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Customisation will chug growth... - Views on News from Equitymaster
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  • Aug 26, 2000

    Customisation will chug growth...

    Many of our readers will be wondering, what is this ‘Industrial Automation’ sector and is it so important to be covered? For starters, industrial automation covers the new wave electronically intelligent devices, be it for process control (hardware as well as systems software) or for shop floor activities or for diesel engines. Simply put, it means technologically advanced products that help the companies optimize operations and services.

    Quite frankly, industrial automation segment is relatively small on the Indian engineering scene. Industrial automation devices find use in oil and gas exploration and refining, power generation and chemicals. These together account for over two thirds of this Rs 12 billion (US$ 261 million) market. The market in India is highly fragmented with presence of more than 100 small units. While these small-scale operations contribute about 35 percent to the total turnover of this industry, the majority 65 percent comes from large organised players.

    Company % share
    Tata Honeywell 25.0%
    ABB 19.0%
    BHEL 18.0%
    Yokogawa Blue Star 14.0%
    Poxboro 10.0%
    Siemens 7.0%
    Rosemount 5.0%

    Source: Industry

    Multinational companies (MNCs) dominate this top end of the market. India’s No.1 engineering behemoth Bharat Heavy Electricals Limited (BHEL) is the lone domestic face among these. The market is highly competitive with each of these players specializing and catering to a particular segment or industry. Tata Honeywell, the first one to enter the Indian market, dominates the industrial automation industry with market leadership position in the fluid control systems segment of the petroleum and chemical industry. On the other hand, BHEL and Yokogawa Blue Star dominate the power automation and petroleum segment respectively.

    The segment has seen little growth in the past couple of years due to lower economic activity resulting in slow investments and poor performance by its user industries. But post 1999, improved economic activity has seen corporate India posting better bottomlines. Hence, industry watchers expect that these companies will be more open to investments to upgrade their manufacturing systems from pure pneumatic control instruments to electronically controlled distributed control systems (DCS). In future the Indian industry is likely to see increased usage of DCS with intelligent field devices, networks, computers and software. Integration of manufacturing and process controls, customised programming will be the order of the day in the overall enterprise system architecture.

    Taking all this into consideration, the industry is expected to clock a healthy 15 percent growth in financial year 2001. Over the next three years, the this figure is likely to accelerate at a higher pace of 18-20 percent on the back of sustained increase in the level of investments.

    Another sub-segment in this whole gamut, which has huge potential, is application software (services). Typically, two-thirds of the revenue generated by a DCS contract is generated by hardware component. Since a bulk of the hardware component is imported, the margins get squeezed. But as the industry matures, more customers will look at high-end customised alternatives. Going forward, growth will come from the ability of the company to offer customised solutions (read products) and value added services. Hence, engineering combined with customised software services will be the key to higher profitability for industrial automation companies.

    In light of all this, existing players including ABB, Siemens, Cummins and BHEL are realigning their operations and are offering not only customised engineering products but also consultancy services. Companies are also looking at maintaining these devices for large industrial customers for a fee. This trend is slowly gaining acceptance, as it is a win-win situation for both the user and the engineering company. The customer can concentrate on its core competencies and leave the maintenance headache in the hands of the engineering company. For the engineering company on the other hand, it not only serves as a device to attract more consumers but also earns it additional revenues in the form of services income.

    But all this will only gain momentum if higher investments do take place as planned in oil and gas exploration, petroleum, petrochemicals and the power sectors. Going by previous records, corporate India has seldom achieved its investment targets as planned. Nevertheless, the industry has much to look forward to and offers immense opportunities.



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