26 March 2009

Automation business decline

By Jim Pinto

In the current financial downturn, the falling tide has lowered all boats, and the stock of all the automation majors had declined to less than 50% of recent levels, in some cases much more. Lasting effects are hard to predict, but clearly there will be some fallout.

At the start of 2009, ARC Advisory Group published “A Series of Unfortunate Reports” by Larry O’Brien.

“Clearly, the global manufacturing environment is in the midst of a big contraction. Projects are still proceeding in many sectors, but many are being canceled and/or postponed. We at ARC still feel that despite overall market contraction in North America, Western Europe, and other developed economies, there will still be growth in the Middle East and emerging markets, such as China and India, although this growth is probably less then half the levels we saw between 2007 and 2008. Nobody gets a free pass this year, and even the market leaders are going to find it a challenging business environment.”

The automation leaders are all undergoing shrinking pains, some worse than others. It is hard to tell whether the current spates of cutbacks are pro-active or re-active. Cutting back on growth projects is relatively easy in a downturn, and most companies will have already done that during the early signals of decline.

Eliminating the fat is relatively easy. The hard decisions come down to cutting “muscle” (the people and projects that keep a business running) and “bone” (the key infrastructure and personnel that continue to provide customer focus and service excellence). Eventually, a company is forced to cut off “limbs”—sell off pieces of the business. When things degrade to the lower levels, there are lasting effects, and the changes are irreversible.

Large companies are all driven top-down, by organizational management and budgets based on ratios, with minimal agility and very little real innovation. When revenues shrink, the bean-counter ratios demand budget reduction to protect the bottom line. If that is not preserved, the companies’ stock declines, and the dominoes begin to fall.

As revenues continue to decline, reduced budgets begin to bite; employee stress and uncertainty shoots up. Consider what happens: The bean-counters’ cutback formulas result from simple spread-sheet calculations. Managers are told, “Your budget must be cut by X%.” Few managers eliminate themselves, and so the next level in the hierarchy reviews and implements the cuts.

Most often, the lowest-level workers are laid off, and more work is expected from the remaining few. The best higher level people quit and simply do something else. Management becomes more remote, closeted in endless meetings. It is a downward slide that cannot be stopped.

It takes a decisive marketing-orientated business leader to stop a steady decline. Accountants (bean counters) cannot do it. They simply track the decline with spreadsheets and matching cutbacks, triggering a “self-fulfilling prophesy.”

When the recovery comes, as it inevitably will, expect significant changes in the automation business. Many major players will not weather the storm. There will be no bailouts, just buyouts. Acquired companies will provide their acquirers with opportunities for consolidations (and cost-cutting eliminations) and an expanded customer base. My old prediction will be fulfilled: The ranks of the automation Big 10 will shrink to just 5.

Related links:

• Reshuffling the Automation Majors
  http://r.listpilot.net/c/isa/2qqfl5z/1hrqk
• Growth Obstacles for large companies
  http://r.listpilot.net/c/isa/2k0nayt/1fpwm
• Top Automation Companies
  http://www.jimpinto.com/enews/feb8-2008.html#1

Behind the byline

Jim Pinto is an industry analyst and founder of Action Instruments. You can e-mail him at jim@jimpinto.com or view his writings at www.JimPinto.com. Read the Table of Contents of his book, Pinto’s Points, at www.jimpinto.com/writings/points.html.