After a record year of buyout activity in industrial equipment and technology (IE&T) in 2021, with some 300-400 deals above typical levels, activity returned to a more normal level in 2022.
Since 2017, the average number of deals each year has ranged from 1,200 to 1,400 and grown approximately 6% per annum. Investment in the distributors/wholesale and industrial supplies and parts subsectors accounted for nearly 60% of IE&T deals in 2022, and investment firms see clear opportunities for:
- Consolidation and rollup
- Expansion of product lines
- A new value-added services proposition from leading players
Now, in 2023, there are a number of notable trends impacting the U.S. IE&T industry that are worth watching.
Material cost and inflation headwinds — Inflation is contributing to the economic constraints of companies, with some 78% having already passed cost increases on to their customers and 50% of respondents to a survey conducted by L.E.K. Consulting saying they expect prices to continue on an upward trajectory through 2025. Among the ways companies are expected to respond to any additional potential headwinds are investing in price forecasting, renegotiating their contracts and exploring the use of new suppliers.
Lasting supply chain impacts — Given that an estimated 76% of world trade is transacted across global supply chains, which are subject to disruption from economic, geopolitical and time constraints, companies are expected to turn to nearshoring and reshoring their supplier networks as they navigate the impact of those supply chain disruptions on the industry. To ensure reliability, firms are already investing in inventory buffers, monitoring systems, parts commonality and additional suppliers.
Persistent labor shortages — Labor shortages are expected to continue; by 2030, as many as 2.1 million manufacturing jobs will go unfilled, threatening growth. As a result, approximately 80% of companies expect that they’ll need to increase compensation, provide retention incentives and open new locations to attract labor. In the meantime, training/upskilling programs will be employed to create the required talent, while tech, such as automation, will fill workforce gaps.
Acceleration of automation — In order to address core industry constraints such as labor shortages and to improve manufacturing efficiency, roughly 85% of companies expect to invest more in automation over the next three years. Over time, that increased utilization of automation will give those firms both increased flexibility and long-term cost advantages that will enable them to transform their workforces.
Continued digital transformation — As manufacturers integrate new technologies such as the Internet of Things, cloud computing and analytics, and artificial intelligence and machine learning into production facilities across all aspects of the value chain, spending on smart manufacturing technology is expected to continue.
Investment in electrification — Some 90% of companies plan to invest in electrification technology over the next three years. But in order to meet market demand, firms need to assess the shifting market trends toward electrification, the existing vs. expected product-market fit and the flexibility of production.
Continued long-term support for ESG — Some 80% of companies expect to increase their investments in sustainable products and operations as well as workplace safety through 2025. But while manufacturing executives acknowledge that environmental, social and corporate governance (ESG) improvements provide long-term competitive advantages, they are delaying investing in ESG in the near term and waiting for market conditions to improve before committing to the overhaul of their business practices.
To learn more about what the IE&T private equity landscape will look like in 2023, please be sure to download our analysis.
For more information, please contact industrials@lek.com.
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