What’s Next for European Capital Goods

Immediate Financial Impact of the Pandemic

• The capital goods sector experienced an organic top-line decline of approximately 15% almost instantaneously due to the high correlation with macroeconomic indicators like industrial production.
• Specific industries faced more severe contractions, with the automotive and aerospace/defense sectors seeing sales declines exceeding 50%.
• Certain segments with existing project backlogs managed to deliver some revenue in the second quarter, mitigating the full impact temporarily.

Long-Term Strategic Shifts: Localization and Automation

• Corporate strategy is shifting from early-2000s emerging market growth and financial crisis-era low-cost sourcing to "localized production" to prevent future supply chain disruptions.
• Companies aim to guarantee efficient costs near demand centers by accelerating factory automation to maintain margins regardless of location.
• This marks a structural pivot to matching supply and demand profitably through automation rather than relying solely on low-cost labor.

Unexpected Resilience in Margins

• Company delivered second-quarter margins were nearly 20% higher than analyst estimates, defying expectations for a steep decline.
• Unlike the 2008–2009 financial crisis, which saw a 3-percentage-point margin drop despite only one-third the volume decline, companies demonstrated greater cost-base nimbleness this time.
• Goldman Sachs attributes this resilience to companies entering the crisis with lower capital expenditure and less over-committed cost bases following a decade of weak investment post-2008.
• Analysts believe even excluding the impact of government furlough schemes and support programs, performance would still have outpaced prior crises.

Market Dispersion and Segment Performance

• Negative Exposure: The automotive sector is showing signs of recovery in July and August following a supply-driven initial shock, while aerospace and defense face a slower demand-driven recovery.
• Structural Strength: Capital investment in "green capex" remains strong and largely unimpacted by the pandemic, driven by the European Green Deal.
  • Sub-sectors like offshore wind cabling are experiencing significant growth.
  • Approximately 40% of covered companies are either beneficiaries or must adjust business models related to green transition goals.
• Cyclical Resilience: The semiconductor segment demonstrated notable resilience despite broader industrial headwinds.

Global Recovery Patterns

• China's industrial base saw a steep recovery in March and April, with activity remaining high from June onwards, contradicting fears that early data represented only pent-up demand.
• The U.S. and Europe are recovering, with strong industrial and construction data in July and August, contradicting earlier management caution regarding the U.S. path.
• Europe's recovery trajectory is viewed as slightly more confident by management teams, potentially due to the extent of furlough programs and safety nets.

Capital Expenditure (CapEx) Outlook

• 2020 global capital expenditure is projected to fall by high single digits, reaching nearly 20% when weighted by large-cap companies.
• Pre-pandemic forecasts for 2021–2022 predicted only moderate growth due to manufacturing capacity utilization already being near 30-year averages.
• While deferred projects may boost 2021 numbers mechanically, investment levels are not expected to return to 2019 standards until at least mid-2022.

Future Growth Opportunities

• Green Capex: Significant investment is expected in the European Green Deal, including energy-efficient transportation shifts toward rail and building renovation for energy efficiency.
• Automation and Digitization: Long-term investment is focused on the "factory of the future," characterized by human-robot collaboration for social distancing, high-density automation, and fully connected digital supply chains.