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In the resurgence of the advanced manufacturing sector, sustainability, transparency and resiliency have become dominant themes. Companies are centering their future initiatives around these three pillars and aligning their current business operations with them. Furthermore, companies plan to undertake several measures to capture market share in emerging areas, such as electric and autonomous mobility, infrastructure decarbonization, sustainable buildings, and renewable energy.
In 3Q21, manufacturing companies dealt with soaring operating costs, uneven demand patterns and severe value chain breakdowns, and in response, they carried out the reinvention of their supply chains. They also took measures to restructure their business, capital strategy and competitive positioning. As the manufacturing sector continues to recover, it is optimistic that the operating costs will stabilize. Consequently, companies expect that their margins will increase. They are confident that the supply chain disruptions will subside once the effects of a more visible supply chain start to kick in.
Key takeaways:
The advanced manufacturing sector plans to invest in digital to achieve operational efficiencies, expedite product innovation and improve visibility across the value chain.
Advanced manufacturing companies are recognizing the importance of meeting customer expectations in order to maintain strong relationships and hold onto their market shares.
In a bid to transform into sustainable, transparent and resilient businesses, companies are operating proactively. They are launching sustainable products, such as net-zero connected buildings and electric aircraft, to meet their decarbonization targets and enhance ESG reporting. Access to timely and relevant data is helping companies to create transparent and robust supply chains.
For your convenience, full text transcript of this podcast is also available.
Announcer
Welcome to the EY Advanced Manufacturing and Mobility Business Minute podcast series, where EY professionals explore the critical business issues impacting our industry today.
Moderator
A warm welcome to our audience and joining me for our first podcast for 2022 are Julie Rosenthal and Mohit Ahuja, who are part of our Global Advanced Manufacturing sector analyst team.
Today, we will be sharing their insights into third quarter earnings calls for manufacturing companies and key themes that were discussed during these calls in October and November of 2021.
Julie and Mohit, welcome to you both – it’s a pleasure to have you here.
Mohit Ahuja
Great to be here and looking forward to sharing our insights.
Julia Rosenthal
Bhavini, as always, it’s a pleasure to be part of this podcast series.
Moderator
Let’s dive in. I see from our analysis three overarching priorities that manufacturing companies have on their agenda: sustainability, transparency and resiliency, which we’ll touch on throughout our discussion today.
In addition, we’ll also hear from both analysts who will share their insights on the top five themes that pertain to market forces and company responses, that were discussed during these earnings calls that were top of mind for the 31 advanced manufacturing companies that formed our analysis.
Mohit, let’s share with our audience the top market force that stood out in the third quarter.
Ahuja
Thanks, Bhavini, I’m happy to start the conversation rolling!
Operating costs are emerging as a significant market force. Skyrocketing variable costs fueled by raw material shortages, a long-lasting surge in transportation costs and a talent shortage are impacting margins and cash flows, especially at the time when manufacturers are already struggling to cut costs. Even when prices are increased, many manufacturers continue to endure revenue losses in the range of US$300 million to US$500 million for 3Q21 and are predicting similar headwinds for 4Q21. Apart from revising prices, many peers are implementing operational improvements via productivity playbooks, and Lean and Kaizen frameworks.
Now, let me hand off to Julie to share the most discussed company response.
Rosenthal
Thanks, Mohit. Glad to share that with our audience.
It won’t come as a surprise that supply chain reinvention was a significant company response for the third quarter. As we’ve talked about before, manufacturers are seeing an upsurge in demand. When this is combined with raw material shortages and congestion at ports, production schedules are going to be delayed. Analysts raised a number of questions on third quarter earnings calls about how manufacturers are responding to this. We heard leaders talking about collaborating with customers and distributors for better visibility. We also heard about efforts to establish relationships with a wider range of suppliers and the signing of long-term contracts. While price increases are not any manufacturer’s first choice, we heard about the implementation of new pricing strategies as well.
Moderator
Thanks for sharing those insights. Let’s explore the other themes for each. Julie, as you’ve just shared one important company response, what were the other four themes that made the top five list?
Rosenthal
Starting at the top, we have change in financial outlook. In spite of supply chain challenges, many manufacturers are optimistic about growth in their revenue and margin forecasts going into the last quarter of 2021. We also heard leaders talking more about competitive positioning, or the ways in which manufacturers plan to hold onto those gains. I mentioned pricing strategies. We’re also seeing growth in new markets and acquisitions in emerging areas such as electric vehicle and healthy building technology. Our third theme, business reorganization or restructuring, has been largely driven by cost control. Manufacturers are continuing to sell business units that are underperforming; we’ve seen this in the sector for many quarters. Companies are decentralizing operations so individual business units have more accountability in their strategy and decision-making. Finally, financial or capital strategy is a new theme in our top five for the third quarter of 2021. Along with acquisitions, manufacturers are planning major investments in new offerings aligned to sustainability and digital transformation.
Moderator
Julie, thanks for those detailed insights. Mohit, over to you to share the remaining market forces that were top of mind with our audience.
Ahuja
Talking about the top market forces, demand patterns continue to be the most talked about theme, with mixed recoveries across regions. At number two, discussions on value chain breakdown, grew stronger owing to prolonged supply chain disruptions. Number three theme was investors, which remained prominent as companies undertook measures to sustain a profitable growth. Number four was operating costs, which we’ve already discussed in detail. Finally, companies continue to position sustainability as a centerpiece in their operating models and hence sustainability initiatives emerged as the fifth theme.
Moderator
Thanks for expanding on those themes Mohit and Julie.
I mentioned earlier three overarching priorities: sustainability, transparency and resiliency.
Let’s spend a few minutes discussing how manufacturing companies are striving to achieve these.
Mohit, how about sharing your insights on sustainability and if you can give a few examples that would be fantastic?
Ahuja
Sure, Bhavini, talking further about sustainability, we continue to witness an urgency from manufacturers to meet their decarbonization targets and enhance ESG reporting. Further, the recent initiatives announced at the UN COP26 conference are accelerating the industry’s efforts to scale the necessary clean technologies. Some recently launched sustainable products include net-zero connected buildings, active use of recycled feedstocks, electric aircraft, aerospace engines with sustainable fuels, and hydrogen propulsion systems for passenger and commercial vehicles.
Moderator
Great insights, Mohit, thanks for sharing with our audience.
Let’s move on to transparency. Julie, over to you to impart some wisdom.
Rosenthal
For manufacturers, transparency has become especially important in a few different areas of the business. Supply chain has been one of the top priorities for transparency since the start of the pandemic. Manufacturers learned just how much they knew, and didn’t know, about their own supply chains when disruptions were appearing almost everywhere. Leaders understand now that they can’t afford not to increase visibility into their own supply chains. We also saw companies investing more in transparency within their own operations. Once you’ve gone after the low-hanging fruit in terms of cost control, you need greater clarity into operations at the individual facility and product line level to improve productivity. As companies automate more of their manufacturing processes, there are opportunities to install systems that can gather data from sensors and analyze operations at a new level of detail. And, to go back to what you were saying about sustainability, Mohit, I think we’ll continue to see opportunities for transparency in manufacturing on the sustainability front, too. Companies are looking at everything from renewable sourcing to more energy-efficient operations in factories.
Moderator
Julie, thanks for sharing your insights. And last but not least, let’s talk about resiliency.
Maybe, you can both chime in here with your respective thoughts. Mohit, you’re up first.
Ahuja
Sure, Bhavini, to become more resilient, AM companies are accelerating their digital transformation journeys by embedding digital technologies across the value chain. This is enabling them to have greater visibility of the shop floor and supply chain, thereby increasing productivity and letting them implement agile pricing. Digital also supports robust customer relationships as companies are increasingly selling technology-based high-margin offerings, which also helps customers reduce cost. Remote maintenance and predictive maintenance are examples of offerings which have been in demand during disruptions as well. Apart from digital, many peers are decentralizing their business units to improve accountability and ownership.
Let me hand off to Julie to share her thoughts.
Rosenthal
Absolutely! Resiliency is another area where transparency can play an important role. Looking at supply chains, for example, resiliency can only come when companies have enough insight into the current state of their operations to create accurate forecasts and make sound decisions about what to do next. Transparency — access to timely and relevant data — supports the tools that allow manufacturers to have confidence in putting their strategies into action.
Moderator
Summarized to perfection – thank you both!
Our analysis also delves into subsector-specific insights for industrial products, aerospace and defense, and chemicals companies.
Let’s start with an update from Julie on the industrial products subsector and what companies discussed during third quarter earnings calls, over to you Julie.
Rosenthal
I’m happy to share that with our audience.
Among our industrial products peers, we heard leaders on earnings calls focusing on finding the right balance in maintaining and growing customer relationships. As they face disruptions such as rising inflation after major supply chain challenges, industrial products companies are rethinking their pricing and sourcing strategies. At the same time, they’re recognizing the importance of meeting customer expectations, including on-time order deliveries, so they can keep relationships strong and hold onto market share. In the area of supply chain, some industrial products companies are setting up dedicated teams for negotiating with suppliers and using digital tools, such as predictive analytics, to minimize material and pricing disruptions.
For the aerospace and defense subsector, I’ll hand off to Mohit to share his insights.
Ahuja
Happy to continue the conversation, Julie. Here are my observations.
On the commercial side, air traffic is likely to return to pre-pandemic levels in late 2023 or early 2024, and the recovery will be in three stages: first domestic, then regional markets, and finally, long-haul international routes. However, emergence of new COVID-19 strains will further push the recovery, especially on international routes.
However, business jets and the freighter market witnessed strong demand, which is likely to continue in the coming quarters. Defense contractors witnessed mixed trends in key end markets with space predicted to be fastest-growing in 2022, while demand from other segments stumbled owing to supply chain disruptions.
And rounding out our last subsector is the chemicals and advanced materials landscape. Julie, back to you to share your perspectives with our audience.
Rosenthal
Thanks, Mohit, here’s what I’ve observed.
As demand from customers continues to recover, chemicals and advanced materials companies are lifting their revenue and profitability outlooks. Growth is coming from expansion into new geographies, as well as the addition of new products to their portfolios. As we’ve talked about, sustainability is a key driver for new product development, with several new brands being launched to highlight everything from renewable raw materials to new customer applications. To overcome the supply chain issues and raw material shortages, chemical companies are looking beyond China to grow their sourcing and manufacturing networks. This growth includes both local and global locations. Chemical companies are also developing M&A strategies to strengthen portfolios, while also improving working capital and cash flow.
Moderator
Never a dull moment in the advanced manufacturing sector. Thank you both for sharing your respective insights.
And to our audience, be sure to visit our website which includes interactive charts that provide more detailed information on the market forces, company responses and each of our three subsectors. Additionally, you can download a copy of our report and read at your leisure.
As we kick off a new year, Julie and Mohit let me ask each of you to give your forward looking opinion on what we may expect to see from the manufacturing industry as fourth quarter has come to an end, and what the future holds as we enter into a new and what I hope will be a better year for all.
Mohit, let’s put you on the hot spot first.
Ahuja
No problem at all. I’m happy to share what I see as positive signs for what 2022 may bring.
We expect rising operating costs to stabilize, helping companies increase their margins. Supply chain disruptions are likely to continue for at least the first half of 2022, till more capacities for key materials such as semiconductors and resins, are established. Pricing strategies will continue to evolve with implementation of more dynamic and analytics-based pricing models. Lastly, investments in digital will accelerate to achieve operational efficiencies, expedite product innovation and improve visibility across the value chain.
Julie, over to you to share your insights.
Rosenthal
Thank you, Mohit. From what I’ve observed in the lead up to fourth quarter, here are my thoughts.
We expect AM companies to emerge much stronger from these waves of disruption. We discussed in detail the three pillars to create value — sustainability, transparency and resiliency. Almost all company initiatives are likely to be centered around these themes. Furthermore, companies will undertake both organic and inorganic measures to capture market share in emerging growth areas, such as electric and autonomous mobility, infrastructure decarbonization, quantum computing, sustainable buildings, and renewable energy.
Moderator
Mohit and Julie, thank you for sharing your valuable insights with our audience and what to expect as we kick-off 2022.
Rosenthal
It’s my pleasure to part of this podcast series and share insights with our audience.
Ahuja
Likewise, I share the same sentiments as Julie. These podcasts are a highlight for our quarterly updates which I look forward to participating in.
Announcer
Thanks for listening to today’s EY Advanced Manufacturing and Mobility Business Minute podcast. We hope you found it engaging and informative. To listen to other Business Minute podcasts, you can find them at ey.com/ammpodcasts.
Download our 3Q21 Advanced Manufacturing Quarterly report here
