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Tech Vendors Defy Economic Slump by Plugging into Developing World Growth Sign Up to receive Daily News Alerts in your E-mail Inbox
Posted on Sunday, August 24, 2008 5:00:00 AM |
Although economic uncertainty persists throughout most of the world's developed countries, publicly owned vendors of plant automation and enterprise software products enjoyed surprisingly strong financial results in their recently concluded reporting periods.
The manufacturing industry's key technology vendors are not out of the stagnant economic waters yet, however. Many, in fact, predict slower growth in the second half of 2008 and into 2009 as some manufacturers are expected to defer technology purchases until the current economic downturn eases.
Vendors of plant automation software and services, such as Rockwell Automation, Honeywell, ABB, Schneider Electric, and Emerson Electric all benefited from soaring demand from customers in developing economies, particularly in Asia, as well as a growing need among manufacturers to become more energy-efficient.
Rockwell, for example, reported a 15% rise in revenue during its third fiscal quarter, ended June 30. The company said it was able to defy the slowing economy in North America by leveraging strong growth in Asia and Latin America, where many customers are building out manufacturing infrastructure. Rockwell also saw strong demand from the booming oil and gas vertical market.
At the same time, Rockwell saw project and spending delays from pharmaceutical, life sciences, and automotive manufacturers in North America during the most recent quarter.
"We are operating in a bifurcated world economy," said Rockwell CEO Keith Nosbusch, explaining the strong results despite the slowing U.S. economy. "Buoyant growth in emerging markets coincides with sluggish growth in developed countries."
Other automation vendors saw similar dynamics. Swiss automation and engineering giant ABB said that in its second fiscal quarter, ended June 30, the company for the first time saw orders from emerging markets, such as China, India, and the Middle East, exceed those from mature market countries. Riding that wave, ABB reported a 27% jump in revenue for the quarter, with revenue from automation products growing 28%.
Emerson Electric, likewise, saw sales, calculated in constant currencies, rise 16% in Asia, 15% in the Middle East, and 16% in Latin America during its third quarter, ended June 30. Constant currency sales, meanwhile, were up just 4% in the United States and 3% in Europe.
"All of the big automation companies are seeing incredibly strong growth, particularly outside of the U.S. as developing countries rush to get their infrastructures and supply chains up and running," said Alison Smith, an analyst at AMR Research. "At some point, this growth is likely to level off, but probably not for another five years or so."
Enterprise software vendors, meanwhile, took a somewhat different path to defying the economic slowdown, benefiting from acquisitions as well as strong growth in developing markets. During its fourth fiscal quarter, ended May 31, for example, Oracle reported a 24% rise in overall revenue, aided by stronger-than-expected revenue of $93 million from its acquisition of BEA Systems.
But Oracle also saw sales of its applications software products rebound during the quarter, with the erstwhile slumping Americas region participating in the growth. New license revenue from applications grew 33% in the Americas, 41% in Europe/Middle East/Africa, and 37% in Asia.
Oracle rival SAP AG also saw strong growth during its most recent quarter, ended June 30, with software revenue jumping 25% and software and software-related service revenue increasing 21%.
Mid-market applications vendors posted respectable or better revenue increases. Epicor Software Corp., for example, had a 21% rise in revenue despite lower-than-expected sales in its retail vertical, which were attributed to "macroeconomic conditions." And Lawson Software Inc. reported a 9% rise in overall revenue, led by a 14% increase in maintenance receipts.
Enterprise software vendors relied less on surging sales from emerging economy regions than on a return by more traditional customers to a buying mode, however cautious.
"A lot of manufacturing companies are involved in a replacement cycle, replacing systems they bought almost a decade ago during the run-up to Y2K," said Ray Wang, an analyst at Forrester Research. "They have the budget to do this, but they're not doing it in a big-bang fashion. They are taking a more phased approach."
At the same time, Wang said, many manufacturers are investing in new order management systems as they take on more distribution and customer-facing business processes.
Despite their ability so far to defy the economic downturn, public automation and enterprise software vendors aren't out of the woods yet, Wang says. Most manufacturers are still using 2008 budgets for their software purchases, he noted. "We haven't really gotten into the 2009 budget cycle yet. It will be important to see if tech purchases continue to get funded."
Indeed, many vendors are approaching upcoming fiscal quarters with caution. Rockwell, for example, despite its surprisingly good third quarter, is taking steps to cut costs by holding headcount steady and reducing travel. The reason: In the current climate of economic uncertainty, customers could well cut back on spending.
"Given what's going on with the macro-economic environment, prudent businesspeople have to be looking at the options they [have] to protect the profitability of the business," Rockwell's Nosbusch told Managing Automation recently.
This article originally appeared in the September 2008 issue of Managing Automation.
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