8 minute read 22 Mar. 2021
Industrial robot with conveyor in manufacture factory

What manufacturers are doing to prepare for market recovery

By Jerry Gootee

EY Global Advanced Manufacturing Sector Leader

Consulting leader with nearly 30 years of experience. Passionate about developing people, building relationships and serving clients. Guitarist and vocalist. Golfer and Cleveland sports enthusiast.

Contributors
8 minute read 22 Mar. 2021

Companies are actively undertaking digitization of existing products and launching connected offerings.

In brief
  • Manufacturers announced cautiously optimistic financial outlooks, driven by momentum in many end markets.
  • To reduce costs and fund growth initiatives, business reorganization and restructuring have become top priorities for many companies.
  • Digital transformation took center stage, with companies making robust investments to enhance digital capabilities.

The true arrival of the digital manufacturing era, expedited by the COVID-19 pandemic, shaped decisions made by aerospace and defense (A&D), industrial products (IP), and chemical companies during 4Q20. Understanding the crucial need for digital transformation, companies undertook multibillion-dollar acquisitions, launched new digital offerings and connected their installed base to create differentiated solutions that support changing business models.

The 4Q20 Advanced Manufacturing Quarterly (pdf) analyzes the top themes discussed by the leaders of 33 advanced manufacturing (AM) sector companies (including those from the A&D, IP and chemical subsectors) during public earnings calls with analysts in January and February 2021.

Themes that stood out:

1. Change in financial outlook

As COVID-19 vaccines become more widely available, many companies are forecasting a return to pre-pandemic activity levels sooner than they predicted in 3Q20. However, 2021 is still likely to be a transitional year rather than a return to normal. Capex-driven sectors, such as heavy machinery, are also witnessing positive demand with expectations to reach pre-COVID-19 levels much earlier than stated in previous quarters. However, commercial aerospace remains subdued, while defense and space are observing robust demand owing to healthy budget allocations from various governments. Emerging regions, such as Asia and Latin America, are witnessing much higher growth in key end markets, especially automotive and consumer electronics, thus driving momentum.

2. Business reorganization or restructuring

This is a continuing trend over the past several quarters. In 4Q20, AM companies continued to consolidate manufacturing facilities and office footprints, and lower headcount to reduce costs. Less business travel provided a tailwind. Many companies also witnessed cost improvements through structural changes, including decentralization of business units to improve accountability and ownership, and material cost savings through supply chain programs. These programs are enabling AM companies to become more resilient to external disruptions and fund other growth initiatives, such as bolt-on acquisitions and financing for R&D.

3. Product design and innovation 

The COVID-19 pandemic has expedited many years of digital transformation, with manufacturers actively undertaking digitization of existing products and launching connected offerings. Many are connecting their large installed base to Internet of Things (IoT) platforms and supporting the launch of 5G and modern networking technologies for space equipment. Products enhancing safety and well-being, such as air filtration systems and touchless interfaces, are witnessing a robust demand. Energy-efficient and sustainable products, such as connected HVAC, refrigerants with lower emissions and recyclable packaging, are being increasingly deployed as end consumers look to meet their decarbonization targets.

For each of the AM subsector themes, we performed a deep-dive approach and present the findings below:

  • A&D

    1. Developments in end markets
    • Consistent with recent travel trends, aerospace original equipment manufacturers (OEMs) expect narrow body (regional carriers) to rebound before widebody (international carriers). The dramatic growth of e-commerce in the past year fueled express freighter expansion.
    • Defense contractors are confident of growth in end markets, owing to strength in international customers.
    2. Change in financial outlook
    • Revenues for commercial aerospace are expected to remain flat in 2021 with near-term market pressure due to the COVID-19 pandemic.
    • As various governments prioritize spend on defense modernization and mission-critical space programs, defense contractors expect to see stable revenue growth.
    3. Competitive positioning
    • A&D OEMs have partnered with airline customers to develop innovative solutions, including touchless airport kiosks, aircraft fixtures, antiviral surface coatings and air filtration systems.
    • Defense companies are pursuing space exploration as a new market and forming joint ventures to develop an ecosystem as new entrants look to join the space exploration landscape.
    4. Business reorganization or restructuring
    • Commercial aerospace OEMs are focusing on driving structural cost reduction by consolidating manufacturing and reducing office footprints.
    • Several companies have been reducing global headcount and executing strategic divestitures.
    5. Customer acquisition and connectivity
    • Commercial OEMs are focused on delivering the backlog of orders for aircraft, while keeping production for new orders at a low rate. They are also providing attractive financing options to airlines for pre-placed orders.
    • Defense contractors booked significant orders for various programs, as the US Department of Defense continues with its defense modernization strategy.
  • Chemicals

    1. Developments in end markets
    • With the pickup in demand for most end-user industries — including automotive, consumer electronics, packaging, and food and beverages — peers are increasing their revenue and volume outlooks for 2021.
    • Companies are also ramping up production while launching new products with a focus on sustainability and the circular economy.
    2. Change in financial outlook
    • Several companies are launching new products and services, which lead them to expect higher revenue growth and profits compared with 2020.
    • However, robust outlooks are likely to be offset by a gloomy environment in oil and gas, and continued slowdown or partial recovery in a few regions, especially across Europe. 
    3. Business organization or restructuring
    • Several companies divested non-core businesses to eliminate cyclicity, simplify organization structure and improve margins.
    • Companies are reinvesting in R&D, acquisitions and other initiatives in growth areas, such as smart infrastructure, sustainable offerings and electric mobility.
    4. Competitive positioning
    • An increase in prices helped companies hold onto margins without losing much market share, especially in the agrochemicals market.
    • Companies are looking to penetrate and gain market share through developing innovative application in clean energy, electric mobility, consumer electronics, health care, and food and beverages.
    5. Changes in production rates
    • Softness in demand from aerospace and oil and gas led to a decline in certain product categories; however, most peers are operating at full capacity to keep up with demand for electronics and semiconductors.
    • Further, with an increased focus on hygiene, demand from industries, such as non-woven fabrics, water filtration and health care, are pushing up production.
  • IP

    1. Business reorganization or restructuring
    • A shift of power kicks in as decentralization takes center stage at some of the biggest industrial manufacturers, empowering individual business units and making them more accountable for the results they produce.
    • Business units now have cost ownership responsibility and drive R&D for profitable growth.
    2. Developments in end markets
    • Companies witnessed robust demand driven by growth in electric mobility, automation (especially in China) and other digital solutions for industrial applications.
    • However, oil and gas, power generation, commercial aerospace, and construction remained subdued, where industrial companies are finding new ways to serve these customers while continuing to meet revenue and margin goals.  
    3. Change in financial outlook
    • After a year that saw many factories under lockdown and output severely impacted, several industrial manufacturers have revised their revenue and margin outlook upwards – in the high single digits for 2021.
    • Recovery in China, along with a rebound in key end markets, such as automotive and HVAC, primarily drove the positive outlook. 
    4. Financial and capital strategy
    • Debt reduction and restructuring remained high on companies’ agenda as they look to reduce their obligations in an increasingly VUCA (volatile, uncertain, complex and ambiguous) world.
    • Several companies continued to actively engage in share buybacks and dividends.
    5. Product design and innovation
    • Digitization of existing products, by connecting installed base to IoT platforms and launches of connected products, such as smart elevators, building automation and control units, were a major focus area.
    • Acquisitions helped to plug gaps in product lines, expand reach and develop digital capabilities to better serve customers.
  • Scope, limitations and methodology

    This analysis examines key themes among 33 AM peers during public earnings calls held in January and February 2021. This update tracks the movement of these themes from quarter to quarter to provide a perspective on shifts in the AM landscape.

Summary

The COVID-19 pandemic expedited the arrival of the digital manufacturing era, which has shaped decisions made by companies in the advanced manufacturing sector. They undertook multibillion-dollar acquisitions, launched new digital offerings and connected their installed base to create differentiated solutions to support changing business models. Many companies in the sector are forecasting a return to pre-pandemic activity levels sooner than they predicted in 3Q20.

About this article

By Jerry Gootee

EY Global Advanced Manufacturing Sector Leader

Consulting leader with nearly 30 years of experience. Passionate about developing people, building relationships and serving clients. Guitarist and vocalist. Golfer and Cleveland sports enthusiast.

Contributors