While most of the financial facts are simply a matter of record, none of the industry journals provide this type of strategic information and straight talk. Understandably, they are reluctant to offend their major advertisers. But, as a result, most industry participants - vendors, customers, sales channels - continue to be blissfully ignorant of the fact that leadership is changing hands, talent is migrating to greener pastures and consolidations are occurring because business is stagnant.

In the US, internet, telecom and biotech are gaining ground, while the tools and knowledge of manufacturing productivity - industrial controls and process automation - are melting away.

Q&A discussions

Q: Your articles don't explicitly address the actual reasons why "the industrial automation market has shrinking margins, a flat worldwide market and no organic growth”. And why “older core businesses continue to shrink and lose money."

A: The total automation market is stagnant. Sure, there may be some segments growing more than others, but the total market is simply NOT growing. For the majors, their strategic core businesses continue to shrink and some segments are losing money. This fact is well hidden in the balance sheets, though it is well known to financial analysts, which is why IA stocks are lagging.

Q: Why is the market stagnant? What is it about the IA market that has changed? Why is organic growth simply non-existent? Why the shrinking margins?

A: Several important strategic factors have changed over the past decade.

1. Fewer new process plants and factories are being built in the US. Hence, US business is primarily replacement business. Maintenance & repair business has been reduced by vast improvements in reliability of field devices and systems. And “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. It is hard to differentiate software, ease of use and operating results. So, many products have become commodities and prices have reduced. DCS prices have dropped from about $200,000 per unit to as little as $ 10,000.
3. Most IA 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. It's clear that an oil-refinery should be built near the oil-resources. Similarly, steel plants should be near the source 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. US development costs are high. The third-world countries (India, China, Far East) have good skills at a much lower cost. IA products (software & hardware) are being developed (and copied) elsewhere.
6. US overheads are high, by comparison. The Majors 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.

Q: R&D generates growth. So, why have the IA majors cut R&D?

A: When growth slows, R&D is often the shortsighted part of the first cut. But, it goes beyond that. From a pragmatic IA marketing standpoint, it seems that there is too much technology chasing too few real needs. Because the training and logistics burden is high, new IA technology that increases shop floor throughput by 10% is simply doomed to failure. Faster computers and better software do not seem to yield improved productivity in a steel mill or a polyethylene plant.

Q: If R&D is cut, where will innovation come from?

A: It is difficult, if not impossible, to generate real innovation midst the bureaucracy of a large company. The only way to get it seems to be by buying smaller companies. This is true is other businesses too - CISCO, HP, EMC and others in the Internet & telecom equipment arena have grown significantly through acquisition.

Q: Yes, CISCO, HP and others acquire smaller companies for technologies - but they all also have massive R&D budgets and proven track records of producing innovative technologies. What is different about IA that makes the majors cut back R&D?

A: The R&D budgets of high-tech companies like Cisco and HP are typically 10- 20% of annual sales. Measurement Control & Automation Association (MCAA), the primary association of IA suppliers, shows that the typical R&D budget for IA companies is about 3-5%, which is a sustaining level. Growth stimulates investment and lack of growth inhibits it. IA is at the negative end of that algorithm, and the track record for innovation is poor.

Q: Have you checked out Honeywell's Corporate Technology Center? What does it contribute to Honeywell's IA business?

A: Honeywell developed the TDC 2000 over 25 years ago and that was probably the last decent surge in innovation (and growth) in industrial automation. Today, everyone has a DCS, albeit smaller and cheaper and PC based with dazzling HMI - but nothing significantly different. I wouldn’t be surprised if the budget for Honeywell’s CTC has now dwindled to a barely sustaining level. Hey! I’ll be happy to hear that I’m wrong.

Q: What is it about the IA field that causes lack of innovation? Is it the long lifetimes and design cycles for IA systems?

A: More than 50% of HP sales are from products that did not exist 3 years ago. For CISCO, the ratio is even higher. In this fast-moving world, most IA majors still have engineers that take 3 years to bring a new product to market. And, this is perhaps matched by industrial customers with the “If it ain’t broke, don’t fix it” mentality. I am not sure which attitude causes which. The long adoption cycle inhibits truly innovative new products and gives competitors the opportunity to copy. This is an acknowledged IA marketing truth.

Q: Do you think it is relevant that so few young engineering and computer science grads choose to enter the IA field? Does IA pay substantively less? Perhaps IA suffers from a low-tech image, but it could and should be high tech and exciting.

A: Understandably, all the best technical talent is going where the gold is - to CISCO and Yahoo - not to Foxboro, Emerson and Honeywell. This is not an accident - it's part of the evolutionary process. Farming, which once employed a major segment of the population, now employs less than 2% in the US; there are few rich and innovative American farmers. Similarly, manufacturing employed over 35% in the US less than a century ago and this is steadily reducing to about 15% today. The US is the world’s most prosperous nation - but we now make stuff abroad and sell it here. This is also why ISA, the primary society dedicated to manufacturing and process productivity in the US, is declining and why, as I predicted, the ISA show this year was once again poorly attended. Too many vendors, not enough Customers!

Q: So, how can industrial automation companies grow? It seems to me that the real impetus for change in the IA world has shifted from the factory floor (productivity and throughput) to enterprise integration. The key for IA vendors should be in moving from a plant or shop floor view of the world to an integrated enterprise view. Do any of the IA majors have the ability to solve this vertical integration - "sensor to CEO" - problem?

A: Growth-orientated IA companies are indeed expanding beyond the traditional boundaries, to generate new growth through enterprise-integration. Foxboro (part of Invensys) has long promoted their “sensor to boardroom” slogan. And this is exactly why Invensys bought Baan, a major player in the enterprise software arena. Peers in the IA business have considered the Invensys move gutsy and high-risk, because traditional IA companies do not have this kind of expertise. But, I believe that it is a good move and you’ll see more growth in that direction after Invensys success has proved the point.

Pinto’s Perspective

Some time ago, while visiting a steel plant in China, I asked the engineers where they got their knowledge. They showed me a McGraw-Hill 1948 textbook on steel making. And then I looked at their instrumentation - well maintained and more than adequate pneumatic displays, recorders, valves and controls.