Industry Briefs

Automotive

China Readies Low Price Auto Exports

Get ready America, China is getting ready to roll into the low priced imported auto market and roll over such competitors as Hyundai, Kia and Daewoo. China’s initial target is buyers looking for an inexpensive alternative to high mileage station “junkers” and “nanny cars.”

But it’s estimated that by 2010 China will edge Germany out and become the third largest auto producer in the world. By 2020 China will have caught up with the U.S. And we’re not talking low-end vehicles here. By then, it’ll be top of the line.

GM Works Both Sides Of The Ocean

Here’s an interesting wrinkle on the China vs. America trade brawl (or bawl, if you like). General Motors is sharply increasing its purchases of Chinese components to use in its plants around the world. They’re basing this decision, worth about $4 billion to China, on the phenomenal rise in that country’s ability to produce quality goods. Radios and other electronic components will make up the bulk of the exports.

On the other side of the ocean, GM is hugely aggressive about selling to China. In fact, sales are up 46% over 2002. This rapid growth is keeping North American suppliers quite busy - 40% of the components used in GM Chinese assembly plants are exported from here.

Year End Auto Report

A quick glimpse of the state of American auto sales in 2003:

• Although light-truck and new-car sales were brisk, the Big Three’s market share continued to erode.
• Year-over-year sales fell 1% for the Big Three, from 16.8 million units to 16.7 million units, which is the lowest since 1968.  Ford sales fell 3.9%, dropping in market share from 21.5% to 20.8%.  Daimler-Chrysler sales fell 3%, dropping in market share from 14.4% to 14.1%.  And General Motors sales were 2.2% lower, as market share fell from 28.7% to 28.3%.

One WMD Indeed Found in Iraq

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

Along with dirty laundry, leftover rice in a pot, one can of 7-UP, two Mars

candy bars, and stale bread, something shocking was found near Saddam Hussein’s spider hole. Soldiers were startled to discover a complete set of blueprints for a Freddie manufacturing plant to be built in the suburbs of Baghdad.  And parked in the back of the hideout was Saddam’s personal Freddie, a 1993 model, resting on cement blocks and painted in desert camouflage with a missing rear bumper and a broken windshield. According to reports, the new facility would have anchored the company’s expansion into the Mideast market.  But given the Freddie’s horrible safety record, it’s safe to say that the automobile would indeed have been classified a “Weapon of Mass Destruction”  in David Kay’s report.

Aviation

China Flying High

The big names in aircraft are flocking to China for the twin technological aviation achievements of quality and cost efficiency. Boeing and Airbus are both stepping up production there; and Embraer, a Brazilian company, is setting up a joint venture with China. Boeing is also building a major repair and maintenance facility in Shanghai.

Boeing, which now has over 3,200 aircraft in service with major parts and assemblies built by China, has proclaimed a real and current partnership with China that emphasizes long-term relationship building. Its current procurement level of $500 million will reach $1.3 billion by 2010.

Airbus, too, is committed to the development of China's aviation industry. It will raise its procurement level from $10 million annually to $60 million by 2007.

Airplane Sales Coasting Low Commercial aviation has taken a hard kick from the double whammy of the recession and the terrorist threats. Jetliner sales have been spinning down, and recent budget cuts threaten to delay and slowdown funding for Pentagon weapons programs aimed at bolstering America's standing as the world's only superpower.

But, while the expected 1% growth to $148 billion seems exceedingly flat, the optimists are, well, optimistic. They're just happy things aren’t worse. In fact, some are saying the industry could recover by 2006. That's as long as SARS, terrorists and a slow economy don't rear their ugly heads yet again.

Construction

The Family Home Sells

With residential housing starts hitting 1.7 million in 2003 - courtesy of the Federal Reserve rate cuts - it's hard to imagine that growth can be sustained. Especially with mortgage interest rates expected to rise to 6.75% by year's end.

Well, the growth can't be maintained but it can still be impressive. Projections are for 1.41 million single-family homes to be built this year. That's the third highest level since 1978 but 3.6% off last year's all time high.

There's No Place Like Non-Residential

Though the bloom may be fading slightly from the rose of residential

building, non-residentials are set to soar. Look for warehouses, hotels, stores, offices and even factories to begin building from the ground up. While figures won't reach the hot 2000 levels, the 2.6% growth to 1.38 billion square feet is much better than the 5.9% drop in 2003. Wal-Mart will open 278 more stores. Wachovia will double the number of its Northeast branches. And Dollar General plans on 675 new super discount stores. Whew!

Economy

U.S. Government Spending 2004

* Includes spending on justice, the environment, agriculture, international affairs, government administration, community development, commerce and energy.

Source: Office of Management and Budget, Budget of the United States Government 2004

China Puts Out Welcome Mat

In the “it should only happen here” category, comes the announcement that China has set a new record for attracting foreign investors: $53.5 billion in 2003. That's up 1.4% year-over-year. But nothing like the rate of growth in 2002, which was 12.5%. It’s speculated that SARS put a damper on travel and investment. Expect that to change, because the Chinese Commerce Ministry gave their blessing to the creation of 41,081 foreign invested companies.  An increase of more than 20%.

Doubtful Durables

While computer and electronic equipment orders rocketed up 21% between April and October, they dropped 2.7% from November to December. Consider as well the 18% drop for communications equipment over the same period.

But don't be discouraged. The big guys are reporting good numbers. That includes IBM reporting an 18% gain in fourth-quarter revenues, led by mainframes. Personal computers, led by laptops, rose 16%. The growth in server revenue reflects the recovering economy.

Qualcomm has recorded a 46% jump in quarterly profits and increased its forecasts. Much of the growth was found in sales to China, India and South America with strong sales in the U.S.

Electronics

The Bust After The Boom

It’s been said that we must learn from history, lest we be doomed to repeat it.  And the history lesson for today is in the field of electronics. Look back and remember the halcyon days of the expansions of 2000. Back then, companies only looked backward at strong market growth. They didn’t look forward, didn’t work out projections and predictions based on the limit to market sales imposed by the economy. The end was ugly and painful. Some did not survive.

Now, with their pockets filled with orders and manufacturing machinery humming along, electronics companies have to look ahead. Because the current expansion is due to end and no one wants to be caught with too much inventory and a frenzy of order cancellations.

How will you spot the beginning of the end? By tracking the inventory/sales ratio. When it starts to rise, persistently, it’s time to regroup.  And here’s another clue: China accounted for 13% of the total world purchasing power in 2003. It accounted for 30% of world economic growth the same year. But China is over-invested in capacity to manufacture such high-ticket items as vehicles, cement, steel, appliances and more. They cannot sustain their growth.

Chipping Away At The Future

As silicon chips get better, faster and cheaper, demand for them is slowly eroding - for the first time in history.  The usual semi-conductor yearly growth rate of 15% to 17% has been slipping. It’s now at 11% to 13% a year. Just around the corner may be the discovery that the big bucks invested in megedense chip development cannot be justified by demand. The following is a real world scenario:

The cost for developing a new fab can reach $3 billion - almost triple what it was a few years ago. And production is swift. Advanced Micro Devices is opening a new 300mm fab in 2006. It will produce 13,000 to 20,000 wafers per month.  AMD will then be producing 60 million chips a year - more than twice the number of PCs that sold worldwide in 2002.

While nanotechnology, speech recognition, intelligent appliances, robotics

and other high tech devices may be waiting in the wings, it’ll take gargantuan killer aps to keep the industry from digging itself into an expensive inventory hole.

Sales Soar For Digital Electronics

While 2003 saw DVD prices drop through the floor, sales soared through the roof.  This year, expect higher prices accompanied by more function. A formula expected to take the category even higher. Sales are expected to double to around 10 million units worth about $3.2 billion.

Digital audio players are also expected to continue playing sweet sales songs. Worldwide some 18.6 million mp3 players will be sold, up 48% from the year before. Prices are expected to drop from Apples iPod high of $500 to lower prices for Dell and Samsung.

IT Factoids

To sum up quite a bit of interesting IT news, let's go to the bullet-points:

• Wi-Fi will take off stronger than ever as new chips with microscopic wiring revs up laptops
• Big businesses, like Proctor & Gamble, are handing off their computer operations. They want to develop their products, not run computer operations. Tech service companies, like IBM and Hewlett-Packard, are ready and able to do the job
• Business process outsourcing is the fastest growing IT niche. It will rise 8% to $121 billion this year.  And while American providers like IBM are capturing clients, overseas rivals are very aggressive - especially in the mature market for outsourcing technology. It's hard to compete with such challengers as India's Wipro Ltd. They offer tech professionals for as little as 25% of the going U.S. rate.

Food

Say Cheese!

While all fall down under the weight of the recession, the cheese industry just bubbles along. Steaming with 98% household penetration, dollar sales for natural cheese has risen a mouthwatering 6.1% and unit sales were tasty at 4.9%. Why you may ask? Well, it seems we're all gathering around the dinner table for company and economy - and cheese is the main attraction.

Manufacturing

Making Manufacturing Jobs

America’s great manufacturing engine is chugging along - just more slowly. Over 2.8 million jobs have been lost in that sector over the last three years. Now, with an anticipated 0.3% growth, only 250,000 workers will be hired. This is in keeping with the flat, 75.8% utilization rate.

Material Handling

How The Handlers Are Handling It All

Material handlers have reported in and, to no one’s surprise, there are few surprises to report. With little enthusiasm for innovation, the top choices for distribution center equipment remains bin shelving, bar coders and scanners, and conveyors. Manual checks continue to dominate quality control.

According to 40% of reporting handlers, returns are down to less than 2% of orders. Methods for managing overstocks have become creative and include electronic catalog sales, outsourcing, telemarketing upsells, auctions and reworking of products. Shipping times have also improved with 32.7% reporting shipping within 6 hours of receiving an order.

The industries priorities remain the same: performance measurement, IT upgrades and labor retention top the list. Awareness of outsourcing and legal/tax issues are considered of moderate importance.

Metals

China Bulking Up On Scrap

Although some are worried that China is taking over all manufacturing business, there is actually some give and take. Here’s an example: China has now bought over $1 billion worth of U.S. scrap materials in one year, making them the first overseas consumer to reach that mark. Of the projected $1.38 billion for the year, $700 million is in ferrous scrap, about $400 million is in the copper-brass category and there’s another $400 million in aluminum scrap.

U.S. Exports To China Way Behind Imports

As we all know by now, China is the big gorilla of trade. And we’ve got some numbers that are going to make you sit up and take notice:

• U.S. merchandise imports from China are on a steep rise, totalling $152 .38 billion, representing a $27.19 billion increase over 2002
• U.S. merchandise exports to China were $28.42 billion in 2003, an increase of $6.29 billion from 2002

The net result: a $123.96 billion U.S. trade deficit with China - and no end in sight.

Russian Nuclear Fleet Is Looted

It didn’t take a war to demolish the previously feared Russian nuclear fleet. It took human greed.

Russian television is reporting the looting of the nuclear-armed fleet by criminal gangs, civilian contractors and Russian navel officers. They are plundering the ships of their precious metal components, rendering them useless. And a strong market for buying these metals, no questions asked, has sprung up in the port town of Murmansk.

One Russian Granit-class, nuclear-powered submarine contains roughly 1 tonne of silver, more than 30 kilograms of pure gold and 20 kilograms of palladium. Shipyards and navel bases are now arming guards with metal detectors in a protective effort.

Paper

Stronger Paper Predictions in 2004

Fundamental issues have beset the paper industry for the past several years. Paramount is lack of capacity and the inability to make price increases hold firm. Nevertheless, some industry experts are optimistic about the year to come.

Fueling this viewpoint is an excellent economic outlook that’s driving a fairly strong market for retail sales. An increase in magazine pages, catalogs, free standing inserts and general commercial printing is expected.

There are some experts who are not so positive.  After three years in the dumps, they are cautions about growth and conservative about their businesses. The most pessimistic prediction calls for 1% growth, down from last year’s 1.4%. The most optimistic prediction is for 7.5%, down from last year’s 8.9%.

The pressure is on distributors to raise paper prices. If they don’t, they’ll have to keep inventories low - which rules out just-in-time deliveries. But, with the current economic climate, they can carry only exactly what they need.

But, if the optimists are right, six months after the expected rebound the mills and distributors will see business activity increase.

China’s Paper Expansion Impacts North America

China is ripping through the paper and paperboard industries, expanding so rapidly, that it has created global excess capacity. During 2003 - 2005, Chinese capacity will reach 9.8 million tonnes with containerboard and boxboard grades being the biggest growers.

What does this mean to North America? China needs fiber for product. It will account for almost 40% of the growth in the world pulp market and almost 30% in recovered paper. This puts America’s exporting of recovered paper to 12 million tonnes, up from 7 million tonnes in the mid-1990s, with China accounting for more than 40% of demand.

While China’s expansion is likely to go on, there is some concern about its weak banking system causing a financial meltdown. But, at least they can write about it on their own paper.

Kraft Paper Sacked

The once ubiquitous brown paper sacks are slowly sinking to the wrong end of the supply and demand equation as plastics make ever more inroads. Producers have reduced production capacity for unbleached papers, particularly grocery bags, by 40% in the 10- year period from 1985 - 1995.

Plastics

Plastic’s Future Is In Flux

The global good news: look for an average economic growth of about 4%, everywhere but Europe, in 2004.  And with that news, most plastics processors are reporting solid increases in orders. But though the GDP is expanding, the benefit will be in service areas. Layoffs will continue in manufacturing where capacity utilization will stay around 75%.

Look for new orders to plastic processors to double from Q2 to Q3 2003 and reach 4.1%. Predictions are for an overall increase of 4.5% with extrusion markets leading the way with the hot housing market fueling the demand for such products as pipe, wire, cable and window frames. This has increased the sale of extruders and auxiliary equipment by 7.3%.

Putting a crimp in the picture is the ever-present import situation.  An example of troubling trends: triple the number of complete automotive subassemblies, like rear-view mirrors and seats, imported from China alone. Even Mexico is feeling the pinch of Asian competition.

In fact, Chinese exports to the U.S. more than doubled to $152.38 billion in 2003 from $62 billion in 1997. Measured that against the U.S. export decline of $718 million in resin and chemicals and $537 million in plastic articles.

Global equipment sales are expected to jump 7.8% with extruder shipments showing an increase of over 11%. The leader will be highly automated auxiliary equipment with a sales explosion of an annual rate of 12%

Polyethylene Problems Persist

Despite expectations of stronger demand for polyethylene, producers are pushing prices per pound up: 4¢ a pound in December, 2003 and 5¢ a pound in February, 2004. Put the blame on high energy and feedstock costs. Overall, the U.S. market is expected to grow about 5% to 6% in 2004. The world market will go about 7%.

Printing

Print Poised To Rebound

The print industry, hit hard in the economic downturn, is looking forward to better days. The industry seemed to bottom out in 2002, when the lowest average profitability on record was recorded by the Printing Industries of America since they began tracking the statistic back in 1921.  Though the recovery has been slower than expected, print can point to a 2% year-over-year sales gain for 2003, which was the first gain in two years.

Sales were up 3.9% in December, 2003 for the NAPL Pritning Business Panel, the largest monthly increase of the year.  In fact, sales actually increased in every geographic zone, something that had not occurred in more than three years.

An improving economy--the GDP was up 7.2% in 3Q 2003--is not the only encouraging sign. Factor in the presidential campaign, the summer Olympics and the “Do Not Call” Registry all working together to push print into positive territory.

Other areas of growth will be in variable data, digital and fulfillment work. Each of these gives the marketer more precise tools with which to reach the consumer. So, instead of BMW doing a shotgun 50,000 piece mailing to the immediate world, they can mail to 500 qualified, likely BMW buyers.

How optomistic are things in the printing sector?  Nearly 55.0% of the printer surveyed by NAPL expected business to improve during the next six months, while only 7.8% expected business to decline.

Retail

Retail Reaches It Goals

Despite killer snowstorms and horrible wind chill factors in the Northeast, retailers have reported a last-minute holiday sales surge and strong post-Christmas business. That meant meeting or coming close to plan, enabling retailers to hitch the rest of their year to season.  Retail chain sales rose 5.5% over 2002 and there were fewer markdowns due to tighter inventories. All in all, a very happy start to the year.

Steel

Domestic Steel Fends Off Imports

Steel import tariffs, a weakening dollar and higher freight charges were just some of the factors contributing to a 30% drop in steel imports for 2003.  Good news after the last five years of fallout from the Asian financial crisis - which included more than 30 mills caught in bankruptcy proceedings.

Now the challenge is to cope with rapidly escalating raw material costs and take on such trade-distorting issues as China’s undervalued currency and its trade deficit with the U.S.

Steel’s Optimistic Sales Outlook

Though current levels of steel inventory are adequate for production requirements, an increase in demand is just around the corner.  An expected combination of increased back orders, as well as low month on hand will lead to increased inventories over the next six months.

Tool Steel Sales Strengthen

The tool steel market is emerging from three long years of depressed prices and weakened demand with upbeat sentiments and higher prices. Experts are citing a recovery, not an upturn as the key factor in a 10% to 12% increase in shipments over the last three years. The tool steel market is seen as a good barometer for overall U.S. economic trends.

Technology

What’s Ahead for Business Tech

Well, the budgets are in and the new year is in motion. Now is the time to check in with business IT and see how they see 2004 shaping up. Most are optimistic - but cautiously so. Kind of like the rest of the country.

To briefly summarize a huge industry:

• The majority of business-technology executives believe this year will see better revenue growth than last year.
• IT spending will diminish slightly. Last year it was at 8.6%, this year it will be about 8.3%. But that percentage is part of a larger overall amount, so actual dollar amounts are stable.
• The top priority is meeting the compliance requirements of theSarbanes-Oxley Act, designed to force more stringent financial reporting and auditing guidelines on public companies.
• There are three key priorities to address: using customer data, improving customer service and optimizing business practices.

Most believe the workforce is more productive now.

Textiles

Levi’s Leaves The States

Levi’s, that great American purveyor of classic denim fashion, has closed down its remaining two stateside factories, laying off about 800 workers in the 26 year old San Antonio plant.

Textiles Weave A Brighter Story

In light of the recent slowdown in the biggest decline in its history, the U.S. textile/apparel industry is looking at 2004 as its turn-around year. Here’s a quick overview of what to expect from a venerable American industry:

• The industry is getting meaner and leaner as it shutters old, inefficient mills, improves its‚ infrastructure, makes solid productivity gains and takes a more globally oriented approach.
• Costs remain in manageable bounds.
• New and improved textiles, with futuristic performance benefits, are coming onto the market.
• Combined textile mill and mill product shipments managed to reach about $73.5 billion last year - down substantially from the near-$90 billion peak of 1990 but still significant.
• Basic textile mill shipments are expected to fall only fractionally and bottom out at around $39 billion in 2004. Good news after the devastating 35% decline since the late 1990’s. This is fueled by the loosened purse strings of the improving economy.
• And remaining in the slim plus column are mill shipments (generally non-apparel goods) with a small gain driving levels to $35 billion this year.
• Relatively high inventories mean adequate/excellent supplies.

Of course, the outlook is not all positive:

• That old catch-22 kicks in: as productivity (output per worker) increases, and there is a fractional 2004 production decline, there will inevitably be some “labor shrinkage.”
• Basic mill employment, not counting mill products, will be hard-pressed to reach 257,000. Almost half of what is was just ten years ago.
• Even with diminished declines of 9%-10%, the estimated 2004 apparel employee level will be about 275,000. That’s a huge 69% decline compared to the 1994 level of 883,000.
• The quotas are being lifted in 2005. China, by itself, could rise from the current $6.5 billion level to nearly $40 billion by 2010.

Downturns and quotas notwithstanding, the industry will survive. But it must acknowledge that free trade is here to stay and staying globally competitive in all phases of business is imperative.

Quote Us On Quotas

The dust won’t settle anytime soon in the continuing debate on how domestic producers will be impacted by textile imports and the looming loosening of quotas. Here are some perspectives:

While stateside producers reported more than 40 plant closings and the loss of 42,000 jobs, textile and apparel imports were up 15% to new record levels. No surprise that the importers enthusiastically supported a new proposal by U.S. Trade Representative Robert B. Zoellick to eliminate all tariffs on consumer and industrial products by 2015. The very same tariffs U.S. textile manufacturers were counting on for some protection.  And the Bush administration’s much anticipated seven-point program promising to improve conditions in the U.S. textile industry has been blasted by a Congressional progress report as a complete failure that was long on promises and short on results.

China has now become the top exporter of textiles and apparel to the U.S. And now other industries have joined the U.S. textile industry in leveling charges against China of closed market manipulation, currency manipulation and problematic subsidies. The Commerce Department is considering some relief by beginning negotiations with China. The goal of these talks will be imposing import quotas on knit fabrics, dressing gowns and bras - segments where the industry claims market disruption.

Of course, importers are crying foul and demanding that the domestic industry produce factual evidence that Chinese imports are disrupting markets and displacing American jobs. Their point of view: get ready for the end of quotas by thinking outside the protectionism box.

Trucking

Managing Mandates Means More Money

The trucking industry is feeling the pressure of two key areas of mandates and regulations. First, cargo security. No one argues the need for new general security and new standards for transporting food and hazardous materials. But implementing and maintaining these standards is difficult and a financial burden on the industry.

Second, new engine emission requirements are significantly increasing business costs for motor carriers.  And, in 2007 and 2010, even more costly and complex diesel engine emission standards will go into effect.

Wire & Cable

China Wires The World

On the face of it, China is surging ahead as a leading producer of wire and cable. Growing ever stronger, the Chinese GDP rose 8% in 2002 and the value of its wire and cable production was 14% of the world total. That’s second place, behind the U.S. In the same year, Chinese wire and cable consumption grew 16.6% - again, second only to the U.S.

But not all is rosy.  Competition is fiercer than ever and the Chinese government is encouraging foreign competition. World powers, such as Pirelli,  Alcatel, Nexans and more, are showing up and building high-end plants. With their superior assets and technology, they are expected to take over the Chinese markets, which are inferior in company scale, assets and R&D.