Instrument prices could decrease

Plant engineers who are stocking up on factory equipment and tools have some good bargaining opportunities and a handful of potential pitfalls. You can see the pitfalls clearly enough by looking at the two industries with an F- margin grade. Manufacturers of motors (SIC 3621) and transformers (SIC 3612) have seen their direct manufacturing costs soar to record highs. For every $100 worth of product made, factories that make motors spent $66.07 on direct materials and labor costs, while plants that produce transformers saw commensurate costs at $64.18. In order to restore current inflation-adjusted margins to five-year average levels, prices for the average motor and transformer products would have to rise 3% and 5.4%, respectively. That leaves little room for plant managers to hold down those costs.

Luckily, if your factory tools budget calls for procuring instruments, then you are in much better shape. The three industries that we track — process control instruments, fluid meters and counting devices, and instruments to measure electricity — can stand to drop average prices by between 0.7% (for the last of the three) and 2.3% (for the first). Those price declines would simply return margins back to levels held on average over the last five years.

The key to capturing those price cuts lies in understanding the supplier's materials budget and to a lesser extent their labor costs. The cost of materials remains mostly on a downward path thanks to dropping prices for semiconductor and other electronic components. On the labor front, the trend hasn't been so hopeful. Surprisingly given the state of U.S. manufacturing, average wages in the process control instruments industry, for example, increased nearly 3% in the latter half of 2002. No other budget category had such a large negative impact on margins than labor costs.