Manufacturers Produce Infotech Boom
Software developers reach record revenues as manufacturers buy new infotech products
Manufacturing companies' demand for productivity-boosting software and consulting services is growing by more than 50 percent annually, creating huge opportunities for high-tech integrators, say industry executives and consultants.
"The market is huge.... [Growth] is just amazing," said Bruce Richardson, vice president of research at Boston-based Advanced Manufacturing Research.
"It is a boom market," allowing several software makers to grow their revenues by 100 percent a year, said Bobby Cameron, an analyst at Forrester Research Inc., Cambridge, Mass.
Manufacturers' demand for software that increases their productivity should reach $9 billion in 2000, up from $4.5 billion in 1995, said Richardson. Moreover, the demand for management consultants able to knit the technology with business operations will grow along with technology sales, he said.
Automakers, chemical companies, aircraft manufacturers and the like spend roughly $47 billion annually on infotech, including desktop computers, robots and software used to design components, as well as so-called enterprise resource planning software, which is used to streamline business operations and increase workers' productivity, said Chris Jones, a research director at the Gartner Group, Stamford, Conn.
The market for this resource planning software is being driven by manufacturing companies' desire to install networks of desktop computers in place of aging mainframes -- and their associated centralized software and bureaucracies -- and by the growth of the Internet, which helps companies keep in close contact with their suppliers and customers. Also, the end of the century is goosing sales as companies face the prospect that their mainframe software might be unable to recognize dates after 2000, said Cameron.
But companies are also looking for improved performance. For example, a manufacturing company can cut its products' delivery time by half and delivery costs by one-fifth if it streamlines responses to customer orders, said Brian Peters, a Menlo Park, Calif.-based consultant for Pittiglio Rabin Todd & McGrath, a consulting firm in Stamford, Conn.
The software technology is provided by a variety of companies such as SAP America Inc., Wayne, Pa.; Baan Company USA Inc., Menlo Park, Calif.; Oracle Corp., Redwood Shores, Calif; J.D. Edwards & Co., Denver; and Systems Software Associates, Chicago.
In turn, major accounting firms dominate the business of blending the software into the manufacturers' business operations. These firms are Price Waterhouse LLP, New York; KPMG Peat Marwick LLP, New York; Ernst & Young LLP, New York; Deloitte & Touche LLP, Wilton, Conn.; and Andersen Consulting, Chicago, which has the largest share of the business. There are many additional players, including large systems integrators such as Computer Sciences Corp., El Segundo, Calif., and Electronic Data Systems Corp., Plano, Texas, as well as Oracle, which integrates half of the software that it sells.
The consultant firms take in between $1.25 to $5 in fees for every dollar spent on software, said Cameron. The cost of integrating J.D. Edwards' software is only $1.25 per dollar of software because the company does its own integration, said Cameron. In contrast, the cost of integrating SAP products can be more than $5 per dollar of software. "SAP is an anomaly.... It is the fault of the consultants [who] push an expensive and protracted [integration] process" onto the customer to increase their revenue, he said. This high cost has prompted SAP to seek more control over the companies that integrate its software, he said.
This trend, coupled with the increasing ease in which different companies' software can be combined, will gradually cut profit margins for software integrators, said Cameron.
However, profit margins for the software makers should not decline, he said. Software prices will also likely remain stable. This is partly because large customers don't want to penny-pinch on critical software purchases, and partly because the cost of the software is only a small proportion of overall costs. These costs include buying the software, integrating it, training personnel, troubleshooting and upgrading, he said.
All of this ensures a rosy outlook for the software companies, many of which are enjoying record revenues. Dutch-owned Baan's revenue will be greater than $350 million in 1996, for example, up from $220 million in 1995, said Rocky Gunderson, vice president of marketing for Baan USA.
Baan's advantage in the marketplace, said Gunderson, is the ease with which a company can adopt its software and subsequently adapt it when circumstances change. Baan's software is used by companies such as Boeing Co., Seattle, and Teledyne Inc., Los Angeles.
Oracle's 1995 worldwide revenue from its software applications business, which include manufacturing-related software, reached $654 million, said Peer Heller, Oracle's director of product marketing. Heller is based at Oracle headquarters in Redwood Shores, Calif. Oracle's customers include Cisco Systems Inc., San Jose, Calif., and Silicon Graphics Inc., Mountain View, Calif.
Similarly, J.D. Edwards had revenue in 1995 of roughly $340 million, and Systems Software Associates will have 1996 revenues of roughly $500 million.
Growth is slightly slower for SAP, partly because it is much larger than its nearest competitor. In 1995, SAP's worldwide revenues of $1.9 billion were 47 percent greater than its 1994 revenues. Revenues from its U.S. subsidiary reached $590 million, up 49 percent from 1994, from sales to companies such as the Boston Beer Co., Boston, and Westinghouse Electric Corp., which is now owned by Northrop Grumman Corp., Los Angeles.
SAP's growth is slowed by pressure from Baan and Oracle, according to Cameron. Competitive pressure will cut revenues from SAP's latest product range -- dubbed R/3 -- after 1997 and force the company to redesign and simplify its products, said a Forrester statement. "This rearchitecting... will require [SAP customers] to expand significant resources to keep up with the products' dramatic shift," according to the Aug. 21 statement.
Also, SAP's products are large and complex, allowing consultants to charge higher integration fees, said Cameron.
"We are aware of the issue... and we will improve the situation with each release" of new software, said Peter Graf, a product marketing manager for SAP, which is based in Walldorf, Germany.
Some of the consultants also recognize the problem. Complexity "is something we are trying to eliminate" by using standard analysis tools for each industry, such as the chemical or textile industry, said David Patterson, a partner at KPMG Peat Marwick, Greenville, S.C.
The software companies are also rapidly developing products to extend their software into the Internet. For example, SAP will release by December up to 25 software programs for purchasing, billing or marketing via the Internet, said Graf.
The Internet opens up a new market because it allows customers, suppliers and manufacturers to thoroughly merge their networks, said Cameron. For example, a customer could use a manufacturers' page on the World Wide Web to track the progress of his purchase from the manufacturers' subcontractors through to its delivery by overnight mail, he said.
Another area for expansion, said Graf, is smaller businesses reliant on Windows NT software sold by Microsoft Corp., Redmond, Wash. To aid these businesses, SAP is adapting its UNIX-based software to operate on Windows NT and on the Web, he said.