Capital Expenditure Survey 2003

By David Humphrey
ARC STRATEGIES
JUNE 2003
Capital Expenditure Survey 2003
Executive Overview .................................................................... 3
Capital Spending Decline Continues............................................... 3
Economic Outlook for CapEx ........................................................ 8
CapEx Trends by Industry...........................................................10
Recommendations .....................................................................18
THOUGHT LEADERS FOR MANUFACTURING & SUPPLY CHAIN

ARC Strategies • June 2003
2 • Copyright © ARC Advisory Group • ARCweb.com
1997 1998 1999 2000 2001 2002 CAGR
Aerospace 3.8% 3.6% 3.1% 3.0% 3.5% 3.5% -1.4%
Automotive 5.9% 6.0% 5.7% 5.7% 5.5% 5.1% -2.8%
Chemicals 7.9% 9.6% 8.7% 7.9% 7.6% 7.1% -2.2%
Food & Beverage 4.5% 4.3% 4.3% 4.3% 4.1% 3.7% -4.0%
Metals 8.6% 9.2% 8.9% 8.3% 6.8% 5.9% -7.4%
Oil & Gas 7.1% 8.7% 7.5% 4.4% 6.2% 6.0% -3.4%
Pharmaceutical 5.7% 6.4% 6.6% 6.1% 6.1% 5.6% -0.3%
Pulp & Paper 7.0% 6.1% 4.8% 5.0% 4.7% 4.4% -8.7%
Semiconductor 12.0% 11.1% 9.7% 12.9% 16.4% 12.8% 1.3%
Utilities 17.3% 16.3% 17.1% 18.1% 19.8% 17.6% 0.4%
All Industries 7.0% 7.4% 6.5% 6.0% 6.7% 6.1% -2.9%
Capital Expenditures as a Percentage of Revenue by Industry
All Industries
(1997 = 100)
86
120
137
80
90
100
110
120
130
140
1997 1998 1999 2000 2001 2002
CapEx/Revenue Revenue Assets
CapEx/Revenue vs. Total Revenue and Total Assets

Copyright © ARC Advisory Group • ARCweb.com • 3
Capital spending continues to
decline in nearly all industries,
continuing a trend that began in
the mid-1990s when
manufacturing productivity began
to increase markedly.
Executive Overview
Capital spending continues to decline in nearly all industries, continuing a
trend that began in the mid-1990s when manufacturing productivity began
to increase markedly. The continuing uncertainty in most economies has
put pressure on manufacturers to cut spending, resulting in a steady de-
cline for several years now despite increasing revenues. Helping to fuel the
cost-cutting fire are the mega-mergers between industrial giants that have
racked up billions in savings as companies increase their manufacturing
economies of scale and eliminate duplicate functions.
ARC’s CapEx index tracks capital expenditures, total revenue, total assets,
EBIT, and return on assets (ROA) for 56 companies in 10 target industries,
representing $2.4 trillion in annual revenue. Companies in the index
generate revenue from most global markets and many
spread their manufacturing around the globe. Of the 56
companies, 64 percent have their headquarters in North
America, 27 percent in Europe, and 9 percent in Asia.
According to ARC’s most recent data, capital spending as
a percentage of revenue across all ten target industries
has declined at a compounded annual rate of -2.9 percent
since 1997. This decline in spending has occurred despite an annual growth
in revenues averaging 3.7 percent and in total assets averaging 6.5 percent
during the same period. Revenue, spending and asset figures in the ARC
CapEx index changed in part due to acquisitions and divestitures made
during the 6-year period, so the indictor used here is capital spending ver-
sus revenue. Even with these gains and losses, absolute capital spending
grew only by 0.7 percent annually.
Capital Spending Decline Continues
Industrial capital spending remained stubbornly flat in 2002, held back
primarily by geopolitical instability that dampened consumer spending and
weighed down nearly all the world’s major economies. To rescue the bot-
tom line, manufacturers cut back production, closed plants, reduced
spending and shed employees in record numbers. IT spending in particu-
lar was hit hard for the second year in a row. Many manufacturers now

By employing open industrial
standards to surface information
above the controls level, CDAS and
CPAS architectures let manufacturers
focus more on meeting business
objectives and less on integrating
dissimilar technologies.
feel they have their IT infrastructures in place and see only marginal bene-
fits in additional investments versus the “leaps and bounds” perception of
the Internet boom.
Why Do Manufacturers Continue to Spend Less?
As the world waits for signs of an economic recovery, many of the same
trends in capital spending continue to plague suppliers, although all indus-
tries vary slightly. The most significant reasons are summarized below.
Mergers Create Need for Collaborative Architectures
The urge to merge is continuing to consolidate manufacturing across many
industries, especially food & beverage, pharmaceutical, oil & gas and pulp
& paper. Manufacturers are acquiring or merging with other players to
increase their critical mass and diversify their product portfolios in increas-
ingly competitive global markets. While a merger may produce long-term
benefits, it also tends to distract a company’s attention in the short-term as
business systems are integrated, sales forces are united and product portfo-
lios are rationalized. Capital budgets are shifted temporarily to internal
integration efforts and ultimately are trimmed to reflect the newly won effi-
ciencies of the resulting conglomerate. The direct benefits for
manufacturers are increased operating efficiencies and reduced costs due to
the elimination of duplicate functions and the more flexible use of manufac-
turing assets. Savings can be substantial: General Mills expects to save $350
million in 2003 and $475 million more in 2004 through its merger with
Pillsbury. Oil mega-mergers like ChevronTexaco and ExxonMobil each
claim savings of over $1 billion per year since the merger.
Some mergers are bearing fruit by creating greater
economies of scale while increasing manufacturing
capacity. However, real synergies can only be
achieved if the additional capacity is exploited
through flexible manufacturing that enable produc-
tion facilities to respond more quickly to changes in
market demand. For example, a South American
brewer recently responded to a sudden increase in
demand for light beer caused by the introduction of a competitor’s product.
Although the capacity to produce the new light beer existed, the brewer
found that the recipes were hard-coded in his automation systems, turning
a simple product changeover into a lengthy and costly project.

Large global producers like Unilever, Procter & Gamble, Nestle and South
African Breweries are constantly faced with the challenge of working with
dissimilar control systems brought together through corporate acquisitions.
Rather than standardizing control system components worldwide, many
are turning to new architectures like CDAS and CPAS (see ARC Strategy
Reports “Collaboration Discrete Automation Systems Define the Factory of
the Future”, May 2003 and “Collaboration Process Automation Systems
Drive Return on Assets”, June 2002). CDAS and CPAS architectures are
based on standards like the ISA S95 Manufacturing Model to increase in-
formation visibility by synchronizing and managing cross-functional
processes across all manufacturing domains. By employing open industrial
standards to surface information above the controls level, manufacturers
can focus more on meeting business objectives and less on integrating dis-
similar technologies.
Strategic Outsourcing Continues
Outsourcing just shifts capital investments from one asset-owner to an-
other, but the reality is that outsourcing allows assets to be used much more
efficiently by an owner with a narrower focus, a broader market for the as-
set, and a larger incentive to maximize the return on assets. The final
frontier of outsourcing, contract manufacturing, has been a huge success in
the electronics industry for years. Now, the outsourcing of manufacturing
is starting to appear in other industries including automotive and even food
& beverage as more and more companies remove manufacturing from their
list of core competencies, focusing instead on product design and market-
ing. ARC expects manufacturing outsourcing to increase while outsourcing
in traditional areas like maintenance and project services continues to grow.
Under-Capacity Keeps Manufacturers in “Improvement
Mode”
Manufacturers’ spending behavior can be classified into two categories: 1)
“improvement mode” spending that focuses on optimizing processes to
squeeze more performance from existing assets when demand is down, and
2) “expansion mode” spending that creates new capacity to meet rising
demand. Good predictors of capital spending behavior are the US and
European government statistic covering capacity utilization for the manu-
facturing industries. The magic line for capacity utilization lies at around
82 or 83 percent. Below this level (presently the case in the US and Europe)
manufacturers are not fully utilizing their assets, so they lie low and focus

their spending on improving or modernizing existing processes. Once ca-
pacity utilization climbs through the “low 80s”, manufacturers switch
modes and begin investing in capacity expansion to meet rising demand.
0
10
20
30
40
50
60
70
80
90
100
1972
1982
1992
2002
0
20
40
60
80
100
120
140
Capacity Utilization Industrial Production
Capacity Utilization in the US Remains Below the Level at Which
Manufacturers Traditionally Switch to Expansion Spending
(Source: US Federal Reserve)
In the US, capacity utilization is currently at about 74 percent, suggesting
that few industries are willing to invest in increasing capacity at this time.
Evidence of this is the continued drop in factory jobs in 2003 despite signs
of a possible turn around later in the year. In Europe, the figures for both
the European Union and the Euro Zone have dropped from about 84 per-
cent in 2000 to a flat 80 percent at present, despite a brief recovery in 2002.
0
10
20
30
40
50
60
70
80
90
100
1998 1999 2000 2001 2002 2003
USA European Union
Capacity Utilization in Europe Hasn’t Fallen as Quickly as in the US, But
Still Remains Below the Spending Trigger Level in Most Industries
(Sources: US Federal Reserve and Eurostat)

The New Focus Is on Operational Strategies
Most manufacturers have their IT systems up and running and are now
focusing on achieve the efficiencies gains promised by IT investments.
Manufacturers invested huge sums in IT infrastructures during the spend-
ing boom that ended in 2001. In addition to hardware investments in PCs,
servers and networks, most companies went through long-term supply
chain management and ERP deployments that touched every area of busi-
ness from raw materials sourcing to sale of goods to after sales support.
Now that those systems are in place, companies are looking to reap the
benefits of their investments.
RPM
Performance
OpX
Execution
CMM
Strategy
RPM, OpX, and CMM Strategies Help Manufacturers Focus on
Consistently Doing the Right Things Well
ARC has identified three emerging approaches that are helping manufac-
turers find ways to squeeze the maximum value out of existing assets.
Collaborative Manufacturing Management (CMM) provides the strategy
and flexible infrastructure required for future dynamic businesses to sur-
vive. Operation Excellence (OpX) defines an execution method for
continuously improving business and manufacturing processes. Finally
Real-time Performance Management (RPM) combines the requirements of
financial performance with monitoring and controlling KPIs in real-time.
Faced with falling demand and lower sales revenue, these three strategies
help manufacturers lean out manufacturing processes, better utilize exist-
ing assets, and shorten return time on capital investments. The result is
that manufacturers are spending their capital budgets with more discretion
and selectivity in the face of both IT investment saturation and supply
overcapacity.

Economic Outlook for CapEx
Capital spending trends are highly susceptible to both global and local eco-
nomic influences. At present, a variety of factors are influencing
companies’ decisions as to how and where to invest. Despite the globaliza-
tion of economies, not all are in synch with each other, and not all offer the
same economic opportunities. Many companies are looking for ways to
spread their investments around the globe to get closer to their customers
while taking advantage of cheaper manufacturing locations.
The Americas
Recent indicators have started pointing to a turnaround in North America.
However, hopes were raised several times in 2002, only to be dashed
shortly thereafter by new shocks to the system like the Iraq war and the
SARS outbreak. But just as several threats ganged up to delay the recovery
last year, the picture of a recovery is now beginning to emerge – corporate
profits are returning, balance sheets are healthier, free cash flow is up, in-
vestor uncertainty is falling, and capacity utilization is climbing. In many
cases, investments simply have been postponed rather than cancelled.
However, manufacturers know they have to spend money to make money,
so an improved climate in the latter half of 2003 could spur on
the long awaited recovery. With interest rates at an all-time low,
there is a risk in North America that a recovery may result from
consumers spending against their home equity, rather than by
increases in industrial spending.
The leading consumers of process automation products and ser-
vices in North America are the chemical and electric power
industries. This trend will continue throughout 2007, but these
industries will still lag slightly behind the overall market average
for growth. As a subset of chemicals, fine and specialty chemicals will ex-
perience above average growth. Pharmaceutical and food & beverage
continue to be the growth leaders in North America and the rest of the
world. Primary drivers for both of these industries are FDA regulations
such as 21 CFR part 11 and adoption of more advanced automation archi-
tectures. Other industries that will experience high growth through 2007
include oil & gas and water & waste. While refining continues to be in a
slump, companies are still investing in exploration and production. Pulp &
paper opportunities remain limited and growth will be the lowest for all of
Regional OutlookRegional Outlook

The final shock to Germany will come
in 2004 when the European Union
admits 10 new member countries on
Germany’s eastern doorstep. The
resulting net loss in manufacturing
jobs not just in Germany but in all of
Western Europe could dampen GDP
growth for years to come.
the major verticals through 2007. Industries that will experience the least
growth through 2007 aside from pulp & paper include refining, bulk
chemical, metals and mining (particularly steel), and cement and glass.
Latin American economies are largely dependent upon the economic health
of Brazil. Argentina’s economy is strongly intertwined with Brazil, result-
ing in a domino effect in this region. Venezuela’s economy has been in a
shambles as a result of the worldwide depression in oil prices and the re-
sulting domestic instability. Latin American markets should see a modest
recovery in 2003, although growth in Brazil and Argentina will not be much
more than 2 percent.
Europe
Anemic growth and high unemployment have plagued the European
economies recently. GDP growth in the 15 member countries of the Euro-
pean Union may reach an unimpressive 1 percent in 2003 and will likely
climb to around 2 percent in 2004. If the depreciation of the dollar against
the euro persists, the competitiveness of European manufacturers will suf-
fer while cheap imports flood the European market, putting Europe at a
risk of deflation.
Lower productivity in Europe has prevented econo-
mies here from achieving the heady GDP growth rates
of 3 or 4 percent common in North America. Part of the
blame lies with Germany. Once the economic motor of
Europe, Germany’s GDP has grown at only 1.1 percent
annually since 1996 – half the rate for the rest of
Europe. In a country hobbled by strict industry regula-
tions and unwilling to undergo major economic
reforms, companies have become more reluctant to in-
vest there at a time when Central and Eastern Europe offer more lucrative
opportunities. The final shock to this industrial giant will come in 2004 when
the European Union admits 10 new member countries on Germany’s eastern
doorstep. The resulting net loss in manufacturing jobs not just in Germany
but in all of Western Europe could dampen GDP growth for years to come.
Central and Eastern Europe and Russia will continue to experience steady
growth of 3 to 4 percent, spurred on by the prospect of EU membership as
of 2004 (not Russia) and possible future membership in the Euro common
currency.

In automotive, premium manufacturers are still performing well but are
turning the corner at the peak, while mass producers are feeling the pinch
earlier. Especially for large European producers like VW and Daimler-
Chrysler, the financial picture is deceptive - booming business in China is
making the European manufacturers' numbers look rosier than they really
are. While this helps spread the risk for European producers, it also masks
the difficulties in the home markets. It is, however, good news for Euro-
pean-based automation product and service suppliers that already have a
foot in the booming Chinese market.
Asia/Pacific
Asian markets will continue to enjoy healthy, sustained growth with GDPs
growing at 4 to 6 percent. China will again be the motor of the Asian
economies with growth at least matching the 2002 level of 9 percent. In-
dia‘s economy has grown more slowly, dropping below 5 percent last year,
but will likely pick up in the next five years. Japan’s economy will con-
tinue to remain flat due to sluggish domestic demand.
Major factors contributing to this growth include the increase in the amount
of disposable income in the hands of large, increasingly affluent popula-
tions, large investments in infrastructure and construction projects, and
massive inflow of capital to set up manufacturing facilities in industries
such as automotive, electric power, cement, chemicals, oil & gas, steel and
textiles.
CapEx Trends by Industry
Aerospace
The aerospace industry has been in absolute turmoil since the terrorist at-
tacks in the US in 2001 ground the worldwide airline industry to a halt.
The overall demand for commercial aircraft has plummeted. Boeing, the
world’s largest producer of commercial airplanes, cut its output by more
than half and laid off tens of thousands of workers in 2002. The industry is
seeking alternative automation strategies to keep costs down while increas-
ing flexibility. Outsourcing production of non-key components is
benefiting aerospace subcontractors.

Capital spending as a percentage of reve-
nue decreased insignificantly as revenues
rose at a steady 3.4 percent annually, ac-
cording to ARC’s CapEx index. However,
eroding profits have reduced the indus-
try’s ROA somewhat during the same
period.
Automotive
Heavy discounting and zero percent fi-
nancing in 2002 boosted automotive plant
capacity to near maximum utilization in
the North American market, which in turn
drove demand for maintenance and re-
placement equipment. However, the demand for new automation remains
relatively sluggish. A key indicator for this sector is the demand for metal
working machine tools and robotics automation equipment purchased by
tier one and tier two component suppliers. These two sectors are in a cycli-
cal downturn that began at the end of 2000. Machine tool shipments have
fallen by at least 35 percent compared to 2000.
Margins at all tiers are being squeezed by
heavy discounting in an attempt to drive
demand. Automaker Chrysler, facing a
$1.2 billion loss in the current quarter, is
leaning on suppliers to further lower prices
or “risk losing future business”. The com-
pany recently sent letter to suppliers
showing the “severe gap” between their
pricing and the lowest price available in the
world, including price comparisons with
suppliers from Europe and low-wage na-
tions in Asia, such as China. The resulting
ripple down the supply chain is forcing
suppliers to seek ways to take even more
costs out of their processes by eliminating
underperforming assets and scaling back large project work for factory up-
grades. To achieve this, carmakers and suppliers are focusing their capital
spending on ways to cut costs and improve operational efficiencies.
93
118
0
20
40
60
80
100
120
140
1997 1998 1999 2000 2001 2002
CapEx/Revenue Revenue
Aerospace Industry
CapEx/Revenue vs. Revenue (1997 = 100)
87
116
0
20
40
60
80
100
120
140
1997 1998 1999 2000 2001 2002
Automotive Industry

In Europe, premium brands like BMW and Porsche are continuing to set
record sales despite recent sales drops in the key US market. However, the
25 percent drop in the value of the dollar versus the euro since last year is
hurting profits for some. Interestingly, BMW, which produces automobiles
in the US market, claims the company is hedged against the weaker dollar
through 2004, while Volkswagen, which makes cars in Mexico for the North
American market, is already feeling the pain of both slower sales and lower
dollar profits. Volkswagen recently sought to gain the support of factory
workers for its ongoing cost-cutting measures, citing the need for substan-
tial cost savings for the company to maintain its “maneuvering room”.
Italian automaker Fiat recently disappointed analysts with a softening of its
turnaround plan aimed rescuing the troubled industrial giant without clos-
ing plants or cutting jobs.
According to ARC’s CapEx index, capital spending in the automobile in-
dustry has remained steady at 5 to 6 percent of revenue since 1997.
However, eroding profits have cut the industry’s ROA in half to between 2
and 3 percent during the same period.
Chemicals
After a disappointing year in 2002, the worldwide chemical industry is still
plagued by overcapacity, weak demand, and declining prices, although
some relief is in sight. Specialization, globalization, consolidation, and out-
sourcing continue to be the key trends. Some chemical firms are divesting
low-margin commodity bulk chemical businesses to concentrate on higher-
margin specialty chemical businesses, which typically require a greater de-
gree of manufacturing sophistication.
Outsourcing enables companies to cut
costs and eliminate production planning in
their own facilities, to focus more energy
and resources on product innovation and
marketing.
Manufacturing chemicals and allied prod-
ucts is capital intensive. The real value of
fine chemicals is often a function of the
production technologies. In place of the
high volume advantages of commodities
and the performance benefits of special-
ties, the value-add comes in the process
89
104
0
20
40
60
80
100
120
140
1997 1998 1999 2000 2001 2002
Chemicals Industry

stage. Consequently, the design of efficient, flexible and agile plants that
satisfy quality requirements while complying with safety, health, and envi-
ronmental legislation can mean the difference between success and failure.
According to ARC’s CapEx index, capital spending as a percentage of reve-
nue in the chemical industry has dropped by -2.2 percent annually since
1997. Revenue during that same time has remained mostly flat while pre-
tax profits have fallen by more than half. ROA, which has suffered slightly
until 2001, shrank again in 2002 to a third of 1997 levels due to poor profit
performance.
Food & Beverage
Investments in the food & beverage industries remain focused on issues
such as developing and introducing new products, maintaining and im-
proving quality, ensuring safety, reducing inventories, optimizing asset
utilization, and cutting costs out of supply chains. These issues continue to
strongly influence capital project and operational decisions. Food & bever-
age is a high volume, low margin industry, so manufacturers must hold
onto their bottom lines by continuously lowering costs in production,
sourcing and distribution. A high
level of integration between manu-
facturing and business solutions
from ERP through CPM, asset man-
agement, data warehouses and
supply chain optimization is neces-
sary to keep up with the changing
landscape.
The wave of acquisitions in food &
beverage is causing producers to
divert capital budgets to the tasks of
integrating and unifying the result-
ing patchwork of dissimilar plants,
business systems and control archi-
tectures. However, while acquisitions may divert capital spending, the sav-
ings from eliminating duplicate functions appear to far outweigh the costs
of integration. Unilever claims to have reached its savings target of €800
million as a result of the successful integration of recently acquired Best-
foods.
82
117
0
20
40
60
80
100
120
140
1997 1998 1999 2000 2001 2002
Food & Beverage Industry

Food & beverage manufacturers continue to focus on their supply chains as
more and more product is sold through mass merchandisers like Wal-Mart
and Kroger in North America or Carrefour, Royal Ahold, Metro, and Tesco
in Europe. While the old mantra “Deliver what I ordered, when I want it
and invoice me correctly” still holds true, large retailers are pressuring
manufacturers to improve their performance by tightening logistics metrics.
nue in the food & beverage industries has decreased steadily at -4.0 percent
annually since 1997, despite annual growth in revenue of 3.3 percent.
Metals & Mining
The worldwide market for steel will grow by more than 4 percent in 2003,
driven largely by increased demand in China. China’s production increased
last year by an impressive 20 percent to 182 million metric tons, putting it far
ahead of Japan (108) and the US (92). China’s sizzling growth will also ac-
count for nearly all of the capacity expansion in the steel industry in 2003,
while the rest of the world focuses its spend-
ing on improving and optimizing existing
assets. Japan’s stalled economy will keep its
steel consumption at the same level as 2002.
In Europe and North America, steel con-
sumption will grow at 2.5 to 3.5 percent on
the back of more solid manufacturing activ-
ity during the year.
The turmoil of bankruptcies and acquisitions
in the steel industry has been marked by a -
7.4 percent annual decrease in capital spend-
ing as a percentage of revenue since 1997,
according to ARC’s CapEx index. During
the same period, revenues have remained
flat while profits have plummeted due to capacity gluts and falling prices.
Oil & Gas
Fluctuating oil prices caused by geopolitical instability made for a difficult
year in 2002 for oil companies. Refining in particular suffered from very
low margins when crude costs rose faster than product prices during a pe-
riod of depressed demand growth.
68
98
0
20
40
60
80
100
120
1997 1998 1999 2000 2001 2002
Metals Industry

Challenges in upstream include managing
oil and natural gas fields to increase pro-
duction, reduce downtime, lower operating
costs and optimize reserve recovery. In
downstream, refiners are focusing capital
budgets on cost reduction, safety enhance-
ment, reduction in capital requirements,
and reductions in refining energy consump-
tion. In addition, a large part of capital
budgets continues to go toward meeting
stringent environmental regulations. Recent
mega-mergers like Chevron-Texaco and
Exxon-Mobil continue to claim annual sav-
ings in excess of $1 billion.
nue has decreased by -3.4 percent since 1997 while wildly fluctuating
revenue due to changing oil prices has increased at an average annual rate
of about 5.4 percent.
Pharmaceutical
Capital spending in the pharmaceutical industry is driven primarily by new
drug development, along with pressure to maintain financial performance,
shorten time to market and improve quality. Drug makers are also invest-
ing in the technologies and infrastructures necessary to achieve and
demonstrate compliance with current and future regulatory requirements.
The United States is the world’s
largest market for prescription
drugs, and the Food and Drug Ad-
ministration (FDA) has traditionally
led the pack with its strict policing of
the industry and the move to elec-
tronic records and signatures.
However, compliance with federal
regulations will become even costlier
with the introduction of new Euro-
pean Union legislation, including the
new Product General Safety (Liabil-
ity) Directive 2001/95/EU, Annex 11
84
130
0
20
40
60
80
100
120
140
1997 1998 1999 2000 2001 2002
Oil & Gas Industry
99
153
0
20
40
60
80
100
120
140
160
180
1997 1998 1999 2000 2001 2002
Pharmaceutical Industry

of the EU Good Manufacturing Practice, Data Protection Directive
95/46/EC, and the Electronic Signature Directive 1999/93/EC.
The pharmaceutical industry is still a low volume, high margin business,
but this is gradually changing as the industry begins to face pressures for
which drug makers are ill-prepared. These pressures are driven by weak
development pipelines, crowding of therapeutic categories, new generic
competition, new FDA responses, increasing socio-political price and deliv-
ery pressure, and new drug delivery systems requirements. The current
strategy of mergers and acquisitions to achieve financial performance and
satisfy shareholders is not sustainable in the face of the global demand for
affordable and available drugs, increasing demand for more new life saving
drugs, and the trend toward greater global social responsibility and har-
monization. The most consistently profitable drug companies will be those
that succeed in shortening development times and terminating unpromis-
ing drugs earlier in the development cycle.
Capital spending in ARC’s CapEx index for the pharmaceutical industry
increased steadily at 8.6 percent annually since 1997, in line with annual
revenue growth of 8.9 percent. However, some of this is due to acquired
growth from mergers. As a percentage of revenue, capital spending rose
during the boom years of 1999 and 2000, only to fall back to 1997 levels last
year. Pharmaceutical manufacturers have enjoyed healthy ROAs in the
range of 18 to 20 percent during this period.
Pulp & Paper
The pulp & paper industry continues to
suffer from overproduction and falling
prices. Recent mergers led to more ROA-
focused manufacturing as large producers
attempt to become global producers by
concentrating their assets on manufactur-
ing paper in line with market demand
rather than the previous tendency to
overproduce.
Increasing size has been accompanied by
the introduction of more sophisticated
production methods as manufacturers try
to cut variable costs in the face of cheap
Pulp & Paper Industry
64
144
0
20
40
60
80
100
120
140
160
1997 1998 1999 2000 2001 2002

imports from Asia. Rather than build new paper mills, which can cost as
much as $1 billion and take several years to build, manufacturers are con-
centrating capital spending on improving existing facilities through better
asset management and quicker response to changes in product demand.
nue decreased steadily by an annual rate of -8.7 percent since 1997.
Overcapacity and falling prices have caused margins to drop substantially,
with many manufacturers losing money in 2002.
Semiconductor
Last year marked another bad year for chipmakers as revenues dropped by
4.4 percent in ARC’s CapEx index. Capital spending in the semiconductor
industry has mirrored the overall downturn in the telecommunications and
personal computer industries. Many manufacturers have taken advantage of
the downturn to make strategic acquisitions as entrepreneurial firms with
key technologies can be had for a low price.
Unlike other industries, chipmakers are con-
stantly faced with the challenge of inventing
new manufacturing processes to produce
smaller and denser chips. This is why “new”
technologies like Collaborative Production
Management, now being introduced in other
industries, were pioneered years ago by the
leading-edge semiconductor industry. Capital
spending focuses for semiconductor manufac-
turers continue to emphasize reducing manu-
facturing costs and increasing lot yield in the
face of falling prices and fluctuating demand.
According to ARC’s CapEx index, capital spending in the semiconductor
industries has been erratic over the past six years, returning to 1997 levels
last year. Growth in spending as a percentage of revenue has mostly re-
mained in line with revenue growth during the same period.
Utilities
The turmoil of 2002 in the energy markets has forever changed the utilities
landscape, but real benefits for consumers and shareholders still vary
136
101100 95
0
20
40
60
80
100
120
140
160
1997 1998 1999 2000 2001 2002
CapEx Revenue
Semiconductor Industry

widely. Newly privatized energy
companies are focusing on increasing
profits to keep shareholders happy,
while coming to terms with the chal-
lenges of profitably re-integrating
energy supply chains broken up by
deregulation. In addition to process
improvement, capital budgets are
focused on cost cutting measures
through better asset management as
well as improving customer respon-
siveness.
According to ARC’s CapEx index,
capital spending as percentage of revenue for utilities has mostly kept pace
with revenue growth since 1997.
Recommendations
• Geopolitical uncertainty, fluctuating oil prices and sluggish demand
continue to hinder capital investment in most industries. As capital
budgets are cut, manufacturers should focus investments on projects
with a clear and measurable return, such as initiatives that cut costs,
improve productivity and quality, and increase utilization of existing
assets. By leaning out manufacturing processes now, companies can
better position themselves to meet increasing demand when the econ-
omy recovers.
• Reduced capital spending spells tough times for solution providers -
especially IT suppliers. Suppliers should shift their focus from pure
technology to helping customers understand how the solution can con-
tribute to improving their bottom line.
• Manufacturers need to understand how CMM, OpX and RPM can help
them improve their business by leaning out manufacturing processes,
better utilizing existing assets, and shortening return time on capital in-
vestments.
102
101
0
20
40
60
80
100
120
140
1997 1998 1999 2000 2001 2002
Utilities Industry

Analyst: David W. Humphrey
Editors: Dick Hill, Chantal Polsonetti
Distribution: All MAS Clients
Acronym Reference: For a complete list of industry acronyms, refer to our
web page at www.arcweb.com/Community/terms/terms.htm
ANSI American National Standards
Institute
API Application Program Interface
CAGR Compound Annual Growth Rate
CapExCapital Expenditure
CDAS Collaborative Discrete
Automation System
CMM Collaborative Manufacturing
Management
CNC Computer Numeric Control
CPAS Collaborative Process Automation
System
CPG Consumer Packaged Goods
CPM Collaborative Production
Management
CRM Customer Relationship
Management
EAI Enterprise Application Integration
EAM Enterprise Asset Management
ERP Enterprise Resource Planning
EU European Union
FDA Food & Drug Administration
GDP Gross Domestic Product
IT Information Technology
KPI Key Performance Indicator
MRP Materials Resource Planning
OpX Operational Excellence
OLE Object Linking & Embedding
OPC OLE for Process Control
PAS Process Automation System
PLC Programmable Logic Controller
PLM Product Lifecycle Management
ROA Return on Assets
ROI Return on Investment
RPM Real-time Performance
Management
SCE Supply Chain Execution
WMS Warehouse Management System
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Leader in Manufacturing and Supply Chain solutions. For even your most
complex business issues, our analysts have the expert industry knowledge and
firsthand experience to help you find the best answer. We focus on simple,
yet critical goals: improving your return on assets, operational performance,
total cost of ownership, project time-to-benefit, and shareholder value.
ARC Strategies is published monthly by ARC. All information in this report is
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out prior permission from ARC.
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Capital Expenditure Survey 2003

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Capital Expenditure Survey 2003