In our view, the fundamental challenge in the plant and machinery sector is now to consolidate or even expand our market position through an integrated but customised approach comprising restructuring and a strategic innovation initiative (digital products including AI-based products, service business, digital sales and maintenance). In our view, companies need to develop a „restart“ plan for various scenarios in order to be prepared for the time after the pandemic.
The German plant and mechanical engineering industry is a strongly export-oriented key sector with annual sales of around €229 billion and around 1.1 million employees (2019). This puts it in third place behind the manufacturing and automotive industries in terms of sales. Around 6,650 companies belong to this sector, which is dominated by medium-sized enterprises.
In 2020 COVID 19 caused a big drop in orders in April of 31% compared to the same month last year. Similar declines were recorded for May and June. The various specialist sectors were hit with varying degrees of severity, with automotive-related areas being particularly hard hit.
In the period July – September 2020 order intake in the plant and machinery sector improved again, but was still well below the level of the same months a year earlier. According to VDMA estimates, the trough was passed in Q3/2020. For 2020 the VDMA estimates that production will slump by 17%, with slight growth of 2% expected in 2021.
Results of the h&z market study
Our sector study from May of this year already revealed that falling demand, corporate insolvencies and consolidation effects among suppliers and competitors are expected to be major extrinsic effects. Internally, the participants in our survey anticipate that digitisation will become increasingly important, that adjustments will be required in the service business and that staff will be cut.
However, just under 50% of participants see both opportunities and risks arising from the COVID 19 crisis. Opportunities are seen through new working models and digitisation as enablers, innovations and consolidation tendencies. In addition to falling demand, the most significant risks are expected to lie in more difficult demand planning, lack of liquidity and disruptions in the supply chain.
Outlook and assessment h&z
On the basis of market developments and the market study we have conducted, we see strategic initiatives in the machinery and plant engineering sector for 2021:
- Digital transformation and industry 4.0
- Green technologies/ sustainability
Nearly all companies in the industry have reacted to the COVID 19 crisis by taking immediate measures such as short-time working, more flexible working hours and securing liquidity. Structural issues are on the company agenda for 2021:
- Strategy: Revision of business model („more robust“)
- portfolio: Streamlining and strategic acquisitions
- Supply Chain/ Operations: adjustment of production footprint, closure of production capacities, site closures, flexibilisation of the value chain
- Procurement: Optimisation of supplier portfolio (relocation), risk management, technical levers for cost reduction such as cost value engineering
- finances: Adjustment of structural costs including SG&A, review of investment planning, medium-term financing strategies
- Personnel/ company organisation: remote working forms, flexibilisation and staff reduction, streamlining of the organisation
The most important elements of a successful restructuring concept are a deep understanding of the market environment and a clear target for the turnaround with a detailed description of the measures. The decisive success factor is the agreement of the top management on the target picture and the demonstrated confidence that the restructuring will be successfully completed. The leadership of top and middle management therefore plays a key role.
Innovation drivers and most important future technologies in plant and mechanical engineering are digitalisation, Big Data, AI, robotics and green products/services. Innovations – based on a clear corporate strategy – are more important than ever in the COVID 19 crisis in order to be protected against disruptive influences in the rapidly changing situation and to open up new business opportunities through new products/services.
Digital transformation and industry 4.0
Nowadays, digitisation serves as a differentiation factor and allows on the market side on the one hand the establishment of new business models and on the other hand the digitisation of products and service portfolios. The highest degree of digitisation is found in the corporate functions of marketing, sales and procurement. Digitisation in services has increased significantly since 2018. However, there is still a backlog demand in production.
Artificial intelligence (AI) holds considerable potential for growth in mechanical engineering. Whether it is that established products are further developed, e.g. through embedded assistance functions, or new business models such as predictive maintenance can be offered in the service business. The company’s own business and manufacturing processes are also optimised through the use of AI. AI also offers considerable potential for the more efficient use of raw materials, supplies and energy. A VDMA survey shows that experience with AI projects increases significantly with increasing company size.
Green technologies/ sustainability
The need to reduce CO2 emissions in many industrial sectors quickly and sustainably offers the industry significant market opportunities and the chance to further improve the positive image of the industry. With its products, the plant and mechanical engineering sector has immense leverage when it comes to sustainability and the decarbonisation of other sectors, based on technologies such as CO2 storage/utilisation, „green“ power generation, plants for the production of hydrogen, more efficient drives, building and air conditioning technology or recycling plants.