The Titanium Economy: Emerging stronger in the face of disruption

The Titanium Economy is a linchpin in America’s path to sustainable and inclusive growth. So far, we’ve explored how the US industrial technology sector (what we call the Titanium Economy), though often overlooked, has become a strong engine of economic growth—creating millions of well-paid jobs and revitalizing entire communities across the country.1The Titanium Economy: An introduction,” McKinsey, October 21, 2022. These companies have consistently delivered strong financial returns, in many cases equaling or surpassing the performance of tech giants that the public has come to equate with business success. But to secure their future, industrials must continue to fill new technical jobs and capture emerging opportunities in the energy transition.

Continued growth of the industrial sector—and indeed the US economy—is far from guaranteed. Geopolitical tensions, such as the Russian invasion of Ukraine, and macroeconomic headwinds highlight the unpredictability of the future competitive landscape and promise to shift the behaviors of all stakeholders.

This unprecedented time of disruption calls for resilience and through-cycle thinking. Six forces in particular—the Fourth Industrial Revolution, new customer megatrends in the wake of COVID-19 and supply chain disruptions, tighter capital markets and slowing M&A activity, a new age of media and communication, growing skills gaps in the workforce, and the sustainability imperative—will create new challenges and opportunities for the US industrial tech sector.

Titanium Economy companies have embraced through-cycle thinking and taken bold action that positions them to thrive—not merely survive—in the face of this disruption. Their actions provide a clear, six-step playbook that may help US and global companies build resilience as we enter a new era of economic uncertainty.

The Fourth Industrial Revolution

Technology continues to advance at a dizzying pace. Sixty-nine percent of boards of directors have accelerated their companies’ digital business initiatives because of changes brought on by COVID-19.2 Industry 4.0—or the Fourth Industrial Revolution—will have an estimated global value creation potential of $3.7 trillion in 2025.3Capturing value at scale in discrete manufacturing with Industry 4.0, McKinsey, September 13, 2019. Cloud-based computing and artificial intelligence are already making waves in manufacturing production, supporting more advanced processes and material development. Quantum computers may soon prominently feature in the industrial landscape and transform the way that data are analyzed.

Titanium Economy companies have historically outspent their peers on digital capabilities and innovation. As a result, they have maintained top-quartile operational performance—measured by product quality, supply chain agility, and margins—among their industrials peers. Titanium Economy companies boast an average operating margin of 13 percent, compared with 4 percent for other industrials, according to McKinsey analysis. As digital advancement continues to shape the industry, companies that focus on innovation—following the example of those in the Titanium Economy—will differentiate themselves in the Fourth Industrial Revolution.

Take Sealed Air, a leader in the packaging materials industry: Sealed Air pioneered a blockchain labeling system to track the chain of custody for packages and ensure product quality for end users, helping the company streamline its supply chain and distinguish itself from its peers—and deliver a 9 percent quarterly EBITDA expansion since 2018.

New customer megatrends

Technology is not the only thing that is changing in today’s world; product preferences and distribution approaches are evolving across all businesses that purchase industrial goods. For instance, 73 percent of B2B companies now report conducting sales online (up from 55 percent in 2020)4 and regularly using ten or more channels to communicate (up from five in 2016).5B2B sales: Omnichannel everywhere, every time,” McKinsey December 15, 2021. On top of this, supply chain issues and growing inflation have drastically changed pricing and product availability. As a result, companies are choosing sources closer to home, with 72 percent of industrial buyers saying they “always or generally” prefer to source locally—a trend that is expected to hold.6 E-commerce and demands for local sourcing are just two examples of customer megatrends fundamentally changing the landscape; others include automation, electrification, recycling, connectivity, and many more. Each will require deep production innovation from industrial companies.

Companies in the Titanium Economy have taken steps to build agility in response to changing preferences and global supply chain challenges. They have innovated to meet their customers’ evolving needs by consolidating their value chains, maintaining regional sourcing and production, and minimizing the distance between engineering and manufacturing and their supply chains.

Middleby, a residential cooking appliance company, is a good example of a company taking the above steps. When the COVID-19 pandemic led to high demand for food delivery, the company leaned in by rapidly introducing “ghost kitchens” in its communities. As soon as the pandemic hit, Middleby listened to its subsidiaries, such as L2F, a manufacturer of robotic kitchen products, to identify how its customers’ needs were changing. The company then coordinated heavily with its suppliers—holding calls with more than 100 tier-one and tier-two suppliers each week7—to source smarter and quickly innovate to meet restaurant and independent chefs’ needs.

Tighter capital markets

The United States may be entering an investment dry spell. Financing in certain markets is down more than 70 percent globally year over year,8 and US M&A volume has declined in each of the past five quarters.9Global M&A market slows in 2022 first half—but shows signs of strength,” McKinsey, September 30, 2022. High-performing, well-capitalized companies can seize the opportunity by stepping into a new role as investors through strategic M&A. Strategic M&A pays dividends: research has shown that industrials that conduct through-cycle, programmatic M&A see median excess returns of 5.9 percent.10How one approach to M&A is more likely to create value than all others,” McKinsey Quarterly, October 13, 2021.

Small- to midcap industrial technology companies have executed programmatic M&A to great effect in recent years. Even in economic downturns, these companies have used strong cash balances to fuel strategic acquisitions and avoid the expensive leverage brought on by increased interest rates. In the process, these Titanium Economy businesses have targeted well-managed companies in specialty markets to help improve margins, expedite growth, and build a platform for future expansion.

One example is HEICO, an aerospace parts manufacturer that has conducted more than 70 acquisitions in the past 30 years, helping it consolidate microverticals and build new capabilities. Many of these acquisitions have come in the past ten years (after the 2008 recession) as the company has doubled its efforts, leading to a tenfold increase in enterprise value.

The Titanium Economy Book cover

The Titanium Economy

How industrial technology can create a better, faster, stronger America

A new age of media and communication

In today’s competitive landscape, it is critical for businesses to tell their story to the right stakeholders and through the right channels. Social media has changed the way stakeholders—from businesses to consumers and even governments—interact with one another. Seventy-one percent of Americans now get their news from social media platforms.11 In this new era of interconnectedness, companies must capitalize on new ways of telling their story to consumers, employees, and the broader public.

Many industrials are beginning to do just that. A recent survey found that 53 percent of customers said they are more likely to purchase again from companies that engage through social media.12 Beyond retaining customers, articulating a clear, purpose-driven story can help build visibility and trust to ensure future growth. As more industrials harness the power of storytelling to build their brand and attract new talent, investment may soon follow. Today, only 1 percent of venture capital investments are directed toward the industry. Telling a compelling story may help turn the tide for America’s industrials.

Tesla, a company that started small and achieved rapid manufacturing success, claims to spend nothing on advertising. Still, the company has publicized its achievements—for instance, how it has saved 52 thousand metric tons of CO2 emissions annually, created and filled 50,000 jobs in its communities, and added $5.5 billion to the economy.13 Each message and metric ties back to a clear mission at the core of the company: to build a world powered by solar energy, fueled by batteries, and transported by electric vehicles (EVs). The amplification of this narrative has helped attract more skilled workers, capture EV tax credits, and expand Tesla’s enterprise value by nearly 100 times. We believe the Titanium Economy has the potential to create a thousand Teslas—small industrial companies that grow and embrace this new age of media to tell the story of how they are furthering inclusive, sustainable growth in America.

Labor shortages and skills gaps

The American economy is facing a talent gap that is projected to grow to six million workers by 2030, with a $1.7 trillion impact on GDP.14 Underinvestment in the industrial technology sector plays a significant part. In the United States, 2.4 million industrial jobs have gone unfilled in the past ten years alone, primarily driven by a skills gap brought on by new digital technologies.15The Titanium Economy: How to overcome the challenge of filling high-quality jobs,” McKinsey, October 26, 2022. Businesses can help themselves and develop the workforce of tomorrow by upskilling workers to interface with digital and automation innovation while coordinating with their communities in the process.

Many US industrials have invested in upskilling their workforces, partnering with local apprenticeship programs, and implementing internal training plans to attract, retain, and develop top talent. This investment pays off. Employee training has a 100 percent ROI—for every $1 spent on upskilling, $2 is either earned or saved.16

Graco is an example of a Titanium Economy company doing workforce development well. The Minneapolis-based fluid-handling business, which requires a technically skilled workforce to operate its production facilities, has built relationships with trade schools through scholarships, capital equipment donations, and apprenticeship programs. Bridging the talent gap has been key to the company’s performance, having achieved a 24 percent ROIC over the past five years.

The sustainability imperative

Sustainability and environmental, social, and governance (ESG) issues have risen to the forefront of consumer and investor agendas. More than 90 percent of S&P 500 companies now provide ESG reports, and another 60 percent have pledged to act on the climate crisis.17Does ESG really matter—and why?,” McKinsey Quarterly, August 10, 2022; “Fortune 500 companies are acting on the climate crisis—but is it enough?,” World Wildlife Fund, June 2, 2021.

Titanium Economy companies have embraced this wave of sustainability18The Titanium Economy: Capturing opportunities in the energy transition,” McKinsey, November 4, 2022. in pursuit of the dual mission to decarbonize operations and accelerate the cost-efficient scale-up of new green businesses. The addressable market is huge: from 2021 to 2030, sales of hardware related to wind power alone could total $1.8 trillion for OEMs.19Unlocking opportunities from industrial electrification,” McKinsey, July 18, 2022 Industrials are making strides in recyclable materials, solar power, and clean-energy sources, helping the country move toward a more circular economy.

Enphase, a renewable-energy pioneer, developed a microinverter to solve a solar-energy conversion challenge, allowing the company to offset 21 million metric tons of CO2 emissions and deliver value to its stakeholders. Since the innovation, Enphase has claimed a 54 percent market share in the US inverter sector and has seen its five-year TSR grow by more than 18,000 percent. When industrials focus on what is important—being responsible stewards of sustainability—everyone benefits.

In the face of disruptive macroeconomic trends, the Titanium Economy has demonstrated resilience by adopting a playbook of calculated, through-cycle steps that companies across all sectors can learn from and implement. In our next article, we will explore the specific actions of this playbook and how they can help American industrials lay the foundation for the country’s future position on the world stage.

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