Rheology companies fight economic tide.

The Commerce Department's announcement on October 31 that US gross domestic product grew at a 7.2% annual rate in the third quarter astonished many stock market observers, but the mood among rheometry and viscometry companies was decidedly more guarded. Few, if any, analysts have said that they

believe this rate of growth will be anything more than a short-term phenomenon, and even the chairman of President George W. Bush's council of economic advisers, visiting France last week, set the bar for fourth quarter growth at a more modest 3.3%. In spite of this, it could be another quarter before manufacturing companies feel the effects of any turnaround, and tightening in capital equipment spending has cut into profits and left many companies scrambling for business.

For rheometer and viscometer makers, who rely heavily on industrial customers, times have been especially difficult. Consolidation and weakness within the polymer and petrochemical industries, which make up nearly one-third of the total demand for rheological instruments, have left instrument manufacturers to reevaluate their place in the market.

In the face of flat growth or losses reported by rheology and viscometry companies, a handful of significant acquisitions have taken place over the last couple of years. In October 2002, Waters subsidiary TA Instuments announced it would pay $17 million in cash and assume $6 million in trade debt to buy the rheology business of Rheometric Scientific, a leader in the field (see IBO 10/15/02); and at the end of last month, Malvern Instruments, a UK-based company that builds particle characterization instruments, purchased Bohlin Instruments, a rheology company similarly headquartered in the UK (see page 2).

Paul Walker, who is the managing director of Malvern and played a role in the Bohlin acquisition, sees rheology entering a crucial phase. "To use an English understatement, it has been an interesting time for the rheology market," he says. "As the global market changes, there's a shift with a lot of manufacturing going East and transnational investment in the East, as well--China, in particular. How does a small company develop itself, develop its routes to market in a way that it can really respond to and serve that sort of customer base?"

For Bohlin, the answer lay in Malvern's technology. Although many particle characterization customers have no interest in measuring rheological properties (such as those who produce raw cement), and some who test rheological properties have little use for particle characterizers (a large part of the polymer market, for example), a significant amount of overlap between the two measurements exists. "All bulk rheological properties are influenced by a number of variables. And particle size, in some situations, can be quite a determining factor in bulk rheological properties," explains Mr. Walker. "It's the applications area where there is some clear relationship between the characteristics of the particle and the rheological characteristics of the system in which that particle behaves."

As analyzers of physical properties, rheometers and viscometers have been embraced by a wide array of industries. While polymers and petrochemicals remain two of the largest customers, the instruments have been applied to materials as diverse as paints, cosmetics, pharmaceuticals and chocolate. To measure the viscosity of a sample, viscometers use one of three primary methods: flow cups, which measure the rate at which liquids fall through holes; capillary tubes (see IBO 1/31/ 01); or rotational devices, in which a rotating spindle encounters resistance as it spins through a liquid. Rheometers, by and large, are of the rotational variety. While viscometers tend to be less expensive than rheometers, the latter can perform, in addition to basic viscometric measurements, a number of other physical property tests.

Although rheology and viscometry companies have been more willing in recent years to divest unprofitable businesses or merge them with complementary segments of broader-based companies, instrument executives do not expect the analyzers themselves to undergo any significant transformation. "Is the technology itself evolving with frontier-pushing changes to different types of circuitry? Probably not at the rate of some of the others," says Bob Hassel, president of TA Instruments. "Take the other business Waters is in: mass spec. That to me seems to be one where they're always pushing the envelope. I don't think rheology is quite in the same class."

For TA Instruments, which makes thermal analyzers as well as its own AR line of rheometers, acquiring Rheometric Scientific was not so much a question of integrating a new technology into in product catalog as of filling out an existing product line. Within the high-end rheometer market are two fundamental approaches: controlled stress and controlled strain. While Mr. Hassel says that controlled stress instruments are selling better than their counterparts, he still believes there is a place for controlled strain technology, and Rheometric's rheometers provided the company with the capability to provide both.

Broad-based corporations like Waters, Shimadzu, Thermo Electron and Roper Industries (each of which occupies a slice of the rheology and viscometry market)--in addition to having the funds to acquire competitors during tough economic climates-hold an important advantage over small competitors that do not participate in other instrument areas. With revenues spread over multiple instrument lines, unusual slowing in purchases for one technique does not necessarily harm other revenue sources. And unlike their smaller competitors, multidisciplinary companies can sell off an unprofitable instrument line without inextricably altering the rest of their instrument business.

To remain afloat, small instrument firms have had to measure their steps carefully. "We do it by being very good financial managers," says Bob McGregor, marketing manager and manager of national sales for Brookfield Engineering, a Massachusetts firm that has made viscometers and rheometers since 1934. "I think our business strategy is still intact. Our objective is to produce instrumentation at an affordable price, and people in the quality--control world expect to pay relatively little for an instrument that they need to use on a day-in, day-out basis. So, the key to serving that market is to keep your pricing reasonable and affordable. I'd say that's the simplest strategy that one could have. It's meat and potatoes."

In addition to maintaining sound business practices, small companies have learned the benefits of diversifying and of expanding their customer bases outside of their country of origin--a lesson that has long served their larger competitors well. "The market dynamics globally are changing," says Mr. Walker. "And it's not easy for a small company to keep on top of and respond to those changes which, in some ways, seem to happen ever more quickly."

Mr. McGregor credits Brookfield's efforts to build a presence in Europe as one strategy that has made the company an attractive vendor to buyers whose main operations might lie outside the US. "By having offices in key industrial countries, I think we're a step closer to the customer in terms of timely support when they have issues that are pretty important," he says. Brookfield has had operations in England since 1989. In the mid-1990s, the company opened an office in Germany.

Because rheometers and viscometers test fundamental material properties, many in the industry see new uses arising, both as new materials become popular and as regulations are instituted on those already widely used. Mr. Hassel sees the need to appeal to potential consumers, while at the same time keeping the instruments specific to their task, as a strategy that all instrument companies must adopt to remain viable in a fluid economy. "Almost everything flows and almost everything changes with temperature," he says. "So, when certain markets are down, if your product is versatile enough and you go about the sales process correctly, you'll find ways on balance to get business from segments that one year are up and one year are down." One market, for example, that has emerged in recent years is the testing of asphalt (see IBO 2/28/95). Requirements enacted by the Federal Highway Administration for asphalt grading has forced producers to conduct more tests on their products, and consequently to purchase more instruments.

Although such regulations can be a godsend for instrument manufacturers, they are not always regular or predictable, and while refinements in the technique are inevitable, it is unclear whether they will be significant enough to attract large numbers of new buyers. Mr. McGregor describes the absence of an expected switch to inline viscometric measurement as one example of the mercurial nature of the technology. "We keep thinking there will be a big revolution at some point where people will say, 'Why don't we just make the measurements inline all the time and not run samples back to benchtop in the laboratory?'" he says. Although Brookfield currently offers process analyzers within its product line, other companies have parted with their inline instruments, as TA Instruments did when it sold its Rheometric process rheometers to Thermo Electron this summer (see IBO 7/31/03). "When I first joined the company in 1990 we thought that inline measurement would catch on very quickly," says Mr. McGregor, "but it's one of those things that turns out to be very gradual, not revolutionary." As the rheology and viscometry Industry battles through a difficult period, it has learned the value of planning for the gradual, no matter how painful doing so might be.

[GRAPHICS OMITTED]

Viscometry and Rheometry Worldwide
Demand by Industry

Polymers       17%
Org. Chem.     15%
Petro.         15%
Pharma.        11%
Inorg. Chem.   10%
Textiles        8%
Ag/Food         7%
Metals          4%
Aerospace       3%
Other           7%

Note: Table made from pie chart.