In this by-lined article, James Hardie, Business Development Manager, Siemens Financial Services in the UK, will look at the benefit of digitalised technology and how turning to specialist private finance can help manufacturers prepare for post-pandemic recovery.
While a natural decline in demand for equipment was expected following the industry peak of 2018-19,[1] the manufacturing industry could not have anticipated the impact of Covid-19 and its economic aftermath. The business implications of the pandemic, including the disruptions resulting from factory shutdowns, workforce and product shortages have been particularly difficult on companies in advanced industries given their global reach and the complexity of their multitiered supply chains.[2]
To deal with supply chain disruptions or lowered production capacity, many manufacturers have had to pivot their processes to meet fluctuating levels of demand. Under these conditions, manufacturers with higher levels of automation continue to find themselves at a clear advantage compared to their counterparts when the crisis hit. More automation has reduced the impact of lockdown conditions on staff shortages, for instance. Furthermore, through the use of ‘digital twins’, fully automated manufacturers have been able to simulate coronavirus impact scenarios and react quickly and effectively to volatile situations.
Investing in new equipment is a necessity to accommodate new packaging needs in line with fast-changing patterns of distribution and consumption. For instance, the recent rise in demand for foods rich in Vitamin C[3] during the pandemic has created challenges for relabelling and repackaging and put considerable strain on packaging companies. Automated packing lines which can react with agility to ensure the safety of food handling are increasingly being deployed by innovative businesses as a means to keep pace.
It is widely agreed among global analysts[4] that maintaining levels of investment in new technologies is critical even in times of economic hardship. Increased agility, productivity and lower energy consumption are among the benefits. Transitioning towards automated and digitalised equipment can better position businesses hoping to bounce back from the crisis and minimise future disruptions to their processes in the uncertain future. While some cautious companies may look to the current economic outlook and consider deferring investments, this goes against historical evidence of successful business strategies during previous crises. In fact, previous research from Siemens Financial Services (SFS) has shown that manufacturers can stand to gain an additional 6.3 – 9.8% of their annual revenues from bringing digitalisation into their manufacturing operations.[5]
The pandemic has, however, impacted profits and liquidity for many manufacturing firms therefore inhibiting investment. Improving cash flow wherever possible is a must. This is why many firms are increasingly turning to specialist private finance in order to invest in new equipment and technology without using up their own valuable capital. Outcomes finance is an effective alternative method of funding equipment and technology investments and upgrades. Such financing techniques spread the cost of technology over an agreed financing period, whereby the customer’s monthly finance payments can be aligned with expected benefits gained over time from new/retrofitted equipment, such as improved productivity, operating cost savings, energy efficiency and access to new markets. This removes the need for a large initial outlay and leaves existing funds available for other expenditures. Financing arrangements can also cover other costs such as installation, as well as provide flexibility to upgrade technology in line with developments.
Furthermore, while generalist financiers may lack comprehensive technical knowledge to fully evaluate the impact a potential investment can bring, specialist financiers active in the manufacturing arena are able to understand the technology, its potential future value and its practical application. This comprehensive understanding of the financed equipment and technology enables specialist financiers to determine appropriate and tailored financing solutions that meet the manufacturer’s specific needs.
In the case of equipment manufacturers such finance arrangements can serve them both as end-users when seeking to upgrade their own equipment, but also as a sales aid vendor financing solution for their customers. Many equipment manufacturers may be focused on the technical side of business operations but there is a dual potential to be drawn from integrated finance arrangements. Being under pressure not simply to offer high performance digitalised technology, it can be their customer value proposition that makes it easy and commercially sustainable for them to upgrade their equipment and systems. Having used asset finance to secure their own equipment, they can personally promote integrated finance to their customers. Such an offering can streamline business interactions and act as an enabler of sales activity. Moreover, having finance as an embedded part of their solution allows equipment manufacturers to capture more sales as the process is simple and easy to conclude, while their own personal experience with the process speaks to clients.
As the crisis continues to unfold, manufacturers must grapple with the consequences for their industry. Investing in and acquiring smart equipment will be vital to providing manufacturing firms with the business agility required to survive and thrive a second wave. As well as turning to specialist finance as a means of accessing investment, equipment manufacturers are increasingly using integrated finance options to speed up the digitalisation journey for their customers. By using flexible financing, manufacturers and their customers have the opportunity to benefit from the investment in equipment and technology straight away rather than delaying their acquisition, and through that timely investment gain an important competitive advantage.
[1] Industry Europe, Corona Crisis To Wipe 4% Off Construction Equipment Production, 4th April 2020: https://industryeurope.com/sectors/construction-engineering/corona-crisis-to-wipe-4-off-construction-equipment-production/
[2] McKinsey, Coronavirus: A response framework for advanced industries companies, 19th March 2020: https://www.mckinsey.com/industries/advanced-electronics/our-insights/coronavirus-a-response-framework-for-advanced-industries-companies
[3] CNN, Orange juice sales are soaring during the pandemic, 9 Apr 2020
[4] See Bain & Co., Beyond the Downturn: Recession Strategies to Take the Lead, 16 May 2019
[5] Siemens Financial Services, The Digitalisation Productivity Bonus in the UK, What value does digitalisation offer Food & Beverage manufacturers, 2017