The drivers behind consolidation in the industrial sector

What does the consolidation wave mean for business owners?

The Dutch industrial sector is consolidating at a rapid pace. This is not a new phenomenon, but its intensity has increased noticeably in recent years. Strategic buyers are expanding their capacity through acquisitions, private equity firms are rolling out ‘buy-and-build’ strategies, and companies that have operated independently for years are increasingly opting for collaboration or sale.

The question that business owners are increasingly asking our sector team is not so much whether this trend will continue, but what it means for their own business and its positioning. To answer that question, it is useful to understand what is driving consolidation in the industry. We see four structural forces that explain why this trend is set to continue for the foreseeable future.

The Four Drivers Behind the Consolidation Wave

Consolidation in the manufacturing industry does not have one single cause. It is the result of four converging developments, each of which is influential separately, but which, when combined, are driving structural change.

1. Economies of scale are becoming greater and more tangible
Economies of scale are one of the most dominant drivers behind consolidation in the industrial sector. Joining forces with other companies creates significant advantages in procurement, production processes and workforce deployment. However, the real impact goes well beyond these advantages.

A key aspect here is the substantial investment required for robotisation, digitalisation and automation. These investments are typically capital-intensive and require a solid financial foundation. Larger companies are able to spread these costs more easily across a higher production volume and an optimally utilised machine park, making automation profitable sooner.

2. Technological complexity is increasing
Technology in the industrial sector is becoming increasingly complex. Advanced manufacturing techniques, digitalisation and smart automation require substantial investment in research and development (R&D). Consolidation enables companies to make these necessary investments and accelerate their innovation. It is difficult for med-sized companies to sustain this whilst operating independently.

Moreover, larger groups can apply unique technological know-how and expertise – which was originally help by individual companies – on a broader scale. This creates greater flexibility, synergy and continuity. Companies are also increasingly choosing to acquire innovative competitors or niche players in order to strengthen their market position, enter new sectors or reduce supply chain risks.

3. A tight labour market forces companies to make choices
The shortage of technically skilled personnel is one of the greatest challenges faced by today’s industry. The lack of technicians and skilled workers affects virtually every company in the industrial sector and strikes at the very heart of their operations.

Larger organizations can invest in attracting, training and retaining employees at a greater scope. They are able to offer more attractive terms of employment, invest in training programmes and facilitate career development opportunities. This helps to develop and retain talent and makes organisations more resilient in the labour market.

4. Sustainability requires the ability to act decisively
The industrial sector is facing increasing demands worldwide in terms of sustainability and regulatory requirements. These includecircularity, regional production, material reuse, energy efficiency and the reduction of CO₂ emissions. The need to increase sustainability is being driven by stricter regulations, trade barriers and societal pressure. In addition, strict requirements imposed, for example, on defence contracts.

Larger organisations are generally better equipped to respond to these developments. They have the capacity and resources to invest in sustainable production processes and to comply quickly with changing laws and regulations. Furthermore, they can leverage economies of scale when implementing sustainable innovations, enabling the transition to sustainable practices to take place more quickly and cost-effectively.

What this means for you as an entrepreneur

Consolidation in the industrial sector is not a temporary trend, but a strategic response to four major challenges and opportunities. For entrepreneurs, this means not only keeping a close eye on sector developments within the sector, but also giving timely consideration ring to their own position within them at an early stage.

The entrepreneurs we speak to generally find themselves in one of two situationspositions. The first is the entrepreneur who recognises this the trend and is considering considers their own role within it. Should they continue to operate independently, or would joining a larger company be strategically sensiblemake strategic sense? The answer depends on the sector, the company’s position and the entrepreneur’s personal ambitions. The second is the entrepreneur who is actively approached. Buyers in the industrial sector are well informed and know which companies are of strategic intereststrategically attractive. Those who do not knoware unaware of their company’s value what their company is worth or and what the right terms areappropriate terms will be at a disadvantage in such discussions.

In both cases, the same principle applies: understanding your own position is the foundation for making a well-informed decision. Entrepreneurs who know where they stand consistently have more greater room to for negotiatione.

About the author

John Hoekman is a Partner at Rembrandt M&A and Head of Industry. He advises on sale processes and acquisitions of industrial companies, with a particular focus on the metalworking and manufacturing industries.