2016 Industrial Products Industry Outlook

In 2016, industrial products firms facing market pressures will likely seek to evolve their position in the industry, among other strategic initiatives, according to Joe Zale, a principal at Deloitte Consulting LLP.

Where do you see the opportunities for growth in your sector?

Zale: The Internet of Things, whereby sensor technologies are embedded into products, presents both a huge opportunity and a conundrum for industrial products manufacturers. These technologies can support better manufacturing plant productivity by allowing firms to more actively monitor and optimize plant, asset, and supply chain performance. For example, more advanced practitioners are directly linking RFID sensors, which can track parts performance and wear and tear, with order fulfillment systems that automatically coordinate ordering, delivery, and technician visits. Some companies are employing sensors that monitor consumable products and send information directly to ERP systems to automatically trigger reordering and billing.

This proliferation of smarter products, combined with enhanced communication infrastructure, is providing industrials with greater volume, velocity, and variety of information. Firms are using insights gleaned from this data to not only increase aftermarket productivity and enhance operations, but also to improve product lifecycle management and, in some instances, commercial arrangements. For example, firms that provide equipment used in production processes are increasingly packaging their offerings to include performance commitments. According to these commitments, if performance stays within an agreed-upon range, the provider will receive a performance bonus, while performance outside the range generates penalties for the provider. The use and application of analytics increases product manufacturers’ confidence in both committing to these arrangements and in delivering offerings in a cost-effective manner.

What issues should businesses consider as they plan for growth?
Until recently, industrial products firms focused on attracting, recruiting, retaining, and training hardware engineers. Advanced technologies are creating demand for employees who understand traditional hardware and are also familiar with software and programming. Several large industrials have already established software divisions and are dedicating themselves to hiring for different skills sets than in the past.

Another challenge facing industrials is uncertainty in the energy sector. Oil and gas prices have fallen to historic lows in real terms,which has slowed the growth that had been generated by the steady expansion of offshore oil shale drilling. Similarly, in the broader energy segment, utility markets are facing longer-term disruption: Power generation and storage are becoming more decentralized, and customers have an increased number of options and can more directly influence demand swings. These trends present opportunities for industrials to gain access to assets at depressed rates and new markets, but firms will also need to sharpen their decision-making and ensure they are properly considering any associated risks.

What is the next big thing? What markets do you see emerging in the sector?

Supply chain management has been, and will continue to be, a key challenge for industrial products organizations. While many firms have gone to great lengths over the past several years to increase supply chain efficiency, a consequence has been increased complexity. The time has come for firms to step back and reconsider operations and assess if the savings they are achieving on materials and labor justify the coordination and oversight costs. Expect industrial products firms to consolidate in an effort to control their supply chain, and to better balance simplicity and production costs.

Due to changes in global markets, I anticipate we will see new customer markets emerge, but they won’t be the usual “new market” suspects. It’s safe to say the bloom is off the rose for China, as the country’s economy is transitioning from unsustainable double-digit growth driven by investments and exports to a much more balanced economy based on domestic consumption. For years, China has built up excess capacity in core infrastructure sectors, such as steel and construction materials, which are major end-market consumers of industrial products. As a result, China’s slowing economic growth is having an adverse effect on the industrial products sector. Similarly, Brazil is fraught with challenges that will influence the market outlook for U.S. industrial products firms. Private consumption in Brazil contracted for the first time in a decade and is expected to do so again in 2016, as high inflation, tightening credit availability, a deteriorating labor market, and corruption issues slow infrastructure investment.

As a result of these challenges, sources of industrial growth in the near term are more likely to come from Southeast Asia, India, the Middle East, and Eastern Europe.

Challenges and uncertainties in the industrial products sector create potential opportunities for these firms to evolve and change their position and role.

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