5 minute read 10 Dec 2018
Woman in factory

How 3Q18 advanced manufacturing themes show growth optimism

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.

5 minute read 10 Dec 2018

Show resources

  • Advanced Manufacturing Quarterly - 3Q18 top 10 analyst themes

    Download 208 KB

Market share for manufacturers is depending now more than ever on innovation. A focus on the customer is key to a competitive advantage.

Advanced manufacturing (AM) leaders have a positive outlook on growth, as recent 3Q18 earnings calls reveal. Trade wars and new tariffs, and the broader geopolitical environment, are one area that leaders are watching closely, with high raw materials prices creating headwinds. On the flip side, company leaders across all subsectors see potential in the Asia Pacific region, which they cite as growing most rapidly, and revenues in Europe and Latin America have climbed as well.

Here are the top 10 themes we identified from 3Q18 earnings calls of 20 public advanced manufacturing companies. 

1. Working capital and cash flow management: signs of improvement

Cash flow continues to improve due to strong prioritization of working capital discipline, often supported by productivity and cost-control programs. Increased pension plan contributions create a drag on cash flows for some companies. A few peers are raising inventory levels to meet customer demand.

In other cases in chemicals and industrial manufacturing, high inventory levels are unplanned and have been identified by leaders as a challenge to working capital management.

2. Geopolitical environment: concerns on trade policy

Trade policy conflicts and the evolution of new tariffs are creating ongoing uncertainty for industrial markets. Some leaders are concerned about secondary effects such as reduced demand in end markets, particularly automotive, if interest rates rise. Responses by manufacturers include leveraging global manufacturing footprints to lower exposure to tariffs, applying for exemptions from tariffs on key raw materials, and increasing prices. 

Some aerospace and defense (A&D) peers are optimistic about new US defense appropriations for fiscal year 2019 likely to support increased military spending. At the same time, rising tensions between the US and Saudi Arabia may lead to restrictions on a key end market for some US A&D peers.

3. Competitive environment: rising costs create challenges

Peers across all subsectors are increasing prices in response to higher raw materials costs and tariff impacts. Premium products based on innovative technologies are best positioned to maintain market share in spite of increased prices. Rising manufacturing costs are leading some peers to renew efforts to improve productivity. 

Expansion of service portfolios, ranging from post-purchase maintenance contracts to business consulting, is providing manufacturers with ways to deepen customer relationships and ensure future revenue streams. Increased caution by customers in committing to large projects, due in part to economic uncertainty, was reported by one industrial manufacturing peer.

4. Geographic developments: reasons for optimism

Company leaders across all subsectors continue to cite the Asia Pacific region as growing most rapidly. China continues to lead demand growth for many products. However, slowing growth was noted by a few peers, particularly in China’s automotive sector and in solar power. 

Revenues in Europe and Latin America rose for some peers, continuing a trend from 2Q18. R&D investments are being made in specific geographic markets, particularly China, Middle East and Europe, to better support local customer needs.

5. Developments in end markets: broad increases in demands

Optimism is supported by growth across a range of industrial markets. Strong growth in air traffic and high load factors are continuing to drive demand for commercial aircraft. Demand for military equipment is continuing to rise as defense budgets in many countries expand. Demand is increasing for advanced materials and specialty chemicals from customers in consumer electronics, agriculture, and food manufacturing.

While demand from automotive customers is slowing in some markets, more than one peer saw growth in electric vehicles. Construction materials were described as “soft” by more than one peer. In the energy sector, order activity has been growing more quickly from renewables customers than from those in traditional power generation.

6. Change in financial outlook: overall, a sense of confidence

After outlooks on 2H18 revenues and earnings per share (EPS) were raised by half of peers in 2Q18, most chemicals and industrial manufacturing peers maintained their outlooks in 3Q18 or made minor adjustments based on situations such as M&A. 

Several A&D leaders continued to express confidence for improving revenues in the last part of 2018 and into 2019. Margins are expected to continue to improve based on the success of ongoing productivity programs for several peers, boosting EPS. A few peers revised outlooks downward on factors such as higher raw materials pricing, weak results in noncore operations or restructuring.

7. Currency impact/foreign exchange volatility: strong dollar has ripple effects

Almost half of peers commented specifically on currency effects. For US-based peers, a strong US dollar created headwinds in reporting revenues from international markets. Foreign exchange volatility was noted most often in connection with revenues earned in Brazil, Argentina and Turkey. 

A chemicals peer also mentioned the euro and the Chinese yuan as creating potential headwinds going into 2019. An industrial manufacturing peer noted the additional challenge of an internal dual IT system environment, which created obstacles in intercompany fund transfers.

8. Financial initiatives: peers are committed to dividends

New share buyback programs or expansions of previous programs were announced by several peers. Peers also provided updates on recent buyback activity, which in some cases has been US$1 billion or more in 2018. Commitments to dividends, including plans for increasing payouts, were shared by peers in all subsectors. 

An industrial manufacturing peer described plans to complete acquisitions before the end of the year, but acknowledged that price was a factor in finding the right targets.

9. Supply chain management: tariffs are having an impact

High raw materials prices, including the impact of tariffs, are creating headwinds. 

A&D peers continue to experience challenges in guaranteeing the availability of key parts, including engines and airframes, which puts aircraft deliveries at risk of falling behind schedule.

Some chemicals peers are building internal sources or establishing joint ventures for access to key feedstocks in order to protect against market price fluctuations. Industrial manufacturing peers are identifying opportunities to reduce costs in supply chain and procurement systems.

10. Business reorganization/restructuring

Manufacturers continue to reorganize portfolios through spin-offs, acquisitions and divestments to achieve a more focused business structure. Productivity programs, underway at several peers, are yielding results by streamlining organizational structures and reducing complexity. 

For chemicals, large transactions in the last few years are now winding down as peers focus more on core capabilities. Deals are more likely to support chemicals companies deepening their specializations.

  • Scope, limitations and methodology

    This analysis examines key themes from the public 3Q18 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 earnings calls held from 17 October to 9 November 2018. 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.


While geopolitical issues are adding uncertainty, advanced manufacturing (AM) peers are preserving revenues and margins through pricing strategies and flexible uses of global manufacturing footprints. Interest in acquisition opportunities remains high, as peers are returning more capital to shareholders. To gain market share, innovation and deep customer relationships remain paramount.

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.