Reshuffling in the majors
After a few lean years, most of the major automation companies have generated respectable growth and profits for several quarters. You know the expression: ‘A rising tide floats all boats’.
As I have predicted previously, this signals a period of new mergers and acquisitions; the weak players are vulnerable to buyout, and the strong are looking for customer-base expansion plus consolidation of talent and resources.
The strong mid-size players, especially publicly-held companies, are subject to attractive buyout offers. The recent MTL acquisition by Cooper Industries is a primary example. Cooper, already $6B, is growing aggressively through good strategic acquisitions.
The top-10 includes Siemens, ABB, Honeywell, Schneider, Rockwell, Emerson, GE, Yokogawa, Omron and Invensys. Expect this top tier to be reshuffled soon. So, who will buy whom?
Rule out the Japanese – they are not acquirable and do not know how to make large acquisitions. There is still some talk about Siemens buying Honeywell (Process Solutions), but that is unlikely. Emerson (Process Management) is well managed and more likely to acquire than be acquired (Foxboro?). The Europeans – Siemens, ABB and Schneider – are indeed looking and have the wherewithal to buy, though they may simply settle for small fry.
The two majors remaining in this category are Rockwell and Invensys. In May I discussed the growth obstacles for larger companies at the Phase-5 tier, with particular reference to Rockwell, the problems that they face, and the benefits the PLC-base would bring to ABB.
Now, what about Invensys? At about £2B ($4B) Invensys has recovered somewhat, but cannot hope to get much beyond barely eking out marginal profits to meet cash-flow demands. Even as they finished the fiscal third quarter with net cash for the first time in history, Invensys reported only 5% year-on-year sales growth, lagging the other majors.
Invensys stock is still languishing at about 318p; market-cap is about $4B. Invensys Process Systems (IPS) is precarious, and there are those who suggest that Foxboro's instrumentation side is for sale. Rail Systems is unrelated, and is available if anyone is interested. The crown jewels, Wonderware and Archestra, are bait for the right whale.
Invensys is dangling in the wind. GE has GE-Fanuc but no DCS – so that is a possibility. Emerson? No. Schneider, or Siemens? Maybe. There may be other surprises. Stay tuned.
Performance-based pricing
Products in the automation industry have traditionally been sold using cost-based pricing – selling price based on manufactured cost, with target gross and net profit margin multipliers. But global competitors (especially China) are prepared to compete with lower profit margins. So, the traditional cost-based pricing model is seriously flawed.
The tactical response by large automation suppliers is to offer broader ranges of products, software, systems and services. But this still has the effect of reducing overall profit margins. The problem lies in obsolescent cost-based pricing.
The cost-based model is a zero-sum game between supplier and consumer – the one’s gain is the other’s loss. The focus must move to win-win – simultaneously providing greater customer value and higher supplier profitability. Performance-based pricing is the answer. It allows the up-front cost to the buyer to be relatively low, and offers the seller a high return based on performance.
Performance-based pricing gives insurance. It guarantees that when suppliers provide more, they are paid more. Buyers also receive insurance through paying only for the performance delivered. With performance-based pricing, suppliers get the opportunity to manage customer value and be closely involved with generating additional profits for both sides.
The model must include service and maintenance, because performance is attained only when the product or system is operating.
Jim Pinto is an industry analyst and commentator, writer, technology futurist and angel investor. His popular e-mail newsletter, JimPinto.com eNews, is widely read (with direct circulation of about 7000 and web-readership of two to three times that number). His areas of interest are technology futures, marketing and business strategies for a fast-changing environment, and industrial automation with a slant towards technology trends.
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