Industrial Automation Technology is Stagnant
(This is part 1 of a trilogy. When you’re finished reading this, you can read Part 2: Why Automation Equipment Vendors Dabble in Integration and Part 3: Lowering the Cost of Automation Equipment.)
I’m not the first person to notice that industrial automation technology isn’t keeping up with the rapid pace of technological change that we’ve all grown used to. Jim Pinto commented on it years ago:
Industrial automation business seems to be stuck in the mold of being a slow-growth, stable business. This generates a mindset, perhaps even complacency that inhibits change. In my opinion it’s marketing myopia, an unwillingness to think “outside the box”.
Most major automation companies have gross-profit margins of 40-50%, the industry mindset. Many other large companies in other businesses generate much lower gross margins, in the region of 20-25%. Some of this may be accounting differences, but the broad-brush differences are there. Traditionally, automation business is based on higher gross margins and lower net-profit, and it’s difficult to think outside that box.
In the industrial market, only 2-3% is spent on R&D, with some lower than that. By contrast, many of high-tech manufacturers spend 10-15% – Cisco 15-20%, with HP, Lucent, in the 8-10% range, and Motorola and Ericsson at 10-15%. One wonders what the impact would be, if industrial automation companies doubled, or even tripled, their R&D investments.
How is it that an industry like industrial automation equipment can have margins in the 40 to 50% range when their primary customers are manufacturers, probably the most price-conscious market in the world today? I’ll tell you why: they’re smart. Here’s what they did…
Originally they all sold interchangeable parts. You built a control system out of power supplies, relays, terminal blocks and valve banks. All of these parts are available, in replacement form, from various manufacturers and distributors so competition keeps margins tight. Even if you only used P&B relays, it’s pretty easy to switch your standard to Phoenix if you can get a better deal.
Then they came out with something revolutionary: the PLC. Manufacturers jumped on it because you could take four double-door panels worth of relays and replace it with a single unit, and even reprogram it in real time! It was truly a marvel of technology, but it shifted the balance of power in the industry away from the customers and towards the vendors. Now this single piece of equipment that controls the assembly line isn’t interchangeable with other vendors. Not only that, but it requires expensive programming software, not to mention a steep ramp-up time for the maintenance and engineering departments to learn the technology. Manufacturers started standardizing on “automation platforms”. Obviously this creates vendor lock-in. Once you standardize on one technology, the vendors can pretty much count on your continued business as long as they provide good support and a clear upgrade path. The barrier to switching technologies is so great that vendors can afford to have high margins, and they don’t feel the pressure to innovate like in other markets.
Unfortunately this means manufacturers are losing. They’re not getting as much value for their money as they could be. Here are some examples of what a PLC should be able to do as we approach the year 2010 (but can’t):
- Open an ODBC connection to a database and execute basic create, read, update and delete (CRUD) instructions, straight from ladder logic, without the need for expensive 3rd party software.
- Send an email or text message when a machine goes down, or on any sort of event.
- Support for Secure Socket Layer (SSL) the same technology your banking website uses. This would prevent exposure of some of our critical infrastructure to network security threats.
Another unfortunate side effect is reduced innovation in the system integration space. Let’s say you’re a system integrator and you want to develop some product for a niche market, you have to choose an automation technology to base it on. Once you’ve chosen that controls technology, say Allen-Bradley, you’re also locked in. You’re going to find it hard to sell your product to a customer that has standardized on Siemens, which means you have to invest extra effort, money, and time in re-engineering your product to work on their platform. Worse, their platform may not have all the features that your product requires, so it may not work as well. It’s not much of a product if you have to re-work the design every time, which means it’s harder to recoup your development cost.
Ultimately, automation technology is more expensive and less powerful because automation equipment vendors have stopped innovating.