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Diversified Industrials Sector Outlook 2019

Diversified Industrials Sector Outlook 2019

  • United Kingdom
  • Brexit
  • Corporate
  • Employment law
  • Mergers and acquisitions
  • Aerospace, defence and security
  • Automotive
  • Chemicals
  • Diversified industrials

23-01-2019

Welcome to your Diversified Industrials Sector Outlook 2019

In this outlook for the Diversified Industrials sector, we take a look at the key trends, legislation and issues we’re set to face in 2019 and the likely impact on businesses operating in the sector.

The impact and anticipation surrounding Brexit dominated the headlines over the past year and is continuing into 2019. This backdrop of uncertainty has led to global industrials assessing their supply chain risks, managing their workforce needs and anticipating changes to the current regulatory landscape.

The global trading landscape continues to change rapidly and over the coming year supply chains will be subject to stresses whether this be in the form of the increasing trend of supply chain models being digitized; alternative sourcing strategies being pursued in anticipation of potential regulatory and border delays and protecting against risk of failure in your supply chain.

Another challenge for companies in the sector is the attracting and retention of talented workforce who can manage, implement, and sustain a specialized portfolio of products and services in a cutting-edge and connected manufacturing world. Companies need to start reinvigorating the workplace culture to compete with tech companies and start-ups in attracting talent.

Further development and investment in emerging technologies and the way in which technology is being deployed in companies is growing at a significant rate as the line between traditional industrial and manufacturing companies continues to blur, with many industrial businesses now describing themselves as digital or technology companies and service providers. Last year we launched our Diversified Industrials Industry 4.Thought Hub to help businesses navigate the challenges and prepare help clients embrace new technologies and ways of working. 

Parmjit Singh

Head of the Diversified Industrials Sector Group

Mergers and spins

More diversified industrial companies are aggressively reviewing their portfolios to boost earnings and to pursue sustained growth in their core business, spurring spin-offs and sales of non-strategic assets.

Aggressive acquisition sprees of the past have created broad conglomerates with revenues in the many tens of billions of dollars.  Shareholder activism is encouraging (to say the least) boards to unlock value in the form of spin-outs.  One recently merged public company has often reorganized itself into two or more core business units, with each of those units forming a spin vehicle which separates to become an independently listed business.  The expectation being that each business has unrealised value which can be extracted by a management team focused on their business.  DowDuPont Inc. is an excellent case in point – the merger of the Dow Chemical and DuPont businesses has a colossal market capitalization before being spun into three core businesses.

The rise of digital technologies and the Internet-of-Things provides industrial equipment manufacturers with a welcome opportunity to diversify.  Industrials have leaned heavily on acquisitions and strategic venturing to strengthen their software offerings. In 2018, we have seen several examples of industrial companies vertically integrating bespoke digital technologies into their product and service offerings and linking up with innovative companies in limited, non-exclusive relationships to access certain technologies.

Diversified Industrials companies seem set to continue these trends through 2019 and beyond. In 2019, we are hosting a half-day seminar exploring how industry 4.0 is shaping industrial development – find out more here or contact lead partner Antony Walsh.

Immigration and freedom of movement implications

Global industrial companies have previously benefitted from the ability to plug skills gaps and move people between plants and sites as a result of free movement. Global industrials will now need to consider their pipeline of skills and talent within the resident labour market in which they operate in and assess how this impacts medium to long term business goals.

If a Brexit deal is agreed during the ongoing negotiations, free movement of workers could impact companies that have a high percentage of EU workers, this needs careful thought and strategy. European workers currently living in the UK will be able to apply for “settled status” from 2019, allowing them to remain indefinitely following the end of the Brexit transition period in 2021, by proving that they have been living in the UK for five years at the date of application. Those who do not meet this requirement can apply for “pre-settled status”, allowing them to remain until they have lived in the UK long enough to be granted settled status.

For more information, please contact Wie-Men Ho.

Supply Chain Risk

Many companies grapple with supplier concentration and dependency. Many have already been dealing with the escalating threat level of issues such as cyber-attacks and preparing for future risks in relation to tighter border controls, such as stockpiling. In addition, there remains uncertainty across the Eurozone in terms of the ability to attract and maintain a workforce together with the inherent risks of a potential dip in consumer confidence in 2019 which may drive underperformance and increase the risk of financial failure in the supply chain. As a consequence it is clear that the approach of using “standard terms and conditions” to protect your supply chain interests is no longer feasible to keep up with the fast pace of change and a market environment which is now far from “standard”.

Eversheds Sutherland has a wealth of experience in dealing with supply chain issues across the diversified industrials sector. For help with insulating your supply chain from failure risk, contact Andrew Jordan or click here for our supply chain brochure.

International Trade

The trade war between the US and China has led to new tariffs on billions of dollars of goods being introduced, and has involved both parties strongly disputing tariffs imposed by the other. Tensions appeared to have cooled between the US and China, with Donald Trump announcing that China was prepared to cut tariffs on US car imports following a meeting between Trump and Xi Jinping at the G20 summit in Argentina. Xi had also agreed to resume purchases of farm and energy commodities from the US, for example soybeans, and the parties had mutually agreed to halt new tariffs.

The negative impact on European trade is likely to be through lowered final demand and broken supply chains, with only a partial possible benefit of increased exports to China. In the event that negotiations fail to achieve stable and favourable trading arrangements, an increase in tariffs on specified products will have an impact on the cost of production and the supply chains of businesses which rely on China-origin imports. These businesses should prepare to be flexible if required by, for example, considering the import classifications of products, whether the origin of relevant products might lawfully be changed, and the possibility of switching to alternative sources.

For more information, please contact James Lindop

The Automated and Electric Vehicles Bill

The UK government plan to phase out the sale of new petrol and diesel cars by 2040, as automotive sector moves closer to autonomous vehicles adoption and implementation, the development of a new insurance framework as outlined in the new bill for the sector will help the UK to steal a further march on other jurisdictions in the race towards a fully automated transport network.

The Automated and Electric Vehicles Bill advocates a single insurer model, whereby the same insurance policy would cover accidents caused by the driver’s operation of a vehicle and the automated operation of the vehicle. This model is designed to avoid confusion on the part of the victim over who it should pursue for its losses, bearing in mind that there are arguments in favour of imposing liability on the manufacturer, owner and even highway authority depending on the circumstances. The Bill received Royal Assent on 19 July 2018. Most sections will need to be enacted by the Secretary of State via regulations. It is not known when the provisions will come into force, but may now be after 31 March 2019.Our Industry 4.Thought Hub is regularly updated with the latest news and developments in the disruptive technology world. For more information on the Automated and Electric Vehicles Bill specifically, please contact Naz Gauri.

Regulation in the chemical industry

For the chemical industry, 2019 starts with huge uncertainty, as the Government steps up its preparations for a no deal Brexit (with no single market type arrangement and no transitional period). “Catastrophic” was how industry witnesses described a no deal Brexit at the recent session of the House of Commons Environmental Audit Committee considering Chemicals Regulation after the UK has left the EU (at which Elizabeth Shepherd, Partner, also provided oral evidence).

One concern is the additional regulatory burden of registering or re-registering chemical substances under UK REACH in a no deal scenario. Another is the likely duplication of data access costs, as existing data access agreements typically limit use to EU REACH. If negotiation with data owners for UK REACH is unsuccessful, repeat testing will be necessary, which could take longer than two years from Brexit (the period in which UK REACH registrants must submit a full dataset to the Health & Safety Executive (HSE), though this timescale will be kept under review).

There is significant concern too that a no deal Brexit will impact the competitiveness of the UK chemicals industry. Regulatory divergence following Brexit could mean compliance with two sets of law, for UK and EU markets respectively. Registration under UK REACH may not be economically viable for some UK companies using high-value, low value substances, based on UK tonnages alone, for what may be a small market. UK manufacturers may consider moving their plant to the EU, to ensure more immediate access to larger markets and one set of regulatory obligations.

The HSE has recently issued its “Additional no deal REACH guidance”, with actions which UK businesses will need to take to maintain or gain access to EU/EEA markets in a no deal Brexit scenario. With Brexit less than three months away, contingency planning is essential, not just for UK businesses but also for EU-based businesses whose supply chain involves the UK.

For more information on Brexit and the chemical industry, contact Elizabeth Shepherd.

US CLOUD Act and proposed EU regulation

Following the enactment of the US CLOUD Act in March 2018, the European Commission has submitted a proposed Regulation on “European Production and Preservation Orders for electronic evidence in criminal matters”. Both the CLOUD Act and the proposed EU regulations mean that law enforcement agencies in the US or EU can obtain data directly from your service provider, without your consent, if it meets certain criteria. Global industrials will need to consider where their service providers are located, as well as where your data is stored. A revision of your terms of service with your providers is also encouraged. Industrial companies are strongly advised to review any data of highly sensitive or confidential nature, ensuring the necessary protections are in place and considering whether or not the hosting of this data exposes you to any risk

For more information, please contact Emma Gordon.

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