Your gut is probably already telling you the industrial market is shrinking significantly. Here's a disturbing statistic to validate that gut feeling. In 1992, the industrial market accounted for 45.8 percent of electrical wholesalers' annual revenues. Today it accounts for 30.5 percent — a decline of more than 33 percent in little more than a decade.
The numbers, which come from Electrical Wholesaling's annual Market Planning Guide studies, succinctly summarize the direct impact of the U.S. manufacturing crisis on the electrical wholesaling industry. As U.S. manufacturers close doors or outsource to other countries, a big chunk of the U.S. market for electrical products disappears.
Given the current trend, one can't help but wonder how the United States can turn around the nation's manufacturing, or if there may come a day when only a handful of industrial factories operate on U.S. soil.
Williams Supply Inc., an electrical distributor based in Roanoke, Va., with between 60 and 70 percent of sales coming from the industrial market, has witnessed a steady decline since its sales peaked in 1999.
“Many factories have either closed, bankrupted, grossly downsized, or turned their manufacturing operations into warehouses for Chinese purchased goods,” said Arnold Jones, president, Williams Supply.
To the south of Roanoke, Henry County's unemployment rate was at 15.8 percent because of recent textile plant closings, according to the Virginia Employment Commission.
Williams Supply's remaining industrial customers, for the most part, aren't spending capital dollars. As a result, Williams Supply is enduring tough times.
“We continually look for ways to reduce costs and maximize efficiency and productivity,” said Jones. “Everything is looked at.”
The distributor closed two of its smaller branch operations, leaving the current count at five Virginia locations. Sales staff was retained, though, except where attrition provided an opportunity to reorganize.
“It's plain to see that due to global economic and socio-political forces, our country is losing its competitive edge in manufacturing,” said Jones.
Larry Stern, president of Standard Electric Supply Co., Milwaukee, has a more positive take on the nation's industrial market.
“I do not believe we're all going to learn to speak Chinese in 10 years and that there will be no manufacturing and no industry in the United States,” said Stern. “It's just a question of what that mix is going to be.”
With more than 90 percent of its annual revenues from the industrial market, the largest share from the sale of components to original equipment manufacturers (OEMs), Standard Electric Supply is No. 138 on Electrical Wholesaling's 2003 Top 200 listing with $34.5 million in 2002 sales. The family-owned distributor has six Wisconsin branches and recently added a seventh in Elk Grove Village, Ill., with its acquisition of DynaTECH, a distributor of electrical automation products.
At Standard Electric's Wisconsin base where paper mills and heavy machinery manufacturers account for a big part of the industrial market, Stern says he clearly has seen a reduction in the work force and reduced industrial activity. He has not seen, though, many manufacturers closing up shop or moving because they can't compete anymore.
“The total market, although not as big as it may have been three years ago, is still quite significant. There's plenty of ability for us to continue to grow our market share,” said Stern.
Growing market share is the distributor's chosen strategy for increasing business. With that goal the focus, Stern says Standard Electric does whatever it can to reduce its industrial customers' costs of doing business and make them more competitive.
The company offers its customers more than $7 million in inventory and a staff of 10 electrical engineers. Stern believes Standard Electric probably has more engineers per dollar sales than most other distributors in the United States. In addition, the distributor offers electronic business-to-business solutions, bin stocking and other inventory-management services. It is also ISO 9001-2000 certified for its service quality.
“I'm not sure other distributors necessarily are as focused on the industrial market, or are willing to dedicate the same kind of resources that we do,” said Stern.
For Standard Electric, this strategy appears to be working. After a drop in sales from 2000 to 2001, the distributor increased sales 4.5 percent from 2001 to 2002. This year, the company forecasts another sales increase.
Standard Electric's story is an industrial-market bright spot amid a more-than-three-year manufacturing blight. Since July 2000, U.S. manufacturing employment has declined continuously, shedding nearly 16 percent of its jobs, according to the Department of Commerce's Bureau of Labor Statistics.
Much like Williams Supply, U.S. manufacturers are looking to cut costs any way they can. Jerry Jasinowski, president of the National Association of Manufacturers (NAM), Washington, D.C., summed up manufacturers' obstacles this spring when he testified before the House Small Business Committee. “Rapidly rising business costs stemming from the burden of government rules and requirements — including double-digit health-care inflation and spiraling litigation costs — are proving to be too much for too many companies, often forcing them to choose between laying off workers or outsourcing to foreign countries,” said Jasinowski.
Jasinowski also pointed to other countries' unfair trade barriers and manipulated currency values. “China is the most conspicuous offender in this regard, and is emerging as the primary threat to many of our core industries,” he said.
Many U.S. manufacturers of electrical products are moving production to China as well. A sizable 54 percent of respondents to a recent survey by the National Electrical Manufacturer's Association (NEMA), Rosslyn, Va., reported they were sourcing products or components from China that were previously manufactured in the United States. Additionally, 34 percent of respondents reported they were sourcing products or components from China that were previously sourced from another country.
The electrical products most frequently sourced from China are components, electronics, building equipment and lighting products. Companies also mentioned sourcing molded-plastic, printed circuit boards, metal castings, sub assemblies, stampings, cords, motors, machined parts and batteries.
Production costs in China were an average of 27 percent less than in the United States, according to the survey.
“Obviously, that's a significant incentive for sourcing from China,” said Don Leavens, NEMA vice president and chief economist.
NEMA's more than 400 member companies include large, medium and small businesses that manufacture products used in the generation, transmission and distribution, control, and end-use of electricity. Annual shipments of these products total $100 billion.
Advance Transformer Co., Rosemont, Ill., is one NEMA member moving production to other countries. In December 2002, Advance Transformer closed its magnetic ballast assembly operations in Monroe, Wis., and moved production to another country. In August, it announced the opening of a new electronic ballast manufacturing facility located in Juarez, Mexico.
Although Brian Dundon, Advance Transformer's president and chief executive officer, was unavailable to comment for this article, he voiced concern about U.S. manufacturing when he testified before the International Trade Commission (ITC) in June. His testimony urged the repeal of U.S. steel tariffs, which he and others say are contributing to lost U.S. jobs.
Imposed in 2002, the steel tariffs were designed to protect U.S. steel manufacturers by stopping steel importers from dumping steel into the U.S. market. But, some business leaders, like Advance Transformer's Dundon and Georgia-based Accuity Brands' Tom Naramore, senior vice president global sourcing, say the steel tariffs have cost thousands of jobs among steel-consuming industries.
“Our parent company, Philips, is now building HID ballast manufacturing capability in China,” said Dundon in his testimony. “A decision to utilize that facility to manufacture for the U.S. market or dedicate it to other markets is pending and depends in large measure on the price of steel in the United States relative to China.”
Accuity Brands, with its portfolio of well-known lighting brands like Lithonia and Holophane, is another NEMA member that has closed plants and moved manufacturing out of the United States. Naramore joined Dundon in June to testify before the ITC on the negative effects of the steel tariffs. Many expect President Bush to repeal the steel tariffs; however, he had not done so at press time.
In September, Bush acknowledged the need to bring jobs back to the nation's manufacturing sector and announced a multi-step plan to do so. China and its low-trading currency is the main target of the plan.
Economists say China keeps its currency, the yuan, at an artificially low level, which allows its manufacturers to produce inexpensive products and keeps Chinese workers employed. Bush identifies the need to convince China to freely float its yuan. If allowed to float freely, economists say the yuan would be worth as much as 40 percent more than the level at which it is traded and would help level the playing field for the U.S. manufacturers.
Meanwhile, the electrical industry faces a manufacturing Catch 22. To keep the price of products down and increase margins, U.S. manufacturers will continue to follow cheap labor to other countries.
“With manufacturing moving offshore, the opportunities to sell electrical products into manufacturing facilities has diminished significantly,” said Henry Bergson, president, National Electrical Manufacturer's Representatives Association (NEMRA), Tarrytown, N.Y. “In some instances, not only are we moving our manufacturers offshore, we're also moving our customers offshore.”
The move of U.S. factories to offshore locations was a top concern among independent manufacturers reps attending the inaugural Keystone Conference Sept. 10-13. (See page 16 for more.)
Bergson said the loss of the higher margin industrial business is driving consolidation of manufacturers rep firms. By consolidating firms and combining niches, reps are able to diversify and broaden markets they serve. “A commodity-type rep may now go into the lighting business, or the specification engineered products business, or maybe even the plumbing business,” said Bergson. Electrical manufacturers' reps are also consolidating to expand geographic territory.
Some independent manufacturers reps and electrical distributors are beginning to think in terms of a global market rather than a U.S. market. Others have been thinking that way for a while.
Argo International Corp. entered the international distribution arena many years ago. Headquartered in New York City, Argo International has 20 total locations, 10 of which in other countries, including China, Mexico and the Philippines. With electrical sales in 2002 of $54 million, Argo International was No. 88 on Electrical Wholesaling's most recent Top 200 list.
John Santa Croce, Argo International president, said he believes his company is well equipped to follow industrial customers internationally.
“Our North America business has declined over the last few years, while our international business has grown nicely,” he said.
“We continue to invest in the international growth markets, like China and India. We have very little market share in the United States and are trying to grow share even though the market is a shrinking U.S. industrial business.”
THE DISAPPEARING INDUSTRIAL MARKET
The percentage of electrical distributors' industrial market sales is steadily decreasing. Electrical Wholesaling's 2003 annual Market Planning Guide (MPG) study pegs the industrial market at 30.5 percent of electrical distributors' total dollar sales. Just three years ago, according to the 2000 MPG study, the industrial market accounted for 34.9 percent of distributors' sales. Go back a little more than a decade to 1992, and the industrial market accounted for 45.8 percent of electrical wholesalers' annual revenues.
STOPPING THE MASS EXODUS
Electrical Wholesaling asked industry leaders what it would take to stop the mass exodus of U.S. manufacturers. Here's how some weighed in.
“The United States must make some changes in the way we compete economically, and we cannot continue to finance the problems of the entire world with debt and increasing taxes. Our government needs to wake up, shake itself up, and look at its own inefficiencies. We need to deal with the rest of the world like they are dealing with us.” — Arnold Jones, president, Williams Supply Inc., Roanoke, Va.
“As long as the United States continues to reduce regulation and unnecessary business costs and foster creativity and innovation, manufacturing will remain a vital sector of the U.S. economy.” — Don Leavens, vice president and chief economist, NEMA, Rosslyn, Va.
“I think the U.S. government must do more to support U.S. industrial manufacturing. I am not a believer in subsidies, quotas, tariffs, etc., nor do I think the U.S. government should bail out companies with excess capacity and pension issues. However, the global playing field is not always fair. The U.S. government should be putting more pressure on the foreign governments to decrease their tariffs, import duties, etc., so U.S. companies are more competitive globally.” — John Santa Croce, president, Argo International, New York, N.Y.
“We may have to reassess our expectations… We're still going to have economic growth, but we may not see double-digit growth and the same kind of returns that we did in the previous decade.” — Larry Stern, president of Standard Electric Supply Co., Milwaukee