Automation is a fragmented market

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

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

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

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?

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.

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.