The COVID-19 fallout is unprecedented. With more than half of the world’s population forced into lockdown and countries struggling to get a grip on the fast-evolving health crisis, the economic implications of the pandemic have started emerging in the form of muted growth projections and unemployment levels unheard of since the Second World War.
Businesses across industries are implementing risk mitigation strategies to minimize the impact of the looming slowdown with economies and industrial production coming to a near-standstill. Besides, restrictions on the movement of people and goods have disrupted global supply chains, which have further exacerbated the issue for many sectors, including the industrial and heavy equipment sector. However, as we eventually begin rebuilding the global economy, this sector will play a key role, and the relative lull at the moment would be an excellent time to think about ways to prime the industry to rise again.
Economic Uncertainties and Market Realities
Before we get into specifics about how the industrial and heavy equipment sector is likely to be transformed and what OEMs will need to do, it is vital to weigh in on the economic uncertainties and market realities at play.
Fall in public spending and demand
As governments prioritize health and social welfare during such trying times, public spending on construction and development of infrastructure will slow down. And since government contracts form a substantial portion of business for developers, this could have a debilitating effect on the sector. On the other end of the spectrum, the widespread lockdown could cripple farmers and small business owners, particularly in emerging markets, plunging them into a liquidity crunch or, worse still, drive them to insolvency. This double blow from institutional customers and end-buyers could translate into a massive drop in demand for OEMs.
Disruption in global trade and supply chain
Despite the local nature and application of heavy equipment, the value and supply chains of OEMs in the sector are fairly complex and distributed across the globe. The lockdown has restricted the international movement of non-essential goods and resources, which has put the brakes on the manufacturing of heavy equipment across the board. Similarly, the closing of ports has disrupted global trade in the agricultural and food sector, and with the perishable nature of their goods, there is very little that the farmers can do. This, without a doubt, will have a cascading effect on equipment manufacturers.
Imbalance between production and the workforce
As discussed, current demand for industrial equipment has or is likely to flatten over the second and third quarters of 2020. As we set off on the road to recovery, demand in the months to follow will remain volatile due to the uncertainties. It is expected that months with intense demand will be followed by notable reductions, and so on. To stay profitable, businesses will need to scale-up or scale-down production to match demand. And to do this effectively, OEMs will require a stable yet flexible workforce that can operate and deliver from within the regulatory constraints that exist or will continue to exist.
Adapting to the Future and the New Normal
Given the mission-critical role of the industrial and heavy equipment sector in recovering from this slump, it is going to be imperative for OEMs to take measures to ensure that their operations and workforce are up to speed in the weeks and months to come.
Flexible and responsive workforce
The health risks associated with the pandemic will change the way we work and how the workforce is structured. This, coupled with fluctuations in demand, will require companies to have a flexible and responsive workforce. Additionally, since the lockdowns have enforced remote working, we can expect this trend to extend to functions that were earlier considered too sensitive. However, for that to be effective, businesses will need robust systems and processes conducive to the new physical and virtual work environments.
Redesigning the supply chain
The globalized nature of operations in the sector, including distributed manufacturing and sourcing of inputs as well as lines of communications, have been disrupted either due to internal decisions or regulatory restrictions enforced by governments. As operations resume, OEMs will need to redesign their global supply chains and optimize it for the new operational realities. From assessing current product designs to evaluating the cost and type of components, to finding alternatives that meet the specifications, the supply chain processes will need to undergo an overhaul.
Hedging global supply risks
In recent years, the industry has seen an increasing trend in offshoring production and sourcing to markets such as China that offer a distinctive cost and labor arbitrage. However, the pandemic has revealed the systemic risks due to concentration on one or two countries. As we move forward, we anticipate OEMs to hedge this risk by shifting some parts of their industrial base from China to other emerging markets.
Deployment of new technologies
Because of the way operations are currently designed, there is a heavy reliance on mobilizing people for field tasks such as maintenance and reporting. And while we have seen an increase in the use of GIS and related technologies, this slowdown will accelerate the use of IoT, connected equipment, and emerging technologies that will enable functions such as predictive maintenance and optimize the use of field technicians. Enhanced remote working capabilities and semi-autonomous assets will help companies remain resilient in not only situations like this, but also during other breakdowns and disasters.
As the fog lifts from the impact of the COVID-19 pandemic and the environment stabilizes over the next few months, OEMs will look at scaling up production rapidly to make up for the lost time and catch-up on orders that have fallen behind during the lockdown. To accelerate the process, companies should consider collaborating with partners to split the product development process and play on their respective strengths to get back on track at the earliest.
For more than 25 years, Cyient has partnered with leading industrial OEMs to help them solve complex business problems by leveraging technology and our deep domain expertise. In keeping with that, we have also rolled out an enhanced business continuity plan that allows our diversified global workforce to continue working securely and productively. As the world gradually determines what the “new normal” will be, we remain committed to helping our customers and designing a better tomorrow together.