What Does It Mean When An Industry Consolidates?
For companies in the control and automation space, as well as manufacturing in general, acquisitions power growth.
Rockwell Automation became a factor in process automation through a number of strategic acquisitions. Siemens fulfills its digital manufacturing vision through acquisitions. ABB, until recently, pursued a growth by acquisition strategy. Schneider Electric, keeping pace with European rivals swallowed Invensys—and much to my surprise seems intent on not only keeping but even building its software presence.
What is the result of acquisitions in an industry? Consolidation. And the result of consolidation? Less competition.
Writing in Industry Week Michael Collins, president of MPC Consulting, asks, Is Manufacturing Industry Consolidation Stifling Competition and Innovation?
That is a fair question. I have been surveying the industry in the two years after leaving Automation World (and Maintenance Technology, where I stayed briefly) looking for what’s new and interesting. The latest cool startup was ThingWorx, which sold to PTC. There are companies doing instrumentation, control and automation well, but not much really new or innovative.
Collins tries out a definition, “Capitalism is a free market system that is supposed to promote competition. In capitalist theory, competition leads to innovation and more affordable prices for consumers. Without competition, a monopoly, oligopoly or cartel may develop.”
This statement contains an amount of belief, but it does describe a market economy in keeping with the 18th Century “liberals” who valued “liberty” over government. The economic theory superseded mercantilism where the government picked winners and losers.
Wishing for more government regulation, Collins reviews history, “This formation of monopolies and oligopolies also occurred in the Gilded Age, when the robber barons controlled entire industries, including oil, railroads, steel and the telegraph. The consolidation did not stop until President Theodore Roosevelt broke up the monopolies using antitrust legislation.”
Collins then surveys today’s consolidations:
- Banks–“In 1995, the six biggest U.S. banks had assets equal to 18% of GDP. Today, they hold assets of about 63% of GDP.
- Search Engines–The search engine business is dominated by Google, which, according to Forbes, owns 90% of the market in non-mobile search worldwide.
- Media Companies–In 1983, 50 companies controlled the vast majority of news media including newspaper, magazines, radio and TV stations, books, movies, videos, and wire services. Consolidation reduced the original number to 24 companies by 1992 and to six companies by 2000. Today, five corporations—Time Warner, Disney, News Corp., Bertelsmann (of Germany) and Viacom control the majority of the U.S. media industry.
Manufacturing industries also have consolidated:
- Meat Packers–In 1982, the five largest meatpackers controlled 16% of the meat industry. Today four firms control 85% of the beef market, an oligopoly that includes National Beef, Cargill, Tyson, and JBS (which purchased Swift).
- Beer–At that time (1970s), there were 43 firms making beer, and the largest had 25% of the market. Today two firms—Anheuser Busch and Miller/Coors—own 90% of the non-craft beer market.
- Autos–The auto industry is now a global industry where five multinational companies have 50% of the world market. The top 10 auto manufacturers control 70% of the world market. [Note: and now the Chrysler CEO is drumming up support for a merger with GM.]
- Oil and Gas–Exxon merged with Mobil Oil and Conoco merged with Phillips. Along with Chevron and Occidental Petroleum, these four giants have 70% of all oil produced in the U.S. (1,919 barrels).
I think it is in the DNA of capitalism to create oligopolies and monopolies, and they can only be restricted by government regulation.
Often consolidation is a reflection of a mature industry. Not much is happening. It’s an industry ripe for disruption.
A number of entrepreneurs are trying innovative airline models. Who knows when one will “take off”, so to speak?
Doctors are forming small companies, removing outpatient surgery and other services out of the hospitals.
Brewery consolidation means companies run by finance people rather than product people. While many will buy according to price even if the taste is not there, the interesting end of the market is now wide open among small craft brewers. When I travel, I always ask for the local beer.
Microsoft is being pressured by Linux in the enterprise and smartphone and tablet products in the low end. Google docs are a viable alternative to Office.
Intel is pressured on many sides with new competition.
Software as a Service models are pressuring the major automation software companies. And open source hardware and software threaten disruption of those markets.
Innovation often comes from outside the dominant market leader group. It is difficult to predict. But there is no doubt disruption is occurring. What’s that famous phrase? “The future is here, just not evenly distributed.” Yep.