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Where we start determines where we are heading

04 April 2013

Where does 2012 leave the European variable speed drives (VSD) market? Steve Brambley, deputy director of Gambica and convener of the organisation’s VSD group, looks at the last five years and gazes into his crystal ball to determine what the next five years may hold for the sector.

According to Swiss bank Credit Suisse, the global automation market is growing twice as fast as industrial production, and with one of the highest operating margins of any sector of industry. The discrete factory automation market is valued at $72bn and the process automation market at $83bn.

This tallies broadly with Gambica’s own research, which collects data for the UK, and the conclusion is that the automation market here is growing while industrial production is not. Geography can make a big difference, especially if one compares Germany with the UK, for example.

The other thing that makes a difference is where you start from, because the Credit Suisse analysis shows that the factory automation market has grown by an average of 7.6 percent per year since 2003 – or 2.1 times the rate for global industrial production.

Most of the trends that Gambica monitors are over a period of five years, so with a starting point of 2006-07 there were significant drops during the downturn of 2008-09, so they are only now back over the levels that they were at before. What this means overall is that since 2006, we have probably seen growth from zero to no more than ten percent.

Had Gambica used 2009 as a starting point, this would have shown 30 percent growth. It is all about where you start and what you want to say. Similarly, 2006 to 2008 would have also shown a big boom.

The UK industrial automation sector went into the recession very quickly and has come out of it very quickly as well - compared with other sectors like the process industries and instrumentation, where power station and chemical plant projects, for example, are much bigger and therefore rather more difficult to bring to a standstill with the onset of a recession. By the same token, it takes a while to get new projects started even during periods of economic recovery.

The industrial automation market is faster reacting and is much more about products, so distributors can de-stock and end users can decide not to replace. Much of it is about investment in either new product lines or the refurbishment of manufacturing equipment.

BRIC competition
The question is whether the economic downturn has forced customers to look for cheaper imports from Brazil, Russia, India and China - the so-called BRIC countries. The threat from BRIC imports into the European automation market is always there, but from the perspective of the Gambica membership, this is seen as part of the market rather than a clear and present threat. The majority of the Gambica membership is not competing on cost; they tend to compete on product quality, features, reliability, safety and added value support, rather than lowest cost.

Despite popular belief, the UK is still a manufacturing nation, ranked ninth in the world in terms of manufacturing output, and we still account for 2.3 percent of global manufacturing. That compares well with China, which is nearly 19 percent of global manufacturing output. UK Government trade missions have focused on the BRIC high growth markets, and there is a key message for UK companies to develop export potential beyond the usual stagnant markets of the European Union. These markets include the leading North American markets as well as BRIC countries.

But of course, exporting is more difficult than selling into domestic markets, which itself is difficult enough in the current economic climate. This difficulty increases with greater geographic distance, different cultural expectations, languages and laws.

Repair and refurbishment
In another recent report, market analyst Frost & Sullivan said that drives repairs are worth a third of new sales in Europe and the market was worth just under 600 million euros in 2011, projected to exceed 940 million by 2018. If it is a third of the size of new sales, then it is a quarter of the market.

This would seem to indicate that manufacturers are still keen to sweat their assets, something I alluded to recently at The Energy Event in September 2012. However, there is a counteracting trend to asset sweating and that is relocation to cheaper labour countries like Poland or China, in which case new equipment would almost invariably need to be procured.

Despite how significant the Frost & Sullivan report seems to say the repair market is worth, for the most part, the issue of drives repairs is not a barrier to growth. Only a small percentage of motors are equipped with a VSD, yet at least half would save energy if controlled by one.

The moral of the story is that you should take any market research with a liberal pinch of salt. The base timeline from which the research data has been gathered can be chosen to prove boom or bust conditions.

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