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How manufacturers are preparing for a post-COVID-19 recovery
In this episode, Julia Rosenthal, EY Global Analyst for Advanced Manufacturing, shares her insights about the key themes discussed by leaders during the third quarter public earnings calls.
The COVID-19 crisis and related concerns still remain a major challenge for advanced manufacturing (AM), especially automotive, aerospace, and oil and gas companies. Among the top themes discussed by leaders of AM sector companies during the third quarter public earnings calls are: developments in end markets, business reorganization or restructuring, and competitive positioning.
Key takeaways:
Business reorganization or restructuring: cost reduction drove streamlining activities at many companies. Divestitures allowed companies to better focus resources on key growth markets while acquisitions were held to make cost savings targets stringent.
Competitive positioning: product and service quality are gaining importance as manufacturers hold onto market share. Outcome-based pricing models are being offered more frequently. Acquisitions and joint ventures are enabling companies to bring differentiated products and services to market more quickly.
Customer acquisition and connectivity: manufacturers are prepared to invest in understanding their customers better. Sales teams are being expanded in growth markets, enabled by new technologies.
For your convenience, full text transcript of this podcast is also available.
Announcer
Welcome to the EY Advanced Manufacturing and Mobility Business Minute podcast series, where EY professionals explore the critical business issues impacting our industry today.
Moderator
Here with us for this episode of the Advanced Manufacturing Quarterly Update is Julie Rosenthal, EY Global Analyst for our Advanced Manufacturing sector.
By way of a quick explanation, the Quarterly Update is a review of the top 10 themes discussed by leaders of advanced manufacturing sector companies during public earnings calls. Included in the analysis are sector companies from aerospace and defense, industrial products, and chemical subsectors.
For this third quarter, we analyzed earnings calls from 32 manufacturing sector companies.
So, let’s get started. Julie, welcome back and thanks for joining us today to share your insights on third quarter earnings season.
Julia Rosenthal
Thank you for having me.
Moderator
So, no surprises here, we’re still dealing with the global pandemic aftermath, and a resurgence in COVID-19 numbers. How are manufacturing companies continuing to deal with this disruption?
Rosenthal
Well, there’s no doubt that manufacturers are still facing a challenging business environment overall. For many of our peers, revenues were down in the third quarter compared with the same period a year ago. A few of our peers did see increases in revenues. Generally, these were the companies that had a larger-than-average exposure to end markets that have been growing this year – markets such as personal protective equipment, medical supplies that are in high demand due to the pandemic and HVAC systems in buildings. There are also some end markets such as defense that have remained stable throughout the last several quarters. Otherwise manufacturers are having to manage through a time of lower revenues and focus on the things that they can control, such as their margins.
When the analyst team listened to earnings calls this quarter, we heard some common themes from leaders as they responded to these challenging market conditions. Cost management continues to be a top priority. For some companies, cost reduction targets that were set early in the year have been increased. Leadership teams are looking at existing programs and finding new ways to make operations more efficient or to streamline businesses. We’ve covered the trend of divestments and a focus on core operations for the past several quarters, but I would say that there’s a renewed interest in that now, especially as companies are still looking for ways to make sure they have plenty of cash on hand.
After streamlining, we heard leaders talking about the importance of differentiating their products and services and making sure they have close relationships with customers. We all know that these tough market conditions won’t last forever, so companies are planning ahead to be best positioned to serve their core customers when business activity picks up again. Understanding customer needs is a critical part of being ready for recovery.
Moderator
Great summary, Julie. As you were analyzing the data, were there any themes that stood out that you can share with us today?
Rosenthal
Yes. It’s always interesting to see what bubbles to the top when we put together the list of the 10 major themes. I’ll comment on three of them: business reorganization and restructuring, competitive positioning, and customer acquisition and connectivity.
As I mentioned, business reorganization and restructuring was one of our leading themes. That one came in at number two this quarter. Along with divestitures and a focus on core businesses, we still saw acquisition activity. Manufacturers are still going after opportunities to build their innovation portfolios by acquiring other businesses. However, when leaders talked about acquisitions that have happened in the last year, we heard an emphasis on the cost savings and the efficiency opportunities that have come along with those deals. Companies are also looking for ways to boost their productivity with investments in new technology, such as digital tools that help factories increase their uptime.
The second theme I want to call out is competitive positioning. This is a new theme for us this quarter; it was at number three on our list. When we say, “competitive positioning,” we’re looking at all of the ways in which manufacturers go to market, from product and service design to the particular groups of customers and sectors that they target. This quarter, we heard about product and service quality becoming more important than ever. Even in an environment of heightened cost control, major manufacturers are very aware of the importance of offering a quality product or service if they want to hold onto market share. This is another area where acquisitions and joint ventures play an important role. They help companies differentiate their portfolios from those of their competitors. Pricing is also a key part of competitive positioning. As manufacturers work with customers in end markets that are challenged, such as oil and gas, they have to strike a balance between setting prices that are sustainable but that are also attractive. We heard some manufacturers discussing outcome-based pricing for projects and services that took into account the ultimate benefits and savings to the end customer.
The third theme is closely related. Customer acquisition and connectivity was at number six on our list this quarter. This is another new theme for us. We’ve added it to our analysis because we’re hearing more on earnings calls now about how manufacturers are putting the customer at the center of their strategic decisions and their business models. This quarter, leaders talked about initiatives such as the expansion of their sales teams in regions around the world that are seeing the most growth right now. Some companies are providing their sales teams with new technologies such as mobile apps with detailed information about customer needs. The challenging conditions that manufacturers are facing are due to the equally tough markets in which their customers are operating. In some cases, those markets are going through profound disruption right now. The manufacturers that understand their customers best and help them through that disruption are going to be the ones best positioned to grow in the long run.
Moderator
Julie, those were interesting updates, especially on competitive positioning — it’s good to see that manufacturers are trying to hang on to their market share, and that they are using acquisitions and joint ventures to differentiate themselves.
We’ve touched on these three themes, what other themes came to light that would be of interest to our audience?
Rosenthal
We always hear good insights on these calls into the end markets that manufacturers serve. Last quarter we talked about how end markets such as aerospace and automotive were experiencing some of the largest growth challenges. As of this quarter, things are looking better for automotive, especially in growth markets such as Asia-Pacific. Commercial aerospace is still looking at a pretty long recovery before passenger traffic is back to pre-pandemic levels. However, manufacturers are finding some innovative ways to help their aerospace clients, such as converting passenger planes to cargo planes.
On the growth side, it’s not just product and services directly connected to the pandemic that are seeing major activity – it’s innovation across the board. In areas such as construction and building design, there are widespread design changes underway – everything from touchless services to innovative environment controls – these are going to set new standards for how we interact with our workplaces and our homes long after the pandemic is over. Many manufacturers are also making new and greatly increased commitments to sustainability. This includes not just sustainable raw materials and products, but manufacturing processes and even commitments to their stakeholders and their communities. I’m going to predict that we’ll be talking a lot more about sustainability on future podcasts.
The last theme I’ll mention is culture and talent. Last quarter, some of the manufacturers we follow were announcing that headcount reductions were going to be part of their cost management programs. Now that we’re in the second half of the year, those programs are underway. Reductions have been largest in divisions that serve customers in end markets that have been most challenged, such as oil and gas. At the same time, companies are continuing to invest in the safety of their workers onsite in manufacturing plants. We also expect to see programs supporting remote workers to become permanent for many companies, especially as they can lower their costs for office space. This is all taking place in the context of a strong competition for talent for manufacturers. So, we also see companies recognizing the value of their workforces. One company gave bonuses to all of its employees below the senior management level to thank them for their service during the pandemic. Manufacturers know that they’re going to need these employees more than ever when economies turn around and we return to growth.
Moderator
Those were great insights, Julie. It’s hard to believe that fourth quarter is about to close and we’ll be ushering in 2021.
Before we let you go, how about a sneak peek at what you’ve observed in the fourth quarter?
Rosenthal
I think every analyst on the Quarterly team would say that the new vaccines are the headline. We’re not likely to see their rollout have a direct impact on manufacturing operations during the fourth quarter itself. As of right now, they’re just starting to get approval in major markets and we’re days or weeks away from people receiving them. But the knowledge that these new vaccines have such high effectiveness rates in testing, and the fact that they’re so close to being rolled out on a more widespread basis – these things are giving everyone some hope we didn’t have even a month or two ago. I expect that we’ll hear a more optimistic tone about economic growth and recovery on earnings calls starting in January.
I mentioned sustainability earlier, and I think we’re going to hear a lot more about this too. I would say that this is more of a long-term growth trend. The idea of the importance of long-term value and of “stakeholders” being not only your customers and your shareholders, but everyone affected in some way by your products, is going to continue to grow. We believe that leaders are going to have more to say about this on earnings calls on a regular basis.
And, lastly, that focus on the customer is going to be key. We expect to hear more about ways in which manufacturers are deepening their relationships with customers. It’s likely to change everything from organizational structures to the technologies that support every interaction between a customer and a manufacturer.
Moderator
Julie, thanks for joining us today and sharing your valuable insights with our audience, and we look forward to having you back in the new year.
Rosenthal
Thank you for having me today and I definitely look forward to our next podcast update.
Announcer
Thanks for listening to today’s EY Advanced Manufacturing and Mobility Business Minute podcast. We hope you found it engaging and informative. To listen to other Business Minute podcasts, you can find them at ey.com/ammpodcasts.
Download our 3Q20 Advanced Manufacturing Quarterly report here
