Digitalization and ESG are key to growth

Industrial manufacturing CEOs are increasingly optimistic about the economy, according to a KPMG survey of 175 industrial manufacturing CEOs globally, which shows that confidence in the economy is up 5 percentage points compared to last year. The main reasons are the easing of supply chain disruptions, the normalization of input and transport costs, as well as expectations that interest rates will decrease in 2024. However, it terms of their own sector, few industrial manufacturing CEOs expect their companies to grow at a higher rate than that of the economy. Just 39 percent of the CEOs surveyed said they expected to see growth of more than 2.5 percent over the next three years. 

Maintaining the status quo is unlikely to lead to higher performance and most of the CEOs surveyed recognize the importance of focusing on the twin transformations which will help their companies grow- digitalization and ESG. To remain competitive, it is always important to keep up to date with and anticipate developments in technology. Unsurprisingly, investment in AI features highly on the agenda of the CEOs surveyed, with 69 percent saying it is at the top of their company’s investment priorities. The main purposes of AI will be to redesign processes, rethink client experiences, and increase efficiency.

A well developed ESG strategy is becoming a prerequisite for a successful business. Aside from the growing amount of regulation related to ESG, stakeholders increasingly expect ESG to be integrated into a company’s operations. For example, employees will frequently want to see a strong commitment to ESG from their employer. Our survey reveals that many CEOs recognize the significance of ESG in attracting and retaining top talent, as well as the potential financial benefits to their business of demonstrating their commitment to ESG principles. Moreover, 71 percent of the CEOs surveyed said they would be willing to divest of an asset that dilutes their organization’s image in this area. 

CEOs’ expectations of a low growth environment are likely to lead to an increased focus on strategic M&As to help the business develop. Our survey reveals that over the next three years, 88 percent of industrial manufacturing CEOs think their organization will make an acquisition and 58 percent said they were likely to undertake acquisitions that would have a significant impact on their overall organization.

Moreover, portfolio reshuffling can also be a useful way to develop a business and improve its efficiency. Hence, more of it can be expected, as companies in the sector seek to focus on core strengths and divest assets that no longer support their long-term strategy. The two pre-requisites for more M&A activity, as seen by many of the CEOs in our survey, are stable market conditions and availability of financing. Both conditions significantly improved during the fall of 2023.

Many industrial manufacturers will need to be prepared for a reduction in state support in 2024. Those which do not take this into account in their planning may have difficulty raising finance, and could face restructuring of even failure. However, for those which focus on the key opportunities presented by investment in digitalization and ESG, this could be a defining year, in which a deep transformation of their businesses takes place. To achieve this, it will be important for CEOs to remain alert, get the right advice and stay ahead of the game. 

KPMG in Romania’s professionals have detailed knowledge of industrial manufacturing and considerable experience of supporting clients in the sector, as well as an astute understanding of market trends. We can help your organization develop the right strategy to prosper in this time of transformation and avoid some of the pitfalls. Please contact us at KPMG in Romania and we will be pleased to help.