Advanced manufacturing (AM) leaders have a positive outlook on growth, as recent 3Q18 earnings calls reveal. Trade wars and new tariffs, and the broader geopolitical environment, are one area that leaders are watching closely, with high raw materials prices creating headwinds. On the flip side, company leaders across all subsectors see potential in the Asia Pacific region, which they cite as growing most rapidly, and revenues in Europe and Latin America have climbed as well.
Here are the top 10 themes we identified from 3Q18 earnings calls of 20 public advanced manufacturing companies.
1. Working capital and cash flow management: signs of improvement
Cash flow continues to improve due to strong prioritization of working capital discipline, often supported by productivity and cost-control programs. Increased pension plan contributions create a drag on cash flows for some companies. A few peers are raising inventory levels to meet customer demand.
In other cases in chemicals and industrial manufacturing, high inventory levels are unplanned and have been identified by leaders as a challenge to working capital management.
2. Geopolitical environment: concerns on trade policy
Trade policy conflicts and the evolution of new tariffs are creating ongoing uncertainty for industrial markets. Some leaders are concerned about secondary effects such as reduced demand in end markets, particularly automotive, if interest rates rise. Responses by manufacturers include leveraging global manufacturing footprints to lower exposure to tariffs, applying for exemptions from tariffs on key raw materials, and increasing prices.
Some aerospace and defense (A&D) peers are optimistic about new US defense appropriations for fiscal year 2019 likely to support increased military spending. At the same time, rising tensions between the US and Saudi Arabia may lead to restrictions on a key end market for some US A&D peers.
3. Competitive environment: rising costs create challenges
Peers across all subsectors are increasing prices in response to higher raw materials costs and tariff impacts. Premium products based on innovative technologies are best positioned to maintain market share in spite of increased prices. Rising manufacturing costs are leading some peers to renew efforts to improve productivity.
Expansion of service portfolios, ranging from post-purchase maintenance contracts to business consulting, is providing manufacturers with ways to deepen customer relationships and ensure future revenue streams. Increased caution by customers in committing to large projects, due in part to economic uncertainty, was reported by one industrial manufacturing peer.
4. Geographic developments: reasons for optimism
Company leaders across all subsectors continue to cite the Asia Pacific region as growing most rapidly. China continues to lead demand growth for many products. However, slowing growth was noted by a few peers, particularly in China’s automotive sector and in solar power.
Revenues in Europe and Latin America rose for some peers, continuing a trend from 2Q18. R&D investments are being made in specific geographic markets, particularly China, Middle East and Europe, to better support local customer needs.
5. Developments in end markets: broad increases in demands
Optimism is supported by growth across a range of industrial markets. Strong growth in air traffic and high load factors are continuing to drive demand for commercial aircraft. Demand for military equipment is continuing to rise as defense budgets in many countries expand. Demand is increasing for advanced materials and specialty chemicals from customers in consumer electronics, agriculture, and food manufacturing.
While demand from automotive customers is slowing in some markets, more than one peer saw growth in electric vehicles. Construction materials were described as “soft” by more than one peer. In the energy sector, order activity has been growing more quickly from renewables customers than from those in traditional power generation.