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On an Upward Trajectory

The T&M instruments market while expected to maintain a CAGR of 5 percent over the next five years, is seeing transformational shifts.

The test and measurement instruments have been on an upward trajectory as there has been a continuous progress in technology from 2G to 3G and to more advanced technologies as LTE and LTE-A. There has been requirement for continuous maintenance and quality testing of frequency and spectrum. A 5 percent compounded annual growth rate shall continue
till 2021, says TechNavio, by when the general purpose T&M market shall be
USD 6.58 billion.

Steady Increase in Demand

The emergence of the 5G network shall demand a lot of testing. 5G is not a linear progression from 2G to 3G to 4G, it is very, very different. It is different in terms of the challenges involved. It challenges the economics of testability, which is going to have an impact, if not solved, on the ability of many companies to come in downstream and start developing solutions in 5G.

The 5G networks are equipped with multipoint connectivity with distributed multiple input, multiple output (MIMO). The network operators collaborate with testing companies for the testing and development of 5G technology, which is expected to propel the demand for the T&M market.

The evolving 5G standard is bringing companies from many parts of the wireless ecosystem together to create new hardware and software. Austin, Texas is a nexus of 5G research not only because of AT&T’s work with Intel and Ericsson, but also because of National Instruments’ 5G research lab. The company’s proprietary equipment and software are being used by carriers, chipmakers, and equipment vendors to test 5G hardware and protocols. The work is focused on millimeter wave technologies, massive MIMO antenna solutions, physical layer hardware, and protocol software.

Greater need for interoperability testing is also a key driver. The entire range of electronic and electrical products being used today has led to end users requiring higher interoperability of T&M equipment so that they need not use a particular manufacturer’s products for a lifetime. The problem applies to both heterogeneous sets of products such as smoke alarms, video monitors, home gateways, and home networking/automation products, and homogeneous sets of products such as routers and switches.

End-users of T&M equipment are facing problems due to incompatibility issues between products that are meant to work together but do not. This issue is becoming a challenge for vendors of T&M equipment, as it results in the loss of potential customers. Therefore, it has become a standard procedure for vendors to conduct the interoperability test to ensure compatibility with different products. Interoperability is soon expected to be a prerequisite, wherein vendors are expected to manufacture products based on specified standards.

Outsourcing gains momentum among OEMs. The demand for continuous maintenance and quality testing of frequency and spectrum has prompted the vendors to outsource quality testing to external entities. This allows them to focus on the expansion of their core business and ensure enhanced quality of service for their customers. They in turn shift their internal resources to product development and customer-facing value-added services such as test design and test services. Contract manufacturers who support test and measurement OEMs must be able to provide fully tested, highly precise subsystems and be responsive to needs for custom fixtures and new test requirements.

Increased Pressure on Price and Margins

Pressure on price on test equipment is a growing trend overall, not only due to exponential growth in technological complexity but also due to fierce competition. Customers have increased their attention on their capital expenditures (CapEx) leading to significant discounts. Their interest in asset management services is also growing in order to better understand their actual test asset utilization and better control expenses related to test equipment.

This market has also become a battleground for leaders including Rohde & Schwarz, Keysight Technologies, Anritsu, National Instruments, and Viavi whose focus has led to significant innovation and product introductions in the past few years.

Rentals – a New Era Sets in

Expenses regarding test and measurement equipment are being scrutinized by many customers across industry verticals and significant efforts are being deployed to control capital expenses related to such equipment, as customers realize inefficiencies in their operations and the huge cost savings that can result from addressing them. These efforts are not only likely to spark opportunities notably for asset-management services, but also lead to a more balanced use of different acquisition means for test and measurement equipment between new instruments, used test equipment, and rental and leasing services.

Penetration of rental and leasing services is simply nowhere near to what it could be indicating significant potential for growth for market participants over the next 5–10 years. Frost & Sullivan’s analysis shows penetration in single digits even in regions where the market for such services is the most developed – North America and Europe. Currently, overall penetration of rental and leasing services for test and measurement equipment globally is around 5 percent, while such services represent about a third of the market revenue in comparable markets. Essentially, this market generates $500 million per year, while new test equipment sales generate close to $10 billion. Even small inroads in penetration can thus yield significant revenue for service providers.

Today, the market is heavily skewed toward new test equipment purchases, which is estimated to represent about 90 percent of the total market revenue, a much larger share compared to used instruments and rental and leasing services. Spanning various applications and consisting of widely differing instruments ranging from highly sophisticated bench instruments used in research and development (R&D) laboratories to small handhelds used in the field for installation, maintenance, and repair purposes, rental and leasing services have seen the most uptake in field applications. However, the largest portion of the market revenue for test and measurement equipment comes from the R&D segment and heavy use of traditional instruments in such applications makes R&D represent the largest revenue generating opportunity for rental and leasing services in the foreseeable future.

While the opportunity is significant and end users’ trends are favoring rental and leasing services, capturing it will not be without overcoming a number of challenges.. In large organizations, corporate financial departments drive the decision to purchase or rent and tend to favor purchases for tax benefits. Providing immediate ownership, purchasing test equipment provides deductions for depreciation and interest, which translates into significant tax savings. This challenge is tempered by the fragmented customer base for test and measurement equipment, which includes many medium and small organizations for whom cash flow is a priority, favoring rentals and leasing services. Moreover, research indicates a growing demand for rentals and leasing services with large organizations for urgent needs due to the implementation of more stringent authorization processes for purchases.

Beyond this, there remain other challenges to increase penetration of rental services in the global test and measurement industry especially in Asia where awareness about such services as an alternative to purchases is low, and cultural aspects and process issues restrain market growth. In addition, rental providers have limited local presence and most operate from offshore bases shipping the equipment to customers, which has time and cost implications that lower the business case for rental and leasing services compared to purchasing equipment.

Enlarging their geographic footprint will continue to be an important competitive factor for providers of rental and leasing services for test and measurement equipment to fuel their growth in addition to investing in equipment to ensure availability. With high synergy between different means of acquisition for such instruments, it will also be highly important to distribute new test equipment as well as sell used instruments in addition to providing rental services.

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