Morningstar | Moats in Industry 4.0; Switching Costs Weak & Strong for ABB and Schneider
Much has been written about the potential of Industry 4.0 and the Industrial Internet of Things, or IIoT, but we don't believe enough attention has been given to the relative supplier competitive advantages and where incumbent suppliers might be less or more able to protect their positions against new-entrant disruptors. In industrial automation, there is a wide variety of suppliers that together create automated processes through multiple software stacks and hundreds of components working together. In a world as fragmented as this, domination by a single player is nearly impossible, but there are pockets where suppliers have stronger barriers to entry and others where the playing field is more level.We see the strongest moats in less flashy control loop functions at the field level of industrial automation, and weaker ones in the more exciting software applications. Additionally, suppliers for process industries have a better chance of staving off new entrants than those in discrete. From our research, including conversations with industry players, these are where the highest switching costs lie. We believe ABB and Schneider have wide moats due to high switching costs and intangible assets in their automation divisions, and in some cases in electrical and power products.
From an investment standpoint, we prefer Schneider over ABB. While both have leading positions in the moatier control loop of industrial automation, as well as exposure to process automation, Schneider's share price offers 11% upside versus our fair value estimate, while ABB is fairly valued. Schneider is also taking a more aggressive software approach, which we think is important for taking advantage of the installed controller base on which to build market share in the software stack.
Please refer to our August 2018 report, "Moats in Industry 4.0: The Underrated Control Freak" for a deeper look into moats in Industry 4.0.
ABB specializes in power and automation technologies. Co. provides a broad range of products, systems, solutions and services that are designed to boost industrial productivity, increase power grid reliability, and enhance energy efficiency. Co.'s automation businesses serve a full range of industries with process optimization, control, measurement and protection applications. Co.'s power businesses focus on power transmission, distribution and power-plant automation, and support electric, gas and water utilities, as well as industrial and commercial customers.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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