6 minute read 16 Sep 2019
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How AM leaders are handling the changing trends in key end markets

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 16 Sep 2019

Advanced manufacturing (AM) leaders are reorganizing their priorities to come up with resilient growth strategy amid changes in key end markets.

The growth outlook is diverging by sub sectors for the advanced manufacturing (AM) sector in 2Q19 as key end markets face challenges. Though the overall prospect looks promising, industries such as chemical and industrial products (IP) are adopting a cautious strategy owing to mixed developments in key end markets such as automotive and electronics.

During the earnings calls in the second quarter of 2019 (2Q19), 28 AM leaders (including those from the aerospace and defense, industrial products, and chemical subsectors) discussed the themes that are shaping their strategies for the next quarter.

Though the topics haven’t differed significantly from the last quarter, a change in priority surfaced during this quarter’s earnings call. Leaders gave more prominence to “innovation and new product/service launches” and “financial initiatives” alongside “developments in end markets,” this time.

The AM strategy for second quarter appears to be varied and nuanced across sectors owing varying growth outlooks. The key discussion points are illustrated below:

1.    Developments in end markets — trends in key customer segments

The forecast indicates that decrease in overall revenues for multiple companies is going to continue in 2H19 owing to the weakness in key customer segments, such as global automotive manufacturing. The electronics manufacturing activity in China and South Korea, and US residential construction are some of the end markets experiencing this period of low growth. But, government spending on defense in the US and Europe will lead to an increased demand for aerospace and defense (A&D) products and services. The extraction and refining activity by oil and gas, and mining customers is also set to rise, increasing demand for both equipment and chemicals.

2.    Critical projects — key project updates crucial for company strategy

As companies acquire new business, timely updates regarding production and milestones relating to key projects will be crucial to forming a successful company strategy. To this end, most of the chemical companies are found investing in efficiency measures ranging from plant upgrades and turnarounds to new enterprise resource planning (ERP) systems.

3.    Geographic developments — growth across regions

In China, demand remains high in sectors such as construction, infrastructure and defense along with economic stimulus efforts and projections for consumer holiday spending. North America’s promise of growth is coming primarily from A&D companies, such as defense spending. Growth in industrial and construction markets appears mixed, though an interest-rate reduction may bring greater spending in 2H19. Aside from the currency headwinds, Latin America, particularly Brazil and Mexico, sports stronger signs of growth. But, drier weather conditions and shipping hazards are adding to the challenges faced by chemical companies in Western Europe.

4.    Innovation, and new product and service launches — research takes center stage

Digital technologies are increasing both efficiency and safety in manufacturing processes for chemical and IP companies, while lowering operating costs. IP companies are continuing to increase R&D spending to support a pipeline of innovative offerings. A&D is keen on R&D too with the support of growing government defense budgets. Partnerships continue to provide peers with opportunities to commercialize new technologies.

5.    Working capital and cash flow management — changes in the outlook

A strong prioritization of working capital discipline, supported by productivity and cost-control programs, is contributing to an improved cash flow system. Improved receivable collection is a growing priority, especially for A&D companies.

6.    Financial initiatives — capital management and deployment

Share buyback activity and dividend commitments remain on track for many, boosted by occasional drops in stock prices. Capital expenditures are increasing for companies in all sectors. Some peers are supporting new product and service launches, and facility upgrades, while others are investing in assets acquired through M&A transactions.

7.    Change in financial outlook — optimistic outlook for revenue growth

Revenue growth for A&D companies appear largely optimistic. However, several peers are taking a cautious tone for 2H19 because of macroeconomic uncertainty and lowered demand in key markets. Cost management programs are expected to continue to yield positive results, but leaders acknowledge that gains may be smaller if revenue growth slows down further.

8.    Cost reduction — cost control across the organization

Common areas for cost control are streamlining of organizational structures, divestment of non-core businesses, improved plant productivity and tighter supply chain management. Automation and digital systems are supporting some of these efforts, but investments and returns must be made clear to investors to support the overall case for cost reduction. Mergers are providing opportunities to benefit from cost synergies while multiyear programs continue to reduce manufacturing costs.

9.    Changes in production rates — capacity adjustments on the rise

A&D companies are leading discussions about capacity expansions in both aerospace and defense. Some chemical and IP peers are reducing production of materials for automotive and electronics applications in response to weaker demand.

10.    Geopolitical environment — tariffs contribute to increase in costs

Trade relations between China and the US are not seen as likely to improve in 2H19 and could affect investor confidence and macroeconomic stability if prolonged. In preparation for Brexit, suppliers are being asked to maintain higher levels of inventory within the UK to lower the likelihood of shortages and delivery delays. As tariffs continue to increase costs for manufacturers, some are raising prices, while others are absorbing costs.

  • Scope, limitations and methodology

    This analysis examines key themes from the public 2Q19 earnings calls among 28 global AM peers, including companies from the aerospace and defense, industrial manufacturing, and the chemicals sectors. The identification of the top 10 themes is based solely on an examination of analysts’ earnings calls. We view the themes as providing a timely snapshot rather than a universal assessment of importance, revealing insights into the minds of both AM leaders and industry analysts during the quarter.


AM companies are reporting differences in growth outlooks for 2H19 by subsector. Sectors such as aerospace and defense are looking ahead with confidence while others are more cautious owing to the changes in key market trends. Commitment to innovation has surfaced as a critical component in keeping products and services competitive throughout all kinds of market conditions.

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.