The industry value chain is changing. We’re seeing a shift away from highly customized fixed warehouse automation to more modular, configurable, and standardized systems, like those from AutoStore and OPEX. This will have far reaching implications for the warehouse industry, eroding margins for system integration and solution design, while benefiting system OEMs. In this insight column, I’ll discuss the following topics:
- The current industry structure and how it developed
- The rise of more modular, plug-and-play systems and the impact this will have on the industry
- How companies can position themselves to capture the most value given the current industry trends
The traditional model of systems integration
There are several steps in the warehouse automation value chain as depicted below. Most integrators cover the span from system OEM all the way to after-market service.
One reason for this vertical integration is the high level of commoditization of traditional fixed warehouse automation, including hardware such as shuttles, conveyors, and sorters. A lack of differentiation and a relatively slow pace of innovation has shifted the buy-versus-build decision firmly to the “build” side. For example, Witron acquired FAS in 2005 in order to bring OEM capabilities in house.
On the other hand, system OEMs, struggling in a low-margin business, have developed integration capabilities in the pursuit of higher margins. For example, TGW – which was originally a manufacturer, developed integration capabilities. This led to the current state of the industry, where OEM system integrators generate the bulk of revenues.
Modular and standardized systems rise
In recent years, we’ve seen several third-party system OEMs enter the market. Companies such as Exotec, AutoStore, Dexterity, and Berkshire Grey have developed highly modular and standardized systems that tend to be based around robotics (as opposed to traditional conveyance).
This is shifting the buy-versus-build decision for system integrators in favor of “buy” due to the rapid rate of innovation surrounding these technologies, coupled with the lack of in-house robotic expertise. Because the market is changing, incumbent integrators don’t want to bet big on a single acquisition target or to develop technologies in house because end-customer preferences may have shifted by that time.
This is leading to the growth of pure-play system integrators, which focus primarily on integrating hardware from third-party OEMs such as AutoStore and Exotec. For example, when it came to the top 10 system integrators in the U.S. in 2022, nearly all OEM integrators lost market share, while the opposite was true for pure-play system integrators.
Even “conventional” OEM system integrators are starting to partner with more robotics makers. For example, Dematic – the quintessential OEM system integrator – partners with AutoStore, Dexterity, and Quicktron. The trend of system integrators partnering with system OEMs is clearly on the rise.
The systems developed by the likes of AutoStore, Exotec, OPEX, and other third-party system OEMs are highly modular and configurable. By contrast, legacy equipment such as conveyors tends to be highly customized and bespoke for each client. The shift from customized to standardized is, in effect, shifting the value creation from the build phase to the design phase.
The warehouse automation value chain is shifting
At present, a lot of the value is created in the integration/build phase because it’s often highly customized and requires extensive software, electrical, and mechanical engineering competencies in order to build these systems. Without the extensive knowledge and skills, it would be extremely difficult to provide a bespoke automation solution.
However, the relative ease with which these novel third-party solutions can be connected is lowering the barrier to entry for system integrators, which has the potential to erode margins for integration over time. Furthermore, companies like SVT Robotics are accelerating this trend, making it easier than ever to integrate third-party solutions using intuitive user interfaces. As mentioned earlier, this is shifting the value from the build phase to the design phase.
This isn’t to say that systems integration will become easy. However, the trend toward greater standardization means that there’s less customized code required to tie various systems together, and the “plug-and-play” nature of these modular and configurable systems means that there’s less of a requirement for engineering competencies.
As we start to see the integration of more third-party systems, the need for system orchestration and execution becomes increasingly critical. We expect there will be a lot of value created in connecting and orchestrating these disparate systems.
The shift towards using third-party system OEMs also raises the question of who will own the after-market service margins. Typically, OEM system integrators have captured the bulk of the maintenance, repair, and overhaul (MRO) and other after-market service revenue.
However, we’ll likely see more system OEMs capturing MRO revenue, particularly when it comes to spare parts.
Robotics is a universal phenomenon
The effects that robotics is having on the value chain isn’t limited to the warehouse market. Across Interact Analysis’ various research areas, we’ve observed a common pattern across sectors experiencing innovation disruption. Value creation shifts downstream to the vendors developing the innovative systems, while vertically integrated participants upstream in the value chain experience value erosion.
Take the automotive sector, for example. Historically, OEMs like Volkswagen and Volvo would manufacture most of the components used in vehicles, including the powertrain.
However, with the shift towards electrification, we’ve seen a trend whereby the Tier 1 suppliers are leading innovation and capturing more of the value by developing new and improved batteries and electric motors. As such, the value that the OEMs offer is eroding over time as the Tier 1 suppliers capture more of it.
Warehouse automation comes full circle, aids competitiveness
However, nothing lasts forever. At some point, the rate of differentiation will slow and hardware will become commoditized. We’ll then likely see two things:
- System OEMs developing integration capabilities in an effort to chase higher-margin opportunities
- Incumbent system integrators acquiring system OEMs
The result will be an industry dominated by vertically integrated system integrators, taking us full circle.
Interact Analysis’ research, which draws insight from primary research, data science, and strategic analysis, provides a way to stay ahead of the curve and weather the ensuing disruption. It just published its “Warehouse Automation – 2023” report, which provides extensive insight into growth segments and competitive advantages.
The report also offers a wealth of market forecast and market share data. Furthermore, Interact Analysis clients can get custom research solutions to help develop warehouse automation strategy, and they get access to its analysts all year round. To find out more, email rueben.scriven@interactanalysis.com.
Editor’s note: This article was syndicated with permission from Interact Analysis.
