Automation: Old dead-ends, new directions

By : Jim Pinto,
San Diego, CA.

The consistent stream of industrial automation mergers, acquisitions, consolidations, re-organizations and layoffs is happening because US industrial automation markets have been declining for the past several years. To understand the decline, we must recognize that several important strategic factors that have changed over the past decade.

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Check out, September 2002

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.

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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:
  1. 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.
  2. 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.
  3. Cost: High-quality products must be manufactured consistently at the lowest cost for global distribution. When growth occurs, the lowest-cost producer wins.
  4. 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.
  5. 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!

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