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According to the analysis, the changes are being driven by rapidly intensifying competition, a slowdown in hardware-centric innovation and the overwhelming power of digitalization to change virtually every aspect of the business.
The global industrial machinery and equipment sector is at a critical juncture, confronted by a series of disruptive forces that will require accelerated changes in the next decade. In its first Global Machinery & Equipment Report, Bain & Company analyzes the wave of digital transformation that is sweeping the industry.
The report explains how leading companies in these trends are outperforming competitors, with sales and earnings growth, as well as fueling an increase in mergers and acquisitions (M&A) and private equity (PE) deals. The document also maps out the main moves that machinery and equipment players can make in the next two to three years to address this transformational agenda.
According to Bain's analysis, the changes that are reshaping the entire machinery industry are being driven by rapidly intensifying competition, a slowdown in hardware-centric innovation, and the power of digitalization to radically change virtually every aspect of the business. The main transformation is the “beyond the machine” to the “machine as a service”. That means combining manufacturers' hardware with software, automation and services built around the machines to deliver fully integrated solutions that are precisely tailored to customers' needs — and within drastically changed new business models.
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Service-based solutions grow at a rapid pace
The consultancy's report shows how this critical shift to a digitally-enabled, service-based model of “bundled solutions” is already unfolding at a rapid pace. Bain & Company research estimates that in the industrial automation sector, where this shift is underway, the share of profits from hardware will decline from 31% today to just 23% by the end of the decade. The remainder of the profit will come from the software, services and solutions package. In some industries, companies generate more than half of their sales and 100% of their profits through services.
By 2030, Bain estimates that major machine companies will sell most equipment as just one piece of bundled solutions that include software and services, further cutting hardware's contribution to profits. In many cases, companies that make this shift have the chance to capture market growth rates many times higher than their current businesses.
Among major machinery and equipment companies, Bain & Company found that the average total annualized return to shareholders was 32% from 2019 to 2021, compared to a mere 4% among industry laggards. But most machinery and equipment companies have been slow to act, for now. The survey reveals that less than 5% of industrial companies have successfully executed a technology-based or digital transformation.
ESG Opportunities
The major transformations in the machinery sector triggered by the forces of digitization and “Industry 4.0” are only part of the story. The industry reshape also presents a huge opportunity for your companies to respond to the global push for organizations of all types to meet and master the challenges of sustainability and environmental responsibility: become more energy efficient, less wasteful and customize operations. to improve the circularity and recyclability of products.
As in other industries, machine builders are already changing operations and supply chains to reduce greenhouse gas and carbon emissions and pursue the goal of zero liquids. But for this industry, the implications go deeper. As all industries are changing, a “Great Refit” is underway as nearly every industrial and manufacturing company rethinks its operations. Machinery businesses that quickly realize potential and develop the products and services that enable customers to meet decarbonization targets are likely to gain first-mover advantage in a massive transition set to last decades rather than years, according to the report.
Supply chain shockwaves drive quest for resilience
The global opportunities to achieve sustainability goals, as well as this “Big Refit” trend, are closely linked to the challenge posed by a new era of supply chain vulnerability. Over the past two years, a series of major supply chain disruptions have hit the machinery sector, from material shortages and price fluctuations brought on by the global pandemic, to, more recently, the aftermath of the war in Ukraine. These and future unexpected disruptions reinforce and expand the market for machine builders to equip customers for the future with equipment that ensures more resilient and sustainable supply chains.
Bain & Company research shows that supply chain executives across all industries have shifted investments to prioritize resiliency and flexibility over cost and speed. Machinery companies are at the forefront of providing the tools and equipment to meet these goals, while simultaneously meeting the urgent goal of greater resiliency for their own operations. Digital tools are also important and can help organizations manage supply chain risks, improve efficiency and measure environmental impact and cost in real time.
China's industry forefront of innovative insurgents drives strategic change
While the machinery industry leaders of the next decade will move to expand their business ecosystem beyond machinery, other companies will struggle to keep up. Those who cannot climb the software and automation ladder, focus on bespoke solutions for specific “vertical” industries, and adapt to new business models will be at risk from the increasing commoditization of machines sold purely as hardware. Chinese manufacturers are rapidly developing competitive, low-cost hardware.
The competitive challenge is underscored by the reality that China is also at the forefront of broader industry trends examined in the report, with Chinese tech startups and other insurgents introducing a new generation of innovative service offerings. The Machine Commander cloud service, offered by Chinese startup Zeaho, which offers real-time monitoring of construction sites to improve equipment efficiency, is an example: it has had 135.000 units of equipment connected to its cloud-based platform for just seven years since it was founded.
To defend their turf, equipment markets are increasing investments in digital technologies and accelerating the deployment of advanced services. For example, 100% of original equipment manufacturers (OEMs) surveyed by Bain & Company plan to offer “predictive maintenance” of machines by 2024, while 95% will provide remote maintenance and new services aimed at operational efficiency.
M&A reaches highest value in a decade
The wave of changes in the machinery sector is also spurring a surge in trading as many companies and their investors reshape business portfolios in the face of evolving dynamics in the sector. Industrial machine builders have a growing appetite for big deals as they accelerate these strategies.
The jump in M&A activity means the average deal size in the sector has risen to an average of $179 million in 2020 and $161 million in 2021, breaking the downward trend previously seen through 2017.
For industry executives, M&A offers access to higher growth and strategically critical markets. These leaders are leaning towards acquiring new capabilities in software, Internet of Things (IoT), artificial intelligence and connectivity – and at higher valuations as they move to meet the challenge of industry digitization and move towards service-oriented solutions models. based business.
Sector attracts attention from Private Equity funds
As with mergers and acquisitions, the machinery industry is now among the most active industrial sectors for global Private Equity trading. Some of the biggest industrial PE deals have been in the machinery sector, such as the €17,2 billion ($20,2 billion) purchase of Thyssenkrupp Elevators by Advent and Cinven in 2020. Over the past decade, Bain & Company has discovered that these businesses generated returns 10% higher than for industrials as a whole, as demonstrated by a median multiple on invested capital (MOIC) of 2,5. In the same period, the business value of machinery companies grew 1,9 times.
PE companies are looking at opportunities to reposition the traditional machinery business amid the broad trends that are reshaping the industry. Top-performing funds are taking a holistic approach to value creation, looking far beyond cost structures to explore all areas of potential improvement, including commercial and service excellence, pricing and M&A potential.
Via Adriana Gartner – RPM Comunicação
