6 minute read 3 Sep 2020
An industrial woman engineer with headset in a factory, working. Copy space.

How manufacturers can reduce costs and look to long term growth

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 3 Sep 2020

Manufacturing leaders share their insights regarding updates and trends affecting the sector, in light of COVID-19.

In brief
  • Cost management has become a top priority for A&D, chemical and industrial products companies in response to an industrial environment challenged by COVID-19.
  • To bring down costs, manufacturers are using all tools at their disposal, including implementations of their own client services in-house.
  • Headcount reductions are expected to continue into 2H20 as leaders face exceptionally complex workforce management questions.

The Advanced Manufacturing Quarterly (pdf) analyzes the top themes discussed by leaders of 31 advanced manufacturing (AM) sector companies (including those from the aerospace and defense (A&D), industrial products (IP) and chemical subsectors) during public earnings calls with analysts in July and August 2020.

Here are the top 10 themes:

1.  Developments in end markets

Since the pandemic, customers have been deferring large projects to conserve liquidity. On the other hand, packaging, pharmaceuticals, food and beverage, and household products continue to drive demand. And as expected, there has been a high demand for personal protective equipment (PPE), testing kits and medical supplies — boosting sales of specialized materials.

2. Financial initiatives

R&D investments have varied widely over the last quarter. Some manufacturers are maintaining their commitments to R&D spending in preparation for a gradual return to industrial growth. Others are pulling back by as much as 30% to reduce operating costs or are investing exclusively in high-growth product categories. Another interesting trend is debt maturing being replaced with longer-term maturity dates. Meanwhile, share buyback and dividend activity is resuming, though liquidity and balance sheet strength remain top of mind.

3. Operating costs

Cost savings targets have been raised at several firms over the last quarter. As expected, discretionary spending, including employee travel and investment in large projects, have declined. Headcount reductions, internal realignments, offshoring and an increased use of automation are supporting greater operational efficiency in organizations. Some manufacturers are implementing their own automation systems rather than working with outside providers.

4. Change in financial outlook

Outlooks are once again being issued by many companies that withdrew them in the first quarter, out of pandemic-related uncertainty. Revenue for most industrial segments in 2H20 are expected to be below 2H19 levels. While several manufacturers are predicting gradual movement toward an overall recovery in 2021, companies forecast that the automotive and aerospace sector are likely to require more time to recover.

For companies that do not change their forecasting methods to meet changing demand, scenario planning for both near-term operations and long-term capital allocation will be fatally flawed.
Loren Garruto
EY Global and Americas Corporate Finance Leader

5. Critical projects

While many commercial aerospace projects and deliveries have been reduced or delayed, defense contracts and deliveries of military equipment and services remains a consistent source of growth for A&D companies. And at chemical and industrial firms, capex reductions have put many facilities and IT systems projects on hold.

6. Culture and talent

In response to COVID-19, companies are implementing new safety procedures at facilities. However, outbreaks and work stoppages related to safety concerns still affect productivity for some companies. Headcount reductions are another concern and will likely continue into 2H20. While in the last quarter leaders were focused on emphasizing sacrifice at all organizational levels, this time, workforce reduction is being seen with a stronger focus on overall cost savings potential. What manufacturers must not overlook is that if they lose sight of the value of their talent, they are at significant risk of losing their competitive edge when markets recover.

Manufacturing workers are the unsung heroes of the COVID-19 pandemic. This crisis is an opportunity to usher in a new way of working that could ultimately benefit your business, employees and customers.

7. Working capital and cash flow management

Inventory reduction will most likely be an area of focus in 2H20, especially for aerospace companies. While receivables have been a focus of working capital improvement programs in previous quarters, manufacturers are trying to balance overdue receivable levels without putting destabilizing financial pressure on clients.

8. Geographic developments – growth markets

Revenue growth in China has been higher than in any other country or region, reversing 1Q declines. Meanwhile, demand for defense equipment and services from countries in the Middle East has continued to grow. However, on the flipside, major Asia-Pacific and Latin American economies, especially India, Brazil and Mexico, are facing growth challenges as COVID-19 cases rise.

9. Changes in production rates

Production lines serving end markets with especially sharp drops in activity, such as aerospace and automotive, are operating at reduced levels to control operating costs and inventory. At the same time, production of pandemic supplies is operating at full capacity. Companies that expanded operations temporarily are considering long-term commitments to serving new markets.

10. Business reorganization or restructuring

To meet increased cost savings goals, several companies are streamlining their internal structures, especially for business units serving challenged end markets. Many firms are even divesting noncore or underperforming business units to generate cash and strengthen balance sheets, allowing them to focus more closely on core operations.

  • Scope, limitations and methodology

    This analysis examines key themes among 31 AM peers, including those from the A&D, IP and chemical subsectors, during public earnings calls held in July and August 2020. This update tracks the movement of these themes from quarter to quarter to provide a perspective on shifts in the manufacturing landscape.

Summary

The 2Q20 quarterly review throws light on some of the important issues the sector faces. Once again, cost management has become a top priority. Financial initiatives, and culture and talent are other poignant themes that have been elaborated and analyzed in the review.

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.