System integrators see strength in improving numbers

J.P. Morgan/CSIA study points to firm optimism as projects get off the back burner

02/04/2013


After a period of being stuck in neutral, 2012 was a year in which system integration projects finally hit first gear. A new study by the Control System Integrators Association indicates 2013 will see a further acceleration of growth as manufacturers begin to see a clearer road ahead.

CSIA partnered with J.P. Morgan to conduct a study of about 200 integrator firms from the U.S. and around the world to gauge their business climate. An increase in automation integration projects is closely tied to growth in the manufacturing sector as a whole, and confidence is firming throughout the sector.

The study found that 39% of survey respondents said their business was stronger at the end of 2012 compared to mid-year, and another 34% found it similar. But 51% see stronger growth in projects over the next six months, and 69% expect revenue growth during that same period. “Growth should accelerate modestly,” the survey stated. “At a minimum, it suggests that industry participants have not seen anything since (the end of the third quarter of 2012) to make them unduly pessimistic about growth for next year.”

“Integrators probably see customers who, for the most part, are in good financial health and willing to spend money on their plants if the payback on these productivity investments can be justified, said Steve Tusa, electrical equipment & multi-industry equity researcher for JP Morgan, and one of the report’s authors. “Some of these projects may be temporarily delayed due to economic uncertainty, but if the pace of planning and RFPs are continuing at a steady pace, then it’s understandable that integrators would look for more growth next year.”

The study also focused on the adoption of manufacturing execution systems by customers as part of their overall automation project. While 21% of integrators who offer MES said its adoption is rapidly occurring, another 59% said that growth would be slow, and 20% said adoption is minimal. 

Tusa noted that the use of system integrators is on the rise. “For several years, the market has trended toward more complex automation systems, often involving components from multiple vendors, where the expertise of an integrator is critical. We think this likely continues,” he said.

Systems integrators as a group have a wide audience, ranging from process integration projects (food and beverage, oil and gas, and water and wastewater are three of the top four client markets) to discrete manufacturing, such as OEMs for industrial projects, mining, and automotive.

An area of growth for system integrators in the coming year and beyond is power and energy, with 16% of integrators looking to expand in a market that already has 28% coverage among integrators.

“U.S. natural gas probably plays a role, but upstream oil capex too has been strong in recent years, as an $80-plus oil price has made a lot of exploration spending economical in some key regions like the Canadian oil sands where the extraction costs are higher,” Tusa said. “Many suppliers continue to target these markets for growth, so it makes sense that the integrator community would follow.”

The comments from integrators in the survey match the optimism—and the issues raised—by the survey data. “I have not seen delays or cancelled projects yet but feel a slowdown is coming sometime next year,” one respondent noted. “Customers are barely keeping old legacy equipment running but are holding back on upgrading due to the uncertainty. Our business outlook is still guarded optimism despite the current headwinds.”

Another respondents noted, “2012 was a good year, mostly due to the oil and gas, but domestic regulations have chased a lot of opportunities to more friendly locations—mostly overseas.”

The auto industry, one integrator said, has “traditionally been a very good market to be in. Since its rebound, 2011 and 2012 have been fantastic years with sales forecasts in 2013-15 looking very good as well. Our issue is finding the engineering talent to be able to grab more of the market as it grows.”

Another integrator was looking even further down the road. “We have to create our own trend, which we are working on. If we just let things drift like you can in an ‘up’ economy, then things would really be down. We expect high levels of inflation over the next five years due to the trillions recently injected into the economy. This is going to make things really interesting.”

That growth potential is one of the takeaways from the J.P. Morgan/CSIA study. “To be sure, manufacturers haven’t been unscathed, as the growth momentum of industrial production has definitely slowed in recent months, particularly outside the U.S.,” said Tusa. “But for U.S.-centric manufacturers, there has been enough end demand from sources like auto sales and corporate equipment capital spending to justify increases in production. The U.S. has actually been only indirectly affected by some of the Europe and China issues and is considered by many the ‘best house on a bad block.’ As long as consumer and business spending holds in, you will probably get continued, but slower, growth in manufacturing.”

The global issues, however, may continue to be a dark cloud in that optimism for manufacturing. “The risks are generally well known, and most are based on the theme of global de-leveraging,” said Tusa. “Consumers are trying to repair their balance sheets in a still-fragile labor market, and much of this debt has now been transferred on to the backs of governments who now must tackle their own fiscal issues.

“What the last several years have shown is a very rapid feedback loop between economic/political issues and business spending,” he added. “If businesses no longer believe that the economy can deal with these imbalances in a credible way, then hiring and capital spending will quickly freeze and the ripple effects of this would be felt across the economy.”



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