Is a wave of price cuts coming?

Producers of factory equipment and tools are doing a mixed job of navigating troubled economic waters. Three industries (lift trucks, transformers, and motors) received a failing F margin grade in March 2003. Seven industries earned troubling D grades. Increasing costs as prices stall have been the cause of these margin troubles.

The only way out for many suppliers will be to hike prices. The fact that end markets are starting to show some pep may make higher tags easier to enforce in the latter half of 2003.

For plant engineers hoping to avoid wholesale price increases, we have some suggestions. Eight of 19 industries in PLANT ENGINEERING magazine's marketbasket of factory equipment industries seem to enjoy margin positions that would encourage future price cuts. Most of the industries in this position are essentially living off margin surpluses created prior to March 2002. For buyers, that means constructing a cost-based argument for lower prices may be more challenging.

The best negotiation opportunities lie in the instruments market (SIC 38). Here, 11 of 17 industries can afford to lower prices by amounts ranging between 0.8% and 5.6%. For example, makers of process control instruments (SIC 3823) have kept price increases in line with cost changes. Pre-2002 inflation victories, however, mean margins remain above normal. As a result, SIC 3823 can safely cut average prices by 1.65%.

Looking at other sectors, we see that the first quarter was very good to makers of speed changers, drives, and gears (SIC 3566). Here, industry prices advanced 1.8% while costs rose at about half that pace. These expanded margins have created a discounting ability of 1.6%.