Services are critical in the lucrative safety systems market

Citation

(2001), "Services are critical in the lucrative safety systems market", Assembly Automation, Vol. 21 No. 1. https://doi.org/10.1108/aa.2001.03321aab.011

Services are critical in the lucrative safety systems market

Services are critical in the lucrative safety systems market

Keywords: Safety, Service

Datamonitor's new report Global Critical Control looks at the market for automation safety systems – its value, dynamics, drivers and competitive issues.

Key findings to emerge from the report reveal:

• •

  The strongly performing, hi-tech market offers good business and is a driver of market consolidation.

• •

  Services can account for as much as 60 per cent of safety systems revenues, providing a lucrative revenue lock-in for automation companies with the right products.

• •

  The strongly performing, hi-tech market offers good business and is a driver of market consolidation.

Major automation suppliers are attracted to the safety systems market because it has a much higher growth rate than the automation market in general. Safety systems are an area with more restricted competition, highly complex and easily differentiated products and non-price related market drivers (in rising safety standards).

The higher profit margins and much higher market growth of the industry attract major automation competitors. This is also a contributory factor in the all-encompassing drive to consolidation in the automation industry.

The global, critical, controls market is currently worth almost $400 million. Datamonitor forecasts that compound annual growth over the next five years will be marginally higher than 10 per cent per annum in total.

Figure 3 considers the consequences of the increasing interest in shareholder value and the move towards greater competition. Both encourage economies of scale, one-stop shops and shorter product life cycles. Suppliers and their customers both care about their margins because of the effect on profitability and hence shareholder value. Greater competition in the wider automation markets generally forces price falls as one of the factors involved in winning contracts. The safety system market is less subject to this pressure as the number of suppliers is more restricted and the systems are more specialised.

Figure 3 The drive to increasing consolidation in the safety systems industry

Shorter product life cycles are supplier driven. New products have much higher margins than older products, because they are sold on non-price grounds such as superior technical performance. In turn this increases the resource demands of product development, encouraging economies of scale. This adds to the long term trend which affects all mature computer system markets moving towards greater product sophistication, and thus makes product development intrinsically more complex (and therefore expensive).

The above features widen competition; the third, the move to one-stop shops, is an attempt by suppliers to limit competition in order to maintain profit margins. However, it leads to greater consolidation by putting a premium on sheer range of products and services. The likely increase in cost from relying on a single supplier is supposed to be outweighed by the increased efficiency and convenience.

In the safety systems market, consolidation has had several recent manifestations (see Table II): services can account for as much as 60 per cent of safety systems revenues, providing a lucrative revenue lock-in for automation companies with the right products.

The value of the safety system market is shifting more towards services as these become the focus of value added elements. Hardware is becoming increasingly commoditised, the result of a number of factors. The rise of fieldbus tends to destroy differentiation between the hardware of different manufacturers. Since the hardware has to be compatible, differentiation can be an actual disadvantage.

Table II Acquisitions of safety systems suppliers by major automation companies, 1994-2000

A second aspect of commoditisation comes from the supplier's own need to cut costs. One way to achieve economies is through mass production. Thus, the customer's demand for lower prices encourages the supplier to provide standardised units. This also ties in with spare parts management which is easier if there are fewer spare parts to manage. This is again encouraged by present management trends towards slimmed spare parts inventories, Datamonitor's research has shown that the value ratio between services and equipment in the global critical control market currently stands at 62:38.

Triconex remains the biggest supplier, thanks to its strong position in the TMR and North American market. Triconex is under a long-term threat to its relative position in the sense that DMR is becoming a more acceptable solution thanks to the development of diagnostics in the past few years. The relative growth of DMR technology in relation to TMR will erode Triconex's share of the overall market. ABB holds second place across the world market. ABB's portfolio was strengthened by its acquisition of August, not just in terms of sales, but also in the extension of its product range to both TMR and DMR solutions.

Triconex has an overwhelming lead in services sales. Of the selected major suppliers, it takes up almost a third of the revenues. However, this is not a reflection of a vastly greater proportion of safety system services to equipment sales as a consequence of Triconex's own commanding lead in the industry in general. The other main suppliers have a much more even distribution of service sales, with ABB as the next biggest supplier (see Figure 4).

Figure 4 Relative safety system sales for services (major global suppliers)

Global Critical Control is available from Datamonitor. Visit Datamonitor at www.datamonitor.com