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.”


UK manufacturing sees orders slow amid Brexit anxiety

11 April 2019

Manufacturing in the UK saw negative growth for the end of 2018, reflecting a wider slowdown in the UK economy to 0.2% for the quarter, followed by three months at the start of 2019 which saw continued softening in orders. With uncertainty still hitting the sector ahead of Brexit’s deferred deadline, the industry faces a difficult 2019.

Despite a perpetually changing economic landscape, manufacturing remains a keystone industry in the UK. Optimism in the industry has been riding high in recent years, reflecting the perceived potential of automotive technologies, but last year saw a slight dip in business performance, ahead of what seems set to be a turbulent period for British manufacturing. Ordinarily, the sector might have expected to recover its footing relatively quickly, but with the looming spectre of Brexit making the economy’s future completely uncertain, this has not been the case.

The uncertainties of Brexit have continued to create headaches for companies on both sides of the channel. As contingency planning continues, new analysis from BDO and the Make UK explores how manufacturing – a segment likely to be hard hit by Brexit – has fared in the final quarter of 2018.

Output balance stable

Manufacturing remains a key industry in the UK, generating around 10% of total economic output and supporting around 2.7 million jobs. Yet while the industry has seen a number of years of strong optimism as well as demand, Brexit is set to throw a spanner in the works, with a range of manufacturing companies leaving the UK, or considering it. Indeed, UK manufacturing’s output currently sits at a 15-month low as the industry anticipates a cliff edge Brexit.

In terms of growth for various parts of the UK economy, a slowdown was noted in the final quarter of 2018 compared to Q4 2017. Manufacturing, in particular, saw growth declines coming in at almost -1%, with a similar trend in production. Construction saw a sharp contraction, falling 2 percentage points to below 0% growth in December 2018. Only services managed to have positive % growth in the final quarter. The final quarter as a whole saw growth of 0.2% in the UK economy – the lowest level in six years.

Output across most sectors in the industry remains positive, with the percentage balance of change in output at 22%. The result is the tension quarter of positive percentage balance of change, with stagnation on the final quarter of 2018. The firm is projecting a slight softening of output going into Q2 2019. The firm notes that there is some stockpiling taking place, with orders and outputs unaligned going into 2019.

Order balance remains positive but dips further

While there is a broadly positive picture for output, the firm does note considerable differences between subsectors. Basic metals for instance, saw a net 24% fall to -18% over the past three months. Metal production is also seeing relatively poor performance as demand from the automotive industry enters a period of acute uncertainty. However, most industries are to see improved output on balance, with rubber & plastic increasing from a net 11% to net 56%.

Export trade

Having been buoyed by the lowered value of the pound, UK export orders are up slightly on the previous quarter, but remain well below the most recent peak in Q3 2018. Domestic orders were relatively strong, with a year between the most recent peaks for the segment. However, Q2 2019 looks to see domestic orders fall sharply, to half Q1’s result, while export orders too are set to see declines.

The decline reflects a decrease in basic metals, possibly a reflection of changes affecting the auto industry. Meanwhile, export orders are down due to Brexit cross-border uncertainty – the effect of the sterling devaluation unable to continue to buoy the market. Basic metals and metal products are both in negative territory for the coming three months.

Investment and employment intentions

UK employment figures reached new milestones, with total unemployment down to 3.9% while participation rates hit record highs. Employment planning continues to be in net positive territory, with a net positive balance of 22% in Q1 2019. The coming months are projected to see a slight dip, again, largely resultant from uncertainties around Brexit. Basic metals is the sector most likely to see a negative trend, reflecting the expected decline in orders.

Investment intentions meanwhile continue to be in positive territory. However, again, the now acute uncertainty about Brexit – the UK government has boxed itself into a corner – mean that confidence around investment could wane rapidly.

Commenting on the wider economy, Peter Hemington, a Partner at BDO, said, “Manufacturing firms have been ramping up their preparations for a disorderly Brexit, in large part through the stockpiling of imported goods. This has had the effect of inflating activity levels… It’s too late to do anything about this now.  But a disorderly Brexit would be far worse than the current relatively mild slowdown, possibly disastrously so… We are concerned it looks more likely than ever that we will exit the EU without a deal.”