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Investment Can Fuel Industrials’ Next Leap

Despite downturn warnings, European industrials seem strongly placed for short-term growth – and capitalizing on tech could take them even higher.

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By Sebastian Kuenne
Published January 17, 2023 | 2 min watch
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Key Points

  • The industrial sector is poised for a transformational leap in capabilities, if it can invest in the potential of artificial intelligence, robotics, and predictive analysis.
  • European industrials are well protected from the effects of a possible downturn by hefty order books.
  • Over the longer term, the prospects for industrials will be heavily influenced not just by automation and other disruptive technologies, but by the availability of critical minerals.

The segue from mainframes to computers – and then to smartphones – revolutionized the consumer tech landscape. Now the industrial sector is poised for a similar leap.

With the arrival of Industry 4.0, and the industrial Internet of Things (IoT), manufacturing could be on the same cusp of scaling that the internet saw in the last decade.

Artificial intelligence (AI), robotics, and predictive analytics can help to resolve the supply bottlenecks and logistical vulnerabilities laid bare by the pandemic. While this will require some investment, it is easy to foresee quick payback through productivity, reduced costs and working capital efficiencies.

Producers now recognize the need for faster digitization that could move them well beyond ‘smart’ manufacturing to complete end-to-end connectivity across their supply chains. This would allow for significantly richer information and flexibility.

A buffer against recession

Manufacturers of mining equipment, for example, are seeing increased demand: supplies are tight after years of underinvestment in the sector. Shipbuilders are benefiting from record freight rates. Higher oil and gas prices are encouraging more investment in that field too, albeit from a low base.

Across many industries, in fact, order books remain full, partly because sales have been held back by supply chain disruption.

In 2021, the average book-to-bill ratio for European industrials was 1.14, by far the highest for a decade. While there is no clear correlation between this ratio and organic growth, it is nevertheless true that every time book-to-bill has been above 1.02 in the past decade, next-year growth has been positive.

This picture casts doubt on the widespread predictions of downturn – and suggests many businesses would benefit from a strong buffer even in a significant slump.

While cost pressures limit the ability for businesses to expand margins, we expect good underlying demand to drive median sales growth and earnings growth of 9% for the financial year.

Copper: in demand, running scarce

Over the longer term, industrials are planning amid forces of change, such as automation, that increasingly cross sectors to influence the entire value chain.

In copper, for instance, automation trends are transforming every step: from mining and processing of the material to its applications. Copper is used in electric motors, whose performance is now optimized by automation and simulation software. A motor might then be used in the arm of an industrial robot in a car assembly plant – again, boosted by data and software.

Copper’s ubiquity in electrification makes it critical for the energy transition, so looming shortfalls could jeopardize climate goals. This underlines how important it will be to keep a close eye on future materials needs, their implications for infrastructure, and indeed how this influences and interacts with other global trends.

That’s why RBC’s Imagine research program is so crucial. Our latest report, Preparing for Hyperdrive, focuses on five disruptive themes developing on multiple fronts – offering unique insights on their potential impact on industrials and other sectors.

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