VDC Research: Industrial Sensing, Networking & Control Market Blog

2015: International Economic Divergence Could Surprise Manufacturers

Recent leading economic indicators for the US economy have been astounding. Last Friday, Dec 5^th was jobs days in America. The US added 321,000 new jobs in November and revised up 44,000 jobs for previous months for a total of 365,000 net new jobs added. The real stand out was manufacturing which added 28,000, bringing the total for the year to 171,000. Another promising data point was average hourly earnings which rose 0.4%. On Wednesday, a positive Consumer Spending Report also pointed to strong trends in the US economy, possibly buttressed by low gasoline prices. WTI traded to below $58/bbl today, a level not seen since the financial crisis.

All of this great news has had a dramatic effect on currency markets and will almost certainly go on to affect global Gross Domestic Product figures. Each country is unique and will be affected differently. Currency market fluctuations are a great predictor of both sentiment and expected economic performance; below I have compiled values for both the Yen and Euro, both now sit at or below 5 year lows – Courtesy of Yahoo Finance.

The real story for automation suppliers is the recent divergence in the performance of major developed economies. What we are seeing now is a marked disparity between the economies of the United States and China versus that of Europe and Japan. Europe has stalled, and the prospects for Japan are much worse than originally thought.  Heading into 2015, sensor companies will be assessing strategy and deploying investments into international ventures. While the US and China are obvious regions for expansion, there are many other countries in the emerging and frontier markets that have promising outlooks. That being said, there are several other economies such as emerging market oil exporters Argentina, Nigeria and Venezuela that should be avoided altogether.

As part of VDC’s Industrial Automation and Sensors practice, many leading economic indicators are canvassed and included into the model. Currency fluctuations are an integral part of the equation and must be at the forefront of any international industrial conglomerate’s strategy discussion. In September, the IAS team first alerted readers to the fact that the strong dollar was having an effect on markets and that the Yen was weakening to multi-year lows. 3 months later, the Yen now sits at ~120 per US dollar. This weakening as well as the geo-location gives the Japanese an immense advantage in selling sensors and automation components into the APAC region. For this reason, it may be prudent for Western companies such as ABB, Honeywell, and Siemens to concede this region, at least in part, to the dominant players in Japan such as Keyence and Yokogawa. Below I have compiled a chart showing the rise in Japanese exports, courtesy of Japan's Ministry of Finance and tradingeconomics.com.

A few regions that the western suppliers could target include Colombia, Mexico, and northern Sub-Saharan Africa.  All of these regions exhibit favorable economic conditions in that the governments have recently stabilized and their economies offer ample growth. Recent reports from the IMF show that Colombia is the fastest growing country in Latin America and that six of the ten fastest growing world economies reside in Africa. This type of information is critical for any international sensor company planning investments for 2015. Automation and manufacturing companies who have accurately planned their 2015 strategy based on sub-60 dollar oil will have an advantage.  Fluctuations have roiled both the commodity and currency markets, fundamentally changing the global landscape.

Why the Next Two Weeks are Critical to Level, Pressure, and Temperature Sensor Suppliers

The oil & gas sector is the most important vertical industry for level, pressure, and temperature related automation component manufacturers. This process industry is highly automated and proprietors are continuously looking for new solutions that drive efficiency and production. Refineries and their various operating units such as the crude oil distillation units and fluid catalytic cracker units will soon undergo scheduled maintenance and downtime, commonly referred to as a Turnaround. Turnarounds, or TARs, are scheduled periods of downtime where a processing unit is altered in order to prepare for the process of different materials or chemicals. The industry will enter a new period of downtime in the next few weeks (early October) as refineries switch from producing gasoline products and start to refine heating oil for the winter.

TARs tend to be the only time where a process or automation engineer will install new automation solutions into an existing process unit. These maintenance periods are often scheduled months in advance in order to properly prepare. Suppliers of level, pressure, and temperature sensors should use this time in order pursue new business and to develop existing relationships.  There will be several key features that end users will be looking for during this cycle.

Safety will be a concern as new regulation has forced the industry to comply with updated standards. Suppliers are now offering SIL rated solutions that can replace two parallel transmitters which would commonly be connected in order to provide the needed level of safety. ABB has been leading with their 2600T Series Pressure Transmitters. Innovation within this product category has been strong and the products now offer features such as self calibration and sensor health diagnostic information. These types of advanced features are found amongst newer sensors and are commonly referred to as smart sensors.

Smart sensor solutions will be another focus point as end users seek to streamline their automation processes. Smart or intelligent sensors are umbrella terms used to describe sensors with advanced functionality. These sensors commonly house an application specific integrated circuit (ASIC) which is a microchip that allows for the advanced features. Emerson currently offers a large array of smart sensor solutions including the 3144P Temperature Transmitter which uses the ASIC to average temperature readings from multiple sensors. The 3144P also has a feature, Hot Backup, which automatically switches the transmitter to a backup sensor in order to preserve the operation of the temperature measurement system. Advanced features that can be performed at the sensor and transmitter level have several advantages including the offloading of computing resources from the central processing node to the sensor node. This dramatically increases the efficiency and redundancy of the system while also cutting down on maintenance expenditures by simplifying replacement procedures.

Automation component suppliers should use the next few weeks to reconnect with business contacts in the oil & gas industry. Many changes have occurred within the industry landscape as hydrofracking has led to large supplies of domestic oil and natural gas. End-user engineers will be looking to employ the latest technology in order to modernize existing assets. Suppliers can maximize their results by promoting new features and functionality during this brief and critical time window.

110 Yen: How Japan’s Systematic Currency Devaluation is Affecting Automation Suppliers

The devaluation of the Japanese Yen was one of the biggest global macro-economic themes affecting automation suppliers in 2013. As the picture for 2015 comes into focus, the Bank of Japan (BOJ) looks to continue its role in manipulating global markets.

The Japanese economy has been mired in stagnation since the early 90s due to a confluence of factors including aging demographics, poor oversight, a high level of debt to GDP, and the emergence of China as an electronics manufacturing powerhouse. The currency had appreciated during this period rising to about 80 USD/JPY in the 2011 timeframe. Since then, Prime Minister Shinzo Abe was elected and with him brought a host of policy changes in an effort to jumpstart the Japanese economy. Japan’s “Abenomics” program is similar to the Quantitative Easing program that the US has undergone in recent years; however the program was about 3 times larger in relative comparison. This effort to unwind the strength of the Yen has worked to some degree but the policy’s effect on the economy still remains to be seen. I have compiled a chart below, courtesy of Yahoo Finance, which illustrates the drastic change in USD/JPY over the last 2 years. 

As is evidenced from the data, the change is extremely significant with an almost 40% change in just two years. This foreign exchange rate change greatly improves the pricing power of Japanese exporters. Companies such as Yokogawa, Keyence, and Panasonic now have a large advantage over both American and European firms. The impact of this change affects all automation component suppliers since Japanese firms are able to offer an additional 10, 20, and even 30 percent or higher discount on their products with little material effect to their bottom line after accounting for FX.  European manufacturers who have a heavy presence selling into US markets have been hurt the most and profitability amongst these firms remains a key issue. Manufacturers need to start developing effective strategies to counteract these trends.

The BOJ has signaled that it will take additional measures in order to support the Japanese economy which hints at further easing and devaluation of the Yen. In preparation of this reality, both American and European manufacturers must develop sales strategies that focus on selling value. Customers also respond well to suppliers who can offer the full solution. Japanese suppliers of sensors and automation components tend to be a relative black box. The components typically do not integrate well with technologies and products from other vendors that may use different protocols or wiring methods. Japanese products also are generally off the shelf and the firms tend to avoid developing custom engineered products for their customers. PNP versus NPN is one example, however Japanese products generally have a limited amount of communication protocols that can be used.

As automation systems begin to encompass more of the manufacturing landscape, end users will be looking for flexible products that they can easily integrate into existing topology. New trends such as the Internet of Things, as well as the proliferation of Manufacturing Execution Systems (MES), will change the practice of suppliers locking in their customers. American and European firms can differentiate from their Japanese competitors by offering customizable solutions that can integrate easily with other systems.

The success of the Abenomics program within the Japanese economy is still uncertain; however the effects within the global macro-economic picture are apparent and unmistakable. As the yen continues to depreciate, American and especially European firms need to take this into account. The currency will touch 110 USD/JPY, and eventually could trade to even 120, or 130 within a few more years. Automation suppliers across all disciplines, whether selling sensors, PLCs, or even software, must develop new sales strategies in order to preserve revenue and margin against their formidable and artificially advantaged Japanese competition.

What the KMI Consolidation Means for Suppliers to the Oil & Gas Industry

On Monday Aug. 11 Kinder Morgan announced that the company would be consolidating its various divisions into one publicly traded corporation. KMI will be the third largest US producer, transporter and refiner of oil and natural gas.  Previously, the various business divisions of Kinder Morgan had been separated into different MLPs or master limited partnerships. An MLP is a specific type of investment vehicle, and to put it simply, instead of the company paying tax on corporate earnings the earnings are distributed to the shareholders of the MLP who are then required to pay taxes on the distributions through a special tax form, K-1. MLPs have been a popular corporate structure since the Oil & Gas boom however the capital structures make investment and M&A activity more difficult given the accounting and tax implications.

Along with the previous announcement, KMI also stated it had identified over 1200 potential acquisition targets representing $875 billion. These existing assets do not include the close to 1 trillion dollars in investment that the US needs in order to fully capitalize on the domestic energy opportunity. These announcements confirm the opportunity for automation suppliers within the Oil & Gas space signaling that continued investment in new products and sales teams is a sound strategy. Existing Oil and Gas companies will be looking to increase spending in order to grow their production, distribution and storage volumes not only to increase value to current shareholders, but also to make the organizations more attractive for potential acquisition.    

There have been quite a few other recent developments within this area including the recent lift on bans outlawing the export of domestic oil and natural gas. This had led to large investment in storage and shipping ports as well as oil tankers. Oil tankers represent a huge opportunity specifically for level and ITG sensor manufacturers because there are so many sensing applications for liquid or gas storage on the ship. Ship builders are reporting record demand for new vessels due to not only oil but also from record volumes of iron ore shipments in 2014. Pressure, temperature, and flow sensors should also see a boost to sales given the increased demand for pipelines and refining facilities.

The KMI development is signaling a sea change for the oil & gas industry because it radically changes how these companies operate and invest in new projects. The new capital structure, while being slightly less profitable for shareholders, will streamline investment initiatives and new projects. This bodes well for the sector as a whole and signals the continued, long term opportunity for automation suppliers with application solutions for the domestic oil and gas industry. 

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

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.

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.

PAC Man Fever Strikes Level & ITG Markets with Acquisition of King Engineering

Recently I blogged about the likelihood of M&A activity impacting the market for process level measurement and inventory tank gauging solutions. How little did I know that my prophetic blog would be so right on the mark?  Marsh Bellofram has recently acquired the product line assets of King Engineering Corp.

King will likely leverage existing Marsh Bellofram technology and resources to expand beyond King’s own line of hydrostatic, conductive and capacitance level and tank gauging solutions. It is also likely that King will now focus more of its efforts outside its core sanitary market segments such as food, dairy, pharmaceutical, etc.

Okay, so Marsh Bellofram is not a supplier of level measurement devices, although they do provide pressure gauges, and this is not a direct case of one level supplier acquiring another; but it does confirm my belief that more consolidation is coming to the industry.  

If tangentially related companies such as Marsh Bellofram see the benefits of expanding their market coverage by acquiring a level and tank gauging company such as King, then I find it logical that level and/or tank gauging suppliers will see the benefit, both as an offensive and defensive strategy, of acquiring other level and/or tank gauging supplier(s). Such an acquisition should be completed if it would help round out a product/technology portfolio, provide access to new market or customer segments, provide new technology such as network connectivity and/or provide some level of best in class service or support capabilities.

Companies are increasingly facing pressure (internal as well as external) to grow revenues and gain market share in order to survive and thrive in their respective markets.  Mergers and acquisitions, at least intelligent ones, can be seen as an effective tool to meet growth MBOs and help a company to not only survive but thrive.

Wondering When PAC Man Fever Will Strike Level Measurement & ITG Markets

For those that have been following my blogs over the last year or two you will be quite aware of my references to PAC Man to signify the impact previous mergers and acquisitions (M&A) had on markets such as industrial networking and data acquisition products.

After taking over the market intelligence activities in support of VDC’s ongoing 2011 Process Level Measurement and Inventory Tank Gauging Market Intelligence Program combined with just having completed eleven market studies covering data acquisition solutions, and having had several in-depth discussions with suppliers, it became quickly evident that ABB’s acquisition of K-TEK back in the summer of 2010 would likely not be an isolated event.

Most of the smaller to mid size suppliers I spoke with noted an increasing trend involving larger industry players such as Emerson, Endress + Hauser, Invensys and Honeywell deciding to move away from private labeling agreements. This trend does not favor some of these smaller players, since larger players are either developing a new product or technology in-house and/or considering acquiring a company that can help fill a gap in that supplier’s product or technology portfolio. Conversely it seems a few of the suppliers that are based in Europe or Asia-Pacific that to until now been supplying these larger (or even smaller) suppliers are starting to desire making inroads by marketing their products under their own brand.

It makes sound business sense, given that our research indicates that more level measurements customers are seeking out partnerships with suppliers that can not only provide “one-stop shopping” but also best in class and world-wide technical and application level support. Suppliers naturally have a vested interest to not create a situation in which a customer has to look somewhere else to meet their needs, since an overall market opportunity likely totaling over $2 billion in 2011 shipments is not chicken feed.

A Few Thoughts on Service Related Revenues

Throughout the economic downturn, companies have been looking to maintain/increase revenues in all areas even as customers defer greenfield projects and brownfield upgrades. When customers have been spending, they are increasingly looking for support particularly in all areas of functional safety.

Recently, the IAC team released a demand-side webcast and supporting research note that emphasized how services can be an important opportunity for industrial automation suppliers. Even so, I believe there should be some caution/restraint taken by suppliers to avoid alienating customers particularly in front of what should be an upturn in business in 2012. I will give you a little background for this opinion which is actually grounded in a consumer experience I had recently.

As part of a kitchen upgrade, my wife and I replaced appliances with higher end stainless steel energy efficient units. Within the warranty, one of the units had a problem and we called the appropriate places to get the repair done. The wait time was over a week. The service person when they did eventually arrive did not have either of the likely parts needed for the repair. There were insinuations made that the problem was likely our fault or the fault of the installer. If this was proven to be the case, we could avoid the charges by buying the extended support package. To make a long story short, we refused to buy anything, the service person ordered the necessary parts and installed them after another week of waiting. Suffice it to say that in the future when my wife and I are making another product purchase we will avoid the offending product manufacturer and channel partner at all cost. I think the following are reasonable takeaways that can be applied to industrial products as well as consumer appliances.

• Do not try to use every customer problem as a new revenue opportunity.
• Minimizing inventory expenses is important but availability of replacement parts is very important for customers. This was in the top 5 business attributes needed in our survey.
• Making sure that service people are prepared and equipped to provide solutions on the first visit will save money for both the suppliers and customers.
• Having an adequate number of service people or channel partners can ensure that service delays are minimized.

As the election year approaches and solutions are found for the European financial problems as well as worldwide employment and consumer confidence, suppliers that have followed these rules will have built up a significant advantage in the eyes of the customers than those that didn't.