Automation

Industrials Insights from Clearwater International

Summer 2015

clearthought Automation The age of automation is bringing untold efficiencies and benefits for industry

Market overview Automation is a rapidly growing global phenomenon which cuts across many industrial sectors, driven by the astonishing pace of technological change and connectivity. In this report, we analyse what is driving the huge demand for automated services and how the M&A landscape is evolving as a result. We also look at the key challenges that the market faces in the years ahead. The market opportunity Automation encompasses the creation and application of technology to monitor and control production and service activities. It can be seen in practice across a wide variety of industries, albeit that some are far more advanced in adopting the technology than others. For instance, although consumer markets are rapidly taking up automation concepts and technologies, more than two-thirds of the industry is still directly related to industrial markets.

time, cooperatively driving production to arguably create a 4th Industrial Revolution.

Automation skills are spread across a variety of activities including: the design and manufacture of devices and hardware; the design and application of software platforms; the configuration of devices in terms of embedded software; and the physical and software integration, maintenance and management of customer specific solutions.

Market drivers

Stand-alone activities such as a robotics cell in a manufacturing plant are increasingly integrated into the wider technology net of an organisation, such that data is shared throughout an organisation in real time and in a seamless way in order to create smarter factories which are better connected to customers. These are very much the concepts behind the so-called ‘Industry 4.0’ vision of future manufacturing - in which ‘intelligent’ factories, machines and products all communicate with each other in real

There is a clear differentiation in the market between those players providing products and software platforms to the automation market and those providing functions such as installation, maintenance and integration services. However, there is increasing pressure for product manufacturers to offer solutions which require a combination of these skills.

A string of factors have created a perfect window for the growth of automation, as entire industries embrace automation techniques and principles in order to transfer them into their own markets. Automation solutions have many benefits: ƒƒ

Improved productivity and asset utilisation

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Reduced waste/re-engineering costs

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Reduced labour costs and human error

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Improved sustainability and efficient energy management

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Enhanced product consistency, quality and traceability

The efficiencies achieved through automation help to facilitate: ƒƒ

The effective roll-out of low-cost manufacturing in developing markets

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More effective outsourcing of expensive/scarce engineering skills

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Better decision-making through real time information

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More flexible manufacturing which is more responsive to customer needs

Automation has much of its roots in the science of robotics which has been used to such success in the automotive industry. Today, advances in areas such as sensors and Machine to Machine (M2M) data collection and communication are making robots much more sensitive, flexible and precise - which means they can be used in a host of other industries and markets. Significantly, robots are falling in cost and becoming more intuitive - which means smaller companies can now start thinking about using them in their supply chains - while application programming is also becoming easier.

clearthought | Summer 2015

Industrials Insights from Clearwater International

Sector breakdown By analysing huge streams of data, companies in the vanguard of the automation revolution can use and adopt software and hardware to remotely monitor, control and optimise homes, factories, transport hubs, warehouses and commercial buildings. Automation also makes assembly lines more efficient and responsive to the needs of customers, while reducing human and mechanical error by allowing devices to talk to each other. The creation of smart factories that work within wider concepts of smart cities and smart grids will also contribute to a greener economy. Highly efficient factories can be smaller and can be located closer to the customer, challenging the current philosophy of ‘big is beautiful’. The following sectors have become the key focus of automation activity:

Manufacturing

Commercial

Automation is well-established in markets such as the automotive sector and is now slowly cross-fertilising into other markets such as electronics, food and aerospace. New manufacturing plants tend to have automation systems built into their designs, while the opportunity to retro-fit into existing facilities represents another major market which can be exploited by automation.

The use of automation is already well established in the design of ‘smart’ buildings and in the growing market for retro-fit of existing buildings. For example, only a small fraction of buildings today have ‘smart’ lighting systems installed, with the market for wireless and wired lighting along with sensor-led technology expected to grow rapidly.

Logistics

Transport

The growth of the Internet has placed massive demands on distribution infrastructure. Automation is now seen as the key to meeting increases in demand in cost-efficient ways, both in terms of outward and inward movement of goods.

Automation solutions support a whole range of transport requirements, for instance: they can assist with the growth in domestic and international infrastructure to support growth and enhanced security in air passenger numbers; help manage the expansion and renewal of the railway network; and assist with the continued globalisation of freight which requires transport to be cheaper, more secure and more adaptable.

Power/Oil and gas

Utilities/Infrastructure

Energy poverty and the decline of traditional energy sources amplifies the need to use less energy, generate it more efficiently and distribute it with minimal losses. These are precisely the key attributes of effective automation and control systems.

The efficient utilisation of ageing assets spread over wide geographical areas, as well as the integration of new and old assets and technologies, poses great demands on engineering resources which rely heavily on automation products and effective software integration.

Housing

Agriculture

One of the fastest growing, and potentially largest, of the automation end markets is housing. The integration and automation of devices that control energy usage, media, security, HVAC (Heating, Ventilation and Air Conditioning) and lighting has massive potential to improve quality of life and increase sustainability in the home, whilst reducing the cost of living.

Agricultural robots, or agbots, are being designed to help pick fruit and vegetables while also minimizing harvest time pressures.

clearthought | Summer 2015

Industrials Insights from Clearwater International

M&A overview Major players in the automation space include Schneider Electric, ATS, Bel Fuse, Honeywell International and Siemens, all of whom have been particularly active in the M&A market. A strong trend in recent years has been for leading players to offer industrial solutions through partnerships so that they can offer joint product development and common technology offerings.

Deal highlights: 2015 Endress+Hauser/Colsein

Potential Are companies responding to the potentially far-reaching implications of automation? A recent report from BCG1 argues that few businesses have truly thought about how the next generation of robotics will affect their “workforce, operations, business models, and competitive position”. And it says even fewer have considered which approach to embracing robotics will deliver the most sustainable advantage. It argues that as robots become cheaper, smaller, and more energy efficient, they will gain flexibility and finesse as they move further into a new range of precision applications far beyond the manufacturing realm. Meanwhile, the links between the robotics industry and US technology giants is gathering pace. For instance: Google has acquired a number of start-ups in the robotics sector over the past few years, while Amazon’s ¤704m acquisition of Kiva Systems - the warehouse automation specialist - was hugely significant. Kiva makes small and flexible warehouse robots which can quickly move large merchandise from shelves to packing areas.

Automotive driver For the time being, the automotive market will continue to be the biggest user of robots. In 2013, according to the International Federation of Robotics (IFR), the automotive industry represented around 70,000 of total robot sales of 179,000, with the next biggest industry being electronics. However, other industries are showing rapid growth

such that overall total robot sales have trebled since 2009. Spending on robots worldwide is expected to jump from just over ¤13.6bn in 2010 to about ¤61bn by 20251, driven by the convergence of falling prices and performance improvements. Players such as Yaskawa, Fanuc, ABB, Comau and Kuka continue to control a majority of the global robotics market.

Global reach Until recently, the growth of robotic and automation markets was very much constrained to developed nations but this picture is changing fast. For instance: by 2017, more industrial robots will be operating in China’s production plants than in the European Union or North America according to IFR. Operating unit numbers in China will double from around 200,000 today to more than 400,000. China is already the world’s largest market for the sale of industrial robots, but the country still has very low robotic density. To date, China only has 30 industrial robots per 10,000 employees in manufacturing industries while in countries such as Germany and Japan the figure is more than ten times larger. In effect, the automation of China’s production plants has only just started and is being fuelled by increasing labour costs across Asia which have eroded much of China’s traditional competitive advantage. 1: The Rise of Robotics: BCG Perspectives

Swiss measurement and process automation specialist Endress+Hauser is acquiring Colsein, a Colombiabased process automation consulting services provider and its long-time sales and service partner in the country. The transaction is expected to complete in January 2016. Colsein’s portfolio covers a wide range of services including calibration, maintenance and engineering. ABB/Gomtec ABB has acquired Gomtec, the German collaborative robot manufacturer. ABB said the deal would help accelerate its expansion into new markets and further penetrate traditional industries as manufacturers pursue new ways to increase flexibility and competitiveness. Gomtec said ABB’s global reach, coupled with its world-class operations, would help bring innovative robots and solutions to the rapidly growing collaborative automation market. Acuity Brands/Distech Controls Acuity Brands acquired Distech Controls, a maker of energy management and building controls, for ¤232m - adding another company to its stable of businesses in the lighting and building automation field. In total, Acuity now has around 15 brands involved in various aspects of the lighting eco-system.

clearthought | Summer 2015

Deal highlights: 2014 Living Bridge/Kirona Living Bridge acquired a majority stake in Kirona, a UK-based field force automation software developer. Kirona said the investment case for its software and services was becoming increasingly compelling for organisations across both the public and private sectors. Murata Machinery/Cimcorp Murata Machinery has acquired Cimcorp, a Finland-based robotic automation systems specialist. Murata and Cimcorp are leading companies in the global material handling systems industry, with Cimcorp being a top supplier of intralogistics to the tyre industry. Lincoln Electric Holdings/Easom Automation Systems Lincoln Electric Holdings acquired Easom Automation Systems, a US developer of automation solutions for industrial cutting and welding applications. The acquisition provided Lincoln Electric with the opportunity to expand its automation offering for industrial conveyors, drives, handling systems, multi-zone weld systems, and robotic transfer units used in the aerospace, automotive and heavy fabrication sectors. Lincoln Electric is a global leader in the design, development and manufacture of arc welding products, robotic arc welding systems, plasma and oxyfuel cutting equipment. Samsung Electronics/SmartThings Samsung Electronics acquired SmartThings, a US security and monitoring platform operator that provides automation, monitoring and power control solutions for building infrastructure, for ¤149m. SmartThings’ technology helps consumers to control their appliances with their smartphones and other devices. The company recently unveiled the second generation of its smart home automation hub that connects with sensors in the home to detect characteristics such as temperature and moisture, while it also introduced a new home-monitoring subscription service that sends texts or calls to the homeowner if there are emergencies at home.

Industrials Insights from Clearwater International

Special focus: Chinese Market China’s old investment-driven model - fuelled by cheap financing, cheap labour, exports and large government projects - has run out of steam. Instead, the government has committed to to restructuring and upgrading its economic model in order to improve investment efficiency and productivity, and to spur on consumption and household income growth. Government policies that focus on efficiency, consumption and innovation are being put in place throughout the economy. This drive, aligned with cost increases and rapidly increasing quality requirements, is provoking a huge shift towards automation in China. Firms are no longer concerned about producing acceptable quality goods as cheaply as possible. Instead, companies want to produce quality products on a large scale while adhering to increasingly strict regulations and also hedging against rising labour and other costs. A study by Clearwater International forecasts that China’s factory automation market will more than double in the next three to four years, making China the leading global market for factory automation solutions. It estimates that factories in China will spend a total of RMB 900bn (¤134bn) between 2014 and 2018 on automation solutions. Around half of this spending will go on system and automation products, while the other

half will go on integration vendors, robot makers, and management software vendors.

White goods sector China produces 85% of the world’s domestic appliances and exports more than 40% of its total production. Because of its exposure to international markets and its very labour intensive production model, the industry has been one of the first sectors to feel cost pressures as margins and profits decrease. To balance these changes, companies have embarked on very aggressive automation programmes. For instance, Haier increased profits in 2013 by 20% to ¤1.36bn and worker productivity by 35% in just one year following a drive towards automation.

Automotive leads way The take-up of automation processes is still imbalanced across sectors. Automotive is by far the largest consumer of automated solutions and uses 90% of China’s robot base, compared to around 70% in Western developed nations. However, automation is not a panacea for all manufacturing companies - especially as there is a shortage of labourers qualified to manage and operate automation machinery.

clearthought | Summer 2015

Industrials Insights from Clearwater International

Hot topic: Internet of Things

The concept of using sensors and other technologies to link just about anything to the Internet, the so-called ‘Internet of Things’ (IoT), has become a powerful force for business transformation and its disruptive impact via automated practices will be felt across all industries. Gartner forecasts that 4.9 billion connected things will be in use in 2015, up 30% from 2014, and that the figure will reach 25 billion by 2020. The digital shift instigated by Cloud and mobile technology threatens many existing businesses which will have no choice but to pursue strategies built around IoT concepts. Consumers, businesses and organisations alike will have to find new ways in which to exploit the technology. Gartner estimates that IoT will support total services spending of ¤63bn in 2015 and ¤239bn by 2020, while 13 billion connected things will be in use in the consumer sector alone by 2020.

Reinvention Many ordinary objects are being reinvented with digital sensing, computing and communications capabilities. In the home, these range from everyday kitchen appliances through to sensors which monitor lighting and heating. In the factory, this includes sensors installed inside equipment to monitor if parts have exceeded their useful life or safety thresholds, or using radar frequency tags, networked cameras and lasers to analyse manufacturing processes and production flows.

Such functionality provides both new and previously passive objects with a digital voice, and the ability to create and deliver an information stream reflecting their status and that of their surrounding environment (so called Big Data). Such developments radically change the value proposition, creating new services and usage scenarios and driving new business models. Within a few years, some level of built-in intelligence and connectivity will be regarded as standard and this will rapidly filter down to mainstream products and services.

Connected ‘things’ in use (million units): Category

2013

2014

2015

2020

Automotive

96.0

189.6

372.3

3,511.1

Consumer

1,842.1

2,244.5

2,874.9

13,172.5

Generic Business

395.2

479.4

623.9

5,158.6

Vertical Business

698.7

836.5

1,009.4

3,164.4

Total

3,032.0

3,750.0

4,880.6

25,006.6

Source: Gartner (November 2014)

Conclusion The automation industry is developing rapidly as it capitalises on huge economic, social and technological global trends. The drive towards greater sustainability and energy management, reduced labour costs, greater product consistency and real-time information delivering better decision-making is ensuring that the industry remains a vibrant and powerful tool for creating production efficiencies. This drive is now felt across the world, not just in developed nations but also across fast-growing emerging economies keen to exploit the benefits that automation can bring. Such a climate has led to strong M&A activity across the sector over the past few years and we anticipate continued healthy dealflow in the years to come, as the market further matures and consolidates.

clearthought | Summer 2015

Industrials Insights from Clearwater International

Deal highlights Some of our Automation deals Seelen A/S

Kirona Solutions

Leading supplier of automation equipment for the insulation industry

Leading field force automation software developer

Clearwater International advised on the sale to Qubica, a technology-driven company with strong products in the fields of intelligent logistics and storage

Clearwater International provided Debt Advisory services for Newco in this secondary buyout transaction, backed by Livingbridge

Capula

Hima-Sella Ltd

Automated control and real time information solutions provider

Provider of safety-critical control and automation systems in the oil & gas, rail, chemical & petrochemical, nuclear & power, and steel industries

Clearwater International advised Royal Imtech NV on its cross-border acquisition of the company

Clearwater International advised the owners of Hima-Sella on its management buy-in, financed by The Co-operative Bank

Quintex

Intellident

HVAC control and automation manufacturer

RFID solutions provider for library systems and the logistics market

Clearwater International advised the MBI team and Fleming Family & Partners on the acquisition of the company

Clearwater International advised One Equity Partners and management on the cross-border acquisition of the company

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Meet the team Gareth Iley Paul Jones

Partner Partner, UK 052 0367 +44 (0)845 845 052 0345 [email protected] [email protected]

Marc Gillespie John Hustler

Partner UK Partner, +44 845 052 0364 +44 (0)845 052 0302 [email protected] [email protected]

Constantine Sarah CharmanBiller

Partner, UK Consumer Analyst +44 845 052 0353 +44 (0)845 052 0393 [email protected] [email protected]

Francisco Gómez

Partner,Naghten Spain Jackie +34 699 446 314 Consumer Consultant [email protected] +44 (0)845 052 0300 [email protected]

John Jensen

Partner, Denmark Alex Patey +45 20 33 47 67 Manager [email protected] +44 (0)845 052 0398 [email protected]

Carlos Morgado

Director, Portugal Perri 918 Blakey +351 213 379 Deal Originaton [email protected] +44 (0)845 052 0390 [email protected]

Carsten Rydahl Simonsen

Director, Denmark +45 27 62 03 73 carsten.rydahl.simonsen @cwicf.com

Olivia Prew

Deal Origination, UK +44 845 052 0375 [email protected]