In 2012, the industrial sector’s performance was consistent with GDP growth globally, witnessing the modest and unsteady beginnings of a recovery. However, continued high uncertainty globally does not favour this largely capex-intensive and cyclical sector. Improvements in the US economy, especially the housing market, and importance of new energy sources like shale gas, have broad implications for the sector. While a gloomy Europe’s recession deepened in 2012, there are pockets of growth in regions and sectors; northern areas including Germany and export-driven sub-sectors are faring better, for example.
Despite these macro challenges, we believe there will be strong opportunities in the industrial sector going forward. However, it is critical to identify the sub-sectors, links in the value chain and business models that offer sustainable growth in the long term. To determine those opportunities, we scanned the industrials space for trends that would affect all markets, regardless of the macro economics at work. Broader themes we see shaping the sector in years to come include:
- Ongoing industrialization in the more developed of the emerging economies, shifting from reliance on commodities to accelerate their growth
- Increasing automation and mechanization in manufacturing, both in developed and emerging markets as they seek to compensate labor cost inflation and upscale their manufacturing capabilities
- Development of an increasingly complex and fragmented global industrial value chain to reduce costs, innovate products and to expand into new markets
- Focus of industrial conglomerates back to core businesses, reining in diversification in order to drive additional value
As such, we have prioritized our efforts in 2013 to focus on: building products and technology, particularly addressing the US housing market; chemicals, such as the optimization of mature businesses and internationalization to access growth markets; energy services, like those that support shale gas initiatives; and engineering, focusing on energy efficiency and new technologies. Investments such as TES Vsetin and Morrison Supply Company are examples of this strategy at work. Each sub-sector is overlaid with the themes above, which we will pursue with our integrated approach of sector-focus, regional presence and experienced operating partners.