Tue, Dec 12, 2023

Challenges and Opportunities in the Industrials Sector: Real Deals Interview

Kroll managing directors Dafydd Evans and Paul Teuten discuss the significant logistical and macroeconomic challenges facing the industrials sector and how businesses can thrive nonetheless.

How Would You Describe the Industrials Sector at the Moment?

Paul Teuten: Trading is difficult for many manufacturing companies at the moment due to the impact of inflation on their input costs and how this is reflected in their pricing strategies. For those with real differentiation in their products and pricing leverage, they can pass on price increases to their customers and preserve or enhance their margins, but not all are in the position of being able to do this. In transactions, this is a real focus of due diligence for buyers or investors, with a corresponding impact on appetite and valuation. The sector is also under pressure because technological progress is happening so quickly, changing the way companies make or deliver products and the value-add of their products to their customers. This is a real challenge but also an opportunity.

Dafydd Evans: It has been a difficult couple of years in the industrials sector overall, but it is on the road to recovery. The sector has experienced several pinch points in the supply chain.

Coming out of COVID-19, there were human resourcing challenges as clients looked to increase headcount in line with growing demand. In some cases, our clients rehired former employees to increase capacity and fill operational gaps.

While this issue is beginning to ease, companies are currently exploring how to increase automation and streamline processes to reduce reliance on headcount; this can require a large capital investment in a period of high interest rates and difficult macroeconomic conditions.

Sourcing raw materials has also been difficult. An industrials business can only move as quickly as its slowest supplier, so there continues to be a real drive to de-risk supply chains. To give you an example, I have heard that a major aerospace business is keeping new aircraft on the assembly line because it is waiting for parts from a regional UK supplier. This is a key theme across aerospace and defense, and elsewhere in the sector.

How Much of an Issue for the Sector is High Inflation?

Evans: Commodity prices have risen significantly in the past few years, but things have evened out a little during recent quarters. However, the titanium industry, for example, has been dominated by a Russian supplier and, given the war in Ukraine, buyers are now looking for alternative sources, making titanium a very expensive material. This has had a knock-on effect across multiple industries including aerospace, defence and power generation.

Teuten: For most companies that we work with, low cost/low price is not the determining factor of success. Due to the shocks we have had in recent years, there are often more important considerations now than price, such as quality, availability, reliability and service. Customers are much more prepared to pay for a quality product supplied on time.


"The sector is also under pressure because technological progress is happening so quickly, changing the way companies make or deliver products and the value-add of their products to their customers."

— Paul Teuten 

How Are Decisions About Tax and Government Policy in General Affecting the Sector?

Evans: The potential UK election in 2024 is causing several British industrial businesses to think about seeking investment now. You will have seen that the Chancellor’s Autumn Statement on 22 November committed to cut tax and back business.

Teuten: For me, the issue is more investment incentives rather than any tax burden. The global playing field in this area is not level. A lot of investment is going into the industrials sector in the US, for instance, thanks to measures such as the 2022 Inflation Reduction Act.

With much larger subsidies and incentives available, British and other European companies are readily looking to invest in the US market – why not put your next factory in America if you can get a $30m (€28m) subsidy?

Are We Seeing an Era of Increased Protectionism? What Does This Mean for the Sector?

Evans: In the UK, we have experience of getting approval for transactions under the 2021 National Security and Investment Act, which came into force in January 2022 and regulates M&A in key industries, such as nuclear energy or defense.


"An industrials business can only move as quickly as its slowest supplier, so there continues to be a real drive to de-risk supply chains."

— Dafydd Evans 

Teuten: It is not just the UK and the US; other countries are also protecting their national interests, often defined quite broadly. If you couple this with the current supply chain issues, the situation is completely different from the old days when we were focused on globalization and this was a major driver of deals. Today, conversations are about ‘national solutions’, ‘national champions’ and onshoring. As a result, many UK transactions are motivated by expanding in the UK, or having a solely British supply chain.

Turning to Opportunities, How is the Sector Benefiting From Technological Innovation and What Part is ESG Playing in Driving This?

Evans: Government money going into industrials to support carbon-neutral targets is driving technological change in the sector. It is also seeing innovations and investments in repurposing and recycling.

A few UK businesses have been acquired by large European and US strategic investors during the past 24 months, which are focused on working with aerospace or automotive parts suppliers in this way, and they are trading at very high multiples.

Teuten: Today, ESG in the industrials sector is not just about a company’s incidental processes. It is embedded in what a company does and produces, and is at the core of the business model and strategy. The more companies embrace the connection between their technology and ESG, the higher their valuations will be. This is not artificial inflation; these companies are more successful. They are winning more work and doing it better, precisely because they are in tune with both the latest technologies and ESG principles.

Evans: Despite the challenges we have discussed, the UK industrials sector is seemingly on a more stable footing. Supply chains are improving and, while lead times remain longer than hoped, businesses can forecast with increased accuracy. This in turn has brought renewed confidence and a willingness to invest in the sector.

Read the Full Interview

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