Tomorrow’s Automation Leaders

By : Jim Pinto,
San Diego, CA.

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?

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Automation is a fragmented market

The 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 up

There 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 barrier

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. 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:

  1. Rosemount fiddled around with resistance temperature sensors (RTDs) until they came up with a differential pressure transducer which was significantly better than anything the leaders – Honeywell and Foxboro at the time – could offer. So, Rosemount grew quickly, and was bought by Emerson before they quite got to $100m.
  2. Modicon (with Dick Morley involvement) came up with novel programmable controllers and was bought by Gould before it got to $100m.
  3. With stubborn family ownership, Moore Products went public and got to a couple of hundred million before it ran out of steam and was acquired by Siemens.
  4. Software leaders Wonderware and Intellution didn’t get much past $50m before they were acquired. US Data went public, and then got acquired. And a whole bunch of other software companies now languish stubbornly around the $10-20m mark.
  5. Interesting exception: National Instruments is a company to watch. It is public and has grown independently to $400m, with market-cap of over $2b. It will be interesting to see how it grows over the next few years, beyond the original founder.

Fragmented markets inhibit growth

The 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:

  1. Proprietary technology that generates revolutionary advantages. Instruments and controls that are magnitudes better than anything seen today. PLCs and DCS are a legacy of the past. Get out of the old logic boxes. In my book, Automation Unplugged, read the section decicated to future technology to see what I think is coming, what will be big.
  2. Products targeted specifically for local markets. Products designed in the U.S. will be for U.S. markets. The companies that will win will design and manufacture locally, for local markets. They will develop marketing abilities that assess correctly the local needs in a global arena.
  3. Automation customers buy solutions, not just products. The leaders of tomorrow will have high-value-added services offered through effective local service providers.
In the global village of the new economy, larger automation companies have little choice – they must find more ways and means to expand globally. To do this they need to minimize domination of the central corporate culture, and maximize responsiveness to local customer needs.

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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Copyright 2003 : Jim Pinto, San Diego, CA, USA