Manufacturing Vertical Applications Market Report 2009-2014

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This applications market sizing report examines the 2009 performance of the top 10 applications vendors in the manufacturing vertical, which includes automotive, discrete and process manufacturing.

The automotive manufacturing sector has rebounded from the recession with OEMs boosting capacity and sprucing up their lineup to develop new alternative-energy vehicles. Similarly high-tech manufacturing companies and process manufacturers have also ramped up their production to accommodate increased customer demand. Such investment plans have sharpened their focus on overhauling their IT infrastructure as well as applications strategies in order to gain better visibility into their operations, while bolstering their support capabilities to improve customer relationship and retention.

In addition, applications vendors havc made emerging markets their top priority, taking advantage of the massive amounts of infrastructure investment in countries such as Brazil, Russia, India and China, all of which are bulking up their manufacturing sectors to meet growing demand both at home and abroad.

Top line and Bottom line

On the top line, the manufacturing vertical is gearing up for significant expansion after a severe downturn that rendered a large number of factories idling or permanently closed. In recent weeks, purchasing managers in the manufacturing sector have reported increased manufacturing output in Europe and the United States.

Manufacturing activities will accelerate in 2011. Cash hoard among some of the biggest high-tech manufacturers have reached a staggering level with Apple’s topping $70 billion and Cisco’s nearing $40 billion projected for 2011. Companies in the industrials segment have seen their cash on hand rising steadily to exceed $160 billion as of the third quarter of 2010, more than twice of they held three years ago, according to Standard & Poors Capital IQ.

What that means is that these companies and their large contingent of partners and suppliers will have to deploy their cash somewhere in order to maintain their competitive edge. For example, Apple’s biggest supplier Honhai Precision Industry Co. has announced large-scale expansion plans in China. In other cases, they will turn to mergers and acquisitions, all of which will have serious ramifications on their capital spending plans as well as their overall IT strategies.

Applications vendors are making a big push into the manufacturing sector by positioning their Product Lifecycle Management software as the key enabler for creating next-generation high-tech electronics or electrical vehicles.

With the manufacturing sector closely tracking economic activity, the bottom line remains that the ongoing recovery could be the real test of whether different segments of the industry from industrial machinery and components to electronics and from automotive to plastic makers will rebound at the same rate, or for that matter any specific segment over the other will be able to regain more than enough ground lost during the recession.

That matters to plenty of vendors that have established sizable presence in certain manufacturing segments. While vendors such as Oracle have been traditionally strong in segments like high-tech manufacturing, others such as Infor have done well among midsized process manufacturers.

The first half of 2011 could be the harbinger of things to come for any application vendor to ascertain the pace of the recovery in the manufacturing vertical and whether any segment offers greater return than others. When that happens, the long-term outlook of the manufacturing vertical will depend on vendors’ ability to capitalize on such lucrative opportunities and replicate the results in adjacent segments in order to dominate the entire vertical.

Market overview

The market for applications in the manufacturing boils down to three major areas:

  1. Operations for routine running of a manufacturing organization that requires constant tuning of its manufacturing execution system, enterprise resource planning system for financial, procurement and human capital management, as well as a whole host of front-office applications for order management and back-office systems for logistics, inventory management, production planning and supply chain management functions.
  2. Customer information management that offers complete visibility into all aspects of customer interaction as well as a full range of sales, marketing, customer service and partner relationship management functions. With the advent of the Internet, multi-channel selling has become critical for any manufacturer that needs to connect with customers in whatever communication mode they prefer.
  3. Specialized applications that handle specific functions such as engineering simulation and computer assisted manufacturing and design in 2D, 3D and increasingly high-definition 3D format.

While 2009 was still a period of retrenchment for manufacturers needing to reduce costs, much of the applications spending was done to ensure that there would be no disruption in business processes or normal workflow. The maintenance mode kept the growth of a large swath of applications vendors in check.

With new development sharply curtailed in the manufacturing sector, PLM apps vendors such as Dassault, PTC and Siemens PLM experienced contraction in their license sales in 2009. The following year was another story. For much of 2010 all three major PLM apps vendors rebounded nicely, suggesting that their manufacturing customers have ratcheted up their development plans in hopes of gaining an upper hand during the upturn.

Meanwhile Microsoft has been investing heavily in the manufacturing vertical through new products that enable subsidiaries of manufacturers to better connect with their headquarters. The two-tier ERP approach has particular appeal among manufacturers that have gone through successive acquisitions in order to stave off the effects of the recession, while shoring up their presence in emerging countries. In some cases, much of the IT spending of these manufacturing companies in 2009 revolved around consolidating operations with the help of the two-tier ERP strategy after making such acquisitions.

Then there was the growing importance of the emerging markets. In Latin America, Middle East and Asia Pacific, manufacturing companies were keenly aware of the looming IT challenges that could put their young and perhaps fragile infrastructure at risk because of years of underinvestment. Applications vendors seized that opportunity and expanded rapidly in countries such as China, India and others. SAP, for example, has reaped considerable benefits after investing in local partners such as Neusoft in China. In fact, SAP has solidified its presence as the leading ERP vendor for major manufacturing organizations in China, much to the credit of its ties with IBM Global Services, which in turn works closely with another fast-growing ERP implementer Camelot Information System in China.

Oracle, on the other hand, has continued to expand its reach into the Middle East market, especially among a new class of budding conglomerates in the region. Recently it signed a $10 million-plus deal with Nuqul Group, a diversified manufacturing company with 5,500 employees that plans to standardize on a number of Oracle applications including E-Business Suite, Demantra, Siebel and Hyperion at its facilities in Jordan, Saudi Arabia, United Arab Emirates, Algeria and Morocco. That followed Oracle’s similar successes in places such as Dubai where it has already won a loyal following across process and discrete industries among other verticals.

In summary, it’s fair to suggest that manufacturing companies in developed countries from the United States to Germany have begun switching from the  maintenance mode that was prevalent during the recession to an investment mindset when it comes to their applications strategies. On the other hand, manufacturers in emerging countries that have already been making selective IT investment over the past two years are accelerating their plans in order to keep up with their growth due to sunnier economic conditions and thusly not being seen as complacent or worse reversing their course of expansion through innovation.

Implications of the Great Recession of 2008-2009

While the worst is behind them, manufacturing organizations have been picking up the pieces that left many in tatters because of their deliberate attempts to fight recession with drastic cost-cutting measures from plant closings to multiple rounds of layoffs.

The much touted alliance between General Motors and Toyota to build light trucks and subcompact models in the highly automated plant in Fremont CA, is a case in point. First opened in 1984, the plant was known as New United Motor Manufacturing Inc. or NUMMI, and it built an average of 6,000 vehicles a week. NUMMI was considered a shining example of Japanese-infused production quality meeting Western metrics-based just-in-time inventory and volume production. Similar to corporate restructuring moves at different levels of the manufacturing vertical due to the recession, the March 2010 closing of the plant, which meant laying off 4,700 employees, ended a chapter for the American automotive industry.

However, in at least one part of the shuttered NUMMI plant, Tesla, which is on the vanguard of high-quality electric cars, has started building a new generation of vehicles since October  2010.

The rebirth of the last remaining California auto assembly plant, albeit on a smaller scale, underscores the dynamics of the American manufacturing industry striving for any chance of a turnaround provided the timing and the product can meet customer demand.

Similarly the robust manufacturing sector in Germany, which thrives on highly specialized tools and equipment as well as high-margin services, demonstrates that the path from oblivion to born-again relevance stems from the ability of manufacturing organizations to innovate and excel through consistent process improvement in order to attain the quality needed to survive and thrive in a market niche that ensures its success.

The role of IT has never been stronger behind such reinvention of the manufacturing sector. For one, Tesla has been running SAP applications since 2007.

Customers

Another reinvention of the manufacturing vertical lies in companies that have been involved in a series of mergers and acquisitions, which often result in a burgeoning number of applications and perhaps a chaotic IT environment.

Some manufacturers have even made a name of rationalizing the heterogeneous IT landscape.

For example, Cummins, the $11-billion supplier to the automotive vertical, amassed hundreds of applications across its enterprise as a result of a series of acquisitions over the past decade. At one point Cummins had a software arm dedicated to the rationalization and management function. The division Cummins Infotech merged with KPIT Infosystems to form KPIT Cummins in 2002. Cummins currently holds a 14.7% stake in KPIT Cummins, which continues to serve the applications integration needs of its former parent.

As the economy improves, many manufacturing organizations are likely to turn to mergers and acquisitions to fuel their growth, which in turn will bring with them third party systems that either have to be decommissioned or integrated into the corporate standard.

Hence musical chairs are expected to be the recurring theme in the manufacturing vertical as one vendor’s expansion invariably comes at the expense of its competitors.

In November 2010 Siemens PLM dropped a bombshell on the automotive vertical by announcing the winning of Daimler AG as its latest CAD customer right under the nose of its archrival Dassault, which has been the CAD provider for the giant German car maker for years.

It wasn’t the first time in 2010 that Siemens PLM was able to pull a rabbit out of its hat, stunning everyone in the close-knit world of selling highly specialized applications to just a handful of global automotive OEMs that in turn wield considerable influence over the IT decisions of their army of tier-1 and tier-2 suppliers.

In July Siemens PLM announced that Chrysler – after using its TeamCenter solution for product data management – has decided to add Siemens NX for design automation as well. Chrysler was also a Dassault CATIA user when it was part of Daimler and remained so even after it was sold to Cerberus, a US private equity firm, in 2007

Such moves underscore the fact that there could be more volatility in the manufacturing vertical as customers need to accelerate their product development cycle or do a better job integrating disparate systems into a manageable environment.

In many respects, last year’s cost cutting measures have been replaced by front-loading applications investment as manufacturers aim to reinvent their industry once again through product innovation by putting the right technology in place.

Top 10 Applications Vendors In Vertical

The following table lists the 2009 shares of the top 10 applications vendors in the manufacturing vertical and their 2008 to 2009 applications revenues(license, maintenance and subscription) from the vertical.

Vendor2009 Share(%)2009 Applications Revenues From  Manufacturing($M)2008 Applications Revenues From Manufacturing ($M)
SAP14.7%16621930
Oracle12.2%13751292
Infor8.0%898949
Dassault7.4%834876
Siemens4.2%474558
PTC4.0%455525
Microsoft1.6%175170
TOTVS1.1%122107
QAD0.9%100130
Consona0.8%9590
Subtotal54.9%61906627
Other45.1%50925271
Total100.0%1128211898

Vendors To Watch

One of the major developments could come from the recent appointment of Charles Philips as the new Infor CEO. Philips, the former co-president of Oracle who took credit for some of its acquisitions, could use the same template at Infor pushing the ERP vendor into new verticals or subverticals within the manufacturing vertical where Infor has already built a sizable installed base.

The rise of China as a global economy could catapult its ERP vendors such as Kingdee and UFIDA to extend their manufacturing expertise into other regions, especially countries within Asia where Chinese companies like Huawei and Lenovo have already become a household name.

In the midmarket manufacturing space, QAD and Syspro will be the vendors to watch as they have been extending their expertise in different segments of the vertical to drum up new business in Asia Pacific for the former and Cloud-based solutions for the latter.

Outlook

On the upside, the manufacturing vertical is bracing for an upturn that could not come sooner. The latest figures are indicating a sustainable recovery. The US Commerce Department, for example, reported orders for manufactured goods in November 2010 rose 0.7% to $423.8 billion from the prior month, suggesting growing momentum in the manufacturing vertical.

General Motors, on the heels of a successful IPO that raised $20 billion, reported its sales rising 7.9% in December 2010, ending the year where auto sales in the United States were up for the first time since the Great Recession of 2008-2009.

What that means is that after years of lackluster growth, applications vendors could see a windfall as manufacturing companies start investing again in order to stay competitive and perhaps become more profitable through process improvement.

On the downside, similar to the economy at large, the manufacturing vertical is likely to hit bumps along the way, perhaps taking considerable time and effort to reach where it stood in the pre-recession days. That could leave some applications vendors empty-handed when it’s time to recoup their sizable losses.

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Manufacturing Vertical Applications Market Report 2009-2014

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