Key challenges for industrial businesses
The key challenge for industrial businesses has been responding to inflation and rising input costs. Businesses have experienced significant increases in energy and raw materials costs in combination with pressure on wages due to skills shortages and cost-of-living challenges. Going forward, these challenges will remain, but demand will wane for many products and services as the forecast recession takes effect and public spending is squeezed.
Rising energy costs are well-documented; however, for many large consumers the protection from hedges will dissipate over the next 12 months, raising pressure on costs and prices. Assuming the conflict between Russia and Ukraine persists, the cost of energy is unlikely to change in the short-term, but it will incentivise investments in alternative energy areas like renewables and hydrogen.
Labour availability in some sectors has been impacted by Brexit, but the largest factor creating shortages has been the many people who left the sector during the pandemic and never returned. Additionally, there is a society-wide desire to work more flexibly — this translates well to office-based jobs for which much of the day-to-day work can be done equally well from home or the office. But for occupations in manufacturing and construction, this isn’t a viable option, and the resulting lack of skills and availability in the workforce is driving wages up.
However, even with these current headwinds, some companies will succeed. Raw material producers, such as oil and gas companies and miners, clearly benefit from the increase in commodity prices, although governments continue to consider the use of taxes to level this up.
Outside of raw material producers, the secret to success will be the ability to pass on price rises, depending on sector and product. In this time of inflation, ultimate exposure to consumer discretionary spend can bring vulnerability, with the automotive market and housebuilding being clear examples. For manufacturing businesses, where demand for their products stays relatively resilient, there remains a good opportunity to pass on price rises to customers; for example, bulk cement manufacturers are seeing costs rise while investment in large infrastructure projects continues to underpin demand.
In addition to supply and demand dynamics, there remain a number of structural tailwinds that point towards potentially attractive areas for industrial businesses. Participating in products and services to improve sustainability will continue to be in demand, especially in relation to accelerating the energy transition and underpinning the circular economy. Productivity improvement enablers like automation and robotics will also continue to be sought after.
“Resilience is everything, and understanding the changes coming and what they mean for your business are the best way to build it.”
— Jeremy Wheatland, Partner, London
How we are helping clients
We are helping our clients rise to these challenges and develop strategies to grow and succeed.
One way we do this is by helping them assess and predict demand in light of the changing macro environment. Having a clearer view of likely demand and competitive scenarios allows us to help optimise costs, resources and footprint to maximise the resilience of the business and enable it to exploit new opportunities.
We have several strategic and performance assessment tools at our disposal to support clients; however, we are finding that the use of data and analytics to create a digital twin of the business is a powerful way to assess performance improvement opportunities under different scenarios. This allows management teams to prioritise activities and focus scarce resources to maximise value.
The year ahead
The fundamental question for everyone is: How will the market evolve and stabilise? What actions should I take now to prepare for new opportunities and a future market upturn?
In times like these, balance sheets matter more than ever. Those that have the resources to carry on and to invest through the cycle in areas such as sustainability and energy transition will ultimately win out.
The single most important thing for the year ahead is resilience. To build resilience, you need to understand the changes that loom ahead, predict when this change will happen and put processes in place that allow you to adapt to these varying circumstances.
Why L.E.K.?
In times like these, you need a partner who is analytically robust and able to support critical decisions with rigorous assessment. You also need a partner with deep experience and a long track record across sectors and geographies and the time to bring real expertise to bear. Our combination of these factors gives our clients the advantage they need.
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