Automation Business Sees Beginnings of a Recovery in Third Quarter

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Automation Business Sees Beginnings of a Recovery in Third Quarter
The automation market is on a path to recovery as seen in the financial results
of the suppliers combined with the results of demand side
macroeconomic statistics in the third quarter of 2003. Suppliers reported
improved financial results in their automation
businesses and users reported increased productivity
and heightened demand. The recovery seems
to be gaining momentum into the fourth quarter
with the announcements of even greater improvements
in demand and productivity and sustained
growth in China. Key indicators such as capacity
utilization, however, remain static, and capital
spending continues to be constrained. Total automation market revenue
growth among our pool of publicly traded suppliers was 2.1 percent in Q3
2003 versus the same period in 2002. On an industry-by-industry basis, the
highest growth remains concentrated in hybrid manufacturing businesses
such as pharmaceuticals and food & beverage.

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Automation Business Sees Beginnings of a Recovery in Third Quarter

  1. 1. THOUGHT LEADERS FOR MANUFACTURING & SUPPLY CHAIN ARC INSIGHTS By Larry O’Brien The automation market recovery seems to be gaining momentum into the fourth quarter with the announcements of even greater improvements in demand and productivity and sustained growth in China, but key indicators such as capacity utilization remain static. INSIGHT# 2003-50M DECEMBER 3, 2003 Automation Business Sees Beginnings of a Recovery in Third Quarter Keywords Automation, Suppliers, Capital Spending, Market Summary The automation market is on a path to recovery as seen in the financial re- sults of the suppliers combined with the results of demand side macroeconomic statistics in the third quarter of 2003. Suppliers reported improved financial results in their automation businesses and users reported increased productiv- ity and heightened demand. The recovery seems to be gaining momentum into the fourth quarter with the announcements of even greater improve- ments in demand and productivity and sustained growth in China. Key indicators such as capacity utilization, however, remain static, and capital spending continues to be constrained. Total automation market revenue growth among our pool of publicly traded suppliers was 2.1 percent in Q3 2003 versus the same period in 2002. On an industry-by-industry basis, the highest growth remains concentrated in hybrid manufacturing businesses such as pharmaceuticals and food & beverage. Analysis Automation suppliers continue to focus on their core businesses while di- vesting underperforming businesses and making smaller, more targeted acquisitions that provide expertise in specific product and industry seg- ments. ARC does not predict any major merger and acquisition activity among top suppliers until the market makes a more protracted recovery. The Automation Technologies business unit of ABB reported significant increases in orders for the third quarter in the midst of a relatively flat envi- ronment. China and India were reported as significant growth areas. ABB reports no significant increase in capital expenditures among its manufac- turing clients. ABB reported a strong products and services business, but a
  2. 2. ARC Insights, Page 2 ©2003 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com relatively weak large system projects business. Automation products and services, which includes ABB’s Robotics business, accounted for the major- ity of the 18 percent increase in sales for the quarter. ABB also recently announced a major reorganization, merging its six automation related businesses into three. AspenTech’s first quarter is traditionally its weakest, and the company re- ported flat revenues compared to Q1 of 2003. The company recently signed some significant license agreements with users such as IC Paints, CITGO, and Rohm and Haas. AspenTech also established a strategic alliance with UOP to market Aspen’s RefSYS refinery simulation and optimization offer- ing. Supplier Q3 2002 Q3 2003 CAGR ABB Automation Q3 2,064.0 2,442.0 18.3% Alstom Power Gen Q2 2004 1,730.4 1,453.2 -16.0% AspenTech Q1 2004 77.3 77.0 -0.4% Danaher Q3 840.2 1,004.2 19.5% Emerson Process Control Q4 912.0 953.0 4.5% Flowserve Q3 217.9 218.0 0.0% GE Industrial Systems Q3 1,880.0 2,068.0 10.0% Gensym Q3 1.3 1.3 0.0% Honeywell ACS Q3 1,727.0 1,875.0 8.6% Invensys Six Months 1,413.8 1,499.8 6.1% Matrikon Q4 9.0 12.5 38.9% Metso Automation Nine Months 178.8 144.0 -19.5% Parker-Hannifin Industrial Q1 2004 1,093.2 1,107.4 1.3% Rockwell Automation Control Systems Q4 800.0 846.0 5.8% Schneider Electric Q3 2,205.0 2,211.0 0.3% Siemens A&D Q4 2,886.0 2,742.0 -5.0% Siemens I&S Q4 1,564.8 1,360.8 -13.0% Total 19,600.7 20,015.2 2.1% Supplier Revenues for Q3 2003 vs. Q3 2002 Except Where Indicated (Millions of Dollars)
  3. 3. ARC Insights, Page 3 ©2003 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com Emerson’s Process business sales were up 4.5 percent in Q4 2003 versus the same period in 2002. Emerson reports a huge order backlog of over US $1 billion and strong project activity in Eastern Europe and Asia. Emerson’s European business in Process Control was up 11 percent for the quarter, while its Asian business was up 9 percent. Business in the US, however, was down by 7 percent. Flowserve Flow Control division sales were essentially flat for the third quarter. The company reported weak sales to its key customers in the up- stream petroleum business, but noted a significant increase in backlog of orders. GE Industrial’s revenues were up 10 per- cent for the quarter, boosted by the company’s recent acquisitions, including Intellution. Honeywell Automation and Control Solutions revenues were up by almost 9 percent for the third quarter compared to the same period last year. The increase was driven largely by acqui- sitions and favorable currency translation, but the company continues to see growth in adoption of its new Expe- rion control system architecture. Parker Hannifin’s total industrial sales increased slightly in the first quar- ter of its 2004 fiscal year. The company reports continued weak demand and no changes in its forecast for fiscal year 2004. Rockwell Automation reported revenue increases of almost 6 percent for its Control Systems divi- sion in the fourth quarter and continues to experience significant growth in its Logix platform and Global Manufacturing Solutions businesses. Rock- well also noted that a significant portion of its growth came from overseas sales. Schneider Electric third quarter revenues increased slightly over the same period last year. Schneider reported an improved business climate in North America with outstanding performance in Asia and Eastern Europe. Western Europe remains relatively sluggish, but the company expects posi- tive growth overall for 2003. Siemens Automation and Drives was a top performer in Siemens overall for the fourth quarter in terms of profitability, but sales were down slightly compared with the same quarter last year. Siemens Industrial Solutions US Manufacturing Capacity Utilization through September 2003 (Source: Federal Reserve Board) 74.3% 74.1% 74.6% 74.5% 74.7% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% May June July August September
  4. 4. ARC Insights, Page 4 ©2003 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com and Services (I&S) reported improved profitability, but lower sales for the quarter in the face of reduced demand for industrial solutions. Siemens also continues to make smaller, selective acquisitions in the automation space, and Siemens I&S announced its intent to acquire software supplier IndX on December 1st. IndX is a supplier of operations intelligence solu- tions to the process industries. US Productivity Soars On the demand side, productivity is soaring. In the US, productivity in- creased at a seasonally adjusted rate of 9.4 percent in the third quarter with an increase of over three percent in the second quarter. Third quarter pro- ductivity in the US was at its highest since the second quarter of 1983. Productivity gains are generally be- lieved to be both the result of improved performance on the part of the work- force as well as increased hours. More remarkable are the productivity gains experienced in the durable goods manu- facturing sector, which were the largest since the first quarter of 1971. Chinese Automation Market Surges Automation market growth in China is at its highest point in years, with most automation suppliers reporting double- digit increases. China continues to build new plants while investing in the latest technology. For example, China is in the process of building the world’s largest Foundation Fieldbus installa- tion at the Shanghai Secco Petrochemicals facility. While there are literally thousands of local companies that produce instrumentation and control systems in China, the technology provided by Western suppliers is still far superior and will continue to be so in the near future. Industrial Production Output Increases US manufacturing output increased by 0.1 percent in October, although production of motor vehicles and parts decreased by almost 4 percent. The most significant increases in industrial production in the US occurred in the steel, wood products, computers, and electronic products industries. Pro- Output per Hour of All Persons in the US Manufacturing Industry (Source: US Bureau of Labor Statistics) 147.0 148.5 149.6 152.7 0.0 20.0 40.0 60.0 80.0 100.0 120.0 140.0 160.0 180.0 Q4 2002 Q1 2003 Q2 2003 Q3 2003
  5. 5. ARC Insights, Page 5 ©2003 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com duction of nondurable goods, such as chemicals, paper, and food & bever- age all declined in the US. In contrast, total industrial production in Europe was down slightly as of the second quarter of 2003 with a slight increase in the production of consumer non-durables in the EU 15 member nations. No Significant Changes in Capacity Utilization in US and Europe Capacity utilization in both Europe and North America has failed to yield any significant increases. In October, for example, US overall capacity utili- zation remained at 73.5 percent – well below the average for the period between 1972 and 2002. In Europe, capacity utilization rates have tradi- tionally been higher, but have remained in the range of between 80 and 84 percent for the year. In the US, manufacturers typically shift into expansion mode when overall capacity utilization exceeds 80 percent, which means that a large-scale revival in purchasing of automation equipment in the US is unlikely to occur until capacity utilization increases significantly. Recommendations Increased productivity continues to be a major focus for automation end users. ARC’s models for Real Time Performance Management (RPM) and Collaborative Manufacturing Management (CMM) are excellent starting points for implementing concrete productivity enhancement and Opera- tional Excellence (OpX) strategies. Please help us improve our deliverables to you – take our survey linked to this transmittal e-mail or at www.arcweb.com/myarc in the Client Area. For further information, contact your account manager or the author at lobrien@arcweb.com. Recommended circulation: All MAS clients. ARC Insights are published and copyrighted by ARC Advisory Group. The information is proprietary to ARC and no part of it may be reproduced without prior permission from ARC.

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