Here’s how electrical distributors and manufacturers are faring in an environment where new challenges lurk around every corner.
Regardless of what you’re watching, reading, or listening to right now, you’re likely beginning to hear some rumblings about a possible economic downturn in 2020. Whether the drivers are the tariffs, the upcoming election, or the simple fact that we’re in the midst of the longest uninterrupted stretch of growth in modern American history, the bottom line is that business is still good, customers are buying, and smart distributors are prevailing.
At least one leading recession signal that started to rear its head has already faded. The Treasury yield curve, which up until October was pointing to a possible recession, is now on an uptrend and no longer signaling a downturn (in part due to progress in trade talks), according to CNBC. And while it’s never a good idea to rest on your laurels and “hope” that business stays good, the good news is that the point where project pipelines dwindle, sales slow down, and the financing spigot dries up may still be a few years off.
Matt McCarron, VP of industrial/commercial sales for LEDVANCE also keeps an eye on real gross domestic product (GDP), which increased in all 50 states and the District of Columbia during the second quarter of 2019, according to the U.S. Bureau of Economic Analysis. Then, economic activity in the U.S. grew at an annualized rate of 1.9% in the third quarter, down slightly from the 2% pace in the second quarter.
That slight dip could mean trouble is brewing, but then again it could just be part of the natural ebb and flow of economic data. After all, during a year when issues like trade wars and political turmoil both had the potential to take their respective tolls on the economy, the industrial market remained remarkably calm.
“It wasn’t as robust as years past, and likely due to the uncertainty surrounding the tariff situation,” says McCarron, whose manufacturing firm has offices in more than 50 countries and business activities in more than 140 countries. “We’re looking at indicators like GDP for the year ahead and planning accordingly. In terms of a potential downturn, we’re not convinced yet.”
Wreaking Havoc Across the Market
It’s been a trying year for the lighting category, where LEDVANCE plays a role in bringing innovative products to market. As of October, McCarron says business has fluctuated, pipelines have slowed (but are expected to pick up), and the tariff situation remains a thorn in the sector’s side. “The tariffs are wreaking havoc across the market,” says McCarron. “[Companies] are unsure of what to bring into the company, and when to bring it in.”
The impacts are also affecting distribution, where a new tariff imposed on a product can multiply three or four times by the time it gets to the distributor level. “When these tariff changes go into place, they have to happen across the entire [supply chain],” says McCarron. “It’s time-consuming and consumes a lot of energy.” The trade wars are also diverting attention away from new projects, he says, and impacting project pipelines.
Despite these pain points, McCarron says 2019 was a “pretty good year” for LEDVANCE, which now has ambitious goals for the future and plans to continue expanding its fixture business at a quick clip. “The trick for us is going to be to offset what at one point was a very large percentage of our business in traditional [lighting], and move towards the 60% LED rate,” says McCarron. “Ideally, I’d like to be at 70%-75% LED products. We’re not quite there yet, but we’re moving in the right direction.”
McCarron says that tariff implementation rates have been particularly complex. With List 4B set to go into effect in mid-December (the verdict is still out on whether it actually will go into effect or not, so stay tuned), the company has to navigate up to six different lists of impacted products ranging from traditional components to finished fixtures. “One of the issues with this tariff situation is the uncertainty behind it,” says McCarron. “It’s not something you can plan for.”
From the distributor’s perspective, Wes Smith, president at Mayer in Birmingham, Ala., says the tariffs are just one more obstacle on a list of issues that companies deal with on a regular basis. “Fundamentally, I don’t think the tariffs pose a greater challenge than any other thing we face,” says Smith, who adds that while customers aren’t happy with the added costs that these political decisions impose, they don’t really drive those customers away. “Folks are going to complain about anything that’s price-related, but does it change their [buying] behaviors? Not as far as I can tell.”
Sticking With What Works
Regardless of the current or projected market conditions, there are some basic blocking and tackling moves that electrical distributors should be using to sustain and grow their businesses.
Smith says the smartest ones are doing more to become trusted advisors and solution providers, versus just product sellers.
Smith also sees technological advancement as a great opportunity for electrical distributors, but admits that leveraging it requires some cultural shifts. “Technology requires a much faster pace of learning than what electrical distributors have been historically comfortable with,” says Smith. “The problem is that if you’re not learning something new today, you’re less relevant than you were yesterday.”
At Schaedler Yesco in Harrisburg, Greg Schaedler, vice president, says he hasn’t seen much pushback from customers on tariffs, and credits the brisk business environment with shielding some of the fallout from any price increases. “As the tide is rising, everyone is pretty busy,” he says. “When the economy is relatively good the price increases are a little easier to accept and digest.”
Right now, Schaedler says his distributorship is focused on continued growth and diversification. “We’re really trying to claim more market share,” he says, “and also invest back in our business.”
For Schaedler Yesco, that means investing in people, inventory, and infrastructure—all of which position the business to be able to take care of its customers. “Looking back to the 2008-2009 recession, we made a very intentional decision to invest more in inventory,” Schaedler says. “As a result, we were positioned very well when the recession ended.”
Tagged with best practices, economy, tariffs