1Roland BergerTrends in mechanical engineeringTrendsin mechanical engineering

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of managers expect a significant downturn,

which will be more L-shaped than V-shaped

78%

are actively driving digital transformation in

their businesses

72%

How to successfully navigate both challenges

Between downturn and

disruption anticipate that sales

growth in the next three years will be below 0%

and EBIT well below 5%

53%

2 Roland Berger Trends in mechanical engineering

All important economic indicators are pointing downward, and many segments of the mechanical engineering industry have already seen their order books shrink dramatically. The industry executives we interviewed also expect to have little to write home about. While they anticipate a less dramatic dry spell than they experienced in the financial crisis of 2008 and 2009, they do think it will be longer in duration. Digitalization and disruption are aggra­vating the situation, as they go hand in hand with structural changes in demand (e.g. electric mobility in the automotive industry) and new revenue models (e.g. "as­a­service" models replacing the sale of machines). All of this means that companies are faced with the challenge of putting in place adaptive cost structures and creating a sustainable business model – preferably both at the same time. To do this, they need efficient workforces and managers who are prepared to take the transformation by the horns.

In a nutshellE X P E R T TA L K

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3Roland BergerTrends in mechanical engineering

bustion engine poses major challenges for all equip-ment suppliers. At the same time, companies are compelled to invest in new technologies in spite of the drop in sales and revenues. While 78% of the managers we surveyed expect the downturn to be less severe this time, they do think it will last longer than the crisis of a decade ago (i.e. it will be more L-shaped than V-shaped). They also expect the slowdown to have a massive impact on sales and prof-itability, at least in the medium term. Indeed, this can already be seen in the 2019 business results of many companies (see infographic p. 4).

Mechanical engineering has always been re-garded as the economic barometer for the health of the manufacturing sector. At present, the industry is giving little cause for optimism: the boom times of past years have come to an end and the downturn has long since gripped many a player (see infographic below). Particularly hard hit are companies in the automotive sector whose business is highly depen-dent on conventional drive systems.

Their example shows that the general econom-ic slowdown and falling investments are joined this time by the challenges of far-reaching structural change. The gradual substitution of the internal com-

After years of growth, the economic downturn is impacting the sector

Nominal GDP growth in OECD countries1

Global growth rate of revenues in mechanical and plant engineering

Global ME growth rate by revenue

8.4%

4.3%

3.9% 4.6%3.1%

4.0% 4.0%4.1% 3.3%

-1.9%

9.4%

22.6%

13.6%

-0.6%

5.1%3.9%

2.7%

-11.9%

2008 20122010 2014 2018

Outlook

2016 2021

?

2019

Between economic crisis and disruption

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-2.4%

4 Roland Berger

Many industry players have successful years behind them. Isn't the mood significantly worse than the situation on the ground? It's true that most companies are in a much better position than they were going into the financial crisis ten years ago because of the larger financial reserves they have. But we think the dry spell will last longer this time, and besides that, many firms have not done their home-work on digitalization.

What do you advise companies to do? They have a balancing act to pull off: they must adjust their structural costs while simultaneously investing in new business areas. This means they need a "weatherproof" core business with adaptive struc-tures, and they also have to address the big topics of the future actively now, such as industrial automation and digital transformation. What that requires is for companies to invest in digitalization, test new business models and grasp industrial automation as an opportunity.

What does this mean for managers? The am-bivalence of the topics makes things very complex. On the one hand, it is far from easy to implement tough cost-cutting programs and at the same time drive forward visions for the future. Although the crisis of 2008–2009 also saw cuts, the turnaround came relatively quickly and the focus was again firmly on growth. On the other hand, this time it is particularly important not to lose your top perform-ers in spite of all the cost cutting, because the suc-cess of the transformation depends on the perfor-mance, and indeed the performance culture, of your managers and workforce.

Expert talk W I T H M A R C U S B E R R E T, S E N I O R PA R T N E R

"The industry is also struggling with homemade problems: high costs,

lack of mid­end offerings, lack of systems expertise and poor posi­

tioning in key regional markets."

D R . G E R A L D O R E N D I , S E N I O R PA R T N E R

The industry sees a gloomy future ahead

The downturn has arrived or will begin in the near future

and take an L-shaped rather than a V-shaped course.

The downturn will not be as rapid and severe as it was

in 2008, but it will have major structural consequences.

Overall, profitability (EBIT) will fall to a level

below 5% over the next three years.

The need for adaptive cost structures is high.

The average revenue growth in the industry

will be below 0% over the next three years.

78% 69%

52%

86%

53%

Selected findings of a survey of more than

300 managers from D, A, CH, I, China, USA, conducted in the third

quarter of 2019

Marcus Berret heads Roland Berger's Industrial Products & Service Team. You can

reach him at marcus.berret@rolandberger.com Phot

os: R

olan

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5Roland BergerTrends in mechanical engineering

Phot

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Many mechanical engineering firms have not done their home­work on digitalization

6 Roland Berger Trends in mechanical engineering

Performance cultureCost structures

Business model

Three levers to tackle the crisis

1. Cost structures Classic cost reduction pro-grams (e.g. SG&A) will often be unavoidable due to the scale of the market downturn. In addition, many me-chanical engineering companies have by no means exhausted classic efficiency-enhancement measures such as supplier management, modularization and standardization. But it may be difficult to address these during a business downturn. Even sales and engineering must be clearly geared toward standard-ization. It's also important to build early indicators into business plans to allow for a rapid change of tack. Data from incoming orders or end customer marketing trends provide good starting points here.

2. Performance culture The war for talents is getting tougher and tougher. The labor market offers the top engineers and managers of the future so many opportunities – especially outside of the traditional industries. Companies should increase the number of training places they offer, strengthen the sense of

community responsibility and use incubator models embedded in their organization to make themselves more attractive employers. They also need a more distinct performance culture to successfully address their structural challenges. The right mix of incentive systems is crucial.

3. Business model Disruption from structural change and new technologies combined means that companies are confronted with the task of evolving their core competencies even as they gear their orga-nization up for digitalization. There is still a great deal of reluctance to test innovative business models, and many of the investments appear to have hardly any overlaps with companies' existing strengths. Alliances can help players become more innovative and cost effective with the help of partners. Overall, the transformation of the business model from systems provider to solutions provider will continue.

7Roland BergerTrends in mechanical engineering

Bottom lineWhether still operating at full speed or already feeling the pain of the economic downturn, mechanical engineering companies must now adjust their struc-tural costs. Among other things, this requires an even stronger focus on stan-dardization and modularization. At the same time, companies should further differentiate their portfolio in the direc-tion of digital business models and new offerings, because conventional growth strategies will no longer be suc-cessful in all segments going forward. Even a single-minded focus on cutting costs and safeguarding financial re-sources is no longer enough. If you want to secure your business long term, you have to take a proactive approach to disruptive trends. In the process, it's important to spread your risks as widely as possible, which you can do through partnerships. Carve-outs could also be considered. Every company is differ-ent. That's why each one needs an individual solution.

Success factors in mechanical and plant engineering:

Findings of our survey

Rapidly reduce operating costs

Implement adaptive cost structures

Top 5 71%

Focus on core competencies

69%

Enhance the performanceculture

59%62%

Exploit the potential of industrial automation

66%

"Players must now tackle issues like standardization and

process streamlining end to end. This can result in a complete

re­engineering of the previous value chain model."

S V E N S I E P E N , S E N I O R PA R T N E R

Publisher

ROLAND BERGER GMBH

Sederanger 180538 MunichGermany+49 89 9230-0

www.rolandberger.com

Phot

os: R

olan

d Be

rger

Gm

bH

Further information on carve­outs and #OPERA 2030 available here

This publication has been prepared for general guidance only. The reader should not act according to any information provided in this

publication without receiving specific professional advice. Roland Berger GmbH shall not be liable for any damages resulting from any use

of the information contained in the publication. © 2019 ROLAND BERGER GMBH. ALL RIGHTS RESERVED.

Contact details

Marcus BerretSenior Partnermarcus.berret@rolandberger.com+49 160 744-7419

Dr. Gerald OrendiSenior Partner gerald.orendi@rolandberger.com+49 160 744-2199

Sven SiepenSenior Partner sven.siepen@rolandberger.com+41 79 7927374

Oliver HerwegPartneroliver.herweg@rolandberger.com+49 160 744-8322

Jan­Oliver SestakPrincipal jan-oliver.sestak@rolandberger.com+49 160 744-3490

USAOliver HazimehSenior Partneroliver.hazimeh@rolandberger.com+1 734 276-3446

ChinaAlex XuSenior Partneralex.xu@rolandberger.com+86 133 8178 3056

ItalyFrancesco CampagnaPartner francesco.campagna@rolandberger.com+39 335 6669518

SwedenHauke BossenPrincipalhauke.bossen@rolandberger.com+46 721 518098