Thursday, September 20, 2007

Business and Industry Intelligence: Capital Goods

Overview

Demand for industrial machinery in the US has fallen in recent years, reflecting the decline of domestic manufacturing industries, as the country becomes more reliant on cheap imports. Throughout this decade, the miscellaneous capital goods industry has faced stagnation and decline. The outlook for this mature and saturated industry is no less bleak, with no growth predicted in future years.

Electrical equipment, including switches, circuit breakers and tools, continues to account for the majority of the markets revenues, although the demand for pumping equipment is rising following the introduction of federal clean air legislation. This has created a shift towards gas-powered energy generators in the US, driving demand for the necessary pumping technology to extract methane, and boosting revenues for equipment manufacturers.

Many end-markets served by this industry, such as construction, are cyclical, accounting for the markets current stagnation. Further, margins have been compromised by expenditure on meeting environmental legislation and increasing raw material and energy costs; these have led to price increases, causing consumers to become dependent on cheaper imports, further damaging margins. Counterfeits and cheap imports are another threat to the markets revenues moving forward.

Leading companies include Hitachi, which dominates the market, Wolseley, Illinois Tool Works, and Eaton Corporation. Companies are expanding through merger and acquisition activity but are neglecting developing regions, such as China, which pose significant growth potential; nor are companies investing heavily in research and development to provide increasingly sophisticated equipment to satisfy demand.

Key Issues

Increasing Costs - High crude oil prices have forced up the price of raw materials and energy, increasing costs and degrading margins. The reliance of several major players on steel is a problem; the continuing steel shortage has further increased the materials fluctuations in price, threatening margins.

Weak Dollar - The current weak dollar has increased the cost of imported materials, which have become more important in view of the current production deficits in a number of key US sectors such as the steel industry. However, the dollars weakness has increased exports, which will become increasingly important in view of Chinas new position as the worlds leading consumer of machinery.

Legislation - The Clean Skies Act (2005) increased the need for extraction of coal bed methane (CBM), driving consumer demand for pumping and extraction equipment and providing a lucrative growth sector within the market. However, expenditure on strict federal, state, and local laws regarding emissions increases manufacturers costs.

Significant Trends

Combating Counterfeits - The US Customs and Border Protection (CBP) and Immigration and Customs Enforcement (ICE) made more than 14,000 seizures of counterfeit goods of all types, worth in excess of $155 million in 2006, which represents a 67% increase on the previous year. Companies are working with customs officials to reduce the influx of counterfeit goods that reduce sales volumes and lower consumer confidence.

Inorganic Growth - Several industrial equipment manufacturers in the US have attempted to insulate against volatile economic conditions through acquisitions and a focus on higher-margin, higher-growth sectors. This has allowed them to capture benefits of scale, strength, and scope to improve profitability.

Foreign Investment - US manufacturers are making fewer direct investments in low-wage locations such as China. Instead, there has been a tendency in recent years to outsource to local companies in these regions.

1 comment:

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