Globalization drives consolidation

June 8, 2007
Globalization started centuries ago, and while the pace of globalization might vary from year to year, no one doubts its continued progress. Senior Tech Editor Dan Hebert, PE, reviews the past 10 years.
Reviewing these past 10 years with an eye to activities such as globalization, mergers, acquisitions, and divestitures in our market is different than covering a technical machine control topic. Machine control tends to advance in step changes with the embrace of new technologies such as the PLC.

Business activities usually don’t advance in steps, they instead proceed gradually, often in fits and spurts of forward and backward moves, but inexorably. That’s the case with globalization, as well as with mergers, acquisitions, and divestitures—activities we collectively will label as consolidation for the purposes of this article.

Globalization started centuries ago, and while the pace of globalization might vary from year to year, no one doubts its continued progress.

The pace of consolidation across the business landscape appears to be more haphazard, but when one focuses on a particular industry, the progress is more predictable. Consolidation occurs in mature industries, such as the automated machine market.

Not much consolidation occurs in markets growing at double-digit rates annually. PLCs in the 1970s are a good example of that—new players were springing up continuously.

Machine automation revenue now grows at a slow and steady rate, but profits are squeezed by globalization and other factors. The PLC marketplace of the 1990s and beyond is an example of how the number of players in a maturing market shrinks through consolidation.

Machine Builders Join Forces
As we reported in our “Meet the Consolidator” cover story, Nov. ’06, the machine builder industry in North America and in Europe is rife with mergers and acquisitions. An independent company that saw the benefits of consolidation is Micro Component Technology (MCT). MCT makes strip-test handlers and strip-laser markers for the semiconductor industry. “We’re comfortable going it alone, but especially in management, we think there would be significant benefits to being a division of a larger whole,” observed Richard Sidell, Sc.D., vice president and CTO of MCT, in that article. “It might give us more financial stability. It probably would give us more credibility with customers. It might offer opportunities to share related technology with partners in other divisions.” Sidell also thought consolidation would offer clearer professional growth paths for MCT employees.

Meanwhile, Dynatorch, a builder of CNC plasma and oxy-cutting machines, voiced a dissenting opinion. It, too, is independent and has no interest in being consolidated. “Being part of a group would harm our flexibility,” said Leon Drake, Dynatorch’s chief engineer. “We often make decisions on projects in less than a day. We also have low overhead, but if we were part of a larger group, we’d need to add overhead personnel to deal with the reports and paperwork for reporting to a parent organization. We enjoy our freedom.”

Vendors Retrench
Vendors are proceeding with consolidation, with perhaps the most noteworthy recent deal being Baldor’s purchase of Rockwell Automation’s Reliance Electric division for $1.8 billion in November 2006. The reasons for the deal are common to many consolidation activities. Baldor makes industrial electric motors, drives, and generators. It wanted to expand into transmission products and larger motors, and needed a manufacturing base in China.

Rockwell wants to focus its efforts on faster-growing electronic and software products. Rockwell CEO Keith Nosbusch said the sale expands his company’s effort to move toward specialized industrial products, such as factory-control software, and away from commodity equipment.

The key word is commodity. Every company wants to move away from commodity products to higher-end products and services that can be distinguished clearly from the competition.

Maturing markets turn more and more products into commodities, and consolidation allows vendors to divest commodities and invest the proceeds in what they think are growing markets.

Fewer Events, Fewer Organizations
Not to be outdone by machine builders and vendors, firms that serve the machine automation industry are joining the consolidation party.

Exhibition and event producers are scrambling to maintain profits or, in some cases, viability in a market with declining interest. We also reported in Nov. ’06 that National Manufacturing Week will be co-located with the Assembly and Quality trade shows near Chicago in September 2007. We noted that the Powder & Bulk Solids Southeast and Advanced Manufacturing Exposition was being co-located with the SouthPack, Automation Technology Expo and Design and Manufacturing South shows in Atlanta from 2007 on. The NEPCON East/Electro show will be co-located with the OEM New England show in the Boston Convention and Exhibition Center in the Fall of 2007.

Leading organizations serving the industry are also merging. The Open Modular Architecture Controls (OMAC) Users Group and ISA merged in 2005.

December 2003 saw the announcement that the Modbus Organization would join forces with IDA Group. This continent-spanning announcement heralded consolidation among various competing industrial network technologies.

Our “Leap of Faith” cover story, Aug.’04, on automation trends discussed globalization at length. Reflecting on the inevitable progress of globalization, the words we wrote three years ago still ring true today. “As the world globalizes, machine builders are selling more to customers outside of North America. These customers often demand compliance with their own regional standards, and industrial OEMs must comply.”

A survey by the National Association of Manufacturers (NAM) released in March 2006 confirmed the globalization trend. The survey found 73% of respondents are selling abroad. The survey also showed that 54% of respondents expected their exports to stay the same in 2006, while 41% expect them to increase. “We’re seeing a much stronger commitment to exporting than in previous years,” said John Engler, NAM’s president and Michigan’s former governor.

As detailed in the “Leap of Faith” cover story, one of the main issues when exporting machinery is dealing with local codes and standards. “Meeting international standards and regulatory standards is a definite trend and a huge challenge for us,” said Mike Harrington, PE, director of engineering at Alliance Machine Systems. Alliance designs and builds material handling equipment for the corrugated box industry.

What’s Your Move?
As a machine automation professional, how should you react to consolidation and globalization? The key is don’t let your skills get commoditized. You can do this by moving up the skills ladder, especially by adding to or improving your non-technical strengths.

Skills such as C++ programming that were once seen as cutting edge now can be duplicated by competitors worldwide. The Internet and e-mail made the delivery of programming and other services from far flung locales a viable and profitable proposition.

Skilled programmers might be a commodity, but a knowledgeable programmer with project management skills is unique and valuable. Many engineers understand basic automation, but few can present a business case to a customer that shows how automation can achieve financial goals.

General management skills are even more in demand as machine builders are asked to coordinate their far flung networks of employers, suppliers, and customers. Unless you’re prepared to be the low wage provider, you need to avoid being commoditized.

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