4 minute read 30 Oct 2019
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Why advanced manufacturing and mobility companies are reshaping in the face of disruption

Authors

Jeffrey Ficks

EY Americas Advanced Manufacturing Restructuring Leader

Seasoned global restructuring and turnaround advisor. Vast healthy and distressed M&A experience. Deep automotive, aerospace and defense industry knowledge. Husband. Father of two. Sports fan.

Mark Costello

US-East Advanced Manufacturing & Mobility Leader

Globally focused business leader. Deep advanced manufacturing, industrial products and chemicals industry knowledge. Passionate about travel and global citizenship.

Contributors
4 minute read 30 Oct 2019

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Preparing now to grow, optimize and protect a business should be top of mind for companies, especially against a backdrop of uncertainty. But how?

Geopolitical uncertainty, disruption from new market entrants and regulatory concerns are uniting to make the current environment particularly challenging for aerospace, automotive and advanced manufacturing companies. Given their capital-intensive nature, advanced manufacturing and mobility companies can’t pivot as easily.

Against this backdrop, how do you gain new ground — as the ground shifts beneath you? How do you balance preservation with reinvention?

In a recent webcast, we held a discussion with our colleagues about the current disruptions in the market and strategies to help companies act in the near term.

Trends in the market

Geopolitical uncertainty looms in the market in a way that hits manufacturers particularly hard. These companies typically rely on global supply chains, manufacturing facilities and warehouses globally, as well as a stable trade environment. Whether it’s Brexit, USMCA (United States-Mexico-Canada Agreement) negotiations or the trade dispute between the US and China, these companies have a large amount of assets and may have inflexible supply chains, making it a struggle to be nimble enough to change as difficulties arise.

Obviously, technological disruption is, and will continue to be, a wild card. For instance, in the automotive sector, the market is expected to begin to accelerate away from combustion engines and move more toward electric vehicles. Agile new startups also have the potential to upend an established market. Digital is playing a growing role as companies expand smart-factory technology and broaden their product and service offerings.

As a result, different approaches to acquisitions and joint ventures — to rapidly divest business units that no longer fit into a company’s vision, or to bring in new talent and product lines through inorganic growth — are bigger factors than in the past. Large cross-border deals are becoming increasingly difficult, especially as the regulatory environment remains uncertain and particularly when it comes to M&A approvals in Europe and elsewhere.

What to do?

Being agile enough to rise amid disruption must also be balanced against determining what your business needs to look like in five years. This is the duality of growth: defending and extending the business of today while growing the business of tomorrow. 

Some may decide to take a wait-and-see approach, particularly with next year’s US presidential election. But the time to act is now. We recommend the following strategies:

Revamp your cost structure. It’s essential to reduce operating costs through increasingly flexible and global workforces, automation, technology and other means. Start by stress testing your overhead and cost structure using multiple reduced volume and profit scenarios. Evaluate the need to reduce management layers. Look at turning to the gig economy to achieve greater labor flexibility, rationalize your real estate footprint, and use smart sensors and artificial intelligence to increase operating equipment efficiency and promote predictive maintenance in your factories.

Optimize your capital structure. A comprehensive capital structure review can help identify areas for improvement and more closely align desired flexibility with corporate strategy, as well as prepare for downside scenarios. Release working capital as a means to increase liquidity or de-lever. And be sure to evaluate the tax considerations before any capital structure changes to avoid unintended consequences.

Redefine the business model. In the future, owning all parts of production may not be necessary. Examine what pieces of the business model must be owned and controlled, and what can be operated better by a partner who may have a more flexible and lower-cost structure. Review the supply chain for ways to cut costs and increase flexibility.

Reassess the portfolio. If a business no longer fits the company’s core, it should be considered for divestment, and if there are gaps in the offerings, they need to be filled organically or through acquisitions (in a tax-efficient manner). Make decisions on your businesses and offerings that are informed by and based on data.

And reshape. In tumultuous times, it’s good to apply old rules in new ways. This encompasses actions like those we’ve described above, along with shifting fixed costs to variable costs, rapidly transforming your profits and performing continuous scenario planning using advanced analytics.

Summary

Disruption, regulatory uncertainty and trade disputes are nothing new for heavy manufacturing companies. But to address all at once — at a time when succeeding means reinventing the business to capitalize new opportunities and changing consumer expectations in the digital age — requires a mentality to protect and optimize.

About this article

Authors

Jeffrey Ficks

EY Americas Advanced Manufacturing Restructuring Leader

Seasoned global restructuring and turnaround advisor. Vast healthy and distressed M&A experience. Deep automotive, aerospace and defense industry knowledge. Husband. Father of two. Sports fan.

Mark Costello

US-East Advanced Manufacturing & Mobility Leader

Globally focused business leader. Deep advanced manufacturing, industrial products and chemicals industry knowledge. Passionate about travel and global citizenship.

Contributors