5 minute read 18 Dec 2019
Engineer works with a head mounted display

How manufacturing leaders are building customer connectivity in turbulent times

By

Jerry Gootee

EY Americas Advanced Manufacturing Advisory Leader

Advisory 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 18 Dec 2019

Manufacturing leaders discuss key forces affecting the sector.

Advanced manufacturing (AM) companies are continuing to experience differences in growth by subsector. As macroeconomic uncertainty becomes the new normal, companies are focusing on deeper customer connectivity to build stability.

The 3Q19 AM Quarterly analyzes pertinent issues influencing the industry covering the aerospace and defense (A&D), chemical and industrial products (IP) subsectors.

The key discussion points are illustrated below:

1. Developments in end markets

Defense spending by governments continues to rise, causing a surge in demand for A&D products. Consumer electronics markets are also showing signs of recovery. On the negative side, there is still an ongoing slowness in the automotive sector which is exerting pressure on sales and margins for manufacturers.

2. Working capital and cash flow management

Several A&D peers are seeing increases in working capital because of growing demand and ongoing challenges with collections of receivables. Many chemical and IP companies are expecting cash flow to improve because of a strong prioritization of working capital discipline.

3. Change in financial outlook

While revenue growth outlooks for A&D companies are largely optimistic, margins are coming under pressure as companies invest in expanded production. Chemical companies are reducing revenue and margin forecasts as industrial demand slows. IP companies are moderating their outlook for growth as they maintain their commitments to cost management programs.

4. Critical projects

New contracts for military aircraft, defense programs and weapon systems, particularly in the US and Europe, continue to dominate conversations on A&D earnings calls. Chemical and IP companies are building new plants and innovation centers in globally strategic locations to be closer to customers.

5. Cost reduction

Multiyear programs that reduce manufacturing costs and increase productivity continue to yield positive results. Common areas of focus are the streamlining of organizational structures, divestment of non-core businesses, improvements to plant productivity and tighter supply chain management.

6. Financial initiatives

Share buyback activity and dividend payments are increasing at many companies as leaders demonstrate confidence in near-term financial performance. Chemical and IP companies are holding steady on commitments to capital expenditures, reflecting a shift in tone from 2Q19 when R&D spending was rising. Peers in all three subsectors are strengthening their balance sheets by reducing debt.

7. Innovation and new product and service launches

Customer connectivity is driving innovations such as new digital sales platforms, tools to enable sales teams to offer a wider range of products and data analytics to support aftermarket services. Sustainability is exerting a stronger influence on new products and services, particularly for chemical companies in areas such as plastics recycling and plant-based raw materials.

8. Geographic developments — growth markets

In the Asia Pacific region, companies are experiencing lower order activity from automotive and electronics customers and higher demands in sectors such as construction, infrastructure and defense in countries like China. On the other side of the globe, Latin America continues to provide growth opportunities, particularly in agriculture and construction, though currency headwinds persist.

9. Geopolitical environment

Manufacturing sector leaders are starting to view trade-related conflict as a medium- to long-term market force rather than a short-term disruption. As tariffs continue to affect cross-border demand for products, manufacturers are relocating facilities to minimize their exposure. While the outlook on a resolution to the US-China trade conflict is slightly more optimistic than in 2Q19, leaders remain concerned about the negative impact of ongoing uncertainty on industrial markets. In preparation for Brexit, some companies are continuing to maintain higher levels of inventory in the UK to protect against shortages and delivery delays.

10. Changes in production rates

A&D companies are leading discussions about capacity expansions in both aerospace and defense. New chemical plants are coming online to increase production rates. This increase creates two risks for the sector: the potential for margin pressure when plants operate below capacity, and the possibility of oversupply when capacity is reached.

  • Scope, limitations and methodology

    This analysis examines key themes from public 3Q19 earnings calls among 27 global AM peers, including companies from the A&D, chemical and IP sectors. This update tracks the movement of these themes from quarter to quarter to provide a perspective on shifts in the AM landscape.

Summary

Aerospace and defense companies are facing tighter margins as they expand capacity to keep up with rising demand, whereas chemical and industrial products companies are adapting to an environment of slower growth with a stronger focus on cost control.

About this article

By

Jerry Gootee

EY Americas Advanced Manufacturing Advisory Leader

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