Trace the roots of all significant automation business
segments and you’ll find key people and innovations. Industrial instrumentation
and controls has always been a hotbed of new products – improved sensors,
amplifiers, displays, recorders, control elements, valves, actuators and other
widgets and gismos. But the markets are relatively small, specialized and
fragmented, and it’s rare that any significant volume results directly from
individual products.
Many automation companies
were founded with innovative developments for niche applications. The target
customers were usually local end-users who provided the opportunity to test new
ideas, usually because of specific unmet needs. The successful startups
expanded their products and markets beyond initially narrow applications and
geographies, depending on the real value of the innovation, and also whether or
not the founder was able to hire suitable management, sales & marketing
leaders to grow the company beyond the initial entrepreneurial stages. Since automation is such a fragmented business, all the larger (multi-billion $) companies are mostly a conglomeration of products and services; each product segment generates relatively small volume, but lumped together they form sizeable businesses.
Companies such as Ametek and Spectris have grown primarily through acquisition of small, innovative, niche product companies where growth is self-limited either through lack of capital for new products and or global sales & market expansion. Indeed, these industrial mini-conglomerates thrive through astute and shrewd accumulation of innovative niche players. But few acquirers can come up with follow-through developments that match the original founder’s innovations. And so the larger companies are usually satisfied with managed product extensions and expansions – with few, really innovative breakthroughs.
Major automation
segments
Perhaps the exception to the small-company innovation
rule was the distributed control system (DCS), a well-managed mix of several
innovations developed in the 1970’s by a team of engineers within Honeywell.
This major industrial automation innovation achieved $100m sales in process
control markets within just a couple of years. The segment has expanded to
several billions of dollars, and has morphed into a variety of different
shapes, sizes and form-factors for process, discrete and batch systems.
The other major automation
product segment to achieve significance, also in the 1970’s, was the programmable
logic controller (PLC). This breakthrough innovation was the brainchild of the
prolific and perennial inventor Dick Morley, who worked for a small development
company, Bedford Associates, associated with Modicon (now part of Schneider).
Also involved was Odo Struger of Allen-Bradley, now Rockwell Automation.
Rockwell became the PLC leader in the US through good marketing and development
of strong distribution channels – their Application Engineering Distributors
(AED). The first PLCs were developed for specific applications – reprogrammable test installations in the automobile manufacturing business, replacing hard-wired relay-logic which was hard to modify. The PLC market expanded rapidly in this key market to the extent that one Rockwell Distributor, McNaughton-McKay Electric, grew to well beyond $ 100 million through serving the automobile production business in just the Detroit area. Over the past 3 decades, PLCs have spread throughout industry and the PLC market segment that has grown to several billions of dollars worldwide.
For a couple of decades PLC applications remained focused around discrete automation markets, while DCS expanded primarily in process control systems. Then PLC’s expanded into control of remote I/O (input/output) systems with control and I/O clusters that could be easily connected as industrial networks. Soon personal computers became the easiest way to connect DCS, PLCs and remote I/O into the rapidly expanding hierarchy of factory and plant networks, fieldbus and the Internet.
Another major industrial automation segment is loosely termed “Supervisory Control and Data Acquisition” (SCADA). This loose conglomeration of products and innovations from several different sources remained fragmented between several markets and applications till networked PCs and Windows-based HMI software arrived in the late ‘80s and 90s.
Several innovative startups grew fairly rapidly, providing human-machine interface (HMI) software with connections to remote PLCs and indusrial I/O. Wonderware (started by engineer Dennis Morin) was paced by Intellution (started by ex-Foxboro engineer Steve Rubin). There were several other startups in the same timeframe, but few achieved significance. It’s interesting to note that the larger automation vendors did not take the lead in this new category; all significant growth came from innovative startups.
Although utilized across a broad array of market segments, the total available market for independent packaged software developments was limited, and the large process controls suppliers inevitably acquired the leaders. Wonderware was acquired by Invensys, which owned Foxboro; Emerson acquired Intellution as a key part of its DCS strategy, which developed into Delta V. Schneider recently acquired Citect, an innovative Australian company that had already branched out into broader software and systems arenas. Iconics, another innovative software startup founded by another ex-Foxboro engineer Russ Agrusa, remains independent and hasn’t grown on a broad front, remaining focused on targeted markets and customers. It will inevitably be acquired by one of the majors.
Sensors &
Actuators
Industrial control has sensors, actuators, and all the
“stuff” in between. Rosemount started with special temperature sensors (RTDs)
for aircraft and industrial applications and then grew rapidly with the
development of its capacitive differential pressure sensors, rapidly overtaking
the traditional instrumentation leaders – Foxboro, Taylor Instruments and
Honeywell. The company was eventually acquired by Emerson – which also acquired
other innovative sensor companies – Brooks (flow), Beckman (pH) and others.
At the other end of the
automation business, Fisher Controls was started in Iowa by Bill Fisher, making
innovative valves and actuators. This company was also acquired by Emerson –
which now had both sensors and actuators. Interestingly, both Rosemount and
Fisher tried to grow by branching out into DCS, but their offerings were
relatively insignificant till Emerson put them together with PCs and Software
(Intellution and other ingredients) to generate leadership with the combination
that is now Emerson Process Systems.
Fragmented
markets inhibit growth
In fragmented industrial markets, few companies achieve
revenues of much beyond tens of millions of dollars. The problem is the variety
of applications. There are millions of thermocouples used, but mostly
specialized and related to specific industries and requirements. You won’t find
a $1bn thermocouple company – or even a sensor company that is quite
approaching that size. European companies like Endress + Hauser and Pepperl +
Fuchs look like they are approaching that threshold, but they are not quite
making it.
At mid-size, there are the
German "mittelstand" companies like Weidmuller and Phoenix, which
primarily sell connectors and are approaching $1bn in total revenue. They have
expanded into electronic instrumentation and controls, but have not succeeding
in growing beyond about $50-100 million in this arena. And you may find other
Europeans and Japanese, but they are all smaller players, looking for growth in
a deceptively big market.
Growth plateaus
Many instrument companies start with a good idea. Once
they expand beyond the natural volume of applications, they get topped out.
There are very few requirements in automation for tens of millions of a product
– even a measly million of anything. Growth in industrial automation takes
time, money and marketing, which few people in the instrument business really
have, or can afford. So, most automation companies seem to get acquired when
they approach $100 million revenue.
The subject has been well
documented in the Harvard Business Review and elsewhere. The engineer founder
grows his company to $1m, with 10-20 people, and then growth flattens. With a
good, balanced team (including marketing, sales, manufacturing and finance) the
startup grows to $10-20m, reaching the 100-people barrier. Some try to cross
the barrier to $100m, and most get acquired in the process, as they run out of
money and talent. There are many examples: - Rosemount came
up with a differential pressure transducer which was significantly better
than anything the leaders could offer. So, the company grew quickly and
was bought by Emerson before it quite got to $100m.
- Modicon (with
Dick Morley involvement) came up with novel programmable controllers and
was bought by Gould before it got to $100m.
- With stubborn
family ownership, Moore Products (based in Pennsylvania) went public and
got to a couple of hundred million before it ran out of steam and was
acquired by Siemens.
- Software leaders
Wonderware and Intellution didn’t get much past $50m before they were
acquired. And a whole bunch of other software companies now languish
stubbornly around the $10-20m mark.
There
are many examples of good companies which have been around for several decades
but have never quite achieved the $ 100 million benchmark. OPTO-22 started with
Bill Engman who exited International Rectifier and made his own solid-state
relays and then branched out into innovative I/O products with the founder’s
son now in charge. The other Moore – Moore Industries in California – is still
headed up by the founder Len Moore, who insists that he enjoys what he’s doing
and continues to stimulate product innovations.
Then there are those
companies that get stuck at the next plateau: $100M to $1B. The company may
have gone "public" but is stuck in a niche that defies growth to the
next level. Typically the founder is still around and has majority ownership –
and so it stays independent (read cannot be acquired because the major
shareholder refuses to allow it). Many significant automation companies grew steadily over a few decades – Fisher Controls, Fisher & Porter, Leeds & Northrup, Foxboro, Taylor Instruments, Bailey Controls. All of these were eventually acquired when they got beyond $ 100m, but not quite $ 1B.
There are, of course, interesting exceptions.
Innovative
startups which remain independent
Omron in Japan is a standout. The company was founded in
1933 and has grown to be the largest industrial automation company in Japan.
The unusual thing about Omron is that alone among any multi-billion
corporations it devotes a significant amount of attention to its ethical,
social and philosophical positions. This unusual ethos can be traced to the
founder, an engineer Dr. Kazuma Tateisi, who has written a significant book –
“The Eternal Venture Spirit”. His innovative yet practical entrepreneurial
philosophy continues in the corporate culture of this significant company. The
company continues to stimulate significant innovation and a plethora of new
products, and has grown to several billion $ worldwide, targeting a doubling in
revenues by the end of this decade.
Another innovative startup
National Instruments, headquartered in Austin, Texas, has about 4,000
employees, 2006 revenue of $660M, trading on NASDAQ with market-cap of over $
2B. The company was co-founded in 1976 by Dr. James Truchard, while he was
still at University of Texas, Austin. In 1986, Jim Truchard and Jeff Kodosky
(who is also still at NI) invented LabVIEW graphical development software. The
intuitive graphical environment of LabVIEW revolutionized the way engineers and
scientists work, much like the spreadsheet provided a new way for financial
professionals to do their jobs. The company is expected to grow well past the $
1-billion benchmark and continue its independent growth and success.
Future growth in automation
Extrapolating automation history forward is an
interesting challenge. In the past, growth inflection points have developed
from new products and leadership (DCS, PLC, sensors, software). Today, growth
is coming from global expansion and services, but that is only incremental, and
not by any means a surge.
A new surge of growth will
come through new technology (perhaps nanotech sensors, or wireless), production
at the lowest cost for global distribution, and fast time-to-market (not
impeded by standards committees and antiquated management conservatism). The
managers, innovators and visionaries who recognize the possibilities will
become the new leaders of tomorrow.
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