Back in younger and more-foolish days, for kicks my friends and I would occasionally stop in at a biker bar aptly enough named Rocky’s. As engineers we stood out like sore thumbs among the leather and tattoos but, for the most part, nobody paid much attention to us. Nonetheless, we always kept an eye out for trouble. A game of eight-ball gone bad or a wanton look at someone’s date was all it took for punches to fly. To avoid getting caught up in someone else’s fight, we had to be quick on our feet when the big guys rumbled.
That pretty much sizes up the situation in the fluid-power industry, too. Eaton, with it’s recent acquisition of Aeroquip and Vickers, joins Parker Hannifin and Mannesmann Rexroth among the big guys on the block. And from all appearances, they only plan on getting bigger.
Granted, consolidation is not exactly new. Parker, for instance, has reportedly made 39 acquisitions in the past five years worth $1.1 billion. But that might be just the beginning. Today the industry is still highly fragmented among many niche players. By my calculations, the big three now control a little over one-third of the market. Don’t be surprised to see that number above 50% a decade from now.
One reason is psychological. Eaton’s move seems to have heightened speculation over who will be next. The major players have stated acquisitions will continue, and now they might be a little quicker to ink a deal before someone else does. And for smaller targets who have resisted overtures in the past, there may be a growing fear of being relegated to a nonentity if they don’t align themselves with someone soon.
There are pragmatic reasons, too. Brian Bachman, Eaton’s senior vice president for hydraulics, notes consolidation gives a company the opportunity to quickly fill holes in its product line, expand regional presence, and move into unserved markets. A firm also can trim corporate overhead while gaining skilled manufacturing and service personnel, and leverage added buying power into lower procurement costs.
Size also brings competitive advantages, according to Parker’s CEO Duane Collins. For instance, because Parker offers a broad product line encompassing hydraulic, pneumatic, and electromechanical motion control, it can deliver the best system for a customer’s application regardless of the technology required, says Collins.
This, he indicates, plays into the hands of what customers increasingly demand today: fewer suppliers, lower prices, state-of-the-art technology, and complete, ready-to-go systems, not just components. Major multinationals such as Ford, Boeing, and Deere want global partnerships with their suppliers, he says, and that means global distribution systems, manufacturing near the customer, worldwide standardization, and the ability to offer local service and training anywhere in the world.
Not surprisingly, the smaller guys beg to differ. When asked if his customers are looking for fewer suppliers offering a more-complete range of products, an executive at one pneumatics company snapped, “OEMs don’t buy that argument for a minute,” adding that the lack of hydraulics hasn’t affected his business. Today, expertise and innovation — the latest technologies, custom manufacturing, and fast delivery — are important, he said. Not trying to be all things to all people.
Maybe Joachim Scholz, a vice president with Rexroth Mecman, offers the clearest assessment. He, too, stresses the advantages the major players hold in offering a range of technical solutions. But, he admits, there’s some truth in the pneumatics guy’s argument because the various divisions of the big corporations tend to operate like autonomous companies. But, he is quick to add, that’s rapidly changing. He notes that Rexroth is realigning engineering and sales networks to leverage the strengths of it’s hydraulics, pneumatics, motors, drives, and linear-motion groups to truly become a “drive and control” company. The goal is seamless, one-stop shopping for the customer. This, he says, will offer huge competitive advantages, particularly when it comes to the plum, big-dollar contracts.
No one is predicting the quick demise of smaller suppliers. But to survive and prosper will require changes from the status quo. Maybe a glimpse of the future can be seen in a deal just announced between Sun Hydraulics and Rexroth. Sun has just agreed to supply screw-in cartridge valves to Rexroth who, in turn, announced it will use Sun-designed valve cavities in a new product line. The two will also cooperate on product development.
The alliance will bring both companies a competitive edge. The Sun cavity is said to offer technical advantages compared with current ISO-standard valves, so Rexroth stands to gain by offering a better product. Sun will benefit from Rexroth’s worldwide reach, reputation, and sales volumes, giving the Sun cavity substantially broader market penetration. To survive and prosper in a land of giants, it doesn’t hurt for the little guy to be a little quicker and better than anyone else.