A short history of Automation growth

By : Jim Pinto,
San Diego, CA.

Automation has a few key segments. In the 1970's, the original DCS was developed in the 1970's by a team of engineers at Honeywell, and the first PLC was the brainchild of inventor Dick Morley and others. Several innovative startups developed HMI software for PLCs and indusrial I/O. Innovative sensors and actuators came from some key companies. In a fragmented business, most innovators get stuck at growth plateuas and get bought out. But some continue to generate independent growth and success.

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Trace the roots of all significant automation business segments and you'll find key people and innovations. Industrial instrumentation and controls has always been a hotbed of new products - improved sensors, amplifiers, displays, recorders, control elements, valves, actuators and other widgets and gismos. But the markets are relatively small, specialized and fragmented, and it's rare that any significant volume results directly from individual products. This model of business is greatly seen in technical sales as well.

Many automation companies were founded with innovative developments for niche applications. The target customers were usually local end-users who provided the opportunity to test new ideas, usually because of specific unmet needs. The successful startups expanded their products and markets beyond initially narrow applications and geographies, depending on the real value of the innovation, and also whether or not the founder was able to hire suitable management, sales & marketing leaders to grow the company beyond the initial entrepreneurial stages.

Since automation is such a fragmented business, all the larger (multi-billion $) companies are mostly a conglomeration of products and services; each product segment generates relatively small volume, but lumped together they form sizable businesses.

Companies such as Ametek and Spectris have grown primarily through acquisition of small, innovative, niche product companies where growth is self-limited either through lack of capital for new products and or global sales & market expansion. Indeed, these industrial mini-conglomerates thrive through astute and shrewd accumulation of innovative niche players. But few acquirers can come up with follow-through developments that match the original founder's innovations. And so the larger companies are usually satisfied with managed product extensions and expansions - with few, really innovative breakthroughs.

Major automation segments

Perhaps the exception to the small-company innovation rule was the distributed control system (DCS), a well-managed mix of several innovations developed in the 1970’s by a team of engineers within Honeywell. This major industrial automation innovation achieved $100m sales in process control markets within just a couple of years. The segment has expanded to several billions of dollars, and has morphed into a variety of different shapes, sizes and form-factors for process, discrete and batch systems.

The other major automation product segment to achieve significance, also in the 1970’s, was the programmable logic controller (PLC). This breakthrough innovation was the brainchild of the prolific and perennial inventor Dick Morley, who worked for a small development company, Bedford Associates, associated with Modicon (now part of Schneider). Also involved was Odo Struger of Allen-Bradley, now Rockwell Automation. Rockwell became the PLC leader in the US through good marketing and development of strong distribution channels – their Application Engineering Distributors (AED).

The first PLCs were developed for specific applications – reprogrammable test installations in the automobile manufacturing business, replacing hard-wired relay-logic which was hard to modify. The PLC market expanded rapidly in this key market to the extent that one Rockwell Distributor, McNaughton-McKay Electric, grew to well beyond $ 100 million through serving the automobile production business in just the Detroit area. Over the past 3 decades, PLCs have spread throughout industry and the PLC market segment that has grown to several billions of dollars worldwide.

For a couple of decades PLC applications remained focused around discrete automation markets, while DCS expanded primarily in process control systems. Then PLC’s expanded into control of remote I/O (input/output) systems with control and I/O clusters that could be easily connected as industrial networks. Soon personal computers became the easiest way to connect DCS, PLCs and remote I/O into the rapidly expanding hierarchy of factory and plant networks, fieldbus and the Internet.

Another major industrial automation segment is loosely termed “Supervisory Control and Data Acquisition” (SCADA). This loose conglomeration of products and innovations from several different sources remained fragmented between several markets and applications till networked PCs and Windows-based HMI software arrived in the late ‘80s and 90s.

Several innovative startups grew fairly rapidly, providing human-machine interface (HMI) software with connections to remote PLCs and indusrial I/O. Wonderware (started by engineer Dennis Morin) was paced by Intellution (started by ex-Foxboro engineer Steve Rubin). There were several other startups in the same timeframe, but few achieved significance. It’s interesting to note that the larger automation vendors did not take the lead in this new category; all significant growth came from innovative startups.

Although utilized across a broad array of market segments, the total available market for independent packaged software developments was limited, and the large process controls suppliers inevitably acquired the leaders. Wonderware was acquired by Invensys, which owned Foxboro; Emerson acquired Intellution as a key part of its DCS strategy, which developed into Delta V. Schneider recently acquired Citect, an innovative Australian company that had already branched out into broader software and systems arenas. Iconics, another innovative software startup founded by another ex-Foxboro engineer Russ Agrusa, remains independent and hasn’t grown on a broad front, remaining focused on targeted markets and customers. It will inevitably be acquired by one of the majors.

Sensors & Actuators

Industrial control has sensors, actuators, and all the “stuff” in between. Rosemount started with special temperature sensors (RTDs) for aircraft and industrial applications and then grew rapidly with the development of its capacitive differential pressure sensors, rapidly overtaking the traditional instrumentation leaders – Foxboro, Taylor Instruments and Honeywell. The company was eventually acquired by Emerson – which also acquired other innovative sensor companies – Brooks (flow), Beckman (pH) and others.

At the other end of the automation business, Fisher Controls was started in Iowa by Bill Fisher, making innovative valves and actuators. This company was also acquired by Emerson – which now had both sensors and actuators. Interestingly, both Rosemount and Fisher tried to grow by branching out into DCS, but their offerings were relatively insignificant till Emerson put them together with PCs and Software (Intellution and other ingredients) to generate leadership with the combination that is now Emerson Process Systems.

Fragmented markets inhibit growth

In fragmented industrial markets, few companies achieve revenues of much beyond tens of millions of dollars. The problem is the variety of applications. There are millions of thermocouples used, but mostly specialized and related to specific industries and requirements. You won’t find a $1bn thermocouple company – or even a sensor company that is quite approaching that size. European companies like Endress + Hauser and Pepperl + Fuchs look like they are approaching that threshold, but they are not quite making it.

At mid-size, there are the German "mittelstand" companies like Weidmuller and Phoenix, which primarily sell connectors and are approaching $1bn in total revenue. They have expanded into electronic instrumentation and controls, but have not succeeding in growing beyond about $50-100 million in this arena. And you may find other Europeans and Japanese, but they are all smaller players, looking for growth in a deceptively big market.

Growth plateaus

Many instrument companies start with a good idea. Once they expand beyond the natural volume of applications, they get topped out. There are very few requirements in automation for tens of millions of a product – even a measly million of anything. Growth in industrial automation takes time, money and marketing, which few people in the instrument business really have, or can afford. So, most automation companies seem to get acquired when they approach $100 million revenue.

The subject has been well documented in the Harvard Business Review and elsewhere. The engineer founder grows his company to $1m, with 10-20 people, and then growth flattens. With a good, balanced team (including marketing, sales, manufacturing and finance) the startup grows to $10-20m, reaching the 100-people barrier. Some try to cross the barrier to $100m, and most get acquired in the process, as they run out of money and talent. There are many examples:

  • Rosemount came up with a differential pressure transducer which was significantly better than anything the leaders could offer. So, the company grew quickly and was bought by Emerson before it quite got to $100m.
  • Modicon (with Dick Morley involvement) came up with novel programmable controllers and was bought by Gould before it got to $100m.
  • With stubborn family ownership, Moore Products (based in Pennsylvania) went public and got to a couple of hundred million before it ran out of steam and was acquired by Siemens.
  • Software leaders Wonderware and Intellution didn’t get much past $50m before they were acquired. And a whole bunch of other software companies now languish stubbornly around the $10-20m mark.
There are many examples of good companies which have been around for several decades but have never quite achieved the $ 100 million benchmark. OPTO-22 started with Bill Engman who exited International Rectifier and made his own solid-state relays and then branched out into innovative I/O products with the founder’s son now in charge. The other Moore – Moore Industries in California – is still headed up by the founder Len Moore, who insists that he enjoys what he’s doing and continues to stimulate product innovations.

Then there are those companies that get stuck at the next plateau: $100M to $1B. The company may have gone "public" but is stuck in a niche that defies growth to the next level. Typically the founder is still around and has majority ownership – and so it stays independent (read cannot be acquired because the major shareholder refuses to allow it).

Many significant automation companies grew steadily over a few decades – Fisher Controls, Fisher & Porter, Leeds & Northrup, Foxboro, Taylor Instruments, Bailey Controls. All of these were eventually acquired when they got beyond $ 100m, but not quite $ 1B.

There are, of course, interesting exceptions.

Innovative startups which remain independent

Omron in Japan is a standout. The company was founded in 1933 and has grown to be the largest industrial automation company in Japan. The unusual thing about Omron is that alone among any multi-billion corporations it devotes a significant amount of attention to its ethical, social and philosophical positions. This unusual ethos can be traced to the founder, an engineer Dr. Kazuma Tateisi, who has written a significant book – “The Eternal Venture Spirit”. His innovative yet practical entrepreneurial philosophy continues in the corporate culture of this significant company. The company continues to stimulate significant innovation and a plethora of new products, and has grown to several billion $ worldwide, targeting a doubling in revenues by the end of this decade.

Another innovative startup National Instruments, headquartered in Austin, Texas, has about 4,000 employees, 2006 revenue of $660M, trading on NASDAQ with market-cap of over $ 2B. The company was co-founded in 1976 by Dr. James Truchard, while he was still at University of Texas, Austin. In 1986, Jim Truchard and Jeff Kodosky (who is also still at NI) invented LabVIEW graphical development software. The intuitive graphical environment of LabVIEW revolutionized the way engineers and scientists work, much like the spreadsheet provided a new way for financial professionals to do their jobs. The company is expected to grow well past the $ 1-billion benchmark and continue its independent growth and success.

Future growth in automation

Extrapolating automation history forward is an interesting challenge. In the past, growth inflection points have developed from new products and leadership (DCS, PLC, sensors, software). Today, growth is coming from global expansion and services, but that is only incremental, and not by any means a surge.

A new surge of growth will come through new technology (perhaps nanotech sensors, or wireless), production at the lowest cost for global distribution, and fast time-to-market (not impeded by standards committees and antiquated management conservatism). The managers, innovators and visionaries who recognize the possibilities will become the new leaders of tomorrow.

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Copyright 2006 : Jim Pinto, San Diego, CA, USA