Mechanical engineering sector: between economic crisis and disruption
Companies need to boost their core business, be more adaptive and further push actively digitalizing
"Unlike in the crisis ten years ago, this time it will not be enough to simply drive down costs. Companies need to fundamentally reposition themselves and invest in their digitalization."
Mechanical and plant engineering is a mainstay of many industrial economies. In Germany, the sector is the country's largest employer with a strong export focus and is even regarded as the showpiece industry par excellence. At the same time, it acts as a kind of unofficial business barometer, as industry order books are considered to be a good indicator of economic trends in downstream sectors.
So far, so good, you might think, with the mechanical and plant engineering sector currently in good financial shape compared to the economic crisis of 2008/2009. However, many of its companies are suffering under the weight of difficult economic conditions, growing political uncertainty and the consequences of technological change. Firms that are highly dependent on conventional drive systems in the automotive sector are particularly hard hit. Their situation shows that the general economic slowdown and falling investments, which other industries are also struggling with, are accompanied this time by the challenges of fundamental structural change in the form of digital disruption.
The industry is facing key challenges
The industry itself is under no illusions: After an initially modest growth forecast, the VDMA now expects negative growth of 2 percent for 2019. The mechanical and plant engineering sector's most important customer, the automotive industry, also saw sales decline in many segments compared with the previous year.
There are, of course, various political and economic reasons behind the lack of investment (including the trade dispute with the USA, lower growth in China, Brexit) and structural problems in the automotive industry, which is currently very reluctant to buy new machinery and invest in new technologies around conventional engines. But the sector is also struggling with industry specific challenges. These include the fact that it is still challenging to position itself in the mid-end segment, need to manage a complex product portfolio and lacks flexibility in its value chain. Because sales and profits are rather low on average compared to those generated by other industrial companies outside the mechanical engineering sector, industry players are finding it hard to finance their transformation or business reorientation.
"In the current situation, it's important for all companies – whether still operating at full capacity or already hard hit by the economic downturn – to both prepare for a crisis and take advantage of the opportunities arising from digitalization."
What to do now: Prepare for bad times and seize opportunities
Faced with this situation, it's important for all companies – whether still operating at full capacity or already hard hit by the economic downturn – to both prepare for a crisis and take advantage of the opportunities arising from digitalization. To this end, they first need to "weatherproof" their core business. Realigning costs in the short to medium term is the best way to start doing this. However, it's just as important to ensure that structures are as adaptive as possible – and where that is not yet the case, to take appropriate measures quickly. Secondly, issues such as standardization to reduce costs and streamline processes must now be tackled with a consistent approach. Ultimately, this could even result in a company reengineering its value chain.
Thirdly, companies should further differentiate their portfolio to incorporate digital business models and new offerings. To do this they must boldly break new ground because conventional growth strategies will no longer lead to success. At the same time, firms must examine with a critical eye their positioning in the various global regions and markets.
Today, the mechanical and plant engineering sector faces a completely different situation to the economic crisis of 2008/2009. A narrow focus on costs and financial resources is no longer enough. To secure their business long term, companies need to address disruptive trends proactively.
In times like these, the thing to do is to spread your risks as widely as possible. Partnerships can be an important way of doing this, but it's also necessary to create room to maneuver on the cost side and consider carving out certain business activities. Because every company is different, each one needs an individual solution. There is no one-size-fits-all strategy.
Latest study:
Conjectures on the future in mechanical and plant engineering
These recommendations also reflect the key challenges and potential solutions that apply to the industry in general. They revolve around the business model, cost structures and performance culture.
