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.

How the R&D 100 Awards Reveal Clues About the Future of AGVs

The R&D 100 recognizes the most critical advances in technology and science. Some of the categories include measurement devices, sensors, telescopes, and other scientific instruments. For 2014, 3 technologies stood out in particular and will serve as critical technology building blocks in the push towards automated transportation.

The first is The Automotive Phased Array Radar developed by Toyota. APAR utilizes a single germanium System-on-Chip (SoC) design and is a Radio Frequency Integrated Circuit (RFIC). Silicon-Germanium (SiGe) integrated circuitry technology is nanotechnology, and can dramatically decrease the cost of radar systems. These RFIC systems are optimized with 16 phase shifters which greatly improve accuracy in detecting pedestrians. This type of logarithmic technique is used in SICK position sensors as well. The RFIC package is only 5.5 x 5.5 mm² and the beam forming components are printed into the RFIC, saving space, weight and power.  Radar technology was always deemed as too bulky and expensive for most distance sensing applications, however this new technology changes everything.

Similar to the APAR, the Airborne Sense and Avoid (ABSAA) Radar Panel is a stepped-notch (logarithmic?) array that uses SiGe chips at the .13um foundry node. The ABSAA is described in less detail, most likely because of its involvement with defense activities and MIT Lincoln Laboratory. Given the small package size of this chip, the entire radar sensor size is dramatically reduced. This makes the ABSAA perfect for drones and other unmanned aerial systems (UAS). The successful implementation of this technology will dramatically accelerate the adoption of UAS drones.  Agriculture, disaster response, security and defense, and package delivery are just a few of the potential every day applications.

The last technology that will dramatically change the face of automated vehicles is Localizing Ground Penetrating Radar. Also from MIT Lincoln Laboratory, LGPR can create maps based on signatures inherent in underground structures. This underground map is stable over time and acts as a perfect localization tool for automated guided vehicles. GPS can have periods of intermittency which makes it a less than ideal solution. LGPR maps 3-D 50 x 50m grids and can calibrate with an existing maps database to detect position. This technology is a breakthrough solution in the localization and mapping technology requirement for automatic cars.

A few confluent trends are apparent across these technologies. First, is that the cost of radar technology is coming down dramatically; in orders of magnitude rather than percentages. Another trend is the increased use of this SIGe material for the development of Application Specific Integrated Circuits (ASICs). Use of Germanium is not popular amongst the major silicon foundries. IBM had one Germanium facility that I was able to visit, however this business has recently been sold to Global Foundries. The last trend is the acceleration of technological accomplishments towards the adoption of automated travel. These 3 sensor technologies could also replace some of the standard laser distance sensing technology seen in automation applications. The SiGe RFIC Radar SoC is the type of sensing principle technology that would be perfect for integration by a multi-national sensor supplier such as Balluff, Banner, Baumer, IFM, Keyence, Omron, SICK or similar business.

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.

How Sensata’s Acquisition of Schrader Further Solidifies ST as the Leader in Onboard Automobile Sensors

On August 18^th, 2014 Sensata Technologies NV (ST) announced that it would acquire, in its entirety, for about $1 billion, the operating assets of Schrader. Netherlands-based Sensata, with significant operations and US headquarters in Attleboro, MA, is the leader in onboard automobile sensors. Applications include oil pressure sensors, occupant weight sensing, fuel system sensors, and anti-lock brake systems among others. The acquisition of Schrader adds to Sensata’s portfolio with their tire pressure monitoring sensors (TPMS).

                TPMS, along with many of the sensors that Sensata offers, first appeared in high-end vehicles from manufacturers such as BMW, Mercedes, and GM’s Cadillac. The sensors were helpful, but broke often and were sometimes costly to replace. In recent years these sensors have become less of a nuisance and are now standard in mid-priced as well as entry level automobiles. Recent US legislation has mandated these sensors because of their benefits, and the total addressable market is now in the range of $2 billion according to ST’s CEO. Tire pressure sensors are useful not only as a safety mechanism to alert drivers that their tires are low, but properly inflated tires also increase fuel economy and the lifetime of a rubber tire.

                Going beyond the tire pressure sensor, Sensata has made great strides in recent years to lead the way towards a fully automatic car. While still somewhat of a futuristic dream, driverless automobiles will eventually be a reality and ST’s sensors will play an important role. Automobile sensors are vitally important in ensuring the safety of the driver as well as others on the road because the sensors are able to alert the operator of impending system failure. Along with peace of mind, automobile sensors embedded in critical systems can also cue the owner of the vehicle to perform preventative maintenance. These benefits help to avoid the types of breakdowns that can lead to massive traffic jams which burn millions of productive man hours annually.

                While the acquisition of Schrader by Sensata will be dilutive in 2014, the business move will turn accreditive in 2015 and significantly add to the earnings potential of ST’s product portfolio.  As the research and technology surrounding driverless cars matures, leading tech and auto companies like Google and Nissan will look to use more of Sensata’s sensors on-board the vehicle. The automobile industry is one of the largest globally, and sensor manufacturers should continue to focus on this platform for their sensor products as the industry rapidly moves towards fully automated and driverless cars. 

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

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. 

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. 

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.