in 2013, in part because of an aging workforce and younger workers
shunning industrial manufacturing jobs for more glamorous sectors, like
high-tech. As a result, talent scarcity could worsen in the coming year and
wages are poised to rise in the near future.
As
companies look to invest in growth, talented people will become more critical
at every stage of an industrial firm’s operations. The advent of digitization
will require new expertise in a variety of fields — not just product
development, manufacturing, and IT, but also marketing, customer interaction,
corporate development, and more.
Finding
and attracting these people will take money — companies must invest in
widespread recruitment and greater promotion of the industry’s possibilities,
benefits, innovation opportunities, and prospects. This task also demands
industrial companies’ willingness to be flexible in how workers are managed,
which often requires giving younger workers the freedom to be creative and more
involved in areas that were typically off-limits to prior generations of
factory floor employees, such as product and plant efficiency improvements.
Enter,
the future
Global
industrial companies have a unique opportunity to build on the gains that the
sector has enjoyed recently. They have plenty of cash now, but to maintain
their growth in the coming years, they must invest it thoughtfully, with the
goal of differentiating themselves through digital innovation, more
knowledgeable relationships with their customers, labor force improvements, and
smart expansion strategies.
http://www.strategyand.pwc.com/perspectives/2015-industrial-trends
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