This magazine frequently looks at trends affecting industrial machine builders. We primarily discuss where emerging technology trends are headed, as opposed to business trends. But as we reviewed how 2006 unfolded this year, it became apparent that two related business trends are affecting machine builders more than any specific technology changes. Those trends are consolidation and globalization. We'll review their impact, and refresh you on what we found out during the course of the year.
Consolidation often is a response to globalization. As customers expand their operations worldwide, they look for suppliers that can build, deliver, and service their purchased machines worldwide. Customers also are demanding harmonization with international standards.
Many machine builders are responding to these customer demands by merging or by joining closely knit industry groups. Affiliations can help machine builders cope with globalization, but joining a group also can present challenges.
The North American machine builder industry is very fragmented with hundreds of firms that range from having a few million dollars to more than $1 billion in annual revenues.
By contrast, the European machine builder market is both bigger and more concentrated, especially in the packaging sector. "The packaging machine industry is so much bigger and concentrated in Europe that it's difficult to even compare it with North America," says David Humphrey, European senior analyst at market research firm ARC Advisory. "Continuing consolidation in the European packaging machine market is driven by two main factors. First, companies acquire others to gain technology or market share. Second, companies expand into new areas by designing new machines, thus consolidating more machine types under one brand name."
The situation in Asia is quite different. "Japan still is fragmented with many small packaging machine builders and a few majors," states Shube Abe, general manager of ARC Japan. Arcot Rajabahadur, ARC's director in India, reports the packaging machinery industry in India also is fragmented with many small manufacturers and few large ones.
ARC says both the Japanese and the Indian markets have yet to experience much in the way of consolidation. Some low-cost machines from China now are in the marketplace, but they have yet to make a significant impact.
Consolidators Are Active
The machine builder industry in North America and in Europe is rife with mergers and acquisitions. Other markets have been slower to move towards consolidation.
But is consolidation a good thing for you and your company? Or is it a serous threat to your livelihood?
Before we sort that out, we first need to describe the market in more detail. Consolidators believe they can make money by buying and combining machine builder operating companies. We'll define an operating company as an entity that makes money by making and selling machines. By contrast, a consolidator makes money by buying and adding value to operating companies.
Some of these consolidators started as machine builders, while others are strictly financial entities. Consolidators typically go public to raise money to buy machine builder operating companies.
One thing is certain: consolidators are prodigious consumers of revenues generated by their operating companies. Consolidators' executives typically carry fancy titles like CEO, CFO, and COO, with salaries to match. Consolidators' expenses can be quite significant even when head counts are small.
Many of these consolidators are publicly traded, so there also is the considerable expense of market listings, investor relations, and financial reporting. Throw in the requisite PR firm to promote the consolidator, and these overheads can become a considerable financial burden for the operating companies to bear.
As a result, consolidators work hard and smart to wring extra profits out of the operating companies to cover their own expenses, and even more profit must be generated to justify acquisition prices.
The theory is that the consolidator can create synergies among the acquired operating companies and make 1 + 1 equal something more than 2. The challenge is ensuring that the synergies are financially substantial and sustainable.
One disturbing finding was the reticence of boardroom-level consolidators to comment for this article. Evasiveness often is a bad sign, and it can fuel fear, uncertainty and doubt. We did get some good input from industry consolidator Pro Mach (see this article's sidebar for details).
Machine Builders Have Plenty to Say
While the message from the consolidators' boardrooms is ominous silence, machine builders have plenty to say about consolidation, much of it positive.