Market Snapshot: Industrial


The demand for industrial products has kept pace even in the economic downturn, and indications are that this market segment strengthened somewhat in 2010. However, whether or not this segment is seeing an actual recovery is still in question.

Industrial products and components aren't glamorous and usually aren't visible to the end user. The industrial manufacturing sector is composed of manufacturers that sell mainly to other businesses. But it plays an important role in the economy, making a plethora of industrial products for power generators, pumps, motors, compressors, and filtration units. According to Hoover's First Research (Oct. 25, 2010 release), the manufacture of these products involves about 1000 companies with combined annual revenue of about $30 billion.

Many players in the industrial products market are huge, highly diversified conglomerates such as AO Smith, GE, Eaton Corp., United Technologies Corp., ITW (with 800 businesses), Ingersoll Rand, and Emerson Electric. The industry is very concentrated, says Hoover's, with the 50 largest companies generating about 80% of the revenue in each major segment.

A wide range of opportunities exist within these companies because they consist of various subsidiaries composed of companies they have either bought or spun off organically from the parent company. Molders seeking to find new business in this market segment can search among the many subsidiary companies for supplier opportunities:

  • United Technologies Corp.'s Hamilton Sundstrand division has two further divisions: Sundyne (Arvada, CO), which makes industrial pumps, compressors, and various electromagnetics; and Sullair (Michigan City, IN), specializing in industrial compressors. In addition to Hamilton Sundstrand, UTC's divisions include Carrier, Otis, Pratt & Whitney, Sikorsky, UTC Fire & Security, and UTC Power.

Based in Hartford, CT, UTC had Q3 2010 revenues of $13.5 billion, 1% above the prior year, and according to UTC's chairman and CEO Louis Chenevert, "Sustained and structural cost-reduction actions drove record segment operating margin." The company's Otis division saw orders for new equipment drop 1% over the year-ago third quarter. Commercial HVAC equipment orders at Carrier grew 3%, and commercial spare parts orders at Pratt & Whitney's large engine business grew 35%. At Hamilton Sundstrand, commercial spares orders were up 13% over the year-ago third quarter. Chenevert says he expects 2010 earnings per share will grow 14% over 2009 on revenues of $54 billion, up 2%.

  • Emerson saw net sales for fiscal 2010 increase 5% to $21.0 billion, with emerging markets hitting a record 34% of sales, and international sales being 57% of the total. The company sold its appliance and industrial motors businesses to Nidec Corp., reportedly because growth and margins were no longer right for Emerson. The company's Industrial Automation business saw strong performance in the fiscal fourth quarter, with sales up 23%. Emerson recently won a major contract to provide power inverters and plantwide controls for what will be California's largest photovoltaic facility, which will also boost Emerson's Process Management business.
  • Ingersoll Rand, a $13 billion global diversified company headquartered in Swords, Ireland, has six subsidiary companies and manufacturing plants in the United States. The company's Industrial Technology segment, which includes manufacture of compressed air systems, power tools, fluid power products, and golf carts and utility vehicles, generated Q3 2010 revenues of $624.3 million, up 22% from Q3 2009. On Nov. 11, the company announced that it has been added to the S&P 500.

M&A deal value improving

According to a report from PricewaterhouseCoopers' Industrial Manufacturing practice, the M&A deal value in the global industrial manufacturing industry in Q3 2010 continued to improve year-over-year as well as from Q2 2010, with $16 billion in Q3. This was fueled by three mega-deals (transactions of $1 billion or more) announced in the quarter, two of which had values greater than $4 billion.

"While cash conservation, cost containment, and margin expansion continue to be trends, valuations remain constrained relative to historical levels, which look to continue to present buying opportunities for industrial manufacturing companies with strong balance sheets," says Barry Misthal, U.S. industrial manufacturing leader for PwC.

PwC's report also noted that industrial manufacturing companies have become more cautious and diligent about what they are buying. "They no longer favor diversification as a global M&A theme, but rather are looking for deals that can provide new strategic opportunities," the report says.

Still, diversified industrial companies did much better in 2010 than 2009, as shown by their quarterly reports. Misthal said this is due to improved demand in 2010 over 2009, and "orders are rising slowly." However, he noted that the industrial sector is not improving "considerably" in most of the world, with the exception of China. "Growth from emerging markets is causing these industrial companies to partner better with their customers and suppliers in these markets," Misthal said in an interview with IMM.

Yet there is some improvement almost everywhere in the industrial segment, perhaps "in anticipation that things are going to get better," suggests Misthal. "[Industrial companies] put off a lot of spending during the recession and are now beginning to use some of the cash they've built up to buy new equipment, prepare idled facilities [production lines or pieces of machinery] to start up again, do deferred maintenance, etc."

Another potential source of growth for molders and moldmakers is these companies' push to innovate as a way to grow, says Misthal. "That means new products and, therefore, a need for new molds, machinery, etc.," he explains. "I would expect especially strong demand for things like rapid prototyping equipment. Additionally, innovation is being invested via new R&D and new product development centers in these emerging regions."

Trends in the industrial supply chain

In a survey done by KPMG International Corp. of 196 senior executives of industrial conglomerates worldwide, three things stood out:

• Strategic suppliers are increasingly becoming partners rather than purveyors of goods and services. Many industrial OEMs are looking for fewer, longer-term supplier relationships. More than half of the respondents plan to collaborate more closely with suppliers on (or give them more responsibility for) product innovation, product development, R&D, cost reduction, and supply chain agility. Interviewees also suggested that building closer relationships was worth the price of helping suppliers financially during the downturn.

• Management of supplier risk has become more hands-on as a result of the downturn, but by avoiding certain risks, companies may be losing out. Industrial OEMs are becoming more aware of supplier risk and are taking steps to mitigate or avoid it.

• The geography of sourcing, a combination of the global and the local, is in flux as companies consider the appropriate link between customer and supply chain location. China is still an attractive low-cost country for sourcing. Some companies expect their suppliers to more closely reflect their local consumer markets in the future.

Snapshot-Jeff-Dobbs
Jeff Dobbs, KPMG's global head of diversified industrials, says that survey findings suggest "uncertainty."

Jeff Dobbs, KPMG's global head of diversified industrials, says KPMG's survey findings "suggest that uncertainty is holding companies back from executing bold changes to their supply chain structures. Sustained instability in such things as currency, commodity, and fuel prices marks a new era, in which volatility is likely to remain a permanent feature of the operating landscape," Dobbs continues. "In this environment, the advantage will go to those organizations best able to anticipate and respond to changing business conditions. This has direct implications for supply chains, the central nervous system for Diversified Industrials [DI] companies." No longer is the supplier relationship based on the "best component for the best price," but the "supplier role has evolved from the tactical to the strategic," says Dobbs. That includes "which suppliers will make the best long-term partnerships."

Dobbs also says that DI manufacturers will become more resourceful in how they manage risk. "Some will reduce exposures in the supply chain by making products closer to point of sale, clustering plants and suppliers near key markets," he says. "Others, with diverse products across global markets, may choose to put management close to the supply base, and engage more directly in developing and managing key partners." DI companies are tending to create new supply chain models that "balance agility, sensitivity to risk, quality, and cost," Dobbs adds.

Web extra: Download details on KPMG's survey

Molders for industrial markets find unique niches

At Diversified Plastics Inc. (Minneapolis, MN), molding for industrial companies represents a good share of the company's business. "Things in that market are picking up," says Annette Lund, VP. "We're getting more business in areas such as water and air filtration and batteries."

Industrial automation is a significant arena for Diversified, which recently began producing a high-precision component for the new Dynapar HS35R Encoder. The component, a shaft-sizing insert, fits within the encoder's center bore and accommodates various motor shaft sizes while insulating the encoder from external stresses.

The insert, similar to a collet adapter, is made from Ryton polyphenylene sulfide (PPS), a lightweight, extremely rigid material with high performance characteristics and resistance to expansion and contraction, according to supplier Chevron Phillips Chemical Co. HS35R Encoders are used in machine applications that require precise shaft rotation, such as industrial controls and robotics for material handling and auto manufacturing. It is a position-feedback device that attaches to a motor's rotating shaft and communicates angular position reading to the machine's computer control. The shaft-sizing insert is the connection between the encoder's center bore and a motor's shaft, and insulates the encoder electrically and thermally from the motor. Typical of industrial parts, the insert is molded with high-performance, engineering-grade thermoplastics to hold up under a heavy-duty workload.

A different high-performance material was useful for Carrier, a UTC company, for making a shrouded vertical-discharge fan used in industrial chillers to move air through the system. These fans can often be several feet in diameter and typically have been made of steel. To reduce weight and make fabrication easier, Carrier decided to use Ticona's Celstran LFRT PP-CF40-02, a 40% long-fiber-reinforced polypropylene.

Snapshot-universal-fan-blades-van
The Van Fan universal cooling fan has blades that can be resized onsite to fit individual system needs, using RTP 200 Series glass-fiber-reinforced nylon 6/6.

To create another heavy-duty industrial application, a universal fan blade, compounder RTP Co. (Winona, MN) collaborated with its customer, Van's Refrigeration Service. Van's was having difficulty finding a specific-size replacement fan for a downed refrigeration system compressor, which led owner Lamont Van Slate to conceive the "Van Fan," a universal cooling fan with blades that can be replaced and resized onsite to fit individual system needs. Material engineers from RTP recommended using a reinforced nylon compound for the blade to give it the stiffness and rigidity required.

"Instead of storing large inventories of bulky fans with blades of various sizes and designs, repairmen and suppliers can now simply stock a series of interchangeable blades that snap on and off a common hub," says Bob Mattox, owner of Mattox Machine & Molding, who developed the universal cooling fan with Van's Refrigeration. "This reduces the number of fan assemblies that need to be stocked, and has the potential to revolutionize the industry."

The unique trimmable blade feature enables the blades to be individually resized to work on any fan from 6-26 inches (15-65 cm) in diameter. Additionally, the blade pitch can be set to eight different choices to allow for efficient airflow.

Where to grow

The industrial market represents good business opportunities for U.S. molders and moldmakers, but the PwC Manufacturing Barometer notes that as global economies recover, "a substantial number of businesses are taking the opportunity to expand or open new facilities in emerging markets such as China, Brazil, India, and many others." And it's not just the traditional push for low-cost manufacturing sites driving the industrial conglomerates to these countries, but an "untapped customer base" as well. Nearly half the respondents (47%) said they are looking to expand their operations in emerging markets, with China the hottest spot. That said, opportunities remain for U.S. molders and moldmakers looking at the various businesses inside these conglomerates and willing to be part of the new supply chain model.

PwC's Misthal says he doesn't expect any rapid expansion in 2011. "Growth in the U.S. will remain sluggish until uncertainty around corporate tax rates and credits is made clear, the cost of employee health care to employers is really understood, and broader demand picks up," he asserts. "We expect FY2011 to still remain slow on growth."

WEB EXTRAS

Trends in industrial products

According to AMR International, the industrial products sector offers significant, sustained potential. "The image of it being a commoditized, low-margin, low-growth sector is far from the truth," says AMR, a global market-based strategy firm that consults on acquisitions, growth, new markets, or changing business models. Significant trends in this sector include:

  • The continuing rise of Asian economies as low-cost manufacturing bases.
  • Increased automation leading to better quality and lower production costs.
  • An increase in the importance of innovation and time to market.
  • More product variants tailored to meet a particular customer group's needs.

What it takes to serve the diversified industrial market

Serving the industrial market segment requires a breadth of capabilities that includes, importantly, design assistance. "That was a critical component in the development of the new Briggs & Stratton program," says Teresa Schell, marketing manager for custom molder Plastic Components Inc. (PCI; Germantown, WI). By design, industrial work comprises about 14% of the company's business, as PCI doesn't want to become dependent on any one industry, says Schell.

Snapshot-plastic-components-inc
Plastic Components molds a number of industrial parts made from high-grade engineering materials such as polysulfone.

PCI operates a fully automated facility, where the used of advanced manufacturing technology is imperative to ensure high-quality parts while maintaining price points in a competitive environment. The molder invested significantly in RJG technology, for both equipment and training, to support its eDart system.

Industrial markets also require a complete, mutual, goal-oriented approach across all facets of a new program-design, part development, launch, and negotiation, complemented with a balance of give and take.

Most industrial components are heavy-duty, and often must function in corrosive environments, which means that expertise in molding engineering thermoplastics is a necessity for PCI. But there are challenges to molding these types of materials.

"Polysulfone [PSU], a high-temperature amorphous material known for its durability, rigidity, and dimensional stability, is a resin that presents some processing challenges," says PCI's operations manager Bob Allcox. "Along with the increased process temperatures, elevated mold temperatures must be achieved through the use of hot oil or cartridge heaters within the mold."

PCI runs several jobs that use PSU with a glass-filler additive. In one case, the required part design presented challenges in sinks and voids due to nonuniform wall thicknesses. This part also required very tight tolerances and a fine finish for sealing surfaces.

With a complex part design and the resin's natural resistance to flow, PCI had difficulty establishing shot-to-shot repeatability. Through the use of scientific molding practices, mold design adjustments, and inmold cavity pressure sensors coupled with RJG eDart process monitoring and control equipment, PCI was able to eliminate viscosity changes and process variations. The result was a repeatable process with no part defects.

PCI knows first-hand that having the expertise and technology to work with these types of engineering thermoplastics is critical to serving the diversified industrial market. "These engineering-grade materials require appropriate mold designs, a thorough understanding of the resins' capabilities and requirements, and the technology and support systems to maintain process stability," says Allcox.—Clare Goldsberry

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