By Jack Keough
What’s happened to electrical and industrial manufacturers in the past two years might be described as the perfect storm.
A strong dollar, currency fluctuations, projects postponed, slowness in construction activity and one of the worst downturns in decades for the oil, mining and gas markets have led to plant shutdowns and thousands of layoffs.
While these problems have yet to be solved, there are reasons for manufacturers to be optimistic this year. In fact, some CEOs indicate they expect slow to moderate growth in 2016 due to improved economic conditions, a housing rebound, increased commercial construction, and new product launches.
Growth is expected from other areas as well. Several electrical manufacturers talk enthusiastically about digital lighting, new lighting products, building automation, and opportunities created by increased energy and environmental concerns.
Overall, economic forecasters also remain upbeat for the manufacturing sector.
ITR Economics, an economics consulting/forecasting firm that closely follows the industrial/electrical markets, points out that, despite the problems faced in several sectors, the U.S. economy actually grew in 2015 – as measured by GDP – and will grow again this year.
ITR, which has a 94 percent accuracy rate, notes that employment is up, as are wages, while interest rates remain low, encouraging expansion of plants and facilities.
“Our extended outlook is that the economy is going to expand in four of the next five years, and possibly six of the next seven years,” ITR says.
The construction market’s rebound is also good news for electrical manufacturers.
Dodge Data & Analytics says that total construction starts are forecasted to advance 6 percent to $712 billion, with gains for residential building up 16 percent, nonresidential building up 9 percent, while the non-building construction sector retreats 14 percent.
And the “green building” movement is having a positive effect. In the residential sector, green building currently accounts for 26 to 33 percent of the total residential market and has helped contribute to the industry’s recovery after the recession, according to Dodge.
In its 2016 Construction Outlook, Dodge Data predicted single-family construction will see a 20 percent increase in starts this year, while multifamily is expected to post a 7 percent gain after several years of double-digit increases.
Electrical manufacturers report in their latest quarterly statements that the strong construction growth has led to increased sales of lighting supplies.
Hubbell Inc., a manufacturer of electrical and electronic products, notes construction helped grow their business in the first quarter of 2016.
“Construction-related markets grew solidly during the quarter, as we experienced double digit growth in our lighting products,” said David G. Nord, Chairman, President and Chief Executive Officer of Hubbell. “Oil and core industrial markets remained weak. The Power segment benefited from strong growth in telecommunications.”
Its electrical segment net sales in the first quarter of 2016 increased 2 percent to $583 million, compared to $570 million reported in the first quarter of 2015.
But Nord, in announcing the company’s quarterly results, also offered a cautionary note.
“First quarter performance – namely non-residential and residential construction market strength, telecommunications growth, and lower levels of declines in oil markets – may indicate an improving outlook,” he said, “but it is still early, given the short-cycle nature of our businesses and our expectation of a prolonged recovery in the oil market.”
Congress may also help electrical manufacturers by passing new comprehensive energy legislation.
The U.S. Senate just passed the Energy Policy Modernization Act by a vote of 85-12. This vote comes four months after a December vote in the U.S. House of Representatives on its comprehensive energy legislation, the North American Energy Security and Infrastructure Act.
“Passage of this legislation shows that improving the energy efficiency of our nation’s homes, schools, and other buildings as well as moving toward a more flexible, resilient, and secure electric grid are citizen issues that should, and in this case did, rise above partisan paralysis,” said NEMA President and CEO Kevin J. Cosgriff.
The Senate and House must now reconcile differences between their two bills before passing final legislation to send to President Obama for his signature. That could happen soon.
Meanwhile, sales of LEDs are soaring, creating opportunities for some manufacturers despite a drop-off in prices.
GE now expects more than half of light sockets in the country to be using LEDs by 2020. It announced in February that it would stop making compact fluorescent lamps (CFLs) by the end of the year.
Acuity Brands reports that sales of its LEDs grew over 40 percent in Q2 of fiscal 2016 compared to a year ago. LEDs now account for some 55 percent of Acuity’s net sales, Vernon Nagel, chairman and CEO, told financial analysts.
But Nagel sees growth in other areas in addition to LED lighting.
“We believe the lighting and lighting-related industry as well as building automation systems will experience solid growth over the next decade,” he said.
Nagel added there would be additional opportunities created by energy and environmental concerns and “emerging opportunities” for digital lighting to play a key role in the Internet of Things.
Acuity noted that third-party forecasts, as well as key leading indicators, suggest that the growth rate for the North American lighting market, which includes renovation and retrofit activity, will be in the mid-to-upper single digit range for fiscal 2016. Expectations are that overall demand in Acuity’s end markets will continue to experience solid growth over the next several years.
While all of this is good news for 2016 and beyond, the comment by one CEO who described the economy last fall as being in an “industrial recession” resonates with others who believe the country is still in the throes of a severe downturn.
Diversified industrial/electrical manufacturer Eaton, which made the huge purchase of electrical giant Cooper Industries four years ago, has closed more than eight plants, idling thousands of workers and leading to some $400 million in multi-year restructuring efforts. Schneider Electric is restructuring and has closed plants, Philips Lighting, a division of Royal Philips, has closed and consolidated plants as has LED maker Cree in North Carolina.
Lighting giant Philips said in December that it was closing a facility in Burgaw, N.C. by September 1 with 50 employees losing their jobs. Only five months earlier it said it was closing a plant in Henderson, N.C.
And there will be further action ahead as companies look to exit businesses and concentrate on their core competencies. Schneider Electric, for example, expects to “prune” its portfolio by selling off some non-core business units.
Schneider is in the midst of a global restructuring effort that translates into millions of euros.
Cree, a maker of LEDs based in Durham, N.C., has reduced its workforce by 10 percent as the company faced a drop-off in revenues. In its new third quarter fiscal earnings report, Cree reported $367 million in sales, lower than the revenues it had projected.
“The estimated revenue is below the company’s previously targeted range of $400 million to $430 million due to lower lighting products revenue,” said Chuck Swoboda, Cree chairman, president and CEO.
He told analysts, however, that the order rates for commercial lighting had improved in March and this, combined with new products, would drive growth in fiscal Q4.
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Keough was the editor of Industrial Distribution magazine for more than 26 years. He often speaks at industry events and seminars. He can be reached at john.keough@comcast.net or keoughbiz@gmail.com.
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