process industries 2025

Process Industries @ 2025

A Whitepaper:

Three Distinct Scenarios to the 2025 Process Industry Landscape

A Preliminary Survey

Version 1.2 (May 2011)

Copyright by Yokogawa Electric Corporation 2010-2011. All rights reserved.

Material

World

A Whole

New World

Let It Be & Lazy Days


DISCLAIMER OF WARRANTIES

This document is provided on an “as is” basis and may be subject to future revisions, modifications, or corrections depending on the time development of world economy, society, science and technology. Yokogawa Electric Corporation hereby disclaims all warranties of any kind, expressed or implied, including any warranty of merchantability or fitness for a particular purpose, for this document. In no event will Yokogawa Electric Corporation be responsible for any loss or damage arising out of or resulting from any defect, error or omission in this document or from anyone’s use of or reliance on this document.


© Yokogawa Electric Corporation 2010-2011

Table of Contents

1. INTRODUCTION ................................................................................................................... 1

SCENARIO PLANNING 101 ............................................................................................................ 1

THE KEY DRIVERS BEHIND THE SCENARIOS.................................................................................... 2

2. SCENARIO I: MATERIAL WORLD....................................................................................... 4

EXECUTIVE SUMMARY (@2025).................................................................................................... 4

WHAT THE WORLD LOOKS LIKE ..................................................................................................... 5

HOW THE PROFIT PATTERNS HAVE CHANGED IN THE PROCESS INDUSTRY........................................ 6

WHAT TRENDS HAVE BECOME PRONOUNCED IN THE PROCESS INDUSTRY........................................ 7

3. SCENARIO II: A WHOLE NEW WORLD.............................................................................. 8

EXECUTIVE SUMMARY (@2025).................................................................................................... 8

WHAT THE WORLD LOOKS LIKE ..................................................................................................... 9

HOW THE PROFIT PATTERNS HAVE CHANGED IN THE PROCESS INDUSTRY...................................... 10

WHAT TRENDS HAVE BECOME PRONOUNCED IN THE PROCESS INDUSTRY...................................... 11

4. SCENARIO III+IV: LAZY DAYS & LET IT BE .................................................................... 12

EXECUTIVE SUMMARY (@2025).................................................................................................. 12

WHAT THE WORLD LOOKS LIKE ................................................................................................... 13

HOW THE PROFIT PATTERNS HAVE CHANGED IN THE PROCESS INDUSTRY...................................... 14

WHAT TRENDS HAVE BECOME PRONOUNCED IN THE PROCESS INDUSTRY...................................... 15


© Yokogawa Electric Corporation 2010-2011 Page 1

1. Introduction

Scenario Planning 101

Scenario planning is not a prediction. Prediction is typically based on the extrapolation of

observable trends. Therefore a simple prediction of any kind is very, very untrustworthy.

Don’t agree? See for yourself what the past “experts” are alleged to have said about the

future.

“I think there is a world market for about five computers” (Thomas J. Watson, chairman of

IBM, back in 1943)

“There is no reason for any individual to have a personal computer in his home.” (Ken Olsen,

president of DEC, back in 1977)

Then what is scenario planning? It’s a planning tool which embraces the fact that our future

is not precisely predictable but could be deflected from its course by an unexpected event.

Instead of predicting the future, scenario planning allows us to develop a number of possible,

high-impact, yet uncertain futures. It helps us deal with the inherent uncertainty that

surrounds us. By creating a set of equally uncertain, yet possible and high-impact futures, it

allows us to think ahead and prepare “what if” plans.

A typical scenario planning activity starts by identifying as many important macro and micro

trends and possibilities that can affect the future state of a given question. Then they are

filtered and categorized by two criteria: possibility (likely or uncertain) of occurrence and

impact (serious or minor) to the global market. The likely and serious trends are treated as

common factors, which you would face soon anyway in every scenario. The uncertain but

serious trends are the candidates for scenario drivers. By synthesizing these factors, the

scenario planners create a number of possible, high-impact images of the future and the

underlying dynamics that can lead to them.

In our case, the key question to be answered is: “how the business dynamics of the

Process Industry might change towards 2025.” It is intentionally made user-oriented,

from automation vender’s point of view, so that we force ourselves to think of the change of

our users’ business first, and then come back to the point how it might affect us.



The key drivers behind the scenarios

What is known as “scenarios drivers” are the key “uncertainties” that can divide the future

into a set of dramatically different worlds. Note that there is no “correct” choice of drivers in

scenario planning -- rather, we look for the most “useful” ones, i.e., those drivers that help us

visualize a set of uncertain yet possible, high-impact, distinct worlds.

The four (eventually merged into three later) scenarios were developed by synthesizing

literally hundreds of key trends and possibilities that may affect the Process Industry

dynamics. By making the scenarios as mutually exclusive and collectively exhaustive as

possible, the scenario planning team identified the following two parameters as key scenario

drivers:

I. Level/intensity of global environmental regulations

2025 status: either “strong global commitment” or “limping along without consensus” If a strong global commitment for environmental regulation emerges, the world will move

away from fossil fuel. The demand for hydrocarbons and their derivatives will dwindle while

clean, green, renewable energy and materials will become the mainstream, thanks to a

huge inflow of public and private R&D (research and development) funding for new

technologies. In contrast, if the global collaboration on environmental regulations continues

to limp along without any real consensus, hydrocarbons and their derivatives will continue to

power human society. This is the first uncertainty that will have a major impact on the

resultant future.

II. Macro shift of the primary source of value/differentiation for the Process Industry

2025 status: either “products and production processes” or “services” If the Process Industry continues to derive the majority of its value from the products they

make and the production processes, the key angle of competition will stay at product

leadership. Speed, particularly time to market, will be the number-one priority for the

Process Industry. If the Process Industry redefines itself as a service industry, however, the

key dimensions of competition will be customer-intimacy at the high end and operational

excellence in the volume zone, respectively.

At this moment, we cannot predict which way the above two drivers will sway. A two-by-two

matrix based on the two drivers, however, enables us to create four equally possible yet

equally uncertain quadrants. Therefore the scenarios that symbolize the four quadrants

collectively represent the uncertain yet high-impact futures of the Process Industry.



They rely upon Products and Production System

Their major Reliance shifts to Services

No Global Consensus

Strong Commitment

Global environmental regulations to industries

Users’ Business Value and

Differentiation

Future World where production is still source of

the strength

Business as Usual

Extrapolation of Current Business Environment

Future World where production is encouraged to

save the EarthFuture World where

industries have undergone tremendous change

Future World where production is no longer source of the strength

“Material World”

“A Whole New World”

“Let It Be”

“Lazy Days”

Figure 1: How the scenario drivers divide the future into four possibilities

1August 2010, Project Holon©Yokogawa Electric Corporation CONFIDENTIAL

ServicesProducts and Production Processes

Macro shift of the primary source of value/differentiation for Process Industry

Level/in

tensity o

f glo

bal en

viron

men

tal regu

lation

Strong

Glob

al C

omm

itment

Limp A

long w/o C

onsensus

Assimilation by ICT Apex Predator

Landslide Service ShiftProcess Industry Bipolarization

Renaissance by New Chemicals

New specialty material and innovative production processes proliferate

Traditional bulk producers are challenged by nimble new venture companies

Industry looks for automation that shortens time-to-market and enable agile production process changes

New ICT-driven services become the dominant industry and value migrates out of production

ICT-originated mega players from mature countries assimilate energy and utility industries, dominating the new ecosystem

Production becomes a low-value activity

Traditional producers merge to compete with new entrants from emerging countries

Producers bipolarize into high-value specialty players from mature countries and low-cost bulk players from emerging countries

Mass of emerging producers look for intuitive automation with just adequate functionalities

Process industries are commoditized across the board and producers redefine themselves as service companies

Producers outsource production to 3rd party mega-plants or local mini-plants

Production sites shift to emerging countries and disappear from mature countries

Figure 2: How the quadrants can be enriched to help visualize the changes vividly

Note: the lower half was subsequently bundled into one scenario due to their high

commonality.



2. Scenario I: Material World

Executive summary (@2025)

The Process Industry is experiencing a new gold rush. Heavy investments from both public

and private sectors worldwide are pouring in, accelerating the R&D and commercialization

of new specialty materials. Materials that did not even exist in the lab ten years ago are used

in every corner of society -- producing clean renewable energy, replacing plastics and other

hydrocarbon-originated materials, and boosting new industries such as personalized

medicine. The “sustainable society” is here -- powered by innovative new materials.

The Process Industry as a whole is more profitable than ever, with the highest margin

concentrated on the R&D-intensive segments such as fine chemicals, specialty chemicals

and pharmaceuticals. A number of traditional segments such as petrochemical and refining

have declined due to the very strong global pressure to move away from fossil fuel. However,

the proliferation of new venture companies as well as the further expansion of the chemical

and pharmaceutical giants, more than compensated for this oil & gas shrinkage.

Innovation and product leadership, rather than cost leadership or customer relationship

management, has become the most important success factor in the Process Industry. Time

to market is the name of the game. Speed, rather than scale or scope, has become the key.

As a result, new key performance indicators (KPIs) such as cycle time and throughput are

now applied to track and improve overall time to market instead of just measuring plant-floor

operational efficiency.

Leading vendors serving the Process Industry have responded to this new challenge by

breaking down traditional barriers. Gone is the separation among the lab, the pilot plant, and

the commercial plant; recipes completed in the lab can now be made into new products and

marketed in no time. Also gone are the cumbersome and time-consuming works to change

the process; modular and engineering-free production units can be quickly assembled and

disassembled to produce just the right amount of product at very short notice. Data from the

lab and the plant are integrated, enabling real-time product lifecycle management.

Meanwhile, automation vendors that failed to deliver a compelling time-to-market value

proposition have faded away, either acquired by others or cornered into a niche player

position. Convergence of Process Automation and Laboratory Automation is now complete.



What the world looks like

The world is bustling with new opportunities. Environmental regulations, once considered

yet another constraint for most companies and a damper on the global economy, turned out

to be a major growth engine.

The global economy is booming, led by the leading producers of innovative new materials.

Manufacturers geared to the global sustainability drive are now the biggest contributor to the

world’s wealth. Nimble new ventures are born every day while traditional giants are also

thriving, attracting talent from all over the world.

The scientists in the leading labs are the modern day alchemists, developing specialty

materials that make up the fabrics of the new sustainable society. The trailblazing chemical

and pharmaceutical giants as well as leading-edge research institutes are mostly

headquartered in Europe and the USA, though the scientists and engineers who work there

are increasingly coming from emerging countries, especially China and India. Less

specialized bulk material production has already moved to their homelands, but the

state-of-the-art material research and process innovations are still mostly spearheaded by

European and US companies and institutes.

The financial and other service sectors are also increasingly geared to the needs of these

leading manufacturers and research institutes, to the point that some are starting to fear a

new bubble economy and all that might entail.



How the profit patterns have changed in the Process Industry

The highly R&D-focused “block buster” profit pattern of the pharmaceutical industry has

become the basis of the new Process Industry dynamics. Even a decade ago, time to

market was already the key for the pharmaceutical companies to recover their huge R&D

expenditures. The global commitment to achieve sustainable society galvanized both public

and private sectors around the world into the quest of innovative new materials, igniting

R&D zeal in the Process Industry at large.

Meanwhile, innovations in both R&D and manufacturing technologies have come to allow

small upstart companies to develop new materials and to commercialize them with a

relatively small capital investment. The extremely large-scale and continuous R&D

investment by the Chemical and Pharmaceutical giants is no longer such a strong entry

barrier for smart venture companies that leverage new technologies.

With time-to-market being the most important success factor, the lab is now clearly the

highest value-adding section. Activities in other part of the value chain including

manufacturing and production are redefined and streamlined to maximize the value of the

lab. The number-one priority for management is to turn the lab outputs into commercial

products ahead of the competition.

At the same time, manufacturing and production remains one of the key value-adding

activities and sources of differentiation for most players in the Process Industry. The high

market volatility and short product life span of new materials have led to the invention of

extremely flexible production facilities that can be modified very quickly.

Truly agile production, however, can no longer be achieved by plant-floor improvements

alone. The seamless integration of the lab and the commercial production processes is now

a necessity instead of a luxury. Those companies that have successfully harnessed the

power of seamless lab-to-production transition prospered, while companies that were not

able to go beyond traditional operational efficiency faded away.



What trends have become pronounced in the Process Industry

Industry trends: segments such as fine chemicals, specialty chemicals, pharmaceuticals,

medical and bio-businesses enjoy the lion’s share of the new wealth created by the

chemical renaissance. Other segments also get their fair share of the benefit of the

expanding economy, but the highest margin goes to the chemical and bio- related verticals.

Geographic trends: Europe has become the world leader, followed by US. While utilizing

highly motivated R&D resources from India and China, most of the leading companies retain

their headquarters in Europe or US, where world-class material and bio- research institutes

keep attracting bright young minds from around the world. New venture companies also

tend to cluster around such leading institutes.

Automation trends: most laboratories are now fully automated by integrated solutions

combining in-situ analysis, micro-reaction, robotics and IT. Connected seamlessly to such a

lab is an extremely flexible production facility, often physically distributed worldwide and

made up of modular and engineering-free “LEGO*-like” production units. Information about

any given product or batch is managed from the R&D phase through commercial production

in a unified production management system, allowing role-based secure access from any

location.

(*LEGO is a trademark of Lego Group)

Vendors/service provider trends: the main automation contractor (MAC) concept has

come to encompass the integration of laboratory automation and process automation as

well as life-cycle optimization services after installation. As a result of this market

convergence, lab-oriented solution vendors have either merged or formed alliances with

process automation vendors.



3. Scenario II: A Whole New World


The Process Industry is practically embedded in the new hegemony of the mega service

industry, where a handful of global conglomerates provide all the smart services for the

hyper-connected human society. By now the majority of the end consumers are very

ICT(information and communication technology)-savvy. They actively participate in the

smart society as intelligent nodes -- not only receiving personalized services but also

contributing real-time knowledge via the net. The world of The Matrix movie is emerging for

real -- powered by ICT technologies and new social norms.

(Note: Distributors are discussed as a part of service providers in this chapter.)

The global economy is booming thanks to continuous investments in the smart society

infrastructure. The Process Industry has become a necessary yet low-profile building block

of the smart society, with the highest margin now concentrated on the power-related

segments such as renewable energy, smart transmission & distribution, energy

management and energy storage. As traditional production activities have grown less

profitable in other segments, Process Industry leaders have teamed up with ICT leaders to

change their business models. The successful ones redefine themselves as service

partners for the new mega service industry, joining the smart society bandwagon.

Customer intimacy over the networked supply chain, rather than product innovation or cost

leadership, has become the most important success factor for the Process Industry. The

products themselves such as energy and material are mostly commoditized, leaving little

room to compete on either functionalities or price. Instead, ICT-enabled responsiveness to

ever-shifting demands has become the key success factor to survive and prosper as a

valuable service partner.

Leading automation vendors to the Process Industry have helped the Industry make this

transition by providing ICT-powered solutions that have transformed what used to be

primarily manufacturing companies into intelligent service nodes of the new industrial

network. The physical ownership or location of production plants no longer matter; the

primary factor is how visible and accessible the companies are as dependable Process

Industry service nodes in the industrial network. Everything else is secondary.




The world is pushing a new frontier that has virtually no limits. Instead of physical expansion

into space, the human race is now focused on tapping the enormous potential of the

ubiquitous, ICT-enabled social networks -- the collective human inner space, so to speak.

People live in smart cities connected by smart mass transportation or rather virtual

transportation, minimizing negative environmental impact while enjoying personalized

services that best-fit their individual lifestyles. ICT-savvy consumers are less and less driven

by the desire to own expensive goods. Instead, one’s online presence and reputation, which

is the measure of the individual’s contribution to the social networks, has become a much

more prestigious and sought-after currency.

The ICT wizards working for the leading mega service conglomerates keep developing new

services that allow their subscribers to both tap and enrich the collective repository of

human knowledge. These relatively benign versions of “Big Brother*” are mostly

headquartered in the USA and Europe, though their back office functions and manpower are

located in India.

*George Owel: “1984” (1949)

While the so-called network externality effect favors the mega service providers with huge

existing subscribers, the entry barrier of this virtual-service business is relatively low

compared to asset-intensive industries. New generations of bright young talents continue to

create new ICT service ventures, constantly challenging the existing mega service players.

The US is still the best place for such entrepreneurs to try new start-ups.

In a way it is reminiscent of the IT (or dot-com) bubble of the early 2000s, but this time, the

communications infrastructure itself is no longer the main driver of investment and economic

growth. Rather, the financial sector is keen on identifying and investing in promising new ICT

applications and service businesses.




The highly flexible, responsive and online business models originated in the retail industry

have spilled over to the Process Industry, becoming the key industry dynamics. Even a

decade ago, discrete manufacturing industries such as apparel were already geared to the

“click & mortar” business model, catering to the individualized end consumer needs via

online commerce. The ICT-originated mega service conglomerates accelerated the diffusion

of web-enabled business models across the entire industry.

The Process Industry leaders have adapted to this new environment by revamping their ICT

infrastructure and making their value chain flexible, agile, and “network-ready”. The

irreversible technical standardization and consumer mindset change of the past decade

made the majority of Process Industry outputs such as energy and materials commodities.

The Industry experiences about them, however, are anything but. Now that the B2B Industry

and decision makers are also very ICT-savvy, the quality of the online customer experiences

rather than the quality of physical products themselves made all the difference.

As online customer intimacy and market responsiveness via the ubiquitous network became

the key success factors, real-time customer relationship management and demand/supply

chain control came to be the highest value-adding functions. Activities of other part of value

chain including sourcing and production are now fully aligned to maximize the effectiveness

of the virtual customer touch-points.




Industry trends: power-related segments such as renewable energy, smart grid, energy

management and energy saving have come to the forefront of the Process Industry as the

closest allies of the mega service companies. The mega service conglomerates led by ICT

companies enjoy the lion’s share of the new wealth created over the network, ushering in

new hegemony in the Process Industry as well.

Geographic trends: The USA has become the world leader, followed by Europe. While

utilizing highly motivated ICT resources and infrastructure in India, most of the leading

conglomerates retain their headquarters in the US or Europe, where world-class ICT

technology and business model research institutes keep attracting bright young minds from

around the world. New start-ups also tend to cluster around such leading institutes.

Automation trends: the mega service conglomerates and their allies are the biggest

producers of automation solutions that allow them to control the demand/supply of energy

and information. New automation technologies such as smart turbine control, smart grid

control, smart electrical control, and smart meters allow them to monitor and control the

entire energy supply chain. Meanwhile, the strong global pressure to achieve sustainable

society boosted the demand for process optimization and energy saving solutions in all

manufacturing sectors. The equally strong price pressure in the general Process Industry,

however, limited the net market growth of such energy saving solutions. All in all, the

automation demand created by the smart energy sectors is now greater in both volume and

margin than that of all the other Process Industry sectors combined.

Vendors/service provider trends: a number of major automation vendors have become

close allies of the mega service conglomerates, which were born out of the ICT leaders.

Some of these automation leaders have become the captive partners of the mega service

conglomerates while others retained their independence through open alliances.



4. Scenario III+IV: Lazy Days & Let It Be


The recession is over and the Process Industry is steaming ahead again. The steady growth

of China and India is driving the global economy, creating ever stronger demand for energy

and material. With the political stalemate unresolved about the enactment of strict global

environmental regulations, the market mechanism continues to have a free reign. There is

little incentive for truly innovative R&D efforts except for simple and easy improvements.

Hydrocarbons and their derivatives remain the most cost-effective sources of energy and

materials for human society.

The market dynamics of the past decade have polarized the Process Industry into two major

groups. On one end is a group of highly sophisticated, service-oriented high-end companies,

mostly originated from the global Process Industry leaders headquartered in the USA and

Europe. These high-end companies have redefined themselves as service providers. They

have sold off commoditized bulk production plants and focused on value chain upstream

activities such as resource exploration as well as downstream activities such as customer

relationship management. On the other end is a group of extremely efficient,

cost-competitive mega producers, mostly originated from national majors that have

consolidated bulk businesses acquired from the global majors.

(Note: Distributors are discussed as a part of service providers in this chapter.)

For the high-end service-oriented group, upstream technical leadership and downstream

customer intimacy have become the key success factors. In contrast, operational efficiency

and cost leadership are the highest priority for the mega-producers. The overall picture is

more or less analogous to what had already happened in the electronics industry.

Major suppliers to the Process Industry have come to help the high-end group with

advanced software and service solutions while providing standardized and intuitive

automation solutions and/or comprehensive operation and maintenance (O&M) services for

the mega-producers. Those serving the high-end group came to partner or merge with

specialists, while those serving the mega-producers came to tie up with low-cost suppliers of

automation products and services. The middle ground no more exists.




The world is an even more dynamic and competitive place than a decade ago. While

political agreement on stricter environmental regulations did not materialize, social,

technological and economic forces enabled the world economy to grow again with a certain

level of sustainability.

The new middle class of emerging countries, particularly China and India, continues to

create massive demands for affordable energy and goods. The mega-producers from

cost-competitive countries not only fill these demands but also supply the mature countries

with reasonable energy and goods. As a result, bulk production/mass manufacturing has

almost completely disappeared from mature countries. The leading value creators in the

mature countries are service providers, targeting value chain upstream activities such as

exploration and resource management, or downstream activities such as distribution and

customer management, or both.

The global supply chain of energy and goods now comprises the service providers from the

mature countries and the mega producers in the cost-competitive countries.




The profit patterns migrated to two extremes as the Process Industry became bipolarized.

They are complementary in nature, enabling a symbiosis of different species on the global

scale.

On the upstream side of the industry value chain, the service providers depend on the

mega-producers to process the resources they discover while the mega-producers depend

on the service providers to secure natural resources as feedstock. On the downstream side,

the service providers count on the mega-producers to supply energy and goods while the

mega-producers count on the service providers to provide the most effective and efficient

access to the global market.

For the service providers, customer intimacy is critical. They also need sufficient scope of

deliverables to meet the Industry’s needs by leveraging their customer understanding. For

the mega-producers, cost leadership is the key. They need to secure scale economy

through dependable sales channels. As these profit patterns interlock well, a number of

global coalitions emerged among the service providers and mega-producers.

Such a disaggregation of the industry supply chain and the subsequent re-integration via

global symbiosis is equivalent to what had already played out in the electronics and other

discrete manufacturing industries through the 2000s. As was the case with the discrete

industries, those that failed to be part of the global symbiosis faded away from the Process

Industry as well.




Industry trends: segments such as oil & gas upstream and metals & mining have become

the highest margin sectors due to their supply chain upstream nature, while segments such

as power and water also show above-average growth and profitability driven by downstream

investments in transmission and distribution. Other segments are also expanding in volume,

but the margin is slim and only the most efficient mega producers are thriving.

Geographic trends: Leading global service providers originated in the USA and Europe

control the global industry supply chain, while the mega producers taking care of outsourced

production are mostly located in the Middle East, China, India and other resource/labor rich

countries.

Automation trends: the major automation demands are now driven by the mega producers

in the cost-competitive countries. They prefer standardized and intuitive solutions that can

be handled by average local engineers. Due to the massive scale of their operations,

reliability is a key buying factor, though not necessarily the reliability of the automation

systems and products; what matters is the reliability of the entire production process.

Solutions that minimize human interventions and human errors are very valuable for these

mega producers. As a result, the demand for advanced software and/or services that either

empower or replace human expertise is at a record high level. In contrast, level 1 and 2

automation products and systems are almost completely commoditized. The high-end

service companies also increasingly require solutions that minimize human interventions

due to the widely distributed and/or hazardous nature of their operating sites. Remote

unmanned operations have become very common for safety and labor shortage reasons.

Vendors/service provider trends: due to their geographically distributed nature, the

high-margin service-oriented segments such as resource upstream and utilities downstream

are well served by automation vendors with advanced SCADA(Supervisory Control And

Data Acquisition)-originated systems integrated or incorporated into MES (Manufacturing

Execution System) or higher level automation. The mega producers also prefer

standardized and intuitive automation. For the high-end service-oriented groups, resource

exploration experts have grown further by forming alliances with automation leaders.

Meanwhile, low-cost vendors from emerging countries have made an inroad to the

mega-producers, complementing their offering by alliances with and acquisitions of software

companies.

(End of document)