JimPinto - The Changing Face of Automation

The Changing Face of Automation

By : Jim Pinto,
San Diego, CA.
USA

This article deals primarily with the industrial automation business. As the century turns, the market is flat and most leaders are turning to mergers and acquisitions as a means to grow. R&D budgets are being cut to a sustaining level and a significant level of sales-channel disintermediation is taking place. During the next several years, growth and technology advances will come primarily from small companies.

The original version of this article was published in Industrial Controls Intelligence, February 2000

The new century has arrived as a benchmark of change. Almost everyone has recognized that business has moved into a new era where the ground rules are intrinsically different. Since our focus is industrial automation, I'll confine my discussion and related predictions to that arena.

The Merger Urge Continues

The top management of large ($ 1b+ sales) automation companies - Siemens, ABB, Honeywell, Emerson, Invensys, Rockwell, Eaton, Danaher - are all focused primarily on stock-market valuations which come from short-term revenue and profit growth. Unfortunately, with shrinking margins and a flat worldwide market in the industrial automation business, very little of either is available. So, the acquisition and merger drive will continue at all levels. (see The Urge to Merge) Stock market analysts are well tuned to this tendency and keep looking for organic growth - which is simply non-existent in the industrial business zero-sum game. So, the stock prices of automation companies continue to erode.

The essential requirement for an acquisitive growth strategy is a high stock market valuation - acquisition with highly valued stock is a good game to play. However, when stock prices continue to decline, the majors have few alternatives. Their best bet is to merge and then quickly divest the supposedly non-strategic pieces for cash. And the cash swells the war chest for new acquisitions that can contribute to core revenue and profit growth.

The problem is that older, supposedly strategic automation core businesses continue to shrink and lose money, which simply dilutes the valuation drive. The only remaining alternative is to merge with another major that has a similar problem, to consolidate the shrinking core businesses and hopefully generate cash savings through shared overhead and divestiture. So, look for more major mergers. Within the next year, I predict that the Industrial Automation Big 10 will inevitably become the Big 5. Hey, if I'm wrong, I still won't be far off…..

Engineering Budgets Decline

Engineering and technology developments, while vital to future growth and success, clearly do NOT yield short-term results. Large businesses recognize too, that their bureaucracy does not stimulate innovation or fast-moving technology development. Therefore, R&D is simply cut back to a sustaining level, with a different new-product strategy in mind: buy small-company stars. Why waste R&D dollars with an uncertain outcome, when you can improve the yield by buying only the winners? As a corollary, the clear exit for those small companies that succeed is to be bought at an attractive valuation by the larger acquisition-orientated conglomerates.

So, in the fast moving next decade, look for most major new developments to come from start-ups and small companies. In large organizations, the death-knell is ringing for corporate R&D and bloated central engineering staffs, as the power shifts to small, independent and feisty divisions. While the conglomerates are conglomerating and divesting the dogs, the winners are wisely left in the respective portfolios to continue the track record of success. The parent provides fuel for further growth through additional investment capital and leveraging of worldwide sales channels.

Sales Channels Change Drastically

The success of the Internet has created a universal platform for networking intelligence and interaction. With more than 100 million Internet users, e-business has taken root and will continue to grow rapidly. More than $200 billion of online e-commerce was conducted in 1999 and that number is expected to reach $2 trillion by 2003. This growth represents a major shift in the way businesses will be able to serve their customers. It is now possible for companies to be in direct contact with customers to communicate, sell, track, coordinate and develop relationships in a unique form of B2B (business-to-business) interaction. Soon, it will not only be expected, but demanded.

Sales in the industrial automation markets, especially in North America, is done though a combination of independent sales representatives, stocking distributors and company-direct sales forces. With the advent of e-commerce, a significant level of disintermediation will take place - elimination of the ineffective middleman. A large portion of the specialized information, product selection and applications assistance can be communicated directly with the customer, obviating the need for intermediaries. The major restructuring of sales channels is inevitable.

Competition and Growth in the New Economy

With the tremendous proliferation of Internet connectivity, the vision of perfect competition is becoming a reality. Consumers can now find out the prices offered by all vendors for any product. New markets have opened up and prices have dropped. When businesses can deliver information through a network anywhere in the world, 24 hours a day and 7 days a week, the advantage goes to the firm that provides the greatest value, the best-known brand and the easiest delivery mechanism.

Growth is fostered by the increasing size of new markets opened up by new technologies. Products with a high knowledge component generate higher returns and greater growth potential. Competition and innovation go hand in hand. Products and processes can be swiftly imitated and competitive advantage can swiftly be eroded. Knowledge spreads more quickly and, to compete, a company must be able to innovate in all the multi-faceted areas of business more quickly than its competitors.

Return to Index of all JimPinto Writings
Return to JimPinto.com HomePage