The process control and automation businesses of the Top 50 global and North American suppliers still face some challenging headwinds, and 2016 was a tough year. Traditional automation suppliers are betting on big transformations into the world of the Internet of Things (IoT)—or to the Industrial IoT (IIoT) in the case of automation—to rejuvenate their businesses. ARC Advisory Group also sees an increasing focus on cybersecurity as the critical infrastructure and manufacturing sectors continue to experience high profile cyberattacks.
In addition, “lower for longer” seems to be the mantra when it comes to oil prices. Higher oil prices had driven much of the investment in new projects before the price crash, but the new reality isn’t betting on a fresh increase in prices to save the day. Instead, both end users and suppliers are focused on improving operations, increasing reliability, reducing downtime, and providing a path toward truly predictive analytics.
In a highly transformational period such as the one we find ourselves in now, it’s normal to see a lot of merger and acquisition activity, emergence of new competitors, and a focus on transforming the installed base—all of which we're witnessing today.
Overall, automation suppliers saw their revenues drop by 1.7% during the first quarter of 2017. Depressed oil and commodity prices continued to hamper growth prospects in the worldwide automation market. However, order activity improved somewhat, particularly for discrete automation suppliers. Process automation suppliers continue to suffer most from exposure to low oil prices, though many have been able to stem revenue declines by shifting from major capital projects to maintenance, repair and operations (MRO) activities. Many discrete automation suppliers fared better, thanks to stronger investment activity in the electronics and automotive industries, particularly in Asia.
Last year marked the launch of the first wave of supplier solutions to address the emerging IIoT. Just about every major supplier introduced its IIoT platforms last year, and they continue to expand on those solutions and partner “ecosystems.” ABB, Emerson Automation Solutions, Honeywell Process Solutions, Rockwell Automation, Schneider Electric, Siemens, Yokogawa and many other suppliers introduced their IIoT strategies in 2016, and continue to refine and build on them. There are just too many to list here, but most supplies have partnered with Microsoft Azure for their cloud platform, and we're seeing a huge wave of introductions for new, cloud-based Level III manufacturing execution system (MES) applications, ranging from alarm management to simulation and control system engineering, available on the cloud.
It's important to begin by recognizing that Internet-enabled strategies represent and necessitate a departure from the traditionally and vertically siloed “us” vs. “them” (production/OT vs. enterprise/IT) mentality that historically pervaded manufacturing firms. Success with Internet-enabled business improvement requires a true convergence of information technology (IT), operations technology (OT) and engineering technology to enable the access, transparency, security and execution capabilities needed to deliver on its significant promise.
IIoT, cybersecurity drive mergers, alliances
The IIoT and cybersecurity push is predictably creating a lot of merger and acquisition activity. The Top 50 looks at calendar year 2016, but we always try to write this article with more of a flavor for what’s happening now, and even in the first half of 2017, we saw some mergers and acquisition (M&A) and even disposal activities as suppliers realign their businesses.
There are a couple of companies that we had to leave off the list this year because they were acquired, and we didn't have reliable visibility into their revenues for 2016. Hopefully, these companies will return to the list in next year’s article. For example, Cameron was acquired by Schlumberger in 2015, while Technip merged with FMC in 2016. Each company contributed more than $1 billion in revenue worldwide.
More recently, ABB’s acquisition of B&R Automation in April-July was a surprise to many in the industry, and really shows that ABB is making a big push into intelligent machines. B&R is one of a very small set of European middle-sized (“mittelstand” in German) companies that have grown a successful factory automation business over several decades. B&R's top-line revenues are roughly $600 million, while its headcount is 3,000, and its business is mainly machine control.
In addition, IIoT means end users will have to have better visibility and insight into assets that were previously “dumb.” For example, Emerson acquired the on/off valve business of Pentair Valve and Controls in 2016. News of Emerson’s bid to acquire the valve and controls business created a stir in the market when it was first announced because the acquisition paired the leading global supplier of control valves with the leading global supplier of isolation and pressure relief valves. It was Emerson’s stated goal to digitize the isolation and pressure relief valve markets.
Meanwhile, Yokogawa announced its acquisition of chemical injection metering valve supplier TechInvent2 AS, which is a Norwegian enterprise that offers technology to prevent blockages and corrosion in oil wells, pipelines and other facilities, and employs a patented technology for thermal control. It incorporates the functions of a mass flowmeter, control valve and valve controller, and has very few moving parts.
Despite its recent challenges, the oil and gas industry hasn't lost its luster for many of the large automation suppliers. This is demonstrated by several alliances, mergers and acquisitions involving oilfield equipment suppliers and other companies. In 2016, ABB and Aker announced their alliance to build on their combined strengths in subsea, power and automation technologies, and develop solutions that will improve oil and gas production for the global energy industry. In October 2016, GE announced its acquisition of major oilfield equipment provider Baker Hughes. The companies combined GE Oil & Gas with Baker Hughes. The new Baker Hughes is a major equipment, technology and services provider in the oil and gas industry with $32 billion of combined revenue.
The push to improved cybersecurity is also expanding product, service and application portfolios for the major automation suppliers, across all types of manufacturing. Honeywell, for example, recently announced its acquisition of Nextnine, a privately held provider of security management solutions and technologies for industrial cybersecurity. The addition of Nextnine’s security solutions and secure remote service capabilities will enhance Honeywell's existing range of cybersecurity technologies, and increase its Connected Plant cybersecurity customer base.
The push to cybersecurity is also resulting in lots of new partnerships, such as Claroty partnering with Schneider Electric in August of this year. Earlier this year, Rockwell Automation also announced a partnership with Claroty.
Beyond better insight into plant assets, IIoT tools also provide the software horsepower to create sophisticated models, analyze large datasets, and provide a path toward true predictive diagnostics. We’re seeing an explosion in the number and variety of analytics applications and suppliers. The migration to the cloud for historians, MES and other non-control applications enables significant reductions in IT infrastructure and support costs, but also raises the perceived risk of a lack of data security.
Organizations have long used business intelligence (BI) platforms and enterprise manufacturing intelligence (EMI) tools to discover and understand the underlying reasons and details about what happened and why in their applications. Now, with the industrial space becoming much more complex, dynamic and infused with Big Data, manufacturers are turning to advanced analytics, artificial intelligence (AI) and machine learning to support predictive and prescriptive analytic solutions. By connecting previously stranded data from smart sensors, equipment and other assets with advanced applications and predictive analytics in the cloud, IIoT is becoming a strategic enabler to improve manufacturing performance.
Again, we continue again to see to lots of mergers and acquisitions in the analytics space. In November 2016, Siemens and Mentor Graphics entered into a merger agreement in which Siemens would acquire Mentor for $4.5 billion. This acquisition extended Siemens' leading Digital Enterprise Software portfolio with Mentor's electronics IC and systems design, simulation and manufacturing solutions. The combination provides mechanical, thermal, electronic and embedded software tools.
As the commoditization of control systems marches on, traditional automation suppliers are finding it increasingly difficult to differentiate themselves with just base-level system functions and features. As a result, in October 2016, Rockwell Automation acquired Maverick Technologies, one of the leading independent systems integrators and service providers in North America. This acquisition supported Rockwell Automation's growth strategy to help customers adopt its Connected Enterprise vision, which connects information across the plant floor with the enterprise to help drive new business value. This is particularly important for process customers, whose uptime and continuous performance are critical. Terms of the deal weren't disclosed, but ARC estimates that Maverick's revenues are approaching $100 million.
Likewise, Yokogawa made a big alliance with Sinopec Engineering Group (SEG) in 2017 that marks the beginning of a long-term collaborative partnership. SEG is an engineering company of the Sinopec Group, one of the world's largest oil refining and petrochemical enterprises. The company designs and builds oil refineries and petrochemical plants inside and outside of China. By working together on projects in the Middle East and Southeast Asia, SEG and Yokogawa have established a strong relationship, and their new three-year agreement means Yokogawa will “provide on a priority basis” its control systems, safety instrumented systems (SIS), field devices and other solutions for SEG's refining and petrochemical projects.
The impact of IIoT on the market for asset reliability can't be overstated as some leading suppliers use asset performance management (APM) as their IIoT entry point. Platforms for applications such as APM are appearing in the solution portfolios of automation suppliers. These platforms provide an efficient, modern application and deployment environment, and enable manufacturers to move beyond assessing the reliability of individual assets to that of systems of assets and, in turn, systems of systems.
In addition to its acquisition of Meridium, GE continues to make acquisitions to broaden its depth in the space in both software and services. AspenTech is a new market entry with its acquisitions of machine learning provider Mtell and Fidelis Group LLC, which provides software to predict and optimize asset performance. Schneider Electric has been a fringe reliability solution supplier due to the deep functionality of its EAM software, but it recently allied with MaxGrip to add reliability consulting experience to its APM portfolio. Also, Bentley Systems and Siemens have announced a strategic alliance for joint development of digital engineering models. Building on this alliance, Siemens’ Energy Management division and Bentley will offer new solutions that will integrate Bentley's utility design and geographic information systems (GIS) capabilities with Siemens' Power System Simulation (PSS) suite.