Outlook for Power Transmission Industry Brighter for 2004

Business and optimism are picking up at most distribution and manufacturing firms in the North American power transmission/motion control (PT/MC) industry heading into 2004. That’s based on responses to the most recent annual member survey conducted by the Power Transmission Distributors Association.

Orders for power transmission/motion control (PT/MC) products, systems and service are at their best pace in several years, say most managers who participated in the association’s 2004 Annual Member Forecast Survey. Customer activity jumped at many companies late in 2003 — and quotes have been turning into sales.

“We had a couple of real strong months toward the end of 2003,” said Andy Nations, president of Bearings & Drives Inc., a distribution firm based in Macon, Ga. “We had customers bring projects they had put off for a couple of years out of mothballs. It seems like most people are cautiously optimistic.”

The same was true at Miller Bearings Inc., a distributor headquartered in Orlando, Fla. “We had a strong fourth quarter and we’re trending on a positive note,” said Craig Faber, the firm’s president. “So far that trend has continued into January.”

The same energy can be felt by many manufacturing firms, including Dichtomatik North America of Shakopee, Minn. “We closed 2003 on a strong note,” said Cliff Bannon, Dichtomatiks’ director of sales and marketing-industrial distribution. “We’re normally slow in December, but December 2003 was our best month in company history.”

In total, more than 100 firms responded to the 2004 Member Forecast Survey. Nearly three-quarters (72.9%) believe the economy is back in a period of economic growth. Last year at this time, two-thirds of survey respondents thought the economy was in decline.

As of January 2004, however, most business signs were looking up.

“We certainly have seen improved activity,” said Mike Power, manager of distributor sales for Lovejoy Inc. of Downers Grove, Ill. “We have the industry standard in jaw couplings, and they tend to be a good barometer of the economy for us. Our distributors are beginning to increase their coupling inventories, meaning they’re seeing a stronger need at their end of the channel.”

“We’re seeing business pick up on the OEM side,” added John Hegel, president of Minarik Corp. of South Beloit, Ill. “Companies are getting into production mode. And if you don’t have the OEM business, you won’t get replacement business.”

The turnaround parlays into improved sales projections. As in the past few years, a group of PTDA distributors and manufacturers envision robust sales growth. This year, however, nearly one quarter (23.3%) of all survey respondents — split almost evenly between distributors and manufacturers — forecast sales growth of 10% or more.

Additionally, more than a third (36.9%) of firms anticipate sales increases of 5% to 10%. Last year, 26.8% of respondents forecast this range of growth.

For 2004, 23.3% of respondents expect sales growth of 5% or less. In 2003, 39.7% of firms projected sales gains of less than 5%.

“The trend is upward, but we had a big slide after 2000,” said Jay Shore, president of C.B.S. Equipment, based in London, Ont. “We went down to a low point, but things started coming back in 2003. In the next 12 months, we expect the trend to continue, but not at a record sales pace.”

Some pessimism remains, however. For the coming year, 10.7% of respondents expect sales to remain constant and 5.8% say sales will decline. Last year, 7.5% projected flat sales and 6.5% expected sales drops.

Of the PTDA members who believe the economy remains in decline (27.1%), most think a turnaround will occur by summer. Most survey respondents who think the economy currently is growing didn’t estimate how long the expansion would last.

MARGINS STILL WITHERING

Although sales should be brisker in 2004, many PTDA distributor and manufacturer members worry profitability will be hindered by sluggish margin growth or erosion.

“The pinch on margins is continuing,” said Keith Nowak, president of MPT Drives, Inc. of Madison Heights, Mich. “I think we dropped maybe half a point last year. We don’t want to see a trend like that continue.”

“Margin pressure is one of the question marks,” added Steve Crain, president of Apache Hose & Belting, based in Cedar Rapids, Iowa. “An element of the competition is cutting prices and absorbing price increases, therefore causing margins to reduce for all of us.”

Fifty-five per cent of survey respondents expect margins to remain constant in 2004, while 11% expect them to slip. Last year, 34.4% of respondents thought margins would remain flat and 16.1% predicted they would decrease.

Only about a third of respondents (34%) see margins increasing in 2004, compared to 48.3% in 2003. For the coming year, 12% see margins growing 5% or more, 12% see them increasing 2% to 5%, and 9% expect margin growth under 2%.

According to Minarek’s Hegel, a key is not to cave in to unprofitable sales. “After a long dry spell, the natural tendency is to get business at any cost,” he said. “In their zeal and zest to get business leads, people tend to make bad decisions.”

Still, independent distributors continued to be squeezed by larger competitors with greater buying power. Meanwhile, North American manufacturers are being undercut by offshore producers with lower labour and overhead costs.

“The price of some items just doesn’t seem to have a bottom,” MPT’s Nowak said. “I have companies with certain products from China, India and Pakistan banging on my door. People can buy really cheap stuff if they want to, but I’m not participating in that type of buying.”

The best strategies for combating ultra-cheap commodity prices remain positioning PT/MC components as engineered products and emphasizing the value-added benefits of higher quality goods.

“Much of our competition today is product coming from China at much lower than industry prices,” said Tony Hood, vice president of sales and marketing for Suwanee, Ga.-based WEG Motors and Drives. “But the sophisticated buyer looks at the requirements, then talks about price.”

“Value-added products are definitely going to be the strength of our country,” added Dennis Edwards, sales manager of Bishop-Wisecarver Corp. of Pittsburg, Calif. “A lot of companies we deal with want not only to improve efficiencies of machines, but their capabilities. Companies making value-added equipment can help customers do that.”

EMPLOYMENT EXPECTED TO HOLD STEADY

The current economic recovery in the U.S. has been called “jobless” by some. Projections for the PT/MC industry don’t refute that. PTDA distributor and manufacturer survey respondents are, at best, cautious when it comes to adding employees in 2004.

The largest chunk of overall respondents — 45% — expect staffing levels to remain constant in 2004. Last year, 52% predicted flat employment.

For 2004, 38.4% of survey respondents expect to add employees, with 16.2% planning to boost staffing by five percent or more. In 2003, 43.3% said they’d add workers, with 13.9% hoping to increase the number of people on their payrolls by five percent or more.

Meanwhile, 16.2% of the firms responding the 2004 survey plan to trim staff, consistent with the 16.1% of the respondents that planned to do so in 2003.

Those PTDA member firms planning to add staff in 2004 seem to be focusing on beefing up their outside sales, inside sales, customer service and technical support capabilities. In general, new hires must directly generate sales or add value for customers. Little, if any, back-office and administrative hiring is anticipated.

“We’ve already upgraded our personnel by adding very qualified, educated individuals who were let go from other firms,” said Philip Cohenca, president and CEO of Jason Industrial Inc. of Fairfield, N.J. “We’re not planning to add significantly more employees, but we are looking at continuing to replace and upgrade, predominantly with sales and engineering.”

CHANNEL RELATIONSHIPS

Distributor r
espondents said they expect the number of supplier’s lines they carry in 2004 to remain steady (55.9%) or increase (44.1%).

Growing customer requirements for local inventory may be a reason. In the coming year, 58.8% of distributor respondents believe this demand will increase, 26.5% expect it to remain constant and only 14.7% think it will decrease.

“We will continue to work on nurturing our partnerships with our customers and our manufacturers,” Faber said. “We’re doing that with a renewed focus on business planning to enhance our sales and service opportunities.”

Among manufacturer respondents, 57.1% said they expect their number of distributor partners to remain the same in 2004. Although 28.6% of manufacturers plan to add distributors, 14.3% say they’ll trim their distributor rosters in the coming year.

But just as in 2003, manufacturers will rely more heavily on distribution in 2004 to get their products to eventual users. More than half (52.4%) of manufacturers hope to increase the percentage of their sales through distribution. Only 9.5% expect distribution sales to slip, while 38.1% project they’ll remain constant.

According to Lovejoy’s Power, “One of our challenges in 2004 will be to ensure that we remain in sync with our distributors in reacting to and keeping on top of an expanding market. We encourage them to be proactive with us in keeping abreast of what they’re seeing in their regions.”

PTDA is an U.S.-based trade association representing 228 power transmission/motion control distributor firms and 190 manufacturers that supply the PT/MC industry. For more information, visit www.ptda.org.