8 minute read 15 Dec 2020
Engineer crouching while examining computer aided machinery

How companies are streamlining operations and deepening relationships

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.

Contributors
8 minute read 15 Dec 2020

Manufacturers are focusing on cost control and divestitures while developing a stronger understanding of customer needs. 

In brief
  • To reduce costs, business reorganization and restructuring has become a top priority for many companies.
  • Manufacturers are striving to hold onto market share using outcome-based pricing models and acquisitions and joint ventures.
  • Understanding customer needs has become critical as manufacturers create solutions that support changing business models in a transformational environment.

A renewed focus on cost savings and customer relationships shaped the decisions made by advanced manufacturing (AM) companies during 3Q20. With revenues at or below 3Q19 levels for many, companies streamlined operations through cost control and divestitures. Understanding customer needs has become more critical than ever as manufacturers create differentiated solutions that support changing business models in a transforming industrial environment.

The 3Q20 Advanced Manufacturing Quarterly (pdf) analyzes the top themes (market forces and company responses) discussed by the leaders of 32 AM sector companies (including those from the aerospace and defense (A&D), industrial products (IP) and chemical subsectors) during the public earnings calls with analysts in October and November 2020. This update tracks the movement of these themes from quarter to quarter to provide a perspective on shifts in the AM landscape.

Themes that stood out, among the top 10, include the following:

  • Business reorganization or restructuring rose to second position this quarter. Cost reduction, now included in this theme under our updated framework, drove streamlining activities at many companies. Divestitures allowed companies to better focus resources on key growth markets while acquisitions were held to stringent cost savings targets. Digital tools are being deployed more widely to maximize productivity measures such as factory uptime.
  • Competitive positioning is new to the list at third position. Product and service quality are becoming more important than ever as manufacturers strive to hold on to market share. Outcome-based pricing models are being offered more frequently to customers, especially those in challenged end markets, such as oil and gas. Acquisitions and joint ventures are enabling companies to bring differentiated products and services to market more quickly.
  • Customer acquisition and connectivity, also new to the list, is at sixth position. Manufacturers are investing to understand their customers better. Sales teams are being expanded in growth markets, enabled by new mobile apps with detailed information about customer needs and opportunities. With this knowledge, companies can create and deliver unique solutions that will help their customers not only survive difficult economic conditions, but emerge with stronger and more resilient business models.

For each of the AM subsector themes, we performed a deep-dive approach and present the top themes for each below:

  • A&D

    1. Customer acquisition and connectivity
    • A&D companies booked an increased number of order intake in the defense and space sectors.
    • Major defense contractors expect to see continued strong bipartisan support for national security in the future as indicated by the US Department of Defense’s US$740 billion targeted for FY2021 appropriation.
    2. Change in financial outlook
    • Major commercial A&D companies have not issued any financial guidance on international travel, amid the COVID-19 impact, though the domestic market recovery continues in selected geographies.
    • Defense and space markets remain significant and relatively stable, and contributed to affirmations in their financial outlooks.
    3. Business reorganization or restructuring
    • Original equipment manufacturers (OEMs) continue to resize and reshape their business to align with a smaller market scenario amid the COVID-19 pandemic.
    • Transformations are focused across the key pillars of infrastructure, supply chain health and operational excellence.
    4. Competitive positioning
    • OEMs are working toward enhancing the safety and well-being of passengers and crews amid the COVID-19 pandemic.
    • Several initiatives, such as Confident Travel, ultraviolet (UV) wand, high-efficiency particulate air (HEPA) filter, have been deployed under industry-wide collaboration to develop multiple layers of protection.
    • Several technology-based initiatives, such as UV cleaning and air filtration systems, have been deployed under industry-wide collaboration to protect passenger health.
    5. Financial and capital strategy
    • Commercial OEMs continue to bolster their liquidity through debt offerings while suspending dividends and share repurchase programs.
    • Defense contractors continue to focus on a balanced strategy, i.e., strengthening balance sheet through debt reduction and funding pension plans, and also returning cash to shareholders.
  • Chemicals

    1. Development in end markets
    • Many chemical companies witnessed a revival in major end markets of automotive, construction, consumer products, health care and agriculture.
    • Companies operating in China and manufacturing pandemic supplies (such as personal protective equipment (PPE) and sanitizers) experienced a stronger recovery.
    2. Business reorganization or restructuring
    • Chemical companies are restructuring their operations and strategy by introducing new cost-reduction programs.
    • Companies continue to divest or carve out noncore and non-sustainable businesses, while also forming JVs and focusing on M&A synergies to reduce costs.
    3. Competitive positioning
    • Major companies resumed new product and service launches, particularly for consumer products.
    • This has also led to a revision of market outlook and change in pricing strategies (primarily increased prices) as they move to meet this year's targets.
    4. Change in financial outlook
    • Many companies revised their FY20 financial outlooks downward for revenue and profits, compared with pre-COVID levels, owing to greater visibility of end markets.
    • Companies continue to focus on cost optimization across the value chain to maintain margins.
    5. Changes in production rates
    • Recovering demand in most end markets and a few regions are leading the reopening of facilities and increased production rates compared with 2Q20.
    • Stabilizing financials have also led to the resumption of capacity expansion plans across regions.
  • IP

    1. Competitive positioning
    • IP companies are focusing on R&D and digital to set their products and services apart from those of their competitors.
    • These capabilities are being supported through acquisitions and JVs, which allow IP companies to develop and commercialize new offerings more quickly. 
    2. Development in end markets
    • Automotive, aerospace, and oil and gas were the most challenged end markets in 3Q20. Many customers deferred large projects to reduce costs.
    • Demand was higher from customers in defense, packaging, pharmaceuticals, food and beverage, and household products, especially in Asia.
    3. Business reorganization or restructuring
    • Cost reduction continues to be a focus as companies manage their margins in an environment of lower year-on-year revenues.
    • Rightsizing, i.e., streamlining back offices and reducing the size of certain businesses, especially aviation, and reducing discretionary spending continue to be key focus areas for operational effectiveness.
    4. Change in financial outlook
    • Many IP companies have revised their revenue outlooks upward in anticipation of better sales prospective for the remainder of 2020 and beyond.
    • The upward outlook stems from improved performance of certain end markets, such as PPE and health care equipment, along with a focus on digital transformation, footprint optimization and augmented R&D investments. However, companies with exposure to auto and aviation continue to struggle and expect slower recovery. 
    5. New product and service innovation
    • COVID-19-centered products that increase safety and well-being remained high on IP firms' agenda. Heating, ventilation, air conditioning (HVAC) companies and those involved in people-moving products launched air filtration systems and touchless interfaces for commercial establishments.
    • Increasing R&D spending, to grow the share of IoT-related products that help in remote controlling and monitoring of assets, took center stage for many IP companies.
  • Scope, limitations and methodology

    This analysis examines key themes among 32 AM peers during public earnings calls held in October and November 2020. This update tracks the movement of these themes from quarter to quarter to provide a perspective on shifts in the manufacturing landscape.

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Summary

Due to cost management prioritization, manufacturers are streamlining operations. Companies are also placing emphasis on understanding customer needs to develop solutions that will help customers survive difficult economic conditions and emerge with more resilient business models.

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.

Contributors