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What factors are driving end market recovery for manufacturers
In this episode, EY global analysts Julia Rosenthal and Mohit Ahuja share their insights on the top themes discussed by leaders during the 2Q21 public earnings calls.
2020 was a tumultuous year for all sectors globally, including the advanced manufacturing sector. Supply chain disruptions, raw material shortages and forced shutdowns caused a significant dip in production levels. However, it seems that one of the hardest-hit sectors, advanced manufacturing, is on the road to recovery, though the pace of recovery is likely to be uneven.
Most manufacturers are confident of the recovery in end markets and are providing positive outlooks for the remainder of 2021. The recovery will be primarily driven by the mass-scale vaccination programs, higher uptake of services, and partnerships and acquisitions. However, manufacturers will need to work on future-proofing their businesses by strengthening supply chains and reviewing risk mitigation strategies.
Key takeaways:
As disruptions are likely to endure through 2021, manufacturers are automating production to increase utilization, contracting alternative suppliers, implementing price hedging and signing long-term contracts to mitigate disruptions in production schedules and minimize financial losses.
Despite supply chain disruptions and the resulting revenue impacts, most manufacturers are confident of recovery in end markets and are providing positive outlooks for the remainder of 2021.
The global vaccine rollout is a boost for manufacturers. While supply chain disruptions and raw material cost increases are still a challenge, many manufacturers are experiencing increased demand as end markets pick up again.
For your convenience, full text transcript of this podcast is also available.
Announcer
Welcome to the EY Advanced Manufacturing and Mobility BusinessMinute podcast series, where EY professionals explore the critical business issues impacting our industry today.
Moderator
Greetings to our audience, we’re back again with our next earnings calls update and joining me for today’s lively discussion are Mohit Ahuja and Julie Rosenthal, who both serve as analysts for our Global Advanced Manufacturing sector.
Today, Julie and Mohit will be sharing their insights into second quarter earnings calls for advanced manufacturing sector companies and key themes derived from these calls.
Welcome, Julie and Mohit, it’s a pleasure to have you both here.
Julia Rosenthal
Thank you, Bhavini, as always it’s a pleasure to be part of this podcast series.
Mohit Ahuja
Thank you and it’s great to be back to share our insights.
Moderator
So, let’s get started. As we explained to our audience with the first quarter update we shared recently, we’ll discuss themes from each of the top five market forces and company responses.
Julie, let me start with you to share with our audience the top market force that was most discussed in the recent earnings calls.
Rosenthal
Thanks Bhavini, I’m happy to kick off!
The market force that stood out for us in the second quarter is value chain breakdown.
Manufacturers are witnessing major disruptions in their production schedules. These disruptions are being caused by supply chain constraints, primarily semiconductors and resins shortages, coupled with commodity inflation and logistics bottlenecks. This in turn is hampering customer relationships. Multiple companies are enduring financial losses in the range of US$100 million to US$200 million. To overcome these disruptions, many are collaborating with customers and distributors for better visibility. They are also taking measures such as automating production to increase factory utilization, contracting with alternative suppliers, implementing price hedging and signing long-term contracts.
And now, let me hand off to Mohit who’ll share insights into the top company response.
Ahuja
Thanks Julie, I’m happy to share that with our audience.
On the company response side, change in financial outlook emerged as the top theme. Despite disruptions in the supply chain and revenue impact in the quarter, most companies are highly confident of the recovery in end markets and are providing robust positive outlooks for the remainder of 2021. This is primarily driven by the ongoing vaccination programs, higher uptake of digital services, and partnerships and acquisitions. These inorganic initiatives are supporting robust top-line growth plans with manufacturers actively acquiring and collaborating to capture market shares in emerging growth areas of electric vehicles, quantum computing, autonomous mobility and healthy buildings, to name a few.
Moderator
Julie and Mohit, thanks for sharing those insights. Julie, as you’ve just shared the top market force, what were the other four themes that made the top five?
Rosenthal
We’ve already talked about value chain breakdown. In terms of other market forces, we’re witnessing continued recovery in many end markets; hence, demand patterns retains its number one position. At number two, we saw a new theme, namely investors, owing to increased investor expectations for improved financial performance. Number three was sustainability initiatives, which is gaining more prominence and driving significant change. Number four was public health – it slipped two positions from last quarter, however, the emergence of new COVID-19 variants is still creating uncertainties.
Moderator
Thanks for those detailed insights, Julie. Let’s switch to Mohit, to round out and share details of the other company responses that were top of mind.
Ahuja
We’ve already talked about change in financial outlook, which was the top company response. To go down the list, we saw activities related to business reorganization or restructuring – that was number two. At number three, we have competitive positioning, where many peers are innovating their pricing strategies and striving to capture market share. Number four was product design and innovation, where we are witnessing several sustainability and digital-oriented products and services being launched. Finally, we heard discussions about working capital and cash flow management as companies shift further into growth mode.
Moderator
Great insights Mohit and Julie, thanks for expanding on those.
Let’s switch gears and turn our attention to subsector-specific analysis for industrial products, aerospace and defense, and chemicals companies.
Mohit, if you don’t mind, let’s start with an update for aerospace and defense, and share with our audience what major themes came to light.
Ahuja
Sure thing, I’m happy to share those observations.
For commercial aerospace, multiple domestic markets are showing remarkable recovery, with bookings consistent with 2019 levels; however, international air traffic recovery is slower than expected. In the near term, major commercial OEMs expect a challenging environment and are consolidating their facilities as they will gradually increase production rates. On the contrary, the global defense market remains strong, and defense contractors remain confident in their ability to grow revenues driven by robust demand, especially for emerging programs, such as space technology, hypersonics and cybersecurity solutions.
Let me pass it over to Julie to share her perspectives on industrial products.
Rosenthal
Thanks Mohit, glad to share with our audience.
The global vaccine rollout has come as a much-needed boost for industrial manufacturers. After facing factory shutdowns and a drop in demand for equipment, industrials now see light at the end of the tunnel. While supply chain disruptions and raw material cost increases are still a challenge for this group, many manufacturers are experiencing increased demand for both products and services as end markets pick up again. Company leaders are reporting especially rapid growth in connected products, maintenance services and the upgrading of existing infrastructure. These forces are supporting the upward revision of financial outlooks, especially for revenues.
Last but not least, is our chemicals subsector, let me hand off to Mohit to round out that discussion.
Ahuja
Thanks Julie.
For chemicals, as economies continue to recover companies are shifting focus to new growth opportunities, such as clean energy and hydrogen value chain, as the demand from the health care sector has already peaked in the first quarter of 2021. Supply chain disruptions leading to raw material price head winds were offset through improved pricing. Lastly, sustainability was a much talked about topic where in companies are announcing ambitious carbon reduction targets, utilizing digital technologies to develop sustainable products, increasing investments in hydrogen, and utilizing recycled or bio-based feedstocks.
Moderator
As usual, a lot happening in the manufacturing sector, thanks Julie and Mohit for those detailed updates.
As a reminder to our audience, available on our website, we have included interactive charts where you can explore the market forces and company responses in more detail, as well as interactive charts for each of our three subsectors. Additionally, you can download a copy of our report.
As the third quarter closing is fast approaching, let me ask each of you to give your forward looking opinion on what we may expect to see from the manufacturing industry.
Julie, let’s put you on the hot spot first.
Rosenthal
No problem, Bhavini. Here’s what I’m observing as early signs of what to expect.
Last quarter, we predicted that the recovery in key end-markets coupled with availability of COVID-19 vaccines would lead to more positive outlooks and more robust order activity. Many leaders did report a resurgence in demand and provided improved financial outlooks for the remainder of 2021. However, we’re also witnessing rising sources of disruptions, such as raw material and labor shortages, commodity inflation and transportation congestion.
As disruptions are expected to endure through 2021, companies are undertaking multiple strategies to overcome financial headwinds and strengthen customer relationships. Evaluation of pricing strategies is one key initiative we see. On the customer front, many peers are increasing product prices to maintain margins. On the supplier front, many are setting up dedicated teams and analytics tools for better price negotiations and supply chain visibility. Apart from this to ensure material availability, peers are also looking at reshoring supply chains and optimization of manufacturing footprints in response to demand fluctuations.
Mohit, over to you to share your insights.
Ahuja
Thank you, Julie, I will talk about how sustainability will take a greater role in framing company strategies and about a few nextwave growth opportunities for the manufacturing sector.
Sustainability will continue to take a greater mind share for the manufacturing companies and will drive the next phase of product innovation and growth.
An urgency to meet decarbonization targets and stricter reporting guidelines, such as the EU Corporate Sustainability Reporting Directive and the U.S. Securities and Exchange Commission’s public consultation on climate-related disclosures, are making peers position sustainability as a centerpiece in their operating models.
Companies will continue to develop more energy-efficient, sustainable and connected products, such as net-zero connected buildings, hydrogen propulsion systems and electric aircraft.
Sustainability will also primarily drive the nextwave growth opportunities. Manufacturers will continue to invest in both organic and inorganic initiatives to capture a greater share of the multi-billion dollar nextwave opportunities, which include US$250 billion in infrastructure decarbonization, US$10 billion to US$15 billion in healthy buildings, US$120 billion in urban air mobility and US$6 billion in quantum computing technologies.
Moderator
Mohit and Julie, thank you so much for sharing your insights and what we may see transpire once third quarter closes. As always, I look forward to our next discussion.
Rosenthal
It’s always a pleasure sharing our collective insights with our audience and I look forward to our next podcast update.
Ahuja
Ditto that, it’s a pleasure being a part of this podcast series, and I look forward to our next update with you and Julie.
Announcer
Thanks for listening to today’s EY Advanced Manufacturing and Mobility Business Minutepodcast. We hope you found it engaging and informative. To listen to other Business Minute podcasts, you can find them at ey.com/amm podcasts.
Download our 2Q21 Advanced Manufacturing Quarterly report here
