1. Automation Market Growth Slows
Dramatically in Q3 2001
BY LARRY O’BRIEN DECEMBER 20, 2001 ARC INSIGHTS 2001-056M
Keywords
Automation, Recession, Capital Spending
Summary
The worldwide automation market continues to suffer in the wake of reces-
sion, continued clampdowns in capital spending, and the specter of global
terrorism. While automation market growth continued to slow through the
third quarter of 2001, what do the next twelve months hold?
Analysis
Automation market growth has slowed to its lowest point in years. While
the continued threat of global terrorism has not helped matters, the slide
began long before the events of September 11 and is likely to continue into
at least the next couple of quarters. Many suppliers have already reported
that the events of September 11 have had a direct ef-
Automation market growth has
fect on the postponement of many projects in plants
slowed to its lowest point in years.
worldwide because of heightened security concerns.
The slide began long before the
events of September 11 and is likely
The news is not all bad, however. While automation
to continue into at least the next
couple of quarters. suppliers continue to downsize at an accelerated pace
and revenue growth is down, the industry as a whole,
based on the cross section of the major automation suppliers that we track
for this update, is not in recession. Revenue growth overall has slowed
down to the rate of three percent compared to the same period last year.
While total year end results will not be available until a few months from
now, we anticipate the overall automation market growth will continue to
slow down, but will likely remain positive.
PAS Business Suffers from Reduced Capital Investments
Process automation system (PAS) suppliers are probably suffering the most
right now. The definition of a “PAS” supplier, however, is becoming in-
creasingly amorphous as suppliers that traditionally competed in either the
ENTERPRISE & AUTOMATION STRATEGIES FOR INDUSTRY EXECUTIVES

2. ARC Insights, Page 2
process industries are beginning to cross over into the discrete industries
and vice versa.
PAS suppliers are reporting a slowdown in the business particularly in Eu-
rope and Asia, with the obvious additional pressures of recession and
terrorism in the US. Some companies reported double-digit decrease in
orders for key process industry segments such as pulp & paper and metals,
while order growth continues to be strong for hybrid industry segments
such as chemicals, pharmaceuticals, and food & beverage. Growth in
power generation and oil & gas also remains stable to stronger than aver-
age.
While the market for large capital projects continues to remain depressed,
some companies have reported growth in their business units dedicated to
the development of collaborative partnerships. Honeywell, for example,
reported significant growth in their ManageAbility business, which it says
contributed significantly to double-digit growth in its new Industrial Solu-
tions business unit.
Discrete Suppliers Face Mixed Results
There are significantly more bright spots among the primarily discrete
players. Siemens, for example, reported double-digit increases in earnings,
sales, and orders for its Automation & Drives business, driven primarily by
good performance in the company’s Industrial Automation Systems (com-
prised largely of PLCs), Low Voltage Controls & Distribution, and Motion
Control Systems. Sales of traditional PLCs were down significantly in
North America due to the overall weaker manufacturing environment,
while major PLC suppliers continue to experience growth in Asia and Latin
America.
As in the PAS segment, services and collaborative partnerships remain a
key area of growth. Rockwell Automation, for example, reported signifi-
cant growth in its maintenance, repair and operations (MRO) business,
signing several multi-year agreements with major manufacturers for MRO
services valued at $450 million.
© 2001 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com

3. ARC Insights, Page 3
Control Valve Business Benefits from Shifting Focus to
Manufacturing
The control valve business, which was doing very well at the beginning of
the year, is also feeling the impact of adverse market conditions. Valve
companies, however, are reporting continued strong activity in the petro-
leum, power generation, and water & waste industries, and some valve
suppliers are doing well despite the challenging market conditions. Plants
today are focusing more on operations and maintenance budgets, which
has contributed to increases in MRO-related control valve sales.
What Does the Next Quarter Hold?
Unfortunately, the business environment has worsened through the fourth
quarter and it looks like things will not change much into the first quarter
of 2002. Most of the larger supplier companies are continuing to downsize
to improve profitability. Industry consolidation will also continue, and
ARC feels there is still room for consolidation even among the top automa-
tion suppliers.
From a technology perspective, the automation market is at a crossroads
and is waiting for the next innovation that will provide it with the signifi-
cant impetus needed to sustain the significant growth experienced during
the advent of digital control systems. In many ways, ARC feels that impe-
tus already exists, but users cannot be convinced without a compelling
message. Real-time performance monitoring, profitable to promise analy-
sis, and plant asset management are all fertile application areas that can
spur automation growth through the next several years, as are technologies
such as fieldbus and wireless. Users just have to catch on and realize the
value that today’s automation solutions can bring. Similarly, suppliers
must effectively communicate their value proposition and message to po-
tential clients.
Most of the growth in the automation market today is coming from ser-
vices, and many of these services are directly related to the formation of
collaborative partnerships between suppliers and users. Users continue to
outsource more and more maintenance and automation functions to auto-
mation suppliers. Suppliers will continue to develop their services and
solutions capabilities for the foreseeable future.
© 2001 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com

4. ARC Insights, Page 4
Supplier Nine Months Nine Months CAGR 00-01
2000 2001
ABB Automation 3,796.0 3,959.0 4.3%
Alstom Contracting (H1) 251.1 297.0 18.3%
AspenTech (Q1) 69.5 61.2 -11.9%
Danaher 2,745.4 2,863.5 4.3%
Emerson Process Control (FY) 3,099.9 3,347.7 8.0%
Flowserve 206.7 209.6 1.4%
GE Industrial Systems 8,443.0 8,605.0 1.9%
Gensym 19.9 15.4 -22.6%
GSE Systems 42.1 38.1 -9.5%
Honeywell IC 5,441.0 5,309.0 -2.4%
Invensys IA (H1) 915.0 981.7 7.3%
Metso 401.4 449.1 11.9%
Parker-Hannifin (Q1) 1,078.2 947.1 -12.2%
Rockwell (FY) 3,677.0 3,359.0 -8.6%
Schneider 7,235.0 7,400.0 2.3%
Siemens A&D (FY) 7,148.7 8,052.3 12.6%
Total 44,569.9 45,894.7 3.0%
Results of Publicly Traded Automation Suppliers for
First Nine Months of 2001 Unless Otherwise Noted
Recommendations
• Suppliers must find more effective ways of communicating their value
proposition to clients. Suppliers must have demonstrable proof that
their solutions provide an excellent return on investments and assets.
• Most end users do not have a sufficient grasp of the value and return n
investment that automation can bring to them. Users typically look at
automation as a necessary expense, but not one that can increase their
profitability much more than it already has. Users have to change their
mindset and look at automation as a profitability enhancer, not a neces-
sary evil.
For further information, please contact your account manager or the author at
lobrien@arcweb.com. Recommended circulation: All MAS clients.
© 2001 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com