Industrials industry outlook
INSIGHT ARTICLE |
Key takeaways from the summer 2020 industrial products industry outlook
- Connected worker technologies and automation are crucial for enhancing productivity.
- Cloud migration will continue to allow businesses to navigate disruptions with flexibility.
- Greater supply chain visibility will increase resiliency in the auto industry.
- Additive manufacturing technologies will pave the way for crucial advances.
- Adoption of advanced digital technologies will be an investment focus for oil and gas companies.
Amid pandemic uncertainty, investment in digital technologies will lead the way
Companies in the industrials sector face significant challenges from the fallout of the global COVID-19 pandemic. Traditional business models have proven inadequate to deal with the disruptions, but the good news is that organizations responded to this crisis and evolved at a pace that would have previously been unheard of. Organizations should seize on this momentum to accelerate their digital transformation and evaluate which changes they made during this pandemic may continue to benefit the business even after the crisis is over. Those that fail to transform risk fading into irrelevance.
In January 2020, the global manufacturing sector expanded at its fastest pace in nine months, and business optimism was at its highest level in more than a year. By May, the world had become a very different place. Global manufacturing output fell for a fourth successive month, and April and May saw the sharpest month-to-month drop in production since the first quarter of 2009. It is clear the COVID-19 pandemic has negatively affected global manufacturing performance, driven by shutdowns across the globe.
Organizations should seize on this momentum to accelerate their digital transformation and evaluate which changes they made during this pandemic may continue to benefit the business even after the crisis is over.
The J.P. Morgan Global Manufacturing PMI—a composite index produced by J.P. Morgan and IHS Markit—registered 42.4 in May, up from 39.6 in April, but well below the 50.4 reading registered in January. According to the index’s accompanying survey, rates of contraction for output, new orders, new export business, quantity of purchases and future output remained at depressed readings not seen since the Great Recession of 2008-09.
The average index reading over the past two months supports the position that worldwide manufacturing output will fall steeply in the second quarter, dropping at a similar rate to that seen at the height of the global financial crisis in the first quarter of 2009. While many large countries extended their pandemic-induced lockdowns in April, May showed signs of life. Factories slowly began to come back online as governments eased lockdown measures, which helped moderate the overall rate of decline.
The marked downturn in global manufacturing activity led to sharp cutbacks in employment, purchasing and stock holdings during May. Supply chains also remained under extreme stress, with average vendor lead times lengthening to one of the greatest extents in the survey's history.
The current challenges facing the global and U.S. manufacturing sector follow what has been an uneven recovery in the industry since the Great Recession. The gains since that global downturn have been largely confined to just a few sectors: transportation equipment, food and fabricated metals. Overall, manufacturing output as a share of U.S. gross domestic product steadily declined between 2002 and 2019. Productivity growth, a key indicator of competitiveness, has been falling since 2005 and now is close to zero according to data from the U.S. Bureau of Labor Statistics.
Digital solutions to accelerate industrials’ path forward
Companies that have been nimble and operating at peak efficiency during the pandemic were enabled by their prior investments in information technology infrastructure and digital technologies. Overall, industrials companies are at varying stages of embracing new digital technologies of the Fourth Industrial Revolution, also referred to as Industry 4.0, which allow manufacturers to revolutionize traditional supply chains and processes into more interconnected systems. Large organizations such as General Electric, Honeywell and Schneider Electric have invested heavily in this area, developed digital platforms specifically for the industrials industry, and pivoted their business models toward becoming industrial software-centric companies.
On the other end of the spectrum, there are traditional manufacturing processes and organizations yet to be transformed by the tremendous potential that smart manufacturing technologies provide. The future of industrials manufacturing lies in smart technologies and companies, irrespective of their digital maturity levels, should exploit the possibilities that the Fourth Industrial Revolution brings to remain relevant and grow.
“We have worked quickly to mitigate disruption to our supply chain by using alternative sources, increasing air freight as needed, redirecting orders to other distribution centers and prioritizing the redistribution of the most impactful parts.” - CEO Jim Umpleby, Caterpillar, April 28, 2020, earnings call
Given the prolonged downtrend in productivity and the prospect of navigating through a difficult environment in which revenue and margin face compression, we expect more companies to explore digital technologies. It is now very evident that the COVID-19 pandemic forced many companies in the industrials ecosystem to shift course and move at a frantic pace. In order to minimize the impact of the pandemic on their business, companies have implemented more innovative ways of operating.
The ongoing COVID-19 crisis has encouraged otherwise reluctant manufacturers to think about expediting their digital journeys by taking advantage of certain workforce and operational solutions that could continue as longer-term solutions even after the pandemic has dissipated. In an April survey, manufacturing industry association SME asked its members what technology they planned to invest in after the pandemic. Results of the survey showed 3D printing and robotics were the most popular options selected.
Working remotely has become the new norm for employees at many companies, but there are a significant number of jobs within the industrials ecosystem where remote work is not an option. Factories depend on operators to keep machines running, and in most cases, it is simply not possible for them to work remotely. It is possible, however, to limit the number of people needed to maintain operations, and technology is the key to achieving this.
As industrials companies return to work, the following solutions could help organizations build on any gains they have achieved over the past few months:
1. Connected worker technologies—currently, machine repairs require the operator to reach out to service technicians or senior-level shop floor personnel for support because they possess the domain knowledge. In some cases, the required knowledge may reside in a different facility or with the original equipment manufacturer. Human contact is also required for training new or existing workers on machines or guiding them through standard operating procedures. Augmented reality solutions can eliminate worker-to-worker contact for repair, service and training needs. These technologies enable workers to operate more independently by using on-demand access to domain knowledge, instructions, assist manuals and other resources in a hands-free digital format. Longer-term, connected worker technologies could also help make domain knowledge more accessible to new and less-experienced employees as senior-level shop floor personnel retire.
2. Migrating to the cloud—while cloud technologies are not new, discrete and process-oriented manufacturing companies have generally been hesitant to migrate their core and operational applications from on-site premises to the cloud. However, the cloud allows industrials companies more flexibility to proactively shift inventory, reallocate manufacturing resources and customize products. Cloud platforms open the door to use more intelligent technologies such as the Industrial Internet of Things or digital twins. Cloud technologies can also enable asset-performance management solutions that allow supervisors to have insights into how their facilities, lines and individual assets are performing, even while being remote.
3. Automation—the pandemic has strengthened the motivation to diversify supply chains and reshore manufacturing operations, especially for segments that are critical for national defense and sustainability. Advances in robotics and automation have drastically increased productivity across manufacturing processes, and thereby, reduced the impact of low-cost labor considerations in on-shoring and off-shoring decisions. In addition, replacing manual processes with automated alternatives can help mitigate workforce availability challenges now and later.
4. Additive manufacturing—3D printing technologies have moved from prototype applications to production of tools and finished products. In situations of supply chain and workforce disruptions for health or geopolitical reasons, additive manufacturing technologies can provide efficient value chain solutions to reduce working capital, enable production on demand, reduce supply chain complexity, modify production processes to reduce the number of tools or parts involved, and reduce the frequency of human intervention. Additive manufacturing-enabled business models such as microfactories, shared factories or toolless productions are gaining traction and may provide critical advantages as manufacturing evolves.
Automotive industry resilience will be tested
U.S. new car sales have been averaging approximately 17 million units over the last five years, and analysts had already predicted a reduction in sales of between 7%-10% for 2020 before the pandemic even hit. The supply chain shocks that began at the start of 2020 due to the COVID-19 outbreak in China’s Hubei province, a major component hub serving OEMs around the world, have been intensified by worldwide demand-side shocks. In light of that disruption, IHS Markit cut its forecasts for 2020 global light vehicle sales by 22%, to 69.6 million units. U.S. auto sales have plummeted since the pandemic began to grip the country in March, with April sales down 46% compared to the same time the previous year. Analysts forecast an improvement in May, but still expect a year-over-year decline of more than 30%. While the current environment presents significant challenges, it also should spur OEMs and their entire value chain to revisit their strategy and business models, and implement new, more agile models, while implementing short-term actions to mitigate risk exposure.
Auto factory floors will not be the same
Automakers and their suppliers are taking extreme steps to maintain the health and safety of critical shop floor employees, including:
- Adjusting production techniques
- Reconfiguring work spaces (for example, adding plastic barriers)
- Checking workers’ temperatures before entry
- Requesting certification that workers don’t have symptoms
- Staggering shifts to limit the number of people on the floor at any given time
- Restricting employees from congregating in common areas
- Requiring all on-site personnel to wear masks and gloves
- Requiring shared tools to be cleaned and sanitized before each use
In addition, organizations should use this time to reassess high-touch repetitive processes that can be better addressed using automation.
MIDDLE MARKET INSIGHT
Middle market companies have historically underinvested in technology. There are signs of change, though; an RSM survey performed in Q4 2019 found that over 31% of manufacturing respondents indicated that digital transformation is the single most important strategic priority.
Enabling a remote workforce
In addition to production staff, there are a significant number of managers, engineering teams and support staff that play a vital role in maintaining efficient plant operations. Engineers must understand the processes and data so they can diagnose and solve problems, while managers must be able to react to problems on the floor that affect production planning and overall equipment effectiveness. Therefore, it should be no surprise that technology to enable connectivity was the third most cited investment priority for the automotive industryin the recent survey conducted by SME, a nonprofit manufacturing industry association.
Remote workforce considerations are one area where businesses should take advantage of advanced technologies such as the Industrial Internet of Things, monitor and control software and edge computing. When combined, these technologies allow organizations to collect, organize and analyze data on-site in real time, connecting critical applications with critical equipment or enabling advanced and remote monitoring and control.
Taking the necessary steps to enable remote monitoring and other contingency plans will not only support business continuity today, but will serve as the foundation for greater resilience going forward.
Supply chain resiliency must increase
If there is one thing this pandemic has highlighted, it is the need for greater transparency and resiliency in global automotive supply chains. Advanced supply chains using analytics and artificial intelligence represent a shift away from the current reactive models in place, equipping automakers and their suppliers to identify and respond to changes in real time. This is especially important for middle market companies, which have historically underinvested in technology. There are signs of change, though; an RSM survey performed in Q4 2019 found that over 31% of manufacturing respondents indicated that digital transformation is the single most important strategic priority. More and more organizations will need to invest in their IT infrastructure to create a more flexible and scalable environment to meet the requirements of advanced digital technologies, and the increasing amount of data created.
Blockchain technology will be another driving force in supply chain management. Automakers were already moving down this path before the pandemic, but we expect the pace of adoption to pick up. Earlier this year, BMW Group announced plans to roll out its blockchain supply chain solution PartChain to 10 of its suppliers over the remaining course of the year. BMW had been testing the platform since 2019; and in the long term, the company aims to create “an open platform that will allow data within supply chains to be exchanged and shared safely and anonymized across the industry,” said Andreas Wendt, a member of BMW AG’s Board of Management, in a statement in March of this year.
Shifts in demand from financially strained consumers
The pandemic has put significant financial strain on U.S. consumers, whose spending declined 13.6% in April, according to the U.S. Bureau of Economic Analysis, with significant declines in durable goods, nondurable goods and services. That is the largest drop on record since data collection began in 1959. Spending on durable goods like vehicles declined the most. Given this backdrop, we expect U.S. car sales will slowly begin to recover in the coming months as regions of the country emerge from coronavirus-induced lockdowns, car dealerships reopen and pent-up consumer demand is released. We do not expect a V-shaped recovery in sales similar to what followed the Great Recession; after U.S. auto sales hit a low of 10.4 million in 2009, sales rebounded over the next seven years to peak at 17.5 million in 2016.
Nevertheless, we do expect significant evolution in the way in which consumers look to purchase vehicles. Given the significant amount of uncertainty surrounding the virus and the lack of a vaccine, there may be a shift toward online sales in order to reduce human contact and create a digital sales process for wary consumers.
This moment could also serve as a catalyst for OEMs to rethink the overall sales model. Consumers are increasingly drawn to digital retail experiences, but the current automotive value chain puts significant distance between companies and their customers. With continued advances in technology, effectively turning cars into large smart devices, the ability to collect, analyze and act on data cars generate will be key to automakers better understanding their customers’ wants and behaviors.
Oil and gas sector adoption of digital technologies will grow
Players big and small across the oil and gas value chain are looking to digital technologies to achieve cost and operational efficiencies, boost safety metrics and reduce negative environmental effects. In 2019 alone, 27 new artificial intelligence and analytics partnerships were announced in the oil sector, according to figures from Bloomberg. Technologies such as AI, robotics, enterprise cloud solutions and blockchain are contributing to significant advancements across the industry.
Throughout the oil and gas space, the degree to which organizations have adopted advanced technologies varies greatly. We explore the use of digital technologies along the value chain below:
Upstream: Exploration and production activities are at the forefront of adopting digital technologies. Geologists have used AI for decades, especially for seismic technology. The use of AI to interpret seismic data allows for faster and more accurate identification of faults that in some cases could not be detected by other methods. Onshore and offshore drilling have also widely adopted digital technology, as evidenced by fully automated drilling rigs, real-time monitoring of drilling activity and remote operations. In October 2018, Norwegian energy company Equinor launched the world’s first fully automated oil and gas platform, the Oseberg H. This platform is completely unmanned, has no living facilities on-site and requires only one to two maintenance visits per year. This type of advancement is expected to improve safety, drive revenue growth and reduce the carbon footprint.
Midstream: The United States alone has nearly 2.5 million miles of oil and gas pipeline that transport petroleum products from their source to the market. This vast and complex transportation network requires significant maintenance, presents safety issues and is highly regulated. Additionally, disparate data sources and dated assets make digitalization a challenge. Despite these roadblocks, the industry has made significant progress toward minimizing human intervention, automating maintenance procedures and optimizing networks. Many operators have adopted the use of drones to detect leaks and take real-time video footage. An even more advanced technique is the use of digital replica modeling tools, or digital twins, which allows operators to view simulations of operational scenarios based on realtime data, which can drastically improve decision-making capabilities.
Downstream: Refiners must constantly adapt to changes in demand for oil products and the supply available at any given time. Growth in refining capacity is expected to be near 12.9 million barrels per day by 2024, according to Bloomberg. This growth, coupled with the reduction in demand related to COVID-19, leaves room for only the most competitive players. This means that the move toward digitization to increase efficiency is more important now than ever. Refineries are using technologies such as AI, sensors and drones to increase efficiency and enhance monitoring capabilities. Refineries’ use of sensors to measure vibration, temperature and acoustics allows operators to monitor the condition of assets in real time. Further downstream, for instance, Shell has piloted the use of AI to detect dangerous consumer behavior at the pump, such as lighting a cigarette. Companies can use image recognition and video analytics to alert gas station attendants when a customer engages in such dangerous behavior.
“We’re cautiously optimistic as we see demand resuming.” – Mary Barra, CEO and Chairman, General Motors, June 17, 2020, interview on CNBC
Energy sector must maintain momentum
Oil companies are expected to spend $1.3 billion on advanced analytics alone in 2021, according to Bloomberg. Approximately 75% of this spend is projected to come from the top 20 majors, illustrating the spread between the majors and other players. For the majors, recent earnings calls indicate that although oil and gas operators and service providers are focused on cash conservation in the current economic downturn, digital transformation strategies remain intact. It remains to be seen whether business needs unrelated to the pandemic will continue to guide those strategies, or whether priorities will shift due to remote work and travel restrictions tied to COVID-19. Outcomes will vary depending on the size, portfolio and cash position of each organization.
Current conditions may cause some midsize companies to double down on the aspects of technology most crucial to keep operations running, such as cloud computing, while pulling back technology spending related to accelerating operations. Major oil companies and oil field services conglomerates that are in a favorable cash position and have more experience aggressively adopting advanced technologies are more likely to continue down the path of investing in innovation, even during this economic crisis. In Halliburton’s first quarter investor’s call this year, the company’s chief financial officer said that “the downturn accelerates the adoption of digital technologies by our customers and by Halliburton.” However, smaller or midsize organizations that came into the pandemic at a less mature state than the majors will likely focus their spending on technology necessary to keep the business running.
Technology-enabled ecosystems and business models will define industrials’ future
While the pandemic has been a source of enormous challenges for many organizations, the economic disruption it has caused also gives industrials companies a chance to redefine their strategy. Addressing any vulnerabilities the pandemic has highlighted can help companies become more resilient as they chart a path forward. In this era of change, organizations should reexamine traditional models of workforce, operation, competition and business in light of any possibilities that this new economic environment provides.
Over the past few years, multi-industrials companies have simplified their businesses by focusing on their core product offerings. They have also embraced a digital future by offering Industrial Internet of Things platforms and analytic solutions to customers taking advantage of their extensive industrial expertise. This is a move toward an asset-light model, which represents a deviation from the traditional equipment intensive industrial framework. This is also a move toward a sustained subscription-based revenue model. This approach is gaining traction in the industrials world with companies creating offerings such as equipment as a service, platform as a service, manufacturing as a service and analytics as a service. These subscription-based models can augment or substitute existing revenue models and increase after-sales service revenues. Such models can also be beneficial to the OEM/service provider and the customer, because value is based on outcomes.
Digitization is also causing a redrawing of traditional industry boundaries by enabling companies to compete in multiple sectors and redefining customers, competitors and partners. Industrials companies are exploiting their domain expertise and foraying into tech platforms, which were previously considered the domain of the technology industry. The pandemic has led to staunch collaboration not only between industrials competitors but also between industrials companies and health care companies to meet exigent market needs. As business-to-business distribution transitions toward an online marketplace, especially in light of Amazon entering this space, companies need to decide whether to view distributors as channel partners or competitors. It will likely become more common for companies to define their business models not by how they compete against traditional industry peers but by how effectively they collaborate with businesses across a range of sectors to create a more customer-centric model.
In order to evolve with these changes, companies must use real-time data to empower their strategic decision-making processes, and integrate digital solutions such as AI and IIoT into their operating models. Companies need to modernize their existing technologies and increase their investments to improve their IT productivity. Historically, middle market companies typically underinvest in their technology infrastructure. Now is the time for companies to invest in the development of digital acumen across their organizations, reskilling employees to prepare for the digital future. Executive leadership must embrace digital culture in order to make it an organizationwide priority, and should make a long-term commitment to digital evolution both during and well after the current economic downturn.
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