Ask any CEO on the planet what the business goal for their company is and no doubt the answer will be, "long-term growth and profitability." It's the mantra of every corporate executive in every industry. But given the unpredictable economy and the vagaries of business itself, the promise of a bright tomorrow could fall under a dark cloud unless the right steps are taken to prepare for the future. Having endured layoffs, budget cuts, and factory consolidation over the past year, the manufacturing industry knows all too well the dimensions of that cloud. The shadow it has cast has also been keenly felt by the vendors supplying automation and control technology for plant operations. Quarter after quarter, many automation suppliers continue to report disappointing financial results including losses. Scrambling to subdue shareholder anxiety and deliver what customers want, many vendors last year announced plans to make dramatic shifts in their business models, repositioning themselves as customer-centric solution providers for the age of the Internet.
In a report last May, Managing Automation outlined the changes underway at companies such as Rockwell Automation (Milwaukee, WI), Siemens Energy & Automation Inc. (Alpharetta, GA), ABB Group (Zurich, Switzerland), Emerson Electric Co. (St. Louis, MO), and Invensys plc (London, UK), all of which reorganized internal operations to conform to the customer-centric, solutions-based model (Managing Automation, May 2001, page 25).
Today, those companies are realizing the vision of how to better serve customers, but much work remains in how to implement those visions. Now that they have all come forth with combinations of hardware, software, and services, supported by industry standards that level the playing field, the next battle to be fought is in identifying and bringing to market technologies that will create differentiation and competitive advantage.
This battle is over radical innovation.
In the past year, Siemens, ABB, and Schneider Electric (Palatine, IL) have announced formal venture capital groups designed to launch new businesses. Many of the business proposals funded come from ideas born on their own as well as outside technology incubators. These incubators can take a number of forms. One of the more popular models is one in which academics, entrepreneurs, and engineers experiment with out-of-the-ordinary ideas that can be transformed into startup companies with seed money. Some companies have aligned themselves with local universities to inexpensively broaden their brainpower, while others are pouring money hand over fist into newly streamlined research and development (R & D) departments.
Whatever the method, the objective is the same: to put the R back into R & D. And while the organizational form is not a new invention in business, the creation of incubators-startups, spin-offs, and academic partnerships-is a new and dramatically different approach to innovation for the industrial market.
"Not too many years ago most of the automation companies did all of their R & D in-house," explains Dick Hill, vice president of automation systems and solutions at ARC Advisory Group Inc. (Dedham, MA). "Then there were a lot of cutbacks to the research part." At first, outsourcing research might seem tactical. But do it under the right conditions, such as in a startup environment where risks won't impact the core business, and it becomes ingenious. "Putting money into an outside venture gives them a little bit of control-or a lot of control depending on how much they invest-and the incubator approach allows them to develop technology that they don't want to bring into the main business unit, but they have an eye on for the future," says Hill.
Although the technologies born in these unconventional venues won't have much of an impact on automation vendor financial results in the near term, just wait. There are a number of ways the automation vendors expect to capitalize on their new investments. One is eventually selling an interest in a startup. Another is buying a venture outright should the technology developed be considered strategic. A third is to be a patient minority investor and reap rewards should a technology take off.
Whatever the eventual disposition of these investments, one thing's for sure: bets are being placed in a number of areas of importance to manufacturers. Predictive maintenance, e-commerce, motors, networks, power systems, as well as alternative energy sources are all areas of concentration for automation suppliers.
Technologies that will be first tested and used in Navy ships, and even toys, for example, will eventually find their way to the factory. A company called Elliptec (Dortmund, Germany), an offspring of Siemens' Technology-to-Business Center (TTB, Berkeley, CA), an organization devoted to radical innovation, makes low-cost mini-motors that someday could be used for such home and facility automation tasks as opening blinds or adjusting recess lighting. Siemens expects a market for this technology to emerge in a few years. Until then, Elliptec is establishing its business by selling the motor to the toy market, while continuing to work closely with Siemens. "We have a strong collaboration with the company and a few years down the road I bet it will be a strategically important part of our business," says Dr. Arding Hsu, president and CEO of Siemens' TTB Center.
Then there is Rockwell Automation working with its R & D partner, Rockwell Scientific Co. (Thousand Oaks, CA), under a government contract building intelligent automation for Navy ships to monitor engineering facilities and detect and reconfigure systems in the event of failures. This technology could potentially be used in a factory setting in the future, says Steve Chiu, manager of control and power systems at Rockwell Scientific.
Rockwell Automation owns 50% of Rockwell Scientific, the other half is owned by Rockwell Collins. Rockwell Scientific has a long-term research agreement with Rockwell Automation, which provides the company with a fixed amount of funding each year. This year, Rockwell Automation is working on about 20 projects, ranging from power conversion to motor drives to new types of sensors and advanced control techniques. Rockwell Scientific collaborates with Rockwell Automation's internal R & D division, called the Advanced Technology Lab, to develop technology enhancements for RA's existing product portfolio.
It is, however, Rockwell Automation's relationship with the University of Wisconsin-Milwaukee (UMW) where equally important bets for radical innovation are being placed. Rockwell participates in UWM's Center for Intelligent Maintenance Systems (IMS) a National Science Foundation Industry/University Cooperative Research Center, which is led by Dr. Jay Lee. IMS is developing a low-cost embedded smart chip and software-which Lee describes as smart infotronics technologies trademarked as Device-to-Business (D2B) and the Watchdog Agent-that will trigger service when a factory device, office machine, or household appliance starts to show signs of a problem. The data is processed locally, thereby reducing the amount of diagnostic information sent, which means something as simple as a cell phone could be synchronized with the device. The technology will be introduced commercially within a year or two, says Lee. But by participating in R & D this way, Rockwell can combine its internal R & D expertise with UWM's talent to create a force more powerful than itself.
"We focus on the gap areas that companies don't normally look into," says Lee. "From an academic point of view, we are in a position to bring ideas and innovation to a company [so it] can make money."
Rockwell, one of 40 companies supporting IMS, pays a $35,000 membership fee to gain access to the technology research, a drop in the bucket considering the cost of a team of in-house engineers. While all of the members have access to IMS' technology, including Rockwell competitors such as Eaton Corp. (Cleveland, OH), each member can establish a separate contract and fund a proprietary project (see sidebar).
For its part, Eaton's Cutler-Hammer (Pittsburgh, PA) division is continuing its effort to bring innovative predictive maintenance to the market by incubating technology in-house. A few years ago, the division acquired a small Russian-based company that had developed an algorithm to monitor the wellness of a medium voltage system or device and predict when it will fail. Originally, Cutler-Hammer tried to fold the operation into its new Engineering Services & Systems group, but it didn't work in a startup unit. Instead, the operation was placed within the larger Power and Control Systems group, but kept off to the side and funded much like a VC initiative. "We didn't want to put an incubated company that needs to grow into the P & L [statement] which would have financial constraints placed on it," explains Jerry Whitaker, vice president of C-H's Power and Control business. "So we kept it off the P & L watch list to incubate it and set some expectations for it year after year."
The venture is funded to the tune of $1 million to $2 million a year. The intent, says Whitaker, is to establish it as a stand-alone business unit by the end of 2003 with a focus on the industrial process facilities and utilities segment. Forming this kind of an entity is out of the norm for Eaton, as it has no formal venture capital group. But other automation companies are putting a greater emphasis on this organizational form.
The new Schneider Electric Ventures is a 50 million euro venture capital fund that provides equity capital for technology startups. It is similar to the group ABB formed early last year, called New Ventures Ltd. (Zurich, Switzerland), which acts as an incubator for new business by investing in such power solutions as wind, solar, and fuel cells, and in automation ideas that match up with ABB's Industrial IT product suite. Currently, New Ventures has invested in 33 initiatives as a minority partner. "We don't fall in love with the businesses because we invest in them for a reason, and that reason is capital gain," says Teemu Tunkelo, president and CEO of ABB New Ventures.
Siemens' Venture Capital organization, formed last October when Siemens consolidated all of its separate VC activities, has several funds including the Information and Communication Networks Fund, the Corporate Fund, and an Automation and Control Fund. To date, the organization has invested over 500 million euros in 70 startup companies.
"We are a classical VC in that we only do investments with the perspective of selling it later," says Sabine Zindera, director of marketing and communications at Siemens Venture Capital (Munich, Germany). That's where the profit comes in. And it makes sense because, "the culture of a big elephant like Siemens and a small startup is so different that you can't integrate those people overnight." Instead, Siemens will hold an investment for three to five years, sell it off, and in some cases retain a stake in the company.
Given the poor economy of the past year, Siemens has not made as many "exits" as it would have liked, but when conditions improve an acceleration is expected. And the extra time allows Siemens to build up the businesses. As Zindera explains, Siemens doesn't throw money at every business proposal that comes along. The technology must match the company's in-house expertise. "Our mission is to nurture the companies and to provide them with more than just plain money," she says. "We want to provide smart money. For instance, if it is an optical broadband company, we try to make the connection with a Siemens expert in that field to see if there is a way to do an OEM business and help establish sales channels or open an office."
Selling off a technology is not always the best approach, however, especially if there are short-term gains to be had by the core business. In that instance, the automation vendor might decide to spin off the technology into a separate business, but will keep a major interest in the company. Schneider Electric, for instance, is a majority owner in Obvius LLC (Portland, OR), a maker of Web-enabled hardware for building information systems. It was spun off of Schneider last July because developing the technology in-house was considered too expensive and time consuming.
Today, Obvius has four employees, five customers, and is in 50 sites with a Web service that can collect data on energy consumption. The Obvius management team of Jim Lewis, chairman, Joe Polaski, president, and Stephen Herzog, director of technology, owns a minority interest in the company. The charter from Schneider is to get into markets that Schneider is not in and be cash-flow-positive within a year.
Invensys is another company that recognized the benefits of separating key technologies. It spun out Sockeye Solutions Corp. (Toronto, Canada) in December of 2000 from the Baan Co. division (Barneveld, The Netherlands). Sockeye has collaborative commerce technology that supports an open architecture. Company executives felt that if the collaboration technology was kept in-house at Invensys, it would be difficult for competitors to accept the technology as open, explains Brian Nickerson, president and CEO of Sockeye, who was formerly part of the Baan Supply Chain Solutions group. So far, Sockeye has not landed any major Baan competitors, but Hewlett-Packard Co. (Palo Alto, CA) is a big user of the technology into which other ERP applications have been integrated.
"There was a feeling that they could make more money with this technology in the context of a separate legal entity than if it were buried in a broad suite of Baan software," says Nickerson. "There was an opportunity to exploit this technology and one of the things that played into the decision to spin-off the technology was basically that a small company is more nimble."
Indeed, to be nimble again is one of the things the automation giants need most. That's the premise behind Siemens' TTB Center, which is a combination business center and incubator that allows the large company to manage radical or disruptive technologies that could be a huge risk, but could also change the future of the business.
Currently, TTB-comprised of 35 people ranging from Berkeley professors, students, entrepreneurs, and R & D specialists-has four startups, with two more planned to be unveiled this year, says Hsu. The latest addition, Look Ahead Decisions (Berkeley, CA), which launched in January 2002, has real-time decision-making technology that can be run from a traditional PC. The company is currently working with Siemens' Industrial Automation division, but Hsu declined to disclose details of how the technology will be rolled out to manufacturers.
What is clear is that automation companies are in the early stages of identifying opportunities that will ultimately contribute to the bottom line. Each venture is filled with risk, but by exploring new ideas and taking the road less traveled these automation innovators may avoid the dark cloud that so often visits the unprepared. More importantly, manufacturers will have some really cool technology to work with in the future. MA