Machinery & Equipment Sector Report & Analysis

Elevated backlogs have provided production stability, but new orders and revenue will continue to be threatened by the economic uncertainties

SENSITIVE RISK FOR ENTERPRISES

Last Update: July 2024

Strengths & Weaknesses

High barriers to entry since a lot of investments in technology and capex need to be made in order to keep up with innovation and expansion.
Strong long-term growth potential in robotics and process automation. The adoption of Artificial Intelligence (AI) is expected to further expand demand for smart and cutting-edge machinery.
Companies with exposure to AI and automation will continue to have pricing power, given the limited offering amid surging demand.
Revenue diversification: Very heterogeneous clients and end-markets, serving companies and people in all regions and all kind of industries.

Cyclical sector, with companies are hit hard during recession periods due to falling demand and lower prices.
Complex and fragmented supply chain, which makes the sector highly vulnerable to supply disruptions or bottlenecks.
Capital-intensive sector, with large investments and R&D expenditures necessary to expand business and offer new products that adapt to new client needs in each end-market.
Susceptible to commodity access and prices since metals such as aluminium, copper, steel and nickel are heavily used for machinery building.

Sector Overview

What to watch ?

Global economic outlook: Macroeconomic conditions have slightly improved from 2023. However, the global economic recovery remains relatively slow, with global GDP expected to grow only by +2.8% in 2024 and 2025, which could put the sector’s growth at risk in the short-term.
Industrial policy: Industrial policies and subsidies are back with a bang, especially in major economies such as the US, China, India, Germany and Brazil. Governments are increasingly getting involved in setting industrial priorities and supporting strategic industries through subsidies to promote innovation and technology diffusion.
Business confidence and manufacturing index: As indicators of future development in manufacturing businesses, both are key to predict the evolution of the sector in the short-term. So far in 2024, manufacturing confidence and PMIs have been gradually improving from last year’s low, but current levels are not very promising.
Improved supply chains: The supply-chain bottlenecks observed over 2021 and 2022 eased throughout 2023 as global trade was broadly muted, with transported volumes falling considerably. This has been very positive for machinery producers, who used to be highly dependent on parts suppliers from all over the world.
Commodity prices: Prices of most metals have gradually declined over 2023 (from the peaks of 2022) due to the gloomy economic outlook. However, there is still a lot of price volatility in the spot market. While steel and nickel prices have corrected significantly, aluminum and copper prices have been climbing recently. These cost fluctuations could have considerable repercussions on the sector's margins in the short-term.
Disinflation: Concerns around persistent inflation have been declining as some improvements have been observed on both sides of the Atlantic. In the US, we expect inflation at 3.0% in 2024 (from 4.1% in 2023) and in the Eurozone we expect 2.4% (from 5.4%). Nevertheless, higher-for-longer interest rates could affect companies’ financials as this sector in particular tends to be highly leveraged.
AI adoption: Big players in the sector have started to implement AI and machine learning in their production processes. With all sectors looking for efficiencies, being able to bring to the market leading edge machinery represents a great opportunity for companies to enlarge their market shares. We believe the ongoing industrial innovation and automation boom (particularly the adoption of AI) will generate multiple benefits both for sellers and users of machinery products. Companies with a more complete portfolio that combines hardware, software, cutting-edge technology and services will largely control this market.

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The global machinery & equipment sector has a market value of around USD280bn and relies heavily on the APAC and North America regions, where revenues represent 34% and 30%, respectively, of the total market. The rest is split between EMEA (18%), South America (11%) and the rest of the world (11%).

As one of the most cyclical sectors, machinery & equipment is often hit hard during slowdowns and recessions. This was the case of 2020’s pandemic-linked downturn, when revenues fell by -10% y/y on average. However, the post-pandemic rebound was significant as various end-market customers resumed operations and increased new orders quickly, making revenues to jump by around +12% in 2021 and +15% in 2022. Then, revenues faced a deceleration in 2023, growing only by +3% y/y (versus an average sector revenue growth of +6% in the last five years). This slowdown was explained by the recession fears arising from central banks raising interest rates to control inflation, which led to lower demand for machinery.

The high levels of accumulated backlogs observed in most of 2023 and easing supply-chains provided an above-average output capacity for the sector, with companies being able to ramp up production and increase deliveries to customers. More recently, backlogs have declined significantly as production rates have been exceeding softening new orders. For 2024, we expect new orders to remain mostly muted and revenues to grow by +2% y/y due to the persistent economic and political uncertainty, co,pounded by ongoing geopolitical tensions. Indeed, many companies, both manufacturers and buyers of machinery & equipment, have been cautious in terms of investment and restocking, adopting a “wait and see” approach.

The cooling in new orders has been observed mostly from farmers and construction companies. On the one hand, farm fundamentals have weakened, which has led companies in the upstream-food sector to reduce their capex for agricultural machinery and farm-equipment purchases. On the other hand, construction spending remains restrained due to still-high interest rates. Mining equipment volume could also decline in 2024 after an increase of +3% y/y on units sold in 2023 for this particular industry. However, in the mid to long-term, sales of metals & mining equipment are poised for continued expansion, with demand expected to accelerate from companies exploding key raw materials such as aluminum, copper, lithium, nickel and rare earth minerals, as all industrial sectors continue to develop their net-zero transition. In our view, the technology sector is the only one planning capex increases this year, from which we expect an enlarged demand for industrial machinery used in the manufacture of semiconductors, gadgets and tech devices.

Subsectors

The machinery & equipment sector includes the following sub-sectors: construction machinery, agricultural & farm machinery, industrial machinery and equipment, mining equipment and robotics.

Contacts

Maria Latorre

Sector Advisor

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