Navigating the Manufacturing Industry in Times of Recession

Steering a successful digital transformation in tough times depends on the right strategic choices – while major factors remain uncertain. The Digital Maturity Index (DMI) helps to identify priorities.

Feel the Urgency – A Call for Action

An impending recession and slowing economic activity dull the mood among CFOs of the manufacturing sector as they anticipate an overall negative development of the German economy. According to our CFO Survey Fall 2019, business prospects in the industry have fallen 57% compared to 2018 and are expected to lead to a 26% decline in operating margins and lower employment rates.

These trends result in a shift of the strategic focus of many manufacturing companies. Typical aspects include cost-cutting programs, the sale of existing assets and decreasing investments, while simultaneously planning to introduce new products and services. Against the background of our Deloitte Digital Maturity Index (DMI) this development is partially distressing, as the DNA of digital Champions in the German manufacturing market requires a holistic approach that balances cost pressure with the need to invest.

Future Manufacturing Business Outlook

The Issue – Decreasing Willingness to Invest in Digital Transformation

More than half of the companies in the manufacturing industry plan to
decrease their future investments. Only 4% of CFOs in our survey cite
investments as a high priority in the next 12 months. Compared to 2018 this is
a decrease of 15%, mainly triggered by the impending recession and the threat
of international trade wars. This downward trend represents a severe issue. For
most companies, the capital-intensive digital journey has already started, but
there are still areas of high improvement potential, and further investments
are needed to continue the digital path. While companies in the industry excel
in terms of collecting and analyzing data, monitoring new business
opportunities and defining clear digital roadmaps, there remain major areas of
development including continuous end-to-end supply chain digitalization and the acquisition of new digital assets.

All these measures require significant additional investment. So far, many investment decisions have already been taken within the industry, amounting on average to 12% of revenue, half of which was allocated to software and hardware to fund the increasing amount of digital services. The CFO Survey shows  that cross-industry, more than 30% of companies invest more that 16% of their revenue in digital transformation, while roughly half of them spend less. Investments in hard- and software are especially prevalent as they pay off long-term and generate increasing financial impact.

In terms of the investment amount, the industry is currently catching up with leading companies, a great opportunity to skim the first benefits enabled through digital technology. Losing this momentum due to hesitant future investment decisions could potentially erode the success the digital transformation has generated so far.

Investment Behavior Manufacturing Companies

Success Factors beyond Investments: Exploit Scaling Options

Apart from investments, successful manufacturing companies focus onscaling,  aiming to leverage efficiencies wherever possible. It is widely known that throughout decades traditional scaling initiatives proved popular and effective measures to decrease fixed costs of costly assets – an important matter for the German manufacturing industry. Generally, it seems to be the case that moving forward with traditional scaling topicsis still in vogue for the average company.

According to the Digital MaturityIndex (DMI), more than 45% of manufacturing companies are busy with shifting capital-intensive production steps to external partners, while more than 50% focus on the increase of their production footprint to exploit scaling effects for delivering their products and services. On the other hand, more innovative measures such as shared assets, lease back and vertical integration still remain rudimentary. Successful companies are determined to boost their agility by slowly turning their back on traditional scale and scope strategies, although many of those companies operate in capital-intensive industries. 

The Manufacturing Champion’s DNA – Guardrails for Success

Bleak economic prospects in the industry force companies to concentrate on the essential fields for investments; however, deciding on the right focus in times of uncertainty is tough. Analyzing the traits of a digital Champion helps identify the guardrails that guide companies in the right direction.

Research shows that Manufacturing Champions combine consistent digital strategy with operational excellence and that they are capable of managing agility and scalability in a balanced way. As the Digital Maturity Index indicates, they tend to take care to adjust their organization so as to be more data-driven and customer-centric, while reducing hierarchies and embarking on partner collaboration to drive innovation. This differs tremendously from an average manufacturing company, with typical competence deficits in areas such as innovation, partnering and agility. Most strikingly, Champions increase capital to gain change momentum and decrease capital intensity in the long term – important positives for a company’s financial health. However, this investment strategy and the associated future success of the digital transformation is currently at stake, as investment decisions are held back by 50% of CFOs in the industry, according to the Digital Maturity Index. Additionally, leading manufacturing companies accumulate significant knowledge in collecting data and performing meaningful analytics, which is the largest area of competency deficits for the average manufacturing firm, according to 48% of CFOs.

Overall, top management should consider investing the remaining digitalization budget in the innovation areas outlined above, in order to move forward towards true digital Championship and to get ahead of the competition.  

Manufacturing Champion's DNA

Benefit from the Economic Downturn - Move ahead of the Competition

Steering and managing a successful digital transformation when times get tough requires a solid transformation path that guides companies to invest wisely and achieve the ultimate goal of becoming a digital Champion. As the Digital Maturity Index (DMI) suggests, companies can benefit from the current economic downturn and move ahead of the competition, provided that digital investments are not entirely cut and spread in the right buckets. As there is no general “one-fits-all”-approach for this type of activity, the selection of the right investment mode depends significantly on a precise assessment of a company’s current digital maturity, for which the Digital Maturity Index is a valuable tool. 

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