global industrial automation

DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit www.credit-suisse.com/ researchdisclosures or call +1 (877) 291-2683. U.S. Disclosure: Credit Suisse does and seeks to do business with companies 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.

14 August 2012Global

Equity Research

Global Industrial Automation Connections Series

The next growth phase In this report, we explain why we think the industrial automation market is an attractive long-term investment opportunity, identify key trends driving the market, and provide an overview of key products, technologies, and vendors involved.

■ Market outlook – premium growth and margins: We analyzed the growth outlook in three ways: (i) scope for automation penetration increases; (ii) specific end-market drivers; (iii) where we are in the industrial cycle. We expect the global industrial automation market to grow at ~1.5x global IP over the next cycle, versus ~1.3x global IP last cycle. Given the high degree of market consolidation, diverse customer bases, limited new entrants, limited capacity additions by incumbents, disaggregated routes to market, and strong price discipline, we think the margin premium enjoyed by automation vendors (~400bps higher than average industrial margins) is sustainable.

■ Growth drivers: China: Although most industrial end-markets are likely to grow at a significantly slower pace in China going forward, we think automation will be an exception. China has hit its ‘Lewis Turning Point,’ in that the supply of rural surplus labor is diminishing rapidly. This, combined with demographic shifts and government efforts to push up wages, will drive elevated levels of automation investment. Taking into account the experience of other East Asian economies that have industrialized, and the low penetration of automation in China, the discrete automation could grow at a 15-40% CAGR over 5 years. End Markets: The automotive sector is one of the largest drivers of discrete automation capex globally; capex growth is set to be higher this cycle, driven by stronger OEM balance sheets, and intensifying competition based on new models / technology (rather than price). Downstream petrochemical capacity expansion (a key market for process automation) is on the rise due to low natural gas prices in the U.S. and an increasing number of Asian countries striving to decrease their foreign energy dependence. Increasingly strict enforcement of food safety regulations in emerging markets, and evolving diets, will also spur process automation spend.

■ Two emerging themes: Convergence, and 3D printing: We anticipate accelerated convergence on both a vertical (automation vendors offer a broad range of controls / software products, as well as hardware), and horizontal basis (a gradual merging of discrete and process markets), with M&A playing a key role. EMR we think is the company most likely to make large strategic moves. Of the major players, we continue to think Invensys is the most likely to be acquired. 3D printing is a second theme this cycle which we think will gain increasing prominence; given technology improvements / cost reductions.

■ Key investment themes: The outperformance of many automation stocks YTD should dilute the widespread perception that automation is an ‘early-cycle’ investment theme. Our preferred names include Rockwell Automation, Siemens, Fanuc, Keyence, Mitsubishi Electric, Delta and Teco (which our Taiwan team initiated coverage of today). Recently, soft global PMI data has weighed on expectations for automation stocks, creating an attractive entry point for long-term investors. Bottom-up data, and the prospects for an acceleration in IP momentum, also suggest automation sentiment could be near a trough, setting many stocks up for a stronger 2H12.

The Credit Suisse Connections Series leverages our exceptional breadth of macro and micro research to deliver incisive cross-sector and cross-border thematic insights for our clients.

Research Analysts

Julian Mitchell 212 325 6668

[email protected] Charles Clarke

212 538 7095 [email protected]

Jonathan Shaffer 212 325 1259

[email protected] Jerry Su

886 2 2715 6361 [email protected]

Pauline Chen 886 2 2715 6323

[email protected] Shinji Kuroda


Simon Smith 44 20 7883 6893

[email protected] Bruno Savaris, CFA


14 August 2012

Global Industrial Automation 2

Portfolio managers’ summary Due to frequent investor queries, we thought it worthwhile in this report to lay out the shape of the industrial automation market, profiles of some of the major global automation vendors (we have detailed profiles of 36 such vendors), and some investment themes.

We define industrial automation as the use of control systems and software to independently operate and monitor a mechanized system of industrial processes. We divide the market into two distinct forms of automation; Factory, or Discrete, Automation ($72bn market globally) and Process Automation ($83bn market globally). Key end-markets for Factory Automation include Automotive and Packaging, and for Process Automation include Pharmaceutical and Oil & Gas. Demand is broad-based across all major geographies.

Exhibit 1: Automation End Markets by Revenue %, unless otherwise stated

Industrial Automation

$152bn Globally Power, 10.5%

Textile, 5.5%

Automotive, 16.7%

Chemical, 14.1%

Packaging, 9.1%

Plastic, 5.3%

Oil & Gas, 9.3%

Pharma, 12.4%

Food Processing,

5.8%

Other, 11.3%

Factory Automation

$72bn Globally

Automotive35%

Packaging19%

Textile12%

Food Processing

6%

Other28%

Process Automation

$83bn Globally Power19%

Oil & Gas17%

Pharma23%

Food Processing

5%

Plastic10%

Other26%

Source: Company data, Credit Suisse estimates

Market Outlook – Growth and Margin Profile We believe industrial automation will continue to outgrow industrial production (IP). Automation relative to IP could potentially see higher growth this cycle compared with the previous one, given the emergence of several new growth themes.

Exhibit 2: Automation market – bottom up growth outlookUS$ in millions, unless otherwise stated

Exhibit 3: 2005-2011 Operating Margins by Industry %, unless otherwise stated

IP Process Factory AutomationYear Global Global Global Global2003 3.7% -0.3% 11.3% 4.4%2004 5.4% 5.1% 13.0% 8.5%2005 4.4% 8.4% 9.1% 8.7%2006 5.5% 11.4% 11.4% 11.4%2007 5.7% 8.8% 11.5% 10.0%2008 0.5% 10.6% 2.4% 6.8%2009 -7.2% -5.1% -19.5% -11.5%2010 9.6% -3.3% 20.6% 6.3%2011 5.0% 9.7% 13.8% 11.6%2012E 3.7% 8.5% 5.2% 7.0%2013E 4.9% 5.4% 7.4% 6.3%03-11 CAGR 3.5% 4.9% 7.6% 6.0%vs. IP 1.0x 1.4x 2.1x 1.7x

0%

5%

10%

15%

20%

25%

Civ

il A

ero

AM

Fac

tory

Aut

omat

ion

Tes

t & M

easu

rem

ent

Aer

ospa

ce E

ngin

es

Fac

tory

Too

ls

Low

Vol

tage

Hea

lthca

re

Ele

vato

rs /

Esc

alat

ors

Wat

er M

anag

emen

t

Pow

er G

rid E

quip

men

t

Pro

cess

Aut

omat

ion

Def

ense

Oil

& G

as E

quip

men

t

Net

wor

k P

ower

The

rmal

Pow

er G

ener

atio

n

Indu

stria

l Pro

duct

s

Ligh

ting

Fire

& S

ecur

ity

Biz

Jet

Hel

icop

ters

Rai

l Loc

o's

+ S

igna

lling

Aut

o co

mpo

nent

s

Civ

il A

ero

OE

HV

AC

Win

d P

ower

Gen

erat

ion

App

lianc

es

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Many industrial companies are enjoying record profit margins, and yet are facing a slow growth outlook, and increasing Chinese competition, which makes some investors cautious about the sustainability of these margins. However, we think that industrial

14 August 2012


automation vendors enjoy some key advantages, such as the lack of penetration so far by emerging Chinese competitors, growing technology content in the industry, a diverse customer base, and disaggregated routes-to-market.

Significant scope for penetration increases In emerging markets (which account for 50% of global manufacturing output), there are only 7 industrial robots per 10,000 manufacturing employees (‘robot density’), against 149 for the developed markets. The largest future growth opportunity for investment exists in Non-Japan Asia, which currently accounts for 35% of the world’s manufacturing output, but only has a robot density of 11 (Exhibit 4).

Exhibit 4: % of Global Output and Robots per Employee %, unless otherwise stated

Exhibit 5: Robot Density for Select Countries (2011) Robots per 10,000 manufacturing employees, unless otherwise stated

50%41%

50%

7%

35%

8%

149

88

11 7 116

Developed Developed(ex Japan)

EmergingMarkets Total

EMEAEmerging

NJAEmerging

LatAmEmerging

% of Global Manufacturing Output

Number of Robots per 10,000 Manufacturing Employees

0

50

100

150

200

250

300

350

Japa

n

Kore

a

Ger

man

y

Ital

y

US

Spai

n

Taiw

an

Fran

ce

Swit

zerl

and

Aus

tral

ia UK

Chin

a

Braz

il

Russ

ia

Indi

a

Robot Density

Global Average

Source: World Bank, IFR, United Nations Source: World Bank, IFR, United Nations, BLS

In the world’s largest manufacturing economy, China, there are signs that the country has reached a turning point, whereby labor shortages at the low-end are creating strong upward pressure on wages (Exhibit 7). This, we believe, is a trigger that will cause automation investment to accelerate.

Exhibit 6: Dwindling Supply of Manual Labor (China) in millions, unless otherwise stated

Exhibit 7: Hourly Manufacturing Labor Costs in China % YoY, unless otherwise stated

-80

-60

-40

-20

0

20

40

60

80

100

1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Mill

ion

pers

ons

10%

12%

14%

16%

18%

20%

22%

24%

2003 2004 2005 2006 2007 2008 2009 2010 2011

* Population aged between 15-19 minus population aged between 50-

54 and new college students.

Source: CEIC, UN, Credit Suisse estimates

Source: Credit Suisse Global Strategy

The historical evidence suggests that China is at an inflection point for automation investment. We see below the very strong robot demand (a good proxy for overall discrete automation investment) growth rates which other East Asian manufacturing economies witnessed, when they reached robot density levels similar to where China is today. This should differentiate the automation growth outlook vis-à-vis many other industrial end-markets, where trend growth in China will likely be slower going forward.

14 August 2012


Exhibit 8: Progression of Robot Density in East Asian manufacturing economies

Robot Density Year T+0 T+5 T+10 T+15 T+20 5Y 10Y 15Y 20YJapan 1980 10 66 183 267 295 45% 33% 24% 18%Korea 1990 6 38 88 171 287 45% 31% 25% 21%Taiwan 1990 5 16 30 67 123 26% 20% 19% 18%China 2011 7

Robot Stock (k) T+0 T+5 T+10 T+15 T+20 5Y 10Y 15Y 20YJapan 1980 14 93 274 387 389 46% 34% 25% 18%Korea 1990 3 18 37 61 101 43% 29% 22% 19%Taiwan 1990 1 4 7 15 27 24% 18% 18% 16%China 2011 71

Time Series Cumulative CAGRs

Source: IFR, Credit Suisse estimates

Aside from increasing penetration, we also see the overall industrial cycle, and specific end-markets, as drivers of higher automation investment.

How to Invest The majority of the major automation vendors globally are publicly-quoted. Many of the major vendors are fairly focused on automation, but there are some key players who have a conglomerate structure (Siemens, ABB, Mitsubishi Electric, Emerson). Our preferred names include Rockwell Automation, Siemens, Fanuc, Keyence, Mitsubishi Electric, Delta and Teco (all OP-rated). The fastest growth segment today is 3D printing, where there are several public companies competing. We think the recent macro ‘pause’ offers an attractive entry point for longer-term investors, and our Strategy Team forecasts that global IP momentum will pick up in Q3 (driven by China and Japan).

Exhibit 9: Valuation Table – Preferred Automation Stocks x, unless otherwise stated

Market CapDividend

Yield

USD (bn) FY1 FY2 FY1 FY2 FY1 FY2 FY1 FY2Delta 8.1 16.2x 14.6x 11.7x 10.2x 8.1x 6.9x 1.0x 0.9x 3.6%Fanuc 30.8 15.7x 14.2x 7.8x 7.0x 7.3x 6.6x 3.2x 3.0x 1.7%

Keyence 15.5 18.5x 17.2x 8.4x 7.8x 8.2x 7.6x 3.8x 3.5x 0.3%Mitsubishi Electric 17.9 9.1x 8.4x 5.4x 5.0x 3.5x 3.3x 0.4x 0.4x 1.8%

Rockwell 10 13.5x 11.4x 9.0x 8.2x 7.9x 7.3x 1.5x 1.4x 3.0%

Siemens 83.7 10.4x 10.0x 10.6x 8.6x 7.6x 6.5x 0.9x 0.9x 4.4%Teco 1.2 11.9x 10.7x 9.5x 8.4x 6.2x 5.3x 0.7x 0.7x 4.8%

Company

P/E EV/EBIT EV/EBITDA EV/SALES

Source: Bloomberg, Credit Suisse estimates

Stocks with very high exposure to automation which are not covered by CS Research, and whose market cap is >$1bn, include 3D Systems, Ametek, AspenTech, Cognex, PTC, Stratasys (Americas), Dassault Systems, GEA, Kuka (Europe), Omron, Siasun, Yokogawa (Asia).

14 August 2012


Table of contents Portfolio managers’ summary 2

Market Outlook – Growth and Margin Profile 2 Significant scope for penetration increases 3 How to Invest 4

Market Growth Profile 6 China – Not all doom and gloom 9

Wage inflation is here to stay 9 Automation will help China manage wage inflation… 11 …And increase its manufacturing technology 12 Automation investment has accelerated in China in recent years… 15 …But Chinese companies’ margins are under increasing pressure… 15 …And penetration remains extremely low 16 What does the experience of other countries tell us about the growth outlook in China? 17

Penetration beyond China is also low 21 Most emerging markets have low automation penetration, and rising wage inflation 21 Few developed economies are at ‘saturation point’ 22

End-market growth drivers 24 Automotive Market 24 Petrochemical Market 29 Food & Beverage Market 32

Margin Profile 38 Industrial Automation margins are above-average 38 Why we think high margins are sustainable 39 Factory vs. Process 48

Types of Industrial Automation 49 Factory (Discrete) Automation 52 Process Automation 52 Hybrid Automation 53 Batch Automation 54 Motion Control 54

Controls Systems 55 Enterprise-level controls 56 Plant-level controls 57 Descriptions and Vendors 58

Automation Instrumentation 61 Feedback Instruments 62

Convergence A Key Theme for Corporate Behavior 67 Vertical Convergence 69 Horizontal Convergence 71 Emerson likely to be a prime mover in any future convergence 72 Partnerships are an alternative to M&A 75

3D Printing – A New Growth Area 76 Major Automation Players 83 Near-term Demand Outlook – Stabilization Likely Preludes Re-acceleration 91

Automation Tracker 93 Geographic outlook 97 Discrete automation is ‘short-cycle’, but not necessarily ‘early-cycle’; process automation is neither 98

Automation stocks 100 Preferred stocks 100 Share price performance, and valuation multiples 102

14 August 2012


Market Growth Profile The Industrial Automation market has grown 6% p.a. since 2003, roughly ~1.7x global industrial production. Process Automation has grown 4.9% (~1.4x Global IP) and Factory Automation has grown 7.6% (~2.1x Global IP). Factory Automation has proven more cyclical than Process, as evidenced by the period up to and including the 2009 downturn – the high/low annual growth rates for FA during these two periods were +21%/-20% vs. +10%/-5% for PA (Exhibit 11) respectively.

Exhibit 10: Automation Markets vs. Global IP Indexed growth, unless otherwise stated

Exhibit 11: Factory and Process Automation Growth

Rates YoY% Growth, unless otherwise stated

80

100

120

140

160

180

200

220

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E

Global IP

Process Automation

Factory Automation

-5%

10%

-20%

21%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

2006 2007 2008 2009 2010 2011 2012E

Process Automation

Factory Automation

Source: Company data, Credit Suisse Economic Research

Factory Automation Weighted Sample: ABB, Schneider, Siemens, Rockwell Automation, Fanuc, Mitsubishi

Electric, SMC, THK, Yaskawa ; Process Automation Weighted Sample: ABB, Invensys, Emerson, Yokogawa

Source: Company Data, Credit Suisse estimates

We see scope for Automation markets to outgrow global IP by a wider margin in future:

■ Much of China’s recent output growth has been driven by construction and infrastructure build-outs. Industrial vendors supplying these markets will likely see lower trend growth going forward. Automation however will likely benefit from two emerging trends in China: (i) wage inflation is accelerating given the country has recently hit its Lewis turning point; (ii) the increased government emphasis on consumption;

■ The global capex outlook for key automation end-markets such as Automotive and Petrochemicals is stronger today in our view compared to last cycle;

■ The efficacy of discrete automation is becoming increasingly apparent, yet penetration remains low in many markets; offering scope for increased penetration to drive growth.

Below, we show bottom up Process and Factory Automation market growth (generated by a wide sample of automation vendors that we track), in the context of Industrial Production.

14 August 2012


Exhibit 12: Automation market – bottom up growth analysis %, unless otherwise stated

Process Factory AutomationYear EM Developed Global Global Global Global2003 8.5% 1.0% 3.7% -0.3% 11.3% 4.4%2004 10.6% 2.4% 5.4% 5.1% 13.0% 8.5%2005 8.3% 2.1% 4.4% 8.4% 9.1% 8.7%2006 9.5% 2.9% 5.5% 11.4% 11.4% 11.4%2007 10.1% 2.8% 5.7% 8.8% 11.5% 10.0%2008 4.9% -2.7% 0.5% 10.6% 2.4% 6.8%2009 0.8% -13.4% -7.2% -5.1% -19.5% -11.5%2010 12.6% 7.1% 9.6% -3.3% 20.6% 6.3%2011 7.6% 2.8% 5.0% 9.7% 13.8% 11.6%2012E 6.5% 1.2% 3.7% 8.5% 5.2% 7.0%2013E 7.9% 2.1% 4.9% 5.4% 7.4% 6.3%03-11 CAGR 8.0% 0.4% 3.5% 4.9% 7.6% 6.0%vs. Global IP 1.0x 1.4x 2.1x 1.7x

Industrial Production

Source: Credit Suisse Research

Below, we show our top down view of the global industrial automation market, where we forecast product growth by geography. Descriptions of the product types can be found later in this report.

Exhibit 13: Automation market – top down growth outlook %, unless otherwise stated

Strong robotics growth driven by automotive capex and penetration growth in China

We expect US and Chinese petrochemical capex to drive above-average growth in DCS

PLM sales should increase as systems integrators move up the supply chain and begin selling cost-saving enterprise level software systems (e.g. Siemens)

We assume growth in the Americas remains above-average through 2013 and Asia re-accelerates in 2013 as Europe remains flattish

Revenue 2011 2012E 2013E 2014E 2015EYoY%Industrial Control Systems (ICS) 7.3% 8.1% 6.9% 6.2% 5.9%

SCADA 7.2% 4.3% 4.5% 5.3% 6.0%DCS 7.3% 11.3% 8.7% 6.8% 5.9%PLC 7.6% 6.6% 7.1% 6.4% 5.9%

Field Devices 5.9% 4.3% 5.3% 5.3% 5.5%Robotics 6.6% 8.3% 8.6% 7.5% 7.5%Machine Vision 6.6% 3.7% 7.1% 6.2% 6.7%Sensors 5.6% 3.6% 3.6% 4.2% 4.2%Relays & Switches 5.5% 3.5% 3.6% 4.2% 4.3%Motion & Drives 4.9% 1.5% 3.7% 4.3% 4.4%Other 6.5% 6.0% 6.0% 6.0% 6.0%

Manufacturing Execution Systems (MES) 8.3% 5.8% 6.7% 7.5% 8.3%Enterprise Resource Planning (ERP) 6.7% 4.6% 4.9% 5.2% 5.6%Product Lifecycle Management (PLM) 20.0% 10.0% 9.4% 8.6% 8.5%Total 8.7% 6.7% 6.6% 6.3% 6.3%

Revenue Change by Region 2011 2012E 2013E 2014E 2015EAmericas 6% 9% 7% 6% 6%Europe 6% 3% 3% 3% 3%APAC 7% 7% 8% 8% 9%ROW 9% 8% 8% 7% 7%Global Total 7% 6% 6% 6% 6%

Source: Markets and Markets, Credit Suisse estimates

We show below our geographic estimates for two product categories whose growth rates we think will be bolstered by some new drivers in this cycle. In Robotics, strong automotive capex in the U.S. is helping drive growth in the Americas, and rising discrete automation penetration in China is offsetting robot ‘saturation’ in Japan. In the DCS market (controls for process automation systems), petrochemical capacity additions are driving growth in the Americas and Asia Pacific.

14 August 2012


Exhibit 14: Revenue growth assumptions within the Robotics and DCS markets %, unless otherwise stated

Robotics Market Robotics YoY% 2011 2012E 2013E 2014E 2015EAmericas 6.0% 18.0% 9.0% 6.0% 6.0%Europe 6.2% 0.0% 4.0% 4.0% 4.0%APAC 6.8% 9.0% 10.0% 9.0% 9.0%ROW 6.8% 6.0% 7.0% 6.0% 6.0%Total 6.6% 8.3% 8.6% 7.5% 7.5%

DCS Market

DCS YoY% 2011 2012E 2013E 2014E 2015EAmericas 7.0% 16.0% 11.0% 6.5% 5.0%Europe 7.1% 8.0% 6.0% 5.0% 4.0%APAC 7.7% 9.0% 9.0% 10.0% 10.0%ROW 11.4% 11.0% 7.5% 6.0% 6.0%Total 7.3% 11.3% 8.7% 6.8% 5.9%

Source: Markets and Markets, Credit Suisse estimates

14 August 2012


China – Not all doom and gloom ‘Productivity isn’t everything, but in the long run it is almost everything,’ Paul Krugman, The Age of Diminishing Expectations

It is a consensus opinion that China will see lower growth in future compared with the last decade, and indeed government GDP growth targets bear this out. The implications for many industrial companies are fairly grim, given the huge boost to industrial demand provided by China in the past ten years. We think automation represents one potential bright spot however.

China has reached a stage of its development whereby its manufacturing model based on large quantities of cheap labor is becoming less tenable, both for demographic, and policy-driven reasons:

(i) China has hit its ‘Lewis turning point’ (as the huge pool of rural labor has largely been drawn down into the manufacturing sector);

(ii) Demographic policies are shrinking the working age population;

(iii) Rising education levels are shrinking the proportion of the working age population ‘available to’, or willing to enter, the manufacturing sector;

(iv) Government policy encourages an acceleration in wage inflation.

The outcome is rising wage inflation, which will pressure costs of manufacturing companies in China.

Automation provides a solution to this issue, as well as allowing the Chinese government to meet its ambitions (as expressed in the current Five Year Plan) of upgrading China’s manufacturing technology, and the quality of manufactured goods. We look at the historic automation data (robot shipments, numeric control penetration of machine tools) in countries such as Japan, S Korea and Taiwan, in order to better understand what potential discrete automation growth China could see in future.

Wage inflation is here to stay We think that automation remains the only way by which China can remain a manufacturing powerhouse (China’s manufacturing output is worth $1.9tn, or ~16% of global output), both by enabling it to remain cost-competitive (and hence discourage manufacturing from migrating to other countries), and by increasing the quality of its output.

China is hitting its ‘Lewis turning point’

In the 1950s the economist Arthur Lewis highlighted a stage of development (subsequently dubbed the ‘Lewis turning point’) that many emerging economies eventually reach, at which point rural surplus labor eventually disappears (due to rising labor demand in the more modern sectors of the economy), driving more rapid wage increases. Exhibit 15 highlights the dwindling supply of manual labor in China, and Exhibit 16 shows the consistent double digit wage growth in the manufacturing sector, even throughout the 2008-09 global recession, and despite the recent slowdown.

14 August 2012


Exhibit 15: Dwindling Supply of Manual Labor (China) in millions, unless otherwise stated

Exhibit 16: Hourly Manufacturing Labor Costs in China % YoY, unless otherwise stated

-80

-60

-40

-20

0

20

40

60

80

100

1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Mill

ion

pers

ons

10%

12%

14%

16%

18%

20%

22%

24%

2003 2004 2005 2006 2007 2008 2009 2010 2011

* Population aged between 15-19 minus population aged between 50-

54 and new college students.

Source: CEIC, UN, Credit Suisse estimates

Source: Credit Suisse Global Strategy

Various studies have shown that these effects are likely to persist for a long time. For instance, Gary. S. Fields’ paper, The Migration Transition in Asia (1994), described how wages in Hong Kong, Korea, and Taiwan increased dramatically beginning in the mid-1960s due to heightened labor demand. Wages in Hong Kong increased 150% from 1960-1980, Korean wages increased 200% from 1966-1980, and wages in Taiwan rose 300% from 1960 to 1979. Since China fits the mold that Fields described (a labor intensive country in Asia with export-led growth), we believe it is reasonable to assume that China will continue to experience wage inflation.

Demographic policies and rising education levels have contributed to the shrinking of the available pool of labor, particularly in the manufacturing sector

The one child policy in China (enacted in 1979) helped create a top-heavy age demographic (Exhibit 17), triggering a gradual decline in labor supply over the past 40 years (as retirees outnumber new workers). Aside from demographic changes, rising levels of education in China (Exhibit 18) have led more new workers to pursue skilled service positions as opposed to lower-paying manufacturing jobs; this trend is likely to persist.

Exhibit 17: China - % of population under age 14 %, unless otherwise stated

Exhibit 18: China – % of 18-24 year olds attending school %, unless otherwise stated

15%

20%

25%

30%

35%

40%

1970 1975 1980 1985 1990 1995 2000 2005 2010

4%

13%

27%

0%

6%

12%

18%

24%

30%

36%

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2015

E

Source: World Bank, Credit Suisse Estimates Source: World Bank

14 August 2012


Government policy is driving up wages

The Chinese government has set a target for an annual rise in minimum wages of 13% for the five-year period through 2015. In June 2012, the Economic Information Daily reported that of the 12 local governments that have released wage plans, most are targeting 14% growth this year.

The government is clearly aware of the risks of slowing growth arising from the evaporation of the ‘demographic dividend’, and hence has made explicit efforts in its current 5 Year Plan to encourage the rise of manufacturing technology within China.

Automation will help China manage wage inflation… Several companies recently commented on the deleterious effects of rising wages in China on their profit margins:

(i) Nike: On its March 2012 quarterly earnings conference call, Nike, one of the largest apparel companies in the world, discussed the gross margin headwinds it is facing related to rising labor costs, particularly in China. The company believes labor costs will continue to rise and are a significant long term issue;

(ii) Schneider: On its October 2011 earnings conference call, Schneider cited wage inflation in emerging economies as contributing to a lower profit outlook for the company.

Recent corporate commentary from automation vendors also underlines the strong demand being driven in China by high wage inflation:

(i) ABB: In February 2012, Michael Demare, the CFO of ABB, stated that “salary inflation is the driving force behind robot demand in China”;

(ii) Emerson: At its February 2012 Analyst Meeting, Emerson highlighted its plans to double sales in China from $3bn today to over $6bn over the next 5 years, but reduce headcount from 30,000 to 20,000, all through investment in automation. Higher wages were cited as a large contributor behind the decision to increase automation investment;

(iii) Kuka: In April 2012, Kuka (one of the leading global robot manufacturers) announced it would expand production capacity in China to 5,000 units this year, from less than 1,000 two years ago. Rising wages, increased quality of production and faster production were cited as the main reasons for increased investment in robotics in China;

(iv) Yaskawa: In July 2012, Yaskawa announced plans to double robot output, anticipating a faster-than-expected expansion in local demand for factory automation amid rising wages. The company initially planned a combined annual production capacity of 6,000 units at these plants, but it has decided to boost it to 12,000 by the time they become fully operational in 2015. As a result, the investment budget for the factories has been raised to roughly JPY4bn yen from the initial JPY1.7bn yen.

There is no clear cut-off point, at which industrial automation spending becomes compelling, but we can see that a clear correlation exists between automation penetration and hourly wage costs.

14 August 2012


Exhibit 19: Robot density relative to hourly wage cost per employee US$, unless otherwise stated

$39 $39

$10 $8 $10 $12

149

88

11 7 116

Developed Developed(Ex Japan)

EmergingMkts Total

NJAEmerging

LatAmEmerging

EMEAEmerging

Hourly Cost (USD) Robot Density


…And increase its manufacturing technology Cost is undoubtedly a key factor when companies study how much automation to invest in (the CEO of Kuka recently noted - “It comes down to the question: at what cost can a robot do the job more efficiently?”), but there are other reasons too:

(1) Reducing operating costs;

(2) Reduce capital costs;

(3) Improving product quality and consistency;

(4) Improving quality of work for employees, complying with health and safety rules;

(5) Increasing production output rates;

(6) Increasing flexibility in product manufacturing;

(7) Reducing material waste and increasing yield;

(8) Save space in high value manufacturing areas.

Although isolating the specific effects of increased automation on broader economic factors is challenging, the data suggests it yields safer working conditions and higher manufacturing output rates (Exhibit 21).

14 August 2012


Exhibit 20: Number of robots and number of reported

manufacturing injuries in North America $, unless otherwise stated

Exhibit 21: Change in robots per head vs. change in

manufacturing output per head (2002-2010) %, unless otherwise stated

90

100

110

120

130

140

150

160

170

$100,000

$110,000

$120,000

$130,000

$140,000

$150,000

$160,000

$170,000

$180,000

2003 2004 2005 2006 2007 2008 2009 2010

North America Robot Population (units) (lhs)

Number of manufacturing injury incidents (per 10k employees) (rhs)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

4% 6% 8% 10% 12% 14% 16% 18%

Robo

ts p

er H

ead

CAG

R 20

02-2

010

Output per Head CAGR 2002-2010

Source: IFR, Bureau of Labor Statistics IFR, Bureau of Labor Statistics, United Nations Statistics, sample of

27 countries

In North America for example, from 2000 to 2010, manufacturing output grew at a 2% CAGR despite the manufacturing employee base shrinking by ~4% p.a. (Exhibit 22); the operational stock of robots grew at a 6% CAGR and manufacturing output per hour of manual labor increased at a 7% CAGR (Exhibit 23). North America is producing more output today with less employees and less total hours worked; more advanced manufacturing technology / increased automation, is a key factor.

Exhibit 22: North America – Manufacturing output and

manufacturing employees $, unless otherwise stated

Exhibit 23: North America – Operational stock of robots

and manufacturing output per hour of labor $, unless otherwise stated

23

24

25

26

27

28

29

30

31

1,600,000

1,700,000

1,800,000

1,900,000

2,000,000

2,100,000

2,200,000

2,300,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Manufacturing Output ($mn)

Manufacturing Employees (mn) (rhs)

80,000

90,000

100,000

110,000

120,000

130,000

140,000

150,000

160,000

170,000

180,000

$40

$45

$50

$55

$60

$65

$70

$75

$80

$85

$90

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Operational Stock of Industrial Robots (units) (rhs)

Manufacturing Output per hour of labor ($)

Source: IFR, Bureau of Labor Statistics Source: IFR, Bureau of Labor Statistics, United Nations Statistics

In their March 2010 research paper ‘What does the Lewis Turning Point Mean for China? A computable General Equilibrium Analysis’, co-authors Huang Yiping (Peking University in China) and Jiang Tingsong (the Center for International Economics in Australia) highlight that “The arrival of the Lewis turning point could signal difficulties for China’s massive manufacturing expansion. Industrial upgrading will be the key for China to sustain rapid growth.” In our view, rising automation penetration is an integral component of any ‘industrial upgrading.’

A recent example of the need for an ‘industrial upgrading’ came from one of the leading domestic automotive OEMs. Great Wall Motors stated in an interview earlier this year that it cannot compete with European automakers such as Volkswagen, unless it invests in better technology and more automation to build higher-quality cars.

14 August 2012


AAC case study

AAC Technologies is a manufacturer of components for consumer electronics products. The CS analyst, Yan Taw Boon, explored in a recent report (Sound Execution warrants re-rating, dated May 21) the extent to which AAC’s automation investment is a source of competitive advantage. The key point is that it costs RMB518m of automation capex to drive a 27% output increase (in the Changzhou plant), and a 15% saving in labor costs.

In terms of background, AAC co-developed a total of 15 automated production lines with Dutch automation company IMS, all of which were designated for speaker production, starting in April 2010. AAC spent the first 1-2 years fine-tuning the automated lines, and reached high production volumes in late 2011 (18 months after the implementation of the line). AAC implemented its first in-house automation for earpiece receivers in September 2010. 60-70% of the 2011 capex was allocated to increasing the number of fully-automated lines from 15 to 35 at the end of 2011, and the company plans to add another 30 fully-automated lines by the end of 2012.

CS visited the Changzhou facility recently, and had the following observations regarding automation at the plant:

i) The 30 semi-automated lines require an average of 150 workers to operate, and produce 1.5mn units / day;

ii) The 70 lean mode lines require 15 workers to operate, and produce 0.7mn units / day;

iii) The fully automated lines require just 2-3 operators, and produce 1.2m units / day.

Exhibit 24: AAC’s Changzhou 1Q12 production lines by automation levels and capacity for speakers/receivers units, unless otherwise stated


In terms of the cost effects specifically, our Asian Team estimates that the total number of staff required to support the plant’s existing capacity of 3.4mn units / day is 5,630. By increasing the current 40 fully automated production lines to 70 by end-2012E, 62% of its daily production output will be automated, driving an increase in total capacity of 27% and labor cost savings of 15%. This saving should offset the expected 15% wage increases for Changzhou for 2012.

Exhibit 25: By 4Q12E, AAC can reduce its work force by 2,640 (-15%) when Changzhou has 70 fully automated lines units, unless otherwise stated


14 August 2012


Automation investment has accelerated in China in recent years… China has ramped up its investment in automation, as shown by the growth in demand for robotics (Exhibit 26) and machine tools (Exhibit 27). In 2001 China accounted for 1% of global industrial robot demand; in 2011, this share had risen to 14%. From 2005 to 2011, orders of Japanese machine tools from China rose 256% while orders from other countries were up only 10%.

Exhibit 26: Robot Shipments to China units, unless otherwise stated

Exhibit 27: Japanese Machine Tool Orders JPY bn, unless otherwise stated

-

1

2

3

4

5

6

7

8

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Robot Shipments to China (LHS)

Robots per 10,000 Manufacturing Employees in China (RHS)

Source: IFR, Bureau of Labor Statistics, Credit Suisse Research Source: JMTBA, Credit Suisse Research

…But Chinese companies’ margins are under increasing pressure… One bottom-up symptom of the insufficient level of manufacturing technology in China comes from the margin data of local industrial companies – gross margins are still declining. This suggests greater investment in automation is needed, in order to stem margin declines.

Figure 28: Chinese Industrial Gross profit margins are declining (2009-2011)

-0.4 -0.5

-2.1

0.7 0.6

(0.9)

2.8

0.60.5

0.20.3

0.1

-4

-3

-2

-1

0

1

2

3

4

All industries Electronics Electrical Machinery

GP Margin Pre-Tax Profits/GP Asset Turnov er Financial Lev erage ROE

CAGR Sales grow th: 24.7%19.8%

23.8%

% point contribution to change in ROE (2009-11)

Source: CEIC, Credit Suisse estimates

14 August 2012


…And penetration remains extremely low Measuring the penetration of industrial automation is not easy, particularly given constraints around the definition of the terminology, and availability of data. One approach we use is to look at industrial robot density, which represents the number of operational industrial robots (multipurpose manipulating industrial robots with at least three or more axes) for a given number of employees. There is a high correlation between robot shipments and the revenue growth of other factory automation products.

Exhibit 29: Robot Shipments and Global Factory

Automation Sales US Indexed, unless otherwise stated

Exhibit 30: N America robot orders and ROK’s organic

sales growth % change, unless otherwise stated

80

100

120

140

160

180

200

220

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Robotics Shipments

Factory Automation

-60%

-40%

-20%

0%

20%

40%

60%

80%

Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12

NA Robot Orders Growth ROK Organic Growth

Correlation = 91%

Source: Company data, IFR Source: Company data, Robotic Industries Association

We are cognizant of the fact that some industries require more robots than others, and the size of the respective industries vary according to the manufacturing base within each geographic area, but we think that the standardization of definition of an industrial robot, and the wealth of salient historic data provided by the International Federation of Robotics (IFR), means that this is the most useful metric.

For this report, we classify the data into geographic regions (Exhibit 31) and then analyze it in the context of manufacturing output.

Exhibit 31: Classification of Economic Regions DevelopedGlobal US, Japan, Euro Area, UK, Switzerland, Denmark, Norway, Sweden, Canada, Australia, New Zealand

EmergingNJA China, Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan, ThailandLatAm Argentina, Brazil, Chile, Colombia, Mexico, PeruEMEA Czech Republic, Hungary, Israel, Poland, Russia, South Africa, Turkey Source: Credit Suisse Research

The higher robot density (and level of automation) in the US is clearly one of the large reasons for the difference in output per head (Exhibit 32). China only has a robot density of 7, vs. the United States at 130.

14 August 2012


Exhibit 32: Output per head – China vs. U.S. US$, unless otherwise stated

Country

Employees(mn)

Output($bn)

Output per head($)

RobotDensity

U.S. 14 1,732 121,931 130

China 99 1,612 16,281 7

Point

China has7x as many

manufacturingworkers

China andthe U.S. produce

the sameoutput

US has 7.5xhigher output

per head

US has 18.5x the number

of robotsper head


What does the experience of other countries tell us about the growth outlook in China? We looked at the historical experience of other East Asian manufacturing countries, in order to see what effects the ‘Lewis turning point’, rising educational standards, and accelerating wage growth, had on their automation investment. Given the importance of aggregate demand in driving all forms of corporate capex, including automation, we also looked at some analyses of the effects on overall economic growth.

Robot density – China entering an inflection point

The example of Japan from the 1970s and 1980s, and the growth trend in China in recent years, suggest that China is now entering its inflection point, with discrete automation investment set to accelerate.

Exhibit 33: Robot stock (base year = 1974 for Japan, 1999

for China) Robot stock in units, unless otherwise stated

Exhibit 34: Robot density (base year = 1974 for Japan,

1999 for China) Robots per 10,000 manufacturing employees, unless otherwise stated

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

T+0 T+5 T+10 T+15 T+20 T+25 T+30

Japan

China

0

50

100

150

200

250

300

350

T+0 T+5 T+10 T+15 T+20 T+25 T+30

Japan Density

China Density

Source: IFR, Credit Suisse estimates Source: IFR, Credit Suisse estimates

We see below the very high growth rates for robot density and robot shipments in Japan, South Korea and Taiwan, once these countries hit a level of robot density similar to where China is now (around 7, assuming 100mn manufacturing employees). In the 5 years subsequent to these three countries hitting a density level of 5-10, their robot installed base grew at a 24-46% annual CAGR.

14 August 2012


Exhibit 35: Progression of robot density and installed base (stock) over time

Robot Density Year T+0 T+5 T+10 T+15 T+20 5Y 10Y 15Y 20YJapan 1980 10 66 183 267 295 45% 33% 24% 18%Korea 1990 6 38 88 171 287 45% 31% 25% 21%Taiwan 1990 5 16 30 67 123 26% 20% 19% 18%China 2011 7

Robot Stock (k) T+0 T+5 T+10 T+15 T+20 5Y 10Y 15Y 20YJapan 1980 14 93 274 387 389 46% 34% 25% 18%Korea 1990 3 18 37 61 101 43% 29% 22% 19%Taiwan 1990 1 4 7 15 27 24% 18% 18% 16%China 2011 71

Time Series Cumulative CAGRs


For a 10 year forecast, if we assume robot density in China reaches the level Japan reached in 1990 (183), this would imply a CAGR of 40%+ for the installed base of robots (depending on one’s assumption on the future size of the manufacturing employee base).

In a lower case scenario, if we assume a trend-line more similar to what occurred in Taiwan (and robot density in China reaches 30 by 2020), this would imply a high-teens CAGR for the installed base of robots.

Exhibit 36: 2022 China Robot Density Scenarios - Implied growth rate p.a. in operational

stock of industrial robots

% CAGR, unless otherwise stated

2022 88 90 92 94 96 98 10030 18% 18% 18% 18% 19% 19% 19%50 24% 24% 24% 25% 25% 25% 25%70 28% 28% 29% 29% 29% 29% 30%90 31% 32% 32% 32% 32% 33% 33%110 34% 34% 34% 35% 35% 35% 36%130 36% 36% 37% 37% 37% 38% 38%150 38% 38% 39% 39% 39% 40% 40%170 40% 40% 40% 41% 41% 41% 42%190 41% 42% 42% 42% 43% 43% 43%

Employees (millions)

RobotDensity

(units per 10k employees)

Source: BLS, IFR, Credit Suisse Estimates

Numeric control penetration – further ‘S’ curve characteristics

The penetration of machine tools by computer numerical control (NC) equipment is one other measure of automation that we study (as the non-NC controlled machine tools are controlled manually and hence are not perceived as representing ‘automation’).

We can see that Japan’s penetration ratio exhibits classic ‘S’ curve characteristics, hitting an inflection point at around 15% penetration, before leveling out at around 70% penetration. China too is showing signs of acceleration, after it hit the low-teens penetration rate a few years ago. We can see below that China has just reached the NC penetration level which Japan reached in 1977, or 30%. Over the next 5 years, NC penetration in Japan almost doubled, and the shipments of numerical-controlled machine tools rose at a 29% CAGR.

14 August 2012


Exhibit 37: Share of machine tool shipments which are

NC-equipped %, unless otherwise stated

Exhibit 38: Cumulative CAGR of NC machine tool

shipments in Japan (base year = 1977) % CAGR, unless otherwise stated

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

T+0 T+5 T+10 T+15 T+20 T+25 T+30

Japan China

29%

21%

14% 14%

9%10%

T+5 T+10 T+15 T+20 T+25 T+30

Source: JMTBA, Credit Suisse estimates Source: JMTBA, Credit Suisse estimates

Education levels

We looked at the correlation between robot shipments and education levels in Korea in Exhibit 39. The Gross Enrollment Ratio (GER) or Gross Enrollment Index (GEI) is a measure used by the UN to determine the number of students enrolled in school at several different grade levels. If as we expect, education levels in China continue to rise, robot investment could grow at a similar rate as it did in Korea.

Exhibit 39: Korea GER vs. Robot Shipments x, unless otherwise stated

Exhibit 40: China GER vs. Robot Shipments x, unless otherwise stated

0

20000

40000

60000

80000

100000

120000

0% 20% 40% 60% 80% 100% 120%

Rob

ot S

hipm

ents

GER (%)

Korea GER vs. Robot Shipments

0

2000

4000

6000

8000

10000

12000

14000

16000

0% 5% 10% 15% 20% 25% 30%

Robo

t Sh

ipm

ents

GER (%)

China GER vs. Robot Shipments

Source: World Bank, IFR Source: World Bank, IFR

Implications for broader economic growth

The research paper ‘What does the Lewis Turning Point Mean for China? A computable General Equilibrium Analysis,’ which we cited earlier, concluded that the ‘Lewis turning point’ and increasing labor shortages are likely to mean that overall Chinese GDP growth will be more subdued, while inflation will be higher.

14 August 2012


Exhibit 41: Hit to China GDP from labor shortage shocks in different scenarios Two Shocks Combined

(-10%, -5%)Unskilled Labor Shock

(-10%)Skilled Labor Shock

(-5%)

GDP (%) -4.64% -4.08% -0.55%

Saving Ratio (% GDP) -0.03% -0.07% 0.03%

Investment Ratio (% GDP) 0.85% 0.68% 0.15%

Current Account (% GDP) -0.88% -0.75% -0.12%

Source: ‘What does the Lewis Turning Point Mean for China? A computable General Equilibrium Analysis’

However, economic growth should still be strong enough to support investment in productive parts of the economy. For instance, Japan and South Korea both saw 8-9% GDP growth rates after reaching their ‘Lewis turning points,’ alongside higher inflation.

Exhibit 42: High GDP growth rates are likely even after the Lewis turning point has been

reached Japan

(1960-1972)Korea

(1982-96)China

(1997-2009)

GDP: Average 8.9% 8.5% 9.6%

CPI: Average 5.6% 5.2% 1.3%

CPI: Maximum 13.1% 11.1% 4.8%

CPI: Minimum 3.6% 2.3% -1.5%

Source: ‘What does the Lewis Turning Point Mean for China? A computable General Equilibrium Analysis’

14 August 2012


Penetration beyond China is also low Despite global industrial robot shipment growth meaningfully outpacing industrial production over the past 10 years (Exhibit 43), data from the IFR indicates that robot density in most geographic regions remains extremely low (Exhibit 44). This augurs well for rising penetration as a driver of automation investment.

Exhibit 43: IP and Robot Shipment CAGR’s (2000-2011) %, unless otherwise stated

Exhibit 44: Robot Density by Region (2002 vs. 2011) Robots per 10,000 manufacturing employees, unless otherwise stated

0% 0%

8%

5%

10%

3% 3% 3%

0%

4%

22%

17%

23%

12%

6%

12%


EmergingMarkets

Total

EMEAEmerging

NJAEmerging

LatAmEmerging

Global Global(ex Japan)

Industrial Production CAGR

Robot Shipment CAGR

121

45

3 3 3 2

22

8

149

88

11 7 116

3019


EmergingMarkets

Total

EMEAEmerging

NJAEmerging

LatAmEmerging

Global Global(ex Japan)

2002

2011

Source: Credit Suisse Research, IFR Source: Credit Suisse Research, IFR

Most emerging markets have low automation penetration, and rising wage inflation Although Chinese companies are likely to have little choice in upgrading their automation investment / manufacturing technology, one could argue that multi-national companies could simply move their production to countries with cheaper labor costs. We note though that many other emerging markets are also seeing a substantial increase in wages, and their base level today is not substantially lower than China’s.

Exhibit 45: Wage Growth CAGR (2007-2011) US$, unless otherwise stated

Exhibit 46: Hourly manufacturing costs (2011) US$, unless otherwise stated

3%2%

8%

10%

9%

4%


EmergingMkts Total

NJAEmerging

LatAmEmerging

EMEAEmerging

$39 $39

$10$8 $10

$12


EmergingMkts Total

NJAEmerging

LatAmEmerging

EMEAEmerging

Source: BLS Source: BLS

We show more detailed wage cost data below.

14 August 2012


Exhibit 47: Hourly manufacturing costs (2011) US$, unless otherwise stated

$0

$10

$20

$30

$40

$50

$60

Nor

way

Switz

erla

ndBe

lgiu

mD

enm

ark

Swed

enG

erm

any

Finl

and

Aust

riaN

ethe

rlan

dsA

ustr

alia

Fran

ceIr

elan

dCa

nada

U.S

.It

aly

Japa

nU

.KSp

ain

Gre

ece

New

Zea

land

Isra

elSi

ngap

ore

Kore

aAr

gent

ina

Port

ugal

Czec

h Re

pSl

ovak

iaBr

azil

Esto

nia

Hun

gary

Taiw

anPo

land

Mex

ico

Phili

ppin

esCh

ina

Indi

aVi

etna

mIn

done

sia

Source: BLS

The penetration of automation in emerging markets remains low (which account for 50% of global manufacturing output); there are only 7 industrial robots per 10,000 manufacturing employees, against 149 for the developed markets. The largest future growth opportunity for investment exists in Non-Japan Asia, which currently accounts for 35% of the world’s manufacturing output, but only has robot density of 11 (Exhibit 48).

Exhibit 48: % of Global Output and Robots per Employee %, unless otherwise stated

Exhibit 49: Robot Density for Select Countries (2011) Robots per 10,000 manufacturing employees, unless otherwise stated

50%41%

50%

7%

35%

8%

149

88

11 7 116


EmergingMarkets Total

EMEAEmerging

NJAEmerging

LatAmEmerging

% of Global Manufacturing Output

Number of Robots per 10,000 Manufacturing Employees

0

50

100

150

200

250

300

350

Japa

n

Kore

a

Ger

man

y

Ital

y

US

Spai

n

Taiw

an

Fran

ce

Swit

zerl

and

Aus

tral

ia UK

Chin

a

Braz

il

Russ

ia

Indi

a

Robot Density

Global Average

Source: World Bank, IFR, United Nations Source: World Bank, IFR, United Nations, BLS

Few developed economies are at ‘saturation point’ Within the more developed economies, we think that penetration has only appeared to reach a ‘saturation point’ (whereby robot shipments are unlikely to see growth driven by higher penetration, but are instead driven solely by factors relating to manufacturing output, and industrial production) in Japan. This suggests many developed economies could still see substantial penetration gains as well.

14 August 2012


Exhibit 50: Robot Installed Base Units, unless otherwise stated

Exhibit 51: Annual Robot Density Robot Density, unless otherwise stated

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E

Japan

U.S.

Germany

Korea

Italy

U.K.

0

50

100

150

200

250

300

350

400

2002 2003 2004 2005 2006 2007 2008 2009 2010

Japan

Korea

Germany

Italy

U.S.

France

UK

Source: Credit Suisse Research, IFR Source: Credit Suisse Research, IFR

Looking at IFR expectations for robot shipment growth by country, density does appear to be a factor – we show current robot density vs. IFR expectations for 2012-2014 growth by country in Exhibit 52. Developed markets such as Japan and the United States will continue to be large markets for industrial automation vendors, but the growth potential from simple penetration increases is much smaller.

Exhibit 52: Current Robot Penetration vs. Future Growth %, unless otherwise stated

Exhibit 53: Robotics Demand by Geography to 2014 %, unless otherwise stated

Korea

GermanyItalyNorth America

Spain Japan UKFranceTotalTaiwanAsia/Australia

China

-10%

-5%

0%

5%

10%

15%

20%

0 50 100 150 200 250 300 350

Robo

t Sh

ipm

ent

CAG

R -

2012

-201

4E

Number of Robots per 10,000 Manufacturing Employees - 2011

Japan, 18%

China, 17%

Other Asia, 24%

North America, 15%

Western Europe, 17%

Other, 8%

Source: IFR Source: IFR

14 August 2012


End-market growth drivers In this section we focus on the second category of automation investment drivers – the key end-markets for automation vendors. We analyze in particular the Automotive, Food & Beverage, and Petrochemical markets, as they collectively account for over 50% of global industrial automation revenues. Our conclusion is that in these three markets, there are clear reasons why this cycle should see stronger investment potentially than prior cycles.

Exhibit 54: Automation End Markets by Revenue %, unless otherwise stated

Industrial Automation Power, 10.5%

Textile, 5.5%

Automotive, 16.7%

Chemical, 14.1%

Packaging, 9.1%

Plastic, 5.3%

Oil & Gas, 9.3%

Pharma, 12.4%

Food Processing,

5.8%

Other, 11.3%

Factory Automation

Automotive35%

Packaging19%

Textile12%

Food Processing

6%

Other28%

Process Automation Power19%

Oil & Gas17%

Pharma23%

Food Processing

5%

Plastic10%

Other26%


Automotive Market We see two distinct drivers for higher automation investment by the Auto industry in this cycle, compared with prior cycles: (i) improved balance sheets and more product-centric competition among developed market Auto OEMs; (ii) rising capex among the emerging market-based Auto OEMs as they seek to take market share globally.

Improved balance sheets among developed market OEMs

The US-based automotive OEMs in the prior cycle were hampered by significant balance sheet constraints. However, the Big Three have seen their balance sheets restored to a relatively strong position in recent years, helped initially by government bail-outs. The stronger balance sheet position clearly allows for increased capital spending, which is essential for these companies to re-take market share as they revamp product offerings.

14 August 2012


Exhibit 55: GM and Ford Total Debt (2002-11) USD in billions, unless otherwise stated

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

2006 2007 2008 2009 2010 2011

GM AutomotiveF Automotive

Source: Company Data

Examples of the capex plans of two major automotive OEMs are shown below. Ford plans to spend $5-6bn in global capex for 2012, representing a 20% increase from 2011 at the midpoint. Volkswagen has targeted ~$18bn in planned China investments from 2012-16 ($3.6bn per year average). This 5-year China capex target represents ~2x Volkswagen’s 2011 total global capex.

Exhibit 56: Ford targeting $5-6bn in capex for 2012 USD in millions, unless otherwise stated

Exhibit 57: VW plans to spend EUR14bn in China EUR in billions, unless otherwise stated

Source: Ford Source: Volkswagen

Partly as a result of shifting competitive dynamics, and efforts to grow their market share in emerging markets, OEMs are continuing to announce significant new plant investments.

14 August 2012


Exhibit 58: Global Auto OEMs continue to announce new plants US$ in millions, unless otherwise stated Company Date Cost CountryNissan Announced plans on 6/25/2012 $785mn China Fiat Completed 6/28/2012 $786.73mn China Volkswagen Announced on 4/23/2012 plans to build 7th factory in China -- China Ford to build 5th factory in China to open in 2015 part of $5 bn invest. $760mn China Audi 2nd factory in China begins production of A3 in 2013 -- China Audi due to start production in 2016 -- MexicoSuzuki due to start operations by 2016 40mn rupees IndiaToyota began production in 5/2012 -- China

Hero MotoCorp 2013 ~$464mn India


We show below capex forecasts for the incumbent Auto OEMs globally. Our Automotive team estimates that capex amongst major OEMs will increase by approximately 20% in both 2012 and 2013. This likely implies significant increases in automotive automation investment over the same period.

Exhibit 59: Capex YoY Change amongst major automotive OEMs %, unless otherwise stated YoY Capex Change 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013ENorth AmericaFord 15% -12% 9% -4% -12% 10% -32% -10% 13% 26% 3%GM -4% 0% 18% -4% 0% -1% -33% -2% 32% 22% -6%

JapanToyota -4% 14% 41% -3% 0% -12% -56% 21% -10% 15% 13%Honda -10% 45% 22% 37% 4% -4% -30% -18% -12% 28% 43%Nissan 13% 12% -1% 7% -16% -11% -29% 24% -17% 42% 37%Mazda 4% 49% 6% 10% -5% 8% -64% 101% -46% 91% 46%Suzuki 41% 52% -28% 27% -29% 54% -24% 27% 121% -8% 68%Daihatsu 13% -2% 59% -32% 44% -31% -52% 11% 71% 27% -20%Fuji Heavy 15% 14% -34% 6% -5% 3% -3% -23% 26% 33% 11%

EuropeVolkswagen -4% 14% 41% -3% 0% -12% -56% 21% -10% 15% 13%Fiat -10% 45% 22% 37% 4% -4% -30% -18% -12% 28% 43%Peugeot 13% 12% -1% 7% -16% -11% -29% 24% -17% 42% 37%Renault 4% 49% 6% 10% -5% 8% -64% 101% -46% 91% 46%Daimler 41% 52% -28% 27% -29% 54% -24% 27% 121% -8% 68%BMW 13% -2% 59% -32% 44% -31% -52% 11% 71% 27% -20%

Global Total 1% 13% 23% 4% -2% -7% -42% 7% -1% 23% 22%


We show below a recent split of automotive industrial robot demand by country, which gives a fair idea of where the OEMs are allocating their capex.

Exhibit 60: Automotive robot shipments (2010) US$ in millions, unless otherwise stated

Automotive Robot shipments (in units) 2010 % of totalChina 8,300 20%Korea 7,056 17%Germany 6,929 17%North America 5,368 13%India 540 1%Brazil 307 1%Russia 61 0%Other 12,161 30%Total 40,722 100%

Source: IFR 2011

Even in Europe, where short-term the volume environment for automotive sales looks bleak (our European automotive team published a sector report In need of a fresh start in early July, where they cut their estimates for regional volume demand to -7% / +0.5% for 2012 / 13 respectively), capital spending and investment in R&D is set to rise. Higher

14 August 2012


capex and R&D are required not only to meet new emissions standards and other legislation, but also to keep pace with competitors (most companies are highlighting the need for catch-up capex for both model renewal, and emerging market penetration). Aggregate capex (Figure 61) is forecasted to rise for the mass-makers to EU16bn+ in 2014 against a 2010 trough of EU8bn, and a 2008 peak of EU11bn. For the premium OEMs, capex is forecasted to rise to EU10bn in 2014, against a 2009 trough of EU5bn, and a 2008 peak of EU7bn.

Figure 61: We believe capex will need to increase to unprecedented levels… Aggregate capex for premium and mass makers in €€ bn

Figure 62: … as will R&D to support global legislation and changing consumer requirements Aggregate R&D spend for premium and mass makers in €€ bn

0

4

8

12

16

20

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

e

2013

e

2014

e

Agg

rega

te C

apex

€€bn

Premium Mass

0

4

8

12

16

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

e

2013

e

2014

e

Aggr

egat

e R&

D €€b

n

Premium Mass


Rising competition from emerging market-based OEMs

China’s Great Wall Auto is trying to compete with the incumbent OEMs, and it sees automation investment as a key way of enabling this. Within the automotive sector, we can see in Exhibit 63 that most emerging economies are yet to significantly invest in automotive robotics.

14 August 2012


Exhibit 63: Automotive industrial robots per 10,000 employees robots in units, unless otherwise stated

0

200

400

600

800

1000

1200

1400

1600

Source: IFR 2011

Emerging market-based Auto OEMs gained domestic market share in the early 2000s, but have subsequently seen a slight drop / stable share since 2005. This trend is apparent in both China and India (see Exhibit 64 and Exhibit 65 below).

Exhibit 64: Indian OEM share of domestic utility vehicle (UV) market by revenue %, unless otherwise stated

Market Share 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Hindustan Motors 1% 1% 0% 0% 0% 0% 0% 1% 0% 0%

Mahindra & Mahindra 27% 31% 34% 33% 32% 30% 30% 32% 36% 32%

Tata Motors 15% 15% 16% 14% 14% 16% 18% 21% 20% 18%

India 42% 47% 50% 47% 47% 46% 48% 54% 56% 50%

International 58% 53% 50% 53% 53% 54% 52% 46% 44% 50%

Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Source: Company data, Credit Suisse estimates

We think this drop off should be a catalyst for emerging competitors to invest further capital in their businesses in an attempt to drive domestic market share back up.

Exhibit 65: China OEM share of domestic passenger cars by unit %, unless otherwise stated

Total Units 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

FAW 10.9% 8.6% 10.4% 9.5% 7.4% 6.8% 6.2% 5.3% 5.4% 3.4%Dongfeng 0.0% 0.0% 0.0% 0.5% 1.1% 1.2% 1.4% 1.7% 2.0% 2.6%Chery 4.5% 4.4% 3.8% 4.8% 5.8% 6.0% 5.3% 4.8% 4.9% 4.4%Geely 0.0% 0.0% 2.7% 3.8% 3.9% 3.5% 3.3% 3.2% 3.0% 3.1%Changan 0.0% 0.0% 0.1% 7.7% 5.2% 5.1% 4.6% 6.3% 6.7% 4.9%Brilliance 0.8% 1.3% 0.5% 0.4% 1.4% 2.1% 1.5% 1.4% 1.6% 1.4%BYD 1.5% 1.1% 0.8% 0.3% 1.2% 1.6% 2.5% 4.3% 3.8% 3.1%Great Wall 0.0% 0.0% 0.0% 0.7% 0.8% 1.0% 1.1% 1.5% 2.1% 2.5%

China 17.7% 15.4% 18.2% 27.6% 26.8% 27.4% 26.0% 28.6% 29.6% 25.3%International 82.3% 84.6% 81.8% 72.4% 73.2% 72.6% 74.0% 71.4% 70.4% 74.7%Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%


We think this trend of new investment has already begun. We show recent examples of capital investment by major emerging automotive OEMs below.

14 August 2012


Exhibit 66: Emerging Market Automotive OEM Investment USD in millions, unless otherwise stated

Company Country Date Announced Date Set to Open Cost Country of Investment

Chery China 2012 2014 $39mn Malaysia

Great Wall China 2012 -- $100mn Russia

Great Wall China -- 2012 $152mn Bulgaria AvtoVAZ Russia 2011 2015 $514mn Kazakhstan

Tata India 2011 -- $556mn England

Chery China 2010 2013 $400mn Brazil Source: Company data

Emerging market-based OEMs are also aiming to increase exports; the expansion of emerging OEMs into international markets should imply greater capital investment in automation, given international safety standards and elevated quality demands.

Exhibit 67: Mahindra & Mahindra exports have increased

175% since 2010 Units, unless otherwise stated

Exhibit 68: Great Wall Motors has seen 66% export growth

since 2008 RMB in billions, unless otherwise stated

Source: Mahindra & Mahindra, June 2012 Source: Great Wall 2011 Annual Results, Mar 2012

Tata’s acquisition of Jaguar and Land Rover, and subsequent increase in capex, is one example of this. For instance, Tata announced in September 2011 its plans for a ~$550mn investment in a Wolverhampton, UK plant for low emission Jaguar and Land Rover vehicles. Further, total product and other investment increased by 77% in 2012 versus 2011 for the combined Jaguar and Land Rover brands.

Petrochemical Market We see two distinct drivers for higher automation investment by the Petrochemical industry in this cycle, compared with prior cycles: (i) increased efforts by emerging Asian countries to develop domestic refinery / chemical processing capacity; (ii) low gas prices stimulating increased petrochemical plant investments in the US.

Refining capacity growth in emerging markets

Our Asia O&G Team published a report APAC Refining - Refining expectations: Buy when low on June 5 2012 in which they laid out their view that ‘Capacity additions are likely to gain momentum into 2013E.’ After declines in global refining capacity in 2011, we are likely to see strong capacity additions growth, to 0.8 / 1.4 / 1.8 / 2.0mbopd in 2012/‘13/‘14/‘15 respectively. On a quarterly basis, refining capacity additions are set to

14 August 2012


peak around 3Q14 / 1Q15. Average annual additions in the last up-cycle (2004-2010) were 1.1mbopd, peaking at 1.7mbopd in 2009.

Exhibit 69: Addition to global refining capacities mbopd, unless otherwise stated

Exhibit 70: Quarterly capacity addition forecasts mbopd, unless otherwise stated

Source: BP Stats, OGJ, Credit Suisse estimates Source: OGJ, Credit Suisse estimates

A large portion of the capacity growth is due to new refineries in China (27% / 49% of global additions in 2012 / 2013 respectively – Exhibit 71 and Exhibit 72) and India (33% / 12% of additions in 2012 / 2013 respectively). In China, our team believes that key drivers of growth are domestic demand, and the desire to reduce the dependence on imports.

In India, public sector companies are building more capacity – this is potentially because they are looking to reduce the country’s dependence on private sector refiners.

Exhibit 71: 2012E refining capacity additions %, unless otherwise stated

Exhibit 72: 2013E refining capacity additions %, unless otherwise stated

Source: OGJ, Credit Suisse estimates Source: OGJ, Credit Suisse estimates

In the Middle East, many projects have seen material delays in recent years, due to escalating costs / the financial crisis. Saudi Aramco is planning two large refineries, although these are not expected prior to 2015. Other projects though are now moving ahead in the region - key ethylene capacity addition announcements are shown below.

14 August 2012


Exhibit 73: Middle East Ethylene Capacity Additions US$ in millions, unless otherwise stated

Country Company Capacity (KT per year) Expected StartupSaudi Arabia Saudi Polymers 1300 2012Iran Kavyan Petrochemical 1000 2012Qatar Qatar Petrochemical 720 1Q2013Saudi Arabia SipChem 200 4Q2013UAE Abu Dhabi Polymers 1500 4Q2013Iran Kavyan Petrochemical 1000 2013Iran Ilam 450 2014Saudi Arabia Sadara (Dow /Saudi Aramco) 1200 2015/16Qatar Qatar Petroleum/Shell 1300 2017Kuw ait PIC 1400 2017/18Qatar Qatar Petroleum/QAPCO 1300 2018

Source: HIS, Company data, Credit Suisse estimates

Better outlook for developed markets, particularly the US

The recent history of downstream petrochemical investment in the US and W Europe has been fairly bleak. However, this is changing in the US, given technology changes in extraction, in particular around hydraulic fracturing technology, which is leading to substantial production increases in natural gas. The effect on natural gas prices has been particularly evident over the past 12 months; our Energy Team expects that this will persist.

Exhibit 74: US natural gas reserve/production change YoY% change, unless otherwise stated

Exhibit 75: US natural gas price USD per MMBtu, unless otherwise stated

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

U.S. Dry Nat Gas Proved Reserves (Bn Cubic Feet)

U.S. Dry Nat Gas Production (Mn Cubic Feet)

$-

$2

$4

$6

$8

$10

$12

$14

$16

Source: EIA Source: Factset

Cheap gas prices are positive for process automation investment because the cheap feedstock is resulting in improved economics for companies to invest in US petrochemical capacity, potentially with a view to increasing exports. According to ICIS for instance, currently planned US ethylene capacity additions total 32% of existing capacity.

14 August 2012


Exhibit 76: Announced Ethylene capacity expansions US$ in billions, unless otherwise stated Company Project Capacity (tonnes) Location Cost ($bn) Start-upExxonMobil Chemical New cracker 1.5mn Baytow n, Texas NA 2016Chevron Phillips Chemical New cracker 1.5mn Cedar Bayou, Texas NA Q1 2017Dow Chemical New cracker w orld-scale US Gulf Coast NA 2016-17Shell New cracker w orld-scale US Northeast NA 2016-17Formosa Plastics New cracker 800000 Point Comfort, Texas 1.7 2016Dow Chemical Restart 390000 St. Charles, Louisiana NA end 2012Westlake Chemical Expansion 108863 Lake Charles, Louisiana NA H2 2012Williams Expansion 272158 Geismar, Louisiana .35-.40 Q3 2013INEOS Debottleneck 115000 Chocolate Bayou, Texas NA end 2013Westlake Chemical Expansion 113399 Lake Charles, Louisiana NA 2014LyondellBasell Expansion 386000 La Porte, Texas NA 2014

Considered expansionsSasol New cracker 1.0-1.4m Lake Charles, Louisiana 3.5-4.5 NAIndorama Ventures New cracker 1.3m NA NA 2018LyondellBasell Expansion NA Channelview , Texas NA NASABIC New cracker w orld-scale US NA NABraskem New cracker NA US NA NAOccidental Chemical New cracker NA Ingleside, Texas NA NAAither Chemicals New cracker NA US Northeast 0.75 2016PTT Global Chemical New cracker NA NA NA NA Source: ICIS

The American Chemistry Council also believes that shale gas will be a strong driver of the chemical industry, estimating that planned US petrochemical capacity additions (~$30bn) through 2017 will total 25-30% of the current installed base.

From a bottom-up standpoint, we highlight some recent commentary which underlines the changing outlook for US investments.

Exhibit 77: US Petrochemical Investment Commentary Company Date Corporate Commentary

Chevron 6/13/2012"Five years ago, the expectation was that the U.S. would become a net importer of ethylene. Now we are expecting that we will not only meet U.S. demand domestically, but will become a major exporter."

XOM 6/1/2012

"We believe the North American natural gas resource is abundant and can support both domestic energy needs as well as exports to the global market. The proposed investment reflects Exxon Mobil's continued confidence in the natural gas-driven revitalization of the U.S. chemical industry."

Williams 9/20/2011

"The shale gas revolution in the United States, coupled with continued strong crude oil prices, has given U.S.-based ethylene manufacturing a tremendous cost advantage over many other supply regions. The results are a revitalized North American petrochemical business and a U.S. ethylene market short of supply.

Sasol 9/13/2011

Since that point in time, we have focused an increasing amount of our energy on cultivating relationships with the companies most likely to have the capacity and willingness to bring this type of technology to fruition in the U.S. We are thrilled that Sasol has selected Calcasieu Parish as its preferred U.S. location for this project.

Westlake Chemical 4/5/2011

"New technical developments in the natural gas industry make expansion in North America attractive and we are accelerating engineering and feedstock sourcing efforts in order to reduce our external purchases of ethylene and provide for attractive future Westlake growth."


Food & Beverage Market Rising healthcare demand in emerging markets is a theme which many investors are very familiar with, and the strong growth evident in China still for healthcare equipment, despite the broader economic slowdown, bears this out. One slightly less well known corollary, in our view, is the strong outlook for emerging market investments in food and beverage

14 August 2012


markets, driven by increasing food safety concerns – it is natural that as healthcare and hygiene demands grow in the middle classes of emerging markets, increased food quality will be perceived as at least as important as better healthcare. One other driver of higher investment is the growth in the consumption of processed and packaged foods in emerging economies.

If we compare food and beverage relative to most other industrial end-markets, the relative stability of customer investment is somewhat unique.

Exhibit 78: Food & Beverage capex is fairly non-cyclical Euros in millions, unless otherwise stated

Source: GEA CMD 2012

There are two main features in China which should spur increased investment in food & beverage in this cycle: (i) the 12th Five-Year Plan explicitly calls for a rise in domestic consumption; (ii) the increasingly strict food hygiene regulations. For instance, on June 1, 2009, China’s first Food Safety Law came into effect, following a contaminated milk problem in 2008.

Exhibit 79: Automation expenditures for food and beverage by region %, unless otherwise stated

EMEA45%

Asia25%

North Am25%

Lat Am5%

Source: ARC 2009

‘Food scares’ have continued since then, which is likely to yield increasingly strict enforcement of food hygiene standards. Walmart for instance had to close 13 stores in

14 August 2012


2011 for a few weeks, due to mislabeling of a pork product. We have also seen the supreme court in China order judges to issue harsher sentences for food safety violations.

Exhibit 80: Recent food & beverage hygiene scares reported in the Chinese media Title of article Date Publication Summary

Bright Dairy recalls milk from stores 6/28/2012 China DailyA major Chinese producer of milk products, said it has recalled a batch of milk tainted by an alkaline cleaning product.

Coca Cola sorry over handling of drinks scare 5/5/2012 China DailyBetween Februrary 4th and 8th 120,000 boxes of drinks were contaminated with excessive amounts of chlorine in Shanxi (of the 120,000, 76,391 were distributed).

Ministry to withdraw 38 food additives 4/10/2012 China DailyChinese officials announced an initiative to remove 38 food additives due to health concerns.

Growers held after safety scare over bean sprouts 2/28/2012 People's Daily Local authorities in Shanghai discrovered bean sprouts with illegal additives.

Online reports prompt crackdown on gelatin-injected shrimp 2/16/2012 People's DailyOnlie reports lead to discovery of an artifical substance in frozen shrimp used to increase shrimps' weight.

Red Bull off shelf over additive fears 2/11/2012 China DailyRed Bull drinks removed from stores due to fears regarding illegal additive ingredients.

S. China province finds cancer-causing mildew in cooking oil 1/19/2012 China DailyFood safety inspectors discover presence of aflatoxin, a carcinogenic mildew, in cooking oil products.

Quality must be controlled 12/29/2011 China DailyEvidence of potential cancer causing substance found in Mengniu Dairy Co. Ltd.'s milk products.

Flu scare sparks mass bird cull in HK 12/22/2011 China Daily17,000 live chickens were killed by the government due to fears of H5N1 avian flu virus in Hong Kong.

590 school cafes punished over unsafe food 5/5/2012 People's DailyChina officials punished almost 600 school administrations, in the form of fines and license revocations, for inadequate food safety.

Pesticide in drink kills boy 12/2/2011 China Daily A boy was killed due consumption of a daily drink containing a lethal pestiside. Source: China Daily, People’s Daily

The dairy market is one of the key areas of concern regarding food and beverage hygiene. Rising consumption of dairy products is a clear trend (see the below chart), and requires substantial investment.

Exhibit 81: China dairy production and consumption Metric tons in thousands, unless otherwise stated

Source: USDA FAS 2011

In a recent CS report APAC: Consumption S curve, Viktor Shvets highlighted the strong outlook for dairy demand – we show the Heat Map from the report below.

14 August 2012


Exhibit 82: APAC country: Industry Heat Map China India Korea Indonesia Malaysia Thailand Philippines

Cereals low low low low low low lowRice low low low low low low lowSugar high low low medium low low lowFruits low medium low low medium low lowVegetable Oils medium low low medium low medium mediumBeverages medium high low low low low mediumWine high low high low low high highBeer low high medium low low medium mediumStimulants high medium high low medium high lowRed Meat medium low medium high high high mediumWhite Meat low high low high low medium lowMilk high low high high high high high

Apparel high medium low high high medium highAppliances high high medium medium medium high lowAuto high low low high low medium highTwo Wheelers high high low medium medium low highConsumer Loans high medium medium high low medium highEducation high medium medium high high high highHealthcare high high medium high high high highPC/Laptop high high low high medium high lowTourism/Travel high high medium high low low high

Basics: Food& Beverage

DiscretionarySpending

Source: Credit Suisse estimates

We can see below recent examples of how Chinese dairy companies have tried to substantially increase domestic technology content:

Exhibit 83: Recent dairy-related investment in China Title of article Date Publication Summary

Danish dairy firm to sell milk powder in China 6/23/2012 China DailyDanish dairy giant Arla Foods will sell 20,000 tons of Danish-produced milk powder to China annually under a 10-year contract, the company said in a press statement Friday

Mengniu to use Danish tech to improve product quality 6/20/2012 China DailyMengniu will benefit from improving its brand image from technology upgrades and believes the Chinese dairy industry can reach a world-class standard

Domestic milk powder quality at its best 5/28/2012 China DailyAdvanced processing technology and equipment, perfect quality assurance system and improved national regulation have provided support to the industrial change.

New Zealand dairy giant unveils plans for more farms in China 4/13/2012 China DailyThe company unveiled a strategy that amounted to more than 100 projects, including many underway, and involved a strong push on the fast-growing emerging markets of China

Source: China Daily

Rising consumption of processed foods

The emerging middle classes generally are consuming more processed and packaged foods, which is leading to accelerated investment in the food and beverage segment of process automation. As an example, GEA estimates a +17% / +25% 2010-15 CAGR for the Western supermarket and fast-food markets in China respectively.

14 August 2012


Exhibit 84: Strong China demand growth for both supermarkets and fast food %, unless otherwise stated


We show below processed food consumption by country. It is clear that the developing economies have a large amount of room to grow relative to their developed counterparts.

Exhibit 85: Processed Food Consumption by Country (2009) Pounds per capita per year, unless otherwise stated

183

112

130

37

251

70

115

42

29

47

28

19

19

19

24

9

10

77

67

77

14

17

25

7

14

12

10

20

9

32

16

12

3

9

108

149

175

433

53

144

81

117

13

7

298

315

265

146

147

127

117

88

31

25

63

77

54

45

75

49

51

28

24

0 100 200 300 400 500 600 700

US

Spain

France

Mexico

Japan

Russia

Brazil

S. Africa

China

IndiaProcessed frozen, dried and chilled food, and ready-to-eat mealsSnacks and candy

Soup and canned food

Pasta

Bakery goods

Dairy products

Sauces, dressing, condiments

Source: Euromonitor, USDA Economic Research

In China, Latin America and Brazil, ~10% of meat is processed, as compared with a range of 35% to 70% in the developed economies. In the coming years, we expect investment in meat processing to increase.

14 August 2012


Exhibit 86: Processed meat consumption US$ in millions, unless otherwise stated

Source: GEA Capital Markets Day 2011

In China specifically, the processed food market totaled ~$140bn in 2011, having grown at a 13.3% CAGR from 2007-11. Of the total market, ~$28bn is dairy-related, ~$19bn is baked goods, and ~$15bn is general processed foods.

Exhibit 87: Processed Food Consumption Split by Revenue in China ($140bn market) %, unless otherwise stated

Dairy20%

Baked13%

Processed11%

Other56%

Source: New Zealand Trade & Enterprise

14 August 2012


Margin Profile Operating margins for Industrial Automation vendors tend to be above-average when we compare them with other industrial end-markets; given the above average sales growth profile (which we described earlier in this report), this should yield a superior returns profile overall. In this section we also explain why we think that this profitability premium is likely to be sustained.

Within Industrial Automation, factory automation margins tend to see higher peaks relative to process automation (due to the higher ‘solutions’ and project-based content in the latter), but also more volatility (due to its greater top-line volatility, which we discussed in an earlier section of this report). As regards the bifurcation of Instruments and Controls, we do not see a significant margin difference, although longer-term Instruments margins are likely to be under greater threat from commoditization by new entrants, in our view (we discuss the implications of this in the ‘Convergence’ section of the report).

Industrial Automation margins are above-average Factory and process automation end markets tend to produce higher than average profit margins when compared to other EE/MI end markets, as we show below. This has been true both in times of strong economic demand (2005-2007, and 2010-2011), and during downturns (such as 2009).

Exhibit 88: EE/MI operating margins by end market %, unless otherwise stated End Market EBIT MarginSector End-market 2005 2006 2007 2008 2009 2010 2011 2012E

Appliances 6% 6% 7% 3% 4% 6% 4% 5%Elevators / Escalators 12% 13% 10% 14% 15% 16% 17% 16%Fire & Security 12% 10% 11% 12% 11% 12% 13% 14%HVAC 7% 7% 8% 8% 6% 8% 8% 9%Lighting 16% 15% 12% 10% 6% 13% 10% 9%Low Voltage 14% 15% 14% 15% 13% 15% 14% 14%Water Management 14% 13% 13%Oil & Gas Equipment 8% 10% 13% 16% 16% 12% 12% 12%Power Grid Equipment 12% 13% 15% 15% 14% 13% 12% 12%Thermal Power Generation 11% 9% 12% 11% 12% 15% 15% 14%Wind Power Generation 8% 8% 7% 5% 6% 3% 3% 4%Factory Automation 17% 18% 19% 17% 11% 19% 19% 18%Factory Tools 17% 18% 19% 17% 3% 12% 14% 14%Industrial Products 11% 10% 14% 12% 9% 13% 14% 14%Process Automation 12% 13% 14% 14% 12% 14% 15% 15%Test & Measurement 14% 14% 16% 15% 13% 15% 17% 18%Auto components 10% 9% 10% 4% 2% 10% 12% 12%Aerospace Engines 14% 13% 15% 14% 15% 15% 15% 15%Biz Jet 10% 12% 14% 14% 9% 9% 9% 11%Civil Aero AM 23% 24% 24% 24% 24%Civil Aero OE 10% 10% 7% 6% 7%Helicopters 11% 5% 7% 9% 10% 12% 12% 13%Rail Loco's + Signalling 8% 9% 13% 9% 8% 8% 8% 10%Defense 14% 13% 12% 13%Healthcare 14% 14% 14% 14% 14% 15% 15% 15%

Network Power 11% 11% 13% 13% 12% 13% 12% 12%

Buildings 11% 11% 10% 10% 9% 12% 11% 11%Energy 10% 10% 12% 12% 12% 11% 10% 11%Industry 14% 15% 16% 15% 10% 15% 16% 16%Transport 11% 10% 12% 12% 11% 12% 12% 13%Others 12% 13% 13% 14% 13% 14% 13% 13%Overall Average 12% 12% 12% 12% 11% 12% 12% 13%

Energy

Buildings

Others

Transport

Industry

Annual


We show below the spread of operating margins across a range of industrial automation vendors – there is a wide range, from single-digit levels, towards 50%. However, the vast majority of vendors enjoy margins in the 15-20% range. Instruments vendors tend to earn higher margins than the Controls vendors, although there is more volatility in Instrument margins (higher incremental margins).

14 August 2012


Exhibit 89: Automation operating margins by company and segment (2011) %, unless otherwise stated

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%


Why we think high margins are sustainable We think this above-average margin profile is sustainable for the following reasons:

i) High degree of consolidation;

ii) Diverse customer base;

iii) Limited new entrants;

iv) Limited capacity additions by incumbents;

v) Disaggregated route to market;

vi) High degree of price discipline.

High degree of consolidation

Although the overall industrial automation is fairly disaggregated, the market in reality comprises myriad sub-segments of controls and instruments, most of which are complementary, but not overlapping. For instance, we can see in the below examples, that the top 5 players in the PLC and DCS markets have fairly high combined global market share. This should create conditions which are supportive of price discipline, as each vendor will fear one or two of its large competitors may follow suit if it chooses to cut prices, which will lower overall industry margins.

14 August 2012


Exhibit 90: PLC Market Share %, unless otherwise stated

Exhibit 91: DCS Market Share %, unless otherwise stated

Siemens, 31%

Rockwell Automation,

22%

Mitsubishi, 14%

Schneider, 9%

Omron, 7%

Moeller, 2%

Other, 10%

ABB20%

Emerson17%

Yokogawa8%Invensys

4%Honeywell

7%

Rockwell Automation

2%

Other42%


Diverse customer base

We discussed earlier that industrial automation products are sold into a variety of end-markets, and as a result, many automation vendors have a naturally diversified customer base, and are not reliant on a few major customers. This should mean that the automation vendors are in a relatively strong position vis-à-vis their customer base.

Exhibit 92: Automation Market Revenue by End Market (2011) %, unless otherwise stated

Power, 10.5%

Textile, 5.5%

Automotive, 16.7%

Chemical, 14.1%

Packaging, 9.1%

Plastic, 5.3%

Oil & Gas, 9.3%

Pharma, 12.4%

Food Processing,

5.8%

Other, 11.3%

Source: Markets & Markets

The degree of diversity will vary from market to market – as an example, the food industry is highly diversified; automotive is much more concentrated at the customer level.

14 August 2012


Exhibit 93: GEA’s largest food industry customer is 1% of sales


Limited new entrants

One advantage for the automation industry is that it is relatively difficult for new entrants to win market share, and hence pressure the margins of incumbent vendors. We see two main sources of competitive threat – the Chinese vendors (given how successful the Chinese have been in other industries), and threats from Western companies who appear to be taking a closer look at entering the market.

We show below our estimate of the threat level posed by emerging Chinese competitors (the source of most new entrants in manufacturing today) in various industrial end markets. We believe the current threat from China is low for both process and factory automation. In the mid-term, we believe Chinese automation vendors pose a medium threat in process automation and a low threat to factory automation, within China; we do not expect the threat to increase significantly in export markets.

14 August 2012


Exhibit 94: China Threat by End Market

Sector End-market Current Mid-term Current Mid-termElevators / Escalators High High Low MediumFire & Security High High Low MediumHVAC High High Medium Medium

Lighting High High Medium MediumOil & Gas Equipment Low Medium Low LowPower Grid Equipment High High Medium HighThermal Power Generation High High High High

Wind Power Generation High High Medium HighProcess Automation Low Medium Low LowFactory Automation Low Low Low LowTest & Measurement Low Low Low LowFactory Tools Low Medium Low LowAuto components High High Low LowBiz Jet OE Mid High Low MediumCivil Aerospace AM Low Low Low LowCivil Aerospace OE Low Medium Low LowHelicopters (OE+AM) (C+D) Low Medium Low LowRail Loco's + Signalling High High Medium HighDefense (OE+AM) Low Medium Low LowHealthcare High High Low Medium

Transport

Industry

China Threat by End Market

Other

Threat within China Threat outside China

Buildings

Energy


As we have discussed in other reports (such as US EE/MI: Update on competitive threats, dated October 28, 2010), we think the markets which are most at risk from emerging Chinese competition include those which share some of the following characteristics: (i) simple route-to market (for instance in industries such as Power or Rail, which tend to have one or two customers only, particularly in emerging markets); (ii) large, high-profile, big-ticket capital investment projects (as the savings from discounting can be significant for the customer, and the size of the projects will encourage a large number of supplies to ‘try their luck’); (iii) explicit encouragement by the Chinese government of domestic champions (we see this in markets such as High Voltage power grid equipment, wind turbines and rail rolling stock equipment). The industrial automation market in our view does not share these characteristics.

This is not to say that there are no emerging threats - we show some of the rising Chinese, Korean and Taiwanese competitors below.

Exhibit 95: Competitive Landscape Amongst Emerging East Asian Competitors USD in millions, unless otherwise stated Company Country of Origin Market Cap (USD mn) EBIT Margin Automation Exposure Key Products Revenues 2011

Airtac Taiwan 737.36 32% High Pneumatic cylinders, valves 186.7China Automation Group China 234.18 20% High DCS 292.6Doosan Infracore Korea 2624.69 8% Low Machine tools 4000.0

Hiwin Taiwan 2168.73 29% High Linear motion, ball screws, actuators 523.6Hollysys China 453.94 17% High DCS, SCADA 262.8GSK CNC Equipment (Pvt.) China CNCSiasun China 1110 15% High Robots, Energy Automation Equipment 124.5Supcon (Pvt.) China DCS and SensorsWuhan Huazhong Numerical Control China 230.6 2% High CNC 67.4


The emerging players are targeting both the Controls and Instruments parts of the market. For instance, in Instruments, Hyundai Heavy has recently re-outfitted one of its unrelated production lines to construct industrial robots (primarily for LCD handling and automotive assembly), and is doubling its production capacity. The company is targeting a top 3 global market share by 2014. Also, Airtac and Hiwin (both from Taiwan) have had good success

14 August 2012


at winning share in pneumatics / linear motion products respectively. If we look at the experience of other markets, it appears that the probability of market share gain success is higher for Chinese players in Instruments, rather than in Controls, given the necessity of high intellectual property content and manufacturing technology if a company is to succeed in the latter field.

In Controls, several Chinese companies are though trying to make some headway. For instance, Wuhan Huazhong Numerical Control is a pure play focused on the CNC market (where the incumbent leaders are Siemens and Fanuc). Last November we met with China Automation Group and Hollysys (which in late July announced the release of HOLLiAS-K, its newest generation DCS system), two of the major local Chinese listed automation vendors. One interesting point was that the Process Automation market appeared easier to penetrate for new players than the Factory Automation market, potentially due to the more SOE-heavy nature of Process Automation (and the state owned enterprises are more willing to give business to a local vendor).

The key points from the two meetings were as follows:

■ China Automation Group: CAG has sales of RMB1.9-2bn, with the majority of sales (90%) accruing from the Petrochemical industry (CAG offers safety and control systems), where the key product is the Integrated Turbine Compressor Control system (ITCC, which controls the flow of materials), and the balance is rail signaling (where the key product is the Rail Interlocking system, or RIS, which directs trains along the rail lines). Key customers are mostly domestic SOEs, including Petrochina, CNOOC, and the Ministry of Rail (80% of rail sales, with Subway systems forming the balance). The company was founded by a former Triconex salesperson.

■ Competitive landscape / market share strategy: CAG claims a 71% share in the petrochemical niche market (followed by HIMA at 9%, ICS, Siemens and Honeywell at 3-4% each), and 36.5% in the rail niche (followed by CSRC at 31%). CAG claims advantages against other locals include leading technology, cooperation with leading foreign companies, after-sales service, and a more entrepreneurial approach than SOE rivals. Against multi-national competitors, CAG claims strengths include better access to local SOEs, closer customer contact, familiarity with local regulations, and government support for local players. Hollysys is the most formidable local competitor, followed by Supcon.

■ PLCs vs DCS systems: CAG believes that it is harder for local players to succeed in PLCs than DCS, because the DCS market tends to be dominated by SOE customers, who are more likely to 'take a chance' on a local DCS supplier, than private sector companies who tend to be the PLC customer. Local PLC companies tend to struggle to expand given very high employee attrition rates.

■ M&A / sourcing: M&A remains a key part of CAG's growth path, and it aims to start undertaking foreign deals as its market cap and cash position increase. The company currently buys its petrochemical hardware from Triconex (part of Invensys; CAG is 40% of Triconex's global sales), and its rail hardware from a Japanese supplier.

■ Cost base: labor costs represent 10% of the COGS, against 40% at the foreign competitors, according to the company.

■ Hollysys: Hollysys sales are predominantly domestic, and are set to reach just over $350m in FY12. 52% of sales accrue from Industrial Automation (over 90% of which is DCS / process automation, and 5% PLCs / factory automation), High-Speed Rail is 28%, Subway Automation 18%, and Nuclear Automation is 2%.

■ PLCs vs DCS automation: The addressable domestic markets for DCS in China is seen at $1-1.5bn annually, and PLCs at $1.5-1.8bn. The company anticipates

14 August 2012


medium-term end-market growth in PLCs of 10-13%, against 7% in DCS. Theoretically, margins should be higher in PLCs than DCS, given the latter requires more system integration, and the former benefits from strong operational leverage as it is much more of a volume game. The DCS market is easier for rising local companies to penetrate, as SOEs tend to be much more prevalent in DCS markets, and they are more willing to give local providers a chance, than private companies and multi-national corporates who dominate the PLC markets (automotive assembly etc) in China.

■ Competitive strategy: Hollysys claims a number 4 position in DCS systems in China, with 11% market share (ahead of local peer Supcon which has 8-9% share), behind the market leader ABB (at 15-16%) and then EMR and Siemens. Its market share in PLCs it sees at only 1% currently, but it is growing sharply (80-100%). The company is targeting the Safety and Plant Design segments as well in automation. HOLI sees its key advantages as providing a greater responsiveness to customer needs than the incumbent Western / Japanese vendors. It also offers 10-20% price discounts on average, although these can reach 30-40% in some cases. The R&D / sales ratio has reached 7.7%, although this has now likely peaked, as a number of large product launches are due in the next year.

GE: Turning away from the Chinese companies, we see the potential for GE, of the Western companies, to offer a disruptive threat to the incumbents (particularly in the process automation field), for the following reasons:

■ Statement of intent: At its Energy Analyst Day in September 2011, the company highlighted the scope to address ‘energy intensive customers’ in Process Solutions, for a potential $100bn opportunity;

Exhibit 96: Potential attractive markets for Process

Source: GE

■ GE already has a starting point: GE’s process automation business was $3.7bn in sales in 2010, and ~$4bn in sales in 2011 on our estimates. Most of their exposure is in Oil & Gas, but we see opportunities beyond this end-market. Process Solutions currently resides within GE’s Oil & Gas reporting segment, representing 29% of segment sales. Within the Home & Business Solutions reporting segment, the

14 August 2012


company also has a PLC business (see our profiles of the major automation vendors later in this report, for more details).

Exhibit 97: GE Process Solutions

Source: GE Energy Analyst Day Presentation, September 2011

■ GE is able and willing to do acquisitions: GE has built up strong global positions in several end-markets in the past decade (wind turbines, oil & gas in particular) via M&A. The company also is in a stronger position to deploy capital for M&A following the Federal Reserve’s approval that GECC can resume dividend payments to the parent company. In August this year, GE announced a small acquisition in process instrumentation, Norway-based Presens, which develops pressure sensors.

Limited capacity additions by incumbents

Several industrial end-markets (such as power grid equipment, light business jets, and wind turbine equipment) are suffering from materially lower profit margins in this cycle. A major reason for this is excess capacity which had been added by incumbent suppliers in the prior cycle. In Exhibit 98, we show the capex / depreciation for several industrial businesses, which we view as a proxy for capacity additions in their respective end markets; we note that capex / depreciation was very high going into the last downturn in business jets and wind power for example.

Exhibit 98: Capex / depreciation in different end-markets USD in millions, unless otherwise stated Capex / Depreciation 2006 2007 2008 2009 2010 2011 2006-11 Average

Rockwell Automation 1.16 1.40 1.49 0.96 1.04 1.24 1.22

Fanuc 1.18 1.42 1.90 1.69 0.74 0.92 1.31Average 1.17 1.41 1.70 1.33 0.89 1.08 1.26

Business jet (Cessna) 1.54 1.90 2.71 0.57 0.44 0.93 1.35

Wind power (Vestas) 1.77 3.15 4.94 3.84 2.52 1.98 3.03

Oil & Gas Equipment (Weir) 1.57 2.49 2.34 1.44 1.49 2.86 2.03

Oil Services (Schlumberger) 1.99 1.92 1.96 1.12 1.21 1.49 1.62Average 1.72 2.36 2.99 1.74 1.42 1.81 2.01 Source: Company data, Credit Suisse estimates

Oil & and Gas equipment is one end-market where we note that margins are currently high, but we are wary of how sustainable this is, given the large capacity additions in recent times. As regards industrial automation, we note that the capex / depreciation at two of the major global pure-plays (ROK and Fanuc), has remained significantly lower than in these other markets.

14 August 2012


Disaggregated route to market

Most industrial automation controls / instruments are sold through distribution, and hence through a fairly disaggregated channel, which can prove very difficult for a new entrant to penetrate.

In general, an automation system is sold through a distributor, to an end user; the automated system then requires integration by a third party systems integrator. This integrator can be a machine builder, the end user (currently less common), or a systems integrator working for the end user (most common in mature markets). Third party integrators typically focus on a particular end market in which they have expertise. There are, however, certain industries and countries where the automation vendors perform the system integration work directly (e.g. China). This situation arises when a customer lacks access to an integrator with sufficient expertise regarding the production process or the automation instrumentation and controls. In these cases, an automation vendor may provide a total solution to the customer directly (including the engineering planning required), integrate that solution, and avoid the use of a distributor.

We show below the several paths an automation product can take from the automation vendor to the end user (this is adapted from a Rockwell Automation chart).

Exhibit 99: Automation Routes to Market

End User

Automation OEM (Emerson, Rockwell Automation, Siemens)

OEM Machine BuilderSpecialist producer of custom industrial machines

Examples: Stolle Machinery, Vecoplan

Specialist producer of industrial panels

Panel Builder System Integrator

Examples: Schneider, Panel Builder

Arranges automation system for use by end user

Examples: ABCO, L2 Systems, Sunapsys

DistributorPurchaser from OEM and seller to end user from maintained inventory

Examples: Rexel, Grainger, MSC Industrial

Source: Credit Suisse Research, Rockwell Automation

Within the automation market, we note that the process and factory automation routes to market are distinct; process generally involves direct sales of a total solution from OEM to end user, whereas factory-related sales are typically individual product orders placed by an end user via a distributor. Process customers more often prefer automation suppliers to also act as the system integrator. This may be attributable to the fact that E&C companies hired to construct a refinery, for instance, are less inclined to deal with both a system integrator and an automation vendor when they can simply deal with an automation vendor. A much higher share of the process business is solutions-related as compared to the factory business. Factory customers will often use an independent integrator. The focus in factory automation tends to be on instrumentation and is more driven by individual equipment sales as opposed to total solutions. Accordingly, a typical customer’s factory engineer will simply order a part and handle the installation / integration independently.

14 August 2012


Below we cite some more details of the route-to-market for two of the major US industrial automation companies, Rockwell Automation, and Emerson:

■ Rockwell Automation: Most of Rockwell’s product offering concerns instruments (~66% of sales), and 75%+ of its products are sold through distributors. In China specifically, there is a higher engineering / integration content, compared with the more mature geographies. Rockwell only provides and integrates a total solution if its products are the centerpiece of the design; Rockwell will then bill the engineering labor separately, with possibly a service agreement on top. Some third party product content is generally required and ROK handles this purchasing. In China, distributor penetration is very low, resulting in more solutions and direct sales.

■ Emerson: On the factory side of EMR’s business (the Industrial Automation reporting segment), the business is mixed between direct customer orders, and orders which are placed via a distributorship. Generally speaking, product sales in the United States tend to flow through distributors. However, most international orders are direct sales and do not involve any distributorship agreements. On the factory side, EMR does not act as a systems integrator thought it offers a large breadth of instrumentation systems. The process management side of EMR’s business is far more mixed between individual orders and total engineered solutions. Emerson’s engineering focus on the process management side means a greater use of the direct sales force with end customers to package a complete solution (i.e. there are less outside orders for individual parts). On process projects, EMR often serves as the MAC (main automation contractor) within a given plant, providing both the bulk of engineering planning, and EMR products.

Bottom-up data suggests pricing discipline remains strong

We run an overall Price Tracker for industrial markets globally; company commentary suggests that price discipline among automation vendors remains fairly high.

Exhibit 100: Automation Price Tracker Date Company Direction Comment

7-Aug-12 KUKA + Systems - And therefore we do have some operating leverage in systems and we see that also the price quality of the business is getting even better because we're talking now about contracts we came in 2010 and the more we go, the better we see, the better drive quality.

1-Aug-12 SPX + Flow Tech - Core margins improved 120 points to 12.7%, benefiting from leverage on the organic revenue growth and increased pricing.

1-Aug-12 Schneider + Industry division - Industry, quite a remarkable resilience of the margin, minus 1.1 point despite the significant decrease of the top line on an organic basis and industry really managed to increase prices, managed to drive profitability on solution

30-Jul-12 GEA + Process- When it comes to process engineering we also brought in pricing discipline, especially into the large projects which some years ago they were sold more than average or lower than average single digit margin, EBIT margin.

26-Jul-12 ABB = And we've pushed price where we can. And Discrete Automation and Motion,the team has pushed it there too where they can, in certain parts of their business.

26-Jul Siemens + So, in the real – how do they say that, in the real heart-and-soul segment environment, margins are decent and where we like to be at. It's a stable environment, so there is no pricing pressure one could see or would be discussed.

25-Jul-12 Rockwell = Rockwell Overall - Price was positive in the quarter and I would say, year-to-date we are pretty much on track to hit our expectation of about 1 point

19-Jul-12 Danaher + We're also getting somewhat of a favorable price/cost dynamic in Industrial Technology as well. And we got about a point and a half of price in that segment

Source: Company data

On its recent earnings call, the CFO of Siemens noted that pricing is ‘actually the least concerning item’ regarding the outlook for the company’s automation businesses.

14 August 2012


Factory vs. Process Margins in the process and factory automation businesses have remained fairly consistent over time. Process margins appear somewhat less variable than factory margins, with a maximum deviation over the past 6 year average of ~1% (as opposed to ~6% in factory). This margin variance may well be the result of greater stability in the respective end markets served by process and factory automation, as well as the longer-cycle / more project-based nature of process automation work (much of which is built out of a backlog, whereas factory automation has a much more rapid turnover of bookings into billings).

Exhibit 101: Industry margins by automation type %, unless otherwise stated Process 2006 2007 2008 2009 2010 2011ABB (PA) 8.2% 10.0% 10.2% 11.4% 9.1% 11.3%Alfa Laval (Process) 9.1% 12.0% 20.6% 22.7% 18.0% 20.3%Emerson (PM) 16.0% 18.0% 19.6% 19.8% 18.2% 18.7%GEA (Process) - - - 6.7% 6.5% 6.0%IMI Plc 11.5% 10.3% 10.7% 11.0% 11.2% 16.5%Invensys (OM) 11.5% 13.2% 13.3% 10.9% 9.2% 10.7%Metso (Total) 7.9% 9.6% 10.1% 10.5% 8.0% 8.0%Rotork (Controls) 24.0% 25.1% 26.5% 28.1% 31.7% 32.4%SPW (Flow Tech) 11.5% 14.0% 16.6% 12.2% 12.9% 13.0%Yokogawa (IA & Control) 11.5% 11.3% 12.1% 9.7% 7.7% 6.3%Average 12.4% 13.7% 15.5% 14.3% 13.2% 14.3%Deviation from 6 year avg -1.5% -0.2% 1.6% 0.4% -0.7% 0.4%

Discrete 2006 2007 2008 2009 2010 2011ABB (DA&M) 15.9% 15.4% 16.2% 12.8% 16.6% 17.5%Airtac 25.3% 22.1% 27.2% 31.7% 31.6%Cognex 18.5% 12.5% 10.5% -4.6% 26.1% 26.5%Danaher (IT) 15.6% 17.0% 16.2% 16.6% 20.2% 21.0%Emerson (IA) 15.1% 15.3% 15.3% 12.4% 14.9% 16.3%Fanuc 38.8% 40.5% 34.6% 21.7% 42.5% 41.2%Hiwin 20.3% 21.6% 20.0% 12.0% 24.7% 29.1%Keyence 50.9% 51.0% 44.4% 40.9% 46.9% 45.7%Krones 5.7% 7.0% 6.6% -1.6% 3.1% 2.8%Kuka 1.4% 5.5% 4.1% -5.8% 2.3% 5.1%Mitsubishi Electric (FA) 18.0% 16.0% 8.8% - 13.0% 11.6%Omron (IA) 15.9% 15.8% 6.7% 6.2% 14.1% 12.3%Rockwell Automation 17.0% 18.3% 16.3% 9.1% 12.5% 15.5%Schneider (I) 14.7% 14.2% 15.4% 9.9% 19.7% 17.7%Siemens (D) 8.7% 12.3% 13.5% 12.0% 12.4% 13.3%Siemens (IA) 15.1% 16.2% 19.0% 14.6% 18.0% 17.6%SMC 26.2% 24.5% 17.5% 11.6% 25.2% 25.8%THK 18.2% 12.9% 4.8% -8.2% 11.5% 10.0%Yaskawa 9.1% 9.5% 5.9% -3.1% 4.3% 4.8%Average 18.1% 18.5% 15.7% 10.2% 18.9% 19.2%Deviation from 6 year avg 1.3% 1.7% -1.1% -6.6% 2.2% 2.5% Source: Company data, Credit Suisse estimates

14 August 2012


Types of Industrial Automation In this section we describe the shape of the industrial automation market, and define key terminology. Later on in the report we describe who the major industrial automation vendors are.

We define industrial automation as the use of control systems and software to independently operate and monitor a mechanized system of industrial processes. We distinguish between two primary types of automation: factory (or discrete) automation, and process automation. Factory automation tends to be used in manufacturing facilities where component parts are assembled and incorporated into larger / more complex units / a final product; it is therefore associated with industries such as automotive and packaging. Process automation is used in industrial sites (such as chemicals, power, water plants) where a continuous flow (of water, milk, oil) is being monitored / controlled. In terms of products, DCS, valves, and other flow instruments are primarily found in process plants. Drives, robots, and PLCs are more common in factories, and are products used in discrete automation. We estimate that the total value of the industrial automation market is ~$152bn.

End markets, products, geographic split

There is a fairly clear divide between the end markets likely to use factory automation and those likely to use process automation. However, many manufacturing processes involve the assembly of goods, and flow regulation; hybrid automation is therefore used. Some examples of end markets that use hybrid automation are Food & Beverage, Pulp & Paper, and Life Sciences. We show below common examples of end markets that utilize factory and process automation.

Exhibit 102: Automation End Markets x, unless otherwise stated

Exhibit 103: Automation Market Revenues (2011) %, unless otherwise stated

Power, 10.5%

Textile, 5.5%

Automotive, 16.7%

Chemical, 14.1%

Packaging, 9.1%

Plastic, 5.3%

Oil & Gas, 9.3%

Pharma, 12.4%

Food Processing,

5.8%

Other, 11.3%

Source: Rockwell Automation Source: Markets & Markets

We show below the split of the market by key products, and geography.

14 August 2012


Exhibit 104: Automation Market Revenue by Product

(2011) - %, unless otherwise stated

Exhibit 105: Automation Market Revenue by Geo (2011) %, unless otherwise stated

SCADA14%

DCS19%

PLC4%

Robotics4%Machine

Vision5%

Sensors7%

Relays & Switches

4%

Motion & Drives3%

PLM17%

MES3%

ERP20%

Americas, 35%

Europe, 35%

APAC, 26%

ROW, 5%

Source: Credit Suisse estimates, Markets & Markets Source: Markets & Markets

Definitional issues

There is no uniform definition for the industrial automation market; different vendors and industry participants define the market in different ways.

In Exhibit 106 we show some of the products associated with automation. In the right-hand column, we list the products (instruments and controls) which we view as core automation products, and in the adjacent columns, we show a number of products which are used in conjunction with, or controlled by, automation products. For instance, we do not include bearings as an automation product (hence why it is in the ‘mechanical’ column in Exhibit 106), as they are consumables which sell into an end product or machine (such as a car). Our focus is more on controls and instruments which are part of capital spending of the customer (rather than operating expenses) and / or part of the industrial manufacturing process (such as tools for cutting, shaping end product inside the factory). We lay out definitions of the key products later on in this section of the report.

Exhibit 106: Automation products and automation-related mechanical & power products Mechanical Power AutomationActuators Alternators CNC

Bearings Batteries DCS

Compressors Electric motors Drives

Conveyors Servo motors ERP

Couplings Switchgear Machine Vision

Machine tools Transformers MESMechanical Gears UPS PLC

Pneumatics PLMTransmissions Relays & Switches

Seals Robotics

Valves SCADA

Sensors Source: Credit Suisse Research

14 August 2012


Within automation products, there is a significant degree of overlap between factory and process automation, especially within the upper echelons of control equipment. However, with regards to instrumentation and automation-related products, we see notable variance. Factory automation primarily involves mechanical motion (i.e. robotics, conveyor belts driven by motors and drives, bearings, etc.), whereas process automation generally focuses on flow control and/or mixing (requiring valves, sensors and piping).

Exhibit 107: Instruments and Controls common within factory and process automation Factory Process

PLM PLMERP ERP

MES MESSCADA SCADA

CNC

Robots Sensors

Drives ValvesMachine Vision

Sensors

Controls

Instruments

Hierarchy of controls and

instrumentation


One practical example of the confusion that can arise, is that much of Emerson’s Industrial Automation reporting segment for instance is not in our view ‘automation’, but comprises consumables and components (such as alternators) related to industrial production.

Also, in an article published last year (Meet the 2010 Top 50 Automation Companies), the editor in chief of Control Magazine laid out a definition of what he includes in ‘automation’, which we show below.

Exhibit 108: Control magazine definition of automation

Process automation systems and related hardware, software and services

Analytical equipment, including process electrochemical, all types of infrared technology, gas chromatographs for industrial manufacturing and related products

PLC business, as well as related hardware, software, services, I/O and bundled HMI

Control valves, actuators and positioners

Other control hardware components; i.e. 3rd party I/O, signal conditioners, instrinsic saftey barriers, networking hardware, unit controllers and single-and multi-loop controllers

Automation-related software - i.e. advanced process control, s imulation and optimization to 3rd party HMI, plant asset mgmt, production mgmt MES, ERP

Process safety systems Other automation-related services

SCADA systems for O&G, water and wastewater, and power distribution Condition-monitoring equipment and systems

AC DrivesAncillary systems, such as burner mgmt systems, quality control systems for pulp and paper, etc.

Motion and control systemsProcess field instrumentation - i.e. temperature and pressure transmitters, flowmeters, level transmitters and associated switches

CNC Systems

Included

Source: Control Magazine

At the same time, the Control Magazine definition does not include the items below. We concur with the exclusion of Buildings sector products such as building automation and fire & security systems, but we do include Robotics within our definition. This is because we see the use of robots as a classic way for plant managers to automate their facilities, and substitute capital for labor.

14 August 2012


Exhibit 109: Control magazine – what is excluded from their definition of automation Not-included

Pumps and motorsRobotics

Material-handling systemsSupply chain mgmt softwareBuilding automation systems

Fire and security systemsProcessing equipment - i.e. mixers, vessels, heaters, etc. and process design licenses

from suppliers that have engineering divisonsElectrical equipment - i.e. low-voltage switchgear, etc.

Source: Control Magazine

Factory (Discrete) Automation Factory (or discrete) automation is the use of a controlled system to coordinate and execute the construction of a finished good via a manufacturing processes. For example, factory automation includes the factory line construction of a car in stages (the robotic application of a door to chassis, the computer-controlled spray of paint to the exterior, etc.). We currently estimate that factory automation is a ~$72bn market.

Exhibit 110: Factory Automation Revenue Split by End Market

Automotive35%

Packaging19%

Textile12%

Food Processing

6%

Other28%


Process Automation Process automation is the system operated control of continuous production processes typically involving flow or mixing control. A system is often comprised of a control / software system and set of sensors, valves and regulators that constantly monitor and regulate the movement and mixing of industrial contents throughout the production process. The processes are characterized by the production of high-volume, uniform units, usually in an environment with high temperature, pressure and large volume flows. Common examples of process automation are Oil & Gas, Petrochemicals, and the Pulp & Paper end markets. We currently estimate that process automation is an ~$83bn market.

14 August 2012


Exhibit 111: Process Automation Revenue Split by End Market

Power19%

Oil & Gas17%

Pharma23%

Food Processing

5%

Plastic10%

Other26%


Hybrid Automation While we narrowly define both factory and process automation, in many practical applications, a factory uses a combination of both. One example is a bottling plant; in this scenario the movement and capping of the bottle likely involves factory processes (packaging of bottles, movement via conveyor) as well as process automation (control of liquid flow to bottles, mixing of contents via control system).

Exhibit 112: Typical automated factory

Source: Rockwell Automation

14 August 2012


Batch Automation As noted earlier, hybrid industries combine elements of both process and factory automation; they are sometimes referred to as ‘batch' industries because the production process is conducted in ‘batches' rather than in one continuous flow, as in the case of a refiner. We do not find the ‘batch’ classification particularly helpful as it logically falls within the purview of hybrid automation. For the purposes of this report, we will treat batch automation as a sub-category of hybrid automation.

Motion Control Motion Control refers to the portion of factory automation which involves the mechanical control of a machine or robot via an actuator (motor for powering mechanical devices) and computer control system. An actuator is most commonly electric (AC or DC), hydraulic (compressed fluid), or pneumatic (pressurized gas). Through the use of this motor and a computer control system, an individual can govern the movement of a given piece of factory equipment.

14 August 2012


Controls Systems We estimate the total value of the automation control systems market is ~$117bn.

Exhibit 113: Automation Control Systems Market Split by Revenue %, unless otherwise stated

PLM22%

ERP26%

MES4%

SCADA18%

DCS24%

PLC6%


We show our growth assumptions for the automation controls market by product type below and estimate the control systems market will total ~$146bn by 2015. We assume the majority of control systems will grow at a comparable CAGR; a temporary slowdown in Asia and Europe could be a drag on organic growth for the balance of the year.

Exhibit 114: Control Systems Market Assumptions through 2015 USD in billions, unless otherwise stated

2010 2011 2012E 2013E 2014E 2015E 2012-15E CAGRPLM 20.0 24.0 26.4 28.9 31.4 34.0 8.8%change 20% 10% 9% 9% 9%ERP 28.8 30.7 32.1 33.7 35.5 37.5 5.3%change 7% 5% 5% 5% 6%MES 4.11 4.45 4.71 5.02 5.40 5.85 7.5%change 8% 6% 7% 8% 8%SCADA 20.1 21.5 22.4 23.4 24.7 26.1 5.3%change 7% 4% 4% 5% 6%DCS 26.4 28.3 31.5 34.3 36.6 38.8 7.1%change 7% 11% 9% 7% 6%PLC 6.3 6.8 7.3 7.8 8.3 8.8 6.5%change 8% 7% 7% 6% 6%Total 105.7 115.8 124.4 133.1 141.8 151.0 6.7%change 10% 7% 7% 7% 7%

Source: Markets & Markets, Credit Suisse estimates

Control systems comprise a mix of computers and software that coordinate, monitor, and operate the mechanical and power products involved in industrial automation. Below we show the hierarchy of computer systems beginning with the PLM (system that considers larger business objectives) and ending in the PLC or DCS (a computer that directly controls robotics, conveyors, valves, and motors).

14 August 2012


Exhibit 115: From planning to execution

V ^ V ^ Computerized Numerical Control (CNC)V ^ V ^ VV ^ V ^ Human Machine Interface (HMI)

Drives Motion SensorsRobots Machine Vision

Enterprise Level ControlsProduct Lifecycle Management (PLM)

Machine Tools

Distributed Control System (DCS) Programmable Logic Controller (PLC)

Plant Instrumentation Valves Sensors

Enterprise Resource Planning (ERP)Manufacturing Execution System (MES)

Plant Level Controls

Supervisory Control and Data Analysis (SCADA)Process Factory


Enterprise-level controls Overview

Enterprise-level systems are the planning and information sharing technologies that allow a company to ensure its business objectives govern the operation of its plant level control systems.

PLM (Product lifecycle management) is a software system that consolidates production information and facilitates the design, manufacture, service and disposal of resources involved in the production process.

Exhibit 116: Early adopter applications for complete PLM solutions % share of the total, unless otherwise stated

Source: Autodesk

Due to the IT expertise required to create a PLM system, most automation OEMs do not play in this space – we think this is changing however. Siemens, for instance, entered the market through its acquisition of UGS (~$3.5bn) and other automation vendors could follow suit. Existing PLM providers include Agile Software, Dassault (including its 2009 acquisition of IBM’s PLM business for ~$600mn), MatrixOne, PTC, Autodesk, and SAP. While many automation players do not produce PLM software independently, they often

14 August 2012


offer it as a part of a total solution. PLM producers such as Autodesk are now connecting their PLM products to “the cloud” so company data can be accessed anywhere.

ERP (Enterprise resource planning) is a software system that integrates internal and external management information across an organization, incorporating finance, manufacturing, sales and service, and customer relationship management data. ERP systems facilitate the flow of information between all business functions inside the boundaries of the organization and manage the connections to outside customers. The major producers of ERP systems are SAP and ORACLE. Oracle and SAP are the two primary players, comprising ~80% of the market (Exhibit 117). Some automation OEMs will offer / integrate SAP and ORACLE Cummins systems as part of a total solution. For example, Rockwell’s Factory Talk integrator is a system designed to serve as a bridge between ERP software and plant-level systems. Thus, Rockwell can connect its own MES product to another vendor’s ERP system and offer the entire package as a total solution.

Exhibit 117: ERP Developer Market Share by Revenue %, unless otherwise stated

Exhibit 118: MES Supplier Market Share by Revenue %, unless otherwise stated

SAP, 17%

Oracle, 9%

Datev, 2%

Infor, 3%

Intuit, 3%

Microsoft, 6%

Sage, 3%

Other, 56%

Invensys, 70%

CDC Software,

10%

Aspen, 8%

Others, 13%

Source: Credit Suisse Estimates Source: Markets & Markets

MES (manufacturing execution system): is an IT system that manages manufacturing operations within a factory. The MES receives product definitions, electronic work instructions, and equipment settings from the PLM and production planning / order requirements from the ERP. The MES then reports production performance results, produced, and consumed materials to the ERP. MES producers include Invensys, SAP, and Oracle. Most major players have a stake in the MES market as integrators but not producers (GE, Invensys, Mitsubishi, ROK, Schneider and Siemens). Invensys is a major player, via its Wonderware line of products. Smaller players include Aspen Tech (a software technology firm that specializes in systems aimed at optimizing process manufacturing) and CDC Software (a software firm that specializes in customer relationship and supply chain management).

Plant-level controls Overview

At the top of the plant control system is the SCADA system which sits above a grouping of PLCs, CNCs and/or DCSs. The SCADA monitors the entire system and can send

14 August 2012


instructions to individual PLCs within the system. A SCADA system coordinates (but does not control) real time processes. It will never directly instruct a motor or drive to perform a specific task for example. Instead, the SCADA will communicate with the PLC (a computerized control system), which in turn governs the motors, drives, belts, and other manufacturing mechanisms directly.

The PLC is most commonly used in factory processes rather than in process automation. In process automation, the SCADA will often control a system of DCSs which are used for continuous flow processes. Instead of controlling mechanical motion like a PLC, the DCS is connected to a series of sensors and actuators that provide feedback to the system. The DCS then processes this feedback and adjusts the valves and actuators so as to control the material flow through the system. This allows the DCS to monitor both pressure and flow. The CNC is the lowest level of operating system and is typically located at the machine it directly controls.

Descriptions and Vendors

SCADA (supervisory control and data acquisition) is industrial control software that monitors and controls industrial (manufacturing and flow - process or factory), and facility-based (HVAC control, access, and energy consumption) processes. Major SCADA players include Yokogawa, GE, ABB, Siemens, Invensys, and Schneider. GE Intelligent Platforms currently offers the CIMPLICITY SCADA line of products. This system is designed specifically for easy integration with an ERP system and comes with a user interface (HMI).

DCS (distributed control system – primarily process) is a control system, typically applied in process applications, in which the controller elements are not in a central location but are distributed throughout the system with each component sub-system controlled by one or more controllers. The entire system of controllers is connected by networks for communication and monitoring. The primary players in this market are ABB, Siemens, Emerson, and Invensys; ABB holds the largest market share in this space.

Optimization Software is a production process analysis program that utilizes algorithms in order to provide the user with efficiency and cost reduction solutions. The software provides a bridge for the gap between ERP and DCS systems. These two systems only provide the user with the ability to measure, monitor & control processes, and acquire data. Both systems operate based on set instructions determined by a user. Alternatively, optimization software provides its users with dynamic real-time solutions and forecasted results. The algorithms employed in the optimization software computes an output function based on data recorded during the production process. The software determines the ‘optimal’ output based on certain input patterns and magnitudes. AspenTech is one of the pure-play vendors in this field; others include ABB, Honeywell, Invensys, KBC Advanced Technology Plc., OSIsoft, Inc., Rockwell, Siemens, Yokogawa Electric, JDA Software Group, Inc., Oracle, and SAP.

14 August 2012


Exhibit 119: SCADA Software Display Exhibit 120: Distributed Control Systems (DCS)

Source: ABB Source: ABB

PLC (programmable logic controller – primarily factory) is a digital computer used to direct automation processes, including the control of machinery, robots, and factory assembly lines. Unlike a typical computer, PLC’s are designed to withstand extended temperature ranges, electrical noise, and are resistant to vibration and impact. The largest player globally is Siemens with approximately 50% market share with its SIMATIC line of PLCs. Other major players in the space include Rockwell Automation, Mitsubishi, Omron, and Schneider.

Exhibit 121: PLC Market Share %, unless otherwise stated

Exhibit 122: DCS Market Share %, unless otherwise stated

Siemens, 31%

Rockwell Automation,

22%

Mitsubishi, 14%

Schneider, 9%

Omron, 7%

Moeller, 2%

Other, 10%

ABB20%

Emerson17%

Yokogawa8%Invensys

4%Honeywell

7%

Rockwell Automation

2%

Other42%


CNC (Computer numerical control): In modern CNC systems, end-to-end component design is highly automated using computer-aided design (CAD) and computer-aided manufacturing (CAM) programs. The programs produce a computer file that is interpreted to extract the commands needed to operate a particular machine via a postprocessor, and then loaded into the CNC machines for production. CNC machines contain at least two axes, which provide variations in motion. This aspect of CNCs is unique to conventional machinery. The precise motions of the CNC machine are programmable into the CNC

14 August 2012


system usually in the form of letter denoted commands. Major players in the CNC market are CNC Systems, Siemens, Mitsubishi Electric, FANUC, Huanzhong CNC and R E Thompson. We estimate the CNC market is a~$6bn.

Exhibit 123: Programmable logic controller (PLC ) Exhibit 124: Computer numerical control (CNC)

Source: Rockwell Automation Source: Siemens

An HMI (human machine interface), a computer screen with keypad or touchpad, allows a user to communicate with control devices so that they can execute a given process. These interfaces facilitate communication between both the machine and controller. The controller issues demands via the interface, while the status of the machine is reported back to the interface. Key players in the HMI market are Mitsubishi, Schneider, Rockwell Automation, Invensys, GE Intelligent Platforms, National Instruments, and Siemens. We note that Siemens holds #1 market share in China for HMI.

14 August 2012


Automation Instrumentation We estimate the total value of the automation instrumentation market is ~$36bn.

Exhibit 125: Automation Instrumentation Market Split by Revenue %, unless otherwise stated

Robotics17%

Machine Vision20%

Sensors30%

Relays & Switches

16%

Motion & Drives12%

Others5%


We show our growth assumptions for the automation instrumentation market by product type below.

Exhibit 126: Automation Instrumentation Market Assumptions through 2015 USD in billions, unless otherwise stated

2010 2011 2012E 2013E 2014E 2015E 2012-15E CAGRRobotics 5.8 6.2 6.7 7.3 7.8 8.4 7.8%change 7% 8% 9% 7% 7%Machine Vision 6.8 7.3 7.5 8.1 8.6 9.1 6.7%change 7% 5% 5% 5% 6%Sensors 10.2 10.8 11.2 11.6 12.1 12.6 4.0%change 6% 4% 4% 4% 4%Relays & Switches 5.5 5.8 6.0 6.2 6.4 6.7 4.0%change 6% 4% 4% 4% 4%Motion & Drives 4.1 4.3 4.4 4.5 4.7 4.9 4.2%change 5% 2% 4% 4% 4%Other 1.7 1.8 1.9 2.0 2.2 2.3 6.0%change 6% 6% 6% 6% 6%Total 34.1 36.1 37.6 39.6 41.7 44.0 5.4%change 6% 4% 5% 5% 5%


Robots are computer-controlled machines with the ability to perform actions pre-set by the user, most commonly in the factory assembly of finished goods. Robots provide their users with an array of benefits, notably the ability to reduce costs, increase efficiency, and offer longevity and reliability. Aging populations and increased economic demand contributed to the recent surge in the robotics market. Key players in the robotics industry include Yaskawa, Fanuc, ABB, and Kuka. We estimate the robotics market size is ~$21bn. New growth in this space is expected to be driven primarily by aging populations and the need for service robots.

14 August 2012


Exhibit 127: Industrial Robot Market Share %, unless otherwise stated

Yaskawa23%

Fanuc22%

Fujikoshi8%

Kawasaki8%

Kuka15%

ABB13%

Other11%


Drives are devices used to generate mechanical motion; with variable speed, allowing the drive to control the rate and degree of movement. Key players in the drives market are ABB, Danaher, Eaton, Mitsubishi, Rockwell Automation, Sauer-Danfoss, Schneider, Siemens, and Yaskawa. In 2011 the industrial drives market amounted to ~$4bn.

Exhibit 128: Industrial Robot Exhibit 129: Drive

Source: Kuka Source: Eaton

Feedback Instruments Overview

These products serve to relay information from the factory floor back to the PLC and DCS operating systems, allowing these systems to adjust flow, motion, etc.

Machine vision is the optic capacity of machines and is applied to industrial production, is used to test for quality assurance, sorting, material handling, robot guidance, calibration,

14 August 2012


detecting defects, and identifying parts. It is commonly used in factory applications. The machine employs image sensors, cameras, and processors that send data to embedded programs, which control the machine’s action based on predetermined parameters. With the ability to ‘see,’ these machines can inspect various objects and processes. There are three different machine vision systems including the PC based machine vision system, smart camera based machine vision system, and embedded machine vision system. The key players in the machine vision market space are Teledyne and Dalsa Corporation, Freescale Semiconductor, Siemens, and Cognex, Industrial Vision Systems, and Microscan. Cognex currently holds the largest stake in the machine vision market. In 2009 the machine vision market amounted to ~$7 billion.

A sensor is a device that converts a quantitative physical property, such as temperature, into data that can be processed and analyzed. The key players in the sensor market are Atmel, Bosch, Dalsa, Denso, Eaton, Honeywell, Omron, Siemens, and Sensata. In August of 2011 Sensata. completed an acquisition of Sensor-NITE, which is an industry leading manufacturer of temperature sensors. The sensor market is responsible for the largest share of the field devices at 30%. In 2011 the market for sensors reached $10.7bn.

Exhibit 130: Machine vision camera Exhibit 131: Motion Sensors

Source: Cognex Source: Siemens

Relays and switches are used to control circuits. Common electric relays are electromagnetic devices that respond to an electric current and trigger a switch to either open or close a circuit. Key players in the replay and switches market are Danaher, Siemens, Tyco, Fujitsu, CIT, and Omron. Recent M&A from September 2011 includes Omron’s acquisition of BST International. Through this deal Omron was able to expand its relay business. In 2011 the relay and switch market amounted to ~$6bn.

14 August 2012


Exhibit 132: Automation-related product types Type

ActuatorAn electric motor used in factory automation, powered by electric, hydraulic or pneumatic energy. These motors commonly control pumps, valves, motors, and switches within the factory.

BearingsA metal or ceramic fixture used to facilitate and control the directional motion or a device or series of parts. Bearings reduce friction allowing the device to perform with unhindered motion.

Compressors

A machine that uses pistons, rotary screws, turbine like blades, to pressurize gases/air into a sealed space. After being captured the controller can release the gases through a hose. The pressurized gas/air is used to inflate objects or power d i

Conveying components

Conveying systems are transport systems that are usually comprised of tracking devices, break points, edge detectors bearings, shafts, sheaves, supports, and rollers. Conveyors are used to move products along assembly lines or simply transport objects from one place to another.

CouplingA fitting that issued to connect rotating shafts. The purpose of a coupling is to integrate the directional motion between two devices, usually rotating shafts.

Machine toolA machine used to cut or shape various materials, typically metals. There are various types of machine tools, such as lathes or grinders.

Mechanical gear

A circular, mechanical part with a notched surface. The gear meshes with another in order to transfer torque, thus influencing direction and speed. Gears are typically used in machine and motors to give the device the capacity to operate at varying speeds and directions.

Pneumatics The use of pressurized air or gas to power machines or industrial devices.

Power transmissionA system of gears, commonly referred to as the "gearbox," that transfers motion generated from an motor to a moving part, such as an axel. Transmissions are found in most motor vehicles and large machinery.

SealA fixture used to prevent leaks under pressure between connected mechanisms or parts. A seal is necessary when storing or transferring liquids or gases.

ValveA mechanism, typically used in process automation to control the flow of liquid, gas or material flows. Valves are commonly used in conjunction with pipes and storage equipment.

AlternatorA generator that turns mechanical energy into an alternating electrical current using magnetism. Alternators are used to support battery power for factory operations.

Battery Is a cell composed of chemicals used to store energy. Batteries have the capacity to turn chemical energy into electrical energy, therefore they are used to power electrical equipment in industrial production.

Electric motorsA motor that generates mechanical energy by using electrical energy, usually supplied by a battery, to generate rotational motion. Electric motors are used in machines and equipment in industrial production.

Servo motorA motor that controls specific motions of other devices. The servo motor is used to execute controls determined by a servomechanism, which monitors the activity of devices and responds to errors.

SwitchgearA safety and regulatory device that is used to interrupt electrical connections associated with other devices. A switchgear is used to protect equipment, machines and electrical systems within an industrial worksite.

TransformerAn electrical device that manipulates the voltage level of an alternating current as it travels from circuit to circuit. Transformers are commonly used to convey electrical currents from powers sources, such a power plant, to factories or worksites.

UPSUninterruptible Power Supply is a backup power system that engages when inadequate voltage levels are reached or a power supply completely fails. UPSs vary in scale, but can be used to support equipment, machines, or a worksite's operations.

InverterIs a device that employs electronic circuits to turn direct currents into alternating currents. This function allows the user to transfer electronic power from a battery, in the form of a direct current, to another device that requires an alternating current.

Circuit breakerIs an electrical device that automatically interrupts an electrical current in order to protect its respective circuit. Circuit breakers prevent potential damage to circuits within a factory or worksite.

Automation-related product definitions

MechanicalEquipment

PowerEquipment

OtherEquipment


14 Au

gu

st 2012

Glo

bal In

du

strial Au

tom

ation

65

Exhibit 133: Automation-related products [1]

Actuator

Bearing

Compressor

Source: Rotork Source: Timken Source: Ingersoll Rand

Conveyor

Machine Tool

Seals

Source: Ensalco Source: MoriSeiki Source: Flowserve

14 Au

gu

st 2012

Glo

bal In

du

strial Au

tom

ation

66

Exhibit 134: Automation-related products [2]

Valve

Alternator

Electric motor

Source: GE Source: Zena Source: ABB

Servo motor

Switchgear

Transformer

Source: Schneider Source: ABB Source: GE

14 August 2012


Convergence A Key Theme for Corporate Behavior Automation vendors have typically focused on one type of control product, or one type of instrument, in either discrete or process automation. By horizontally integrated, we mean they compete globally in both the discrete and process automation markets. While Siemens and Mitsubishi have a broad product offering in discrete automation, neither have a strong process automation business. By vertically integrated, we mean a broad offering of instruments and control solutions (high level enterprise control systems, low-level instruments, and products in between). ABB and Emerson both have large discrete and process automation business, but neither has a strong controls offering in discrete.

Evidence in recent years however indicates a change in approach, leading us to believe the automation market will increasingly bear witness to both horizontal and vertical convergence:

In terms of automation vendors, we think EMR has the greatest strategic imperative to undertake corporate action. In light of the accelerating convergence theme, we think assets such as Invensys and Rockwell Automation look increasingly attractive.

Exhibit 135: Automation convergence axes


A slightly more detailed / complex view of the above axes can be seen below.

14 August 2012


Exhibit 136: Key Automation Vendors At Different Parts of the Chain Major players

PLM: Autodesk, Dassault, Siemens

ERP: SAP, Orcacle

MES: Invensys, Aspen, CDC Software

SCADA: Siemens, Invensys, ABB

DCS: ABB, Honeywell, Yokogawa; PLC: Rockwell, Siemens, Omron

V ^ V ^ Computerized Numerical Control (CNC) CNC: Fanuc, Siemens

V ^ V ^ VV ^ V ^ Human Machine Interface (HMI) HMI: Invensys, Mitsubishi, Siemens

Drives Sensors

Robots Machine Vision

Plant Instrumentation Valves Sensors Machine Tools

Sensors: Eaton, Honeywell, OmronMachine Vision: Cognex, Teledyne

Robots: ABB, Fanuc, KukaDrives: ABB, Danaher Mitsubishi

Machine Tools: Mori Seiki, Gildemeister

Plant Level Controls

Supervisory Control and Data Analysis (SCADA)Process Factory

Distributed Control System (DCS) Programmable Logic Controller (PLC)

Enterprise Level Controls

Product Lifecycle Management (PLM)

Enterprise Resource Planning (ERP)

Manufacturing Execution System (MES)


We think that convergence is more of a theme in this cycle given:

■ Technology changes: This is blurring the distinction between discrete (PLC) and process (DCS) control systems;

■ Rising threat of Chinese competition at the instrument layer: Chinese manufacturers are increasingly moving into the low and mid end of automation instruments, just as they are across the industrial spectrum. This may encourage automation vendors to acquire instrument vendors (to help bolster market share against the new entrants) and / or expand into more software / technology-rich automation product offerings;

■ M&A trend accelerates convergence: Despite the softening macro indicators in recent months, industrial corporates still have strong balance sheets, and industrial M&A continues at a robust pace.

Exhibit 137: YTD Industrial M&A transactions US$ in millions, unless otherwise stated

EV/TTM or EV/Last FY EV/NTM or EV/Next FY

Announce Date Acquiror Target Sales EBITDAEBITA or

EBIT Sales EBITDA EBITA or EBIT9-Aug-12 National Oilwell Varco Robbins & Myers 2.4 9.3 2.3 8.7 $2,5008-Aug-12 Platinum Equity Clipper Windpower (UTX) ---30-Jul-12 Roper Sunquest 10.1 14.2 $1,41525-Jul-12 BC Partners&Carlyle Milton Roy, Sullair (UTX) 1.8 9.5 $3,46023-Jul-12 GenCorp Inc RocketDyne unit (UTX) 1.8 9.5 $5505-Jul-12 GKN Volvo Aero 1.4 $1,00018-Jun-12 Melrose Elster 1.2 8.4 $2,30021-May-12 Eaton Cooper Industries 2.1 12.9 15.3 2.0 12.0 12.6 $11,80015-May-12 GE Industrea Ltd 1.8 5.5 8.8 1.6 4.5 6.6 $69015-May-12 GE Fairchild International NA10-May-12 Platinum Equity Caterpillar Logistics Services $7508-May-12 General Electric China XD (15% stake) 1.8 30.2 $53526-Apr-12 Ametek Dunkermotoren 1.7 $25025-Apr-12 Dover Production Control Services 2.4 $22010-Apr-12 Danaher X-Rite 2.5 10.0 11.5 2.6 10.3 - $62510-Apr-12 Cobham Thrane & Thrane 2.3 14.8 $4282-Apr-12 Bodycote Curtis Wright HT 1.4 6.2 1.4 6.8 $5220-Mar-12 Siemens Connectors & Measurements, Expro Holdings 5.2 - - - - - $62019-Mar-12 Amazon Kiva Systems - - - - - - $77510-Feb-12 Dover Maag Group 1.6 9.3 12.6 $29030-Jan-12 ABB Thomas & Betts 1.7 11.1 14.6 - - 13.6 $3,85730-Jan-12 Siemens RuggedCom Inc. - - - - - - $38330-Jan-12 Sany Heavy Putzmeister 0.6 - - - - - $47525-Jan-12 Weir Novatech 2.8 7.0 - - - - $17624-Jan-12 Robert Bosch SPX- Service Solutions - 12.7 - 1.2 - - $1,15017-Jan-12 Kennametal Deloro Stellite 1.3 8.0 - - - - $354

Announced Deal Value (USD mn)


14 August 2012


Vertical Convergence

We see two primary areas where vertical convergence is likely to occur:

■ Automation vendors seeking to expand their offerings from plant instruments (robots, drives), to plant-level controls (DCS, PLC). This is often driven by concerns around the longer-term commoditization of the instrument level, as these can tend to be markets characterized by the mass production of standardized hardware components (whereas the controls layer involves the use of software), which is the type of market where Chinese companies have found it relatively easy to win market share. We see for instance many Western industrial companies’ strategies are focused on an increasing ‘Solutions’ approach in a broad range of end-markets (Schneider is one of the best-known, and most successful, in this approach).

■ Automation vendors seeking to expand their plant-level controls (DCS, PLC) offering, to enterprise-level controls (MES, ERP, PLM). One way that automation vendors can add value is to offer solutions which more closely integrate the design of products, with the manufacturing process. This can allow a more iterative process between the engineers, and the manufacturing layer of the enterprise, enabling faster time-to-market of products, and more specification. One other factor is that, as the ability of PLM and ERP systems grow in the long-term, this may eliminate the need for some (or many) plant level systems. Put differently, as PLMs and ERPs become increasingly sophisticated, they may one day communicate directly with plant instruments such as robots, eliminating the need for SCADA, DCS, and PLC.

We show below some examples of vertical integration via M&A in recent years. One of the most notable deals was Siemens’ acquisition of UGS in 2007, for $3.5bn. Siemens subsequently has built on its Siemens PLM Software unit with the acquisitions of Innotec, and Vistagy.

Exhibit 138: Select Controls & Software M&A amongst major automation players Date Company Target Description

Jun-12 Honeywell INNCOM Software-based energy management solutions Jan-12 Siemens Rugged.com EthernetJan-12 Mitsubishi Messung PLC, HMINov-11 Siemens Vistagy Computer aided design softwareOct-11 Mitsubishi ICONICS 20% equity stake, SCADA softwareSep-11 Siemens Active SA MESJan-11 Rockwell Hiprom Integration software and consulting designApr-10 Invensys Skelta Software Business process management softwareJan-07 Siemens UGS PLM

Source: Company data, Credit Suisse Research

We can see one key advantage of the higher-end controls layer is that it enables the vendor to target a very broad spectrum of the manufacturing plant, beyond just one level.

14 August 2012


Exhibit 139: PLM enables selling to the entire enterprise %, unless otherwise stated

Source: Autodesk

Challenges for Vertical Convergence

Although there are strong drivers for vertical convergence, there are certain forces that could inhibit this progression:

■ Different products go through different sales channels and are therefore sold to different individuals within the same customer company e.g. plant instrumentation may be sold to maintenance personnel while more sophisticated software and controls may be marketed to engineers and IT personnel. Thus, it may not make sense for one OEM to converge its sale of all products as it will target various levels of customer.

■ We see limited evidence to date that being an integrated supplier necessarily implies faster organic revenue growth (Exhibit 140).

Exhibit 140: Organic revenue change of pure plays versus integrated vendors %, unless otherwise stated

2005 2006 2007 2008 2009 2010 2011 Average 2005-2011Pure Play FactoryAspenTech -13% 17% 1% 7% -34% -21% 26% -3%Cognex 7% 10% -5% 8% -28% 65% 11% 10%Fanuc 15% 10% 12% -17% -35% 76% 21% 12%Kuka -5% 11% 10% -2% -29% 20% 33% 5%Rockwell Automation 11% 7% 6% 6% -19% 10% 20% 6%Average 3% 11% 5% 0% -29% 30% 22% 6%

IntegratedMitsubishi Electric 10% 18% 2% -17% -26% 42% 7% 5%Schneider 17% 11% 3% -24% 24% 10% 7%Siemens(D) 7% 9% 16% 15% -12% -9% 18% 6%Siemens(IA) 7% 9% 16% 11% -18% 6% 18% 7%Average 8% 13% 11% 3% -20% 16% 13% 6% Source: Company data, Credit Suisse estimates

14 August 2012


Horizontal Convergence

There are very few companies that have a strong position in discrete and process automation.

As control systems and software become increasingly sophisticated, the need for intermediary controls will dissipate and plant activities across process and factory can be directly controlled by a single system. From a practical perspective, enterprise-level controls are uniform across both process and factory automation systems; the plant-level differences (PLC v DCS) are not necessarily significant from a producer’s perspective. Further, segment consolidation (the joint delivery of process and factory products and services within a single segment) is a more efficient way to provide total solutions, especially given the hybrid nature of many automation systems; why have two independent operating segments with parallel hierarchies designed to provide a single solution?

Siemens and Rockwell Automation are two vendors with historic strength in discrete automation, who are now looking to expand their process automation market shares. ABB is an example of a vendor with a strong process automation background, and has recently undertaken several acquisitions to build its presence in discrete automation.

Exhibit 141: Examples of horizontal convergence US$ in millions, unless otherwise stated Company Date Historic Strength Acquistion Target Target Focus Area Primary Offering Deal SizeSiemens 2012 Discrete Innotec do Brasil Process Process Solutions --Siemens 2012 Discrete Cambridge Water Process Water Treatment --ABB 2011 Process Baldor Discrete Motion controls 4200Rockwell Automation 2011 Discrete Hiprom Process Process control --Rockwell Automation 2007 Discrete ICS Triplex Process Process control & safety 172Rockwell Automation 2007 Discrete Pavilion Technologies Process Process control -- Source: Company data

Challenges for Horizontal Convergence

One key barrier here on the instruments side is that there is very little overlap between process instruments such as valves and pumps, and discrete instruments such as robotics. There is also only a limited overlap on customer end-markets; oil & gas customers will have limited need for discrete offerings, and car manufacturers have limited need of process controls. The vendors who do offer both sets of customers a wide range of products, tend to separate the organizational structure of their discrete and process offerings. ABB for example has a Process Automation reporting segment, and a Discrete Automation and Motion segment, while Emerson separates Process Management from its Industrial Automation segment.

As we discussed earlier in this report, we think automation generally is a high-margin business, with high returns generated by the Controls assets in particular (given its relatively capex-light business model). In terms of the margins among the various players, there appears little correlation between size and margins (Exhibit 142).

14 August 2012


Exhibit 142: Automation Sales vs. EBIT Margin (2012E) %, unless otherwise stated

Ametek

Emerson

SMC

KennametalRockwell Automation

ABB

Alfa Laval

GEA

IMI Plc

Rotork

Sulzer

Airtac

Fanuc

Hiwin

Keyence

Siemens

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

- 5,000.0 10,000.0 15,000.0 20,000.0 25,000.0

Automation Sales

EBIT

Mar

gin

(201

2E)

Source: Datastream, Credit Suisse estimates

Emerson likely to be a prime mover in any future convergence

We think it is likely that the company expands its control offerings in both process and discrete automation, with M&A an integral part of this approach:

■ 50% of Emerson sales are automation-related, but the majority of these are instruments, where longer-term we see an increasing threat from Chinese and other manufacturers: 76% of Process Management revenues are devices / instruments, and almost all of IA revenues are instruments;

Exhibit 143: EMR Process Management Revenue Split %, unless otherwise stated

Exhibit 144: EMR Industrial Automation Revenue Split %, unless otherwise stated

Measurement Devices, 46%

Valves & Regulators, 30%

Systems, Solutions &

Services, 24%

Motors & Drives, 35%

Power Generation,

22%

Industrial Equipment,

6%

Power Distribution,

9%

Fluid Automation,

16%

Mechanical Power Trans.,

12%

Source: Company data Source: Company data

■ Process Management is the best-performing asset within EMR, and the company is unlikely to want to let new players make big inroads onto its turf: We estimate Process Management will comprise c50% of EMR’s earnings growth in 2013, and it is the business investors appear to value most highly within the company. At the same time, there are potential new threats to EMR’s strong position in process automation – we discussed earlier (Exhibit 97) the increasing appetite of GE to move into this arena, and Siemens (as well as Rockwell Automation) are now looking to move beyond discrete automation. In discrete automation, ABB is making a renewed push to grow market share, but the EMR offering in its Industrial Automation segment is very diverse, implying it should be less concerned about imminent emerging competitors.

14 August 2012


ABB may also be more-focused in the short-term on consolidating existing recent deals, rather than undertaking large new discrete acquisitions;

■ There are strategic assets to buy, which other companies may also be interested in: Within the process automation (and discrete) controls market, there are only a handful of major players with a large installed base (Exhibit 122), whereas at the instruments level, there are myriad players. Invensys appears to be the most likely of the large players to sell its process business, in our view. We think that an acquisition of Invensys makes strategic sense for Emerson, as it would expand the company’s controls offering, and prevent the asset falling into the hands of GE or Siemens (we do not anticipate Honeywell looking to buy Invensys), and hence prevent them taking process market share. We can see below that Invensys’ process automation business is mostly (78% of sales) controls-focused, which would present a strong complementarity with Emerson’s instruments focus.

Exhibit 145: Operations Management End Market Split

FY12 %, unless otherwise stated

Exhibit 146: Operations Management Sales by Type FY12%, unless otherwise stated

Oil & Gas, 33%

General Industrial, 27%

Utility, 14%

Discrete Manufacturing,

7%

Petrochemical, 5%

Other, 14%

Systems, 60%Software,

18%

Equipment, 22%

Source: Invensys Source: Invensys

■ Emerson has not done a major deal since Chloride in 2010, and it has a strong balance sheet. The net debt / EBITDA ratio at EMR is around 0.5x, and at its analyst day earlier this year, the company highlighted its ambitions to spend at least $5-6bn on M&A over 2011-2015.

14 August 2012


Exhibit 147: EMR M&A could total $10bn over 2011-2015…USD in billions, unless otherwise stated

Exhibit 148: …with divestments worth $2-3bn in sales

likely, and acquired sales of $5-6bn Revenues in USD bn, unless otherwise stated

Source: Emerson Investor Conference February 2012, Slide 29 Source: Emerson Investor Conference February 2012, Slide 24

■ Invensys confirmed earlier this year that Emerson had made a ‘highly preliminary offer’ for the company. We show below an accretion scenario if Emerson acquires Invensys.

Exhibit 149: Potential accretion if EMR buys Invensys US$ in millions, unless otherwise stated

Invensys TakeoutPrice 3.24Premium 32%EV/EBITDA 9.5xCost of Debt 5%

2012 EMR ISYS ($) Deal CombinedSales 24,435 4,089 28,524EBITDA 4,840 469 50 5,359Net Income 2,473 237 2,592EPS 3.36 0.29 3.53

Accretion (ex deal costs) 5%

Gross Debt 5,201 0 3,500 8,701Gross Cash 2,667 471 -955 2,183Net Debt 2,534 -471 6,518/ EBITDA 0.5x -1.0x 1.2x


Longer-term, Emerson is also interested in expanding its controls offering at the discrete automation level, but we think this is less of a priority, as we think it very unlikely that many other players are looking to buy, for instance, Rockwell Automation. We show below the earnings accretion if EMR purchases Rockwell Automation.

14 August 2012


Exhibit 150: Potential accretion if EMR buys ROK US$ in millions, unless otherwise stated

ROK TakeoutPrice 89Premium 28%EV/EBITDA 10.5xCost of Debt 5%

2012 EMR ROK Deal CombinedSales 24,435 6,249 30,685EBITDA 4,840 1,165 100 6,105Net Income 2,473 733 2,855EPS 3.36 5.11 3.88

Accretion (ex deal costs) 15%

Gross Debt 5,201 1100 10,000 16,301Gross Cash 2,667 1700 -2,232 2,135Net Debt 2,534 -600 14,166/ EBITDA 0.5x -0.5x 2.3x


Partnerships are an alternative to M&A

Aside from a strategy of pure acquisition, many major automation players have a series of partnerships in order to fill the gaps in their product offerings.

Rockwell Automation tends to be fairly cautious around its M&A strategy, and therefore uses partnerships assiduously. On the process instrumentation side, Rockwell partners with Swiss-based private company Endress and Hauser. Rockwell provides its PlantPAx process automation system but incorporates Endress and Hauser field devices. In terms of enterprise-level control systems, Rockwell partners with Dassault to deliver integrated product design and manufacturing software (PLM). Networking products are provided by Cisco, allowing smooth connection between enterprise controls and plant systems.

14 August 2012


3D Printing – A New Growth Area 3D printing, the most common form of additive manufacturing, is the process of converting a computer designed image into a 3D object. Where a typical manufacturing process is subtractive (i.e. begins with a fixed amount of material that is milled, shaved, shaped etc.), additive manufacturing is a bottom-up layering process using a nozel where nearly all applied materials remain part of the finished product. Thus, in contrast to traditional manufacturing, 3D printing eliminates a large degree of raw material waste.

3D printing is made possible by Computer Aided Design (CAD) software, which enables an operator to create a digital blueprint of an object. CAD was a $3bn market 2010, and dominated by PTC, AutoDesk, Dassault, and Siemens.

3D printers have historically been used for prototyping, not for final consumer products, although this is changing. In our view, 3D printing will become increasingly prominent in the manufacturing world starting with this industrial cycle.

Basic Methodology

Exhibit 151 highlights six commonly used methods of 3D printing. Though the methods are fundamentally similar in practice there are some differences, such as the materials used and the mechanism employed to fuse the layers. Every method however begins with 3D CAD design and uses Standard Tessellation Language (“STL”), which enables CAD software to connect with the additive manufacturing system. We show a graphic illustration of these types of printing in Exhibit 153.

Exhibit 151: Types of 3D Printing Method Abbreviation Material Description

Stereolithography SLALiquid

thermoplastics

Is the original method of additive manufacturing. After a 3D digital depiction of the object is created using computer-aided design (CAD) software, the image is sent to a 3D printer. The printer then creates a

cross sectional layer of the object. An ultraviolet light, within the printer, then vulcanizes liquid plastic on top of the cross sectional layer. This process is repeated until the layers compile to form the entire object.

Laser Sintering - PowderThe process of creating and binding cross section layers by repeatedly using a laser to selectively melt and solidify powder on top of a former

layer.

Electron Beam Melting EBM PowderAn electron beam is used to melt the powder, thus forming layers.

Systems that use electron beams are able to produce rapidly, however the surface finish and detail are not as precise as other methods.

Fused Deposition Modeling (also called "Aerosol Jet

Technology")FDM

Polymer Filament

Thermoplastics are used to create a physical object that was designed digitally. The plastic is melted and pushed through an extrusion head

(similar to pushing Play-Doh through a cookie cutter), which shapes the layer. The material is then cured with a laser or UV light. This process is

repeated and the layers are compiled on top of one another.

Ink-Jet - ThermoplasticSimilar to inkjet document printing but instead of jetting drops of ink onto

paper, it jets layers of liquid photopolymer onto a build tray and is solidified using a UV light. The layers build up one at a time to create a 3D object.

Laminated Object Modeling LOM Sheet MaterialProcess of creating 3D prototypes by compiling sheet of paper. The

paper is binded with an adhesive substance and pressed together using a roller. After the paper is compiled a laser is used to shape the object.


14 August 2012


Key additive manufacturing terms we show below.

Exhibit 152: Additive Manufacturing-related terminology Additive Manufacturing ("3D Printing") AM Process of creating an object beginning with the bottom-up layering of cross sections; all materials applied remain part of the

finished product.Digital Light Processing/Selective Light Modulation DLP/SLM A form of laser s intering in which a DLP projector is used to solidify a liquid resin in a programmed manner. During this process

an entire cross sectional layer is created at one time. Digital Part Materialization DPM Sand or metal 3D objects are constructed by using a powder binding catalyst to join cross sectional layers. Direct Metal Laser Sintering DMLS The process of spreading powder between layers and then using a laser to solify the substanceDrop-on-Demand Thermoplastic Ink-Jetting DoD A form of ink-jetting that uses wax.Electron Beam Melting EBM An electron beam is used to melt the powder, thus forming layers. Systems that use electron beams are able to produce rapidly,

however the surface finish and detail are not as precise as other methods.Film Transfer Imaging FTI A transparent film, coated with a layer of photopolymer, is placed over an exposure area.Then a layer is created using a

deformable mirror array. The machine recoats the film and the process is repeated. Fused Deposition Modeling (also called "Aerosol Jet Technology")

FDM Thermoplastics are used to create a physical object that was designed digitally. The plastic is melted and pushed through an extrusion head (similar to pushing Play-Doh through a cookie cutter), which shapes the layer. The material is then cured with a laser or UV light. This process is repeated and the layers are compiled on top of one another.

Ink-Jet - Similar to inkjet document printing but instead of jetting drops of ink onto paper, it jets layers of liquid photopolymer onto a build tray and is solidified using a UV light. The layers build up one at a time to create a 3D object.

Laminated Object Modeling LOM Process of creating 3D prototypes by compiling sheet of paper. The paper is binded with an adhesive substance and pressed together using a roller. After the paper is compiled a laser is used to shape the object.

Laser Sintering - The process of creating and binding cross section layers by repeatedly using a laser to selectively melt and solidify powder on top of a former layer.

LENS - Process uses a high-powered laser to melt a powder in accordance with the design of that specific cross secitonal layer. This process is repeated once the cross section before solidifies.

Multi-jet Modeling ("Thermojet") MJM A machine with several extrusion heads selectively distributes a melted plastic material, which eventually hardens forming the 3D object.

Selective Laser Melting SLM Similar to laser sintering, except the process is used to fuse, essentially “welding”, metal together (usually gold or titanium).Selective Laser Sintering SLS The process of spreading powder between layers and then using a laser to solify the substanceStereolithography SLA Is the original method of additive manufacturing. After a 3D digital depiction of the object is created using computer-aided design

(CAD) software, the image is sent to a 3D printer. The printer then creates a cross sectional layer of the object. An ultraviolet light, within the printer, then vulcanizes liquid plastic on top of the cross sectional layer. This process is repeated until the layers compile to form the entire object.

Subtractive Manufacturing SM Process of creating an object, but begins with a fixed amount of material that is milled, shaved, shaped etc.

Two-Photon Lithography- Areas within an application of liquid resin are solidified using a laser. This process is usually employed when creating small

objects.


14 Au

gu

st 2012

Glo

bal In

du

strial Au

tom

ation

78

Exhibit 153: Types of 3D Printing

Stereolithography (SLA)

Laser Sintering

Electron Beam Melting (EBM)

Fused Deposition Modeling (FDM)

Ink-Jet

Laminated Object Modeling (LOM)

14 August 2012


Who uses 3D printing?

3D printing is used by a wide variety of companies and today is mostly used to produce smaller scale objects, especially prototypes. The customer base spans a wide range of customers and end markets as you can see from Exhibit 154.

Exhibit 154: 3D Systems Customer Base of 3D Printer Users

Source: 3D Systems

What do the printers look like? How much do they cost?

In Exhibit 155, we show 3D printer offerings from 3D Systems, the largest OEM in the space. The price range for a printer is quite wide and can run anywhere from $1,300, to over $1m. According to Industry Snapshot’s article, Automation’s Brave New Niche, most 3D printers sold cost between $15,000 and $500,000. Last year 6,050 3D printers worth $5,000 or more were sold and 23,000 smaller printers were sold for under $5,000.

Exhibit 155: 3D Systems Offerings and Price Range

Source: 3D Systems

The market – size, players, historic growth and future outlook

According to Wohlers Associates, an independent consulting firm providing technical and strategic advice on rapid product development and additive manufacturing, the market for industrial 3D printers is expected to generate ~$1.5bn in sales in 2012. The largest

14 August 2012


(publically traded) vendors in the space are 3D systems (DDD - $1.7bn market cap) and Stratasys (SSYS - $1bn market cap). Other noteworthy vendors include EOS, Cybaman Technologies, Arcam AB, EnvisionTEC, ExOne, Materialise, Optomec, Realizer, and 3shape. We highlight the primary 3D printing players below in Exhibit 156.

Exhibit 156: Major 3D Printing Players

Players Headquarters Type of Printing/Core Business 2011 Sales (US$ mn) Market Share

Headcount 2011

3D Systems US SLA, SLS, MJM, SLM, Ink-Jet (Z Corp) 230 15% 714

3DMTP Israel CAD Cloud Software Solutions

3shape Denmark 3D Scanners, CAD/CAM Software

3T RPD Ltd. UK SLS, DMLS

Arcam AB Sweden EBM 17 46

CMET Inc. Japan SLA

Cybaman UK Hybrid (AM/SM), CNC Machine Tool

EnvisionTEC Germany DLP/SLM

EOS Germany SLS

ExOne US DPM

Materialise Belgium Laser Sintering, SLA, FDM, Poly-Jet

Objet Ltd. Israel SLS, FDM, SLA, Inkjet 121 8% 430

Optomec US LENS

ReaLizer Germany SLM

Stratasys US FDM, DoD 156 10% 530

Total 1,500.00

Source: Credit Suisse Research, Wohlers Associates

We expect to see significant growth in the additive manufacturing market, with particularly rapid growth 3D printing. Hybrid machines, consisting of both subtractive and additive features, already exist in production. Currently, additive manufacturing can only produce low volumes and are limited in terms of product size and material usage. However as technology advances, volume and product size should increase. These machines require less space than conventional assembly lines, therefore companies will be able to expand their productive capacity as well as expand their sales mix. Leasing could help penetration as it drives down cost of use in the short term.

Exhibit 157: 3D printing sales by end-market %, unless otherwise stated

Exhibit 158: 3D printing installations (1988-2010) %, unless otherwise stated

Other 13%

Academic 9%

Aerospace 10%

Industrial machines 12%

Medical, dental 15%

Motor Vehicles 17%

Consumer products 24%

U.S. 41.10%

Turkey 1.40%

Canada 1.90%Germany 9.20%France 3.20%

UK 4.80%

Italy 4.10%

Spain 1.50%

Japan 10.20%

Korea 1.90%

China 6.50%

Taiwan 1.40%

Russia 1.30% Other 11.50%

Source: IBISWorld, Wohlers Associates Source: Wohlers Associates

14 August 2012


The market opportunity by industry for 3D systems is outlined below in Exhibit 159 and the overall 3D Printing Industry forecast, provided by Wohlers, is shown in Exhibit 160. Wohlers estimates that the market will grow at a 42% CAGR from 2012 to 2020.

Exhibit 159: Market Opportunity for 3D Systems Units, unless otherwise stated

Exhibit 160: 3D Printing Forecast US$ in millions, unless otherwise stated

$1,500 $2,100

$3,000

$4,000

$5,050

40%

43%

33%

26%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

$-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

2012 2014 2016 2018 2020

$

YoY%

Source: 3D Systems Source: Wohlers, 3D Systems Presentation May 08, 2012

Below, we show historic sales for Stratasys and 3D Systems. Growth appears to have accelerated dramatically in this cycle.

Exhibit 161: Stratasys and 3D Systems Revenue Growth USD in thousands, unless otherwise stated Revenue YoY% 2007 2008 2009 2010 2011 1H12 2007-11 CAGR

Stratasys

North America -3% 7% -17% 18% 26% 7.1%

Europe 26% 38% -29% 31% 44% 16.4%

Asia Pacific 19% -6% -14% 30% 4% 2.1%

Other 172% -34% -41% 90% 3% -6.3%

Total 8% 11% -20% 24% 27% 30% 8.6%

3D Systems

United States 12% -16% -11% 48% 63% 15.8%

Germany 44% -7% -25% 12% 29% 0.1%

Other Europe 14% -12% -17% 56% 26% 9.2%

Asia Pacific 0% -1% -31% 44% 34% 7.2%

Total 16% -11% -19% 42% 44% 57% 10.2% Source: Company data

Industry consolidation is likely to continue

The two largest players (3D Systems and Stratasys) have both made a number of acquisitions over the years (Exhibit 162). Assuming a $1.5bn market, 3D Systems and Stratasys have ~27% revenue market share together. They are two of the larger players, indicating the industry remains fragmented and further consolidation is likely.

14 August 2012


Exhibit 162: Relevant Mergers and Acquisitions: Company Acquired Date Core Business3D Systems Bespoke Innovations May-12 Prosthetics Producer

3D Systems FreshFiber May-12 Customized 3D Printed Products

3D Systems My Robot Nation Apr-12 Consumer 3D Design Services and Production

3D Systems Paramount Industries Apr-12 Medical & Aerospace Device Parts

Stratasys Object Ltd. (*Merger) Apr-12 3D Printing Systems

3D Systems Z Corporation ("Z Corp") Jan-12 3D System Technology

3D Systems Vidar Systems Corporation ("Vidar") Jan-12 Medical/Dental Imaging

3D Systems Huntsmand Corp's Advanced Materials Divison Nov-11 Printing Materials & SLA 3D Printers

3D Systems BotMill Nov-11 3D Printers, Kits, Accessories, and Materials

3D Systems Kemo Oct-11 Custom 3D Plastic and Metal Manufacturing Services

3D Systems Formero Sep-11 Custom 3D Plastic and Metal Manufacturing Services

3D Systems Alibre Jul-11 3D System CAD Solution Provider

3D Systems Freedom of Creation May-11 3D Printing Research and Design

3D Systems The3dStudio.com May-11 2D & 3D Digital Media Resources

Stratasys SolidScape May-11 3D Printing Systems, Materials, and Softw are

Stratasys Dimension May-11 3D Printers (lease or buy) & Supplies

3D Systems Print3D Corporaton ("Print3D") Apr-11 CAD Parts Services

3D Systems Sycode Softw are Solutions Apr-11 Softare Solutions for CAD Users

3D Systems Accelerated Technologies Mar-11 3D Printing Systems and Parts

3D Systems Quickparts Feb-11 Custom Manufacturing Services

3D Systems National RP Support Jan-11 3D Printing Systems and Parts

3D Systems Bits from Bytes Oct-10 Personal, Educational, and Professional 3D Printers and Kits

3D Systems Provel Oct-10 Rapid Prototyping and Tooling

3D Systems Express Pattern Sep-10 Rapid Prototyping and Manufacturing

3D Systems PROTOMETAL Jul-10 Rapid Prototyping and Manufacturing

3D Systems Prototypers CEP Jul-10 Rapid Prototyping and Manufacturing

3D Systems Design Prototyping Technologies Assets Apr-10 3D Printing, Rapid Prototyping and Manufacturing

3D Systems Moeller Design Feb-10 Additive Manufacturing Solutions

3D Systems Desktop Factory Aug-09 3D Printing Systems Source: Credit Suisse Research

Is 3D printing a threat to conventional manufacturing?

Although the market has tremendous growth potential, current 3D printing is burdened by a number of impediments, which make it a minimal near-term threat to conventional manufacturing in our view.

■ Size: the size of the “printer” sets the parameter for the size of the object that can be printed

■ Speed: production speeds are generally much slower than conventional manufacturing

■ Materials: a number of materials cannot be used, leather for example

■ Cost: sophisticated 3D printers can cost upwards of $1mn

The longer term threat will depend on the ability of the industry to develop technology that addresses the size, speed, material choices, and costs associated with 3D printing.

14 August 2012


Major Automation Players In Exhibit 163, we summarize the major publicly-quoted automation vendors, by region.

Exhibit 163: Profile of Major Public Automation Vendors Globally US$ in billions, unless otherwise stated

Automation Sales Automation Sales Automation Exposure Market Focus Product Focus Key Offerings$USD bn % of total company High / Medium / Low Factory / Disrete Controls / Instruments Products & Solutions

3D Systems Corporation 0.2 0.2 100% High Factory Instruments 3D Printing SystemsAmetek 3.0 1.8 61% High Process Instruments Motors, Sensors

AspenTech 0.2 0.2 100% High Factory Controls Optimization softwareAutodesk 2.2 2.2 100% High Factory Controls PLM and CAD softwareCognex 0.3 0.3 100% High Factory Instruments Machine vision

Crane Co 2.5 1.2 45% Medium Process Instruments Commercial valves and pumpsDanaher 16.1 1.0 6% Low Factory Instruments Motion control / motorsEmerson 24.2 12.3 51% High Both Instruments DCS, process instrumentationFlowserve 4.5 1.5 33% Medium Process Instruments Valves, pumps, actuators

GE 147.3 0.8 1% Low Both Instruments SCADA, control softwareHardinge 0.3 0.3 100% High Factory Instruments Milling and grinding machineryHoneywell 36.5 3.0 8% Low Process Controls Process control (DCS)

Hurco 0.2 0.2 100% High Factory Instruments Computerized machine tools and control softwareIdex 1.8 0.8 44% High Process Instruments Pumps, meters, valves & controls

Kennametal 2.4 2.4 100% High Factory Instruments Cutting toolsNewport 0.5 0.5 100% High Factory Instruments Motion control, industrial lasers

PTC 1.2 1.2 100% High Factory Controls PLM SoftwareRockwell Automation 6.0 6.0 100% High Factory Combined PLCs (technically controller), drives, safety control

Rofin-Sinar 0.6 0.6 100% High Factory Instruments Industrial laser sources and solutionsRoper 2.8 1.3 48% Low Process Instruments Meter readers, pumps, valves

Sensata 1.3 1.3 100% Low Factory Instruments Sensors and controlsSPX Corp 4.6 2.0 45% High Process Instruments Pumps, valves, filters

Stratasys Inc 0.2 0.2 100% High Factory Instruments 3D Printing SystemsABB 38.0 17.1 45% High Both Combined Robotics, control systems, drives, and sensors

Alfa Laval 4.0 4.0 100% High Process Instruments Pumps, valves and heat exchangersDassault Systems 2.4 2.4 100% High Factory Controls PLM Software

Gildemeister 2.6 2.2 88% High Factory Instruments Machine toolsGEA 7.2 3.9 54% High Process Instruments Pumps, valves, heat exchangers

IMI Plc 3.3 2.5 77% High Process Instruments Valves, actuators, controllersInvensys 2.5 1.1 46% High Process Controls DCS, SCADAKrones 3.3 3.3 100% High Both Instruments Package and bottle machine machine manufacturerKuka 1.9 1.9 100% High Factory Instruments RoboticsMetso 8.8 1.0 12% Low Process Combined Controls, sensorsRotork 0.7 0.7 100% High Process Instruments Valve actuators and control systems

Sandvik 13.1 3.8 29% Medium Factory Instruments Cutting toolsSchneider 29.1 5.8 20% Low Factory Combined PLCs, switches, motion control, drivesSchuler 1.3 1.3 100% High Factory Instruments Stamping, forging, minting machinerySiemens 97.5 24.1 25% Medium Factory Combined PLCs, drives, motors, CNCSulzer 3.4 3.4 100% High Process Instruments Pumps, controls

Weir Group 3.5 0.2 7% Medium Process Instruments Valves and pumpsAirtac 0.2 0.2 100% High Factory Instruments Pneumatic cylinders, valves

Amada 2.2 2.2 100% Low Factory Instruments Machine toolsChina Automation Group 0.3 0.3 90% High Process Controls DCS

Delta 5.7 1.2 21% Medium Factory Controls HMI, PLC, Sensors, Servo Motors & Drives, Machine VisionDoosan 7.3 1.2 17% Low Factory Instruments Machine toolsEbara 4.7 3.8 82% High Process Instruments PumpsFanuc 6.1 6.1 100% High Factory Combined Robotics, CNCHiwin 0.5 0.5 100% High Factory Instruments Linear motion, ball screws, actuators

Hollysys 0.3 0.1 50% High Process Controls DCS, SCADAKawasaki 14.9 2.0 13% Low Factory Instruments Pumps, motors, valves, robotsKeyence 2.3 2.3 100% High Factory Instruments Sensors, machine visionMakino 1.3 1.3 100% High Factory Instruments Computerized machinery

Mitsubishi Electric 43.9 5.4 12% Medium Factory Combined PLC, robotsMori Seiki 1.7 1.7 100% High Factory Instruments CNC

Nachi 1.9 1.9 100% Medium Factory Instruments Cutting tools, machine tools, robotsOkuma 1.5 1.5 100% High Factory Instruments Computerized machinery, CNC, CADOmron 7.1 3.1 44% High Factory Combined PLCs, sensors, relays, machine visionOSG 0.9 0.9 100% High Factory Instruments Cutting tools

Seiko Epson 10.0 1.9 19% Low Factory Instruments Robots, digital control, optic devices, sensorsSiasun 0.1 0.1 100% High Factory Instruments Robots, Energy Automation EquipmentSMC 3.9 3.9 100% High Factory Instruments Actuators, valves, and switchesTeco 0.9 0.9 100% High Factory Instruments Industrial motors THK 2.2 2.2 100% High Factory Instruments Electronics, Machine Tools

Wuhan Huazhong Numerical 0.1 0.1 100% High Factory Instruments CNCYaskawa 3.5 3.5 100% High Factory Instruments Motion controls, robotics

Yokogawa 4.1 3.4 83% High Process Controls Industrial automation & controls

Europe

North America

Asia

Region CompanyCompany Sales

$USD bn


We summarize below the major non publicly-quoted automation vendors.

Exhibit 164: Profile of Major Non-public Automation Vendors Globally Automation Sales Automation Sales Automation Exposure Market Focus Product Focus Key Offerings

Headcount $USD bn % of total company High / Medium / Low Factory / Disrete Controls / Instruments Products & SolutionsEurope Beckhoff 2,100 0.6 100% High Factory Control Servo Drives/Motors, Software ( for PLC, NC, and CNC) Europe Bosch Rexroth 38,384 7.9 100% High Both Instruments Drives, filters, gears, motors, pumps, valves, actuatorsEurope Endress + Hauser over 8,000 2.0 100% High Process Instruments Sensors, probes, flowmetersEurope Festo 15,500 2.8 100% High Both Instruments Drives, motors, valves, sensorsEurope Heidenhain N/A N/A 100% High Factory Instruments Encoders, digital readouts, and numerical controls Europe Pepperl + Fuchs 5,200 N/A 100% High Factory Instruments Sensors, monitorsEurope Staubli over 4,000 0.2 25% Medium Factory Instruments RoboticsAsia Supcon N/A N/A 100% High Process Controls DCS, programmable controllersAsia Yamazaki Mazak 7,152 N/A 100% High Factory Instruments CNC machine tools, CAD/CAM, FMS

Region Company


14 August 2012


Some the largest automation players globally are conglomerates – Siemens and Mitsubishi Electric for example accrue less than 50% of total sales from automation.

Exhibit 165: Automation Exposure vs. Automation Sales US$ in millions, unless otherwise stated

Omron

Mitsubishi Electric

Ebara

SiemensSchneider

Sandvik

GEA

ABB

Emerson

0%

20%

40%

60%

80%

100%

120%

- 5,000.0 10,000.0 15,000.0 20,000.0 25,000.0

RockwellFanuc

Automation Sales in USD mn

Aut

omat

ion

Exp

osur

e as

% to

tal s

ales


When we look at revenue growth among the major players, we highlight the following:

■ Discrete automation has already enjoyed a substantial snap-back in revenues following the last downturn: many of the automation vendors who have seen the fastest growth rates have been focused on the discrete market, both in terms of software (Dassault), as well as robotics (Fanuc).

Exhibit 166: Automation comps/divisions average growth for last 10 quarters %, unless otherwise stated

0%

10%

20%

30%

40%

50%

Hol

lysy

sFa

nuc

Kuka

Mits

ubish

i Ele

ctric

(FA)

THK

WEG

(Ind

ustri

al/E

lec

Equi

p)R

ockw

ell A

utom

atio

n (P

A)M

etso

(Tot

al)

GEA

(Pro

cess

)SM

CD

assa

ult S

yste

ms

Aspe

n Te

chEm

erso

n (IA

)Sc

hnei

der (

I)Ke

yenc

eR

ockw

ell A

utom

atio

nSi

emen

s (IA

)AB

B (D

A&M

)G

EA (M

echa

nica

l Equ

ip)

GEA

(Far

m T

ech)

Emer

son

(PM

)D

anah

er (I

T)Kr

ones

Om

ron

(IA)

Airta

cSP

W (F

low

Tec

h)H

oney

wel

l (AC

S-Pr

oces

s)PT

CYa

skaw

aAl

fa L

aval

(Pro

cess

)R

otor

k (C

ontro

ls)

IMI P

lcSi

emen

s (D

)In

vens

ys (O

M)

GE

(Inte

lligen

t Pla

tform

)AB

B (P

A)*

Yoko

gaw

a (IA

& C

ontro

l)

Last 10 quarters median growth for Automation Comps


■ In process automation, Yokogawa and Invensys appear to have lost substantial share; Honeywell and Rockwell have gained: On both a 10-quarter view, and a 5-year view, Yokogawa and Invensys appear to be one of the laggards in terms of sales growth. Honeywell and Rockwell Automation seem to be the main beneficiaries.

14 August 2012


Exhibit 167: Automation comps/divisions growth for last 5 years %, unless otherwise stated

-10%

0%

10%

20%

30%

40%

50%

Hiw

inR

ockw

ell A

utom

atio

n (P

A)Ai

rtac

Holly

sys

WEG

(Ind

ustri

al/E

lec

Equi

p)H

oney

wel

l (AC

S-Pr

oces

s)D

assa

ult S

yste

ms

GE

(Inte

lligen

t Pla

tform

)Fa

nuc

Rot

ork

(Con

trols

)AB

B (D

A&M

)TH

KIM

I Plc

Met

so (T

otal

)Al

fa L

aval

(Pro

cess

)Si

emen

s (IA

)Ku

kaKr

ones

Emer

son

(PM

)Si

emen

s (D

)AB

B (P

A)Em

erso

n (IA

)PT

CSc

hnei

der (

I)Ro

ckw

ell A

utom

atio

nG

EA (P

roce

ss)

SPW

(Flo

w Te

ch)

Keye

nce

SMC

Inve

nsys

(OM

)D

anah

er (I

T)M

itsub

ishi

Ele

ctric

(FA)

Om

ron

(IA)

Yask

awa

Yoko

gaw

a (IA

& C

ontro

l)As

pen

Tech

Last 5 years sales growth for Automation Comps


We show in the subsequent pages detailed comparisons of some of the major players.

14 Au

gu

st 2012

Glo

bal In

du

strial Au

tom

ation

86

Exhibit 168: Key factory automation controls players US$ in billions, unless otherwise stated

Company name Autodesk Dassault Systems GE Mitsubishi Electric Omron PTC Rockwell Automation Schneider SiemensAutomation business Total Company Total Company Intelligent Platform Factory Automation Systems Industrial Automation Total Company Total company Industry Industrial AutomationSales ($B) 2.2 2.4 0.8 5.4 3.1 1.2 6.0 5.8 11.9% of sales 100% 100% 1% 12% 44% 100% 100% 20% 12%Operating profit ($B) 0.53 0.57 0.06 1.09 0.38 0.12 0.93 1.04 2.09Operating margin 24.1% 24.0% 8.3% 20.1% 12.3% 10.0% 15.5% 17.7% 17.6%% of operating profit 100% 100% 0.3% 39% 83% 100% 100% 24% 20%

Customers / end-market split Architecture, Engineering and Construction, Manufacturing,

and Digital Media and Entertainment Industries

Aerospace & Defense (14%); Transportation & Mobility (31%);

Marine & Offshore; Industrial Equipment (21%); High-tech;

Architecture, Engineering &Construction; Consumer Goods

– retail; Consumer Packaged Goods – retail; Life Sciences;

Energy, Process & Utilities; and Financial & Business Services (11%); New Industries (23%)

Automation OEMs, Power, Consumer Products, Biomass, Data Centers, Life Sciences,

Mining, Oil & Gas, Telecommunications, High-Frequency Trading, Water &

Wastewater

Automotive, Home Appliances, Building, Energy, Factory Automation, Information

and Communication Systems, Public Systems, Semiconductors & Devices,

Space Systems, Transportation, Visual Information Systems

Automotive, IT, Public Facilites, Traffic, Security, Medical,

General Industry

Airlines, Consumer Products, Footwear & Apparel, Retail,

Aerospace & Defense, Automotive, Medical Devices,

Industrial Equipment, Electronics & High Tech

Heavy Industry (50%), Consumer (32%), Transportation (13%),

Other (5%)

Water, Food & Beverage, Mining, Minerals, & Metals

Manufacturing Industry, Water, Transport, Buildings, Utilities

Products sold Design Software - PLM Solutions, CAD Software

PLM Software and SolidWorks Computing Platforms - Single Board Computers, Memory

Products, Operator Interfaces & Industrial PCs, Processors,

Adaptors. Control Platforms - Control Software, System

Controllers, Distributed I/O, Safety, Software, Operator Interfaces & Industrial PCs,

Conventional Control Systems. Automation Software -

HMI/SCADA software products

PLCs, HMIs, AC Servos, CNCs, No-fuse Circuit Breakers and Earth Leakage

Circuit Breakers, Memory Car Navigation Systems, ETC Equipment for Vehicles,

Industrial Robots, Laser Processing Machines, Electrical Discharge

Machines, Electron Beam Machines, Low Voltage Power Distribution and

Power Monitoring Products

PLCs, Controls, Sensors, Servomotors, Servo Drivers,

Inverters, Network Automated Optical Inspection (AOI) Devices, Laser Repair Devices for Liquid-

crystal Applications, Power Supply Units, Indicator Display

Equipment

License (29%), Consulting & Training Service (23%),

Maintenance (48%) - PLM Software, Computer-Aided

Design Software (CAD, CAM, CAE), Application Lifecycle

Management (ALM)

Architecture & Software (43%) and Control Products & Solutions

(57%) - Control products (discrete, batch, continuous

process, drives control, motion control and machine safety control); Software products

(configuration and visualization software used to operate and supervise control platforms)

Circuit Breakers & Switches, Contractors & Protection

Relays, HMIs, Feeder Automation, Measure & Control Relays, Motion &

Drives, Controllers, Sensors, Switchgear, Transformers

MES, CNC, Controls, Drives, Electric Motors, Gearboxes and

Couplings, Motion Control, Power Distribution, Process Analytics,

Process Control Systems (PCSs), Process Instrumentation,

PLM Software, Identification Systems, Power Supplies, HMI

Devices and Software

Major Brands Autodesk Cloud, Autodesk PLM 360, AutoCAD, AutoCAD LT, Autodesk Revit, AutoCAD Civil 3D, AutoCAD Mechanical,

AutoCADArchitecture, Autodesk 3ds Max, Autodesk Moldflow,

Autodesk Inventor Autodesk Maya, Autodesk Flame,

Autodesk Smoke, Autodesk Lustre, Autodesk Flare

SolidWorks, CATIA, SIMULIA, DELMIA, ENOVIA, 3DVIA,

Exalead, 3DSwYm

PACSystems, Proficy, PACMotion, VersaMax, Rxi,

Durus,

MELQIC, MELSEC Series, GOT Series, MERLSERVO, FREQROL Series,

EcoMotor Pro

SYSMAC, E5CC/E5EC, OMRON Scientific Technologies Inc.,

Windchill, Arbortext, Creo View, Integrity, Crea

Parametric, Creo Elements/Direct, Mathcad

Allen-Bradley, Rockwell Software, FactoryTalk, ICS

Triplex

Masterpact Series, TeSys Series, Easergy Series,

Magelis Series, Zelio Series, Altistart Series, Altivar Series,

Minera Series, Modicon Series, OsiSense Series,

Argus Series

SIMOTION, SINUMERIK, SIMATIC IT, SIRIUS< SITOP, SIDAC, SINVERT, SIMATIC

HMI, SIMATIC PCS, SIMATIC Series, SIMOTICS

Geographic sales split based on LFYUnited States 36% 27% 5% 12% 37% 56% 23% 23%EMEA 39% 46% 7% 14% 40% 20% 32% 54%Asia 25% 26% 87% 72% 23% 16% 27% 23% o/w Japan 73% 48% 10% o/w China 16% 12%RoW / Other 1% 2% 8% 18%Total 100% 100% 100% 100% 100% 100% 100% 100%

Europe 46% 7% 14% 40% 20% 32%MEAGeo Split Segment Total Company Total Company Total Company Total Company Total Company Total Company Total Company Industry


14 Au

gu

st 2012

Glo

bal In

du

strial Au

tom

ation

87

Exhibit 169: Key process automation controls players US$ in billions, unless otherwise stated

Company name ABB AspenTech Emerson Honeywell Invensys YokogawaAutomation business Process Automation Total Company Process Management Process Solutions Operations Management Industrial Automation & ControlSales ($B) 8.3 0.2 7.0 3.0 1.1 3.4% of sales 22% 100% 29% 8% 46% 83%Operating profit ($bn) 0.93 (0.05) 1.40 0.39 0.12 0.24Operating margin 11.2% -27.5% 20.0% 13.0% 10.7% 7.2%% of operating profit 20% 100% 33% 15% 40% 100%

Customers / end-market split Oil & Gas (35%), Minerals & Metals (25%), Marine (20%), Pulp & Paper

(10%), Utility & Water (5%), Other (5%)

Process Industries; Energy, Chemicals, Engineering & Construction, Consumer

Packaged Goods, Power, Metals & Mining, Pump & Paper, Biofuels, and

Pharmaceuticals

Oil & Gas (39%), Chemical (15%), Power/Utilities (14%), Refining (9%),

Other (23%)

Chemicals (15%), MMM (7%), Oil & Gas (30%), P3 (14%), Pharmaceutical

(2%), Power (6%), Refining (23%), Other (3%)

Oil & Gas (33%), General Industrial (27%), Utility (14%), Discrete

Manufacturing (7%), Petrochemical (5%), Other (14%)

Oil & Gas, Chemical, Food & Beverage, LNG Supply Chain, Pharmaceutical,

Pulp & Paper, Refining, Power, Iron & Steel, Petrochemical, Water & Waste

Products sold Robotics, Control Systems, Drives, High/Medium/Low Voltage Products,

Sensors, Robotics, Actuators, Measurement Products, Bearings,

Circuit Breakers, Couplings, Conveyor Components, Feeder Automation,

Generators, Inverters, Motors, PLCs, Servomotors, Transformers ,

Converters

Process Optimization Software; Engineering Software, Manufacturing

Software, Supply Chain Softare - License (52%), Training & Other (33%), Maintenance & Professional Services

(15%)

Measurement and Analytical (44%), Valves and Regulators (32%),

Systems, Solutions and Services (24%)

Field Solutions (13%), Control Systems (40%), Advanced Solutions (12%),

Lifecycle Solutions (35%)

Systems (60%), Equipment (22%), Software (18%)

Control (83%), Measurement (10%), Other (7%) - Production Management

Systems, Production Controls and Safety Management (PLCs, DCSs,

Safety Instrumented Systems "SISs"), Controllers, Recoders, Data Acquisiton Equipment, Measurement Equipment,

SCADA,

Major Brands Freelance, Compact 800 Systems, eA Series, Symphony Plus ("S+") Series,

Heritage Systems, cpmPlus Series, IRB Series, BORDERLINE Series

aspenONE Measurement and Analytical (CSI, Daniel, Mobrey, Micro Motion,

Rosemount, Roxar), Valves and Regulators (Fisher, TESCOM, Bettis),

Systems and Software (DeltaV)

Ademco, Fire-Lite, Hand Held, Metrologic, MK, North, Notifier, Novar,

RMG, System Sensor

Foxboro I/A Series DCS, Triconex, Avantis, IMServ, IntelaTrac, SimSci-

Esscor, Skelta, Wonderware, Eurotherm, Foxboro, InFusion,

Triconex

Centrum VP, TruePeak, VigilantPlant Services, Fast/Tools

Geographic sales split based on LFYUnited States 22% 36% 37% 22% 29% 6%EMEA 51% 27% 23% 45% 40% 16%Asia 27% 0% 23% 24% 24% 67% o/w Japan 1% 41% o/w China 8%RoW / Other 38% 17% 9% 7% 11%Total 100% 100% 100% 100% 100% 100%

Europe 39% 27% 23% 37% 26% 8%MEA 12% 8% 14% 8%Geo Split Segment Process Automation Total Company Process Management Process Solutions Operations Management Total Company


14 Au

gu

st 2012

Glo

bal In

du

strial Au

tom

ation

88

Exhibit 170: Major US / European factory automation product vendors US$ in billions, unless otherwise stated

Company name ABB Bosch Rexroth Cognex Danaher Emerson Kuka Siemens Automation business Discrete Automation & Motion Total Company Total Company Motion Industrial Automation Total Company Drive TechnologiesSales ($B) 8.8 7.9 0.3 1.0 5.3 1.9 12.2% of sales 23% 100% 100% 6% 22% 100% 12%Operating profit ($B) 1.54 0.09 0.18 0.83 0.09 1.62Operating margin 17.5% 26.5% 19.3% 15.7% 4.5% 13.3%% of operating profit 33% 100% 7% 20% 100% 15%

Customers / end-market split

Discrete Manufacturing, Hybrid Manufacturing, Process Industries, Utilities,

Transportation Equipment, Infrastructure Buildings, Renewable Energy

Automotive, Rail, Industrial, Consumer goods,

Packaging, Pulp & paper, Solar, Maritime, Aerospace,

Infrastructure

Factory Automation (75%), Semiconductor &

Electronics Capital Equipment Manufacturers

(12%), Web & Surface Inspection (13%) - Engine Parts and Semiconductor Wafers, Pharmaceutical

Packaging, Product Assebmly, Materials (steel, paper, plastics), Food and

Beverage

Industrial Automation, Packaging, Medical

Equipment,Robotics, Circuit Board Assembly Equipment, Elevators and Electric

Vehicles

General Industry (26%), Building & Construction (11%), Power (10%), Oil & Gas (7%), Other

(46%)

Automotive (42%), General Industry (39.4%), Service

(18.6%)

Manufacturing Industry, Transport, Buildings,

Utilities

Products sold LV Drives, Power Electronics & MV Drives, Motors & Generators, Robotics, Power

Electronics, PLCs, DCSs

Drives, filters, gears, motors, pumps, valves,

electromechanical actuators, accumulators,

cylinders

Machine Vision Systems (85%) , Surface Inspection

Systems (15%)

Motors, Drives, Controls, Mechanical Components

(Ball Screws, Linear Bearings, Clutches/Brakes,

and Linear Actuators)

Power Generation (24%), Mechanical Power Transmission (20%), Motors and Drives (19%), Fluid Automation (18%), Power

Distribution (12%), Industrial Equipment (7%)

Robotics (42%), Systems (58%)

Converters, Motors, Geared Motors, Gear Units,

Couplings, Hybrid Drive, Engineering Software

Major Brands RobotWare, SafeMove, Freelance, Compact 800 Systems, eA Series, Symphony Plus ("S+") Series, Heritage Systems, cpmPlus Series, IRB Series, BORDERLINE Series

Rexroth DataMan, 1DMax+, Hotbars, 2DMax+, OCRMax, In-Sight,

VisionPro

KOLLMORGEN, THOMSON, DOVER,

PORTESCAP

Appleton, ASCO, Branson, Control Techniques, Kop-Flex,

Leroy-Somer, Numatics, Sealmaster, SD Wind Systems,

Control Techniques, System Plast, Trident

QUANTEC, KRC4 ELFA, FLENDER, SINAMICS

Geographic sales split based on LFYUnited States 32% 16% 34% 45% 39% 19% 23%EMEA 41% 58% 33% 32% 42% 58% 54%Asia 27% 27% 15% 16% 16% 23% 23% o/w Japan 15% o/w ChinaRoW / Other 17% 7% 3%Total 100% 100% 100% 100% 100% 100% 100%

32%Europe 38% 58% 33% 38% 58% 54%

MEA 3% 4%Geo Split Segment Discrete Automation & Motion Total Company Total Company Motion (w/in Industrial Tech) Industrial Automation Total Company Drive Technologies


14 Au

gu

st 2012

Glo

bal In

du

strial Au

tom

ation

89

Exhibit 171: Major Asian robot / machine tool / CNC vendors US$ in billions, unless otherwise stated

Company name Amada Fanuc Mori Seiki Okuma Siasun Wuhan Huazhong Numerical Control YaskawaAutomation business Total Company Total Company Total Company Total Company Total Company Total Company Total CompanySales ($mn) 2214 6147 1712 1541 124 67 3506Sales ($B) 2.2 6.1 1.7 1.5 0.1 0.1 3.5% of sales 100% 100% 100% 100% 100% 100% 100%Operating profit ($mn) 193 2532 97 137 22 7 169Operating profit ($B) 0.19 2.53 0.10 0.14 0.02 0.01 0.17Operating margin 8.7% 41.2% 5.7% 8.9% 17.3% 10.0% 4.8%% of operating profit 100% 100% 100% 100% 100% 100% 100%

Customers / end-market split Aerospace, Alternative Energy, Automotive, Composite, Consumer

Goods, Distribution Center, Education, Electronics, Fabricated Metals, Food & Beverage, Foundry, Glass, Medical, Paper & Printing, Pharmaceutical, Plastics, Wood

Industrial Machinery, Automotive, Aviation/Space, Hydraulic/Pneumatic

Equipment, Molding, Electronic Components & Communications, Oil & Energy, Agriculture & Construction Equipment, Semiconductor, Medical,

Others

Automotive, Aerospace & Defense, Construction & Farming Equipment,

Oil & Energy, Medical, Mold and Dye, Fluid Power Industries

Automobile, Motorcycle, Engineering Machinery, Electronic and Electric

Assembly

Textile and Mechanical Industries, Education, Energy, Medical, Chemical, Steel

Elevators & Escalators, Automotive, Building Automation,

Chemical/Petrochemical, Converting, Food and Beverage, Machine Tool, Material Handling, Metalforming,

Packaging, Pharmaceutical, Plastics and Rubber, Solar, Textile

Products sold Metalworking Machinery (Sheet-Metal Processing 74%, Presses 3%), Metal Machine Tools Business (Bandsaws 14%, Machine Tools 8%), Others 1%

Factory Automation (50%), Robots (21.%), Robotmachines (29%) - CNCs, Servo Motors, Lasers,

Robotics

CNC Lathes, Machining Centers, Multi-axis Machines, Application

Systems

Numerical Control Lathes (29%), Maching Center (45%), Multitasking

Machine (22%), Numerically Controlled Grinding Machine (2%),

Other (3%)

Industrial Robots CNC Controllers, Servo Drives and Motors, CNC Machines, Infrared Products

Motion Control (53%), Robot (28%), Systems Engineering (12%), Information (5%), Others (3%)

Major Brands Amada Machine Tools, Amada Tool Precision, Amada Engineering, Amada

Tools

ROBODRILL, ROBOSHOT, ROBOCUT, ROBONANO,

ROBOWELD, FANUC CNC Systems, Laser C Series, Ai/Bi Series, i-Model

Series

N-Series, X-Class, GILDEMEISTER, DMG, TOBLER S.A.S., Magnescale, DCG (Driven at the Center of Gravity), DDM (Direct Drive Motor), BMT (Built-

in Motor Turret), ORC (Octogonal Ram Construction), MAPPS IV,

ZERO CHIP, Spinning Tool

"THINC", 3D Virtual Monitor Software, MacMan-Net 2010, Collision Advance System (CAS), One Touch IGF-XL,

Okuma ATC (Automatic Tool Changer), Okuma Automated Modular

Pallet System (AMPS)

HNC Products "Bestact," MotoSight, iQpump, iQrise, Z1000 Series, E7 Series,

Sigma Series, Junma Series

Geographic sales split based on LFYUnited States 11% 14% 28% 18% 13%EMEA 15% 12% 21% 10% 10%Asia 74% 73% 50% 73% 77% o/w Japan 63% 24% 35% 64% 49% o/w China 6%RoW / Other 0% 0% 0%Total 100% 100% 100% 100% 100%

Europe 15% 12% 21% 10% 10%MEAGeo Split Segment Total Company Total Company Total Company Total Company Total Company Total Company Total Company


14 Au

gu

st 2012

Glo

bal In

du

strial Au

tom

ation

90

Exhibit 172: Other major factory automation related products vendors US$ in billions, unless otherwise stated

Company name Airtac Delta Hiwin Keyence SMC Teco THKAutomation business Total company Energy Mgmt Total company Total Company Total Company Total Company Total CompanySales ($B) 0.2 1.2 0.5 2.3 3.9 0.9 2.2% of sales 100% 21% 100% 100% 100% 100% 100%Operating profit ($B) 0.01 (0.01) 0.15 1.04 1.01 0.04 0.23Operating margin 5.8% -1.0% 28.9% 45.7% 25.8% 4.6% 10.0%% of operating profit 100% 0% 100% 100% 100% 100% 100%

Customers / end-market split Automotive, Machinery Manufacturing, Metallurgy, Electronics, Environment

Protection, Lighting and Textile, Ceramics, Medical Equipment, Food and Packaging Industry

Food, Textile, Chemical, Electronics, Metal, Plastic,

Pharmaceutical, Printing, Energy Saving Air-Conditioning, Water

Treatment Facilities

Machine Tool Supplies, Medical Equipment Supplies, Vending Machinery Supplies, Material

Handling Supplies, Automotive Industry Supplies

Automotive, Defense/Aerospace, Electrical Appliances, Food, Pharmaceutical, Cosmetic,

Packaging, General Manufacturing, Metals, Materials

(Plastics, Rubber, Glass, Ceramics, Textile),

Transportation, Precision Manufacturing

Life Science, Machine Tool, Resources, Secondary Batter,

Food and Packaging

Petrochemical, Textile, Mining, Construction, Machine Tool Industry, Metals Industry,

Semiconductor Plants, TFT Plants, Mechanical Electronics

Turn-Key Projects, Printing Equipment Industry, Dyeing,

Plastics Industry, LED Lighting, Solar Photovoltaic, Water

Projects, Home Appliances, Wind Power

Machine Tools, General Industry Machinery, Precision Instruments,

Semiconductor and LCD Manufacturing Equipment,

Industrial Robots, Electronic Devices, Transport Systems,

Construction, Aerospace, Medical, Other

Products sold Pneumatic Equipment - Actuators, Control Components, Air Prepartation Products, Oil Buffers, PU Hose

Telecom and Industrial Power Systems, Uninterruptible Power Supplies (UPS), Photovolataic Inverter (PIV), Medium Voltage Drive, Vehicle Power Product Line, Micro PV Inverter, AMI,

PLCs, AC Motor Drives, AC Servo Motors and Drives, Brushless DC

Motors and Drives, HMIs, Temperature Controllers,

Encoders, Electric Vehicle Motors and Drives

Linear Motors, Linear Actuators (SAR and LA), Ball Screws, Linear

Guideways, Linear Encoders - PMS, Elevator Gearless Traction

Machine

Sensors, Measuring Devices, Machine Vision Systems,

Control/Measuring Instruments, PLCs, Analysis Devices for R&D, Business Information Technology

Devices, Application Software

Actuators, Valves, Airline Equipment, Connectors,

Vacuums, Switches, Dryers, Temperature Control, Sensors,

Filters, Pumps

Motors (49.4%), Home Appliances (17.9%), System Automation

(13%), Mechanical & Electrical Construction (8.1%), Others

(11.6%)

Machine Tools (7%), General Machinery (8%), Electronics

(11%), Transportation (2%), Other (2%)

Major Brands G Series, A Series, B Series, Solenoid Valve, Flow Control Valve, Manually/Mechanically

Actuated Valves, Standard Cylinders, Mini Cylinder, Compact

Cylinder

AC Motor Drives Series, VFD Series, BLDCM, Active Front End, DVP, Delta DOP, Delta Industrial

Ethernet Total Solution, Delta Machine Vision (DMV)

LAN Series, LAC Series, LAM Series, LAS Series, WE Series, RG Series, HG/HGL Series, EG

Series, MG Series, PG Series, QH Series, QE Series, TMS Series,

TMA Series

Visual KV Series, FD-M Series, AP Series, FT Series, MD/ML

Series, VHX Series, VK Series, VW Series, BZ Series

TECO Westinghouse Economy Series ES/EC, TSC, Universal Series US, Compact

series SKR, Linear Motion Series GLM, Clean Series CSKR, Super

FA Series KT, Rod Actuator CRES, LM Guide, "RHYTHM"

Geographic sales split based on LFYUnited States 16% 7% 9% 13% 33% 12%EMEA 30% 8% 15% 4% 11%Asia 85% 59% 63% 83% 68% 63% 77% o/w Japan 69% 39% 6% 67% o/w China 85% 57% 19%RoW / Other 15% 25% 4%Total 100% 100% 100% 100% 100% 100% 100%

Europe 8% 15% 11%MEAGeo Split Segment Total Company Total Copany Total Company Total Company Total Company Total Company Total Company


14 August 2012


Near-term Demand Outlook – Stabilization Likely Preludes Reacceleration Although investor sentiment (particularly in the US) has soured towards discrete automation (reflected in the YTD performance of US stocks such as Rockwell Automation and Cognex), we think this will prove to be a fairly temporary phenomenon, and think the current weakness provides a good entry point from a risk / reward stance. Catalysts to drive improving sentiment towards (US) automation stocks include (i) stabilization in global lead indicators; (ii) China demand bottoming out.

We divide our analysis of the near-term outlook for this market into three sections:

■ Automation Tracker: We think this shows demand is stabilizing, whereas investor sentiment is more aligned with fears of a prolonged slowdown, or a leg-down in demand;

■ Geographic outlook: Some signs of life in China, with US data marginally worse.

■ Is (discrete) automation by nature an ‘early-cycle’ market? We do not think so, and note that if we are merely seeing a mid-cycle pause, the acceleration in discrete automation demand later this year, could be fairly sharp.

The overall cycle – IP momentum may be at a trough

Our Strategy Team thinks that we will see a recovery in global industrial production momentum this quarter, which should provide a supportive backdrop for automation stocks.

Exhibit 173: Global IP Momentum and ISM New Orders

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

15

25

35

45

55

65

75

90 92 94 96 98 00 02 04 06 08 10 12

ISM New Orders (lhs) Global IP Momentum (rhs)

Source: Datastream, Credit Suisse

We show below the Strategy Team’s key views as expressed in the Global IP Scorecard report (August 10, 2012)”

“We expect China and Japan to lead a modest recovery in Global IP Momentum in Q3, probably reinforced by Europe and the US by Q4/Q1, as spending or expenditure delayed by (multiple) uncertainty shocks comes back into the system. In broad terms, this suggests a phase in which both core bonds and equities continue rallying together, but not without considerable volatility. By late this year or early next, a more decisive growth recovery would imply a more classic combination of higher yields and higher risky assets.

Q2 was the weakest three months for Global IP since Lehman and the Japanese earthquake; momentum has fallen from a February peak of 4.5% to a trough around -

14 August 2012


0.5% in June/July. But G3 policy is much more focused on supporting growth this year, global production appears to have undershot demand and PMI new orders seem to be stabilizing. China is showing early signs of recovery. European and US new orders have tentatively stabilized and METI expects Japanese IP to rebound strongly after a sharp drop.”

End-markets

In Exhibit 174 we show aggregated Credit Suisse global industrial analysts' sales growth expectations for 2012 and 2013, which we have carved up into a number of key industrial end-markets. In terms of the terminology in the table:

■ ‘Organic growth’: A function of the aggregated forecasts, which, given the number of different analysts and companies covered, we think offers a good proxy for ‘consensus’ expectations.

■ ‘Consensus’: Based on the growth rate expectations for 2012, we then bucket the end-markets into whether the consensus opinion appears ‘bullish’ (high growth expected), or ‘bearish’ (low growth expected), or somewhere around the overall average growth rate (‘neutral’ consensus view).

■ ‘Scope to surprise’: our view of whether the figures in the ‘organic growth’ column look overly optimistic or overly pessimistic.

Exhibit 174: End Market Outlook- Consensus view and the end markets we think could surprise Scope to

Consensus End Market 11 12E U.S. Europe APAC Surprise Key Themes EE/MI Exposure

Wind Power Generation 1% 17% 20 to 30% (2) to 0% 5 to 10% - Weak demand in most regions; US to see big 2013 drop GE, UTX

Biz Jet 11% 16% 15 to 25% 5 to 15% 25 to 35% - A discretionary big ticket corp capex item TXT, HON, UTX, GE

Oil & Gas Equipment 12% 10% 10 to 14% 10 to 14% 10 to 14% US gas-related demand softer; non-US demand is solid GE, DOV, EMR, GDI

Civil Aero OE 12% 10% 3 to 5% 7 to 9% 25 to 30% Muted Air Show; backlogs look sol id into 2014 GE, HON, UTX

Auto components 20% 9% 10 to 15% 0 to -5% 12 to 15% US good, China at a trough, Europe down significantly HON, SPW, TXT

Process Automation 10% 9% 6 to 8% 2 to 4% 11 to 13% + Downstream O&G picking up; Food & Bev strong EMR, HON, ROK, TYC, SPW

Aerospace Engines 7% 8% 3 to 5% 7 to 9% 10 to 12% Spares down substantially; OE holding up GE,UTX

Thermal Power Generation -2% 8% 4 to 6% 0 to 2% 10 to 12% Orders flat / down; US IGT recovery some way off GE, SPW

Civil Aero AM 14% 6% 8 to 10% 8 to 10% 8 to 10% - Muted traffic growth; Europe, US demand softening UTX, GE, HON

Water Management 6% 6% 4 to 6% 1 to 2% 8 to 10% Municipal risk in U.S. and Europe; strong EM DHR, GE, RXN

Rail Loco's + Signal ling 8% 6% 3 to 5% (1) to 1% 10 to 15% Growth mostly in Asia - market dominated by local players GE

Factory Tools 23% 5% 1 to 3% 1 to 3% 10 to 15% + Minimal demand growth; scope for Q4 re-stocking KMT

Industrial Products 13% 5% 2 to 4% 0 to 2% 10 to 15% Minimal demand growth; scope for Q4 re-stocking GDI, IR, RXN, UTX

Factory Automation 15% 4% 4 to 6% 0 to 2% 5 to 10% + Weak China, Europe demand; LT fundamentals look strong ROK, EMR, DOV

Elevators / Escalators 4% 3% 4 to 6% Flat 7 to 9% US and N Europe sluggish; China likely to decelerate UTX

Healthcare 5% 3% 2 to 3% (4%) to (6%) 7 to 9% Europe is weakening; US is sti ll ok, China sti ll strong DHR, GE

Fire & Security 5% 3% 1 to 3% 0 to (2%) 5 to 7% Retrofi t demand driving moderate growth HON, IR, TYC, UTX

Appliances 0% 3% 0 to 2% 0 to (2%) 8 to 10% + More positive US outlook; Europe soft GE

Lighting 6% 2% 3 to 4% 0 to 2% 8 to 10% Energy efficiency theme drives moderate growth CBE, GE

HVAC 8% 2% 2 to 5% 2 to 5% 10 to 12% Strong US Resi HVAC growth; Transport refrigeration rol ling over in 2H IR, UTX, EMR, HON, SPW

Power Grid Equipment 6% 2% 5 to 7% 1 to 3% 5 to 6% + US picking up but China remains fairly soft CBE, SPW, VMI

Helicopters 7% 2% (1) to 1% (1) to 1% (1) to 1% Civil orders recover slowly; US defense risk of cuts TXT, UTX

Low Voltage 8% 1% 4 to 6% 1 to 3% 8 to 10% Weak demand given construction markets CBE

Test & Measurement 15% 1% 2 to 6% 0 to 2% 8 to 11% Weak demand; scope for Q4 re-stocking SPW, DHR

Defense 1% 0% 0 to (2%) 0 to (2%) 2 to 4% - Defense budgets at risk, newsflow to remain negative TXT, UTX, HON, GE

Network Power 8% -1% (2) to 2% (2) to 2% 6 to 8% Some push-outs in US datacenter, servers; soft Telecom capex EMR

Transport 11% 8% 8% 5% 15%

Energy 4% 9% 12% 4% 9%

Industry 15% 5% 4% 2% 11%

Buildings 5% 2% 3% 1% 9%

Others 5% 1% 1% -2% 6%

Ov erall Av erage 9% 5% 6% 2% 11%

Organic Growth 2012 E Grow th by Region


Note: ‘+’ denotes we see scope for upgrades to organic growth; ‘-‘ denotes we see scope for downgrades to organic growth.

14 August 2012


Automation Tracker We monitor near-term demand via both bottom-up and macro data. We use our Vendor Data and End Market Trackers for bottom-up data. As evident below, commentary from global automation vendors has been fairly subdued, in particular among Europe-centric discrete automation vendors, such as Siemens. However, on the plus side, we note that Mitsubishi Electric (focused on discrete automation) has alluded to a recovery in demand, after several quarters of weakness, and process automation demand still appears very healthy.

Exhibit 175: Mitsubishi electric FA orders and Auto orders US$ in millions, unless otherwise stated

Source: Company data

Qualitative bottom-up data

Overall, we can see that Industry Sector commentary (comprising both Industrial Products, and Factory / Process automation end-markets) saw the biggest drop in the proportion of comments which were positive, between Q1 earnings (April), and Q2 earnings (July).

Exhibit 176: Change in Positive Commentary by End Market (Q411 to Q212) %, unless otherwise stated

71%67%

28%

14%

20%

86%

100%

72%

57%

92%

75%

19%

0%

80%84%

69%

63%57%

64%

58%

25% 25%

75%

39%

75%

47% 48%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Pos

itive

Com

men

tary

(% o

f tot

al c

omm

enta

ry)

Q4 2011 Q1 2012 Q2 2012


For instance, we note that only 17% of Industrial Products commentary is currently ‘positive’.

14 August 2012


Exhibit 177: End market commentary summary (Q212) %, unless otherwise stated

Sector End Market General Comment + = - SizeAppliances More positive US outlook; Europe soft 50% 50% 0% 2Construction US comm’l recovery pushed out to 2013; US Resi showing good improvement; China mixed 21% 36% 43% 14Fire & Security Low-single digit growth, retrofit driven 0% 0% 100% 4HVAC Strong US Resi HVAC growth, at slightly lower mix; Transport refrigeration rolling over in 2H 75% 25% 0% 4Lighting Low-single digit growth, retrofit driven 0% 75% 25% 4Total Buildings 25% 36% 39% 28Oil & Gas Equipment US gas-related demand softer; non-US demand is solid 75% 8% 17% 12Power Grid Equipment (T&D) Very strong US market; pricing potentially at an inflection point 60% 20% 20% 5Thermal Power Generation Orders flat / down due to tough comps; US IGT recovery some way off 60% 20% 20% 10Wind Power Generation US market collapsing ahead of PTC expiration; Europe offshore pushed out; China excess capacity 0% 25% 75% 4Total Energy 58% 16% 26% 31Industrial Products Deceleration in all regions; potentially suffering from de-stocking 17% 67% 17% 6Factory / Process Automation Factory down due to Europe; process remains very strong (O&G, F&B) 50% 8% 42% 12Total Industry 39% 28% 33% 18Aerospace Weak spares demand, particularly in engines; OE outlook remains solid 64% 18% 18% 11Automotive US holding up, China at a trough and is picking up, Europe down significantly 58% 8% 33% 12Rail (Loco's + Signaling) Resilient demand in Europe / US; China to accelerate in the 2H 60% 20% 20% 5Total Transportation 61% 14% 25% 28Defense Sequestration overhang in the US; market looks bleak into 2013 25% 0% 75% 4Healthcare European weakness offset by emerging markets strength; slight US growth 75% 0% 25% 4Network Power US telecom spending rebounding; datacenter investment is sluggish 100% 0% 0% 2Total Other 60% 0% 40% 10

Total 48% 21% 31% 115

Other

Buildings

Energy

Industry

Transport

Source: Credit Suisse research

Looking at the automation vendor commentary in detail, we think that the outlook is not as bleak as certain share prices / companies (Siemens and Rockwell Automation) would suggest – Schneider noted stabilization in demand, while Mitsubishi alluded to improvement.

Exhibit 178: Automation End Market Tracker Date Company Direction End market Comment

8/1/2012 Schneider AutomationWe've seen stabilizing. We see it actually quite stable over the past two quarters. And don't forget that even if we sell lines of product, ourstrategy is to sell them in solutions. So the dynamics are pretty linear or pretty similar or consistent across the lines of products because at theend of the day they are bundled together by machine manufacturers, system integrators into consistent systems.

7/30/2012 Mitsubishi Electric AutomationThe factory automation systems business saw an increase in sales from previous fiscal year owing to stable demand for smartphone- and tabletPC related investments mainly in Asia… The automotive equipment business saw increases in both orders and sales from the previous fiscalyear due to expansion in emerging markets including India and China as well as recovery in the North American Market.

7/30/2012 Cognex AutomationFactory automation revenue in the second quarter was flat year-on-year. The lack of growth was due to substantially lower revenue from thesolar industry and the unfavorable impact of currency exchange rates. Without these items factory automation revenue would have grown 9%year-on-year.

7/30/2012 Omron AutomationCapital investment demand was solid in automotive-related industries but sluggish in semiconductor- and electronic component-relatedindustries. Consequently, sales of core sensor and programmable controller products weakened.

7/26/2012 Siemens Automation

First is high innovative, top-of-the-line, tool-making environments, mostly in Germany and Northern Europe like Northern Italy and the likes, havebeen significantly stopping demand. … And they are not ordering as much service and OpEx-related parts anymore as they used to and that thedisti channel is still weak in terms of sell-out. So, that also would suggest that we have not yet seen the bottom of that weakness as we movealong.

7/26/2012 Metso Automation Good demand in both capital and services – still a good level of activity.

7/26/2012 ABB Automation (Process) Process Automation has continued to develop driven by strong trends in oil and gas.

7/26/2012 ABB Automation (Factory)

Orders declined in the quarter compared to the strong second quarter a year earlier, mainly reflecting lower demand from the renewable energyand rail sectors as well as reduced demand in China and southern Europe. Orders continued to grow in North America, including a double-digitincrease in orders for ABB’s low-voltage drives...But if you look at discrete automation and motion, particularly in the renewables industry inChina and our sales to that have been down in that marketplace quarter-on-quarter, so that hasn't necessarily revived itself. .When you look atour drives business, we've actually seen an increase, a continuing increase in our drives and sales in that marketplace. And so that's a reallygood sign for us.

7/26/2012 Metso Automation (Process)Earlier on this year we had issues with process automation systems, primarily volume and some other things that was also on a good level butwe don't think it will repeat the all time best result it had last year. So it will be at the good level, but repeating last year will be difficult.

7/25/2012 Rockwell Automation Automation (Factory)We believe motion will still be a little slower, particularly with what we're seeing with respect to the German OEM machinery export expectationsand what is going on in Italy.

7/25/2012 Rockwell Automation AutomationGenerally, all regions came in at the lower end of our growth rate expectation reflecting a slowing of market demand...Most of the signs point toa flattening of customer demand at least in the short-term.

7/25/2012 Rockwell Automation Automation (Process)Process continues to grow above the company average and we're not seeing anything in the front log or the order trend that would indicate thatProcess will not continue to be the higher rate of growth piece of our Solutions business.

7/18/2012 Danaher Automation (Factory)In Motion, core revenues declined at a high single digit rate in the quarter with softness in industrial automation, technology and renewableenergy markets across most major geographies. We expect the rate of year-over-year core sales decline to improve as we move forward for thebalance of the year, in part due to easier year-over-year comparisons.

7/18/2012 Honeywell Automation (Process)In ACS for the third quarter, we expect a modest uptick in ESS, driven by better year-over-year comps coupled with continued good growth inProcess Solutions in BSD as they continue to convert on strong backlogs.

7/17/2012 Alfa Laval Automation (Process) Process Industry showed strong growth, driven by refinery in Asia and Middle East.

6/26/2012 Robbins & Meyers Automation (Process)Process & Flow Control orders were up 16% year-over-year and 12% sequentially...We are benefiting from more and larger projects in Asia, andwe are loading the work into both Asian and European manufacturing locations.

=

-

+

+

++

-

=

-

+

-

+-

+

-

=

Source: Company data, Credit Suisse Research

14 August 2012


Quantitative bottom-up data

Using our Vendor Data, we can also see, in a more quantitative fashion, the extent to which Automation related markets have seen a softening, with Factory Automation being one of the weakest end-markets in terms of order growth in Q2.

Exhibit 179: Comparison of Q112 and Q212 actual y-o-y trends in Orders and Sales

Orders Trends Strongest trend Q1 to Q2 Weakest trend Q1 to Q2 Highest growth rate Q2 Lowest growth rate Q2

Power Grid Equipment Wind Power Generation Rail Loco's + Signalling Wind Power GenerationRail Loco's + Signalling Aerospace Engines Elevators / Escalators Thermal Power Generation

Network Power Oil & Gas Equipment Power Grid Equipment Factory Automation

Sales Trends Strongest trend Q1 to Q2 Weakest trend Q1 to Q2 Highest growth rate Q2 Lowest growth rate Q2

Aerospace Engines Factory Tools Aerospace Engines Factory ToolsBizJet Oil & Gas Equipment BizJet Automotive

Rail Loco's + Signalling Automotive Rail Loco's + Signalling HVAC

End-markets

End-markets


Aside from quarterly data, we also track monthly data, shown in Exhibit 180. We think the data is commensurate with some stabilization in end-demand, rather than a fresh leg down.

14 Au

gu

st 2012

Glo

bal In

du

strial Au

tom

ation

96

Exhibit 180: Monthly Automation data %, unless otherwise stated

PeriodKMT Orders

OrganicEMR IA Orders

EMR PM Orders

FAST Sales GWW Sales

Omron IA Orders

Yaskawa Orders THK Orders

Nabtesco Precision

Machinery Ordres Airtac Sales Hiwin Sales JMTBA Orders AMT Orders

Conveyor Equipment

Orders-North America

JMTBA Overseas

Leading DI US ISMUS ISM New

OrdersUS Capacity

Utilization

US Durable Goods Orders

Ex Trans, Ex Defense YoY%

US Factory Orders YoY% US IP YoY%

Germany Factory Orders YoY% China PMI

Dec-09 -22% -19% -20% -9% 11% 77% 87% 63% -6% 0.0 55.8 64.6 70% -3% 2% -3% 7% 56.6Jan-10 -13% -8% -15% 2% 12% 117% 134% 70% 244% 189% 24% -6% 0.0 56.7 60.6 71% 10% 16% 0% 21% 55.8Feb-10 -3% 3% -10% 4% 12% 65% 193% 375% 203% 217% 23% 15% 6.3 55.8 57.5 71% 11% 17% 1% 25% 52.0Mar-10 11% 9% 6% 12% 18% 223% 236% 295% 178% 262% 49% 16% 9.2 59.3 61.4 72% 18% 22% 3% 26% 55.1Apr-10 11% 18% 6% 19% 16% 68% 191% 243% 400% 149% 221% 107% 21% 7.8 59 64.5 72% 21% 24% 5% 30% 55.7

May-10 35% 22% 7% 21% 16% 73% 256% 259% 420% 163% 192% 55% 20% 12.5 58.8 66.1 74% 22% 20% 7% 25% 53.9Jun-10 39% 45% 11% 21% 18% 63% 163% 227% 285% 117% 139% 69% 53% 18.2 56 59.3 74% 22% 18% 8% 25% 52.1Jul-10 39% 45% 15% 24% 21% 58% 92% 179% 310% 126% 145% 71% 50% 13.6 55.7 54.9 75% 15% 17% 8% 18% 51.2

Aug-10 37% 41% 17% 22% 20% 58% 69% 144% 165% 164% 170% 84% 27% 12.3 57.4 55.6 75% 22% 16% 7% 20% 51.7Sep-10 33% 40% 24% 24% 18% 53% 32% 104% 85% 145% 114% 154% 38% 10.6 56.4 54.5 75% 17% 19% 7% 14% 53.8Oct-10 32% 33% 25% 22% 11% 48% 21% 64% 55% 127% 71% 150% 1% 4.5 57 58.7 75% 14% 15% 6% 18% 54.7Nov-10 30% 30% 25% 18% 14% 48% 13% 60% 90% 128% 104% 78% 22% 4.6 58 57.8 75% 19% 17% 6% 21% 55.2Dec-10 31% 30% 26% 21% 16% 41% 3% 58% 60% 124% 64% 112% 51% 3.0 57.3 59 76% 17% 17% 7% 20% 53.9Jan-11 28% 29% 28% 19% 10% 38% 25% 33% 115% 43% 96% 90% 186% 41% 4.5 59.9 63.8 76% 17% 13% 6% 17% 52.9Feb-11 25% 28% 25% 22% 11% 38% 19% 28% 15% 53% 101% 74% 99% 48% 4.5 59.8 62.7 76% 12% 11% 5% 20% 52.2Mar-11 25% 27% 18% 23% 12% 33% 3% 17% 40% 42% 90% 50% 95% 44% 6.1 59.7 61.9 77% 11% 14% 5% 10% 53.4Apr-11 24% 23% 17% 23% 14% 13% 10% 4% 55% 24% 85% 32% 74% 72% 4.5 59.7 62.7 76% 13% 11% 4% 11% 52.9

May-11 24% 19% 16% 23% 11% 13% 20% -12% 15% 18% 96% 34% 127% 34% 9.2 54.2 55 76% 11% 13% 3% 12% 52.0Jun-11 24% 12% 13% 23% 12% 9% 5% -18% 75% 25% 94% 54% 92% 0% 9.2 55.8 53.6 76% 6% 13% 3% 9% 50.9Jul-11 22% 5% 11% 22% 10% 6% 8% -25% -5% 15% 79% 35% 91% 7% 4.6 51.4 50.8 77% 15% 14% 3% 9% 50.7

Aug-11 20% 1% 18% 20% 10% 6% -14% -32% 60% 12% 77% 15% 102% 27% 4.6 52.5 51.8 77% 7% 13% 3% 4% 50.9Sep-11 17% 2% 16% 19% 14% 5% -15% -31% 30% 12% 72% 20% 46% 35% 7.7 52.5 51.1 77% 8% 9% 3% 2% 51.2Oct-11 13% 2% 25% 21% 16% 2% -16% -27% 0% 16% 64% 26% 19% 104% 4.6 51.8 53.4 78% 15% 10% 4% 5% 50.4Nov-11 13% 5% 20% 22% 15% 2% -1% -26% 0% 1% 57% 16% 36% 17% 6.2 52.2 55 78% 3% 10% 4% -4% 49.0Dec-11 14% 3% 15% 21% 10% 1% -6% -33% 25% 14% -20% 17% 20% 34% 6.2 53.1 54.8 78% 8% 12% 4% 0% 50.3Jan-12 14% 3% 11% 21% 17% 0% 3% -26% 10% -48% -19% -7% 12% 6% 4.6 54.1 57.6 79% 7% 7% 4% -6% 50.5Feb-12 13% 3% 10% 20% 18% 0% -7% -23% -10% 43% -23% -9% 34% 25% 6.1 52.4 54.9 79% 12% 10% 5% -6% 51.0Mar-12 8% 3% 17% 19% 15% 0% -2% -21% 85% 3% -23% 2% -2% 24% 6.1 53.4 54.5 78% 4% 3% 4% 0% 53.1Apr-12 5% 0% 22% 17% 12% -18% -20% -17% -15% -6% -2% 0% 4% 4% 7.6 54.8 58.2 79% 3% 3.4% 5% -3% 53.3

May-12 1% -3% 20% 13% 13% -13% -21% -5% -20% 9% -17% -3% 19% 24% 7.6 53.5 60.1 79% 3% 2.7% 4% -5% 50.4Jun-12 1% -3% 19% 14% 12% -5% -8% 0% -20% -16% 6.1 49.7 47.8 79% 0% 3% 5% -8% 50.2Jul-12 12% -10% 3.0 49.8 48 50.1

Q1 12 v Q411 - = - - + - + + + - - - - - - + + + + + + - +Q212 v Q112 - - + - - - - + - - + + - - = - - = = = = = -

Total - = + - = + TotalQ1 12 v Q411 13 2 8 57% 9% 35% 100%Q212 v Q112 16 0 7 70% 0% 30% 100%

23 163%23 229%

Oct-Dec13% 3% 20% 22% 14% 2% -8% -29% 8% 10% 34% 20% 25% 52% 567% 52.4 54.4 78% 9% 11% 4% 0% 49.9

Jan-Mar 12% 3% 12% 20% 17% 0% -2% -23% 28% -1% -22% -5% 15% 18% 560% 53.3 55.7 79% 8% 6% 4% -4% 51.5 Apr -May 2% -2% 20% 15% 12% -15% -15% -10% -18% 1% -13% -6% 11% 14% 710% 52.7 55.4 79% 2% 3% 5% -6% 51.3

#DIV/0! (1.00) (1.00) 1.00 (1.00) (1.00) (1.00) (1.00) 1.00 (1.00) 1.00 1.00 (1.00) (1.00) (1.00) 1.00 (1.00) (1.00) 1.00 (1.00) (1.00) 1.00 (1.00) (1.00)

Macro DataAmericas Asia 3rd Party Data

Change in trend in Orders/ Sales

Positive / negative datapoints


14 August 2012


Geographic outlook Global PMI data has been fairly subdued in recent months, as have investor expectations. Any improvement or even stabilization here will drive more favorable sentiment towards automation vendors.

Exhibit 181: Global PMI data

30

35

40

45

50

55

60

65

Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12

Global Eurozone US China

Source: Bloomberg

One concerning trend in the Q2 earnings has been the allusion by some companies to an incremental softening in US demand (see our Q2 2012 Temperature Check report for more details). When we look at the future capex expectations within the US regional manufacturing surveys, we see these are down, but would highlight that these time series are highly volatile, and have taken sharp leg downs in both 2010 and 2011, before re-accelerating. We think that US corporate capex has proved its resilience in the face of numerous headwinds over the past 3 years, and are not convinced that this time ‘things are different’.

Exhibit 182: Future capex expectations in US regional manufacturing surveys

-50

-40

-30

-20

-10

0

10

20

30

40

50

Jul-02 Jul-04 Jul-06 Jul-08 Jul-10 Jul-12

6m Expectations - Capital Expenditure

Empire State SurveyRichmondPhiladelphia

Source: Bloomberg

We show below the orders and sales growth by quarter in different regions for business lines which we classify within the Industry Sector. EMEA and non-Japan Asia have both slowed to around zero, with N America growing at a high -single digit pace still.

14 August 2012


Exhibit 183: Quarterly Sales Change Americas % yoy, unless otherwise stated

Exhibit 184: Quarterly Sales Change EMEA / Asia % yoy, unless otherwise stated

YoY change Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12SalesAmericasNorth AmericaEMR* US 13% 6% 3% -4% 3% 6%EMR* Canada 22% 20% 15% 6% 10% 10%Fanuc US -11% 58% 50% 49% -28% --Keyence Americas 21% 12% 13% 12% --KMT* Americas 25% 31% 33% 16% 12% -2%OSG Americas 24% 20% 8% 2% 5% 9%ROK* US 26% 21% 18% 8% 5% 6%ROK* Canada 9% 8% 20% 11% 25% 24%Sandvik* US / North Am 25% 29% 16% 18% 23% 14%Schneider* North Am 15% 8% 9% 8% 8% --Siemens* Americas 13% 14% 12% 2% 11% 5%Siemens* US 9% 15% 9% 2% 14% 10%SKF* North Am 25% 16% 10% 6% 15% 9%SPW Americas 9% 18% 7% 10% 7% --Average 16% 20% 16% 10% 9% 9%Median 15% 19% 12% 8% 11% 9%

LatAmEMR* Lat Am 26% 17% 22% 3% 11% --ROK* Lat Am 38% 21% 23% 14% 4% 5%SKF* Lat Am 18% 3% 10% 11% 11% 17%Average 23% 16% 18% 9% 9% 11%Median 26% 17% 22% 11% 11% 11%Americas Avg 18% 20% 16% 10% 9% 9%Americas Median 20% 18% 12% 8% 11% 9%

YoY change Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12EMEACompany RegionABB* Europe 16% 15% 3% 12% 6% 1%EMR* Europe 17% 9% 10% 0% -4% 0%Fanuc Europe -19% 46% 28% 19% 37% --KMT* Europe 23% 24% 21% 12% 13% 3%Keyence Europe and others -- 35% 23% 8% 8% --OSG Europe 13% 24% 22% 13% 11% 2%ROK* EMEA 30% 19% 12% 9% 7% 3%Sandvik* Europe 29% 22% 22% 7% 3% -3%Schneider* Western Europe 6% 2% 0% -3% -5% --Siemens* EMEA / CIS 1% 3% 5% 2% 5% 3%Siemens* Germany 5% 0% 4% 1% 6% 4%SKF* Europe 22% 14% 10% 1% -1% -3%SPW Europe / CIS -2% -9% 7% 11% -9% --Average 12% 16% 13% 7% 6% 1%Median 15% 15% 10% 8% 6% 2%

AsiaCompany RegionABB* Asia 6% 10% 10% 9% 10% 9%EMR* Asia 10% 12% 13% -8% 2% 9%Fanuc Asia 5% 12% 5% -3% 62% --KMT* Asia 26% 31% 14% 11% 8% -4%Keyence Asia -- 15% 4% -13% -11% --OSG Asia 46% 34% 20% 4% -1% -2%ROK* Asia Pac 22% 14% 15% 0% 9% 7%Sandvik* Asia 25% 17% 10% 9% 5% 12%Schneider* Asia Pac 18% 15% 15% 14% -2% --Siemens* Asia / Australia 11% 12% 16% 6% 5% 3%Siemens* China 18% 13% 18% -4% -11% -4%Siemens* India 19% 34% -- 8% -- -12%SKF* Asia 22% 17% 5% 1% -8% -8%SPW Asia 38% 42% 8% 20% 20% --Average 21% 20% 12% 4% 7% 1%Median 20% 15% 13% 4% 5% 0%


Exhibit 185: Quarterly Sales Change Other / Global Totals% yoy, unless otherwise stated

Exhibit 186: Quarterly Orders Change % yoy, unless otherwise stated

YoY change Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12OtherCompanyABB* MEA 4% -2% -9% -1% -10% -9%EMR* MEA 13% 26% 13% -4% 5% 5%Fanuc RoW 1% 101% 70% 120% -31% --Keyence Japan -- 15% 4% 5% -3% --OSG Japan 23% 14% 7% 14% 12% 21%Schneider* RoW 10% 14% 10% 10% 5% --SPW MEA 12% 25% 10% 8% 9% --Average 10% 28% 16% 24% -4% 6%Median 11% 15% 10% 8% 5% 5%

GlobalCompanyABB* Total 18% 17% 11% 16% 8% 6%DHR Total 10% 8% 8% 4% 2% 4%EMR* Total 14% 10% 9% -4% 2% 6%Fanuc Total 6% 32% 23% 16% 14% --HON* Total 11% 8% 8% 7% 6% 4%KMT* Total 25% 24% 17% 14% 11% 2%Keyence Total -- 17% 6% 4% -2% --OSG Total 28% 19% 13% 9% 7% 12%Philips Total 4% 6% 3% 4% 5%ROK* Total 24% 13% 17% 8% 7% 7%Schneider* Total 12% 9% 8% 6% 0% --Siemens* Total 6% 8% 9% 3% 7% 3%SKF* Total 21% 14% 8% 3% 1% -1%SPW* Total 3% 6% 4% 13% 7% --Average 15% 13% 10% 7% 5% 5%Median 13% 12% 9% 7% 6% 5%

YoY change Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12OrdersAmericasCompany RegionABB* Americas 41% 34% 17% 11% 23% 10%ABB* Brazil 22% 38% 32% -8% 26% 12%ABB* US 20% 34% 7% 25% 16% 13%Siemens* Americas 13% 1% 1% 5% -5% -19%Siemens* US 15% 6% -2% 6% 1% -28%

EMEACompany RegionABB* Europe 18% 6% 2% -8% -1% 2%ABB* Germany 23% -2% 14% 4% 14% -10%ABB* MEA -6% -27% 0% -18% 2% 34%Siemens* Germany 33% 99% 5% -2% -40% -62%Siemens* EMEA / CIS 79% 34% 58% -7% -22% -38%

AsiaCompany RegionABB* Asia 39% 24% 8% 61% -11% -1%ABB* China 70% 4% -5% 6% -35% -2%ABB* India -3% 39% 25% 300+% 18% 11%Siemens* Asia / Australia 29% 39% -3% -9% -13% -4%Siemens* China 15% 29% 4% -17% -12% -5%Siemens* India 58% 31% -- -59% -- 7%

GlobalABB* Total 25% 18% 12% 17% 0% 6%Siemens* Total 27% 25% 2% -4% -16% -27%


Discrete automation is ‘short-cycle’, but not necessarily ‘early-cycle’; process automation is neither Automation (particularly discrete) is definitely a ‘short-cycle’ market (in that orders are billed as sales within one quarter, and there is limited backlog for automation vendors to draw down when incoming new orders slow down), and it is early-cycle to the extent that discrete automation growth rates on a global basis in this cycle probably peaked in 2010,

14 August 2012


at 21% (Exhibit 187). However, while future growth rates may struggle to reach this 21% rate again for the balance of this cycle, we think that automation growth rates will still exceed the overall end-market average growth rate (forecasted at c6%), for the reasons we discussed earlier in this report. It is less easy to characterize process automation as ‘early-cycle’, given revenues only started to recover in 2011, and much of the demand is ‘long-cycle’ (for instance the provision of process controls for nuclear power stations – these power plants can take 7 years to build).

While we acknowledge the outlook for discrete automation has deteriorated of late, we believe this more likely reflects a pause in customer confidence and investment, than the end of a recovery. We are aware that we are in the 3rd year of an industrial up-cycle and that discrete automation markets have recovered strongly off the 08-09 troughs, but still see scope for automation markets and stocks to outperform.

Exhibit 187: End-market growth rates, annually %, unless otherwise stated

End Market Organic Sales Growth

Sector End-market 2005 2006 2007 2008 2009 2010 2011 2012E

Appliances 6% 15% 6% -4% -9% 5% 0% 3%Elevators / Escalators 7% 10% 10% 8% 0% -1% 4% 3%

Fire & Security 4% 3% 3% 2% -7% -2% 5% 3%HVAC 7% 8% 7% 1% -18% 8% 8% 2%

Lighting 4% 6% 9% 3% -15% 11% 6% 2%Low Voltage 8% 8% 9% 3% -17% 8% 8% 1%

Water Management 4% 6% 6%Oil & Gas Equipment 12% 20% 19% 20% -2% 4% 12% 10%

Power Grid Equipment 12% 15% 19% 12% -3% -1% 6% 2%Thermal Power Generation 12% 15% 17% 16% 8% -9% -2% 8%

Wind Power Generation 57% 27% 41% 38% 1% -2% 1% 17%Factory Automation 9% 11% 11% 2% -20% 21% 15% 4%Factory Tools 11% 9% 7% 3% -31% 16% 23% 5%

Industrial Products 9% 12% 10% 4% -16% 9% 13% 6%Process Automation 8% 11% 9% 11% -5% -3% 10% 9%

Test & Measurement 11% 15% 5% 1% -26% 17% 15% 1%Auto components 10% 3% 11% -5% -25% 35% 20% 9%

Aerospace Engines -3% 29% 5% 4% -6% -4% 7% 7%Biz Jet 25% 20% 17% 10% -12% -5% 11% 16%Civil Aero AM 14% 0% 11% 10% -12% 0% 13% 5%

Civil Aero OE 14% 18% 10% 7% -16% 2% 12% 10%

Helicopters 9% 10% 9% 4% 4% 3% 7% 2%Rail Loco's + Signalling -1% 6% 5% 32% 1% -4% 8% 6%Defense 8% 7% 7% 8% 10% 4% 1% 0%Healthcare 7% 6% 3% 2% -2% 3% 5% 3%Network Power 9% 9% 0% 11% -9% 3% 8% -1%

Buildings 6% 8% 7% 2% -11% 5% 5% 2%Energy 23% 19% 24% 22% 1% -2% 4% 9%

Industry 10% 12% 9% 4% -20% 12% 15% 5%

Transport 10% 12% 10% 9% -9% 4% 11% 8%

Others 8% 7% 3% 7% 0% 3% 5% 1%

Overall Average 11% 12% 10% 8% -9% 5% 9% 5%

Others

Annual

Buildings

Transport

Energy

Industry


14 August 2012


Automation stocks In this section we highlight the major automation vendors globally and offer our preferred investment ideas. Our valuation table is shown in Exhibit 194.

Preferred stocks Americas: Rockwell Automation (ROK, OP, coverage analyst Julian Mitchell)

Although we have preferred ‘self-help’ names in the EE/MI sector over the past 6 months, we think expectations are now sufficiently low on a number of more-cyclical names, creating a favorable risk / reward profile. In addition to underperforming US EE/MI stocks, ROK has underperformed its global automation peers (Exhibit 188) and the valuation multiple is now cheap (Exhibit 193). The potential for market share gains in process automation, and in its core discrete automation market (where ROK is gaining significant traction in Europe) should provide for above average organic growth. It’s pure-play status, and focus on the controls side of the discrete automation market (where we think M&A will increasingly be focused), also render it a potential take-out target, in our view.

Europe: Siemens (SIEGn.DE; OP, coverage analyst Simon Smith)

Siemens generates 31% of profits from automation and is the world leader in factory automation systems. Siemens offers an attractive valuation and could benefit from the following potential catalysts over the next 12 months: 1) Chinese automation growth – the IA and DT businesses are currently being impacted by cyclical weakness but in 2013 we expect the drive for greater automation in China will benefit Siemens’ strongly positioned business; 2) Productivity savings- In September Siemens will unveil a new company wide cost cutting programme with potential cost savings of €€ 1bn, which should give self-help support to earnings in 2013; and 3) Releveraging – Siemens has already announced a €€ 3bn share buyback programme in 2013 and we would expect to see further action in future.

Japan: Keyence (6861, OP, coverage analyst Shinji Kuroda)

We reiterate our OUTPERFORM rating on Keyence, which we view as a highly profitable, cash-rich company capable of sustaining organic profit growth in an uncertain macro environment. As we had been projecting, the company achieved OP of ¥22.8bn in 1Q FY3/13, which was a record 1Q result for Keyence. Market share also reached a new high. We think the 1Q results underscore Keyence’s ability to generate strong profits in the face of a slowing macro economy. The company’s 4% YoY OP growth is all the more laudable when we consider that Yaskawa Electric, Omron, and Mitsubishi Electric reported declines of 54%, 33%, and 11%, respectively. Keyence has a world-leading team of salespersons specializing in automation consulting, which it plans to deploy in aggressively pursuing new business in Asia—and later the US and Europe—as populations age in those markets (i.e., the so-called "silver cycle"). The company had an overseas sales weighting of 37% in 1Q FY3/13, and aims to ramp up that figure to 50%. Over the long term, we think Keyence has extremely high growth potential, as we expect it to make full use of the ¥560.2bn in cash and equivalents on its balance sheet, accounting for around 82% of total assets.

In using the term “silver cycle,” we refer to the expected growth in automation and labor-saving investment as Asia grapples with the onset of an aging society and associated lack of manpower. We provide a detailed explanation of this silver cycle in our recent reports on SMC (6273; published on 18 June), Keyence (6861; 14 June), and Fanuc (6954; 28 June).

14 August 2012


Japan: Fanuc (6954, OP, coverage analyst Shinji Kuroda)

We believe the investment community is overly concerned about the near-term demand outlook for Fanuc RoboDrills (tapping machines) used in iPhone-body processing. We would refer such investors, however, to the company’s FA segment, which sells computer numerical control (CNC) equipment and has an estimated OP margin of 60% and OP weighting of roughly 70%. Over the medium to long term we see FA segment profits growing on the back of rising use of CNC equipment across China, which is now the world's largest machine tool producer (currently the diffusion rate in China for CNC equipment is 30%, but we estimate this will reach around 50% in three to five years. We note also that Fanuc’s robot segment, which has an estimated OP margin of 20% and 10% OP weighting, now holds a 20% or so global market share. Going forward we see abundant room for growth driven by an increase in robot adoption in China (taken as a percentage of the Japanese figure, the rate of robot adoption in China is just 8%), and rising demand for general assembly and material-handling robots for use in place of humans. We also see significant growth potential for general machinery in the application of robotics to machine tools. We estimate that if one-third of all new machine tools were fitted with a single robot, new robot demand would effectively double.

Japan: Mitsubishi Electric (6503 JP, OP, coverage analyst Hideyuki Maekawa)

Mitsubishi Electric’s factory automation business accounts for 20-30% of total OP. As part of its growth strategies, the company is spearheading the uses of integrated solutions and global technological support capabilities. Overseas business accounts for 60% of FA revenues. The company boasts top global share for its flagship products such as PLCs (global share 20%, China market share 25%), AC servomotors (19%, 24%) and laser processing machines/PCB processing (60%, 75%). One of the key focus areas is China, where MEI’s market share is above average and the company is making continuous investments through setting up dedicated production and solutions center.

Non-Japan Asia: Teco (1504 TT, OP, coverage analyst Jerry Su)

Teco is the third largest mid-range and large motor supplier globally with 10% market share. Motor is the core business for Teco and accounts for 50% of Teco’s 2011 revenue. Teco’s global mid/large motor market share has doubled to ~10% in 2011 from ~5% in 2003. We forecast an 8% CAGR in motor revenue from 2011-14, thanks to share gain and increasing industrial motor demand, especially from the North America. The company has been leveraging its know-how in motor to expand its footprint in system automation and wind power. We believe system automation (13% of sales in 2011) will be the next growth driver for Teco on ramp of own brand solutions with a better margin profile.

Non-Japan Asia: Delta (2308 TT, OP, coverage analyst Pauline Chen)

While industrial automation only accounts for 8% of Delta’s total revenue, it represents an estimated 20-25% of Delta’s operating profits. We believe that Delta is in a good position to gain share in the growing market in China, thanks to its competitive cost structure, flexibility in delivery and customization, expanding product portfolio (both horizontal and vertical), strengthening channel distribution and brand awareness, and proven track record. As a result, we believe industrial automation will be a multi-year growth driver for Delta.

14 August 2012


Share price performance, and valuation multiples There are a couple of observations we would make around the share price performance / multiples of global automation stocks, with investment implications:

■ US automation stocks have under-performed global peers despite broader US equity markets performing relatively well and U.S. macro data remaining strong relative to other regions - we think this offers scope for U.S. names to catch-up. We highlight ROK in particular;

Exhibit 188: Automation Comps (High Exposure) YTD Performance %, unless otherwise stated

-50%

0%

50%

100%

150%

200%

3D S

yste

ms

Stra

tasy

s In

cKu

kaSi

asun

Sulz

erG

ildem

eist

erD

assa

ult

PTC

Airta

cRo

tork

Yoko

gaw

aKe

yenc

eIn

vens

ysAu

tode

skH

ardi

nge

IMI P

lcO

SGEb

ara

Kron

esEm

erso

nId

exH

iwin

Teco

SPX

Cor

pFa

nuc

SMC

Kenn

amet

alG

EAO

mro

nH

olly

sys

Wuh

an H

uazh

ong

Siem

ens

Cog

nex

ABB

Hurc

oR

ockw

ell

Oku

ma

New

port

Alfa

Lav

alM

itsub

ishi

Ele

ctric

THK

Yask

awa

Rof

in-S

inar

Mak

ino

Mor

i Sei

kiC

AG

Source: Datastream

■ 3-D printing is the strongest growth portion of the market at present, with sharp increases in consensus EPS forecasts YTD, compared to reductions in forecasts for a number of typical automation bellwethers. 3D Systems and Stratasys have benefited notably;

Exhibit 189: Change in consensus EPS (YTD %) vs. YTD price performance %, unless otherwise stated

3D Systems

Hardinge Idex

Stratasys Inc

OSGSMC

THK

Wuhan Huazhong

Newport

Rofin-Sinar

SPX Corp

Gildemeister

IMI Plc

KukaRotork

SulzerAirtac

CAGFanuc

Hiwin Keyence

MakinoMori Seiki

Okuma

Omron

Yaskawa

-50%

0%

50%

100%

150%

200%

-50.0% -40.0% -30.0% -20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0%

Change in consensus EPS (YTD %)

YT

D P

erfo

rman

ce

Source: Bloomberg

14 August 2012


■ We think automation stocks (including discrete automation) are not doomed to only perform well early on in the up-cycle: As we noted in an earlier section of the report, a fairly common perception among investors is that industrial automation (particularly on the discrete side) is an ‘early-cycle’ growth market. The outperformance so far this year of automation stocks in several regions globally (Europe, Japan) suggests that this perception is no longer (if it ever was) particularly relevant.

Exhibit 190: YTD performance of companies with respect to their equity indices %, unless otherwise stated

-50%

0%

50%

100%

150%

200%

3D S

yste

ms

Stra

tasy

s In

cSi

asun

Sulze

rKu

kaD

assa

ult

Airta

cYo

koga

wa

Keye

nce

Rot

ork

PTC

OSG

Inve

nsys

IMI P

lcEb

ara

Gild

emei

ster

Auto

desk

Hard

inge

Hiwi

nH

olly

sys

Teco

Wuh

an H

uazh

ong

Fanu

cSM

CO

mro

nEm

erso

nId

exSP

X C

orp

Kenn

amet

alO

kum

aAB

BKr

ones

Cog

nex

Hur

coM

itsub

ishi

Ele

ctric

GEA TH

KRo

ckw

ell

Yask

awa

Alfa

Lav

alSi

emen

sM

akin

oNe

wpor

tM

ori S

eiki

Rof

in-S

inar

CAG

YTD Perf rel to local indices

Source: Datastream

■ European stocks have performed fairly well YTD: Although European short-cycle demand is weak, and PMIs in Europe are well below the levels of other regions, the European automation related stocks have performed well – Kuka and Gildemeister for instance. This suggests the relative underperformance of the US peers is likely linked to China concerns (as the US economy still appears the healthiest of the three major economies). As we discussed earlier, we think these concerns will abate somewhat as we move through the balance of the year.

■ Over the long-run, automation stocks tend to outperform local markets: We show below the 10 year performance of automation stocks relative to their respective broader market indices.

14 August 2012


Exhibit 191: 10 year price performance %, unless otherwise stated

-300%

-100%

100%

300%

500%

700%

900%

1100%

1300%

1500%St

rata

sys

Inc

Hur

co3D

Sys

tem

sR

otor

kAu

tode

skAl

fa L

aval

Sulze

rR

ofin

-Sin

arR

ockw

ell

ABB

IMI P

lcG

EAFa

nuc

PTC

Das

saul

tO

kum

aO

SG Idex

Kenn

amet

alM

itsub

ishi E

lect

ricC

ogne

xKe

yenc

eYa

skaw

aEm

erso

nKr

ones

SMC

Mak

ino

Yoko

gaw

aO

mro

nG

ildem

eist

erTe

coKu

kaTH

KM

ori S

eiki

Ebar

aSP

X C

orp

Siem

ens

Har

ding

eN

ewpo

rtIn

vens

ys

10 Year Performance rel to respective local indices

Source: Datstream

■ Yield is not bad for cyclical stocks: Although we would tend to characterize industrial automation stocks as predominantly ‘growth’ stocks, we note that the dividend yields are quite respectable, on average. Teco, Siemens, Mori Seiki and ABB have the highest dividend yields.

Exhibit 192: Dividend yield %, unless otherwise stated

0%

1%

2%

3%

4%

5%

6%

Teco

Siem

ens

Mor

i Sei

kiAB

BC

AGIM

I Plc

Airta

cEm

erso

nRo

ckwe

llAl

fa L

aval

GEA

Sulz

erM

akin

oO

SGG

ildem

eist

erId

exH

iwin

Yask

awa

Mits

ubis

hi E

lect

ricFa

nuc

Om

ron

Oku

ma

Inve

nsys

Ebar

aKe

nnam

etal

Rot

ork

THK

SPX

Corp

Kron

esW

uhan

Hua

zhon

gC

ogne

xH

ardi

nge

Das

saul

tYo

koga

wa

SMC

Keye

nce

Source: Datastream

■ Valuation multiple appears consistent with broader industrial sectors, with EV/sales multiples broadly at 10X EBIT margins: The names which look ‘expensive’ on this basis include the 3-D printing companies, and the Taiwanese names; most of the rest look ‘cheap’.

14 August 2012


Exhibit 193: EV/ Sales (2012E) vs. EBIT Margin (2012E) US$ in millions, unless otherwise stated

3D Systems Corporation

Ametek

Cognex

Emerson

Hurco

Idex

Stratasys Inc

SMC

KennametalNewport

PTC

Rockwell Automation

Rofin-Sinar

ABB Alfa Laval

Dassault Systems

GEA

IMI Plc

Krones

Rotork

Sulzer

Airtac

Fanuc

Hiwin

Hollysys

Keyence

Omron

0x

1x

2x

3x

4x

5x

6x

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0%

EV/S

ales

(FY1

)

EBIT Margin

Source: Datastream, Credit Suisse estimates

■ Who looks cheap on an absolute basis? We show in Exhibit 194 the valuation multiples of the major automation-related stocks globally. We think that Rockwell Automation, Invensys, SPX Corp, Kuka, Metso, Mitsubishi Electric, Siemens, and Omron look cheap, relative to local and global peers.

14 August 2012


Exhibit 194: Automation Comps Valuation Table x, unless otherwise stated

Market CapDividend

YieldUSD bn FY1 FY2 FY1 FY2 FY1 FY2 FY1 FY2

3D Systems Corporation 1.9 29.9X 25.8X 16.5X 13.9X 16.1X 11.4X 3.7X 3.1X 0.0%Ametek 8.3 18.5X 16.5X 12.1X 11.1X 10.7X 9.8X 2.6X 2.4X 0.7%

AspenTech 2.2Autodesk 8.1 17.4X 17.9X 10.1X 8.6X 9.3X 8.2X 2.6X 2.4X 0.0%Cognex 1.3 18.3X 14.6X 17.8X 14.0X 15.3X 12.4X 4.7X 4.1X 1.4%

Crane Co 2.1 9.5X 8.5X 8.7X 7.9X 7.4X 6.8X 1.1X 1.1X 2.9%Danaher 34.8 16.6X 14.9X 13.2X 12.0X 11.0X 10.1X 2.3X 2.2X 0.2%Emerson 32.8 15.2X 13.6X 9.4X 8.6X 7.9X 7.3X 1.7X 1.6X 3.5%Flowserve 6.0 15.0X 12.7X 9.9X 8.7X 8.5X 7.5X 1.4X 1.3X 1.3%

GE 207.6 13.8X 12.4X 28.9X 25.5X 25.8X 23.0X 3.6X 3.5X 3.5%Hardinge 0.1 8.3X 7.7X 0.9%Honeywell 42.4 13.1X 12.2X 9.7X 8.5X 8.2X 7.4X 1.3X 1.3X 2.7%

Hurco 0.1 10.5X 9.2X 6.7X 5.5X 0.7X 0.6X 0.0%Idex 3.1 12.8X 11.5X 10.8X 9.8X 9.1X 8.3X 2.0X 1.9X 2.2%

Kennametal 2.7 9.9X 9.0X 6.6X 5.9X 5.4X 5.0X 1.0X 1.0X 1.7%Newport 0.4 12.1X 8.2X 13.5X 9.5X 7.2X 6.2X 1.3X 1.2X 0.0%

PTC 2.6 14.8X 12.7X 10.4X 9.3X 8.4X 7.3X 2.0X 1.9XRockwell Automation 10.1 13.9X 12.7X 9.8X 9.1X 8.6X 8.1X 1.6X 1.5X 3.0%

Rofin-Sinar 0.5 13.1X 10.1X 10.2X 8.1X 8.2X 6.9X 1.2X 1.1X 0.0%Roper 9.2 19.6X 17.8X 13.8X 12.8X 11.5X 10.8X 3.4X 3.2X 0.6%

Sensata 4.7 12.7X 10.6X 12.0X 10.4X 10.0X 8.6X 2.8X 2.6X 0.0%SPX Corp 3.0 16.2X 12.4X 14.2X 11.3X 10.4X 8.8X 0.9X 0.9X 1.7%

Stratasys Inc 1.1 39.6X 34.1X 18.4X 14.5X 13.6X 11.4X 3.9X 3.4X 0.0%ABB 37.5 12.8X 11.8X 8.6X 8.0X 7.1X 6.7X 1.0X 1.0X 4.1%

Alfa Laval 7.2 13.2X 12.3X 11.1X 10.3X 9.2X 8.7X 1.8X 1.7X 2.8%Dassault Systems 12.3 23.7X 20.7X 14.7X 12.7X 13.0X 11.2X 4.2X 3.8X

Gildemeister 0.9 9.1X 8.6X 6.7X 6.2X 5.4X 5.2X 0.5X 0.5X 2.0%GEA 4.9 11.7X 10.3X 9.8X 8.5X 7.8X 6.9X 0.9X 0.9X 2.5%

IMI Plc 4.0 11.3X 10.9X 9.7X 9.2X 7.6X 7.2X 1.4X 1.4X 3.8%Invensys 3.0 13.3X 11.4X 10.6X 8.6X 7.5X 6.4X 0.8X 0.8X 1.9%Krones 1.6 13.2X 11.5X 8.5X 7.4X 5.5X 5.0X 0.4X 0.4X 1.4%Kuka 0.8 14.7X 13.2X 6.8X 6.4X 5.1X 4.9X 0.4X 0.4X 0.0%Metso 5.0 10.1X 9.0X 7.6X 6.8X 5.9X 5.3X 0.7X 0.6X 6.4%Rotork 2.9 20.7X 19.4X 15.1X 14.0X 13.8X 12.8X 3.7X 3.5X 2.3%

Sandvik 15.5 12.3X 11.1X 9.6X 8.9X 7.4X 6.8X 1.5X 1.4X 3.8%Schneider 29.0 12.5X 11.7X 10.9X 10.4X 8.6X 8.2X 1.4X 1.3X 3.9%

Schuler 0.7 12.5X 11.9X 3.0X 3.0X 2.4X 2.4X 0.2X 0.2X 1.3%Siemens 83.2 10.7X 11.2X 11.2X 9.6X 8.0X 7.1X 1.0X 0.9X 4.4%Sulzer 4.2 14.7X 13.6X 11.3X 10.5X 8.8X 8.3X 1.2X 1.2X 2.5%

Weir Group 5.0 11.8X 11.7X 10.3X 10.1X 8.6X 8.4X 1.8X 1.7X 2.2%Airtac 0.7 16.1X 12.9X 2.6X 2.1X 2.3X 1.9X 3.9X 0.7X 3.5%

Amada 2.2 15.4X 13.5X 5.3X 4.5X 3.3X 3.0X 0.4X 0.3X 2.8%China Automation Group 0.2 7.7X 6.4X 5.9X 5.1X 5.3X 4.4X 1.1X 0.9X 2.8%

Delta 8.3 17.4X 15.7X 12.7X 11.0X 8.8X 7.5X 1.1X 1.0X 3.6%Doosan 2.6 11.1X 7.7X 13.3X 11.4X 10.0X 8.9X 1.1X 1.0X 0.0%Ebara 1.6 17.0X 11.7X 9.1X 7.5X 5.3X 4.7X 0.5X 0.4X 1.7%Fanuc 30.8 15.6X 14.1X 7.7X 7.0X 7.2X 6.6X 3.2X 3.0X 1.7%Hiwin 2.2 16.3X 13.6X 20.4X 15.2X 15.5X 12.9X 5.3X 4.8X 1.1%

Hollysys 0.5 8.2X 7.4X 7.9X 6.9X 7.3X 6.6X 1.5X 1.4X 0.0%Kawasaki 4.1 9.1X 8.0X 14.1X 14.8X 7.4X 6.8X 0.6X 0.6X 2.6%Keyence 15.5 19.3X 17.9X 8.9X 8.3X 8.7X 8.1X 4.1X 3.8X 0.3%Makino 0.6 8.3X 8.5X 8.8X 8.2X 0.9X 0.9X 1.9%

Mitsubishi Electric 17.9 9.2X 8.1X 6.3X 5.6X 4.0X 3.7X 0.4X 0.4X 1.9%Mori Seiki 0.9 13.2X 7.8X 18.9X 14.2X 8.4X 7.6X 0.7X 0.7X 3.2%

Nachi 0.8 9.2X 6.9X 5.7X 4.7X 0.8X 0.7X 2.3%Okuma 1.0 8.2X 8.2X 4.0X 3.7X 3.0X 2.9X 0.4X 0.4X 1.7%Omron 4.7 12.3X 9.8X 9.4X 6.9X 5.3X 4.5X 0.6X 0.5X 1.8%OSG 1.4 13.2X 11.3X 0.0X 0.0X 5.9X 5.1X 1.5X 1.4X 2.0%

Seiko Epson 1.6 8.9X 6.4X 6.9X 6.0X 4.2X 4.0X 0.4X 0.3X 4.2%Siasun 1.1 30.3X 22.5X 21.0X 14.9X 24.4X 17.5X 5.9X 4.2X 0.0%SMC 11.8 14.3X 12.4X 7.7X 6.6X 6.8X 6.0X 2.1X 1.9X 0.3%Teco 1.2 11.9X 10.7X 9.5X 8.4X 6.2X 5.3X 0.7X 0.7X 4.8%THK 2.3 12.8X 10.8X 10.4X 8.1X 5.4X 4.8X 0.9X 0.8X 1.5%

Wuhan Huazhong Numerical 0.2 31.9X 30.5X 7.8X 8.0X 1.2X 0.8X 1.5%Yaskawa 1.8 16.6X 12.6X 11.6X 9.1X 7.5X 6.2X 0.6X 0.5X 1.8%

Yokogawa 2.7 15.5X 12.6X 10.8X 8.9X 7.9X 6.5X 0.8X 0.7X 0.6%

Asia

Region CompanyP/E EV/SALESEV/EBITDAEV/EBIT

Europe

North America


14 August 2012


Companies Mentioned (Price as of 12 Aug 12) 3D Systems Corp. (TDSC, $40.00) AAC Technologies Holdings, Inc. (2018.HK, HK$23.20, OUTPERFORM, TP HK$28.00) ABB (ABBN.VX, SFr17.44, RESTRICTED) Airtac (1590.TW, NT$163.00, NEUTRAL, TP NT$170.00) Alfa Laval (ALFA.ST, SKr121.20, NEUTRAL, TP SKr140.00) Amada (6113, ¥403, NEUTRAL, TP ¥520, MARKET WEIGHT) Ametek, Inc. (AME, $32.55) China Automation Group (0569.HK, HK$1.45) Cognex Corp. (CGNX, $36.26) Crane Co. (CR, $40.56) Danaher Corp. (DHR, $53.48, NEUTRAL, TP $54.00) Dassault Systemes (DAST.PA, Eu78.54) Delta Electronics, Inc. (2308.TW, NT$105.00, OUTPERFORM, TP NT$106.00) Doosan Infracore Co Ltd. (042670.KS, W19,300) Ebara (6361, ¥302, NEUTRAL, TP ¥290, MARKET WEIGHT) Emerson (EMR, $51.25, OUTPERFORM, TP $53.00) Fanuc (6954, ¥12,670, OUTPERFORM, TP ¥14,800, MARKET WEIGHT) Flowserve Corp. (FLS, $128.03, OUTPERFORM, TP $142.00) Ford Motor Co. (F, $9.35, NEUTRAL, TP $13.00) GEA Group (G1AG.DE, Eu22.16) General Electric (GE, $21.10, OUTPERFORM, TP $22.00) Hiwin (2049.TW, NT$252.00, UNDERPERFORM, TP NT$210.00) Hollysys Automation Technologies (HOLI.OQ, $8.44) Honeywell International, Inc. (HON, $59.01, NEUTRAL, TP $60.00) IDEX Corp. (IEX, $39.90) IMI Plc. (IMI.L, 891 p, UNDERPERFORM, TP 930.00 p) Invensys (ISYS.L, 248 p, NEUTRAL, TP 220.00 p) Kawasaki Heavy Industries (7012, ¥177) Kennametal, Inc. (KMT, $37.30, OUTPERFORM, TP $46.00) Keyence (6861, ¥20,250, OUTPERFORM, TP ¥21,000, MARKET WEIGHT) Krones (KRNG.DE, Eu39.64) Makino Milling Machine (6135, ¥419) Metso (MEO1V.HE, Eu30.78, OUTPERFORM, TP Eu38.00) Mitsubishi Electric (6503, ¥650, OUTPERFORM, TP ¥950, MARKET WEIGHT) Mori Seiki (6141, ¥542, NEUTRAL, TP ¥600, MARKET WEIGHT) Nachi-Fujikoshi (6474, ¥245) Newport Corp. (NEWP, $12.21) Nike, Inc. (NKE, $94.50, NEUTRAL, TP $93.00) Okuma Corp. (6103, ¥467, OUTPERFORM [V], TP ¥750, MARKET WEIGHT) Omron (6645, ¥1,595) Oracle Corp. (ORCL, $31.61, OUTPERFORM, TP $40.00) OSG (6136, ¥1,097) Parametric Technology (PMTC, $22.05) Rockwell Automation, Inc. (ROK, $71.01, OUTPERFORM, TP $81.00) Rofin-Sinar Technologies, Inc. (RSTI, $19.35) Roper Industries (ROP, $104.76) Rotork plc (ROR.L, 2309 p, OUTPERFORM, TP 2,430.00 p) Sandvik (SAND.ST, SKr96.60, NEUTRAL, TP SKr90.00) SAP (SAPG.F, Eu 51.89, OUTPERFORM, TP Eu 57.50) Schneider (SCHN.PA, Eu49.16, NEUTRAL, TP Eu51.00) Seiko Epson Corp. (6724, ¥523, UNDERPERFORM, TP ¥660, MARKET WEIGHT) Siemens (SIEGn.DE, Eu74.17, OUTPERFORM, TP Eu90.00) SMC (6273, ¥13,430, NEUTRAL, TP ¥13,000, MARKET WEIGHT) SPX Corp. (SPW, $64.81, RESTRICTED) Sulzer (SUN.S, SFr131.30, NEUTRAL, TP SFr120.00) Teco (1504.TW, NT$19.45, OUTPERFORM, TP NT$24.00) THK (6481, ¥1,344, NEUTRAL, TP ¥1,500, MARKET WEIGHT) Weir Group (WEIR.L, 1730 p, OUTPERFORM, TP 1,850.00 p) Volkswagen (VOWG_p.F, Eu 147.81, OUTPERFORM, TP Eu 195.00) Yaskawa Electric Corp. (6506, ¥560, NEUTRAL, TP ¥600, MARKET WEIGHT) Yokogawa Electric Corp. (6841, ¥824)

14 August 2012


Disclosure Appendix Important Global Disclosures I, Julian Mitchell, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. Analysts’ stock ratings are defined as follows: Outperform (O): The stock’s total return is expected to outperform the relevant benchmark* by at least 10-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stock’s total return is expected to be in line with the relevant benchmark* (range of ±10-15%) over the next 12 months. Underperform (U): The stock’s total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. *Relevant benchmark by region: As of 29th May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe**, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry factors. For Latin American, Japanese, and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stock’s total return relative to the analyst's coverage universe**. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. **An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector. Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ coverage universe weightings are distinct from analysts’ stock ratings and are based on the expected performance of an analyst’s coverage universe* versus the relevant broad market benchmark**: Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. *An analyst’s coverage universe consists of all companies covered by the analyst within the relevant sector. **The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months. Credit Suisse’s distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Outperform/Buy* 46% (59% banking clients) Neutral/Hold* 42% (55% banking clients) Underperform/Sell* 10% (48% banking clients) Restricted 2%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html

Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

14 August 2012


Important Regional Disclosures Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report.

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.

The following disclosed European company/ies have estimates that comply with IFRS: ABBN.VX, ALFA.ST, DAST.PA, IMI.L, ISYS.L, MEO1V.HE, 6141, SAND.ST, SCHN.PA, SIEGn.DE, SUN.S, WEIR.L.

As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at anytime after that. Taiwanese Disclosures: This research report is for reference only. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. Reports may not be reprinted without permission of CS. Reports written by Taiwan-based analysts on non-Taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. • Jerry Su, non-U.S. analyst, is a research analyst employed by Credit Suisse AG, Taipei Securities Branch. • Pauline Chen, non-U.S. analyst, is a research analyst employed by Credit Suisse AG, Taipei Securities Branch. • Simon Smith, non-U.S. analyst, is a research analyst employed by Credit Suisse Securities (Europe) Limited. • Shinji Kuroda, non-U.S. analyst, is a research analyst employed by Credit Suisse Securities (Japan) Limited. • Bruno Savaris, CFA, non-U.S. analyst, is a research analyst employed by Banco de Investimentos Credit Suisse (Brasil) S.A. or its affiliates. For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at www.credit-suisse.com/researchdisclosures or call +1 (877) 291-2683. Disclaimers continue on next page.

14 August 2012Global

Equity Research

Automation_COnnection Series_FINAL.doc

This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse AG, the Swiss bank, or its subsidiaries or its affiliates (“CS”) to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates. The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients as its customers by virtue of their receiving the report. The investments or services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice or a representation that any investment or strategy is suitable or appropriate to your individual circumstances or otherwise constitutes a personal recommendation to you. CS does not offer advice on the tax consequences of investment and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. CS believes the information and opinions in the Disclosure Appendix of this report are accurate and complete. Information and opinions presented in the other sections of the report were obtained or derived from sources CS believes are reliable, but CS makes no representations as to their accuracy or completeness. Additional information is available upon request. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, a trading call regarding this security. Trading calls are short term trading opportunities based on market events and catalysts, while stock ratings reflect investment recommendations based on expected total return over a 12-month period as defined in the disclosure section. Because trading calls and stock ratings reflect different assumptions and analytical methods, trading calls may differ directionally from the stock rating. In addition, CS may have issued, and may in the future issue, other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Those reports reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other reports are brought to the attention of any recipient of this report. CS is involved in many businesses that relate to companies mentioned in this report. These businesses include specialized trading, risk arbitrage, market making, and other proprietary trading. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgement at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR’s, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment, in such circumstances you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed the linked site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS’s own website material) is provided solely for your convenience and information and the content of the linked site does not in any way form part of this document. Accessing such website or following such link through this report or CS’s website shall be at your own risk. This report is issued and distributed in Europe (except Switzerland) by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is regulated in the United Kingdom by The Financial Services Authority (“FSA”). This report is being distributed in Germany by Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). This report is being distributed in the United States by Credit Suisse Securities (USA) LLC ; in Switzerland by Credit Suisse AG; in Canada by Credit Suisse Securities (Canada), Inc.; in Brazil by Banco de Investimentos Credit Suisse (Brasil) S.A. or its affiliates; in Mexico by Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); in Japan by Credit Suisse Securities (Japan) Limited, Financial Instrument Firm, Director-General of Kanto Local Finance Bureau (Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Securities Investment Advisers Association, Type II Financial Instruments Firms Association; elsewhere in Asia/Pacific by whichever of the following is the appropriately authorised entity in the relevant jurisdiction: Credit Suisse (Hong Kong) Limited, Credit Suisse Equities (Australia) Limited , Credit Suisse Securities (Thailand) Limited, Credit Suisse Securities (Malaysia) Sdn Bhd, Credit Suisse AG, Singapore Branch, Credit Suisse Securities (India) Private Limited regulated by the Securities and Exchange Board of India (registration Nos. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House,Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777, Credit Suisse Securities (Europe) Limited, Seoul Branch, Credit Suisse AG, Taipei Securities Branch, PT Credit Suisse Securities Indonesia, Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn. Bhd., to whom they should direct any queries on +603 2723 2020. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-U.S. customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. U.S. customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the U.S. Please note that this report was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not regulated by the FSA or in respect of which the protections of the FSA for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. Any Nielsen Media Research material contained in this report represents Nielsen Media Research's estimates and does not represent facts. NMR has neither reviewed nor approved this report and/or any of the statements made herein. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Copyright 2012 CREDIT SUISSE AG and/or its affiliates. All rights reserved.

global industrial automation

Documents