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(originally published by Booz & Company)


Six Industries in Search of Survival

Until now, many domestically focused North American EPS companies have generally not had to compete for growth around the world, but trends point to fierce new global competition. Emerging competitors could claim a sizable share of their home markets and simultaneously make inroads into the United States and Europe. Newly industrialized giants on the receiving end of the outsourcing trend have been developing their engineering and services skills for years. Now they are poised to aggressively compete with their Western counterparts. Three of the world’s top five automobile-producing countries are in Asia (Japan, China, and South Korea). The Commercial Aircraft Corporation of China is developing an airliner to rival planes from Boeing and Airbus. A Chinese company, Zhejiang Geely, is likely to acquire the Volvo brand this year; meanwhile, Tata Motors of India has purchased Jaguar and plans to export the low-cost Nano to the United States within a few years.

Globalization can be seen as a continuum along which some EPS sectors have evolved more than others. At one extreme are companies that are limited by government constraints such as tariffs or export control. At the other extreme are companies operating in fully open, free market environments. Companies that are inherently restricted to domestic markets, such as rail transport or freight operators, are typically the most limited participants in globalization. Next are companies that export products and services to reach international customers, but keep product development and manufacturing at home. These are followed by companies that gain access to international markets through partnerships or joint ventures, such as British Airways and Lockheed Martin. Finally, truly global companies have an in-country industrial presence, are executing domestic strategies in multiple countries, and develop customized products for each of their strategic markets. Companies at this level, such as Caterpillar, FedEx, Toyota, and BAE Systems, build a sustained presence through local acquisitions and sourcing.

Superior capacity management or engineering skills are no longer enough to differentiate companies in today’s competitive environment. Global growth demands strategic approaches and operating models tailored to the dynamics and needs of individual markets. What is certain is that global growth will require lower-cost business models and capabilities for the future. As the global economy emerges from the shock of the past year, business leaders must recognize the potential of foreign markets, acknowledging that the United States is no longer a high-growth economy. They must understand the implications of a changing competitive landscape, and embrace the global economy as an opportunity rather than a risk. Companies that build defensible capabilities, continue to innovate, and maintain cost competitiveness will be the ones that not only withstand future crises, but prosper.

— Matt Ericksen, Robert Reppa, and Randy Starr

Click here for the full 2010 Engineered Products and Services Industry Perspective (PDF)


5. Oil and Gas: Uncertainty and Oversupply

Top-down regulatory and legislative actions aimed at curbing carbon emissions, coupled with bottom-up changes in consumer behavior toward frugality and sustainability, are among the dynamics creating substantial uncertainty in the energy sector. In response, all players will need to scrutinize the mix, quality, and performance of the assets in their portfolios.

Oil producers weathered the recent meltdown well as the OPEC oligopoly ratcheted supply downward in line with shrinking demand. Downstream, the news wasn’t as good. Refiners were particularly hard hit because overcapacity, partially built up in response to the prior demand surge, had already deeply cut margins; refining margins will likely continue to be depressed, at least in the short term. Meanwhile, refining costs are expected to increase with the passage of some form of carbon legislation. Such legislation is likely to require refineries to purchase pollution permits, to invest additional capital in pollution mitigation measures, or both. The problem of oversupply is exacerbated by the challenges in eliminating capacity: Refineries are difficult to shutter, and refining is a fragmented industry sector.

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