Sensors and Controls: Investing Essentials

Although they're not as flashy as some other technologies, sensors and controls are critical components of many of the products that we frequently use. For instance, cars, jets, and home appliances are jam packed with them.

Sensors take a physical input, such as pressure or temperature, and convert that input into an electrical signal that a computer-based system can use. Controls, on the other hand, are devices that are built into systems to keep them from overheating and/or being fed too much current.

Given how critical sensors and controls are, let’s take a closer look at the industry.

What is the sensors and controls industry?

The sensors and controls industry consists of companies that design and sell sensors and controls. Now, as Sensata Technologies – a leading independent sensors and controls vendor – notes, these companies can either be independent vendors of sensors and controls or in-house development teams at the vendors of the end-products that require sensors and controls.

Sensors often measure a variety of types of input, including: pressure, speed, position, temperature, and force. Some of these sensor types, such as pressure sensors, have far-reaching uses in automotive, industrial, and marine applications. Others, such as force sensors – found in automotive applications – are fit for a narrower set of use cases.

To get a sense of what controls are and what types are available, it’s worth looking at Sensata’s core product offerings, which include:

  • Bimetal electromechanical controls: These are commonly used in applications such as lighting and household appliances to prevent overheating and having too much current driven through the devices.
  • Thermal and magnetic-hydraulic circuit breakers: These devices help prevent damage from thermal and electrical overload. Found in many applications including medical devices, electronic power supplies, and industry.
  • Power inverters: These convert direct current power to alternating current power. For example, if a device needs alternating current -- think power from a wall outlet -- but one wants to power it using a battery (direct current), a power inverter is needed. 
  • Interconnection products: Semiconductor companies use these products to test the reliability of their own finished products.

With such a rich set of product offerings, the next aspect worth exploring is the size of the industry in dollar terms.

How big is the sensors and controls industry?

Sensata estimates that its annual served addressable market in the sensor space is $6.8 billion. This opportunity breaks down into about $1.85 billion for pressure sensors and switches, $1.73 billion for speed sensors, $610 million for high temperature sensors, and $2.64 billion for position sensors.

The controls market is significantly smaller, with Sensata citing an annual served addressable market of about $1.3 billion. The breakdown by product category comes out to about $163 million for power inverters, $367 million for power protection, $632 million for motor protection, and $145 million for interconnection.

Given that this one company claimed a total served addressable market of $8.1 billion, the full addressable market (which may include segments that Sensata does not participate in) is likely even larger.

How does the sensors and controls industry work?

The sensors and controls industry is, like many technology industries, very research and development-intensive. Companies that can consistently deliver products on time that meet specification, and do so at the right cost structures, are poised to succeed.

Further, although the general types of sensors and controls are standard, Sensata claims that these products – depending on the application – can require quite high degrees of customization. This means that independent vendors need to engage with potential customers early on in those customers’ respective product development cycles, particularly as these vendors often need to compete with the in-house operations of some of their larger customers.

Additionally, Sensata claims that since there is extensive engineering work done in conjunction with supplying components into a given design (leading to very high switching costs), its sales teams dedicate much of their efforts on “’early entry’ into new applications rather than the displacement of existing suppliers in mature applications .”

This means that if a vendor is firmly entrenched in a market, barring some serious execution gaffes, that vendor is likely to remain entrenched.

What drives the sensors and controls industry?

The sensors and controls industry is driven by the technological needs of end customers. For example, Sensata notes that as safety, energy efficiency, and emissions standards continue to tighten, the opportunity to embed more -- and more sophisticated -- sensors and controls into many products drives longer-term industry growth. 

In addition to more sensors and controls within end products, the growth in sales of those actual products is also a key driver of the sensors and controls industry.

Further, given that this industry is highly competitive, there is a continued need to lower overall product cost through both engineering might in addition to ever-better sourcing strategies. One such strategy that delivered 5% cost savings for Sensata in 2013 is “best cost sourcing”. Best-cost country sourcing, according to Accenture  , refers to sourcing decisions that are “made more based on total cost rather than lowest price.”

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