Nowhere to Go But Up

Manufacturers, material processors, and other production-oriented organizations in the U.S. all have been singing the same song during these economically lean times: Do more with less. Pushing back or avoiding spending on major capital equipment became a cost-containment strategy that shoved capital equipment suppliers, industrial machine builders, and automation and control suppliers into a deep slump that predated the recession and only got worse as the U.S. economy slowed to a crawl. In addition, with capacity utilization hovering around 74-75%, the chances border from slim to none that any new or significant plant capacity will be added in the U.S. for some time to come.

ARC Advisory Group (www.arcweb.com) director of research Larry O'Brien confirms this: "There continues to be little incentive for adding capacity in the foreseeable future. In the U.S., there's actually some disincentive as producers of all kinds work to drive down capital spending. Doing more with less continues, and ARC is forecasting only moderate potential for growth."

The effects of these market influences continue to be deeply felt by control and automation technology suppliers who saw their markets evaporate along with demand for new capital equipment. There was still plenty of pain being felt this past year. In the first and second quarters of 2003 for example, U.S. tool demand figures, released in November 2003 from AMTDA, The American Machine Tool Distributors' Assn. (www. amtd.org), and AMT, the Assn. for Manufacturing Technology (www.mfgtech.org), reveal that overall, demand through the first eight months of 2003 declined 16.1% to $1.2 billion from $1.4 billion during the same period a year ago (Figure 1).

According to NABE, the National Assn. for Business Economics (www.nabe.com), which presents the consensus of macroeconomic forecasts (made by a panel of 35 professional forecasters), of factors that might influence increased capital spending, 60% identified replacing aging equipment as the leading driver and 26% stressed the search for even higher productivity.

ARC's O'Brien says the replacement market is indeed a bright spot with a market approaching $65 billion over the next several years. "But don't look for wholesale manufacturing line or process train replacements, because manufacturers will only be replacing a little at a time." It appears that automation suppliers and machine builders in particular will need to articulate their migration strategy very clearly if they are to capture a significant part of this pie.

It is increasingly obvious that much of the diminishing amount of capital invested in plants and manufacturing/processing systems over the past 5-10 years went towards technologies that create efficiencies, boost productivity, increase output, and cut waste. Recent economic data is proving that this has been well worth the investment, and will continue to drive production-oriented capital spending in the near to mid-term. The effect of this general strategy continues to yield long-range dividends for manufacturers, and bodes well for machine builders and other production equipment suppliers--but more on that later.

In the coming years, machine builders, process equipment vendors, and automation and controls suppliers will likely experience more growth on the "soft" side of the business, says IT industry analyst Michael Burkett, research director at AMR Research (www.amrresearch.com). He finds there is a sharp focus by manufacturers and processors to get more out of their capital equipment, and equipment vendors selling productivity-oriented IT technologies will find a lucrative market niche there.

"Lately there has been a shift," says Burkett, "away from wide-scope applications to technologies that integrate disparate IT technologies across the enterprise and the plant floor." He calls them "glue" technologies that integrate legacy systems and provide incremental productivity improvements. Thus, machine builders offering technologies that allow for online, real-time diagnostics or instant control software upgrades, for example, can create competitive advantage and likely increase their sales in spite of current market conditions.

"The technologies that are selling provide a clear migration path, identifiable ROI, and a positive shift in operational efficiency," says Burkett. The spending trend, he says, is most definitely toward systems and software that integrate production processes, remove steps in the work flow, animate or articulate a process, and identify waste.

Connecting the dots for process industries, Sath Rao, industry analyst with Frost & Sullivan (www.frost.com), says, similar to the manufacturing industry, processing plant managers are clearly trying to do more with less. Spending in the 1990s clearly became directed toward optimization, advanced process control, and the selection of sensors and analyzers that yield better control over production. "The dominant focus for business in the beginning of this century," says Rao, "increasingly will be on maintaining and protecting asset investments." Any new investment has to be increasingly justified based on the improved return on assets it will yield.

Thus, vendors selling better production monitoring and control, data processing and network integration, equipment condition-monitoring, and other IT-based technologies that contribute to better, more efficient plant asset utilization, while driving down production costs and waste, have expanding global markets to look forward to. In a recently concluded Frost & Sullivan study "World Asset Management Market for Process Industries," market revenues for asset management technologies reached $734 million in 2003 and are forecast to grow at 10.6% CAGR, reaching revenues of nearly $1.5 billion by 2010. For machine and equipment builders selling in the process industries, this bodes well for future revenue expectations.