How Technology is Reshaping Industrials and Materials
The article below is from our BRIEFINGS newsletter of 28 May 2019
Infrastructure, digitization and sustainability were just some of the topics on investors’ minds at the Goldman Sachs Industrials & Materials Conference earlier this month. We spoke with Jerry Revich, Joe Ritchie and Brian Maguire of Goldman Sachs Research who shared thoughts from the conference which, for the first time, combined the Industrials and Materials sectors to connect firm clients and corporate management teams in a single, comprehensive event.
Team - you just had more than 750 investors, clients and company management teams in New York for the Industrials & Materials conference. What were some of the key themes?
Jerry Revich: We’re seeing a pickup in infrastructure spending which emerged in the back half of 2018, and really accelerated this year. Over 30 states have raised their transportation budgets several years ago in anticipation of infrastructure projects – think roads, bridges and tunnels – but delayed the actual spending in the hopes that a federal infrastructure bill would be passed, which obviously didn’t happen. And there was also an added delay given that many states’ Department of Transportation offices didn’t ramp up staffing to match the budget growth. Now, we’re starting to see states put those dollars to work which is translating into stronger orders for construction materials, and should ultimately contribute to productivity improvement.
Joe Ritchie: I’d add that, in addition to infrastructure, we’re also seeing stronger spending levels in the non-residential institutional sector, such as government and education buildings. With spending remaining below prior peaks, several of the companies that attended the conference reported a pickup in order trends. This is good news for the broader economy as further construction activity could ultimately boost consumer spending. Elsewhere, short-cycle industrial trends are more muted, with several management teams highlighting destock in auto/broader industrials that could continue for several quarters, which coupled with uncertainty around tariffs, could dampen growth for the space in the near to medium -term.
What about pockets of innovation? Are you hearing about any of the same tech trends like automation and digitization that are sweeping other industries?
Brian Maguire: We’re now hearing about the former in waste management as a means of coping with new price weakness in recycled materials. Recent Chinese government quality standards have resulted in a sharp decline in the price of US recycled commodities, 30% of which were historically exported to China. As a result of these lower prices, many waste companies are moving to eliminate recycling offerings or at least sharply restrict what materials they will recycle or implement new fees and surcharges on municipal governments. But to help offset those pressures, waste companies are investing heavily in automation of recycling sorting facilities, or Materials Recovery Facilities. Waste Management, for example, is piloting a “MRF of the future” in Chicago that is completely automated. If successful, this could greatly reduce recycling operating rates and allow them to re-establish recycling offerings to all their customers. And we’re seeing more examples like these where a desire for sustainability is governing new innovations in the space.
Jerry Revich: Advancements in technology are driving profound changes in traditional manufacturing and industrial companies as they move to integrate software and sensors into their machines and equipment. Precision farming is a topic we’ve highlighted – Deere and Trimble make automated planting within a half inch precision possible, while driving at 10 MPH. Deere uses artificial intelligence to automatically identify and spray herbicide on weeds. The images of the weeds feed into an 800 million image database – a database that extends with every spray run, using artificial intelligence to continue to improve treatment efficiency. Mining trucks are now completely autonomous and well beyond field testing, as Rio Tinto just put in an order for a fleet of autonomous trucks and other mining equipment from Caterpillar. We’re also seeing low cost technology solutions - United Rentals was an early adopter of location-focused GPS trackers to improve transportation logistics. Paccar and other truck manufacturers are using telematics to identify and prevent engine problems before they happen, using the field data to then improve the manufacturing process in nearly real time. Paccar has even started to monitor truck utilization as an early indicator for delinquency in its financial services arm.
It sounds like traditional manufacturing companies are taking a page from the tech industry’s playbook. Is software also taking over this sector?
Jerry: It might seem that way. As companies move to digitize their equipment, they have the potential to roll out services to new and existing customers as part of a subscription-based model. At our conference, industrial technology company Trimble, for example, announced that its transition towards subscription services is tracking ahead of expectations set as recently as six months ago, with new client signups under its newly available via subscription SketchUp product were up 50% year-over year. For the supplier, the subscription model means that it is easier and cheaper to maintain the technology and creates a recurring source of revenue. For the customer, it means a much easier installation, lower trial risk, and a continuously improving product.