What is the Industrials Sector?
The Industrials Sector consists of companies that provide industrial and commercial equipment and services, transportation, and distribution operations. From construction and farming machinery to airlines, railroads, and waste management, the industrials sector has a broad range of end markets and beneficiaries. The sector also enjoys vast exposure to emerging markets. Industrials is considered a cyclical sector, meaning there's less demand for them in a down economy. During a weak economy, the sector usually underperforms. By the same token, when the economy shifts from recession to recovery, the sector experiences a boost.
COVID-19 Impact on the Industrials Sector
The COVID-19 pandemic ushered in a host of challenges to US industrial manufacturers, especially those that depend on workers whose jobs cannot be carried out remotely. Reeling from the effects of a global pandemic-driven shutdown, US industrial production and total factory orders saw a steep decline in April 2020, followed by suppressed improvement. Manufactures faced continued downward pressure on demand, production, in addition to cash-flow liquidity challenges and difficulties in managing debt obligations. Though production and order levels are still below pre-pandemic levels, the trajectory of the decline has slowed. Additionally, 2020 experienced a significant dip in manufacturing employment levels, largely due to forced shutdowns in the early days of the pandemic and suppressed orders, with April recording manufacturing's lowest employment levels since 2010. That being said, much of the country's manufacturing base is back in operation and employment levels are gradually increasing.
Industrials Key Trends
Electrification: Automakers have continued to experience pandemic-induced supply chain challenges, but that has not stopped some companies and investors from zeroing in on electrification and the acceleration of the Electric Vehicle (EV) market as auto demand returns. The auto industry overall has mostly bounced back after taking a hit last year. This is especially true in the EV sector, which is benefiting from continued advancements in technology and increasing regulation to curb emissions from gasoline and disel-powered vehicles. The EV space has also garnered significant investments from legacy automakers, who have historically taken a wait-and-see approach to embracing electrification. There has also been a flurry of capital market activity in the EV and battery space, which signals that the world's largest automakers are doubling down and accelerating their electrification efforts.
Importance of the Internet of Things (IoT): IoT, which entails the interconnection of unique devices within an existing internet infrastructure, has enabled manufacturers to make informed, strategic decisions using real-time data and achieve a wide variety of goals, including cost reduction, enhanced efficiency, improved safety, and product innovation, etc. COVID-19 has brought renewed interest to IoT technology due to its remote monitoring and predictive maintenance capabilities.
Reevaluation of Sourcing: The pandemic has prompted manufacturers to reevaluate sourcing. COVID-19 caused significant disruption to the global supply chain, making it more challenging for manufacturers who source from other countries – China, in particular – to get a hold of materials. This has prompted many manufacturers to diversify sourcing by a adopting a "China, Plus One" strategy or something known as near-sourcing. Near-sourcing, also known as local sourcing, is the process by which a business brings operations closer to where its finished product is solid; in industrial manufacturing, it typically refers to the sourcing of raw materials from domestic suppliers. We can expect near-sourcing to be a leading trend throughout the rest of 2021, as industrial manufacturers attempt to reduce or eliminate entire dependencies on foreign materials.
Industrials Subsectors & Key Players
Given the broad range that the Industrial sector group covers, it can be helpful to divide the industry into subsectors and identify the key players in each. Here are a few of the key subsectors in the Industrials industry:
Construction and Engineering: Construction and Engineering in the Industrials sector includes companies engaged primarily in non-residential construction (including civil engineering companies and large-scale contractors). Key players include Bechtel and The Turner Corporation.
Electrical Equipment: The Electrical Equipment industry in the Industrials sector includes companies that produce electric cables and wires, electrical components or equipment, and manufacturers of power-generating equipment and other heavy electrical equipment (including power turbines, heavy electrical machinery intended for fixed-use and large electrical systems). Companies in this subsector include Ametek, Eaton Corporation, and ABB Ltd.
Transportation Infrastructure: The Transportation Infrastructure subsector includes operators of airports and companies providing related services, owners and operators of roads, tunnels, and rail tracks, and marine port owners and operators. The performance of companies in this sub-sector is highly sensitive to fluctuations in company earnings and the price of transportation services. Main factors affecting company earnings include fuel costs, labor costs, demand for services, geopolitical events, and government regulation. An example of a major transportation infrastructure company is the Chicago Bridge & Iron Company.
Airlines: The airlines industry provides air transportation for passengers and cargo by using aircraft such as airplanes and helicopters. The key players should all be familiar, including United Airlines, Delta, Cathay Pacific, Lufthansa, etc.