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Manufacturing investments face flexibility, sustainability and talent concerns

16 February 2017 Consultancy.uk

Major manufacturing players remains relatively upbeat about their respective sector outlooks, a new report finds. Key concerns remain however, around the development of key capital expenditure projects, as changing trends, from increased demand for flexibility and sustainability to a war for talent, take hold of the industries more widely.

The manufacturing industry faces a host of new challenges from new technologies and models, such as digitalisation, additive techniques and Industry 4.0; a scarcity in talent; and sometimes unpredictable changing, and radically different, consumer and client sentiment across global markets. Environmental and wider supply chain concerns too are becoming increasingly prominent factors to consider for the industry.

The global manufacturing industry is expected to have seen growth of 2.8% in 2016. Manufacturing production is likely to risen by 1.3% in industrialised countries and by 4.7% in developing economies. To meet the increasing demand, in the face of market uncertainties, manufacturers across a range of sectors face key strategic capital expenditure (capex) decisions that meet the various, and sometimes complex, market challenges. In a new report from Arcadis, titled ‘Industrial Capital Investment Survey 2017’, the firm interviewed 73 manufacturing industry executives to get a better picture of key current trends affecting their capex decision making.

Outlook for manufactuing sector

The analysis by the firm finds that most industry executives are positive about current market trends. 36% of all respondents believes that the market will improve over the coming 12 months, hitting 50% in the engineering and manufacturing segments.

The automotive and heavy industries are less upbeat however, with no respondent from the sector expecting market conditions to improve, and 80% and 67% respectively expecting conditions to remain the same. FMCG respondents and building & metals respondents, too, are predominantly expecting the market to remains stable at 60% and 59% respectively.

Tjerk van der Meer, Global Sector Leader at Arcadis, remarks: “Overall, our survey presents a positive picture for the industrial manufacturing sectors. Many are taking a mature, future focused approach to their capital programs, however, companies cannot afford to rest on their laurels in the changing and price-constrained market. While progressive companies can embrace technology and data platforms to improve their capital delivery, all can learn from best practices across different sectors and in different countries.”

Are company’s flexible enough

Flexibility

Flexibility in the face of dynamic market requirements, from changing sentiments to more diverse consumer tastes, places a host of strains on built assets to be sufficiently agile to make various products, or small-batch products, among others.

The survey shows that a small majority (52%) of respondents are able to meet current flexibility requirements, with chemicals out ahead at 78%, followed by automotive and FMCG, both at 60%. A number of industries face considerable shortfalls in agility however, particularly pharmaceuticals, and a segment of the FMCG market whereby 40% feel that they are not sufficiently flexible to meet the challenges facing their business.

Are companies investing to mitigate environmental impact

Environmental impact

Reducing the environmental impact of the manufacturing process, which may include adding the cost of a host of externalities to the process itself, has become an increasing imperative for companies. Aside from social and regulatory pressures from customer bases, the reality of the effects of their actions on the wider environment are also becoming increasingly difficult to simply ignore.

In the face of mounting pressures to protect their reputations, as well as meet compliance rules, the consultancy firm asked respondents about the degree to which they are reducing their environmental impact through their capex strategy, from reducing risks to focusing on a circular economy. The report found that particularly the automotive industry, some of which has faced particularly poor press recently, is significantly focused on environmental impact, at 100% of respondents. Heavy industries respondents too, showed propensity to invest in more sustainable capex investments. FMCG follows, at 80% of respondents.

Are companies facing a talent shortfall

Talent management

The research also finds that the manufacturing industry is increasingly finding it difficult to attract the right people for its capital investment programmes. Around 42% of respondents said that the situation was more difficult, with particularly the automotive and chemical sectors, on 80% and 67% respectively, noting concern.

In the pharmaceutical and manufacturing sectors, a sense of no change was noted, at 71% and 50% respectively. While few respondents, 16% of the total, said that the talent situation has become easier – with mainly respondents in heavy industries and engineering reporting optimism.

Tjerk van der Meer states: “Despite the broadly positive outlook, which is great news, manufacturing companies are challenged to adapt their production capacity and facilities to meet clients’ need, due to shortages in available capital and skilled workers. As digital technologies come to the fore, we see a need to ensure that any investments into building new, or upgrading existing, production facilities are flexible and demonstrate a clear return on investment to succeed.”

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Private equity firms ramp up sustainability focus

19 April 2019 Consultancy.uk

In line with business leaders across the industrial gamut, private equity firms are increasingly on board with sustainability projects. According to a new study, the investment arms for major funds are implementing a number of strategies aimed at supporting sustainable economic development in line with global goals.

While the business world has finally begun to acknowledge the danger of climate change, effective action plans remain difficult to achieve. The Paris Agreement has stipulated a clear target for the decades leading up to 2100, although massively reducing emissions while not crashing the economy could be a tall order.

Businesses that are able to acquire capital can use it to boost productivity and output, thereby creating a virtuous cycle of development. However, some businesses are better able to utilise resources than others, both in terms of their relative productivity, as well as the value of the respective outcomes relative to costs (including environmental harms). Financing can therefore provide an avenue to select businesses that are aligned with various global sustainability goals, while shunning those that drive little or unsustainable social value creation.

Top moves made by investment arms towards responsible investment

Profit has for the longest time been the central criterion for investment decisions. Yet profit at any cost is increasingly seen as creating considerable social harms, while often delivering only marginal value. As a result, the private equity sector, which was initially sluggish to change its ways with regards to sustainability, has started to see the topic as an opportunity as much as a challenge.

A new study from PwC has explored how far sustainability goals have become part of the wider investment strategy for private equity (PE) firms. The report is based on analysis of a survey of 162 firms and includes responses from 145 general partners and 38 limited partners.

Maturing sustainability

Top-line results show that responsible investment has become an issue for 91% of respondents. For 81% of respondents, ESG (environmental, social, and corporate governance) was a board matter at least once a year, while 60% said that they already have implemented measures to address human rights issues. Two-thirds have identified and prioritised Sustainable Development goals that are relevant to their investment segments.

Change in concern and action on climate-related topics over time

While there is increasing concern around key issues, from human rights protections to environmental and biodiversity protection, the study finds there are mismatches between concern and action. For instance, concern among investment vehicles around climate change has increased since 2016.

In terms of risks to the PE firm itself, concern has increased from 46% of respondents in 2016 to 58% in the latest survey. However, the number who have taken action remains far below those concerned, at 9% in 2016 and 20% in 2019. Given the relatively broader scope of investment opportunities, portfolio companies face higher risks – and more concern – from PE professionals, at 83% in the latest survey. However, action is less than half of those concerned, at 31%.

Changing climate

In terms of the climate footprint of the portfolio companies, 77% of respondents state concern in the latest survey. 28% of respondents are taking action through the implementation of measures to mitigate their concerns.

Concern and action taken on ESG issues

In terms of the more pressing issues for emerging responsible investment or ESG issues, governance concern of portfolio companies comes in at number one (92% of respondents), while 60% have taken action on it. Firms have focused on improving awareness – setting up policies and a range of training modules for their professionals around responsible investment decision making. Cybersecurity takes the number two spot, with 89% concerned and 41% implementing strategies to mitigate risks.

Climate risks take the number three spot in terms of concern for portfolio companies (83%), but falls behind in terms of action (31%). Health and safety track records are a key concern at 80% of businesses, with 49% implementing action. Gender imbalance within PE firms themselves ranks at 78%, which is being dealt with by 31%. A recent survey from Oliver Wyman showed that there is gender balance at 13% of GP teams in developed countries.

Biodiversity is also an increasingly pertinent topic, with risks from pollution and chemical use increasingly driving wider systematic risks around environmental outcomes. It featured at number eight on the ranking of most likely global risks for the coming decade, with its impact at number six. As it stands, biodiversity is noted as an issue at 57% of firms, with 15% implementing action.