Market Insight

Smaller building installations driving slow but steady growth in the building automation equipment market

November 29, 2017

Bryan Montany Bryan Montany Research Analyst II

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Highlights

  • The building automation equipment market has grown to $5.4 billion in 2017 and will continue to grow about 4 percent annually for the next several years
  • While the market for automation equipment in larger buildings with complex systems has matured and is stable, growth in small and mid-sized buildings is accelerating, especially in North America and Western Europe
  • This market shift may present opportunities for new market entrants, while conventional building automation equipment manufacturers will likely introduce new product offerings to compete in this sector

Our analysis

In 2017, global building automation equipment revenue totaled $5.4 billion, growing 3.8 percent from the previous year. More than 35 percent of revenue was invested in equipment for systems in small and mid-sized buildings under 200,000 square feet.

Over the past several years, equipment installed in small and mid-sized buildings has grown faster in market size than equipment installed in larger buildings that have conventionally used this equipment. IHS Markit anticipates this trend will accelerate between 2017 and 2021. This development represents an opportunity for new entrants to compete for projects in this industry, as the traditional suppliers of building automation equipment are not as deeply entrenched as providers of the unique product offerings needed to service these buildings.

The importance of building automation systems

Worldwide, occupied buildings account for more than a third of all energy consumption, contributing significantly to carbon dioxide emissions. Commercial buildings without building automation systems are less efficient with their energy consumption because they often have climate control systems that continue to operate at night or on weekends when the buildings are unoccupied. Even on workdays, HVAC systems that lack building automation systems may unnecessarily cool or heat infrequently used rooms or floors in an inefficient manner that is expensive for building owners.

Building automation systems ensure that HVAC systems are managed properly through automatic control of equipment to make certain that building climates remain within acceptable ranges; predictive analytics are utilized in these systems to enable the system to adapt to changing conditions. Building automation can also allow for proactive maintenance of failing devices. Last, these systems can improve occupant comfort levels, leading to healthier and more productive employees.

The conventional market for building automation equipment

Traditionally, building automation equipment has been installed in complex and intricate system architectures to accommodate very large buildings. In this sector of the market, four companies have established themselves as the industry’s preeminent suppliers. Honeywell, Siemens, Johnson Controls, Schneider Electric and their subsidiaries were projected by IHS Markit to possess a collective global market share of nearly 52 percent in 2017, with more than 75 percent of revenue coming from systems installed in complex buildings.

For a number of reasons, this portion of the market is not likely to become more competitive in the next decade. Integrators and installers who work on complex projects are familiar with these four companies’ brands and prefer installing their equipment, and many of these products are packaged together in full-scale solutions that are provided by a single manufacturer. The complexity of the freely programmable controller types more frequently used in these projects also present a barrier for new market entrants. These controllers are designed to allow for greater customization of system architectures in complex projects, but they require more sophisticated software and are more expensive to manufacture.

The market for small and mid-sized buildings

In North America, more than 99 percent of commercial buildings and over 70 percent of commercial floor space are in structures under 200,000 square feet in size. However, fewer than 15 percent of these buildings have building automation systems. These buildings lack an efficient way to manage their climate control systems, resulting in unnecessary and wasteful energy consumption. As the cost of building automation equipment has declined and as building owners are becoming more educated about the benefits of these types of systems, systems are being installed as retrofit projects to accommodate these buildings.

IHS Markit anticipates that the global market for automation equipment in small and medium-sized buildings will grow at a 5.5 percent compound annual growth rate (CAGR) between now and 2021, nearly double the rate of 3 percent annual growth for the complex market with larger buildings. Market growth is most vigorous in the North American and European regions. In North America, the trend is fueled by installations in buildings that previously lacked any equipment. In Western Europe, preexisting systems in smaller buildings are being retrofitted to improve energy savings.

The traditional building automation equipment suppliers have recognized this opportunity and are beginning to offer new product lines of controllers, sensors and software specifically designed to appeal to small and mid-sized building owners. However, these offerings are less ingrained in this comparatively new market. In addition, the industry has transitioned to a more open framework. Contractors who install systems in smaller buildings often prefer to “mix and match” equipment and software from different suppliers.

These developments with small and mid-sized buildings have presented opportunities for new market entrants. Information technology companies have entered this space and are offering their own variations of building automation software. Suppliers of HVAC equipment have begun selling their products with embedded building automation controllers, offering small and mid-sized building owners a combination of desired products at a cheaper price point. Smaller regional companies have offered comparatively simple and inexpensive controllers and sensors that have sold well among price-conscious contractors.

Conclusion

Building automation providers must adopt new strategies and offer new products to compete for small and mid-sized projects. Traditional companies will find themselves at a disadvantage unless they either scale their products down or promote new product offerings to accommodate projects in this sector. The key for these suppliers will be to find ways to offer the powerful analytics available in their complex building automation systems at a lower price point that is affordable for small building owners. The equipment in these systems will need to be designed to be easy for contractors with limited expertise to install and operate. A possible answer could be the use of Wi-Fi enabled equipment, which could limit wiring costs in retrofit projects. Underserved opportunities to install systems in small and mid-sized buildings is forecast to be a major dynamic in this market in the near future, and both conventional building automation equipment manufacturers and new market entrants who seize this opportunity will experience stronger growth than their competitors.

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