Prices stall as demand slows

By Elena Epatko Murphy -- Purchasing, 3/8/2001

Prices for gears will be flat this year as automotive demand has slowed. Original equipment manufacturer (OEM) and aftermarket orders will remain stable and supply will be readily available. To compete in a lackluster market, suppliers will renew their focus on services and design changes.

Conventional gear usage will increase about 4% this year, says John Morehead, vice president, marketing, Bodine Electric, Chicago, Ill. He expects the building of industrial machinery, which indirectly serves a number of industries including semiconductors and automotive, will grow at a moderate pace through the year.

Automotive, which makes up the lion's share of orders, has slowed, stalling orders for gears. Analysts at The Freedonia Group, Cleveland, Ohio, say U.S. demand for gears will increase 4% annually through 2004, approaching $30 billion. The gradual growth reflects a drop in production of heavy and light trucks. In addition, the market research firm expects the increased use of continuously variable transmissions (CVTs) will lower demand because CVTs do not require gears. Automatic and manual transmissions now account for half of automotive gear demand.

Freedonia's research estimates automotive sales will represent 70% of total gear sales by 2004. Gear use in transmissions and drivetrains and the increase in accessories that employ gears contribute to the large percentage of product directed to automotive OEMs. The market research firm attributes sluggish automotive demand to competitive pricing and less demand for light and heavy trucks.

There won't be much more demand in aftermarket orders, either, according to Freedonia. Gear designs are lasting longer, reducing the need for replacement product.

Fourth-quarter earnings among gear producers gave buyers a preview of this year's softer demand level. The Cleveland, Ohio-based TRW, one of the two largest non-automotive gear producers, reported expected fourth-quarter earnings below expectations. The company says that recalls, lower automotive production, and "the strength of the U.S. dollar" account for the lower earnings, but the company does not expect that trend to continue. Dana Corp., based in Toledo, Ohio, is the other largest non-automotive producer of gears, accounting for 5% of the market when combined with TRW's market share.

While demand overall has stalled, gear assemblies are one segment that is growing. These combinations of a motor and speed reducer are expected to exceed shipments of individual gears through 2004, say analysts at Freedonia. At present, individual gears account for more than 60% of total shipment value. However, growth potential for individual gears is limited by competition from imports and the slower automotive sector.

Though automotive demand is sagging, suppliers are investing in production capability to serve OEMs. Morehead says there is more opportunity in general OEM demand, predicting 20% expansion based on his company's equipment investment.

Based on weaker automotive demand and a number of other factors, gear prices will soften. As a result, suppliers will lower costs to remain competitive.

Bodine's Morehead says prices won't increase in 2001. He points out demand for industrial machinery is weak, though used in a number of OEM markets.

In addition, Freedonia's analysts see Internet sourcing as contributing to lower prices because of the opportunity to compare products.

Buyers will continue to track gear cost structure. Steel and steel alloys continue to be dominant materials for gears, but will grow the least through 2004 because of technological advances in other materials and market saturation, reports Freedonia. For instance, producers are increasingly using plastics for gears.

Due to softer demand, buyers will not experience delays when ordering gears this year. Capacity utilization is moderate and there are some expansions expected. Leadtimes are short and are not expected to extend in coming months.

Capacity is at about 70% for standard production, says Bodine's Morehead, though some specialized designs are driving capacity utilization higher. He notes that investment in new equipment is improving the efficiency of operations. Bodine recently announced it will open a new manufacturing unit. Distributor Motion Industries, a significant presence in power transmission products, also announced the opening of new facilities in Brownwood, Texas, and Battle Creek, Mich.

Leadtimes are stable and will hold at present levels through the year. Purchasing's recent leadtime survey shows nearly a third of buyers obtain gears in less than a week. Half of survey respondents receive deliveries in one to five weeks. The average leadtime is just over five weeks, almost a week longer compared to a year ago.

Given the stable market conditions for gears, buyers won't build inventories much this year; supply will be adequate. In addition, certain gear suppliers and distributors continue to develop relationships with customers to automatically replenish supply, allowing gear suppliers to plan production accordingly.

Supply is readily available and prices stable, so gear producers are adding value to design as one strategy to secure market share. Design changes improve product appeal to consumer markets and lengthen product life, says an industry source. Other value-added approaches include improving the production methods or the gear's interaction with other products.