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Driving Value Creation in the Qatari Industrial Manufacturing Industry

https://www.pwc.com/me/deals

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The COVID-19 pandemic has disrupted business globally, both creating and further accelerating distress in many markets and economies. Far from 'business as usual', whole business models and industries are having to rethink and reconfigure themselves in the wake of new challenges. With significantly reduced demand, supply chain disruption, working capital issues and the impact of local lockdowns, businesses need to find new ways to create value.

The industrial manufacturing (IM) sector, which includes industrial machinery, fabricated metal products, rubber and plastics and other industrial manufacturing sub-sectors, has not been spared either. The pandemic has introduced unique challenges and uncertainties across many organisational structures in industrial manufacturing, affecting the entire value chain.

COVID-19 impacted demand and revenues, which led companies to rethink and refocus on their core customer base, i.e. based upon their long term prospects, business profitability and if they historically pay on time.

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The impact of COVID-19 on the value chain

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Whilst navigating through lockdowns and managing lower plant availability, many players scrambled to explore unexpected angles by adopting virtual ways of working and tightening safety measures. Manufacturing output was also reduced due to the lower on-site presence and shrinking demand that resulted from the slowed economic activity.

Most importantly, it is apparent that the ‘new normal’ is here to stay, with some of the disruptions and operational transformations (i.e. automation, localisation and diversification of supply chain) evolving into a sustainable strategy that leads to long-term growth.

By applying the approach of repair, rethink and reconfigure, it is apparent that the current uncertainty and turmoil within the industry can be leveraged into a world of opportunity through which to build a more resilient future.

The journey to value creation within the Qatari industrial manufacturing industry consists of:

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Build supply chain resilience

Champion technological innovation

Optimise your Investment strategy

Align with Qatar Vision 2030 for sustainable growth and change

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Having witnessed the vulnerability of supply chains since the outbreak, the pandemic has created an urgent need to repair, rethink and reconfigure various aspects of supply chains in order to enhance their resilience. Qatar was well positioned to weather supply chain disruptions as the country had already initiated an ambitious diversification programme to mitigate the effects of the previous political tensions.

The exposure to cross-country risks, as a result of the novel coronavirus, also highlighted the importance of adopting shorter and more localised supply chains to find upside and drive growth.

Glocalization is likely to create new deal opportunities in Qatar, as the country and industry as a whole adapts to new market realities. Qatar’s Tawteen program and Qatar Vision 2030 are a stark example of this ambition, serving as catalysts to localise, attract foreign investors and enhance the business environment within Qatar.

01Build supply chain resilience

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Whilst localisation might not be feasible for certain products, due to factors such as climate, proximity to raw materials (i.e. ores, trees), and adequacy of trained labour, acquisitions and investments in international players are anticipated. Industrial manufacturing organisations have started to consider transformation tactics, casting an eye on supply chain partners to identify new synergies, unlock deal value and explore strategic acquisitions that would further boost the resilience of the sector. As such, additional vertical integration is likely to occur in the sector over the next few years to develop new and more resilient supply chains, localised value chain components and the right legislative and commercial frameworks to support businesses.

Further, as the competitive landscape increases, leading players are likely to acquire competitors as a means to create shareholder value. Businesses have also started divesting non-core operations in order to take control of their business, stop value leakage, and focus on core operations whilst simultaneously considering deal opportunities that provide synergies with their existing operations. Industrial companies would benefit not only in prioritising focus over diversification, but also from centralisation over decentralisation in order to allow for a greater level of group control and enhanced ability to react to significant events such as lockdowns.

It is evident that building supply chain agility is also key to industrial manufacturing. Being able to better forecast disruptions in supply chain does not only assist in avoiding shortfall or a build-up of inventories, but also ensures that potential disruptions to production can be foreseen and their effects quickly minimised. From the perspective of organisations, new supply chain technologies are being introduced and adopted across the sector, with the aim of improving visibility, transparency and reducing risk management overheads.

Supply chain resilience is not new on the agenda of the State of Qatar government, but it’s importance has been amplified. COVID-19 has introduced whole new supply chain vulnerabilities and increased the stimulus to localise industries. It has become a national priority to identify the sectors where localisation would create maximum value and upside for the State of Qatar. To achieve this, organisations need to act quickly and decisively as they map their journey towards enhanced resilience and ultimately value creation.

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Compared to other sectors, industrial manufacturing has lagged behind in terms of digitalisation of operations and innovation through technology. Lockdowns and work restrictions have emphasised the need to automate factories for enhancing resilience by reducing the need for human operators present onsite.

Champion technological innovation

As the speed of the fourth industrial revolution (4IR) keeps increasing, manufacturers deciding not to invest in technology will miss out on clear returns and risk being left behind while competitors revolutionise the way their business is run across all dimensions.

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Manufacturing processes are good candidates for automation through robotic infrastructure which can be controlled remotely through a combination of Internet of Things (IoT) solutions and embedded sensors connected to algorithmic machine components. Accumulated sensor data can then be fed into Artificial Intelligence (AI) and Machine Learning (ML) systems for analysis and process optimisation. Automation of factories will shift human labor towards higher value adding tasks requiring a higher digital IQ and fluency in technology. This will involve training the current workforce to attain more relevant skills and ramping up the hiring of software and IoT engineers. In a recent study conducted by PwC to gauge the preparedness of businesses for the workers of the future, Middle East respondents felt more prepared than global respondents in 45% of the areas surveyed.1 There seems to be appetite for a drastic redesign of human work across the region, including the State of Qatar.

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Qatari manufacturers should also maintain sight of emerging technologies. For instance, tapping into 3D printing can enable a more flexible production of parts and components. Given its strong local petrochemical industry, Qatar has a cost advantage when it comes to the raw material inputs necessary for 3D printing. Another emerging technology is blockchain which can help streamline operations and improve transparency in supply chains.

A reliance on quality and timely data and analytics is essential, and it is important that market players work closely with their clients to provide a holistic understanding to help them adapt and future-proof as much as possible in response.

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Manufacturers should invest in technology through selected acquisitions of innovative firms or through joint ventures. By opting for inorganic growth, companies can get faster access to new technology capabilities that would otherwise take years to build themselves. Furthermore, value can be created in deals by tailoring operations to embed the core values of targets. IM companies need to be people centric by ensuring that tech capabilities acquired as part of M&A still revolve around people. Therefore, cultural fit must be meticulously assessed to ensure tech talent retention.

According to the Middle East findings of our 24th Global Annual CEO survey, M&A will also be important over the next year or two, and we expect dealmaking in the region to focus on consolidating operations and divesting non-core assets, in line with the global emphasis on repairing and reconfiguring businesses, as well as adding new technologies in support of digitisation. Around 41% of CEOs said they hope to form a new strategic alliance or joint venture in the next 12 months, up from 36% last year.2

By undergoing a digital transformation, businesses can evolve into agile archetypes and develop the ability to effectively pivot operations in response to change. Technological advances can increase capacity and lower costs through automation, as well as help to reduce the carbon footprint of heavy industry and drive value through an Economics, Sustainability and Governance (ESG) lens in a world where these issues are increasingly high on both the public and private agenda. Investors are likely to seek businesses that have robust ESG before injecting capital. Likewise, customers will want to do business with ESG compliant manufacturers and subsequently, additional value will be created by manufacturers applying ESG. Qatar can be a case in point by adapting its IM sector to the 4IR. The bottom-line benefits of embracing digital and adapting to ESG best practice could prove crucial to weather current and future economic downturns.

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Recovery through building resilient supply chains and championing technological advances can only be achieved through a robust investment strategy. Investment leaders need to ensure they have clear objectives (ROI, sector focus, etc.) provided by the shareholders which set the framework of the investment strategy. Each portfolio asset needs their own strategies that creates shareholder value from organic and inorganic (M&A) growth; whilst optimising operations and balance sheets.

Optimise your investment strategy

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There are a range of investment opportunities available, driven in part by the strong local demand for large infrastructure projects in the country and the upcoming FIFA 2022 World Cup. Export opportunities could also be seized by virtue of Qatar’s developed air and marine port infrastructure. The gradual reopening of country borders and the creation of transit and travel corridors creates a floor of support in regional markets and gives Qatar a robust platform on which to trade globally. Foreign competitors in the IM sphere might also venture into the Qatari market given the gradual reopening. This increased competition re-emphasises the need for manufacturers to have a competitive edge by adding resiliency to supply chains and by going digital.

However, given Qatar’s international growth ambitions, existing market players are incentivised to diversify existing operations through international M&A and thereby diversifying away from single country revenues.

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In the current environment, valuations are likely to be lower as some organisations face financial difficulties making it a good time for opportunistic and strategic decision-making to enhance your portfolio and create value for the future. Now is the time to review business models and investment strategies. For some this may signal a need to divest and simplify, re-focusing on the core portfolio and operations. For others it may be a chance to strategically diversify and expand, with the next six to 12 months expected to be full of opportunity and transformation in dealmaking.3

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The IM sector would do well to align itself with Qatar’s Vision 2030 objectives which rest on the four pillars of economic, environmental, social and human development.

Align with Qatar Vision 2030 as a catalyst for sustainable growth and change

Given economic development and diversification priorities, a prosperous industrial manufacturing sector would prove crucial in pivoting away from an oil and hydrocarbon economy.

The Qatar Development Bank (QDB), a financial institution owned by the state of Qatar, has launched initiatives such as Jahiz which aims to support SMEs by providing ready-to-operate industrial facilities for leasing.

It would be beneficial for the government to continue to seek adjustments to regulations and support frameworks to attract investments and enhance the business environment in Qatar.

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IM companies can contribute towards the environmental and social development pillars; first by investing in green technologies and second by exerting greater control over their supply chain to ensure compatibility with ethical values that contribute towards a more humane and sustainable world.

Aside from the value which can be created through economic, sustainability and governance (ESG) initiatives, and the increasing importance of these on both the world stage and in capital markets, it is also a catalyst for creating greater value at a local level and growing the customer base. The human development pillar aims to supply Qatar with a capable and motivated workforce. As supply chains become shorter and localised and as newer technologies are adopted, the IM sector will need to employ talented supply chain and technology professionals. By balancing tech and supply chain innovation with human insight, real value creation can be enabled. As such, this presents tremendous opportunities to develop human capital in Qatar and the associated education and training ecosystem as a means to enhance Qatarisation.

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Few sectors have been spared the negative fallout in the wake of COVID-19. But from these uncertainties organisations have been acting to minimise further value destruction, and reach a state of relative stability and, ultimately, value preservation in this ‘new world’. The IM sector needs to repair, rethink and reconfigure to not only survive but ultimately thrive, and the various steps towards the end goal of value creation must be carefully thought-out.

By building supply chain resilience, championing technological innovation, optimising your investment strategy and aligning to Qatar Vision 2030 as a catalyst for growth and change, the journey to value creation will be well underway, allowing you to take back and maintain control of your own destiny.

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Repair, rethink and reconfigure for shareholder value

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Distressed and crisis situations

Entry enterprise value

“Repair”

Stable starting value

Strategic repositioning

Performance improvement

Asset optimisation

Multiple impact

Potential enterprise value

Rapid cost reduction

Supply chain diversification

Digitalisation & remote working

Loan payment holiday

Government support

Value preservation

Portfolio optimisation

Capital (re-) allocation

Business model changes

Transformational M&A

Strategic repositioning

HeadwindsCost optimisation

Operational excellence

Revenue growth

Performance improvement

Embracing technology

Boosting supply chain resiliency

Tax efficiencyBS efficiency

Capital efficiencyNWC/CF/Capex

Asset optimisation

Multiple impact & Purpose

Stakeholder alignment

Resilience / Business model agility

Sustainability & ESG

Market (Economic) shifts

Qatar Vision 2030

Tawteen

“Rethink”“Reconfigure”

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Glossary:

IM: Industrial manufacturing

IoT: Internet of things

ML: Machine learning

AI: Artificial Intelligence

4IR: Fourth industrial revolution

ESG: Economics, Sustainability and Governance

SME: Small and medium-sized enterprises

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References:

1: Workforce of the Future, Middle East, 2019: https://www.pwc.com/m1/en/publications/documents/workforce-of-the-future-middle-east.pdf

2: PwC, 24th CEO survey, 2021 - Middle East Findingshttps://www.pwc.com/me/ceosurvey

3: PwC, Global M&A Trends, 2020 https://www.pwc.com/gx/en/services/deals/trends.html?j=120228&sfmc_sub=3777254&l=16_HTML&u=2032188&mid=510000034&jb=1

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Authors:

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Mohammad Homoud

Mohammad is a Senior Associate in PwC’s Deals Advisory practice, and has worked with the firm across the region since 2017. During his tenure at PwC, Homoud was part of key projects, advising clients within the financial services, real estate, government, healthcare, industrial manufacturing, education and consumer markets industries. Homoud is also one of the authors of PwC’s quarterly Qatar Banking Sector Report, and a PwC Data Digital Accelerator that capitalises on digital assets for dynamic and strategic delivery models.

Alexios Zachariadis

Alexios is a Director in PwC's Deals Strategy & Operations team, based in Abu Dhabi. He focuses on Energy, Utilities and Resources and works with clients across the GCC region on pre-deal strategy. Over the last two decades, he has worked across strategy consulting, industry and investment banking, advising clients across multiple sectors globally, on strategy, M&A, business planning and feasibility studies, risk management, trading and operating model design.

Kamal Fayed

Kamal is a Transaction Services Partner based in Doha and leads PwC’s Deals practice in Qatar. He has almost 20 years of experience with PwC and specialises in leading large and complex due diligence and valuation engagements. He advises governments, large corporates and institutional investors on a wide range of transactions including IPOs, strategic acquisitions and privatisations. His previous experience includes leading various engagements in connection with investments in the Industrial Manufacturing sector (in Qatar and across the ME region).

Tarek Chawaf

Tarek is a Senior Associate in the Deals Advisory team with PwC Qatar specializing in transaction services, and has worked on projects across the Middle East and Europe. He has been part of key valuation and financial due diligence projects within multiple sectors including but not limited to industrial manufacturing, transportation and logistics, and agriculture.

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