Industry Leader Network

Latest insights - September 2017

Highlights

China on the rise

Industry Leaders reported stronger than expected auto and machinery demand from China. They think current levels can be supported by the country's expanding middle class and growing investments in the manufacturing sector.

Construction driving confidence

Industry Leaders remain bullish on the European business climate. Their confidence is bolstered by strong construction activity in the region's key markets, particularly Germany where the construction sector is 'under pressure' in a positive way.

Labor shortage solution

Due to the scarcity of skilled workers like engineers, manufacturing companies are exploring the use of new technologies like Augmented Reality (AR) that will allow engineers to service and repair machines remotely.


 

Deep dive

Are the benefits of new technology measurable?

  • Over the past year, Industry Leaders have made a larger allocation of capex investments into Industry 4.0 technologies. This includes new capabilities in capturing and analyzing big data, cloud computing, and Internet of Things (IoT). Given that these technologies may not always have a direct impact on productivity, we asked Industry Leaders how they measure the expected return on their technology investments.
  • Industry Leaders agree that it's extremely difficult to measure productivity gains and cost benefits from Industry 4.0 technologies. However, they believe it is detrimental to not participate in this "exploration phase" so they rely on their intuition when approaching new investments
  • Companies must adopt an entrepreneurial approach and be willing to fail. Since many of the new investments are not asset heavy, like purchasing land or buildings, business leaders can let go of the mindset that they will be stuck with their investments for a long period of time.
  • Because the learning curve is steep, Industry Leaders suggest making simultaneous investments in several small projects and try to remain agile and adapt where needed. It should be expected that most investments will fail to produce significant results, but likely one will prevail and have rewarding benefit.
  • When selecting investments, Industry Leaders suggest to carefully consider the technical dependencies each project may create. Another selection criteria is to pursue projects that will provide a company a better understanding of its requirements, even if the project fails.
  • Given the extensive number of new technologies, companies who are small or are dependent on the developments taking place in other parts of the supply chain, are prudently waiting to see which direction a trend develops before making investments.

 

Regional insights

Americas

  • Industry Leaders retain their positive outlook for the US construction market, and anticipate home improvement related purchases to remain robust. The hurricanes that hit Texas and Florida are also expected to provide a small boost, albeit temporary, to construction related activity.
  • There is a positive trend in US demand for new manufacturing equipment as investments in automation moves higher. Industry Leaders believe there is significant room for growth in this area because labor unions have previously inhibited the implementation of automation but are now losing their influence.
  • The outlook for Brazil's business environment is slowly improving. Business leaders are confident that pro-business reforms will translate into long-term benefits. However, Industry Leaders proceed with caution because the country's economy has grown more sensitive to political events, which are difficult to predict and hedge against.
  • Profit margins at manufacturing companies in Argentina are coming under more pressure. The country's high inflation rate is making them making them less competitive and market share is being lost to their counterparts located in Brazil and Mexico.

Europe

  • Industry Leaders remain bullish on the European business climate. Their confidence is bolstered by strong construction activity in the region's key markets, particularly Germany where the construction sector is 'under pressure' in a positive way.
  • Last month, Industry Leaders reported that their outlook for the UK is becoming subdued and they expect sluggish growth. There are some aspects of the economy slowing down but they noted that negative widespread affects are not felt. Furthermore, they are not seeing any impact on their workforce or foreign employee applications.
  • Industry Leaders operating in the UK are repositioning their business to potentially benefit from a weaker sterling. To do this, they are focusing on building a network of local suppliers in effort to reduce their dependences on imports while expanding their export opportunities.

APAC

  • Chinese demand for manufacturing machinery over the past several months is trending positively, particularly at the premium end. Chinese companies continue to invest in technology and quality and show a preference for machines produced in developed markets in the West, notably Europe.
  • Companies in industrial heavy countries are starting to feel more threatened by the manufacturing sector in China. The technology gap between China and the West is narrowing. This, combined with the belief that the Chinese have a different view on work-life balance, could make China the preferred supplier on cost, quality and volume.
  • Companies are seeking alternative suppliers in Southeast Asia in an attempt to escape rising wage pressures in China. However, the search is challenging because it is not easy for manufacturers to relocate to these lower cost countries. It will take many years before these countries have the local infrastructure and workforce to handle both high quality and high volume production.

Middle East & Africa

  • The outlook for Northern Africa is slowly turning positive and business owners are enthusiastic. This is mainly driven by the stabilization of the Egyptian pound against the US dollar which has led to an increase in foreign investments (particularly real estate), exports, tourism and an overall improvement in the economy.
  • Businesses domiciled in emerging market countries have found it difficult to work with trusted foreign suppliers. They often ask for payment upfront and are unwilling to grant letters of credit to companies located in politically and economically volatile countries. This ultimately puts a strain on a company's finances.
  • As economies in the MENA region continue to develop, the local workforce is showing a strong preference to work in service industries. This has caused a shortage of workers in labor intensive sectors and has created the need to import workers from India and Bangladesh.

 

Sector insights

Consumer Discretionary

Apparel back in fashion

  • Due to persistent economic growth, strong employment levels and low interest rates, Industry Leaders believe that consumer discretionary budgets have increased and are once again starting to spend on apparel – previously a lower priority item.
  • B2B pricing pressure has decreased for consumer staples and discretionary products. This suggests that companies are confident that they will regain pricing power due to strong consumer demand.
  • In emerging markets with improving economic conditions and subsiding inflation, consumers have pent up demand for discretionary items as these products are now within affordability again.
  • The growing middle class in frontier markets of Africa, Middle East and Southeast Asia, offers Industry Leaders expansion opportunities. They want to reach this new customer base through web and mobile sales channels. However, they must first understand the technological limitations in these frontier markets. It is not possible to simply redeploy existing e-commerce sites and mobile apps because they often require higher processing power and connectivity.

Consumer Durables

Strong demand for diesel engines

  • News headlines suggest that auto manufacturers are making a large push towards electric vehicles. However, Industry Leaders see new investment spending, especially from large auto makers, being poured into technology that will reduce carbon emissions from diesel engines.
  • Industry Leaders said this is further evidenced by a better than expected increase in orders for diesel engine components. Their 2018 order books firming up, citing that most demand is coming from China, followed by Europe.
  • In the US, there is new activity for bigger engines and super sized trucks. This is a result of lower oil prices and US manufacturing firms making new investments in the automation of the manufacturing process.
  • Globally, order inflow for home appliances and furnishings are coming down. Supply times for polymer materials used in the production of these products is starting to normalize and moving down from an almost overheated situation.
  • Furniture and home appliance sales in Asia are doing well compared with other regions. Industry Leaders believe the region's growing middle class and investments in residential construction are supporting this demand.

Industrials

Continuation of strong orders

  • Order intake for manufacturing equipment has been very strong over the past couple of months. Demand is being lifted by increasing investments in automation as manufacturers try to fend off rising wage costs, as well as China's focus on higher quality production.
  • Industry Leaders are emphasizing collaboration within their industry vertical as new technology and the speed of innovation has, in some cases, increased dependencies across supply chains. Co-creation and communication surrounding product developments allows manufacturers to make any necessary changes to the production environment in advance. This alignment is expected to decrease costly mistakes and reduce lag time in the supply chain.
  • While technically advanced and efficient machines are on the market, they can pose operational risks for companies that operate in remote areas and lack a skilled service and maintenance workforce.
  • The above constraint can be reduced by the use of Augmented Reality (AR) on the manufacturing floor. As adopting AR can reduce dependencies on highly skilled engineers because it can be used to assist a lesser qualified worker to fix complex equipment or allow a skilled engineer to fix a machine remotely.
     

Materials

Prices lifted by demand

  • Strong sales of consumer durable and industrial products (autos, home appliances, machines) has lifted demand and pricing for aluminum. Confident that current levels will continue, Industry Leaders are willing to invest in more land and equipment to increase their production capacity.
  • Raw material suppliers are pushing aggressive terms and conditions with their business counterparts. They are asking customers to make large or full payments in advance in effort to reduce accounts receivables risk. This is mainly happening for companies domiciled in emerging markets and whose local economies are dependent on natural resources and are highly sensitive to economic fluctuations.
  • The relatively high cost of eco-friendly materials is inhibiting wide-spread adoption. Smaller companies choose to wait until their larger counterparts, who are willing and able to afford the premiums, start using these materials, and through economies of scale eventually drive prices lower.

Tech, media, and telecom

New funding methods

  • Tech start ups and growth companies say the capital raising environment remains positive, on both a private and public (IPO) perspective yet they are exploring new funding options. In some instances, companies are considering an Initial Coin Offering (ICO) which is a new form of fundraising that allows companies to raise capital without having to give up equity.
  • Additive manufacturing or "3D printing" is not yet used for large scale production, but is being used for prototyping. 3D printing enables manufacturing firms to produce prototypes within a few days rather than weeks. Ultimately, it allows them to test new products without having to make changes on the assembly line.
  • To further attract and retain customers, Software-as-a-Service companies are placing a larger emphasis on co-creating with their customers rather than trying to become experts in their business model. By helping their customers fully understand the software capabilities, they are able to use the tools in a more powerful manner.

 

Share your view

  • What do you think of the current situation in Qatar?
  • Do you think financial markets will experience a significant pull back within the next 1-2 months?
  • How will your business be impacted by data security regulations? How are you responding?
  • If you'd like to share your insights or have questions for other members, please contact SH-ILN@ubs.com
 

Networking events

If you'd like to attend an upcoming networking event, please contact SH-ILN@ubs.com

2-3 November 2017, Zurich – New technologies in the field of AI and robotics


About the network

The UBS Industry Leader Network is composed of executives and entrepreneurs of privately-held companies worldwide. Network membership is offered to a limited number of clients and prospects interested in sharing their business and industry perspectives.

Each month, this report presents the key takeaways from the conversations that network participants have with CIO.

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