Comment

01 January 2004

Difficult growth

Manufacturing is following the same path as agriculture. As productivity rises, employment falls.

If the U.S. is the world's designated consumer, and by all accounts it is, year 2004 will see modestly improved business activity over year 2003. The global instrumentation and automation markets will prosper too. Their rate of improvement will lag that of the rate of the U.S. economy.

The lag time is that period of time it will take manufacturing decision makers to believe that they can improve balance sheets by means other than they used in 2003 — cost cutting, layoffs, and employee — benefit downgrades.

The statistics on the U.S. economy — the world's largest-are glowing as we press into the year. In a curious way, what's good for the American consumer is good for the world economy, because with its mere 5% of the world's population, the U.S. consumes one-third of the world's goods.

And with that 5% of the world's people, Americans consume 30% of the world's resources. In fact, an American consumes his or her own body weight in basic raw materials every day.

The world's factories process those raw materials and manufacture those finished products. Automation feeds the margin and separates the superstars from the flat liners.

Here are the economic statistics that wind down 2003, and the production technologies that will move the discrete and process industries in 2004.

A SIGNIFICANT DECREASE

As the U.S. economy accelerates there are significant indications that not all buy into anything resembling a stampede. Caution prevails among many top financial officers at midsized manufacturers.

In late 2003, Fleet Capital polled 601 chief financial officers (CFOs) at manufacturing companies with annual revenues between $25 million and $2 billion.

They are optimistic about the economic recovery over the next year, but their outlook for the manufacturing sector is less certain. Fleet asked about an array of financial subjects including their views of the economy, prospects for revenue growth, requirements for financing, and plans for mergers or acquisitions.

The most encouraging finding was that nearly three out of four believe the national economy will expand in 2004; it is the highest percentage of CFOs anticipating expansion in the survey's six-year history.

However, in response to a query as to whether the manufacturing sector would expand, contract, or stay the same in 2004, 53% responded expand. While this is still a majority, it represents a significant decrease from the 67% who cited expansion last year-year 2003.

Even more significantly, 16% of those surveyed believe the manufacturing sector will contract next year, nearly three times as many as anticipated contraction a year ago.

This paints a very different picture from last year when the outlook for the manufacturing sector was consistent with the outlook for the U.S. economy, said Fleet Capital.

MANUFACTURING STALLED OR STABLE

This more pessimistic prospect for manufacturing's future likely is because CFOs' views of the state of manufacturing have deteriorated over the past twelve months.

When asked, "How would you rate the current state of the manufacturing sector on a scale from 0 (extremely weak) to 100 (extremely strong)?" the average score was 51. Although the score has dropped from 2003's 70, the good news is that it is still above the midpoint. That is consistent with other recent studies.

For example, the Institute of Supply Management's index of manufacturing activity-based on a survey of 400 manufacturers-was up to 62.8 in November. Readings above 50 point to expansion in manufacturing activity, while those below indicate contraction. The fact that the index remains above the midpoint indicates that manufacturing, which accounts for about one-sixth of overall economic activity, is expanding.

While that view is common to a number of analysts, a recent Wall Street Journal reported that although there is mounting evidence that manufacturing activity is improving, the gains are neither uniform over time nor by industry.

The idea that recovery of the manufacturing sector will be slow, spotty, and not necessarily linear isn't surprising considering that it is widely believed to be the hardest hit by the recession.

Manufacturing has suffered thirty eight consecutive months of declining employment, and a closely watched survey by Manpower, Inc., says the job outlook among manufacturers remains flat.

Even though the Fleet survey says the CFOs are concerned most by the economy, the cost of material and equipment, and revenue and cash, in that order, by a far margin they are expecting increased revenue in 2004.

How can this be when they don't expect a significant improvement in manufacturing as a whole?

Says James Connolly, president and chief executive officer of Fleet Capital, "When the longevity of the recession hit home, CFOs not only adjusted their expectations for growth and profits, but made a number of appropriate and prudent changes in the way they run their businesses."

"I think CFOs feel more equipped, given the measures they've taken, to compete in this environment," says Connolly.

Expansion plans appear to be modest, most likely a result of the current state of overcapacity. The most recent statistics by the federal government peg capacity utilization at about 75%.

FEW ARE BUILDING NEW PLANTS

In ARC Advisory Group's Total Automation Business for the Process Industries Worldwide Outlook, author Himanshu Shah also addresses overcapacity. With excess capacity globally across many industries, few manufacturers are building new plants now, reported Shah. However, with expected economic growth, this will be absorbed.

"Although users will remain very conservative in their spending decisions for capital equipment, global competition will compel most manufacturers to improve their plant machinery and process to stay competitive," said Shah.

Basel, Switzerland-based Intechno Consulting says that any significant increase in the global market for process automation probably won't happen before 2005. From that time to 2010 they expect a 5.1% average annual growth rate. From 2000 through 2004 they call for 3.6% growth compound annual growth.

Intechno says the world market for process automation will grow from $61.3 billion in 2000 to $94.2 billion in 2010. Process automation market refers to the overall automation and instrumentation demand of the process industries that are relevant for the plant operators.

Their report-the World Report-analyzes and forecasts all of the 11 process industries. Their report says that process industries, in the narrower sense, dominate the present and future markets with $30.3 billion in 2000 and $48.0 billion in 2010. The average annual growth is 4.7%.

These process industries in the narrower sense are the chemical and pharmaceutical industries, petroleum industries such as refineries and petrochemicals, and the food and beverage industry.

In the chemical industry, increasingly fierce competition leads to more and more complex and highly automated plants, which are extensively integrated with the logistics concepts of different plant locations and enterprises. Flexibility and availability of the plants tend to keep growing.

The automation demand in the raw materials sector is expected to grow to approximately $11.1 billion in 2010, a 4.4% average annual growth. The raw materials sector includes mining (coal, uranium, ores, salts, and construction materials) as well as oil and gas production. Mining in highly industrialized countries can only be successful with constant rationalization and higher and higher finishing stages. Extraction and transport show a trend toward remote control.

The basic industries sector comprises the stones and earth industries, including glass and ceramics; metal production (from blast furnaces and smelting to rolling mills and coating); and the pulp, cardboard, and paper industries. The automation demand in this sector will rise from $10.9 billion in 2000 to about $15.5 billion in 2010, which corresponds to an average annual growth rate of 3.6%.

Automation technologies in these sectors further enhance productivity, reduce pollutant emission, improve product quality, and develop plant flexibility. Surface control, image processing, thickness measurement, and modern weighing technologies keep growing.

NO GROWTH IN ELECTRIC POWER

Worldwide demand for automation technology for power plants, decentralized power generation, and standby plants should rise from $8.8 billion in 2000 to $12.2 billion in 2010. The average annual growth is 3.3%. Note that in the U.S., automation demand will decline sharply between 2000 and 2005, because of high surplus capacities that came about in 2000 and 2001. Only by 2010 will the automation demand reach the level of 2000 again.

Worldwide automation demand in the environmental protection sector is estimated to grow at an average rate of 6% per year, from $4.1 billion in 2000 to about $7.4 billion in 2010.

The main reasons for this growth are rising worldwide demand for drinking and service/cooling water, and increased demand for modern sewage plants, solid waste treatment plants, and exhaust air purification equipment due to stricter environmental legislation in industrial and fast-developing countries.

As to the regional development and demand for measurement and automation technologies, Intechno breaks the present global market into the following shares: Western Europe 27.5%, Eastern Europe 4.5%, North America 35.3%, South America 4.4%, Asia-Pacific 25.2%, and the rest of the world 3.2%.

The high share of North America is due to the dominating market position of the U.S. in the sectors of chemicals, petrochemicals, pharmaceuticals, pulp and paper, mining, oil and gas, and power plants. Other reasons are Canada's strong position in ore mining, gas extraction, and pulp and paper production, as well as Mexican positions in the cement industry and in gas and oil extraction.

Until 2010, the shares of the U.S. and Western Europe will shrink, and those of India and China will rise. In addition to the constant growth of automation investment in power plants, refineries, and chemical and metal production, automation investments in the environmental sector keep growing here, too.

The reasons for investing in process automation are varied. In the highly industrialized countries, it serves to enhance product quality, master the variety of products, and improve process safety and plant availability, to efficiently use resources and to lower emissions.

In fast-developing countries, on the other hand, mastering mass production is the main motive for applying process automation. Quality and environmental aspects, however, are gaining importance as well.

LITTLE TECHNICAL UNIQUENESS

Intechno also reported that as of year 2000-the latest year for which a full accounting is possible — there was a $61.3 billion worldwide demand for automation products, systems, and external services, of which $37.3 billion was for hardware products and systems, and about $2.9 billion for standard software. About $21.2 billion went for external engineering, installation, commissioning, maintenance, and training services.

About 39.3% of that automation hardware was for the process control level, and 60.7% for the field level, including all sensors, measurement equipment, and actuators integrated in the various process technological machines.

Until 2010, the share of the control level in the total hardware will probably shrink to 35.8% worldwide. The primary reasons for this are intelligence is moving to the field level, and control-level products and systems are getting cheaper-they are increasingly becoming commodities. Features of technical uniqueness are getting few and far between, especially in view of the increasing application of PCs on the user-related human-machine interface level and the process-related control level.

Particularly strong growth is seen in fieldbus communication and Ethernet and TCP/IP components. Although the former should grow at a rate of 8.2% per year, the growth rate for the latter should be about 17%. The share of external engineering demand will keep increasing worldwide. It will rise from 13.9% in 2000 to 15.5% in 2010. The new World Report distinguishes between basic engineering, detail engineering, and application engineering. The latter includes software engineering and minor hardware adaptations. Especially all industries with prototypical plants have to expect further increases in engineering expenditures. The trend toward rationalization and plant optimization accompanied by increased integration of automation systems with the information systems of the production site and the enterprise level will further add to the engineering share in the total plant project costs.

THE HUMANLESS FACTORY

Intelligence, modularity, and remote diagnostics are the trends of the future. Decentralized automation allows distributing intelligent automation components across the plant. Smart pumps are just one example for these units whose electronics are increasingly integrated within the aggregates, thus allowing new forms of communication and interaction.

New biotechnological processes represent new challenges for automation, particularly in pharmaceuticals and biotech-based fine chemical production. Minireactors and microreactors will bring new challenges for automation as well.

In general, automation technologies will benefit substantially from vertical integration with the information technologies used for management processes. Important growth is emerging at the interface, where both worlds meet-the manufacturing execution systems.

Optimization, statistical quality control, and product tracing/tracking are a few examples. Horizontal integration of core processes with the utilities remains an area of progress and growth as well. However, automation is not going to explode forever.

The humanless factory and plant will not materialize yet for many years. Highly automated plants are more flexible than totally automated plants. Moreover, the former has higher availability as well as lower maintenance and investment costs. IT

Nicholas Sheble compiled and wrote this article. Write him at nsheble@isa.org . Sources for the article are Alliance Capital Consulting, ARC Advisory Forum, Fleet Capital, Intechno Consulting, National Public Radio, and The Wall Street Journal.