By Walt Boyes, Control’s Editor-in-Chief and Larry O’Brien, ARC Advisory Group
We called it "Mr. Toad's Wild Ride" last year, as we noted that automation sales had remained strong while the rest of the economy had dropped into the pot. It didn't take long, however for the automation vendors to follow like lemmings over the recession cliff. Starting in the first quarter of 2009, sales softened and, in some cases, plummeted. Sales funnels vanished, and some companies began cutting and gutting in a frantic attempt to maintain profitability. Which portion of the manufacturing economy the company faced determined how fast and how deep the cuts had to go. Companies working in the process industries generally had to cut less, at least at first, than those in the discrete manufacturing sector. Those servicing the automotive industries and their suppliers were hurt the worst as the big automakers flailed and both GM and Chrysler filed for bankruptcy protection.
The numbers we present here, however, do not reflect the precipitous decline in the performance of the sector since the end of 2008, because, as always, we've used the last full year of financial performance data we can get to establish the Top 50 rankings. In this case, the data are normalized to 2008 financial performance. So you can take it as given that we'll be able to show you the whole sorry story next December, after all the 2009 performance data have come out.
How Do We Do It?
Here's what we are including in our definition of the fifty largest companies:
- Process automation systems and related hardware software and services
- PLC business, as well as related hardware, software, services, I/O and bundled HMI
- Other control hardware components, such as third-party I/O, signal conditioners, intrinsic safety barriers, networking hardware, unit controllers and single- and multi-loop controllers
- Process safety systems
- SCADA systems for oil and gas, water and wastewater, and power distribution
- AC drives
- General motion control systems
- Computer numerical control (CNC) systems
- Process field instrumentation, such as temperature and pressure transmitters, flowmeters, level transmitters and associated switches
- Analytical equipment, including process electrochemical, all types of infrared technology, gas chromatographs for industrial manufacturing, and related products
- Control valves, actuators and positioners
- Discrete sensors and actuators
- All kinds of automation-related software, from advanced process control, simulation and optimization to third-party HMI, plant asset management, production management (MES), ERP integration packages from the major automation suppliers and similar software
- All other automation-related services provided by the automation suppliers
- Condition-monitoring equipment and systems
- Ancillary systems, such as burner management systems, quality control systems for pulp and paper, etc.
What we're not including are:
- Pumps and motors
- Material-handling systems
- Supply chain management software
- Building automation systems
- Fire and security systems
- Processing equipment such as mixers, vessels, heaters, etc., as well as process design licenses from suppliers that have engineering divisions
- Electrical equipment, such as low-voltage switchgear, etc.
The recovery is already underway in our opinion, at least in the process industries. Will we see a return to the high growth of 2007 and 2008? Not likely. The recovery is going to be slow, and it will be many years before we see the levels of growth that we saw in 2007 and 2008, if ever. The discrete industries continue to be plagued by the situation in the automotive industry and machine business, and their recovery will lag that of process automation by several months.
The question is what will fuel the recovery? In North America and Western Europe, unemployment is forecast to remain high until at least 2012. Jeremy Leonard, economist, Manufacturers Alliance/MAPI, said in a speech at Rockwell Automation's Manufacturing Perspectives event on Nov. 10 that emerging markets, including the so-called BRIC countries (Brazil, Russia, India, China), will lead the recovery, while Western Europe and Japan will lag. "High debt levels and cautious consumers augur a sluggish U. S. recovery," he said. "Consumers are still very worried about the unemployment rate, which is expected to continue to be over 10% throughout 2010, and only reduce about 1% per year until at least 2012." The table on page 27 shows the numbers, and they are not grim, but not good either.
This is bad news for the consumer packaged goods and automotive industries because cautious consumers don't buy things with the reckless abandon we've come to delight in since the early 2000s.
The process industries, however, are already on their way back. The biggest growth industries for process are currently oil and gas, water and wastewater, and power generation. Mining is another promising sector. And, life sciences still offers a lot of opportunities related to regulatory compliance.
Leonard agrees. "The industrial equipment sector was down over 22% in 2009, but will slowly rise to a positive 3.5% in 2010, before increasing at a 22% bounce back in 2012," says Leonard. His numbers though, show declines after 2012, which, when combined with the continued high unemployment rate, are indicative of a shaky economic recovery in the U. S.
Leonard did say that he believes that manufacturing is not only not dead in North America, but that it's actually growing, as he shows in the chart on page 26. Manufacturing is actually tracking the GDP, and has shown a signficant increase since 2002. Of course the last part of the chart shows GDP and manufacturing dropping precipitously, but as you can see from the chart on the next page, Leonard believes this drop to be both painful and temporary.
Inside the Numbers
What the numbers may not show immediately is the impact of acquisitions outside the traditional "automation" space, namely the continued snatching up of small-to-medium size system integrators that fill specific gaps in industry expertise or regional expertise, such as the acquisition of Ber Mac by ABB, Rutter Hinz by Rockwell Automation, and The Automation Group by Emerson. Many of the numbers here mask the effect that the global recession had on what was otherwise a great year on the fourth quarter results. Up until the fourth quarter, 2008 was shaping up to be a great year just like 2007. The downturn in Q4 2008 was sudden and in many cases violent. The numbers also do not show the large transition that is going on related to system migration and modernization, as competitors continue to go after each other's installed base amid a rapidly aging base of automation systems that must be replaced.
Internationally, the former design institutes of China are being spun off into independent system integrators. The transition to private enterprise is agreeing with many of these companies, but not so much for others. Rockwell Automation acquired one of these companies, called Xian Hengsheng, at the end of 2008, for example.
Leonard says, "U.S. manufacturing remains an "engine for growth in the global economy." Productivity and wages have consistently outpaced the rates of other U.S. industries, as well as foreign manufacturers. Manufacturing productivity has more than doubled in the last two decades, almost twice the growth for the overall economy.
"This is a boom for our competitiveness and the general prosperity of the economy," Leonard said. "Contrary to popular belief, the U.S. economy is not de-industrializing."
According to Leonard, this is a good thing for the automation companies and for automation workers in general. Leonard adds the "actionable items" manufacturers need to focus on include capital-intensive automation improvements, and to start to reach out to emerging markets where capital-intensive investments are growing. While he expects the overall economic recovery to be "tepid," Leonard forecasted that the manufacturing sector over the next two years will grow "quite a bit faster" than the economy as whole. This should translate as faster growth for the automation industry than the manufacturing industry itself, and thus faster than the economy as a whole.
Winners, Losers and Why
Overall, winners will be determined by their strength in the services business, both project services and, more importantly, after-sales services. The companies that will weather the recession the best are the ones with the strongest emphasis on services. Take the DCS market, which is over 50% services already. Services are renewable business, and they are directly tied to plant performance and the labor crisis that is affecting so many end users today.
Consequently, what is going to happen when the economy comes back full steam and end users find they need to add capacity? They are not going to have the human resources necessary to meet demand, and they will increasingly turn to automation suppliers to provide them with outsourced maintenance services, training services and other plant-performance-related services.
Companies that provide a value-added service will have greater success as the recovery improves than companies who just provide a product. Years ago, the argument among automation marketers was how to "productize" services and software. In the years ahead, the argument will be how to "service-ize" products, so they do not become commodities.
Something else that will happen in the near term is that offshoring in the classic sense of closing factories in North America and Western Europe to open them up again in Asia is becoming a thing of the past. Companies are beginning to realize that engineering, R&D and manufacturing of very complex products are sometimes done better in the First World, and that offshoring is sometimes false economy. What will happen is that plants will be located close to markets, and since the U. S. and North America are still the world's largest market, they will be located here. It appears that GE's Jeffrey Immelt's idea that the U. S. economy requires about 20% manufacturing is taking root and being listened to by CEOs and analysts. Commodities will continue to be made in the cheapest location possible, but many automation products are not commodities.
Some of the things that always accompany recessions are layoffs and restructuring. Automation companies removed all the fat from their employee base long ago. Every automation company has let go personnel in 2009, and not all of them were, in a word, turkeys. In every recession, many of these quality personnel who have been furloughed come back into the market as entrepreneurs with a new product or service that they were unable to produce "back at the farm." This trend will continue throughout the 2010-2012 recovery time frame. If you are an automation professional with a good idea, it may be that now is the time to take a flyer and see if the marketplace agrees with you.