You Don’t Have to Go Home But You Can’t Stay Here: Preparing for the Industrial Capital Equipment buying Slowdown

Saturday Night / Sunday Morning

The late great Jimmy Buffett once said “It’s a fine line between Saturday night and Sunday morning.”? The partying and fun that so many of us enjoyed in our youth (and some in not so youth) is coming to and end as the world's economic sun peeks it’s head over the horizon. Not only in macro terms but one more specifically in the capital equipment markets (of which automation & packaging is a subset).? The roaring early 2020s are coming to an end.??

Despite COVID’s devastating toll on the world, the silver lining for our industry was that it made manufacturers realize they needed to automate to remain competitive.? Unfortunately manufacturers tend to have limited memories and tighter budgets.? And the glory days of massive backlogs and more work than we could handle is coming to an end.

The Lights Just Came On

Anyone of Gen X or older knows the collective sadness that fell over a club or bar when the lights came on about 15 mins before closing time. It was time to stumble or taxi (we didn’t have Uber) back to the dorm or apartment and face the reality of the next morning.

Capital equipment markets enjoyed this partying for the last 2-3 years. After the initial shock and awe of the pandemic, the automaton markets began to quickly grow.? Many of us business owners went from “Am I going out of business?” to “How can we handle all this business?” almost overnight.? At the height of the machinery buying frenzy some integrators were quoting 2+ year lead-times with 2+ year backlogs.? We were all fat and happy.

Then the pandemic and supply chain woes began to wane.? By mid 2022 we had entered the typical “summer slowdown” that plagues our industry.? Everyone is on vacation, contracts are not approved, POs don't get signed etc. but we all know this happens?and at first it was business as usual. The only difference was that we didn't see these summer slowdown the previous two years as everyone was working remote (no vacations) and business continued to pour in during the summer.

However by Q3 2022 the orders were still slow.? Orders that many expected to hit did not materialize.? RFQs were still high.? People still wanted to automate but the economic winds had begin to shift.? Talks of more rate hikes and possible recession in 2023 began to fill conversations.

By Q1-Q2 2023 the slowdown continued.? Unnoticed by some (and for the record there are always niche industries and outliers that throw off the narrative) many had started to notice the change. Orders were not coming in.? Discussions at trade shows and conferences became filled with “What are you seeing in the market?”? And most did not like the answers.

By the summer of 2023 the slow down was evident to even the most optimistic firms.? Backlogs that use to sit at 1-2 years were down to 6 months.? Purchasing managers at clients began the old “the PO is routing” excuses.? Large projects were handed over to junior purchasing staff (which is always the sign of a delayed project).

No one was losing work to someone else.? The work was just not materializing at the same rate. The light were turning on and the music volume was going down from the former 11 (link for the Millennials, GenZ has probably seen it)

What You See When the Lights Come On

So what?? The party is over.? We can still keep having fun right?? Well as many can attest that bar/club doesn’t look as nice as it did with the dark ambiance and neon accents.? With the harsh fluorescent lights on you can see that maybe the party is indeed over.

The Purchasing Managers Index (PMI) which is a measure of capital equipment purchases has been declining since it’s peak in early 2020. A value of 50 means no change in buying habits.? Higher = more buying.? Lower = less.? As you can see we crossed that line in late 2022 and it continues to decline even into Q3 of 2023.

Interest rates continue their steady climb as well.? The Fed has raised rates a dozen plus times since Jan 2022 and yet it has failed to significantly affect inflation.? Just yesterday the Fed announced we should be expecting rates to stay higher for longer to aid in a “soft landing” (which I think it’s not going to happen for the middle class, but that’s a different article).

In retrospect they waited far too long to start raising rates (should have happened in Jan 2021) but hindsight is 20/20.? Regardless we are now in a non-zero interest rate environment.? Even large corporations often debt finance large equipment purchases.? With rising interest rates these loans look less and less attractive.? Now they have to decide if they are going to use their cash for purchases or operations, and the latter most always wins out.

Robot sales are also on the decline.? This is the leading indicator for many integrators as the robot is often the first item purchased in a big project.? While there was “overbuying” in the late stages of the pandemic which pulled deman forward, there is an obvious slow down in the growth of robot sales.

From FANUC’s earring report this year:

The sudden decline in robot orders was a negative surprise, as June-quarter segment orders fell 23% year on year, after 10 consecutive quarters of annual growth. Much of this was due to inventory adjustments in China and the Americas regions, and with manufacturers remaining cautious over capital investments, we expect this adjustment will continue throughout 2023. While we cut our 2023 companywide revenue growth forecast to a 7% year-on-year decline (down from 1% growth), we maintain our 7% revenue CAGR projection between 2023 and 2027.

So while there is indeed long term optimism (see below for more), in the next few years it’s fully expected to be an uphill slog to get back to anything approaching pandemic level sales (which I believe we will not see again for a long time).

Machine tools sales (typically a leading indicator) have also seen a dramatic decline of 34% since the previous year.

Are you invited to the after-party?

Any great night always has an after party, and if you’re one of the lucky individuals, you got invited to it. It was maybe not in the best part of town or you had to duck down some seedy alley to find it, but it was always there.

We are moving into the after party hours.? It’s been illustrated that manufacturers are slowing spending.? So what is a capital equipment OEM or system Integrator to do? Well if you're done of the lucky to be invited to the after party then things do not look so bad. You may be in a sector unaffected by the slowdown (oil & gas) or in a niche industry or customer that is continuing to spend. That's great! Party on Wayne!

Oh You Weren’t Invited?

For the majority that did not get invited however, it’s time to lick your wounds and plan for the the sunrise.? Crack open that Gatorade, find a greasy diner for some early morning bacon and eggs and maybe find an Advil or two.? Because if you don’t prepare that Sunday morning is going to hurt.

Automation, robotics and packaging companies are going to need to do several things to prepare:

1. Look at your P&L and budgets.? It’s been a good few years.? Your expenses likely began to balloon and you were making so much money you didn’t really pay that much attention to each dollar.? It’s time to focus.? Find places to reduce costs (except labor, more on that).? Cut back on software subscriptions, travel, trade show expenses (still go, just scale back). Scrutinize very single line item with a cautious but critical eye.
2. Don’t cut labor unless you have to.? Good engineering, assembly, sales (and just about every category) is hard to find.? If you lose this talent it’s so much harder to re-find it versus finding a way to keep them on staff.? Find tasks for them to make your company more efficient and profitable.? Redesign your product to cut COGS.? Make your processes more efficient and easy to follow.??However if you have underperforming employees this may be the time to perform a small but calculated RIF. Just be sure to let them down softly.
3. Take this time to standardize your product offerings.? Even if you are a custom automation provider there are various levels at which you can standardize your mechanical, electrical and controls engineering processes and methods.? This not only hits the bottom line directly, but allows you to be quicker to market.? Ignore those that say “but we have to follow the customer’s spec”.? You don’t.? Educate them on why this only adds cost and why your products are superior.??It works. I've been doing it for 20+ years.
4. Start strategic planning.? Stop working “in” the business and start working “on” the business.? Dedicate a few hours per week for you and your management staff to make a 3/6/12/24 month plan.? Look at the best and worst case scenarios.? Do a SWOT analysis.? Do a white space competitor analysis.? Determine what you need to do to continue to grow despite these headwinds (and headaches).? Failure to have a strategic plan is a recipie for disaster in these next 36+ months.
5. If you are profitable (default alive) then good. Keep at it. If you are not, you had better have some cash runway. If you don't have at least 18-24 months runway you are in danger. Shore up that balance sheet and figure out how to get profitable. Perhaps now is the time to consider an exit to private equity or take on other outside investments.

The Party Really Never Ends

So while maybe you’re bruised and banged up a bit, the party is really never over.? Next weekend the gang will make that call and you’ll be back out there doing the same thing again.? Maybe you’ll be a bit more cautious.? Maybe you won’t stay out till the lights come on.? But just like the party, automation and capital equipment sales will continue due to labor shortages, onshoring and numerous other factors. It's a growth industry.

Just not to the epic scale that we saw in the last few years.? You have to prepare yourself for the slowdown and be more efficient and proactive.? A lack of a decision is still a decision.? And often the wrong one.

Do you need help analyzing these aspects of your equipment business?? Give me a ring.? With 27 years experience in up and down markets I can help you navigate these next few years.? Maybe your management needs someone to lean on.? Maybe you need new management.? Whatever the case, I am a firm believer that my experience as a successful integrator for 20 years will help you and your company to thrive in the years to come.

Contact me here on LinkedIn or at [email protected] for an introductory call.

Sean Dotson, PE is a lifetime veteran of the automated industrial machinery space and a leading expert in automation, robotics and packaging. He was the founder and President of RND Automation and now has an advisory service for manufacturers and equipment builders: Automation AMA (Ask Me Anything).