Competing in a global environment

By : Jim Pinto,
San Diego, CA.

Many automation companies are moving rapidly to outsource product design and manufacturing to the Far East and software to India. In a global environment, this is indeed a good business decision for most companies.

Broaden your own horizons. Consider offshore capabilities as resources to be utilized to help your company become stronger. Seek out ways and means to complement the strengths of your own department and organization and maximize your own results.

This article was published by:
Check out, January 2003

Along with the broader recession in an uncertain economy, industrial automation has declined considerably in the past couple of years, bringing mergers, acquisitions, divestitures, consolidations in its wake. With declining revenues, most companies are struggling to meet shrinking budgets quarter-by-quarter, which causes continuing layoffs and reductions-in-force. Only the most naive expect mythical market resurgence, a return to “the good old days”.

The prolonged business recession in this new century indicates irreversible change in a competitive, global environment. Let's put on our objective marketing caps for a while, and review the trends.

Many automation products have become commodities

The technology catalysts that caused business surges in industrial automation in the past were a/ PLCs to replace hard-wired relays; b/ mini-computers in distributed control system to replace centralized control rooms with main-frame computers; and c/ replacement of both PLCs and DCS with personal computers and software, providing significant cost improvements, flexibility and an effective path to a networked environment.

When technology is proprietary, it has value and generates good margins. When design and manufacturing knowledge is spread widely, products become commodities - available from several sources with marginally different features and benefits. Incremental proprietary features that translate into marginal gains do not command much beyond commodity pricing. At this point, the lowest cost producer usually lowers prices and wins market-share, causing a general business decline. A recession makes the competition more brutal, as competitors cut prices in their struggle to survive.

Software is also quickly and easily copied - if not directly, then at least through availability of functional equivalents that can be developed quickly and cheaply.

Sadly, most automation products today are commodities - subject to drastic price reductions and stiff competition. The features and functions of PLCs and PC-based SCADA and control systems are easily copied. Everyone in the world knows how to design and manufacture them. This leaves US manufacturers very little true product differentiation. This reduces margins and causes a steady push to reduce the only costs remaining - overhead.

Offshore manufacturing & design

Most US and European companies have been though the treadmill of quality and cost improvements - TQM, Lean Manufacturing, and the like. But offshore companies too have quickly learned the drill. This reduces the cost differentiation directly to wage scales.

With fast developing quality skills and wage-rates that are just 10% of comparable western equivalents, China is poised to take over the world's manufacturing. Manufacturing workers outside of China are being displaced on a large scale; even Mexico is losing manufacturing jobs to China.

But that’s just half the story. China and India are poised to replace the world's knowledge workers as well. Both countries turn out hordes of engineering graduates each year from universities that are rapidly growing in size and quality. Pay ranges for engineers range from $3,000 to $7,000 a year. India has the advantage of a high-percentage of English-speaking scientists and engineers.

Software development in India has been booming in recent years. India now sells $5b software annually to the US, with 60% annual growth projected over the next decade. As product design becomes more network-centric and less location-dependent, competition against Western engineers is becoming fierce.

Many automation companies are moving rapidly to outsource product design and manufacturing to the Far East and software to India. Honeywell, GE, Rockwell, Invensys and many others are generating significant cost reductions through manufacturing in China and software development in India. In a global environment, this is indeed a good business decision for most companies. However, with significantly higher pay scales, it does mean that manufacturing and design engineers in US, Canada and Europe are under a severe disadvantage. Budgets are measured directly against offshore alternatives and widespread layoffs are a direct result.

Good, cheap and fast

One might well ask, "But, are the results as good?" It turns out that they are - and in some cases superior. It is hard to simulate hunger. It is not easy for an engineer who makes a comfortable living and goes home to a 2-car garage, to compete with someone who is working 12-hour days in a hungry environment.

Remember when new products took 3 years to develop? Well, that was the last century - we are now in the Internet age, where Time is critical and clearly a competitive weapon. Today, with accelerating technology, some products are obsolete within months. Move fast, or become history….

I recall a fundamental tenet that was preached in the past by a technical guru I respected. His axiom was "Products can be developed Good, Cheap and Fast - pick any two." In today's competitive environment, the prizes go to those who can deliver all three, without compromise. Sadly, some companies do not, or cannot see the point - and they lose market share to those who can. Happily, there are business managers who recognize the possibilities; they become the new leaders of tomorrow.

There is no puzzle with what I am pointing out - just plain, Internet age common sense. Let me relate a real-life example: Kodak, the photo giant. George Fisher, the then relatively new CEO, recognized back in ‘96 that Kodak had better come up with a good digital camera fast, or risk losing market share to Casio, Sony and a hundred others. Fisher asked the Kodak US development group how long it would take to develop a new digital camera; they said 3 years - quite reasonable in a conventional sense. The project was put in the hands of a rookie manager who was not burdened by comparable schedules, and who understood the clear imperative. His team came up with a new digital camera in just 6 months and put it into high-volume, high-quality production within a year - to be on the shelves by Christmas ’97. Today Kodak is still a player in the burgeoning digital camera business. Without that first high-speed development, it would be toast.

How was it done? The results came through round-the-clock, internet-based project management and product development teams at several Kodak development centers and alliance partners around the world. While some slept, others were working and handing off results to others in the chain. Modern technology and new concepts of distributed development and marketing alliances provided the answers.

Think outside the box - utilize distributed resources

There are lessons to be learned from the Kodak story. In a narrow sense, the Kodak engineers were reasonable to suggest that development of a new digital camera would take 3 years. But that would have killed Kodak; or, at the very least, would have relegated the company to being a lower level player in the market. The fast-track development saved the company.

As an automation techie there are lots of new things that you can do to help your company remain competitive in the global environment. Become more pro-active, more of a salesman and marketer. Go with the sales people to visit customers; find out what they need for you to be competitive. Help the marketers to write the spec. Find new ways to shorten development cycles and reduce production time frames. Develop incentives to make your engineering team “hungry” and competitive. Look for ways and means to do things faster, cheaper and better, utilizing superior tools, development infrastructure, alliance partnerships and vendor relationships.

Remember the adage, "Think outside the box". Well, in a global environment, the "box" extends far beyond local perimeters. Broaden your horizons. Don’t simply blame your business manager for reducing costs by eliminating jobs - rather become part of the overall decision-making process. Consider offshore capabilities as resources to be utilized to help your company become stronger. Develop your own skills and capabilities to complement new resources. Ask your company if you can visit China, India, Singapore, to broaden your own scope and vision. Use your engineering & design talents to complement available offshore capabilities; you’ll find that your involvement is welcomed. Find out how remote capabilities can reduce costs and shorten development timeframes. Seek out ways and means to complement the strengths of your own department and organization and maximize your own results.

Broaden your vision! In a global environment, think global!

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Copyright 2002 : Jim Pinto, San Diego, CA, USA