Longbow Research releases automation industry survey

Longbow Research, which is an investment analyst firm that rates companies in the automation industry among others, has issued its December Automation Survey. I read Longbow's research religiously, because analyst Mark Douglass is the only investment analyst on or off Wall Street  that I know of who has a background in manufacturing and automation, and he knows whereof he speaks.

Here's Mark's and Eli Lustgarten's take on what's been happening:

Demand predominantly flat or negative. Reports of decreasing demand were more prevalent in December, accounting for 35% (vs. 24% in October) while flat demand was basically unchanged at 44% (vs. 43%). Automotive, machine tools, pulp & paper, steel, ethanol, semiconductors and general industrial were cited as particularly weak with packaging, solar, oil & gas, beverage, wastewater, biodiesel and pharmaceuticals still showing life. MRO work is supporting many right now, but this pipeline is expected to last only about another three to five months.

Pricing remains strong year over year, but flat sequentially. Pricing remains up with respondents reporting a year over year increase ranging from 3-12%. Forty-two percent now categorize prices as up <5% (vs. 47% in October) and 54% observed increases of 5-10% (vs. 50%). Pricing has remained stable sequentially and there were no reported announcements of pending price increases.

Inventories remain in-line. The majority (59%) still have flat inventories (vs. 76% in October) with upticks in increasing and decreasing inventories: 16% reported decreases (vs. 5%) reflecting 4Q economic weakness and 25% reported increases (vs. 18%). Many of the contacts who stated that inventories were increasing cited strong local economies or efforts to win market share as the cause.

Pessimism increases going into 2009. Negative outlooks increased from 23% to 29% while positive responses were unchanged at 25% and neutral expectations decreased to 46% (vs. 53% in October). The consensus thinking is that 1H09 will continue the weak trends from 4Q08 with improvements in the back half of 2009 offsetting expected declines in the first half.

After discussing their ratings on the automation companies they study closely, including Emerson, Parker Hannifin, Rockwell Automation, and others, Mark and Eli continue the discussion of what is going on in the market:

We contacted over 25 automation/electrical distributors and automation integrators across the U.S., and have compiled data on their demand, sales, pricing, inventory and outlook. The distributors sell into a range of markets (e.g. pulp & paper, chemical, power, wastewater, food processing, automotive, HVAC, packaging, commercial construction and general industrial) and geographies.

Demand reports were predominantly flat or negative. Reports of decreasing demand were more prevalent in December, accounting for 35% compared with 24% in our October survey (refer to report published 11/07/08). Flat demand was basically unchanged at 44% versus 43% in October. Demand growth was reported by only 21% of those surveyed, following 33% in October.

Discussions were similar to those in our other industrial market surveys where many reported reasonably decent sales up until 4Q08, at which point sales declined dramatically; we had some reporting declines of up to 15% in a single month. End markets that have been particularly hard hit were automotive, machine tools, pulp & paper, steel, ethanol, semiconductors and general industrial.

The few bright spots appear to be packaging (particularly food & beverage), solar, oil & gas, beverage, wastewater, biodiesel and pharmaceuticals, although the distributors tended to comment that sales were more stable as opposed to growing. Several distributors are holding up due to MRO work, but this pipeline is expected to last only about another three to five months. Biodiesel plants continue to fare better than ethanol since they can switch production to producing soy oil, which some have done.

 One of the most fascinating things Mark and Eli discussed was the market for what we used to call DCS systems...things like FactoryTalk and PlantWeb/DeltaV/AMS.

We also have indications that plant-wide software (e.g. ROK’s Factory Talk and EMR’s
PlantWeb/AMS Suite) demand is waning due to the economic downturn. Even in good times, small- to medium-sized manufacturers have had difficulty justifying the investment costs and are especially leery now while large multinationals have already transitioned. One integrator commented that many companies continue to look but simply do not upgrade until the pain of not installing plant-wide software “hurts."

  They added some interesting quotes from their respondents that I thought were worth sharing:

“Allen Bradley (ROK) stuff is weak, but so is everything else. The only new business we're generating is from people overhauling their production facilities. There are still some of those projects ramping up, and we have at least four months in our pipeline.” – MO

“We knew it was going to get bad, but it happened really quickly. A few months ago, sales were fine. Now we just have no new business, and our old customers are buying much less than in summer.” –FL

“2008 was lousy compared with 2007. We are actually expecting 2009 to be as good or better than 2008, because the comparisons will be pretty easy.” – CA

“Food continues to be healthy for us. One of the largest beer manufacturers in the U.S. is upgrading their controls extensively ($100 million in upgrades) using Allen-Bradley controllers and Danfoss drives.” – OH

“Demand is starting to slacken. Drives and controllers have been awfully weak the last six weeks or so.” – WA

“Logix (ROK) is one of the few bright spots. They have to be taking some market share from competitors, but I'm not sure how much.” – IL

“We're selling more Logix systems than we did last year or the year before. They keep improving the platforms, which keeps demand fresh.” – OH

“[Pricing for] products that came out more recently are pretty flat, because the raw material increases were already priced in. Anything that's been out for a while is up 10-12%.” – OH

“Small [price] increases compared to our non-automation products. We never saw the spike for some reason, they've just gradually crept up throughout the year.” - CA

“We've seen multiple increases in the last six months on most products. They've slowed recently, and we think we are probably done with that for awhile, because everyone's watching their money now, and we expect suppliers to compete on cost.” – OR

“We're stocking up [on inventory] right now. We still believe the way you gain market share in times like this is to have the parts on hand that everyone else is back ordering.” – VA

“I think we'll get slower, not sure if that applies to other areas. After the flooding this year, we got a big bump in MRO work. We aren't likely to get anything similar, and the economy is much worse than it was in the first half of 2008 now.” – IA

“We have had a few good months here while the overhauls go on. I think we are looking at about May for the current round of projects to expire, and then we are going to slow.” – UT

“Right now we are forecasting a steady 2009. I think that's probably a pretty accurate reading, just based on what we've done through past slow downs.” – NY