Assessing the Situation in the High tech industry
In addition to the challenge of structural change, companies face production downtime, a slump in demand, unstable supply chains, and a faster pace of business transformation.
The coronavirus crisis has placed high pressure on companies in mechanical and plant engineering as well as the high-tech sector. The latter has been subject to recession for the past two years due to reasons such as political developments, trade conflicts, and the repeatedly postponed Brexit process. Now carmakers, aircraft manufacturers, suppliers, and producers of consumer goods are slowing down production, which is having an increasing impact on companies connected to the industry.
According to some estimates, the pandemic will cause what was an approximate decline in sales of 5 percent at the beginning of the year to spiral to as much as 30 percent for around two out of three companies in 2020. The actual decline in sales will depend to a large extent on when companies can return to normal.
On the one hand, businesses are facing a massive drop in demand, while on the other hand orders are being canceled and investments in new machines and systems postponed. The associated slowdown in production, the underutilization of staff, and a drop in liquidity will lead to the prospect of necessary cost reduction measures and restructuring in companies. One way to achieve this is to increase efficiency in value creation with a cost reduction program and process adjustments that are tailored to specific business areas.
In a VDMA survey, 84 percent of respondents stated that their production processes have been disrupted in part due to outstanding deliveries and missing parts. This makes it all the more important for companies to model a supply chain (often affected by massive disruptions in recent times) in such a way that nothing can stand in the way of a rapid ramp-up and stable production when systems are back up and running after lockdown.
At present, it is impossible to predict how long the issue of coronavirus will cast a shadow over industry. Cautious forecasts predict a return to last year’s level in 2021–22. Companies can use this time to position themselves in the market through the flexible, carefully considered use of investment with regard to relaunching business and developing areas for the future.
In our view, the focus is on three topics:
- Streamlining costs to ensure liquidity and investment
- Safeguarding and realigning suppliers and the supply chain
- Accelerating business transformation
Streamlining costs to ensure liquidity and investment
The full extent of the crisis in the mechanical and plant engineering sector will only become apparent in the coming weeks given the delay caused by a large proportion of long-term orders. In order for companies to secure liquidity without stopping necessary investments on an ad hoc basis and without due thought, it is necessary to adapt cost structures in line with the current situation.
One possible instrument is reduced working hours, which allows companies to lower staff costs in the short term and to secure liquidity without a long-term effect. In order to achieve sustainable solutions, it is possible to adapt processes that do not add value as well as cost and staffing structures. The focus should not be on structural elements alone, but should also take the change process and employees into account. At the process level, efficiency gains only lead to success if the overlying structures are optimized.
Especially in present times, it is crucial to take action in order to boost efficiency in areas such as production, administration, and logistics. Doing so should secure a competitive advantage for the post-coronavirus return to work thanks to balanced cost structures, accelerated processes, and the manufacture of high-quality products.
Safeguarding and realigning suppliers and the supply chain
During the coronavirus crisis, weaknesses became apparent in the supply chain and supplier management even before orders slumped. This has affected a large number of companies. In Italy alone, lockdown and a standstill among suppliers led to disruptions in production for many European companies, for example in the precision engineering and metal parts sectors.
According to a VDMA survey involving around a thousand companies in March 2020, some 60 percent claimed that they had already been forced to deal with compromised supply chains. About two-thirds of the remaining companies expect adverse effects in the next few months. To address these bottlenecks, it is advisable to spread the risks associated with supply chains more broadly, moving away from single sourcing where possible and getting several partners on board.
It is not so much about questioning international supply chains in general, but the processes behind them. These need to be made more transparent and coordinated more effectively. One challenge on this front is to abandon traditional ways of thinking, tracking a supplier network and a supply chain using cockpit tools to identify risks early and to react to them. A possible solution is a sourcing strategy that breaks away from the traditional supplier–customer model in favor of agile networks and cooperation at a higher level. Since the crisis has been merciless in exposing the weaknesses in supply chains, it is now time to begin the search for additional suppliers and to establish a supply chain network.
The aim is to achieve a high level of supply chain stability in the future so that prompt action can be taken to counteract disruptions through a cooperative supply chain network.
Accelerating business transformation
Crises such as the coronavirus pandemic have always been a driver for change and the departure from standard practice. It is already clear that a lack of digital competitiveness among some companies will have to be tackled faster than planned due to the crisis. In that sense, digital technology will be one of the winners of recent developments.
Despite current tensions, it is advisable not to stop investments in strategic areas that promote digitization and automation, among other things, but to continue these in a focused and reflective manner, separating them entirely from cost-saving measures. In our experience, it is beneficial to create a transformation road map in order to make the right decisions. This should set out and evaluate issues associated with digitization and automation while establishing priorities.
For example, the change to software as a service (Saas) that has already been experienced in the software industry can now be approached on an increasing scale in the high-tech sector, allowing companies to secure a constant stream of income in addition to revenue from traditional products.
Furthermore, RPA (robotic process automation) is gaining a foothold in administrative company departments so that processes can be easily automated, saving labor hours.
Use the time created by this turbulent period to position your company for the post-corona world and ensure a head start on the competition!