REPORT

BAIN & COMPANY

MACHINERY ENTERS BRAVE NEW WORLD ‘BEYOND THE MACHINE’ AS DIGITAL DRIVES A HIGH-STAKES RACE FOR GROWTH

The global machinery and equipment industry stands at a critical moment as it confronts a whirlwind of disruptive forces, facing its leaders with fundamental and accelerating change over the next decade.

In its first Global Machinery & Equipment Report, Bain & Company analyses the wave of digital-driven transformation sweeping the sector.

The report explains how the emerging winners from these powerful trends are embracing “machinery beyond the machine,” experimenting aggressively beyond the industry’s traditional boundaries. It reveals how this strategic approach is propelling winning companies past competitors in a high-stakes race that is turbocharging sales growth and profits—as well as fueling a surge in mergers and acquisitions (M&A) activity and private equity (PE) dealmaking. And it maps out the key moves that machinery and equipment players can make over the next two to three years to tackle this transformational agenda.

“The tectonic shifts reshaping the entire machinery sector are being driven by rapidly intensifying competition, a slowdown in hardware-centered innovation, and the power of digitalization to radically change virtually every aspect of the business,” Michael Staebe, leader of Bain & Company’s Global Machinery and Equipment practice, said.

“The industry’s traditional focus on smarter, faster, cheaper machines as the key to drive growth no longer gives any guarantee of success. Even the most technologically advanced machines, and their makers, are not immune from disruption.”

Instead, the report shows that the fundamental transition now happening takes the industry “beyond the machine” to “machinery as a service.” This means combining makers’

Karim Shariff, Partner at Bain & Company Middle East and leader of Bain & Company’s EMEA Construction, Building Products, Real Estate and B2B Services practice

“The push for more sustainable, diverse, equitable, inclusive, and socially and environmentally conscious operations is the strongest it has ever been.”

hardware with software, automation and services developed around the machines. It means delivering tightly integrated solutions that are precisely tailored to customers’ needs—and within dramatically altered new business models.

“The industrial machinery and equipment sector has reached a turning point. While the industry never stood still, regionally, it is currently experiencing the most profound transformation in decades. The push for more sustainable, diverse, equitable, inclusive, and socially and environmentally conscious operations is the strongest it has ever been. We see senior executives investing heavily in digitization and this is affecting talent retention and workforce management. These changes are being expressed at various speeds depending on the subsectors, which is leaving decision makers in significant ambiguity,” said Karim Shariff, Partner at Bain & Company Middle East and leader of Bain & Company’s EMEA Construction, Building Products, Real Estate and B2B Services practice.

Services-based solutions are “shape of things to come” for machinery The report sets out how this critical shift to a digitally-enabled and servicesbased ‘bundled solutions’ model is already developing at pace. Bain & Company’s research projects that in the industrial automation sector, where this shift is well underway, the share of profits coming from hardware will fall from 31% today to just 23% by the end of the decade. The rest of the profit will come from bundled software, services and solutions. In some sectors, companies already generate more than half of sales and 100% of their profits from services.

“This trend is accelerating and will become the norm—the shape of things to come—for the industry in the next few years,” Thomas Lustgarten, leader of Bain & Company’s Global Advanced Manufacturing & Services practice, said. “By 2030, Bain projects that the leading machinery companies will sell most equipment as only a part of bundled solutions that include software and services, further cutting hardware’s contribution to profits. In many cases, companies making this shift have the chance to capture market growth rates several times those of their current businesses.” >>>

Among the top machinery companies, Bain & Company found that the average annualized total shareholder return was 32% from 2019 to 2021, compared with a mere 4% among the industry’s laggards. But most machinery and equipment companies have so far been slow to act. Bain finds that fewer than 5% of industrial companies have successfully executed a technologically or digitally based transformation. “Industrials that put effort into digital are four-times more likely to outperform the competition—but two out of three digital laggards are worse performers than the competition, according to Bain & Co.’s 2019 survey of 205 industrial businesses,” Lustgarten adds.

“Great Retooling” for global sustainability and net-zero creates multi-decade opportunity The sweeping machinery sector transformations triggered by the forces of digitalization and “Industry 4.0” are only part of the story for the machinery and equipment sector, however. The reshaping of the industry also presents an enormous opportunity for its companies to give a powerful response to the global push for businesses of all kinds to meet and master the challenges of sustainability and environmental responsibility: to become more energy efficient, less wasteful, and to tailor operations to improve the circularity and recyclability of machinery products.

As in other industries, machinery makers are already changing operations and supply chains to reduce greenhouse gas and carbon emissions and pursue net-zero goals. But for this sector, the implications go deeper. Because every industry is changing, a “Great Retooling” is underway as nearly every industrial and manufacturing company rethinks its operations. Machinery businesses that quickly grasp the potential and develop the products and services to allow customers to meet decarbonization goals, are likely to gain first-mover advantage in a huge transition set to last decades rather than years, the report finds.

Spate of supply chain shocks fuel retooling for resilience The global opportunities of rising to sustainability goals, as well as from this Great Retooling trend, are closely tied to the challenge posed by a new era of supply chain vulnerability. Over

Thomas Lustgarten, leader of Bain & Company’s Global Advanced Manufacturing & Services practice

the past two years, a spate of major supply chain disruptions has battered the machinery sector, from materials shortages and price fluctuations sparked by the global pandemic to, most recently, the consequences of the war in Ukraine. These and future unexpected disruptions reinforce and extend the market for machinery makers to equip customers for the future with the equipment that ensures more resilient and sustainable supply chains.

Bain & Company’s research shows that supply chain executives across all industries have shifted investments to prioritize resilience and flexibility over cost and speed. Machinery companies are on the front line to provide the tools and equipment to meet these objectives while simultaneously meeting the urgent aim of greater resilience for their own operations. Digital tools are important here, too, and can help firms manage supply chain risks, improve efficiency and measure environmental impact and cost in real time.

Companies at the forefront of this evolution have a head start in building competitive advantage in the markets of 2030 and beyond. They are building new capabilities, such as supply risk assessments, to bolster their customers and their own operations. As such, they will also bounce back faster in times of supply disruption and gain from a tailwind of support from customers, investors and regulators.

China’s industry vanguard of innovative insurgents drives imperative for strategic change While the machinery sector’s winners over the coming decade will move aggressively to expand their business ecosystem beyond machinery, other companies will struggle to keep up. Those that fail to climb the software and automation ladder, focus on tailored solutions for “verticals” specific sectors, and adapt to the new business models, will be at risk from the growing commoditization of machines sold purely as hardware. Chinese manufacturers are rapidly developing competing, lower-cost hardware.

Michael Staebe, leader of Bain & Company’s Global Machinery and Equipment practice

The competitive challenge is underscored by the reality that China is also in the vanguard of the broader industry trends examined in the report, with Chinese tech start-ups and other insurgents introducing a new generation of innovative service offerings. The cloud service Machine Commander, offered by the Chinese startup Zeaho, offering real-time monitoring of construction sites to improve equipment efficiency is one example: it has 135,000 units of equipment connected to its cloud-based platform just seven years since it was founded.

To defend their turf, equipment markets are increasing investments in digital technologies and accelerating the rollout of advanced services. For example, 100% of original equipment manufacturers (OEMs) surveyed by Bain & Company plan to offer “predictive maintenance” of machines by 2024. 95% will provide remote maintenance, and new services geared to operational efficiency.

M&A jumps to decade-highs as companies accelerating moves to buy in capabilities The wave of change across the machinery sector is also stimulating a surge in dealmaking as many companies and their investors reshape business portfolios in the face of the evolving industry dynamics. Industrial machinery manufacturers have a growing appetite for big deals as they accelerate these strategies.

The jump in M&A activity means that the average deal size in the sector shot up to an average of $179 million in 2020 and $161 million in 2021 breaking the prior downward trend seen up to 2017. Last year’s $63 billion global deal value was the sector’s second highest annual total in the past decade, only exceeded by 2020’s $72 billion tally.

“For machinery executives, M&A provides access to higher-growth and strategically-critical markets. These leaders are leaning-in to acquire new capabilities around software, the Internet of Things (IoT), artificial intelligence and connectivity – and at higher valuations, as they move to meet the challenge from the sector’s digitalization and move to servicedriven, solutions-based business models,” Michael Staebe said. “We don’t expect momentum to slow for large M&A deals in the machinery sector.”

PE drives faster pulse of machinery dealmaking on rising valuations and returns As in M&A, the machinery industry is now among the most active industrial sectors for global PE dealmaking—and machinery and equipment deals are outperforming those in other industrial sectors.

Some of the largest industrial PE deals have been in machinery, such as Advent and Cinven’s €17.2 billion ($20.2 billion) purchase of Thyssenkrupp Elevators in 2020. Over the past decade, Bain & Company finds that such deals produced returns 10% higher than for industrials as whole, as shown by a median multiple on invested capital (MOIC) of 2.5. Over the same period, the enterprise value of machinery companies grew 1.9-fold.

Winning PE firms are spotting opportunities to reposition traditional machinery businesses amid the broad trends reshaping the sector. Top performing funds are taking a holistic approach to value creation, looking well beyond cost structures to tap all areas of potential improvements, including commercial and service excellence, pricing, and M&A potential.