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Re: Why is the Automation market declining?
Sep 20, 2000 8:58 am, by Jim Pinto
Text :
Michel A. Levesque eng., mcp wrote:
>I believe that the global market is not declining.
>Maybe if one looks at just the major market (NA), but not the
>entire worldwide industry.
Michael Griffin asked for some clarification :
> I am very curious for more details from Mr. Pinto about this.
>I don't know about the Montreal area, but things seem to be
> booming around here and have been for some time.
>I have heard repeatedly from companies building automated
>equipment that they can't seem to hire enough programmers
>and control system designers.
Jim Pinto responds :
C'mon, guys - put your marketing hats on for a while.... Sure, with a large and broad-based market like industrial automation, there *are* some segments (products, markets, geographical) that will continue to grow. But, the market **as a whole - worldwide** is flat (read - not
growing).
Canada is approximately 10% of the total US market for automation products (most people recognize 5-15%) and some geographical areas and segments will continue to show growth (in the US, Canada and elsewhere).
Michael continues :
>There are some fairly large companies in southern Ontario that build
>equipment, and more have been opening up as people see the business
>opportunities. A lot of this equipment is exported. Quite a bit goes to
the
>US market, but also to other countries around the world.
Jim :
Michael, define "large". Define "lot" and "quite a bit" - (exported to the US and other countries).
Michael asks :
> If these companies are all so busy, then why would the market for
>the components they use be declining?
>The only explanations I can think of are:
> 1) I am imagining the whole thing.
Jim :
No, you are thinking locally, and perhaps are blocking out the idea of a broader trend. During the depression days, there were industries and business segments that were indeed quite busy.
Farmers today cannot find good labor to pick apples and do the harvest.
Michael's list :
> 2) The Canadian market (or at least southwestern Ontario) is
>booming, but the rest of the world isn't. (Is this likely though?)
Jim :
Not likely. The Canadian market for industrial is *not* booming - except in some very narrow geographical and market areas.
Michael's list :
> 3) This decline is actually just a local US phenomenon, and isn't
affecting Canada or the rest of the world. This is not entirely impossible.
Jim :
In a world that is financially linked, that *is* impossible.
Michael continues:
>The structure of the economies of the US (which Mr. Pinto is looking at)
>and Canada (which I am looking at) are very different which means there
> is no reason why demand for any particular class of specialised products
> would necessarily be synchronised (or have any relation at all) between
> the two.
Jim :
The economies are different, but the underlying financial structure is the same. On my global "Industrial Automation Majors" list, there is no
Canadian based company. All Canadian majors are subsidiaries of the US, European and Japanese majors. *Oh yes!* there is a relationship between the two.
Michael continues (On a slightly different tack) :
> we have had custom equipment quoted for us by American companies
>and I have noticed that the price of equipment built in the US is much
> much higher than comparable equipment built here.
Jim :
Yes, because "custom equipment" is *always* quoted high, since it needs local assistance. Harking back to my article - quote :
"US overheads are high, by comparison. The Majors are moving to "turnkey services" and "systems integration", but cannot compete against local
labor-rates with knowledge that is often available locally. Projects are most often won on price, at shrinking margins. "
Michael :
> I have discovered that they have found it very difficult to compete
>with Canadian companies in terms of price for typical custom (one-off)
> machines ever since the American dollar rose so high.
Jim :
It has *nothing* to with the dollar value.
Custom (one off) projects are always lower priced locally, and avoided by foreign companies, since they always need local, on-the-job hand-holding.
Michael :
> 4) There is a major world wide decline in industry segments that I
>am not familiar with (e.g. process industries) that is masking growth in
>areas that I am familiar with.
Jim :
Yes, some segments are shrinking more than others.
Michael :
> 5) Price decreases are large enough that volume is growing (slowly)
>while sales value is declining. Inelastic markets might mean that lower
>prices would not necessarily increase sales volume significantly.
Jim :
The market is *not* elastic - lowering the price on a PLC by 50% would *not* increase the demand for the number of PLCs in a project.
Michael :
> 6) *World wide* sales declines are an illusion caused by
converting
>all sales into US dollars. Restating sales in say euros, yen,
(or even Canadian dollars?), might show a different picture.
Jim :
Nope ! It is *not* a currency problem! That is always a temporary shift in a global economy.
Michael :
> 7) Market declines are an illusion caused by measurment sampling error.
>If you base your overall sales estimates on sales figures from a small
>selection of companies, and those companies' sales *are* declining while
> the overall market is actually growing, your sales estimates will be
wrong.
Jim :
Sorry, Michael - marketing analysts and researchers are indeed familiar with the fundamentals of Math and Statistics.
Michael :
> Mr. Pinto - would you care to comment?
Jim :
Because this discussion has been going on for a while, I felt compelled to answer point by point.
Michael's summary :
>Particularly, I would like to know why industrial automation suppliers
>would have declining sales if their customers are so busy.
>What are we missing here?
Jim :
Why ? Please go back and re-read the article.
I have listed 6 major reasons for the decline.
As to the customers being busy - I know a lot of avocado farmers and apple-orchards that can't grow enough avocados and apples. So, would you like to be a farmer?
Michael, I appreciate and applaud your detailed thinking and your diligent list and questions. I too am an Engineer, by background and training. I hope I have helped!
Sincerely :
jim
----------/
Jim Pinto
email : jim@jimpinto.com
web: www.JimPinto.com
San Diego, CA., USA
----------/
Reply
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Re: Why is the Automation market declining?
Sep 20, 2000 2:10 pm, by Michael Griffin
At 15:44 15/09/00 -0700, Jim Pinto wrote:
>Michael continues :
>>There are some fairly large companies in southern Ontario that build
>>equipment, and more have been opening up as people see the business
>>opportunities. A lot of this equipment is exported. Quite a bit goes to
>the
>>US market, but also to other countries around the world.
>Jim :
>Michael, define "large".
For the companies I deal with, say 200 - 300 million dollars plus in annual sales for the largest down to 50 million dollars plus for some of the medium size ones. I believe there are a number of other sizable ones, but they don't build the sort of equipment I buy. These are not giant companies, but this isn't a business composed of giant ones, rather it tends to have a
lot of small or medium size ones.
I don't have detailed sales figures, that's not the business I am in. The point was though that if these companies are expanding at 20 - 100 percent per year, why are the companies which supply them with components doing so poorly? What is so exceptional about the companies that I do business with that they are *all* so busy while the rest of the world isn't?
>Michael's list :
>> 2) The Canadian market (or at least southwestern Ontario) is
>>booming, but the rest of the world isn't. (Is this likely though?)
>
>Jim :
>Not likely. The Canadian market for industrial is *not* booming -
>except in some very narrow geographical and market areas.
OK, but Michel Levesque mentions that "Michael, for your info. the entire province of Quebec is booming. I used to work for the Rockwell
distributor here before starting with an integrator, I have seen the market here grow substantially in the past seven years."
Now I see Ontario booming, M. Levesque sees Quebec booming (with respect to the industry we are talking about) - and that just about covers
the most of Canada as far as general industry is concerned (excluding mining, pulp and paper, oil, etc. which are process industries). The bulk of
the automotive, appliance, aerospace, electronics, telecommunications equipment, chemical, steel, general industry, etc., etc. are concentrated between Windsor and Quebec City. (And if anyone from Alberta is reading this, please take a tranquilliser before commenting on that point). To put these numbers in perspective, I believe that nearly one in five of the cars
built in North America are built in southern Ontario so some of these industries are not insignificant in size.
In other words, as far as Canada is concerned, "very narrow geographical and market areas" are precisely the ones that M. Levesque and I are *not* referring to. So the question remains, what is so exceptional about what we see around us?
>Michael continues:
>>The structure of the economies of the US (which Mr. Pinto is looking at)
>>and Canada (which I am looking at) are very different which means there
>> is no reason why demand for any particular class of specialised products
>> would necessarily be synchronised (or have any relation at all) between
>> the two.
>
>Jim :
>The economies are different, but the underlying financial structure is the
>same. On my global "Industrial Automation Majors" list, there is no
>Canadian based company. All Canadian majors are subsidiaries of the US,
>European and Japanese majors. *Oh yes!* there is a relationship between the
>two.
Yes, but what is your point? I was only advancing a theory as to why I may be wrong while you may be correct. Is the possibility I have advanced the reason why I may be wrong?
>Michael continues (On a slightly different tack) :
>> we have had custom equipment quoted for us by American companies
>>and I have noticed that the price of equipment built in the US is much
>> much higher than comparable equipment built here.
>
>Jim :
>Yes, because "custom equipment" is *always* quoted high, since it needs
>local assistance.
and
>It has *nothing* to with the dollar value.
>Custom (one off) projects are always lower priced locally, and
>avoided by foreign companies, since they always need local,
>on-the-job hand-holding.
Except that some of these US companies are physically closer to us than some of the Canadian companies, yet they bid 50% or more higher. However again, you are arguing my point rather than your own. I advanced a theory as to why I may see a growing market, while you see a shrinking one (machines built here and shipped there). I agree that the machinery market tends to be local (except for very large or specialised machines). This is why I dismissed this explanation by saying "I seriously doubt that this
particular problem has been large enough to have a significant effect on the overall market in the US though." In other words, I don't believe that it could explain why I (and M. Levesque) would believe we see a busy market while it is declining in the US (or world wide).
>Michael :
>> 6) *World wide* sales declines are an illusion caused by
>>converting all sales into US dollars. Restating sales in say euros,
>>yen,(or even Canadian dollars?), might show a different picture.
>
>Jim :
>Nope ! It is *not* a currency problem! That is always a temporary shift
>in a global economy.
However, "temporary" can last for years - long enough to put a severe squeeze on any business. Introductory economics courses used to teach that currency values followed trade flows. This has long been an obsolete notion. Currency values now follow capital flows which dwarf real trade in goods and services. This is why the US can have a 400 billion dollar trade deficit and a rising currency, while Canada can have a 29 billion dollar trade surplus and a falling one (figures in US dollars, from the latest issue of The Economist).
The result is that price differentials between countries (even at Parity Purchasing Power values, let alone nominal ones) can persist over long periods of time. The only limit for traded goods such as industrial automation products is how long the companies which control the markets are willing (and able) to maintain price differentials in the various markets in
order to pursue their long term pricing strategies.
Actual manufacturing costs of many of the products they sell are only a fraction of the final sale price. This means it is financially
feasible to have different prices in different markets provided they actually can keep these markets separate by various means (e.g. tight
control of distribution channels).
Are they doing this? I don't know. I was merely advancing another theory as to why the market may look busy to me (and others) while it is actually "declining" world wide.
This point could be easily dealt with if anyone had a representative list of prices changes of various products in different markets. If prices do not closely follow currency movements, then there exists the potential for the situation I have outlined above. If this is the case, then of course Mr. Pinto may be entirely correct in his statement that the market is declining, but only from the point of view of US dollars.
>Michael's summary :
>>Particularly, I would like to know why industrial automation suppliers
>>would have declining sales if their customers are so busy.
>>What are we missing here?
>
>Jim :
>Why ? Please go back and re-read the article.
>I have listed 6 major reasons for the decline.
Ok, I understand that good scholarship requires occasionally going back to the primary sources. However, this is where I *started* on this thread. I listed your six points and discussed each one. This conversation proceeded from there. My conclusion was that I could understand your points as explanations of why the process industries or the US market may be in
decline, but they did not provide sufficient explanation of a *world wide* general decline.
>As to the customers being busy - I know a lot of avocado farmers
>and apple-orchards that can't grow enough avocados and apples.
>So, would you like to be a farmer?
Sometimes the idea has its attractions. However, to extend your own analogy, if everyone is buying apples and (I'm not sure what an avocado
looks like - so lets say apples and pears), then I would be very surprised if the farmers weren't selling any.
This discussion has so far consisted of a mountain of speculation hoisted upon a modicum of fact. Your article can be summarised as follows:
Pinto's First Postulate: "The total automation market is stagnant ... there may be some segments growing more than others, but the total market is simply NOT growing."
Can you please cite some suitable statistics for this? I looked for some on your web site, but wasn't able to find any. I believe that "Control Engineering" publishes some sales statistics now and again, but I don't recall what they were.
Pinto's Second Postulate: "For the majors, their strategic core businesses continue to shrink and some segments are losing money."
So, are Rockwell, Siemens, etc. seeing their PLC and motor control businesses shrink? Are their sales in these areas actually declining? By how much?
Pinto's Third Posulate: "most industry participants - vendors, customers, sales channels - continue to be blissfully ignorant of the fact
that leadership is changing hands, talent is migrating to greener pastures and consolidations are occurring because business is stagnant."
Are these people ignorant of the business stagnating, or are they ignorant of the "leadership changing hands" etc.? I must admit that I (a customer) was ignorant of both. Why though would the vendors and sales channels be ignorant of either stagnant business or "changing leadership". I thought that that sales figures were all these guys ever talked about.
Please Mr. Pinto, I am not doubting your word on any of this. However, I was trained to look at the numbers. Can you (or anyone else)
please tell us what these declining sales figures are?
I will finish up by commenting on the anecdote at the end of you article. You related: "Some time ago, while visiting a steel plant in China, I asked the engineers where they got their knowledge. They showed me a McGraw-Hill 1948 textbook on steel making. And then I looked at their instrumentation - well maintained and more than adequate pneumatic displays, recorders, valves and controls."
The state owned heavy industry in northern China (and in Szechuan) is well known as a black hole down which the state pours a substantial proportion of its annual budget each year. This has become unsupportable in recent years, so that the state faces the choice of either modernising or closing them down. Given the large numbers of people employed in these
industries, closing them is not very politically attractive.
If I were in the business of selling control systems to steel mills, I would look at your anecdote and see an interesting business opportunity.
**********************
Michael Griffin
London, Ont. Canada
mgriffin@odyssey.on.ca
**********************
Reply
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Re: Why is the Automation market declining?
Sep 25, 2000 1:37 pm, by Jim Pinto
Automation Listers :
This subject has stimulated a significant amount of feedback and new thinking, and I appreciate everyone's involvement!
Michael Griffin has been a major contributor - thanks, Michael. I'd like to address some of his new points :
Michael defines large as :
> For the companies I deal with, say 200 - 300 million dollars
>plus in annual sales for the largest down to 50 million dollars
>plus for some of the medium size ones. These are not giant
>companies,but this isn't a business composed of giant ones,
>rather it tends to have a lot of small or medium size ones.
Jim Pinto:
The financial and marketing definitions are :
Large : at least $ 1b and above
Medium : $ 100m to $1b
Small : $ 20m to $100m
Yes, indeed - the industrial automation is composed of a few (10-20 at most) - large companies and a host of small ones.
Michael :
> The point was though that if these companies are expanding at
>20 - 100 percent per year, why are the companies which supply
>them with components doing so poorly? What is so exceptional
>about the companies that I do business with that they are *all*
>so busy while the rest of the world isn't?
Jim :
I know *no* company in the industrial automation business that is growing 100% a year, (unless it is very tiny, which doesn't count).
Small companies (like OPTO-22 and Moore Industries - can you name a few others?) have stalled at $ 20-50m, with little or no consistent
growth (I'd really like to have *anyone* contradict me, with clear numbers).
Michael :
> Now I see Ontario booming, M. Levesque sees Quebec booming (with
>respect to the industry we are talking about) - and that just about covers
>the most of Canada
Jim :
Canada is about 10% of the US market, with *no* large industrial automation majors. Most Allen-Bradley Distributors are stuck, or declining. A-B
itself is declining. And, we are talking about some geographical segment "booming" ?
You guys are giving me a headache. Stop it!
(My apologies for my impatience - there is too much myopic repetition here).
Michael (on higher US pricing) :
> some of these US companies are physically closer to us
>than some of the Canadian companies, yet they bid 50% or more higher.
Jim :
Please understand that some US companies bid higher simply because they do *not* want the systems integration and custom-business.
Michael :
>Mr. Pinto may be entirely correct in his statement that the market is
>declining, but only from the point of view of US dollars.
Jim :
The market is declining - and *not* only in US dollars. The total market is stagnant, growing in spots, but declining overall. Doesn't anyone get my farming metaphor?? Farmers produce more, the overall market for food is the stable, but the individual farmhand (not the isolated, innovative farming conglomerate) is getting "poorer" and migrates to better work in other industries.
Please, I do *not* intend to insult the innovative and wealthy few in farming. I am drawing the parallel that there are simply fewer (and poorer) farmers.
Michael :
>Your article can be summarized as follows:
>Pinto's First Postulate: "The total automation market is stagnant
>... there may be some segments growing more than others, but the total
>market is simply NOT growing."
>Can you please cite some suitable statistics for this?
Jim :
No, it would take a book of numbers. And this is a discussion list. I refer you *not* to the Control magazines (who tend *not* to discuss these
topics openly, for fear of offending their advertisers), but to the financial analysts who drive the stock market. Rockwell, Honeywell, Emerson, Siemens and all the big companies have declining stocks, because market growth is simply not there. Consolidations (and consequent layoffs) are occurring because many companies are ailing.
Michael :
> Pinto's Second Postulate: "For the majors, their strategic core
>businesses continue to shrink and some segments are losing money."
>So, are Rockwell, Siemens, etc. seeing their PLC and motor control
>businesses shrink? Are their sales in these areas actually declining? By
how
>much?
Jim :
**Yes** indeed! PLC sales are declining (for the reasons I listed - lower price, competition, etc.) I challenge any major IA company reading this to come back and give us growth numbers for the past 1-2-3 years.
Michael :
> Pinto's Third Posulate: "most industry participants - vendors,
>customers, sales channels - continue to be blissfully ignorant of the fact
>that leadership is changing hands, talent is migrating to greener pastures
>and consolidations are occurring because business is stagnant."
> Are these people ignorant of the business stagnating, or are they
>ignorant of the "leadership changing hands" etc.? I must admit that I (a
>customer) was ignorant of both. Why though would the vendors and sales
>channels be ignorant of either stagnant business or "changing leadership".
I
>thought that that sales figures were all these guys ever talked about.
Jim :
*Key* point. It's the emperor's clothes syndrome - no one wants to admit that the industry is stagnant. Everyone *assumes* - making an ass out of u and me - that everything is OK.
*Hooray!* Michael, you have helped me to make my key point.
Let us - Michael Griffin and Jim Pinto and the Automation List challenge any major industrial automation company - Rockwell, Honeywell, Emerson,
Siemens, Invensys, ABB - to refresh this list with some growth numbers, or some of the correct facts and figures that are sorely needed.
Sadly, I think there will be no takers.
Sincerely :
jim
----------/
Jim Pinto
email : jim@jimpinto.com
web: www.JimPinto.com
San Diego, CA., USA
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