6 minute read 14 May 2019
workers production line machine part above

How competitors respond to market forces with a greater focus on customer

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.

6 minute read 14 May 2019

A customer-centric mindset is pushing growth forward in 4Q18 with visibly increased investment in R&D, innovation and digital offerings.

Despite the challenges, such as uncertainty from unresolved trade policy issues, increase in price and supply chain adjustments caused by the local shifts in demand and trade policy issues, advanced manufacturing (AM) leaders continue to maintain a positive outlook on growth, as per the recent 4Q18 earnings calls. A customer-centric mindset is pushing growth forward in this quarter with visibly increased investment in R&D, innovation and digital offerings. Partnership and connected solutions occupy a prominent place too.

Simplification of internal structure, including business reorganization and realignment, is another key area of focus for 4Q18. Apart from the ongoing apprehensions about the uncertainty caused by trade policy and geopolitical aspects, peers across sectors are also citing unplanned high inventory levels as a concern. Several peers have proposed actions like supply chain adjustments to manage the financial impact of tariffs resulting from trade policy issues. Increase in price, spurred by high cost of raw materials and facilities, continues to be another area that requires attention.

Here are the top 10 themes we identified from 4Q18 earnings calls of 20 public advanced manufacturing companies, which focused on geographic and subsector trends.

1. Geographic developments: Asia-Pacific is leading

In terms of growth, all subsectors continue to cite Asia-Pacific as the most rapidly evolving region. Within the region, China continues to lead demand growth for many products. Customer uncertainty created by trade policy discussions between China and the US is a point of concern for chemicals peers. In Europe and North America, revenue growth has been the strongest for aerospace and defense (A&D) peers, while industrial products peers had mixed results in Europe and generally positive results in North America.

2. Financial initiatives: capital expenditures on the rise

Owing to the unexpected drops in stock prices, many peers experienced an increase in share buyback activity during late 2018. Initiatives, such as dividend commitment, including plans for increasing payouts, continued in this quarter. Leaders also saw an increase in capital expenditures to support future growth.

3. Developments in end markets: optimistic outlook supported by growth

Strong growth in air traffic and high load factors are continuing to drive demand for commercial aircraft. Expansion of defense budgets across countries has increased the demand for military equipment. Increased demand for advanced materials is being observed in nonresidential construction whereas spending by oil and gas customers have returned to more conservative levels due to price volatility. More than one peer cited the strength of a diversified product portfolio as a hedge against market volatility in individual customer segments.

4. Working capital and cash flow management: changes observed from prior quarter

Strong prioritization of working capital discipline, supported by productivity and cost-control programs has ensured continued improvement of cash flow. However, increased pension plan contributions have created a drag on cash flows for some peers whereas rising inventory levels has also posed challenges for some.

5. Innovation and new product or service launches: focus on digital technologies and R&D

Peers across subsectors have increased their R&D budgets as they are benchmarking their investments against recognized industry leaders. Some of them are allocating resources to specific business units and product lines to give business unit leaders more autonomy and to better assess returns on investment. The trend of reorganizing digital offerings into single business units within the company to support enterprise-wide collaboration has also been observed. Partnerships are fostering innovation, whether with clients to produce highly customized offerings or with third parties to develop and commercialize new technologies. The focus on digital and analytics, for internal operations and for product and service offerings, continues to strengthen. Internet of Things (IoT) continues to be a driver for the creation of connected solutions, such as building management systems and satellite networks.

6. Cost reduction: controlling costs in all parts of the organization

Peers across all sectors are continuing with the streamlining of centralized business functioning, both in terms of headcount and departmental structure. In order to support agility, some of them are reassigning corporate functions to individual business units. This also provides greater levels of transparency into operating costs. Multiphase productivity programs continue to deliver results. The methods adopted to this end include accelerations in time frames or increased financial goals for the programs, and plans to defer discretionary spending in the short term. A&D peers are partnering with major customers to identify opportunities to maintain quality while lowering costs and price.

7. Business reorganization or restructuring: operational streamlining and divestments

Internal structures, such as matrix-based ones and multi-layered service lines, are being simplified to better support customer relationships. Manufacturers continue to reorganize portfolios to achieve a more focused business structure. Some are allowing their digital services to be managed by a single group or business unit in order to provide stronger coordination of digital service development and delivery.

8. Critical projects: production updates and milestones for key projects crucial to company strategy

Significant new government contracts have been announced by A&D peers. They are adjusting production rates and ramp-up plans as key projects transition from development to delivery phase. Chemicals companies are benefiting from new facilities coming online, particularly those based in the US and well-positioned to take advantage of low-priced feedstocks. Customer orders are growing for industrial products peers.

9. Geopolitical environment: impact of government policies and trade flow on industrial revenues and margins

While there are concerns about the impact of tariffs on 4Q18 results, most comments about geopolitical issues have been focused on potential scenarios in 2019. Leaders are noting uncertainty from customers as a result of unresolved trade policy issues and the partial US Government shutdown in early 2019. Actions, such as supply chain adjustments, are being planned to manage the financial impact of tariffs. Brexit has been a topic on calls for peers across AM.

10. Competitive environment: increasing prices owing to raw material cost and tariff impacts

Premium products based on innovative technologies are best positioned to maintain market share in spite of increased prices. Expansions of service portfolios, ranging from post-purchase maintenance contracts to business consulting, are providing manufacturers with ways to deepen customer relationships and ensure future revenue streams. Pricing flexibility varies by customer segment and geography. Some peers have experienced challenges in raising prices in Asia and Europe because of local economic growth trends, especially in sectors such as automotive and lighting.

  • Scope, limitations and methodology

    This analysis examines key themes from the public 4Q18 earnings calls among 20 global AM peers, including companies from the aerospace and defense, industrial manufacturing, and the chemicals sectors. The identification of the top 10 themes is based solely on an examination of analysts earnings calls. We view the themes as providing a timely snapshot rather than a universal assessment of importance, revealing insights into the minds of both AM leaders and industry analysts during the quarter.


Apart from a strong focus on R&D and innovation, advanced manufacturing (AM) peers are looking at strong prioritization of working capital discipline through productivity and cost-control programs to ensure continued improvement of cash flow. Business realignment and reorganization, and expansions of service portfolios are providing manufacturers with ways to deepen customer relationships and ensure future revenue streams.

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.