Asset intensive sectors in Germany facing growing challenges

13 September 2017

Germany’s automotive, retail and construction sectors are best equipped to face down digital disruption, according to a new survey of the nation’s markets. German asset intensive sectors were surveyed to identify how far firms are able to adapt to the changes, and which company types currently find themselves in the most stress.

Asset heavy companies, whose asset bases tend to be expensive and involve a long utilisation period to make returns, are increasingly faced with difficult decisions. Trends in digitalisation, changing consumer behaviour and a shift towards sustainable operations mean that companies can fall into an asset trap in which they are left with stranded assets.

In a new report from Roland Berger, titled ‘The asset efficiency game’, the consulting firm explores strategies of German companies in asset intensive industries, such as the energy sector and manufacturing, can deploy to stay ahead of the curve in increasingly disruptive landscapes. The research looks at companies based in the EU’s largest economy, and explores their respective asset efficiency; the ability to turn asset investment into returns.

Asset efficiency

The research finds that globally, there is around €550 trillion invested into industrial assets, with every €1 generating an average return of €2.50. Considerable disparities exist, however; large players tended to have asset efficiency of slightly under average, at €2.40, while smaller players, with fewer than 250 staff, have asset efficiencies of €4.90 on average, as smaller, more innovative competitors increasingly outmanoeuvre market incumbents to disrupt industries top companies.

The news was not all positive, however, with the paper also pointing to a decrease in average asset efficiency over the past five years, falling from €2.70 in 2012 to €2.50 in 2016.

Four typical types

To better understand trends within the 150 companies in the firm’s sample, four different performance categories were determined, which consider different ways in which asset efficiencies are derived.

Efficiency winners, which accounted for 25% of the sample, were able to improve their revenues faster than the value of their asset base – highlighting their ability to improve their respective asset efficiency. Risk takers, meanwhile, which account for 38% of the sample, have invested in assets but have seen their revenues fall – suggesting that repayment for assets is expected somewhere down the line. Non-adapters, around 15% of the group, saw their asset base grow while their revenues declined – highlighting poor utility. Around 16% of respondents were noted to be agile adapters, whose revenues declined more slowly than their reductions in their asset bases.

Growth of asset base

In terms of a scatter graph of the companies surveyed, most companies are relatively close to the line between risk takers and agile adapters and efficiency winners, with those on the revenue growth side tending to be there due to some form of risk taking. Non-adapters tended to also be relatively close to the line in terms of growth, with most scattered between 0% and -5% CAGR in the period 2012 – 2016.

The firm notes that different industries are in relatively different market conditions. Automotive, for instance, is increasingly investing in assets as global vehicle demand continues to mount – although UK manufacturers continue to operate in a period of considerable uncertainty.

Industry barometer

In terms of which industries were likely to best adapt to disruption, automotive, retail and construction all ranked at +7% CAGR growth in revenue between 2012 – 2016, which researchers attribute to those industries tending to be dominated by risk takers, supporting a previous report from Roland Berger that found the German automotive industry was one of the world’s best equipped for automation. The electrical industry and major airports, meanwhile, topped efficiency rankings, where +3% CAGR in revenue growth was recorded over the same period. Oil & gas and chemicals & pharmaceuticals were deemed non-adapters, while regional airports and conventional energy were deemed to be agile adapters.

“Asset-intensive companies like energy producers, chemical firms or machinery manufacturers need to be able to run their assets efficiently under all market conditions," explained Ralph Büchele, a Partner at Roland Berger. "Technological advancements and shifting customer needs or new growth markets frequently require capital-intensive upfront investments in new production lines and facilities. If you're not flexible enough to act when the need arises, you run the risk of falling into the asset trap: rigid cost and plant structures keeping earnings and profitability figures down and restricting your ability to take action to address pressing needs.”