Industry Briefs

Automotive

Chrysler Cracks The Whip

Chrysler is becoming the bearer of bad news and high demands. In the wake of a $1.2 billion loss prediction for the second quarter, the company has issued a series of edicts, chief among them the demand that 132 of their suppliers adhere to "world-class pricing." Which means meeting and beating the prices set by low-wage Asian companies. And, price cuts must be retroactive to January first. If the suppliers don't comply, they'll be cut.

In a continuing effort to meet their financial woes head-on, Chrysler has also declared delayed merit raises, reduced health-care benefits for white-collar employees, limiting overtime and canceling a new production plant in Ontario.

Joint Ventures Venture Into New Territory

As China stands poised to become the third largest automotive market in the world, behind the U.S. and Japan, it actively seeks partners to crank out the cars. But not partners in the traditional sense.

The government has put foreign competitors into joint partnerships with the same companies. Which means that just as Volkswagen finishes touting its investment in First Auto Works (China's largest vehicle company), Toyota announces its venture with the same company. It's all part of Beijing's plan to use the superior technology and management of its partners to bring its own companies up to international standards.

But don't cry for the foreign automakers. They're making money hand over fist. Proof is in the China auto sales that grew 88% in just five months.

Production Numbers Rolling In

Well, we can't say the U.S. is keeping up the same pace as China when it comes to growth. Consider these numbers for the first five months of 2003 as compared to 2002:

• Overall production was down 3.6%.
• Car production output was 1,977,955, 13.1% down from last year.
• Production of light-duty trucks was up 5.5% to 3,162,078.
• Canadian car output was 609,629 units, up 5.5% ­ but trucks dropped 6.4%.
• Mexico reported a drop of 18.1% in car production and 7.7% in truck production.

Free Freddie

(Remember Fredonia Motor works (FMW), the beleaguered manufacturer of the renowned "Freddie" ­ voted Car and Driver's Most Pathetic Car of the Century"?)

Fredonia Motor Works, facing severe excess inventory levels (3-year supply), has announced a business alliance with Anheuser-Busch targeted principally at college-age males. Bud customers will be able to collect and redeem 100 six-pack proof-of-purchase labels for a new Freddie. When questioned about how FMW could afford to give away a new Freddie, Rufus T. Firefly, FMW's Chairman, stated that the Company intends to make it up on service, which with the Freddie is often and expensive, since the Freddie is the car with the shortest warranty period, 5 weeks or 500 miles.

Aviation

Ailing Economy Clips Aviation's Wings

These are the facts: airline traffic has declined 12% from March, 2000 to March, 2003; Boeing has cut 35,000 jobs and halved production in its commercial aviation division in the last 18 months; 1,700 aircraft are parked in the desert, lasting reminders that the predictions for passenger growth in 2000-2001 were wrong; the Concorde has landed for good, the Sonic Cruiser has been shelved.

These are the current predictions: Airbus has increased its market share and is expected to overtake Boeing for deliveries this year for the first time since entering the market in the early 1970's; Airbus can also, in the short term, keep financing, manufacturing and development going ­ but experts say the levels are unsustainable; Boeing has remained profitable but at the cost of R&D.

These are the strategies: ever more belt-tightening; creative financing including Export Credit Agencies, public organizations that provide government-backed loans and manufacturers with large portfolios e.g. Boeing Capital.

Candy

Candy Is Doing Just Dandy

As always, the strong will prevail. In this case, it's the strongest mint and breath fresheners in the marketplace. After seeing several years of double-digit growth, sales have dipped 5% in the category. This is seen as a consolidation ­ not a downturn. The market, saturated with super-strong mints from all contenders, including confectionery companies, is simply retrenching. It's also taking a breath as it readies advertising to compete with sugar-free gums and breath strips.

Construction

Rebar Is Rebounding

That quintessential construction element, rebar, has been showing some modest price gains. Can these figures be a sign of better things to come?

• Grade-60 reinforcing bar was up .3%. That's a third better than the previous month but still 1.2% below last year.
• Epoxy-coated rebar posted a .1% price gain after a more than 4% decline the previous month.
• Wide-flange prices held steady.
• Channel-beams declined .2% while I-beams increased .6%.

Economy

It's The Recovery, Stupid

The markets are happy. They have decided to believe the economy will grow in the second half of the year, spurring a recovery. This viewpoint is supported by Alan Greenspan, our moneyman in Washington. But while the bond markets aren't worried about low inflation and the possibility of deflation ­ as they were in January ­ they are starting to get nervous about the government's rising budget deficits. The deficits were brought on by the government's cutting taxes to stimulate the economy.

It's always something.

Euro Recession Not Receding As Fast As U.S.

At the end of the Iraq war, U.S. consumer confidence enjoyed a nice bounce back. In Europe, it did not. And, even though the U.S. unemployment rate, at 6.3% in June, is the highest since 1994 ­ it looks positively optimistic compared to the 8.8% the Eurozone is posting. In fact, looking at the combined data on consumer confidence, labor and manufacturing, it's projected that the U.S. will see a good recovery in the second half of the year. While Europe is still struggling. Credit is being given to three linked U.S. initiatives to boost the economy: lower interest rates, tax cuts and a weaker dollar. The Eurozone does not have such programs in place, either as individual countries or as a consortium.

Electronics

New Technologies Create Need For New SMT Equipment

As machines and software continue to integrate and couple with increasing circuit density on printed circuit boards, and miniaturization and advanced packaging technologies gain stronger footholds, the need for state-of-the-art Surface-mount Technology Inspection Equipment grows. In fact, the industry revenues totaled $403 million in 2002; total market revenues in 2009 could go as high as $1.1 billion.

Tooling Up For A Semiconductor Revival

In very good news for the economy as a whole, the semiconductor industry is forecasting improved demand. The evidence is solid: factories are operating at much higher capacities levels than last year with plant utilization at 81% for the entire industry as compared to 59% in mid-2001.

As the plants revive, so will their needs for the esoteric tools used to create ever more powerful chip technology. And the tool industry is ready: companies spent the last three slump years developing products in an effort to maintain their share of the market.

Energy

Energy Lacks Power

It is inevitable that as America switches from regulated power and utility monopolies to a free market competitive platform, there will be many bumps, lumps and deep crevices in the road. This has been proven by the highly visible Enron scandal. The result of all this activity is a rapid decline in credit quality that has brought former industry leaders near or to bankruptcy. In fact, Standard & Poor now rates a record 18% of power industry corporations below investment grade. This is triple what it was two years ago. S&P predicts that the average rating in the industry will drop from "A-" to "BBB" very soon.

The struggles facing the energy industry include:

• More restructurings and bankruptcies.
• Overcapacity, low power prices and the collapse of the energy marketing and trading business.
• Refinancing in the tens of billions.
• The need to create a solid base through the maximization of undervalued assets.

Energy Goes Back To Its Roots

With a myriad of tangible and perceptual obstacles to overcome, the power and utility industry is returning to basics to rebuild. That means addressing their core rate-regulated utility services and pulling away from non-regulated diversification interests. With these goals in mind, look for utilities to sell off poorly-performing, non-regulated business; scale back on energy marketing and trading; and make a geographic retreat ­ mostly by selling off non-US utility holdings.

This is a big change from the go-go years when business diversification was considered central to stock growth. Today, the traditional number cruncher is in vogue and will be de-leveraging the balance sheet and boosting liquidity through asset sales and reduced capital spending. Because now, achieving rating stability is king over all, even over earning per share growth... as the key financial objective.

Food

Milk Making Lots Of Moo-la

"Got milk?", one of the most successful ad campaigns in history, is still going strong after making its debut 10 years ago. Evidence lies in the 2% yearly rise posted in California, putting milk sales at its highest level since 1992. The California Milk Board has been very aggressive in maximizing the milk phenomenon, relentlessly focusing on the campaign and gaining 90% awareness with TV advertising; a marketing initiative to popularize "Licuado," a Latin milk-based beverage among the general population; increased emphasis on Hispanic and bi-cultural markets; strong national licensing efforts; and strategic partnerships with such big brand names as Nabisco, Nestle and Kellogg.

The success of the campaign is so groundbreaking it has fundamentally changed not only the way a commodity product promotes itself, but is changing American dietary habits as well. It seems that flavored milk, so widely favored by children and teens, lowers soft drink consumption and increases calcium consumption, but does not increase overall intake of added sugar or fat.

Lumber

Timber In Free Fall

There is no good news to report about lumber. Despite a brief first quarter rally, the downward spiral continued with:

• Prices for 2 x 4's, the most common species, fell .7%, following May's 1.9% decline.
• Dimensional softwood is down 7% to 12% from last year's level.
• Only plywood shows some promise, with prices within 1% of June 2002's price level after a 1.9% increase.

Wooden You Know, Lumber Goes Global

In an effort to stay competitive, American woodworking firms are taking their businesses global. As they source raw materials from around the world, often shipping from one country to the next without even going through the U.S., the lines between import and export simply disappear and the process becomes one of supply and demand. So now, red oak from Russia may be shipped directly to China, a major consumer of hardwoods, who will then fabricate furniture for sale in the U.S. market.

Hardwood Takes It Hard

Wouldn't you know, wood is splintering under the weight of the recession. And not just in the U.S. There has been a decrease in hardwood consumption here and around the world. In America, the reduction is 20%, due not only to our economic straits but to furniture imports, as well. The Chinese market is especially problematic. They don't need to import U.S. hardwood because they are closer to other markets with a large variety of hardwood readily available. Ergo, it is a hard market for the U.S. hardwood industry to compete with.

Machinery

Machine Industry Needs Fixing

The news from the machine tool sector is not good. The numbers keep dropping, to such a point that America's investment in modern manufacturing equipment is at one of its lowest points in history. The bad numbers: Machine tool consumption totaled $697.95 million for the first five months of 2003. That's down 24.4% year-over-year.

Manufacturing

Manufacturing Needs Building Up

For the third month in a row manufacturing failed to grow. This is in contrast to the overall U.S. economy, which has seen 19 months of consecutive growth. However, there are some signs of life, including improvements in new orders, production, pricing and backlogs. Plus, the purchasing managers index, which was at 45.4% in April, rose to 49.4% in May. Anything under 50% is generally viewed as an indication the manufacturing economy is declining.

Metals

Is Metal Finishing Finished?

The bad news for metal finishers just got worse. After suffering through a 14.5% downturn in 2001, the industry absorbed a 21.4% drop in 2002. And no one is expecting business to pick up any time soon. The few companies that posted gains cited aggressive wooing of past clients, diversification and extremely short lead times as the keys to their success.

Dollar's Down, Copper's Up

Combine a weakened dollar with a strong Chinese demand, and you'll see copper exports shoot to their highest level in the past ten years. In just one month, exports rose 5.5% to 64,104 short tons. And shipments for the first five months of the year rose 28.7%. In fact, lower-grade copper is in short supply, forcing both overseas and domestic consumers to buy the pricier refined copper scrap.

The Raw Numbers On Raw Steel

In a bit of satisfactory news, we can report that raw steel production seems to be holding its own. During the first six months of 2003, United States mills produced 43,787,000 tons at an averaged capability utilization rate of 82.4%. That's up 3.5% over last year when mills, operating at an 87.7% utilization rate produced 42,311,000 tons.

Packaging

Packaging Perks Up

In comparing year-over-year data, the folding carton industry is pleased to report a gain in shipments. April was the third consecutive month in 2003 to show gains over the previous year. Though the gain was a modest 1.4%, it is still an encouraging sign.

Paper

Paper Crumples Against The Competition

For the first time ever, the paper industry has reported two consecutive years of declining capacity. Paper and paperboard capacity was down 1.9% in 2001 and 1.3% in 2002. Called a "contraction," the blame is once again placed on stiff foreign competition, combined with a low point in the cycle.

Although levels are expected to remain flat for the next three years, there is some good news. With the passage of President Bush's economic growth plan, and the elimination of double taxation on dividends, the industry will become more competitive globally. This in turn, will enable plants to modernize machinery and equipment.

Loving Latin America

Board converters are celebrating the upswing of their business for 2003. So far, they're seeing numbers that indicate a definite recovery...and most of it is coming from North American companies taking advantage of the Free Trade Area of the Americas initiative. The market on the whole is about $7.2 billion.

Corrugated Slowly Crumples

Year-over-year, the 2003 corrugated market is showing poor vital signs. Shipments fell 5.3% with containerboard consumption falling 0.9%. Inventory of containerboard also fell, 2.7%. It all adds up to an industry caught in the doldrums and struggling to get out.

Pharmaceuticals

Pharmaceuticals Feeling Pain

Up until recently, the pharmaceutical industry was the darling of investors. Blazing new paths with wonder drugs, stocks soared and fortunes were made. Now, with the pipeline drying up and morality coming into the foreground, the pharmaceuticals are shaken up enough to shake up their business. Some points to consider:

• Pricing: we all agree things are getting out of hand as we grapple with the problem of getting medicine to poor people here and abroad.
• Patents: as the patents run out on the big sellers, investors weigh the decision to invest big bucks in new drugs, knowing that they may not be able to recover their investment once drug prices are brought down to more affordable levels.
• Alliances: the giants are forming partnerships with the small upstarts in order to acquire new drugs, but this again puts the squeeze on prices.

Plastics

Mold Makers Make Their Way To China

With all injection molding roads leading to China, it makes sense for hot-runner suppliers to set up business where the business is. Husky is setting up hot runners, as well as injection machine operations, near Shanghai. After setting up sales in Shanghai, Mold-Masters is acquiring land for its first Chinese production facility. The impetus is the local manufacturers' demand for a five-day delivery time.

Printing

Print Industry Projections

The traditional printing paradigm is swiftly dying. And just as swift are the changes that will revitalize the industry, keeping it thriving and essential. It is projected that revenue streams will now flow from digital printing and value-added services, while traditional lithography falls ever further behind. Printers are also expected to morph from single-service providers to purveyors of total communication solutions. Digitization will make it possible to offer faster turnaround in general. As expected, the race will go to the swiftest: those nimble enough to make the switch. There are some that say 20% - 30% of printing establishments will bite the dust in the next four years. They are simply unprepared to make the change over.

Retail

Key Demographic Plans on Spending

You won't believe this, but it's true: 24% of people 18-34 years old, with no children, plan on spending more than usual on products and services. This is up 27% from the previous quarter, according to the NPD.

Shipping

Big Boxes Keep On Growing

It is absolutely no surprise that the world's leased container fleet is growing by leaps and bounds. Considering just China's activity, you'd almost expect it to be more than the 51.6% expansion it has enjoyed over the last five years. And the growth goes on with major lessors planning to buy about 497,000 TEUs totaling nearly $921 million. The big investments are in the big boxes: 40-foot high-cubes and high-cube refrigerated containers.

Steel

Ferrous Exports Hitting New Highs

U.S. ferrous scrap prices are at the $170-a-tonne mark... and they're expected to go even higher. A west-coast yard sold No. 1 heavy melting steel to a South Korean steelmaker at that high price. Included in the 27,5000-tonne cargo was 12,000 tonnes of bonus grade at $180 a tonne and 7,500 tonnes of shredded at $175 a tonne.

Refrigerators Warm Up Steel Sales

Sales of refrigerators and upright freezers, both of which use more steel and aluminum than most major household appliances, heated up during 2002. Refrigerators shipped a record 9,744,300 units, while freezers rang in with 1,042,500 units, also a record. That's good news for both the appliance industry and the steel and aluminum mills.

Technology

HP Spurs Sales With Trade-in Plan

Taking a page from the automotive industry, Hewlett-Packard has announced a new marketing strategy. It will lower the cost of corporate desktops and PCs targeted toward small and mid-size companies, using what they have named the "PC migration service bundle" program. HP will install the new machines and give customers credit for the trade-in value of old PCs. HP, moving beyond the basic beige box, is also offering IT services designed to assess companies' desktop security and will set up PCs in wireless networks.

Aging Desktops Need Rejuvenation

About 40% of the 164 million PCs worldwide are over three years old. That includes the 30 million in the United States alone. And unlike fine wine, computers do not get better with time. They are now expected to start having hardware failures and will suffer even more as Microsoft withdraws its support for older computers. While new and improved computers will increase productivity, offsetting the buy-in costs, not everyone is coming to the store. Market estimates have been revised downward: instead of shipping 7.9% look for a 6.6% increase for the year.

China Chips Away At Restrictions

Under the international Wassernau agreement, the sale of equipment and technology for processes below 0.25-micron is restricted. Yet, China has devised its 10th Five-Year Plan and this one intends to build between eight and 11 wafer fabs, two of which could be 300mm. The plan incorporates three or four 150mm wafer fabs, and four to five 200mm lines, each with process technologies ranging from 0.13-micron to 0.25-micron. These are within the Wassernau terms of agreement.

Textiles

An Industry Unravels As Trade Quotas End

Mark this date: Jan. 1, 2005. That's when four decades of quantitative restrictions on textile trade will end. U.S. manufacturers will no longer be protected by quotas, which have distorted and artificially altered trade patterns. It is expected that the ultimate effect of this action will be the dominance of China as the purveyor of textiles. Other countries likely to benefit include Korea, Taiwan, India and Pakistan. All are able to provide full services, from design to completed production. Geographically closer countries, such as those in Central America and the Caribbean Basin, are expected to fare as well as suppliers of "just-in-time" deliveries with shorter production cycles and better inventory control.

Tech Textiles Rush To The Rescue

While clothing textile quotas end, and low-cost overseas fabric production continues to close American plants, all is not over for the U.S. textile industry. Technologically sophisticated factories, innovative fabrics and big business, in addition to clothing manufacture, will keep many factories in business.

Pretty much invulnerable to offshore competition is carpet production. Big, bulky, heavy and produced without much hands-on labor, carpet production is still a strong stateside industry. High shipping costs and automated production combine to protect makers of draperies, bedspreads and towels as well.

Even more interesting are the engineered fibers used in everything from tires to fiber optics to human artery reinforcements. While American companies lead the way in patents and overseas royalties from licensees, they are not immune to the industry's age-old evil: The Knock-Off.

Transportation

Class 8 Truck Sales Get Promoted

We are happy to report a glimmer
of improvement in truck sales. The numbers coming in for May, 2003 show an improvement in Class 8 truck sales. Although the numbers were down 10% over last year, when fleets began pre-buying vehicles to beat the EPA '02 emissions standards, there are some good numbers to consider:

• Overall sales were 2% higher in May than in April.
• Volvo sold 1,204 vehicles this May, a 43% increase over the 884 sold in April.
• While Western Star sales were down 22% for the month, they did move 61% more Class 8 vehicles year
  over year.

Pre-Buying Before Emission Rules Kick-in

In a repeat of last year's scenario, fleet executives are flat out refusing to buy into the new trucks built to meet the 2007 emission rules. They want more time to test the new engines. Since they're not likely to get that time, they are likely to pre-buy prior models in a massive way. This will, of course, raise costs and push some suppliers out of the market.

Light Trucks Beat Out The Heavies

While the overall growth picture for the truck industry is good (sales in May jumped 27% year-over-year), the money is not going into the big rigs. Light trucks, which are cannibalizing auto sales, are the real growth segment. Here's how things are rolling along:

• Class 1 trucks are up 34% with dealers selling 586,505 vehicles.
• Class 2 trucks increased by 17% with 252,270 vehicles being sold.
• Class 3 trucks were the only other GVW class to post gains. There were up 18% with 7,899 trucks sold.
• Medium and heavy-duty trucks have flat sales with Class 4 truck sales down 7%.
• Class 5 trucks remained unchanged.
• Class 6 trucks took a 3% downturn.
• Class 7 trucks took the biggest hit, down 32% year-over-year.
• Class 8 truck sales were down 10%.

Wire & Cable

Cable & Fiber Manufacturers Closing Doors

The telecom market collapse has taken the cable and fiber industry down with it. Fiber manufacturing facilities have dropped from a 2000 peak of 65 to 46 in 2002 and more closings are expected. Worldwide, sales have dropped from $8.7 billion in 2001 to $3.5 billion in 2002. The reasons: steep decline in demand, excess capacity, eroding prices, competition and a change in the mix of applications.

High-Tech Broadband Installation Breaks Down Barriers

The product of the partnership between Novis and Alcotel proves that new technologies can improve both communications and the bottom line. By using the existing regional DWDM network installed in Lisbon and Portugal by Alcotel, Novis created its first Gigabit Ethernet service. This significantly expands Novis' ability to meet the growing demand for new broadband services by deploying the Alcatel 1696 Metro Span Compact, with its 4Xany concentrator.

Without getting any more technical, let's just say this is a savvy solution to providing services by maximizing the alliance possibilities between existing functionalities.

Corning Confident About Communications

Though its industry has seen some of the sharp declines so many others have suffered, Corning, the manufacturers of optical fiber, cable and photonic products, remains steadfast in supporting the long-term potential of the optical communications industry.

Three factors are key for resumed industry growth: carrier financial health, profitable broadband business models and public policy initiatives. Also very encouraging is the recent FCC ruling on broadband, which loosened unbundling and wholesale pricing rules.