1、Global Equity Research22 October 2019Automation IndustryJ.P.Morgan/CSIA System Integrator Survey:Notable Step Down In SentimentElectrical Equipment&Multi-IndustryC.Stephen Tusa,Jr CFA AC(1-212)622-Bloomberg JPMA TUSA J.P.Morgan Securities LLCPatrick M.Baumann,CFA(1-212)622-J.P.Morgan Securities LLCA
2、bhipsa Sahu(91-22)6157-J.P.Morgan India Private LimitedEuropean Capital GoodsAndreas Willi AC(44-20)7134-Bloomberg JPMA WILLI J.P.Morgan Securities plcSee page 46 for analyst certification and important disclosures,including non-US analyst disclosures.J.P.Morgan does and seeks to do business with co
3、mpanies covered in its research reports.As a result,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.Our latest proprietary survey
4、 of automation system integrators shows a notable step down in recent months compared to continued growth momentum in the prior surveys.While not foretelling a cliff event,the responses that have proven stable over time took a meaningful shift negative.With this backdrop,interesting to us were respo
5、nses on the impact of US/China trade friction where 36%of respondents cited no impact on near-term demand,up from 14%in the prior survey,and 15%cited significant negative impacts(vs.29%in prior survey),while on impacts from the 2018 TCJA law on capital expenditures,21%of respondents saw materializat
6、ion as a catalyst,while 7%still hope for some materialization in the future,whereas a material 72%did not see any new business.In other words,the movement in feedback here seems more based on organic end market trends versus anything headline related.All of this said,respondents noted project delays
7、 are up,but pent-up demand is down,and interestingly,despite some of the more negative comments on book/bill and demand,responses around expectations for orders and sales to be higher in the next 6-12 months were more positive,reaffirming that the slowing is not a recessionary event.On MES,adoption
8、continues but at a slower pace than hype would indicate,with ROIC tough to justify and a lack of awareness among manufacturers and consumers.From a US stock perspective,we remain N on ROK(expectations remain too optimistic)and OW on EMR(attractive valuation and better growth outlook for Process).In
9、Europe,we prefer Schneider(OW)and Siemens(OW)over ABB(UW).While Siemens auto exposure holds back near-term growth,we believe that it has the outstanding industrial software franchise in the automation industry.Schneider is well positioned with its stake in Aveva and strong growth momentum,mainly in
10、Energy Management.At ABB,we are concerned about the market share loss in process automation and the near-term earnings risks in Robotics while the company also has a weaker position in industrial software.J.P.Morgan/CSIA automation survey.This note summarizes our latest proprietary survey of control
11、 system integrators,where we received 257responses.System integrators are third-party firms focusing on delivering technically advanced capital projects,a proxy for upward of 70%of sales for automation suppliers.Responses are slanted toward North America,similar to the overall SI industry,but with s
12、ome global representation as well.We are pleased to continue our partnership with CSIA(Control System Integrators Association),the leading professional association representing the industry.2Global Equity Research22 October 2019C.Stephen Tusa,Jr CFA(1-212)622- Survey results show slowdown in demand
13、amid macro weakness.Responses on demand were still on net showing growth but with a discernable shift negative,reflecting a slowdown in order activity,B2B,and revenue growth.The overall percentage of those reporting order strength versus weakness was less favorable vs.our prior survey(40%/30%strengt
14、h/weakness vs.42%/24%prior),with expectation for order activity over the next six months lower at 47%/14%(strength/weakness)vs.66%/7%in our prior survey.On September trends specifically,33%noted stronger demand than in Jul/Aug vs.19%indicating weaker,implying a solid but more tapered than previous e
15、xit rate.On B2B,28%are 1.0 x and 30%are 1.0 x and 17%1x vs.34%prior in Oil&Gas,49%seeing 1.0 x vs.34%prior in Auto&Tire,and 28%seeing 10%growth vs.27%in the prior survey.Keep in mind,as always,responses are typically biased on optimism in forward expectations,and actual growth tends to fall below ex
16、pectations as weve seen in prior surveys.On backlog visibility,44%said they were at normal levels and 29%at weaker than normal levels,worse than prior survey where 52%said they were at normal levels and 23%at weaker than normal levels.Fewer respondents were positive on capex expectations:50%expect i
17、t to be up in 2019 with overall 2019 weighed capex growth expectations showing 1%type growth,vs.54%expecting it to be up in the prior survey,showing 2%type growth expectations.For ROK,we assume organic growth of+1.5%in FY19 and-0.8%in FY20.At EMR,we model FY19 organic sales up 3.2%(up 5.1%for Automa
18、tion),followed by+2%in FY20(+2%in Automation).At Schneider we look for+0.3%organic sales growth in the Industry Automation segment in FY19 and+0.9%in FY20.At ABB,for Robotics&Discrete Automation,we look for-4.3%organic sales in FY19 and-2%in FY20,while for the Industrial Automation(former Process Au
19、tomation)segment we assume FY19 to be up 1.1%organically and up+2%organically in FY20.At Siemens Digital Factory,we look for flat organic growth in FY19 and-4%in FY20.Demand impacts from tax and tariff laws mixed.We asked respondents about changes experienced in capital expenditures in the US due to
20、 the 2018 TCJA law,and 21%of respondents indicated that they saw this materialization as a catalyst,while 7%still hope for some materialization in the future and a massive 72%did not see any new businessthis is somewhat surprising given the typically optimistic nature of demand expectations in our s
21、urvey,historically.On the trade tensions surrounding US/China tariffs,42%of respondents claimed to have had no impact on their business,16%saw a material negative impact,while 42%witnesseda relatively small impact.On being asked if they see any impact on near-term 3Global Equity Research22 October 2
22、019C.Stephen Tusa,Jr CFA(1-212)622-demand,49%of respondents said that they saw a small negative impact(vs.57%prior),while 36%see no material impacts(vs.14%prior)and 15%see significant negative impacts(vs.29%in prior survey).MES/IoT adoption picking up but gradually.Respondents continue to indicate t
23、hat adoption of MES solutions is picking up,but the pace is gradual,similar to the prior survey where the tone of response commentary was mixed as respondents cited a lack of manufacturer and customer knowledge and little justification of ROI and didnt see MES capturing enough attention to be integr
24、ated into businesses.Roughly 33%of respondents described MES adoption as minimal(versus 22%/26%in prior two surveys)and 20%described it as improving materially(vs.20%/18%in prior two surveys).The US focus of the survey may skew responses to the domestic suppliers given their strong regional position
25、.The stocks:Remain OW on Schneider,Siemens,and EMR,N on ROK,and UW on ABB.Responses suggest strong demand momentum should continue through early FY19.For ROK,this means continued solid MSD type growth through early FY19,but we dont see material upside to estimates to justify a further re-rating(5%we
26、ighted premium),keeping us on the sidelines.For EMR,the fundamental profile continued to look solid,particularly with strength in process end markets,that could likely drive upside to standing growth estimates,an attractive setup given valuation is not as demanding at current levels(5%weighted disco
27、unt).In Europe,our preference order is for Siemens(OW)and Schneider(OW)and ABB(UW).The preference is largely driven by our assessment of the broader portfolio and earnings growth vs.valuation,while we recognize the strength of Siemens in discrete,well positioned for a potential future convergence of
28、 design and control.Siemens Digital Factory achieves around one-third of sales with the auto industry.This market is now declining despite the support of new model introductions and the transition to EVs and Hybrids.We see a structurally declining auto capex market longer term post the transition.AB
29、Bs automation exposure is to Robotics(approximately 6%of sales),B&R,and Process markets.We expect Robotics growth to slow and are concerned about pricing given the substantial capacity increase underway and announced in the industry.In Process Automation,ABB has so far not materially participated in
30、 the strong end market recovery,indicating market share losses and/or a less attractive business mix vs.peers.On 2019E,Schneider trades on 11.5 2020E EV/EBIT vs.Siemens at 11x and ABB at 13x.Except ABB,the valuations overall are low compared to the highly rated US peers.4Global Equity Research22 Oct
31、ober 2019C.Stephen Tusa,Jr CFA(1-212)622-Table of ContentsBrief Background on System Integrators and Their Relation to Suppliers.5Control System Integrators:What They Do.5A Look at Rockwells Sales Channel.9Other Suppliers:EMR Most Exposed Among Process Players.12Recent Financial Results/Macro Update
32、.17Detailed Review of Survey Results.24Demographics and Respondent Profile.24Business Trends and Expectations.28Software Trends.415Global Equity Research22 October 2019C.Stephen Tusa,Jr CFA(1-212)622-Brief Background on System Integrators and Their Relation to SuppliersTo provide context around the
33、survey results,the sections below give a brief background on what a“control system integrator”is and how its work relates to the automation revenues of the key suppliers in our coverage.Control System Integrators:What They DoWhat is a control system integrator?Control system integrators are engineer
34、ing firms specializing in bringing together component subsystems and providing a broader automation solution for the end user.A typical job would involve taking general requirements or specifications from a customer,then designing and executing the delivery of that specific manufacturing capability,
35、including the required hardware,software,documentation,and installation.Approximately 40%of a typical systems integrators revenue would be the pass-through of equipment purchased from a supplier,which is given a small mark-up,while a control system integrators“value add”is the engineering/service pr
36、ovided(typically represents 60%of revenue).Role in the sales channelAs background,the primary channels for automation equipment include 1)direct sales to end users,2)sales through distributors,and 3)various independent sales representatives,including integrators.Suppliers often prefer to use direct
37、sales for large or captive accounts,while distributors may stock multiple brands or may be retained on an exclusive basis by a supplier for a certain region.System integrators are part of this third category of independent reps and are typically employed when applications are complex and products ne
38、ed specialized programming or design.Although there are a handful of larger players with$25-100mm in sales,there are thousands of system integrators globally,with most having revenues in the sub-$5million range.A brief history on the development of systems integrationPrior to the 1980s,instrumentati
39、on and control projects were typically handled by a combination of OEM representatives,electrical/mechanical contractors,large architecture and engineering(A&E)firms,and internal engineers employed by the end user.The automation OEMs were generally accustomed to handling basic integration projects s
40、uch as programming a system to interface with specific sensors or valves.As control technology developed through the 1980s/1990s,automation systems became both more complex and increasingly“open”in the ability to combine components from various vendors into a customized system for the end user.This
41、created a natural opportunity for highly advanced firms that could bring together the technology in a value-added way.Simultaneous to this was a trend toward consolidation in the industry,with end users reducing their internal engineering head count and increasingly relying on outside expertise.Ther
42、efore,it is not uncommon for a control system integrator to have worked for either an OEM supplier or an end user before moving to either join a firm or start his or her own.6Global Equity Research22 October 2019C.Stephen Tusa,Jr CFA(1-212)622-Relationship to end usersEnd users vary in the size of t
43、heir internal engineering staff and their use of outside system integrators.Some manufacturing companies prefer to do all their own project integration,while others handle only small projects internally,and some outsource nearly everything.This choice would depend on the size of the company and the
44、technical requirements associated with a particular project.We believe there is a trend toward the greater use of independent system integrators.Relationship to suppliersThe interaction with suppliers is more nuanced as system integrators can be both a customer and/or a competitor.From the perspecti
45、ve of equipment sales,system integrators are a key sales channel(we estimate these firms account for$5-10B in equipment purchases globally),and automation vendors have made increasing efforts to market their products to them.Although the equipment brand used on a given project is sometimes dictated
46、by the end user,an integrator can play an important role in selecting the equipment used and may lead with the technology of a preferred supplier.At the same time,however,the internal engineering arms of OEMs will sometimes compete head-to-head with system integrators on bids,typically on larger pro
47、jects where there is a significant amount of equipment revenue to be won.End market and product focusSystem integrators are present across every automation end market and nearly every sector of the industrial economy.Although there is no widely accepted data on the end market breakout of system inte
48、grators revenue,Control Engineering Magazineprovides an estimate that we reference below.Importantly,the end markets here utilize a broad range of discrete,process,and batch/hybrid applications.7Global Equity Research22 October 2019C.Stephen Tusa,Jr CFA(1-212)622-Table 1:Estimated Control System Int
49、egrator Revenue BreakoutApproximate%of industry sales(2014)End Market%of salesOil&Gas(including refining,pipelines)11%Food&Beverage9%Automotive6%Water&Wastewater6%Chemicals&Petrochem5%Metals(including mining/processing)4%Power generation&distribution4%Agricultural3%Processing3%Material handling(robo
50、tics,conveyors,elevators)3%Manufacturing3%Pharmaceuticals manufacturing3%Packaging3%Government&Defense3%Pulp&paper3%Building automation&facilities management3%Electronics(including component&assembly)2%Energy production,management,conservation2%Machinery&heavy equipment2%Utilities2%OEMs2%Bottling&ca