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Europe`s drives-makers `face a threat from the East`

01 May, 2006

Western European drives manufacturers will face "a serious threat" from manufacturers based in Eastern Europe and Asia over the coming five years. Although a new report from the analyst Frost & Sullivan suggests that the outlook for EU drives-makers is "bleak to an extent", it also predicts the European drives market will witness "moderate" growth over the coming six years, expanding from $2.5bn last year, to more than $3bn by 2012.

The report* says that Europe`s drives-makers are both benefiting from, and being restricted by, globalisation. By moving production to lower-cost regions, multinational drives manufacturers are cutting their costs and this is starting to be reflected in drives prices. But this movement is also affecting the drives manufacturers` customers, which will limit their opportunities for business in the longer term.

The report says that existing players have "a key opportunity" in the immediate future to establish strong, defendable positions that exploit their existing customer bases. The fact that end-users are familiar with the companies and their products will remain a key criterion for their future purchases, it explains.

"Therefore," says the report, "resisting growing competition will be dependant on protecting the existing end-user sector". The only likely path to increasing market share will be through "aggressive marketing and pricing strategies," Frost adds.

One possible means of fending off the challenge from Eastern rivals could be for the European manufacturers to differentiate themselves by offering packages that combine, drives, motors and software, the report suggests.

It says that demand for drives will continue to be strong in Europe because of the widespread acceptance of the technology and the increasing emphasis on energy efficiency.

If energy prices continue to rise as predicted, this will intensify the need for drives users to improve the efficiency of their plants, and drives suppliers will benefit, says the report. However, it warns that the impact of this trend should not be overstated. Energy efficiency incentives are localised across Europe, and even in better incentivised areas - such as the UK - not all manufacturers are limiting their energy consumption.

"Instead, it can be argued that a stronger incentive for manufacturers comes from the need to manage costs in the face of growing global competition, leading to accelerating demand from particularly threatened industries," suggests Frost`s programme manager, Richard Tamworth. "The electric drives market will be influenced positively by the intensifying pressure on the manufacturing sector to streamline its production processes in order to reduce costs, maintain efficiency and ensure profitability."

The shift of production to low-cost regions and the dwindling level of new, heavy manufacturing investment in Western Europe will continue to have widespread implications on the drives industry.

"As many multinational corporations move their manufacturing operations or redirect their new investments to low-cost regions," Tamworth notes, "electric drives manufacturers are likely to find their markets increasingly condensed into the limited number of high-growth, high-tech manufacturers remaining in Western Europe. With Europe`s manufacturers competing on the basis of their expertise, growth will be focused increasingly on high-tech companies - often with particularly demanding requirements from their equipment and suppliers".

With competition in the drives market increasing, the need for more accurate market positioning and longer-term strategic thinking by individual drives suppliers, is becoming increasingly important, Frost says.

The analyst expects the machine tools and robotics sector to remain the largest user of drives in Western Europe, followed by the automotive sector. Opportunities in the pulp, paper and printing sector are likely to decrease as production moves to Asia.

The report predicts that Spain will be Europe`s fastest-growing drives market over the coming six years, due to large investments in infrastructure, r&d and the environment. It forecasts that Germany will remain the EU`s largest drives market (followed by Italy), as well as its biggest exporter of drives.

Frost & Sullivan describes the Western European market for drives as "mature" (particularly for standard AC and DC technologies). "With high levels of competition, and high price sensitivity, the cost of winning new business will be high," it warns, with margins suffering. Large, multinational drives manufacturers should focus on strengthening their positions in the global market, the report suggests. For smaller suppliers, growth opportunities will come mainly from specialising in higher-quality niche and premium products, or by focusing on specific end-user markets.

* Western European Electric Drives Forecasts (report B715-17). Frost & Sullivan will send you a "virtual brochure", providing an overview of its analysis of the Western European drives market, if you send an e-mail to magdalena.oberland@frost.com including: your full name, company name, title, telephone number, city, state, and country.




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