“How do we get to the table where the big boys are playing?” That was the question Peng-Sang Cau, President and CEO, Transformix Engineering Inc, was asking herself regularly leading up to late 2005. She had noticed while doing the rounds of multinational companies located within a 2-3 hour drive from Kingston, an industrial town in the province of Ontario where Transformix was based, that the big boys were not in Canada. They were outside of it – in the US and Europe.
Every large manufacturing company in Canada was owned by foreigners. Their Canadian subsidiaries had no decision making authority and their discretionary funds were no more than $50,000. They had to get their HQ approval for purchasing large capital machinery that Transformix was selling.
After a decade of being in business at Kingston, Transformix was at a crossroads in 2005. It had annual revenue of $4 million and employed 25 people, a majority of engineers, and tradespersons. The company was in the middle of a crisis on many levels. The home market was losing manufacturing plants to cheap labor countries in Asia and South America. Canadian ability in business and commerce revolved around its natural resources. The automotive sector, which was generating 40% of the company’s revenues, was harsh on its suppliers and very competitive. Transformix was all things to all people providing custom automation to any companies in any sectors within a 2-3 hour drive from Kingston. Although the company was taking on technologically challenging projects, the customers did not see its competitive advantages. They looked upon it as just another system integrator. Most sales were by referrals and there were no new customers. Costs were rising. The company was close to bankruptcy.
As part of our recovery strategy, we asked ourselves three questions. First, how do we create a niche? The answer led to sharpening our business focus on two core technologies: high speed assembly machines for companies requiring high speed production; and specialty machinery for the tube and pipe industry. They were areas in which only a few service providers prevailed worldwide. Second, who are the customers we should target? The answer led to six core industries: oil & gas; medical devices; consumer packaged goods; food and beverages; electronic connectors; and of course, tubes and pipes. We dropped automotive because it was the root of our troubles. Third, we asked: Isn’t Kingston, or even Eastern Canada, a small market for what we are capable of offering? We decided to go global. One of our directors summed up the tipping point: “We go global or go home.” -Peng-Sang Cau, Transformix Engineering Inc.
Industrial automation was related to “the use of control systems and software to independently operate and monitor a mechanized system of industrial processes.” The industry had two broad segments: Factory Automation and Process Automation.
Factory automation was the use of a controlled system in an assembly line leading to a finished product and involving frequent stoppages (as in shift changes). In the manufacture of a car, for example, it was carried out in stages like the robotic application of a door to the chassis or computer-controlled spray of paint to the exterior. It was characterized by high-volume output through standardized methods. The key end markets for factory automation were automotive and packaging companies.
Process automation was the use of a controlled system in production processes that were continuous and with no interruptions. The system used software and sensors to check various parameters in real-time. It was characterized by high-volume, uniform output in an environment of high temperature and pressure. The key end markets for process automation were oil & gas, and pharmaceutical companies.
The practical applications involved a combination of both. In a bottling plant, for example, the capping of the bottle and its movement on a conveyor belt involved Factory automation while the flow of liquid to the bottle and mixing of its contents involved Process automation. Companies like Siemens and Rockwell Automation had a strong history in factory automation and were expanding their process automation market share, while companies like ABB had a strong history in process automation, and were expanding into factory automation.
The global demand for industrial automation products was valued at about $152 billion. The main product category in Factory automation was the distributed control system (DCS) while the main product category in Process automation was the programmable logic controller (PLC). The market was growing by about 6% since 2003. The margins in process automation were lower than in factory automation because it had project-specific content and had customized solutions.
There are several factors driving the growth of industrial automation. Customers need to reduce their capital and recurring costs. They have to improve product quality and consistency. They have to improve the quality of work for employees. They have to increase production output rates. They need flexibility in product manufacturing. They have to reduce material wastage and increase yield. These are all best facilitated by industrial automation products. - Peng-Sang Cau
The demand was broad-based across all major geographies. However, emerging markets, which accounted for 50% of global manufacturing output, were a growth opportunity. The robot density (defined as the number of robots per 10,000 manufacturing employees) was 7 in emerging markets as opposed to 149 for the developed markets. The largest opportunity prevailed in Non-Japan Asia, which accounted for 35% of the world’s manufacturing output but had a robot density of 11. Factory automation in China was forecast to grow at 15% annually.
Transformix Eng. Inc. – Company Background
The company was founded in 1995 at Kingston, a university town in the Canadian province of Ontario, by four graduate students – Peng-Sang Cau, Richard Zakrzewski, Ken Nicholson, and Martin Smith – all had graduated from Queens University. Cau had graduated in commerce, Zarkzewski and Smith in electrical engineering, and Nicholson in mechanical engineering. Cau’s basement served as the office.
At first, the focus was on providing engineering design services. The benefit of integrating electrical with mechanical design was the company's key distinction from its competitors. Transformix identified its core skill as “taking a blank piece of paper, create something from nothing, and have it work the first time, every time, under a budget and a time constraint.” For the next decade, the company was providing integrated solutions to all types of industrial customers located within a 250 km radius of Kingston.
Each decision opened up growth opportunities for the future. It also prepared the company to develop its innovative suite of products called CNCAssembly™ in 2012. CNCAssembly™ has several competitive advantages over traditional technologies. It takes the best of robotic, indexing motion and continuous motion technologies. It gives clients high speed, flexibility and standardization. It reduces clients’ need to invest capital for new product introductions by restricting the changeover to just retooling instead of the core machines. It improves usage of assets on the shop floor. Stepping out of Canada made sure that Transformix would become a 100% global revenue company.- Peng-Sang Cau
The company used the funds provided by the Scientific Research and Experimental Development (SR&ED) program of the federal government for expansion. SR&ED was a tax incentive that allowed some expenses as tax-deductible and provided an investment tax credit.
Issues Before CAU
By early 2006, Transformix had decided to focus on international markets. They were unknown, unlike the home market it knew well. That was a major risk.
We had decided to see the world as borderless and to focus on the markets we wanted to go after. It does not matter who we buy from and who we sell to. We will source components from anywhere in the world as long as they are reliable and priced right. We will sell our products to any market in the world where there is demand. Going global is an opportunity to grow and prosper. - Peng-Sang Cau