Guarded optimism and inbred skepticism permeated delegates' attitudes at this summer's meeting of the General Assembly of the European Union of Electrical Wholesalers (EUEW) in Lausanne, Switzerland.
Last year was another disappointing year for European distributors. Total 2003 sales volume for the 14 member nations of EUEW was 27.4 billion euros (approximately $33.7 billion), off 1.6 percent from 2002. As a point of reference, according to Electrical Wholesaling magazine's November 2003 issue, sales through U.S. electrical distributors grew 2.6 percent to $73.9 billion in 2003 and are expected to grow 5.2 percent to $77.8 billion in 2004.
Bright spots were few, with the United Kingdom posting the largest gain of 4.6 percent in sales volume for a total of 2.5 billion euros (approximately $3.1 billion). Sweden, Italy and Finland were the only other member federations to register positive numbers, all between 2 and 3 percent. The other ten were in the negative zone.
Salary costs were 11 percent of total sales volume, and 55 percent of total operational costs. Gross margins stood at 22.3 percent, a scant improvement of 0.4 percent.
Overall, the 14 member countries experienced a 1 percent growth in GDP, unemployment stood at 5 percent, and inflation declined 0.3 percent to 2 percent. Construction activity, the bellwether for the industry, was virtually flat at 0.3 percent.
With regard to the four basic product classifications tracked by the EUEW, installation materials represent 49 percent of the average distributor's total sales, lighting 18 percent, wire and cable 15 percent, and all other 18 percent.
In terms of markets served, installer/contractors account for 64 percent, industrial 18 percent, commercial and government institutions 12 percent, and all other 6 percent.
EUEW countries forecast that gross domestic product will increase this year anywhere from 1.5 percent to 3 percent on average.
Hopes persist that the end of the year will show the first significant signs of recovery in the European electrical wholesaling industry since the downturn of 2002.
Uncertainty continues to surround the fortunes of two of the multinational electrical wholesaling megapowers, Hagemeyer and Rexel. The virtual absence of both these companies was conspicuous at this annual gathering. The consensus at the meeting was that this situation, with all of its global implications, remains an impediment to electrical industry strategic planning and expectations on both the manufacturing and distribution sides.
A Sept. 27 Reuters report said Rexel's Paris-based parent, French retailer Pinault-Printemps-Redoute SA (PPR), wants to divest its 74 percent Rexel stake by year-end. At least five groups of private equity firms are expected to submit indicative bids upwards of $2.1 billion for a majority stake in Rexel SA, the largest electrical distributor in the world, according to a recent Reuters article.
WHAT A WASTE
A still-to-be-finalized environmental directive from the European Commission (EC) in Brussels regarding waste disposal, or recycling, of electrical and electronic equipment is a cause for concern among many delegates. Specifics regarding processing obligations and financial responsibilities throughout the supply chain remain undefined for the directive, known as WEEE (waste from electrical and electronic equipment).
As one delegate remarked, even if internal market forces and industry conditions stabilize, external political and regulatory pressures can always be depended upon to promptly destabilize the process.
According to Adrian Harris, secretary general of Orgalime, a Brussels-based lobbying organization representing some 30 trade federations in the electrical and electronic, metalworking, and mechanical engineering industries, the lack of concise definition is the critical issue.
“In a nutshell, it's a mess,” he said. “But waste disposal regulation is here to stay and will probably continue to proliferate. What needs to be clarified is how the collection will be organized and who will pay for it.”
Currently, the EC draft documentation uses the ambiguous term “producer” to refer to whomever happens to be the end user's source for a given electrical or electronic product. The Orgalime position is that there must be differentiation among manufacturer, importer and distributor within the supply chain before any regulatory stipulations as to physical handling or degrees of financial responsibility are imposed.
To complicate matters, most European nations already have recycling or waste disposal legislation in place, all of which will now have to be “transposed” or brought into compliance with this new EC directive.
Among the member federations within EUEW, opinions differ widely as to whether waste disposal costs should be met by charging a “visible” fee on the customer's invoice, by bundling these costs into the distributor's typical service charges, or labeling the costs as a “unique European” fee, clearly indicating that this is an excise surcharge dictated by the EC in Brussels.
Many of the individual electrical wholesaling federation executive directors view this as an impending major preoccupation for the industry and one it simply doesn't need in terms of time and money.
“All of us are in the dark,” commented Nigel Ellis of the Electrical Distributors Association in the United Kingdom. “Regulations have not been published and responsibilities remain obscure.”
“Implementation of the WEEE directive on a national level raises many questions,” said Tarja Hailikari of the Finnish Electrical Wholesalers Federation. “The interpretation of this legislation is still wide open, and a structural system for making it work is yet to be put in place.”
In a Europe where support for the European Union continues to be challenged in national elections, the imposition of this ill-defined regulatory burden on the private sector has met with universal dissatisfaction throughout the industry.
Still plagued by the costs of rebuilding the former East Bloc segment of the country, Germany continues to struggle.
As the largest economy in the European Union, the GDP in 2003 was off only 0.1 percent, and unemployment stood at 4.4 percent. Total electrical sales volume was down 5.9 percent to 8 billion euros (approximately $9.8 billion), largely reflecting a 5.8 percent decline in construction. It's interesting to note that while Germany has the highest sales volume of the European nations represented in the EUEW, its sales are still dwarfed by one state in the United States: California. Last year, Electrical Wholesaling forecast California's 2003 electrical sales volume at $12.8 billion.
Ongoing pressures on margins and no signs of internal market growth will translate to only moderate gains in 2004 for Germany, according to Dr. Hans Henning, executive director of VEG. Declining prices across the board have become the norm.
Although a number of manufacturer-linked distribution chains are closing outlets, a strong tendency still exists among suppliers to sell direct. Ironically, on the ecological front, while the German government is promoting use of photovoltaic energy sources that could mean new business for distributors in terms of ancillary products, the above-noted WEEE directive would most probably cancel out any new profit potential.
With total sales of 548 million euros (approximately $674.7 million), Finnish wholesalers saw a 2 percent gain in 2003. Growth for 2004 is expected to be 4 percent to 6 percent, according to SSTL executive director Hailikari.
The Finnish GDP rose 1.9 percent in 2003; inflation and unemployment were pegged at 0.9 percent and 5 percent, respectively.
With the general economy showing slow but steady growth, electrical wholesalers are looking to new housing and renovations as the market with the best potential. Telecommunications and data network sales have also begun to improve due to home renovations that include wiring for digital television access.
Following a 2.8 percent gain in 2003 sales to 1.1 billion euros (approximately $1.3 billion), electrical wholesalers have experienced about a 5 percent increase so far this year.
Björn Högborn, executive director of SEG, attributed this to the increase in both residential and commercial projects as well as infrastructure investments. This is expected to continue, hopefully reversing last year's 3 percent decline in construction.
On the downside, widespread eroded margins and price-cutting mean most wholesalers cannot maintain acceptable levels of profit.
In terms of products, the best prospects are those related to data networks, mobile communications and security systems.
In an attempt to reduce high building costs, the government has recently been encouraging contractors to seek cheaper products “outside the normal flow,” which is widely interpreted to mean Asian imports. This raises a number of issues including lower pricing, product liability and direct sales by Asian producers — all sources for concern among electrical distributors.
Electrical wholesalers have seen sales increase dramatically so far this year by 9 percent. If the trend continues as is expected, the year-end total will be 835 million euros (approximately $1 billion), according to EFO executive director Jens-Dag Vatndal.
This would effectively offset the 7 percent drop in sales in 2003, when distributors were impacted by unfavorable exchange rates as well as high interest rates. The economy is now strong with significant activity in both residential and commercial construction, as well as renovation.
The product categories showing the best performance include lighting, which is up 24 percent; wire and cable, up 15; and installation materials, up 9 percent.
Distributors' sales declined 3.9 percent to 644 million euros (approximately $792.9 million) for 2003. Factors influencing the decline included a 14 percent fall-off of commercial construction and an 8 percent increase in salary costs.
However, forecasts point to a significant upturn this year, according to ICGME associate director Bruno van der Stappen. Products leading in sales include wire and cable, up more than 10 percent; and installation materials and lighting, both up 5 percent.
The Portuguese economy suffered the greatest decline among the EUEW countries in 2003, with GDP off 1.3 percent.
Portuguese distributors witnessed a 12 percent drop in construction activity, which contributed greatly to overall sales slippage of 3 percent to 291 million euros (approximately $358.3 million). Unfortunately, the industry sees little improvement for this year, with only minimal improvement in the building quarter, reported Daniel Ribeiro, associate director of AGEFE.
The best prospects in terms of products at this time are high-end electronics and telecommunications equipment. Looking ahead, there is strong potential in the utility industry for electrical and electronic renewable energy support equipment for use in solar and mini-hydro installations.
Continuing to ride the wave of participation in the EU, Ireland saw a GDP increase of 1.4 percent in 2003, up 4.6 percent this year.
The most profitable market has been residential construction, which increased an impressive 19 percent last year and is ahead another 4 percent currently, according to Derek Pollard, AEW executive director.
As noted, distributors in the United Kingdom had the most positive numbers in 2003, posting a 4.6 percent advance in sales volume to 2.5 billion euros (approximately $3.1 billion). National GDP was up 2.2 percent; unemployment, at 1.4 percent, was the lowest in the EUEW.
Construction was up 5 percent, contributing to the industry's continuing recovery, noted Nigel Ellis of EDA. This year, wire and cable color-coding in the U.K. was brought into conformity with European standards, and the sales index in this product category rose significantly.
After 2003 when both the GDP and distributor sales volume remained flat, the latter stalled at 6.6 billion euros (approximately $8.1 billion), French wholesalers posted a 6 percent increase in sales for the first eight months of this year.
Construction, which was up 7.5 percent in 2003, continues strong as does the industrial sector, according to Michel Nicolas, executive director of FGMEE.
Like in Germany and Portugal, ancillary equipment for solar and photovoltaic renewable energy source development are developing as significant potential sales opportunities in the utility market. Security equipment and lighting continue as major product growth sectors.
In general, the Swiss economy has been dormant for the past four years. Electrical wholesalers have experienced declines in sales volume through 2003, when they posted a total of 403 million euros (approximately $496 million), largely due to weakness in the construction industry, which was down 4 percent in 2003.
Indications of a turnaround are evident, however, said Jörg Reimer, executive director of VES. Residential construction in particular is recovering; there is an increase in building permits being issued; and wholesalers expect to see positive numbers by the end of this year.
The GDP expanded 2.5 percent in 2003, but wholesaler sales remained static at 1.7 billion euros (approximately $2.1 billion), according to ADIME executive director Pedro Torres.
Spain was the only country to enjoy expansion of both the residential and commercial construction markets, up 5 percent and 3 percent, respectively.
Italian distributors saw gains of 2.3 percent in 2003, reaching a total volume of 4.5 billion euros (approximately $5.5 billion), according to Emmanuele d'Alo, executive director of FNGDME.
This growth was partially attributable to the addition of 57 new member companies to the federation as the result of an aggressive recruitment program undertaken by the organization.
Malta, one of the 10 countries recently admitted into the European Union (EU), also became a participant in the EUEW.
This island nation's federation, the Electrical Importers Association (EIA), comprises 10 members with a total sales volume of 17 million euros (approximately $20.9 million).
According to executive director Joseph Attard, the Maltese model for electrical distribution differs significantly from those of most European countries in that exclusivity is the rule. The leading European and multinational manufacturers each have one distributor representing them in Malta.
John Paul Quinn is a free-lance writer and international communications consultant based in Stamford, Conn. He can be reached at (203) 323-9850 or via e-mail at [email protected].