The North American industrial goods sector continues to be strong: profits are up, CEOs are optimistic, and companies are looking to expand. Overall, especially compared with the mixed results in our European analysis, it’s a rosy picture. But industrials are subject to the same macro factors that are disrupting businesses in other sectors, leaving the industry at an inflection point. To continue the positive outlook, the sector will need to be resolute when adopting hedging mechanisms and making decisions on future investments amid the ever-changing landscape.

To get a comprehensive perspective on the state of the industry and its biggest priorities and challenges going forward, we interviewed leaders in the field, conducted online surveys, and analyzed more than 1,000 public companies worldwide. Our analysis yielded several key takeaways.

North America leads the world in industrial goods market growth

The Oliver Wyman Industrial Goods (IGO) Index, an aggregated index representing the development of market cap of more than 140 industrial goods companies in the US, grew 23% year-over-year in 2023, the largest change of any region. And while performance has been strong globally, North America is expanding its market share, which rose three percentage points to 39% between 2022 and 2023.

Multiple reasons accounted for this shift. First, North American companies have greater pricing power because of consolidation in the region, while protectionist policies have further helped support local businesses. The US in particular has had advantages, including comparatively high productivity and a stable economic base, that facilitated a quicker recovery from the pandemic.

A closer look shows that considerable variation exists within the industry. Value has continued to move toward a handful of sub-sectors, including industrial software and semiconductor manufacturing equipment.

The North American industrial goods sector shifts focus to simplicity and growth

In the past, industrial companies were more open to pursuing new or experimental initiatives in fields like artificial intelligence (AI) and digitalization, often with few concrete goals in mind. Now, however, a common thread among CEOs we interviewed is a return to basics to manage an uncertain economic and political environment. That means developing plans to simplify their organizations, become more vertically integrated to derisk supply chains, and strengthen core competencies.

This back-to-basics approach is part of a broader movement to prioritize growth. In an AI analysis of the shareholder letters from North American industrials companies’ annual reports from 2022 and 2023, we found that the number of mentions of growth and expansion increased more than for any other topic.

Focus on supply chain resilience and geopolitical uncertainty

Industrials CEOs are focusing on supply chain resilience to reduce risk and manage geopolitical instability, protectionism, and government industrial policies. The US is quickly changing the mix of countries it imports from, as well as looking at entirely new options for potential trade partners.

In general, industrials firms have seen considerable success solidifying their supply chains. Of the nine industries in our “Global Supply Chain Risk and Resiliency” survey, the global industrials sector had the highest number of “Leaders,” or companies that had made significant improvement in supply chain resilience and were ahead of their target and peers. Overall, 65% of respondents from the industrials sector were above the global average in supply chain improvements. Firms in North America fared especially well, with 85% of respondents scoring above the global average.

Artificial intelligence as a catalyst for internal growth

While industrials firms see AI as a growth opportunity, the applications they are pursuing mainly are focused on internal operations. This is very much in keeping with the back-to-basics strategy, with lofty, aspirational initiatives giving way to the goal of stitching the technology into the fabric of what the company does every day. Specifically, Oliver Wyman Forum’s 2024 CEO survey found, compared with other sectors, industrials are investing heavily in applications for workforce productivity and analytics-based insight generation.

But even with all of AI’s promise, some roadblocks to widespread implementation remain. Executives we interviewed cited the need for industrials to find the right partners or acquisition targets to more rapidly improve their capabilities with the technology and set up their AI governance and organization. Perhaps an even greater concern is the need for deeper understanding and expertise in AI technology among employees. By 2027, Oliver Wyman Forum finds, 60% of workers across industries will need reskilling or upskilling on AI. It will be imperative for companies to prepare effective training programs.

Workforce performance in a multi-generational landscape

Like many other industries, industrial goods companies now employ teams comprising workers from Generation Alpha all the way up to the Silent Generation — five distinct groups in all. Managing people with highly divergent values and expectations is fraught with the potential for conflict and even age discrimination. Doing so effectively will be a high-wire act that requires extremely careful planning and a deft touch.

Industrial firms also must contend with the difficulty of finding new talent in a tight market. Large North American industrial goods companies, many of which combined through mergers and acquisitions (M&A), are now seeking strategic deals with cash-strapped startups and other smaller entities to bring in skilled tech workers. In 2024, while the number of M&A deals has declined from the previous year, the median deal size nearly tripled to $110 million , according to research firm Pitchbook. Larger deals may indicate acquirers are engaging in M&A to increase their access to talent and technology or to increase their value, while sellers are rationalizing portfolios and aligning investments around their core areas.

Sustainability as a core business strategy

Sustainability initiatives are no longer a requirement that executives grudgingly adopt. They have become squarely among the “basics” — a market demand that executives are increasingly prioritizing to preserve their companies’ right to operate and remain competitive. As a result, smart industrials businesses increasingly are adapting their business models to position sustainability as a product offering. A well-crafted strategy featuring assiduous reporting of Scope 3 and other emissions can drive positive business outcomes in multiple ways. For instance, adopting more energy-efficient practices — such as using alternative materials for products or changing modes of transportation to move freight — often reduce costs.

The executives we interviewed also pointed to energy diversification as a major growth opportunity. Given the uncertainty of the regulatory landscape, though, some are hedging their bets in their portfolios and product offerings, aiming to serve both coal and renewable energy sources (geothermal, hydroelectric, solar, wind, and others) without taking an outsize chance on either.