Factors
in automation decline
Over
the past several years, there has been a consistent stream of mergers,
acquisitions, consolidations, re-organizations and layoffs in the factory
automation and process controls businesses. This is because US industrial
automation markets have been declining for the past several years. Organic
growth has been simply non-existent and margins have been shrinking.
Industrial
automation market decline is beyond the recent across-the-board decline in
financial markets. To understand the decline, let's review several important
strategic factors that have changed over the past decade.
-
Less
new business: Fewer new factories are being built and so US business is
primarily MRO (maintenance & repairs). Also, MRO revenue has been
reduced by improved reliability of products and systems; "re-manufacturing"
- third party supply of re-conditioned, used-equipment - has made some
inroads.
-
Falling
prices: Older control systems were based on custom technology; today
they are commercially available products, protocols, operating systems and
software. Many products have become commodities and prices have reduced.
Average prices for distributed control systems (DCS) have come down from
$100,000 to $ 10,000 PC-based systems. Commodity PLCs are available for as
little as a few hundred dollars.
-
Longer
equipment life: Most industrial automation equipment is quite reliable
and tends to be under-utilized. Steel plants and oil and gas refineries are
often not refurbished for more than a decade, so large projects are few and
far between. When big jobs emerge, they are very hotly contested and margins
slide.
-
Location:
Oil-refineries and steel plants are being built near the sources of raw
materials. The new plants being built - in the Far East and China, for
example - are bid very competitively with locally made equipment. US
products are expensive - against cheap (but adequate) copies.
-
Costs
& Overheads: US development costs are high. The third-world
countries (India, China, Far East) have good skills at a much lower cost.
Automation products (software & hardware) are being developed (and
copied) elsewhere. US overheads are high, by comparison. Most of the major
Automation.companies are moving to "turnkey services" and "systems
integration", but cannot compete against local labor-rates with knowledge
that is often available locally. Projects are most often won on price, at
shrinking margins.
New
directions
Rather
than simply be a reporter of recession, let me suggest some key areas of
industrial automation growth and success:
-
Technology:
Proprietary products generate high margins. The benefits generated by
proprietary technology must be substantial, to get beyond the commodity
noise level. New technology demands significant and sustained allocation of
development resources. R&D budgets must be sustained at the typical
high-tech level of 10% of annual sales.
-
Agility:
To remain proprietary in this day and age, developments must progress in
months, rather than years, or value degenerates quickly. Faster
time-to-market is an imperative.
-
Cost:
High-quality products must be manufactured consistently at the lowest cost
for global distribution. When growth occurs, the lowest-cost producer wins.
-
Customer-care:
Marketing, sales and distribution channels should be focused on
customer-centric services. Customer
alliances and partnerships must be given the highest priority. Distributors
are direct links to the customer and should be stimulated in that role.
-
Global
markets: Markets today are spread out throughout the world. The special
needs and custom requirements of remote customers must be handled locally,
giving them the feelings of partnership and proximity. Go Global think
local!
Implementing
a combination of all these new directions is indeed a tall order. New and
different management leadership abilities are demanded. But, in the new and
different business environment of the new century, the organizations that can
achieve these goals will indeed generate significant growth and success!
Jim
Pinto is an industry analyst and commentator, writer, technology entrepreneur,
investor and futurist. You can email him at: jim@jimpinto.com.
Or look at his poems, prognostications and predictions on his website: www.JimPinto.com
