! Updated 17 December 2003 !>
By : Jim Pinto,
By : Jim Pinto,
In the industrial automation business, you can count the $ 1+billion companies on your fingers. Then count the companies between $ 100 million to $ 1 billion; you won’t get more than just a couple. All the others who seem to be in that range are simply divisions of larger conglomerates. So, who are the leaders of tomorrow?
Automation.com, December 2003
Automation is a fragmented marketThe problem with industrial automation is that it is NOT one market, but rather a loose conglomeration of specialized applications and vertical market segments. You’ll find lots of engineers, with all kinds of gadgets and instruments – sensors, displays, recorders, and actuators – and everything else is an adjunct.
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 $20-$50m 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.
Systems integrators find it difficult to scale upThere are a lot of systems integrators. They look like they are serving big markets and can grow. But, it takes good systems talent to design and install a system, to develop the right cost tracking and controls, to expand beyond a home territory without running out of talent or money.
Companies like Measurex grew to a few hundred million, and then ran out of steam and got acquired. Go to the Control and Information System Integrators Association website, and find out how many systems integrators there are beyond $10m. Not too many.
In their search for growth, many product manufacturers have expanded in to systems integration – to become "total solution providers", rather than just product suppliers. In my opinion, this is a mistake. It simply puts them into direct competition with some of their best customers – the local systems integrators. It’s true that the manufacturer has the advantage of additional margins and proprietary product applications knowledge. But the integrator has the advantage of being local and can often defect to competitors' products.
The $100 million barrierMany 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. 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:
Fragmented markets inhibit growthThe only growth is through new products, or new markets, on a much broader scale. New markets are different applications for the same products, or new products, or new geographical territories. For different applications, the product needs to be re-packaged and marketed differently. For new products, it takes development talent, which is seldom replicated (few company founders come up with more than one good idea). For new geographical markets it takes international marketing experience, which few can muster.
Even large companies like Siemens and Yokogawa think too linearly to fathom the needs of a fragmented market with multiple geographies. Growth in industrial automation takes time, money and marketing, which few people in the instrument business really have, or can afford.
And so, in the automation business, there are no billion-dollar Apple Computers, or Compaqs – which had good ideas that spanned broad markets, strong manufacturing talent (to manufacture millions of computers within a couple of years, with quality), strong marketing talent, and enough growth to generate capital through venture capital initially, and then public markets.
I once asked a venture capitalist (VC) why he never got involved in industrial automation. His response: no growth potential, too much investment, for too long, and too little reward. Growth in industrial markets is steady, but slow, and very few founders stay for the long haul. It takes a different mindset to get to the next level.
These problems apply to other businesses too, but are magnified with automation startups since the markets are small, and slow-growth.
Who will be the new leaders?Times have changed. And technology is driving exponentially forward, to nullify all the old rules. The drive will come, from innovative marketing in an international marketplace – the "global village" has local adaptations ad infinitum.
These characteristics will differentiate the leaders of tomorrow:
Sadly, many larger companies do not, or cannot, see the point. And so they lose market share to those who can. And happily, there are start-ups and visionaries who recognize the possibilities – and they become the new leaders of tomorrow.
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