issue: January 2008 APPLIANCE Magazine
North America Forecast
2008: The Industry Shows Its Resilience
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by Diane Ritchey, News Editor
While shipment numbers remain sluggish, the U.S. industry continues to court success by cutting costs and convincing consumers to pay a premium for value-added appliances.
The year 2007 was full of anxiety, with rough times for the U.S. housing industry and talk of a recession at year’s end. In late November 2007, U.S. Federal Reserve chairman Ben Bernanke said that economic growth would “slow considerably in the coming months” and warned of heightened inflation risks. High oil prices meant high prices at the gas pump, and forced many to simply stay home. The slumping dollar made headlines, falling to record lows against several major currencies, including the euro, the British pound, and the Canadian dollar. Americans became increasingly pessimistic about the economy, sending a widely watched barometer of consumer confidence to its lowest level in two years. The Conference Board said in late 2007 that its Consumer Confidence Index dropped to 87.3 in November, marking a four-month slide and down almost 8 points from October.
Real gross domestic product (GDP)—the output of goods and services produced by labor and property in the United States—was relatively steady throughout 2007, increasing at an annual rate of 3.8% in the second quarter and 3.9% in the third quarter, yet it was estimated to be only 2.5% in the fourth quarter. GDP growth for 2008 is estimated to be 2.7%.
Realistically, though, most economists said that the U.S. economy overall escaped 2007 with just bumps and bruises, and showed signs of being resilient through 2008, with major rebounds occurring in 2010 and beyond.
In 2008, the U.S. Federal Reserve expects unemployment to rise to between 4.8 and
4.9%—still low by historical standards. Overall inflation should ebb this year to 2.1% and should moderate further in 2009 and 2010. The U.S. government said it expects consumer prices to increase by 2.1% in 2008, down from a previous forecast of a 2.5% increase. That’s encouraging news, as oil prices marched past $92 a barrel. “While the difficulties in housing and credit markets and the effects of high energy prices will extract a penalty from growth, the U.S. economy has many strengths, and I expect the expansion to continue,” said treasury secretary Henry Paulson, in late November 2007.
The United States’ neighbors to the north and south weathered 2007 relatively well, and also have cautious hopes for 2008. The Canadian economy was expected to slow slightly in 2007, at 2.6%, just less than the growth of 2.7% in 2006. Growth in 2008 is expected to be at 2.5%, and core inflation should slow from 2.3% in 2007 to 2%. Mexico’s GDP was 3.7% during the third quarter of 2007, the fastest pace last year, thanks to high outputs in automobile manufacturing and construction.
According to the International Monetary Fund’s World Economic Outlook, Mexico’s economic growth this year will be 3%. Mexico’s sales to the United States as a percentage of total exports peaked at about 90% in 2001 and have since fallen to about 80%, according to the statistics ministry.
Most of the economic predictions for North America for this year, however, seem to depend on the state of the U.S. housing industry. For most of 2007 there was little good news to report, as housing prices slid, builder confidence was down, and there was talk that negative media attention only added fuel to the fire. The Case-Shiller home price index showed prices fell 1.7% in the third quarter of 2007 compared with the second quarter, and were down a record 4.5% in all of 2007. It was the largest quarter-to-quarter price decline in the 20 years covered by the index.
Housing Forecast 2008
The housing industry expects a bottom-out and turnaround in 2008. National Association of Home Builder (NAHB) chief economist David Seiders said that despite a market contraction, housing should begin to turn around this year for a number of reasons: the overall economy and job growth should move ahead at a decent pace, core inflation is under control, a credit crunch in mortgage markets is showing signs of easing since the Federal Reserve cut short-term interest rates last September, and the supply-demand equation will be better balanced as builders whittle down excess inventories.
“Home sales should bottom out by the end of the first quarter of 2008, and I have starts up in the third quarter of , assuming the inventory overhang stabilizes,” Seiders said.
NAHB is forecasting 828,000 new single-family home sales for 2007 and 781,000 in 2008, a 5.6% decline. Seiders noted that the peak-to-trough decline in home sales from the boom years of 2003–2005 is more than 40%, and as sales start to move slowly upward, beginning in the second quarter of 2008, they will still only be on par with levels recorded in the late 1990s. Total housing starts are expected to register 1.363 million in 2007 and 1.2 million this year, an 11.9% decline, according to NAHB projections.
Single-family starts, Seiders said, are expected to show a 50% decline from their peak in the first quarter of 2006 to a trough in this year’s second quarter.
“By the end of 2009, we may be at a pace of 1.5 million units of new housing production (including manufactured homes). Once we are out of the woods, we should see good growth in front of us—maybe 2 million per year,” Seiders said.
Stable Majors In 2008
For most of 2007, major appliance shipments were down. The Association of Home Appliance Manufacturers (AHAM) said total 2007 projected shipments of “AHAM 6” major appliances (washers, dryers, dishwashers, refrigerators, freezers, and ranges and ovens) would be down 1.52%. Shipments in AHAM’s “all major appliances” grouping was projected to be down 3.89% in 2007.
AHAM projects shipments overall to be flat in 2008, with increases or declines of about 1% or less in refrigerator/freezers, laundry appliances, and cooking.
In late 2007, Whirlpool Corp., the world’s largest appliance maker, reported that third-quarter sales in North America fell 8%, with the housing slump hurting demand for refrigerators and dishwashers. It forecasts its full-year 2007 U.S. unit shipments to decline approximately 4%. “The combination of record material and oil-related cost increases and weaker than expected appliance demand in the U.S. have negatively impacted our North American business,” said Jeff Fettig, chairman and CEO.
Making More from Less
Yet Fettig noted that the company was successful in 2007 with cost-cutting initiatives, and it absorbed higher raw-material costs by raising prices and paring expenses. In addition, the company said the Maytag acquisition would boost performance within North America during the fourth quarter of 2007. In fact, the company expects 2007 savings of more than $400 million from the acquisition.
Michael Jemal, president of Haier America, predicts overall 2007 shipments to be down or flat, due to the housing market and other factors. Nevertheless, he said that Haier will not be affected much because many of the company’s products are “necessities that must be replaced regularly.” In addition, he noted, “In the past, we have been in the low-to-middle market in terms of price, and consumers will still buy those products. We will continue to produce products for those markets and the high-end market, so we expect positive growth in 2008.”
“We’ll be in a great position,” he added. “We are smaller than most of the companies in the industry, and that helps us. We’re not so dependent upon the high end, although we will make more high-end products. We have kept ourselves in a strong and solid position and when the time comes to add a higher end to our business, we’ll be well positioned to do so.”
For high-end appliance manufacturer Dacor, some of the biggest challenges with manufacturing and marketing appliances in 2008 will include cost increases. “With the rising cost of fuel, freight, and raw materials, everyone is tightening their belts a bit because of the additional strain on marketing and manufacturing budgets,” said Bob Lewis, assistant vice president of product development. “In 2008, we’ll have to spend marketing dollars more wisely, utilizing more intrusive tactics to reach our consumers and increase brand preference so we stand out among our competitors, especially as the housing market continues to suffer. We also want to drive consumers to the Web, which has become an integral step in the purchase cycle.”
George Simadiris, vice president of engineering for Dacor, said that the company will continue to look at different ways to operate Dacor appliances in the interest of making the owner’s experience a more enjoyable one. “We are introducing a series of new wall ovens in early 2008 with modified controllers that offer much better temperature control and a patented back element underneath glass,” Simadiris said. “Unlike porcelain, the glass doesn’t chip at high temperatures and the heating element is more efficient at warming the oven cell. Additionally, we are working to make devices smarter so they are easier to service. The ability to download the appropriate data from the appliance, so servicemen can pinpoint exactly what may be causing an operational error, will reduce repair times. If the service team knows what the problem is ahead of time, it can reduce repair delays across the board—making the consumers happier.”
Atul Vir, president and CEO of Equator Appliances, predicted that 2008 may be just as tough as 2007. “This may only be the beginning,” Vir said. “The housing industry has to come back for the appliance industry to get better. I don’t see that happening until 2009.” Yet he noted that Equator will be in a solid position in 2008, because the company’s smaller, undercounter products are mainly for condos and apartments. “Everyone has to live somewhere,” he said. “Many people cannot afford right now to live in a new home or invest in a second or third home, but they can live in an apartment or a condo, and our products serve that market well.”
Consumer Electronics Grow
Consumer electronics continued to be a bright spot in the North American industry in 2007, with a bright outlook for 2008 as well. The Consumer Electronics Association (CEA) forecast total factory-to-dealer sales of consumer electronics to surpass $160 billion in 2007 and $170 billion in 2008.
“Just when we think we’ve reached the limits of our expansion, our industry continues to reach greater heights,” said CEA president and CEO Gary Shapiro. “We are changing the lives of consumers every day by creating the products and innovations they love. Our latest industry projections demonstrate that consumers simply cannot live without their consumer electronics.”
The most popular gifts in 2008 and beyond, CEA said, will be MP3 players, notebook/laptops, video game systems, digital cameras, and any type of television. Accessories emerged as a powerful booster to overall CE sales in 2007, and CEA predicts accessories sales will reach almost $9 billion in 2008.
The single-largest contributor in terms of dollar sales continues to be display technologies. Forecasted to reach shipment totals of $26 billion for 2007, the display category—including the category’s anchor, flat screen digital televisions—continues to grow as consumers embrace digital technologies. More than 30 million digital televisions were projected to ship in 2007 and 32 million in 2008.
The portable communications market grew substantially in 2007 and will continue in 2008. CEA is projecting that more than $20 billion will be spent on portable devices, in part due to consumer demand for anytime, anywhere devices that enable entertainment content and business applications on the go. Smartphones, including the Apple iPhone, CEA said, typify consumer demand for converged wireless capabilities including e-mail, Internet browsing, instant messaging, and audio/video entertainment.
Quiet and Confident Housewares
The floor care industry had a relatively quiet 2007, but most companies expect solid growth in 2008 and beyond, achieving growth through new product introductions. Bissell Homecare, for example, launched its Pet Hair Eraser vacuum, specifically for pet owners.
Techtronic Industries (TTI) acquired the Hoover floor care business from Whirlpool after it was sold from Maytag, and it spent much of 2007 integrating the Hoover business. Yet, it noted that its floor care business grew during the first half, as Dirt Devil handheld Kone and upright Reaction vacuums continued to perform well at major retailers. TTI plans to launch new stick and handheld products, including a new WindTunnel upright vacuum, in 2008.
Gordon Thom, U.S. president for floor care appliance maker Dyson, said that he thinks the 2008 market will be strong for products that deliver on their promises to consumers. “We expect to see our sales continue to increase throughout 2008 and beyond,” he said. “Our future plans are always based on bringing better products and advanced technology to market. Get the product right and then let the consumer decide.”
Average company sales grew more than 12% for International Housewares Association (IHA) member companies, according to the trade association. Yet the growth was one of the lowest reported in the last seven years. Cook and bakeware, kitchen electric, kitchen tools and accessories, and tabletop showed the highest category gains, and combine for more than half of the sales reported by IHA member companies.
For 2008 and beyond, consolidation will continue to contract the base of retailer customers for the housewares industry. For example, 43 companies on the 1995 Top 100 list from Homeworld Business are not on the 2006 list—gone due to mergers, acquisitions, bankruptcy, and store closings. That trend, said the association’s State of the Industry report, will unfortunately continue.
One trend that will pick up speed in 2008 and beyond is “green” housewares—products that are less harmful to the environment than their traditional counterparts. As ecological and social issues become more important than ever before, a new role is opened for product design, manufacturing, marketing, and retail in housewares. Designers and manufacturers, even retailers such as Wal-Mart, will increasingly seek ways to make products perform well while not cluttering the environment for future generations, and they use sustainability reporting to measure their efforts.
Growth in Comfort
As in major appliances, the problems with the U.S. housing industry took a toll on HVAC products in 2007. Yet, for 2008, if housing improves, so will the outlook for HVAC.
Several major OEMs are moving manufacturing operations out of the United States to reduce costs in 2007 and beyond. Lennox International closed refrigeration operations in Danville, IL, U.S., and consolidated its Danville manufacturing, support, and warehouse functions in its Tifton and Stone Mountain, GA, operations. Todd Bluedorn, CEO, said, “Because of increasing pressures we face in our refrigeration markets from both domestic and foreign competition, the consolidation of our refrigeration operations is necessary for us to remain competitive.” Lennox also moved some air-conditioning and heat pump manufacturing from Grenada, MS, U.S. to Saltillo, Mexico.
With 26 years of experience in general management and sales and marketing, Robert (“Bob”) McDonough, president of Carrier Residential and Light Commercial Systems (RLCS), a $4.5 billion business in North America, has seen more than a few changes in the HVACR industry, including how the pace of change, overall pace of business,
“instant” communications via the Internet, and other technologies can have an impact on operations.
“I think the speed of information and data flow today compress reaction times for everything, including lead times, which are much shorter,” McDonough said. “The horizon of visibility into the business is also shorter. However, customer expectations for speed and accuracy of response are understandably higher. As a result, we are vigilant about getting the right product to the right customer at the right time—and that means driving excellence in every transaction, no matter how big or small.
“I have many goals for Carrier RLCS,” he continued. “Our focus is on our customers and partnering with them to help them grow their businesses. Market conditions being what they are, I encourage my team to continue looking for ways to execute better than others, including improving our transaction speed and accuracy, tailoring our products and services portfolio to the realities of our market, and sharpening the clarity of our family of brands.
“Additionally, Carrier is particularly well positioned to take advantage of increasing rate of repair versus replacement with our company-operated sales and distribution footprint of 200-plus locations in North America—and our great family of independent distributors that can take advantage of our Totaline offering of parts and supplies,” he said.
To facilitate growth in 2008 and beyond, the heating and cooling division of Rheem Manufacturing Co. purchased a 37-acre commercial development site in Nuevo La-
redo, in the state of Tamaulipas, Mexico. The Rheem Heating & Cooling and Water Heating Divisions currently have manufacturing operations in Nuevo Laredo. The company also continued its rapid product introduction pace, with more than 100 new heating and cooling products in a 30-month period.
One way that some HVAC companies will generate growth this year and beyond is through partnerships with “green” builders and the technologies that accompany them. Trane is working with the building industry on green building design and construction projects, including project financing and building management. “The average household will spend almost $2100 on home energy costs in 2007, with heating and cooling costs accounting for about one-half of the typical residential energy bill,” said Dave Pannier, president of Trane’s residential systems business. “When installing an energy-efficient HVAC system, consumers can do something responsible to the environment and good for the pocketbook.”
In 2008, the industry will continue to examine and work with boiler and furnaces standards, in particular a new Department of Energy rule that amends the current federal efficiency standards for residential furnaces and boilers. That work continues to be spearheaded by the Air-Conditioning and Refrigeration Institute (ARI) and Gas Appliance Manufacturers Association (GAMA), which plans to merge in 2008 into a new association named The Air-Conditioning, Heating, and Refrigeration Institute (AHRI).
The Great Outdoors
For the first time in five years, U.S. shipments of walk-behind mower shipments will fall below 6 million units, according to the Outdoor Power Equipment Institute (OPEI), and will decrease 5.7% in model year (MY) 2007 (September 2006–August 2007). The decrease is estimated to be larger than OPEI’s July 2007 forecast of a decrease of 4.1%. The estimated decrease in front-engine lawn tractors (12.9%) and riding garden tractors (44.9%) is also projected to be deeper than earlier forecasts (decrease of 7.5% and 12.9%, respectively).
Total rider shipments in MY 2007 will fall 11.6% to 1,538,667 units, OPEI said. In most cases, an increase in shipments will not occur until the end of MY 2008 (August 2008) or beginning of MY 2009 (September 2008).
The negative trend that started in MY 2005 for intermediate commercial turf walker shipments will continue through MY 2007 with a forecast decrease of 9.6% in shipments. Minimal growth of 1.8% is forecast for MY 2008 for the intermediate commercial walker. During MY 2007, shipments for commercial riders are predicted to fall well below 200,000 units. OPEI said that commercial riding mower shipments will contract 1.9% to 176,793 units for MY 2008.
While everyone—from appliance makers to economists—are cautiously optimistic about 2008, there’s a great deal of uncertainty. When will housing come back? When will consumers start spending again? How likely is a recession?
As is always the case, economic predictions are just that—educated guesses. Only time will tell if the U.S. economy can really get its footing in 2008.