Original equipment manufacturers (OEMs) making automated machines for factories are experiencing a period of intense change in their industry. Gareth Jones, vice president for strategic marketing at Control Techniques, gives his view on the challenges facing the world’s machine builders.
I think the most interesting trend facing machine builders today is the ongoing changes to their competitive landscape. China is central to this story. Over the last few decades, China has successfully established itself as the workshop of the world. This involved the creation of numerous factories of quite astonishing scale. Major electronics manufacturers, like Foxconn and Flex, have factories in China employing tens, and sometimes hundreds, of thousands of workers. Such factories require huge numbers of advanced, automated machines. For a long time, hi-tech machines had to mainly be imported from the developed world, particularly the US, Germany and Japan. Chinese machine builders were able to compete only on the production of less advanced, low cost machinery.
As time went on, Chinese machine builders started to win business from advanced western OEMs. They did this by differentiating themselves on their service offering. They were able to tempt Chinese customers to buy their machines on the basis that they had a much stronger local support and service offering. Many Chinese companies were happy to buy lower performance, and sometimes less reliable, machines on the basis that they were much lower cost and would quickly be fixed if they broke down.
Having said all that, right now, western OEMs are growing and doing well. This is being driven by strong growth from manufacturers that need to be in the west. Examples of this include manufacturers of perishable goods, such as the food industry, as well as manufacturers of large quantities of physically heavy goods such as automobiles. Here transport costs dictate a regional manufacturing strategy.
Now things are changing again.
The intensity of competition for Chinese OEMs, has become quite unbearable for many. There is major oversupply in many areas of the Chinese OEM market, such as wire drawing and textile machines, and a lot of low cost Chinese OEMs are struggling to make money. Consequently, there is a market shakeout going on, with market consolidation and less efficient machine builders being left behind.
At the same time the best Chinese OEMs are starting to build higher tech machines that can compete with western-made machines on capability. This is the key challenge that western OEMs trying to export to China now face. Moreover, some of the advanced Chinese OEMs are actually starting to export their machines to other developing countries. This has the potential to deprive western OEM exporters of other important markets in places such as Russia, Brazil and India.
China is becoming more similar to other developed markets. In the next few decades Chinese machine manufacturers will start to compete with western OEMs on their home turf, and will start exporting high-capability machines to the EU, the US and Japan. This won’t spell the end for western OEMs though. Operational costs such as wages in China are rising too. Soon, western OEMs may find that they enjoy cost parity, or even a cost advantage, when exporting to China. Additionally, western OEMs can localise in China by building their own production facilities in the country. Some are actually doing this right now. Localising will enable them to cut their costs and develop a competitive service offering.
Automotive is really exciting at the moment. Not only is the sector booming in many countries, including the UK, but it is going through a period of transition driven by political demands to reduce pressure on the environment. Part of this is through scandals, such as the recognition that diesel is dirtier than previously believed, and part of it is driven by the increasing electrification of cars. Commercially viable electric cars are increasingly taking off, and this is something I’ve seen with my own eyes. Recently, on a business trip to Shenzen, China, I took a taxi from the airport to the hotel. It was only once I had got into the vehicle and set off that I realised it was electrified. And in the last year I’ve noticed that the motorway service stations in the UK’s west midlands – near to my home in Wales – all now have charging points for electrical vehicles next to the petrol pumps. Changes to the automotive market, like car electrification, create big opportunities for OEM machine builders, because they require factories to retool to produce new products. For example, companies that test electric cars have created a market demand for new designs of test rigs that simulate battery technologies, so that development engineers can prolong testing with any desired battery charge level being simulated, behaving in the same way as an electric battery would behave.
Many OEMs should think more about how data can help to improve outcomes.
One of our machine builder customers that uses big data in some interesting ways is a manufacturer of machinery for the food processing industry. They track absolutely every component in their machines. This means that if one of their food manufacturing customers phones them with a problem and gives the machine serial number, then the machine manufacturer then knows all components in a machine – and can ensure the correct part is instantly sent out for speedy replacement.
Software is also an important thing for OEMs to think about at the moment. Increasingly, I’ve noticed a trend for some OEMs, even relatively small ones, to put a lot of effort into their software offering. Some OEMs are actually developing separate software houses that specialise in software for the manufacturing industry. In my view, this is a savvy move. In modern manufacturing, software is vital and it is going to become more so. This makes it a big business opportunity. The large US software houses are moving in on the manufacturing market, and increasingly setting up formal partnerships with manufacturers – such as Microsoft’s partnership with Jabil, a major contract manufacturer, announced earlier this year. Unless OEMs make their own efforts to capture software business from their manufacturing customers, then they will find this business opportunity is taken from them. Obviously, software is not something that all OEMs can compete on, but a significant number of OEMs have very skilled software engineers working with them. As the original manufacturers of the equipment, OEMs understand their machines far better than big software firms do, so they have the chance to develop a software offering that is of real value to their customers.
One trend we are seeing in manufacturing is a merging of technologies.
In most offices, many types of electronic machines, like photocopiers, printers, fax machines and scanners, have now merged. A similar trend is now happening among components in industrial machines. For example, programmable logic controllers are merging with human machine interfaces; and variable speed drives are merging with standard controllers.
Another trend is that communications will be based on more open standards. Already, PROFINET, Ethernet/IP and Modbus TCP/IP are able to coexist on the same cable. This allows machine builders much more scope to mix and match products from different suppliers. In future, this trend towards product openness will increase, and devices like variable speed drives will support all communications protocols, allowing transparent data transfer across an automation system.
Smart sensors are also becoming more common across machines. These are sensors that connect directly to a communications network and provide rich data, not just the status of a variable but also the rate of change and history of that measured variable. Technologies like smart sensors will cause a change in OEM business models. It seems likely to me that customers supplying machines may also start to tie in consumables. So, a customer supplying machines for making plywood might also start to supply the glue. And instead of buying the machine, the end user would sign a contract for access and machine uptime. This is good for the consumer because it ensures security of operation and quality of output. It is also good for the machine builder because it provides a new revenue stream and higher profits.
For me, the big question for the future of the machinery market is whether small and medium sized OEMs will have made inroads into the industrial software market that is currently emerging rapidly, or whether this new market will be dominated by the big US software houses.