Automation Business Sees Beginnings of a Recovery in Third Quarter The automation market is on a path to recovery as seen in the financial results of the suppliers combined with the results of demand side macroeconomic statistics in the third quarter of 2003. Suppliers reported improved financial results in their automation businesses and users reported increased productivity and heightened demand. The recovery seems to be gaining momentum into the fourth quarter with the announcements of even greater improvements in demand and productivity and sustained growth in China. Key indicators such as capacity utilization, however, remain static, and capital spending continues to be constrained. Total automation market revenue growth among our pool of publicly traded suppliers was 2.1 percent in Q3 2003 versus the same period in 2002. On an industry-by-industry basis, the highest growth remains concentrated in hybrid manufacturing businesses such as pharmaceuticals and food & beverage.

1. THOUGHT LEADERS FOR MANUFACTURING & SUPPLY CHAIN
ARC INSIGHTS
By Larry O’Brien
The automation market recovery seems
to be gaining momentum into the fourth
quarter with the announcements of even
greater improvements in demand and
productivity and sustained growth in
China, but key indicators such as
capacity utilization remain static.
INSIGHT# 2003-50M
DECEMBER 3, 2003
Automation Business Sees Beginnings of a
Recovery in Third Quarter
Keywords
Automation, Suppliers, Capital Spending, Market
Summary
The automation market is on a path to recovery as seen in the financial re-
sults of the suppliers combined with the results of demand side
macroeconomic statistics in the third quarter of 2003. Suppliers reported
improved financial results in their automation
businesses and users reported increased productiv-
ity and heightened demand. The recovery seems
to be gaining momentum into the fourth quarter
with the announcements of even greater improve-
ments in demand and productivity and sustained
growth in China. Key indicators such as capacity
utilization, however, remain static, and capital
spending continues to be constrained. Total automation market revenue
growth among our pool of publicly traded suppliers was 2.1 percent in Q3
2003 versus the same period in 2002. On an industry-by-industry basis, the
highest growth remains concentrated in hybrid manufacturing businesses
such as pharmaceuticals and food & beverage.
Analysis
Automation suppliers continue to focus on their core businesses while di-
vesting underperforming businesses and making smaller, more targeted
acquisitions that provide expertise in specific product and industry seg-
ments. ARC does not predict any major merger and acquisition activity
among top suppliers until the market makes a more protracted recovery.
The Automation Technologies business unit of ABB reported significant
increases in orders for the third quarter in the midst of a relatively flat envi-
ronment. China and India were reported as significant growth areas. ABB
reports no significant increase in capital expenditures among its manufac-
turing clients. ABB reported a strong products and services business, but a

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relatively weak large system projects business. Automation products and
services, which includes ABB’s Robotics business, accounted for the major-
ity of the 18 percent increase in sales for the quarter. ABB also recently
announced a major reorganization, merging its six automation related
businesses into three.
AspenTech’s first quarter is traditionally its weakest, and the company re-
ported flat revenues compared to Q1 of 2003. The company recently signed
some significant license agreements with users such as IC Paints, CITGO,
and Rohm and Haas. AspenTech also established a strategic alliance with
UOP to market Aspen’s RefSYS refinery simulation and optimization offer-
ing.
Supplier Q3 2002 Q3 2003 CAGR
ABB Automation Q3 2,064.0 2,442.0 18.3%
Alstom Power Gen Q2 2004 1,730.4 1,453.2 -16.0%
AspenTech Q1 2004 77.3 77.0 -0.4%
Danaher Q3 840.2 1,004.2 19.5%
Emerson Process Control Q4 912.0 953.0 4.5%
Flowserve Q3 217.9 218.0 0.0%
GE Industrial Systems Q3 1,880.0 2,068.0 10.0%
Gensym Q3 1.3 1.3 0.0%
Honeywell ACS Q3 1,727.0 1,875.0 8.6%
Invensys Six Months 1,413.8 1,499.8 6.1%
Matrikon Q4 9.0 12.5 38.9%
Metso Automation Nine Months 178.8 144.0 -19.5%
Parker-Hannifin Industrial Q1 2004 1,093.2 1,107.4 1.3%
Rockwell Automation Control Systems Q4 800.0 846.0 5.8%
Schneider Electric Q3 2,205.0 2,211.0 0.3%
Siemens A&D Q4 2,886.0 2,742.0 -5.0%
Siemens I&S Q4 1,564.8 1,360.8 -13.0%
Total 19,600.7 20,015.2 2.1%
Supplier Revenues for Q3 2003 vs. Q3 2002 Except Where Indicated
(Millions of Dollars)

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Emerson’s Process business sales were up 4.5 percent in Q4 2003 versus the
same period in 2002. Emerson reports a huge order backlog of over US $1
billion and strong project activity in Eastern Europe and Asia. Emerson’s
European business in Process Control was up 11 percent for the quarter,
while its Asian business was up 9 percent. Business in the US, however,
was down by 7 percent.
Flowserve Flow Control division sales were essentially flat for the third
quarter. The company reported weak sales to its key customers in the up-
stream petroleum business, but noted a
significant increase in backlog of orders.
GE Industrial’s revenues were up 10 per-
cent for the quarter, boosted by the
company’s recent acquisitions, including
Intellution. Honeywell Automation and
Control Solutions revenues were up by
almost 9 percent for the third quarter
compared to the same period last year.
The increase was driven largely by acqui-
sitions and favorable currency
translation, but the company continues to
see growth in adoption of its new Expe-
rion control system architecture.
Parker Hannifin’s total industrial sales increased slightly in the first quar-
ter of its 2004 fiscal year. The company reports continued weak demand
and no changes in its forecast for fiscal year 2004. Rockwell Automation
reported revenue increases of almost 6 percent for its Control Systems divi-
sion in the fourth quarter and continues to experience significant growth in
its Logix platform and Global Manufacturing Solutions businesses. Rock-
well also noted that a significant portion of its growth came from overseas
sales. Schneider Electric third quarter revenues increased slightly over the
same period last year. Schneider reported an improved business climate in
North America with outstanding performance in Asia and Eastern Europe.
Western Europe remains relatively sluggish, but the company expects posi-
tive growth overall for 2003.
Siemens Automation and Drives was a top performer in Siemens overall
for the fourth quarter in terms of profitability, but sales were down slightly
compared with the same quarter last year. Siemens Industrial Solutions
US Manufacturing Capacity Utilization
through September 2003
(Source: Federal Reserve Board)
74.3% 74.1% 74.6% 74.5% 74.7%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
May June July August September

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and Services (I&S) reported improved profitability, but lower sales for the
quarter in the face of reduced demand for industrial solutions. Siemens
also continues to make smaller, selective acquisitions in the automation
space, and Siemens I&S announced its intent to acquire software supplier
IndX on December 1st. IndX is a supplier of operations intelligence solu-
tions to the process industries.
US Productivity Soars
On the demand side, productivity is soaring. In the US, productivity in-
creased at a seasonally adjusted rate of 9.4 percent in the third quarter with
an increase of over three percent in the second quarter. Third quarter pro-
ductivity in the US was at its highest since the second quarter of 1983.
Productivity gains are generally be-
lieved to be both the result of improved
performance on the part of the work-
force as well as increased hours. More
remarkable are the productivity gains
experienced in the durable goods manu-
facturing sector, which were the largest
since the first quarter of 1971.
Chinese Automation Market
Surges
Automation market growth in China is
at its highest point in years, with most
automation suppliers reporting double-
digit increases. China continues to build
new plants while investing in the latest technology. For example, China is
in the process of building the world’s largest Foundation Fieldbus installa-
tion at the Shanghai Secco Petrochemicals facility. While there are literally
thousands of local companies that produce instrumentation and control
systems in China, the technology provided by Western suppliers is still far
superior and will continue to be so in the near future.
Industrial Production Output Increases
US manufacturing output increased by 0.1 percent in October, although
production of motor vehicles and parts decreased by almost 4 percent. The
most significant increases in industrial production in the US occurred in the
steel, wood products, computers, and electronic products industries. Pro-
Output per Hour of All Persons in the US
Manufacturing Industry
(Source: US Bureau of Labor Statistics)
147.0 148.5 149.6 152.7
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
180.0
Q4 2002 Q1 2003 Q2 2003 Q3 2003

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duction of nondurable goods, such as chemicals, paper, and food & bever-
age all declined in the US. In contrast, total industrial production in Europe
was down slightly as of the second quarter of 2003 with a slight increase in
the production of consumer non-durables in the EU 15 member nations.
No Significant Changes in Capacity Utilization in US and
Europe
Capacity utilization in both Europe and North America has failed to yield
any significant increases. In October, for example, US overall capacity utili-
zation remained at 73.5 percent – well below the average for the period
between 1972 and 2002. In Europe, capacity utilization rates have tradi-
tionally been higher, but have remained in the range of between 80 and 84
percent for the year. In the US, manufacturers typically shift into expansion
mode when overall capacity utilization exceeds 80 percent, which means
that a large-scale revival in purchasing of automation equipment in the US
is unlikely to occur until capacity utilization increases significantly.
Recommendations
Increased productivity continues to be a major focus for automation end
users. ARC’s models for Real Time Performance Management (RPM) and
Collaborative Manufacturing Management (CMM) are excellent starting
points for implementing concrete productivity enhancement and Opera-
tional Excellence (OpX) strategies.
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transmittal e-mail or at www.arcweb.com/myarc in the Client Area. For further
information, contact your account manager or the author at lobrien@arcweb.com.
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