Podcast transcript: Why digital is the way forward for advanced manufacturing companies
12 min approx | 1 April 2021
Welcome to the EY Advanced Manufacturing and Mobility Business Minute podcast series, where EY professionals explore the critical business issues impacting our industry today.
For this episode of the Advanced Manufacturing Quarterly Update, I have the pleasure of speaking with Julie Rosenthal and Mohit Ahuja, who both serve as Analysts for our Global Advanced Manufacturing sector.
By way of a quick explanation, the Quarterly Update is a review of the top 10 themes discussed by leaders of advanced manufacturing sector companies during public earnings calls. For the last quarter of 2020, we analyzed earnings calls from 33 manufacturing sector companies. Included in the analysis are sector companies from aerospace and defense, industrial products, and chemicals.
Let’s get started for a lively discussion as we round out a tumultuous 2020 and hope what will be a better 2021 year ahead.
Welcome, Julie and Mohit, it’s a pleasure to have you both today.
Thank you for having me.
A pleasure to be here, Bhavini.
I’m optimistic that 2021 will be much brighter, especially now that we see vaccine distribution underway globally.
For the manufacturing sector, we saw companies announce more positive financial outlooks, expediting their digital transformation and a continued focus on cost reduction, while looking to unlock value via numerous inorganic initiatives.
First, let’s discuss some common themes that stood out as you analyzed earnings calls for the last quarter of 2020.
Thank you, Bhavini. We can start with the changes we are seeing in financial outlooks. As COVID-19 vaccines are becoming more widely available, many companies are forecasting a return to pre-pandemic activity levels sooner than they predicted in 3Q20. However, 2021 is still likely to be a transitional year rather than a return to normal.
Capex-driven sectors, such as heavy machinery, are predicting that demand will return to pre-COVID-19 levels earlier than they were forecasting last quarter. Defense companies are also seeing steady demand, thanks to healthy budget allocations from governments.
On a geographic level, emerging regions such as Asia and Latin America are witnessing much higher growth in key end markets, especially automotive and consumer electronics. Markets such as commercial aerospace are still challenged, though, and are expected to be for some time.
Bhavini, I would also say that business reorganization and restructuring continues to be a major theme. We heard leaders talking about the consolidation of manufacturing facilities and office footprints. This was a priority even before the pandemic, but took on new urgency as factories and offices were closing. Manufacturers are also finding other ways to reduce costs, such as headcount reductions, organizational streamlining, and new supply chain programs. As companies engage in these cost-reduction efforts, they’re better prepared to work on reorganization programs that focus more on growth, such as acquisitions.
We also heard a lot of discussion about product design and innovation on earnings calls. The pandemic has expedited many years of digital transformation. Manufacturers are actively undertaking digitization of existing products and launching connected offerings.
Many are connecting their large installed base to Internet of Things (IoT) platforms and supporting the launch of 5G and modern networking technologies for space equipment. Products enhancing safety and well-being, such as air filtration systems and touchless interfaces, are witnessing a robust demand.
Energy efficient and sustainable products, such as connected HVAC, refrigerants with lower emissions and recyclable packaging, are being increasingly deployed as end consumers look to meet their decarbonization targets.
Thank you both for those summary insights. In your analysis, you highlight 10 themes, were there others that stood out that our audience would find interesting?
Let’s start with financial and capital strategy. That was #5 on the list in the fourth quarter, up from #7 in the prior quarter. Company leaders were talking about pursuing and completing multibillion-dollar deals. This is especially worth noting because of the challenges of making deals such as these when COVID-19-related restrictions are making things such as site visits more difficult. We also thought this was important because we’re not hearing that messaging from all companies in the advanced manufacturing sector. This is happening mainly among the largest companies, which are the ones we profile in the Advanced Manufacturing Quarterly.
As a contrast, when we look at the companies tracked in the EY Capital Confidence Barometer, we see that small and midsize manufacturing companies are still taking a more cautious approach to deals in the near term. Aside from M&A, we heard leaders at the largest companies highlighting debt reduction and restructuring, so we know liquidity is still a high priority. At the same time, companies in the chemical and industrial products sectors are returning capital to shareholders by paying dividends and buying back shares.
Mohit, over to you.
Thanks, Julie. At #7 in Q4 was the theme of customer acquisition and connectivity. Leaders are saying that end market conditions are improving. This means that AM companies are seeing an increase in new orders, especially from customers in the sectors of defense, health care, electronics, and food and beverages.
Customer relationships continue to be very important as manufacturers compete for market share. To increase connectivity with customers and deliver new solutions, companies are expanding their sales and field technician teams.
We also heard that companies are continuing to invest in enterprise-wide CRM systems to effectively reach customers in the new digital era.
We also had a new theme on the list in Q4 at #10: enterprise resilience and compliance. This is where we track discussions about issues such as sustainability in operations and anything that might be changing on the regulatory or legal fronts.
On fourth-quarter calls, we heard leaders talking about taking initiatives such as targeting efficiencies in production processes, sourcing renewable energy and recycling waste to meet sustainability targets. Three of the chemical companies in the peer group reached agreements to settle legal activity related to a category of chemicals called perfluoroalkyl and polyfluoroalkyl substances, or PFAS.
On the A&D side, commercial aerospace OEMs are working with regulators and making design modifications to meet various regulatory safety standards.
That’s a lot of terrific information you’ve both shared. Let me switch gears and ask you both on sharing insights into subsector highlights for industrial products, aerospace and defense, and chemical companies that are part of the analysis.
Let me throw the first question to Mohit: for industrial products, can you summarize key insights that were observed for our audience, please?
I’m happy to share that.
Earlier we talked about business restructuring. Leaders at some of the industrial products companies are focusing on decentralization in their overall structures. By decentralization, we mean more autonomy – and responsibility – being given to business unit leaders. This empowers business units while making them more responsible for the results they produce.
We also saw many of the same themes for industrial products as the ones that stood out for manufacturing as a whole. Outlooks are continuing to improve as industrial manufacturers are seeing more orders from customers. Many manufacturers are converting products to services, investing in digitization, reducing debt and announcing acquisitions to plug gaps in product lines and geographic footprints.
Let me pass it over to Julie, who can share highlights for the chemical subsector.
Glad to, Mohit. For chemical companies, outlooks are becoming more optimistic as key end markets such as automotive, consumer electronics, packaging, and food and beverages are continuing to grow. Many of the peers in our group also have a large customer base in the oil and gas sector, which is more challenged right now.
However, on the whole end markets for chemical products and services are growing. We know that sustainability is an increasingly high priority for chemical companies.
Leaders are talking more often about the importance of being part of circular economies, in which their products are designed to have a life beyond a single use.
Let me round out with the aerospace and defense sector which is further behind in the recovery cycle than either industrial products or chemicals. This is due to continued softness in passenger traffic, which is causing airlines to continue to delay or reduce their spending on orders for new aircrafts.
However, we’re still seeing areas of growth in A&D. OEMs are partnering with airline customers to develop innovative solutions such as touchless airport kiosks, aircraft fixtures, antiviral surface coatings and air filtration systems.
Julie and Mohit , those were great insights, a lot happening in the manufacturing sector. For our audience, be sure to check out our 4Q20 Quarterly update for more details.
Before I let you both go, how about a quick outlook of what you both think we’ll see manufacturing sector companies looking to achieve as the first quarter of 2021 rounds out?
Mohit, I’ll put you on the hot spot first.
Happy to oblige. Here’s what I’m observing:
Last quarter we predicted that the availability of COVID-19 vaccines would lead to more positive outlooks and more robust order activity. Leaders sounded more confident about future growth. Companies are reporting order activity close to pre-COVID-19 levels in many sectors. We expect this growth to continue during the first quarter as vaccines are rolled out more widely.
Digital transformation is continuing to be a major area of focus. Manufacturers are launching connected solutions and implementing digital technologies throughout the enterprise. Leaders have recognized that digital solutions are critical to increase efficiency and save costs.
Julie, what do you think?
I agree on both: the impact of the vaccines and the growth of digital.
I also think that manufacturing companies are going to increase their M&A activity to support growth. Earlier, I mentioned that the largest manufacturers are probably going to be most active in making deals in the near term. Bolt-on acquisitions continue to be a solid way to grow. Acquisitions to boost innovation, especially in digital, will also be of strong interest to manufacturers. There was intense competition for these kinds of assets before the pandemic, so we expect to see interest in those kinds of targets returning. And, as the economy continues to strengthen, I think we’ll see smaller companies participating in acquisitions again too.
The last trend I would call out is sustainability, which we talked about last time. We’re hearing about this from leaders in all three of our subsectors. A&D companies are talking about alternative fuels and making their manufacturing operations carbon-neutral.
Chemical companies are focusing on the circular economy and reducing the impact of plastics on the environment. Industrial products companies are developing new products and services to help their clients operate in more sustainable ways, including everything from energy to buildings to packaging.
Mohit and Julie, my thanks to you both for joining me today and sharing your valuable insights with our audience, and I look forward to having you back to update us on the first quarter of 2021. Speak to you in a few weeks’ time!
Thank you for having me today and I definitely look forward to our next podcast update.
Likewise, it was a pleasure to take part in this podcast and I look forward to our next update.
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/amm podcasts.