To maintain asset efficiency. Many companies struggle to maintain asset efficiency, ultimately damaging their bottom line and ability to execute strategic moves.
Tangible assets like buildings, machinery and manufacturing equipment are the basis upon which companies earn their profits.
Unsurprisingly therefore, the total industrial asset base spread around the world is worth an estimated EUR 550 trillion. But these assets are not always put to efficient use: the average revenue generated for each euro invested in the asset base is EUR 2.5.
That said, the differences are vast: the leader in each industry does significantly better than this – more than three times better than the average, generating EUR 7.8.
The flipside, of course, is that many players do significantly worse. These are the findings of the study “The asset efficiency game – Making the most of tangible investments” by Roland Berger, for which they analyzed 150 internationally operating companies from a range of industries. The experts also recommend specific measures that companies can take to improve their asset efficiency.
“Asset-intensive companies like energy producers, chemical firms or machinery manufacturers need to be able to run their assets efficiently under all market conditions,” explains Ralph Büchele, Partner at Roland Berger. In reality, only one in four companies are able to manage their assets optimally, enabling them to successfully adapt to an evolving market and changes in their business model. Those that can’t are not just missing out on potential profits – they are taking a considerable risk. “Technological advancements and shifting customer needs or new growth markets frequently require capital-intensive upfront investments in new production lines and facilities,” says Büchele. “If you’re not flexible enough to act when the need arises, you run the risk of falling into the asset trap: rigid cost and plant structures keeping earnings and profitability figures down and restricting your ability to take action to address pressing needs.“
Most companies are “Risk Takers”
The Roland Berger experts analyzed the tangible assets and revenues of 150 internationally operating German companies over the period from 2012 to 2016 and looked at their fixed asset turnover ratio. The study found that there were four types of companies.
The first are the Efficiency Winners, whose revenues grew faster than the value of their asset base. Hence, these players improved their asset efficiency – a prerequisite for long-term success.
Only one quarter of the analyzed businesses fall into this group of companies, and they are mainly found in sectors with slow but steady growth, such as the electrical industry or mechanical engineering sector.
Besides the 25 percent of firms that are Efficiency Winners, a further 16 percent have been able to improve their efficiency and are classed as Agile Adapters: These firms are mainly found in markets experiencing slow decline – regional airports, for instance – or in industries that have already seen a major contraction, such as conventional energy. They managed to reduce the size of their asset base faster than their revenues fell.
“The Agile Adapters show how companies can effectively to bring their assets into line with declining sales from shrinking markets,” says Büchele. “They do that by increasing asset-light activities, offering a new portfolio of services and making increased use of alternative financing options.”
The two remaining categories comprise companies whose asset efficiency deteriorated over the five-year period. First we have the Risk Takers: These companies have made significant investments in their asset base in the hope of higher returns. In doing so, they are taking a considerable risk.
The problem is that Risk Takers constitute 38 percent of the analyzed companies, making them the largest group. They are typically found in industries that experienced fast market growth over the past five years, such as the automotive industry and construction.
The near-record sales figures experienced by many automakers have induced them to make heavy investments in production capacity upgrades in recent years.
But new approaches to car sharing, mixed ownership and on-demand ride hailing, or the breakthrough of e-mobility, could heavily impact demand and leave OEMs sitting on overcapacities in conventional engine technologies.
The final group are the Non-Adapters. These are companies generally operating in markets that are shrinking fast but whose asset base has continued to rise owing to long-term investment decisions they made. Their return on investment is massively impaired as a result. This group makes up 15 percent of the analyzed companies and includes oil and gas industry players. “These firms are already stuck in the asset trap,” says Büchele.
Areas where firms can take action on asset efficiency
“Our analyses illustrate that many companies have trouble maintaining a high level of asset efficiency,” says Ralph Büchele. “If the planned level of growth fails to materialize, the demand shifts to other regional markets or disruptive technologies like biotechnology, e-mobility or renewable energies change the game, those companies are then unable to react with the requisite speed. That’s when a maladjusted asset structure hits revenues and profits – with disastrous consequences.”
The Roland Berger experts therefore identified four transformation areas where companies should take action to maintain or increase the value created by their assets.
– The first of the four transformation areas is asset strategy. Here, it is the Non-Adapters in particular that need to put clear plans in place for utilizing, modernizing or replacing assets as necessary in order to match the company’s current strategy.
– The second transformation area is asset operations: Working in this area means improving the availability and quality of operations, and minimizing downtime, setup times and throughput times. “This transformation area is especially valuable for companies identified as Risk Takers,” says Büchele. “Optimizing the maintenance strategy, for example, holds considerable potential to cut costs and increase availability.”
– The third transformation area is asset financing. Companies focusing here have to aim at reducing their capital costs by optimizing their financing concepts. The key is to ensure that they are exploiting equity and loans as effectively as possible, at the same time as making use of public subsidies and refinancing where appropriate. This transformation area is particularly interesting for Efficiency Winners in that it can enable them to improve their asset efficiency even further.
– The fourth transformation area identified by the study is asset intensity: This involves companies optimizing their production processes and outsourcing their non-core processes. It can lead to the closure, renting out or divestment of assets or production facilities, which reduces the amount of capital tied up in assets. It should be the main area of focus for Agile Adapters.
“Asset efficiency is what determines success or failure in many industries,” says Roland Berger expert Büchele, summarizing the study. “That is why companies must always take steps to avoid the asset trap – irrespective of whether they are in a boom phase or a slowing market, because economic cycles are now faster and more unpredictable than they ever were.”