Sales boom continues at double-digit rates

By By Tom Stundza -- Purchasing, 11/2/2000

Led by sales to the booming telecommunications and computer networking industries, the North American industrial electrical and electronic equipment marketplace continues to sizzle at double-digit growth rates. In fact, Federal Reserve Board Governor Laurence Meyer recently told the House Banking Committee that "a surprising trend" has been the sustained monthly gains in factory orders for electronic and electrical equipment. Independent Industrial Economist Wes Basel says that "domestic demand for industrial electrical equipment remains solid, while export volume is accelerating."

A midsummer decline in shipments of electronic and electrical equipment was concentrated in communications equipment. That's because tight supplies are constraining supplies of the preferred electronic components and final-good manufacturers are scrambling to switch to alternatives.

Still, U.S. producers are manufacturing equipment at a 95% capacity utilization rate so far this year. Shipments of industrial electrical and electronic equipment are expected to rise to $1.54 trillion this year in the U.S. and Canada, and to grow another 18% next year to $1.82 trillion. And, even if the rate of regional economic growth lags in coming months, bullish forecasters still see sales exceeding $2 trillion in 2002. These figures compare with $1 trillion in shipments at the start of the last decade.

Economist Basel suggests that "the slowdown in U.S. housing and transportation demand will eventually slow the industrial electronic and electrical equipment expansion." But, for now, "domestic demand for high-technology equipment continues to rule the roost," says business analyst Tom Runiewicz at the wefa Group in Eddystone, Pa. "The need to expand the flow of information, improve communications systems, and achieve productivity gains have brought electrical equipment to the forefront of business investment."

Runiewicz contends that "purchasing growth will slow in coming years from recent booming rates, but technology will continue to capture the lion's share of the investment dollar." In fact, looking ahead to 2005, the consensus forecast shows regional electrical equipment shipments in excess of $2.5 trillion.

Prices aren't a problem

Interestingly, these record-setting sales totals come even though prices for electrical equipment have continued to slip this year off the cyclical peak recorded in 1995-1996. Earlier this year, Norbert Ore, business conditions survey chairman of the National Association of Purchasing Management, was worried about "fairly intense across-the-board pressure on prices for the raw materials used by the electrical equipment industry." However, he now notes that "there is no concrete evidence that prices are being passed through to intermediate and final-stage goods." Industry insiders note that intense competition for market share in North America and a resurgence in export sales has insulated the finished equipment-as well as such raw materials as metals, wire and cable, and switches and sensors-from supply-side price pressures.

Much of the equipment-buying boom is tied to what economists call "the connectedness of the manufacturing sector," which refers to the sharing of business and technical data through electronic linkages within and across organizational boundaries, such as between partners, suppliers, customers and subcontractors. "From company perspectives, improved connectedness should result in increased productivity and, ideally, to an environment that fosters innovation," explains economist Rick Egelston at Bank of Montreal. Atop that, new product development cycles for components and models are dropping and new product introduction cycles are increasing. So, there's more turnover of older electrical equipment for new equipment then there was in the past."

During the next two years, industry insiders expect high-technology electrical and electronic equipment will continue to lead the marketplace with domestic demand for more traditional machinery and equipment projected by the market mavens as "a mixed bag." However, domestic suppliers of all types of equipment will benefit from growing offshore demand. "Exports of both high technology and the more traditional types of machinery and equipment will gather momentum as key foreign economies continue to gain ground," says Runiewicz.

Computers and office equipment, communications equipment and electronic components form the high-technology group. The equipment includes analog electronic computing and processing equipment, electronic central processing units, digital computer peripheral equipment, computers, keypunch drives, such control units as magnetic tape drives and digital electronic components, digital electronic computing and processing equipment, disc drives, drum drives, electronic data processing machinery and equipment, such input or output on-line devices as printers, plotters, readers and punched media plus such computer connectors as terminals-keyboards, punch cards, and optical scanning devices, and memory modules and peripheral processing units.

Telecommunications equipment includes telephone, telegraph, microwave-transmitting and numerous related equipment. These products include telephone equipment and parts, telegraph equipment and parts, carrier current equipment, central office and switching equipment, intercommunicating telephone sets, microwave transmitting equipment, multiplex equipment, telephone, station apparatus and subscriber apparatus.

Also included in this group are the machinery that makes alarm and signal systems, antennae, aviation radio communication equipment, closed-circuit television equipment, electronic navigational aids and related devices, electronic process control equipment, intercommunication, land mobile radio communication equipment, marine radio communication equipment, micro-wave transmitting equipment, point-to-point radio communication equipment, public address systems, radar equipment, radio broadcast equipment, sonar equipment, studio equipment for radio or television broadcast, portable television broadcast equipment, and transmitting equipment for radio or television broadcast.

Runiewicz notes that " demand for such equipment, both here and in foreign markets, is being propelled forward by a steady stream of new products, declining prices, and public- and private-sector recognition of the benefits of using state-of-the-art technology."

The more conventional equipment includes electrical industrial apparatus, industrial machinery, power-generating equipment, service industry machinery, electrical transmission and distribution equipment, and such other equipment as electronic process control equipment, specialty turbines, industrial control equipment, general-purpose machinery, motors and generators, switchgear, relay and industrial control apparatus, wiring devices, numerous types of transformers, motor-vehicle electrical and electronic equipment, and electronics component manufacturing and processing equipment.

Electrical transmission and distribution equipment has benefited from the power-generation industry's initiatives toward region-to-region expansion. Atop that, North American demand has been benefiting from increased manufacturing activity and a shortage of skilled labor, the strong recovery in demand for semiconductor-making equipment, and the improving picture for oil and gas exploration and power industry improvements in new generating and transmission capacity.

Wire and cable benefits

All this activity in the manufacture of electrical and electronic equipment has kept producers of parts and components extremely busy. Key example: Steady growth in shipments of wire and cable-both copper-based and fiber optic-to the telecommunications, computer networking and multimedia equipment manufacturing industries. A new market report from the Freedonia Group in Cleveland suggests that while copper cable maintains the leading growth position among electronic signal transmission methods, fiber optics has taken the lead in multimedia signal transmission functions.

Following a growth of 39% in 1999, worldwide installation of fiber optic cable is expected to total 17.5 million kilometers with a projected growth of 40% in 2000, according to KMI Corp. Specifically, U.S. installation of fiber optic cable is expected to total 11 million kilometers. Telephone wire center cable and equipment is expected to reach $1 billion in 2000, according to World Information Technologies. Sales should grow by 11% in 2001 due to the high demand from rbocs and the state of successful customer shipments via network builds and basic line growth standards.

Increased demand stems from growth in fiber development, Internet traffic, bandwidth and network capacity, investment in infrastructure and capacity, local market competition, advances in technology and services, private digital line, copper lines and buildouts, according to World Information Technologies in Northport, N.Y. Fiber's share of U.S. telecommunications outside plant market is 67% this year, up from almost 45% in 1996. The remaining 33% of the market will be copper products, which, by comparison, accounted for 74% of demand as recently as 1991. The purpose of outside plant products is to provide the physical layer for telecommunications and data communication signals traveling between telephone company switches, and from central offices to customer premises.

Still, copper-based insulated wire and cable sales are expected to grow by 5.5% annually through 2002, creating nearly a $20 billion industry in the U.S., according to Freedonia's market analysis. There are currently over 300 manufacturers of insulated wire and cable in the U.S. alone. Overseas shipments of insulated wire and cable will exhibit faster gains than U.S. shipments due to the competitive state of overseas-based home and export markets. As a result, the U.S. should see a marked surplus of insulated wire and cable via foreign trade.