Although the effects of COVID-19 on the industrial automation equipment market were not obvious in the first quarter of this year, it seems that the worst is yet to come. Looking specifically at motors and drives, end users across all industries have put orders on hold and reduced investments in new equipment. Some industries like food & beverage and other consumer-driven applications have remained unaffected, but the main takeaway is that the impact of COVID-19 on the motor and drive markets has been quite detrimental.
Currently, the manufacturing operations of most motor and drive vendors are still running, as these products are deemed essential. However, earlier in the year, factories in countries that were severely impacted by the spread of the virus, such as China, Italy, and France, were forced to shut down for a week to undergo deep cleaning and quarantine procedures each time an employee contracted the virus, resulting in significant losses of production and output. As of the end of April, most factories are completely operational but have roughly one-third of their staff rotating in and out of the facility with the remainder on leave or working from home. This restricts overall supply to the motor and drive markets, reducing the ability of companies to work through order backlogs and recover quickly from lost output.
The lack of order fulfillment has created threats and opportunities in the motor and drive markets, where short lead times are often a competitive advantage. Some manufacturers have reported revenues as much as 15% below forecast for March, while other suppliers exceeded their March forecasts. In addition, some companies observed a spike in sales during Q1 as machine builders increased orders due to fears that the COVID-19 crisis would cause delays in the supply chain. However, as buyers of motors and drives increase inventory in Q1 to mitigate supply chain disruption, it hinders sales pipelines for motor and drive vendors in Q2. In April, most suppliers of motors and drives reported decreased quoting activity as well as more existing orders either being cancelled or put on hold.
In the figure below you can see the forecasted impact we believe COVID-19 will have in the machinery production market. Although manufacturers reported experiencing revenue growth on Q1 we expect machinery production revenues to drop in 2020 between 10 to 18% depending on the region.
This reduction in activity due to the impact of COVID-19 also extends to distribution networks and servicing channels. For example, motor distributors are still open as they are deemed essential, but they are operating at a reduced level with some businesses already announcing layoffs. Meanwhile, the motor repair industry, which is also deemed an essential service, is operating as usual but business is declining significantly as part of their customer base is shut down completely during this pandemic. Currently these repair shops are operating under an emergency only basis and their storefronts are closed. This puts them at risk of insolvency, along with many other companies across the supply chain, and could lead to severe disruptions across the motor and drive industries.
To mitigate these risks, it is important that motor and drive vendors work closely with their key suppliers and service providers to ensure that quality and consistency remains high and that smaller businesses remain solvent. In addition, with a recent ISM report finding that roughly 75% of companies have experienced supply chain disruption as a result of COVID-19, vendors of motor and drive technologies should work to identify any weak links in their supply chains and potential solutions to these. This could involve identifying new suppliers, re-shoring outsourced activities, or the acquisition of other companies.
Despite the negative outlook for many areas of the motor and drive markets, both food and beverage and water and wastewater are experiencing steady growth because they are considered to be essential industries at this time. However, even within these industries there are areas of growth and areas of decline. For example, in the food and beverage industry, farmers in the nursery stock, flower, and bedding plant sectors have been hit the hardest reporting sales at 60-70% below average. The meat industry is also experiencing reduced consumption because of closures from the food service industry like hotels, restaurants, and catering businesses. Meanwhile, the slowdown in exports is creating an excess supply of wine and olive oil which will lead to decreases in grape and olive purchases in the next harvesting year.
On the other hand, the biggest opportunity for motor and drive suppliers is in the processed food sector. Currently, demand for processed food products is high as consumers are opting for more wheat products such as flour, breads, and pastas, and purchasing fewer high value cuts of meat and seasonal products like lamb. This increase in demand is putting added pressure on the food processing industry which is struggling to obtain, and process, supplies as quickly as needed.
Processing produce is also an issue in the agricultural sector. The European commission believe the demand for fruits and vegetables is expected to remain strong even though closures in the hotels, restaurants, and catering sector has weakened overall demand. However, the biggest obstacle facing the agriculture sector is the access to labor as farmers are reliant on seasonal workers during peak planting, pruning, and harvesting periods. With public health measures in place that encourage distancing from one another, this proves challenging to the industry. One potential solution would be the introduction of more automation and machinery, which could provide opportunities for vendors of motor and drive technology. However, a lack of investor confidence has the potential to restrict these opportunities.
In the short-term, capital expenditure budgets have been greatly reduced, however, operational expenditure budgets remain largely unchanged. As a result, greenfield opportunities for motors and drives are likely to be significantly fewer, whilst retrofit projects will be the main driver of recovery in these markets.
Long-term, the COVID-19 pandemic has the potential to stimulate demand for industrial automation products and IIoT solutions as end-users across a variety of industries look at ways to reduce the risk of similar shutdowns in the future. Demand for services such as remote operation, remote monitoring, and digital twin, to simulate new processes and procedures without disrupting production, are likely to see increased demand as a result of the disruption the manufacturing industry has faced.
Overall, the impact of COVID-19 on manufacturing has been devastating, with factories shut down and supply chains disrupted across all industries worldwide. The motors and drives markets are likely to experience decline in Q2 and Q3 of 2020 as a result. However, long-term opportunities exist for motor and drive vendors as they strengthen supply chains and end-users turn towards automation as a way to mitigate against future risks to factory output.