VDC Research: Industrial Sensing, Networking & Control Market Blog

Economic Indicators Update - June

Factory Orders (May)

• Orders fall 0.5% in May due to a larger drop in military spending, concluding the consecutive three months of gains. It follows the +0.8% in April, +1.5% in March, and +1.7% in February. Economists originally predicted the factory orders to slip 1.3%.

GDP (1Q14-T)

• 1Q14 came in weaker than expected, down 2.9 percent following an increase of 2.6 percent in the fourth quarter of 2013. This is far below the expected -1.8% and the worst reading since Q1 2009.

Durable Goods (May)

• Durable goods in May fell 1%, due to the decline in demand for transportation, machinery, electronic products, electrical equipment, appliances, and defense capital goods. Many analysts predict that the economy will increase by 3.5% in the April-June quarter.

Chicago PMI (Jun)

• Chicago PMI down 2.9 points to 62.6 in June. Although it is a decline, it is still above last year’s 52.0 reading. June’s data mark the 14^th consecutive monthly expansion as well as the third consecutive month above a 60 reading.

Construction Spending (May)

• US construction spending rises slightly by 0.1% in May, following a gain of 0.8% in April. The severe winter contributed to the industry’s struggle, causing reduced building productivity in many areas. Economists predict that housing and overall construction will improve in coming months.

ISM Mfg (June)

• ISM index of national factory activity remains almost unchanged from May’s 55.4 to June’s 55.3 reading. Although economists polled by Reuters expected a 55.8 reading, a reading above 50 indicates expansion in manufacturing for the 13^th consecutive month.

Auto Sales (June)

• Auto sales in U.S. increased 1.2%, the best annualized number in 8 years. With low interest rates and a brighter economic outlook as its main drivers, the sales of new-vehicles grew to 16.98 million vehicles in June, dispelling fears of a market slowdown. 

 

 

-Regina Yip - Research Associate, IAS

The Siemens Automation Summit: Optimism Abounds

This week I had the honor of attending the Siemens Automation Summit held in Orlando Florida. During the conference analysts had the opportunity to interview Raj Batra, CEO of Siemens Automation division, 1 of 16 business divisions within the conglomerate. Raj and the entire Siemens team were optimistic for several reasons as they herald the manufacturing renaissance taking place here in the United States.

        For the last few decades, manufacturing has been looked at as a drag on the business model, with many MBA certified C-suite decision makers looking for ways to outsource, go fab-less, or get their products made by contract manufacturers. Costs like overhead and labor were the primary focus as CEOs looked to lower OpEx and improve cash flow. In the last few years much has changed with the advent of hydraulic fracturing and the abundance of cheap energy. This is coming at the same time as wage rates grow in China and many manufacturing processes are becoming automated. With Energy costs now attributing up to 60% of a factory’s total OpEx, many manufacturers are looking towards the US where energy prices are 1/3 that of Europe and ¼ that of Asia. There are other advantages to manufacturing close to home as well, namely time advantage.

        Mass customization has been in full force over the last 10 years with the sheer number of product varieties rising 250 percent. Consumer tastes and trends are changing so fast that the products are often still on the boat while demand changes overseas. Enhancing flexibility within assembly and manufacturing is one way to mitigate this risk and the way to do it is to manufacture closer to the demand center. Manufacturing is also becoming a knowledge based profession so centralizing the expertise is making a lot more sense. Companies will increasingly look to modernize existing assets with top technology, allowing machinery to continue to run long after it has been fully depreciated. CFOs and business managers are really latching onto this trend especially in this low interest rate environment where cost of capital is extremely low. Siemens has recognized that now is the time to invest capital in modern industrial equipment before rates begin to rise again and they are doing just that.

        Siemens is the recognized leader within the Industrial Automation space propelled mainly by their industrial controls products. Aside from automation, Siemens is now in the top 3 on the process side boasting a $30 billion install base. Through both of these businesses, Siemens is leveraging a relatively new services branch which is primarily software based and focused on things like asset monitoring, predictive analytics, and most importantly, project lifecycle management. As technology costs continue to plummet and labor costs rise, the new value will be created by lowering the engineering time it takes to complete a project. Through the Siemens TIA portal, now boasting over 55 million lines of computational code, engineers can see up to a 30% reduction in engineering time. In a few years Siemens expects all physical assets to become digitized, that is, all documentation, certification, validation, etc. of everything from a dumb pipe to an advanced control system will be housed in a central software program that is continually syncing in real time. Concepts like this will allow for easy changeover and procurement of replacement parts; An idea that VDC is labeling as “optioneering.”  A new, drop-in replacement can be installed, with all specifications and necessary information propagated out to all related systems. This fully integrated, virtualized, cyber physical model is the next essential step in realizing a connected factory.

                The Siemens Automation Summit was a great experience and the excitement surrounding the event was truly palpable. Engineers from legendary manufacturing companies like Dupont, Air Products, and Dow Corning were interacting and enthusiastically discussing new methods and best practices. With innovative software tools, intelligent sensors, secure industrial networks, and an army of educated engineers the American industrial renaissance is charting an ambitious course towards the next level of global economic prosperity.

 

- Frank Bertini, Sr. Analayst - IAS

3D Printing Poised to Alter the Manufacturing Landscape, are Automation Suppliers ready?

As 3D printing continues to evolve, the technology has the potential to become one of the next manufacturing game changers. 3D printing, also coined as additive manufacturing, has existed since the 1980s mainly using plastics. There are many companies utilizing the printers nowadays to create new products or to improve old ones. This revolutionary technology has gradually enhanced industries’ operational processes.

Many might ask how exactly does a 3D printer work? Well, a three dimensional object is modeled by a designer using software such as computer-aided design (CAD), then the design is sent to the printer and the material is selected. The design that goes into the printer is built three dimensionally, layer by layer, using raw materials. Additive manufacturing involves sending the raw materials through a 3D printer to create an object comprised of that particular material. These printers commonly use door interlocks for safety reasons during the printing process. Considerations need to be made for the material handling before and after the piece is printed and usually robotic arms are used when the process is automated. Typically, 3D printers are used in low volume, highly specialized manufacturing situations; it certainly has many advantages to traditional manufacturing.

Poised to replace injection molding, 3D printing can easily handle complex designs and print an item with multiple parts at once. With injection molding, parts often need to be manufactured separately and then assembled. Additionally, injection molding only comes into play with a limited amount of materials whereas 3D printing can use a wide range of materials to produce items. 3D printers can also produce unique shapes not possible with other manufacturing methods.  With the current 3D printers on the market, each printer differs based on what types of materials are used. Using the printers we currently have, we are able to print with plastics, metals, ceramics, glass, paper, and even living cells (dubbed as 4D printing).

Although 3D printing will not completely eliminate traditional manufacturing, the technology has the potential to reshape manufacturing not only in the U.S., but in other foreign countries. As President Barack Obama emphatically stated in the 2013 State of the Union address, “3D printing has the potential to revolutionize the way we make almost everything.” Using the printing technology will reduce the energy used in the manufacturing industry while also producing fewer waste byproducts.

As for the future of this technology, VDC Research predicts that the 3D printing will impact the manufacturing field in more ways than one. VDC likens the disruptive nature of 3D printing to IoT, Cloud computing, Mobile Internet, and others. 3D printing should be considered a viable option for companies as it can disrupt traditional manufacturing in the food, military, electronics, medical, consumer products, and automotive industries. This type of printing lessens the waste and the carbon footprint that manufacturing has on the Earth.

With the help of automation suppliers, 3D printing can improve significantly as there are still many technological roadblocks primarily around safety, material handling and process control.  Some opportunities for suppliers include sensors for the printing head position as well as flow sensors for the plastic and other material inks that are used in the more specialized machines.

One of the biggest challenges in 3D printing is mass production. If companies need to produce thousands of products in a short amount of time, traditional manufacturing methods are faster and more cost effective. This specialized type of printing is best used in a small batch, high mix manufacturing context, however this could be changing. New techniques involve moving the object below multiple printer heads instead of moving an individual head above the object.  3D printing still has multiple hurdles to overcome however manufacturers are quickly developing novel solutions that apply the technology in innovative ways. 

by Regina Yip - Industrial Automation and Sensors team

with contributions from Frank Bertini - Snr. Analyst IAS

Maquiladoras face challenges despite rapid changes in the Mexican economy.

Implemented in 1965, the Mexican maquiladora (also known as “twin plants”) program created a free trade agreement for foreign countries to bring materials into the country for manufacturing.  Initiated as a means of attracting foreign investment and fostering industrialization along the US/Mexico border, maquiladora factories tend to be located within a short distance from the border and are typically owned by non-Mexican corporations from the U.S., Japan, and European countries. These companies have been using maquiladoras to import equipment and raw materials to Mexican assembly plants on a duty-free and tariff-free basis for assembly or manufacturing. The assembled goods are then usually re-exported back to the origin country or a third party country. 

At the start of the maquiladora initiative, there were around 2,000 maquiladoras with 500,000 workers. The North American Free Trade Agreement (NAFTA) has favorably impacted the growth of maquila plants and within a few years, both the number of manufacturing plants and the number of workers has more than doubled. Now due to maquiladoras, the rate of unemployment is much lower along the border than anywhere else in Mexico. These factories employ over one million Mexicans who would otherwise be unemployed.

Maquiladoras mainly produce electronic equipment, clothing, plastics, furniture, appliances, and automobile parts. Since its launch in the mid 1960s, clothing has been the number one product of these factories. Although competition from China has weakened the allure of maquiladoras in recent years, corporations must consider the advantages these factories hold.  With advantages such as lower shipping, energy, and labor costs as well as faster delivery times benefiting U.S. corporations, Mexico also receives advantages from maquiladoras. The plants create employment opportunities and additional income to those who live in the border region. The country’s export revenues have also increased due to the assembly factories. The industry has been rapidly expanding and currently, maquiladoras have become Mexico’s second largest source of income from exports, right behind oils.

While there are advantages of the maquiladoras for both Mexican and foreign entities, workers face serious risks such as low wages, terrible working conditions, low job security, poor and inadequate training, and high exposure to hazardous and toxic chemicals. Working conditions are gradually improving as some workers are now getting a minimum wage of $3.40 per hour and factories have moved into modern, automated and air-conditioned facilities. Safety conditions have greatly improved as Mexico continues to adopt standards popular in other countries. Safety scanners, door interlocks, and other sensors are now widely used as plant managers become familiar with the technology. In addition to overcoming risky working conditions, automation and sensors have allowed plants to run more efficiently, helping to combat problems such as industrial pollution and environmental damage

The growth of maquiladoras has been increasing at a significant rate since 1965. As maquiladoras expand, foreign countries will continue to take notice. Since the late twentieth century, the industry held 25 percent of Mexico’s gross domestic product and accounted for 17 percent of the total Mexican employment. Currently, 80 percent of all goods produced in Mexico are shipped to the United States. As the development of maquiladoras continues, technology and automation will play a critical role in protecting workers, increasing efficiency, and providing higher paying skills based employment opportunities. 

 

- Written by Regina Yip & Frank Bertini, VDC IAS Team. 

Why the South China Sea is the Fastest Growing Region for Data Acquisition and Automation

Throughout history small bodies of water surrounded by multiple trading partners have acted as bastions of economic growth. The Mediterranean Sea is the premier example, followed by similar regions such as the Great Lakes, The Persian Gulf, and also the Black Sea to some extent. The South China Sea will have the highest amount of economic activity for at least the next 20 years. This hotly contested region is dominated by China, but Cambodia, Indonesia, Japan, Malaysia, Singapore, The Philippines, Thailand, and Vietnam all lay some claim to the geographic region. At stake is one of the largest deep water oil reserves left in the world as well as control of the world’s new economy. If DAQ and Automation component suppliers are looking for a place to grow their business, this is certainly it.

                Over the past year there has been much consternation about the slowing growth of China, and what effect that will have on the surrounding trading partners. While this event is important, it should not deter investment in the area. If one were to look at the percentage of global growth in terms of GDP from this region, it would become very obvious that this is the sweet spot. While percentage growth is slowing, the base number has now swelled to become quite large. The overall pie is double the size or more from just 10 years ago and this has been skewing people’s interpretations of what that means in terms of global economic activity.

                Applications and opportunities for revenue capture definitely center around Oil & Gas, Logistics and Transportation, distributed power, as well as a host of manufacturing applications, most notably Semiconductor and electronics.

                Any global DAQ manufacturer who is looking to grow should be investing heavily in sales teams, warehousing, and corporate infrastructure in this region. Developing something like an Asian Headquarters should be a priority especially as growth in Brazil, Russia, and India is stagnating. The opportunity density in this area is unlike anywhere else in the world right now and companies who embrace this trend will capture the largest percentage of revenue growth in the world. Similar to the Mediterranean during the Renaissance, and the Great Lakes during the Industrial Revolution, The South China Sea will be the center of economic opportunity, trade, and wealth creation for many years to come.

Mergers & Acquisitions Musings for the DAQ Market

2014 is well underway, and after years of head fakes from the economy and political uncertainty in Washington, the year finally brings with it some semblance of medium-term stability. With policies like the most recent budget deal and Obamacare in place, the stage is set for the next couple of years. Companies are emerging from safe mode and starting to take steps toward revenue growth. As we look at what this means in terms of the Data Acquisition space, we find that the larger companies like Agilent, National Instruments, and Honeywell boast balance sheets that are stronger than ever with ample cash reserves and low amounts of debt. One solution for these businesses to add to their top line is through acquisition. Rather than investing capital and time into developing new products and training new people, larger corporations should look toward their smaller, profitable counterparts for opportunity.

                Several companies within the market appear to be primed for takeover, with strong product portfolios, increasing cash flows, and long-term, top-tier customers. The best organizations to acquire would have exposure to growing vertical markets such as aerospace, automotive, and oil & gas. All three of these markets exhibit underlying long-term secular growth trends. Exposure to OEM Machine Builders, Semiconductor, and Laboratory vertical markets would be something to avoid as the effects of budget cutting and technological consolidation take their course.

                VDC recommends exploring smaller niche companies with strong customer bases as potential targets. Companies like an Opto-22, with its emphasis on mobile operator interfaces, or a Data Translation, with its modular Ethernet DAQ systems, both have strong portfolios with an eye on future trends. Other companies with favorable characteristics for acquisition by a larger company include AD Instruments, Dynamic Signals, Pacific Instruments or VTI.

                There are many other companies that would fit the criteria of being a strong acquisition target and as 2014 develops, VDC expects it to be a year of increased M&A activity in the DAQ market. 

Apple is Leading the Way for Bringing Back "Made in America"

Apple recently announced plans to manufacture at least one of its MAC computer lines in the United States in 2013. After reading with some interest in this news I harkened back to a blog I wrote on January 11th of this year in which I mentioned my belief that the time when "made in America" would mean something again was near. Little did I know it would have happened so quickly and would be driven by a company as high profile as Apple.

No doubt Apple may be making this move in large part due to its constant pressure and public criticism of the working conditions of its primary contract manufacturer, Foxconn, and that company's problems with worker unrest, worker suicides and reports of poor working conditions. I would also like to think that Apple's management was driven, if in just some small measure, by a general belief that America's future lies in its ability to rejuvenate a strong manufacturing presence on the world stage. I would have mentioned something like a sense of patriotic American spirit but that would be going a little too far, since after all Apple is a business.

I would like to think that some share (however small or large) of consumer and companies may consider buying an Apple device based on the belief that we, as Americans, need to support the success of our own country and begin to purchase more American made products whenever possible. I also blogged about an article written by Andy Grove (circa 12/10/12), Chairman Emeritus at Intel, on his similar belief that American companies have been hollowing out our long-term competitive advantage by continuing to outsource manufacturing jobs overseas in the constant need to please Wall Street's incessant demands for quarterly results, regardless of potential long-term implications of a short-term focus.

It is good to see that companies such as Apple are finally taking action to address the stark reality that this country faces in terms of rebuilding our manufacturing base, if not just for high value added manufacturing applications (search on Cisco blogs) in which America's innovative spirit and technology strengths are more fully exploited. I am certainly not foolish enough to think that someone at Apple read my blog and decided to move some of their MAC computer manufacturing oeprations back to the USA, but it is good to see that great minds do think alike.

Happy holiday wishes to one and all.

 

 

 

 

Recent Acquisition of Invensys Rail by Siemens, Is Invensys Operations Management Next on the Block?

Siemens recently announced its plans to acquire Invensys Rail for about $2.8 billion (~$1.7 billion Euro) and the deal is expected to close in Q2 2013 assuming it meets no regulatory obstacles.  In VDC's opininon this deal thereby opens up the possibility that Invensys may also spin off its Invensys Operations Management and Climate Controls businesses as a means of maximizing its value to shareholders, something that was at least speculated based on reading some articles in June and September of this year.

Apparently there were (are?) several interested parties in a possible acquisition of Invensys Operations Management (or perhaps Invensys overall) including Emerson, ABB and GE. An acquisition of IOM by anyone of these companies would definitely represent a major shake-up in the competitive landscape as it would bring in over $1.6 billion in revenues and a great deal of sizeable customer accounts and a pretty strong product portfolio including leading brand names such as Foxboro, Eurotherm, Wonderwre and Triconex, among others. The addition of such a product, solutions and services portfolio to anyone of these rumored acquirers would be a real competitive advantage.

I have written several blogs in the past regarding my analogous use of PAC Man to explain industry consolidation occuring in any number of different product and technology markets. If an acquisition of Invensys overall and/or Invensys Operations Management went down then that would represent a pretty sizeable example of PAC Man in action. You can learn more about several of the key markets in which Invenys and its rumored suitors compete by checking out VDC's Industrial Automation practice homepage.

B&B Electronics Catching PAC Man Fever, Acquires Conel and Quatech

After a hiatus from blogging I thought I would get back into the fray by writing a quick blog about B&B Electronic's recent acquisition of Conel, a Czech based supplier of wireless communications routers, gateways and devices that connect cellular networks to Ethernet, serial and other data networks.

The acquisition further expands B&B’s European footprint, as well as strengthens B&B’s position in the fast-growing wireless market by extending its reach into cellular communications networks.  In Q4 of 2011, B&B acquired Quatech, Inc., an industrial networking company with a complementary product line that included an industrial-grade embedded OEM wireless technology platform sold under the Airborne brand name.

“The Quatech and Conel acquisitions are consistent with our strategy of rapidly growing our market share and deepening our technology solutions,” explained Sean Harrigan, B&B’s president and CEO.  “As our industry continues to consolidate, we plan to remain aggressive in seeking out a wide range of opportunities that will strengthen our position, product breadth and the value we bring to our customers.”

I must admit that B&B Electronics was not on my radar screen of companies that I would have foreseen playing the role of PAC Man. In hindsight, B&B Electronic is a prime example of a company that was realizing that its prospects of longer term success as a small/mid-tier player where to either grow by acquisition or likely be gobbled up by another larger player seeking to reach its growth based MBOs.

In VDC's Wireless Industrial Networking Infrastructure Products market study I made the observation that, for the most part, companies looking to succeed in the longer term would have to decide on, and act on, a strategic course of action that basically boiled down to three options, 1) gain share through both organic and acquisitive growth, 2) remain a niche player serving segments which a strong beachhead exists, or 3) be prepared to be acquired by another company seeking to either fill a gap in their product/technology/service portfolio. In rare instances a supplier may eventually go out of business if they are not serving a defensible niche segment and/or are growing via acquisition.

Following a PAC Man strategy will likely play a very active role in shaping the competitive landscape in the industrial automation space for some time to come.

PAC Man Strikes Again in Level Measurement Markets - MSI Acquires Assets of Cosense

Just having completed the final PowerPoint slides, which includes commentary on M&A activity in the level market segments, in support of the first two of four reports in support of VDC's 2011 Process Level Measurement and Inventory Tank Gauging Market Intelligence program, Measurement Specialties Inc. (MSI) decides to acquires the assets of Cosense, Inc. The purchase price was $11.5 million and the transaction was closed on April 2, 2012.

Cosense is a designer and manufacturer of ultrasonic sensors and systems for highly reliable OEM Fluid measurement and control applications such as liquid level monitoring, air bubble detection, flow sensing, fill verification of liquids and solids for semiconductor, medical, aerospace, and industrial applications. MSI is covered in VDC's level research as a supplier of hydrostatic level measurement devices so the acquisition is a move designed to broaden MSI's reach into the sonic/ultrasonic market segment which represents a >$250 million opportunity worldwide.

Frank Guidone, MSI's CEO commented, "Cosense's ultrasonic sensors are an excellent addition to our current product portfolio and fit nicely within our Piezo product line. Cosense products are used for single-point, multi-point, and continuous liquid level measurement, along with entrained bubble detection. Their innovative solutions are very complementary to our existing product offering, particularly within the high-purity semiconductor, medical infusion pump, and commercial aerospace markets."

MSI did not provide VDC with any advance details on the acquisition but its actions confirm VDC's belief that the market for process level measurement technologies is continuing to consolidate as companies face the omnipresent pressure to achieve their growth objectives through whatever means necessary. Acquisition of new products/technologies is one strategy employed by businesses across all product and/or technology markets across the world and the process level measurement market is no exception.