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.

09/10/2003


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.

Price/cost/demand roundup

Average Product Prices1Change, %, During 12-Mo Ending...

Direct Mfg. Costs2and Margins Grade

Growth in U.S. End Markets3Change, %, During 12-Mo Ending...

NC means data could not be computed.
1 Average product price changes are calculated from the producer price index for each 4-digit SIC (standard industrial classification) industry from the U.S. Bureau of Labor Statistics.
2 Analyses of each industry's direct manufacturing cost changes are from Thinking Cap Solutions, Inc.'s proprietary Industry Cost Escalation (ICE) model. The "grade" indicates that recent price/cost changes have produced record high (A+) margins to average margins (C) to record low (F-) margins for the average producer in an industry. Grades of A to A+ mean plant engineers may be able to strike a better bargain with suppliers and better control plant costs.
3 Growth in U.S. end markets data are from the ICE model and are estimates of output for the domestic end markets which purchase a given industry's products.
All data prepared and presented by Thinking Cap Solutions, Inc., Port Angeles, WA (telephone: 360-452-6159; e-mail: ebaatz@ice-alert.com).

Industry

SIC

Mar 03

June 03

Costs are...

Grade

Mar 03

June 03

Other Hand and Edge Tools

3423

-0.04

-0.74

stable

D

0.67

0.43

Hand Saws and Saw Blades

3425

1.69

2.04

stable

C

0.03

0.28

Other Hardware

3429

0.47

0.27

stable

C

0.21

0.18

Other Power Transmission Equipment

3568

1.47

1.12

stable

F

-0.20

-0.32

Conveyors and Conveying Equipment

3535

0.05

0.03

stable

C

-2.48

-1.74

Hoists, Cranes and Monorails

3536

0.83

1.13

stable

A

-4.75

-3.60

Industrial Trucks and Tractors

3537

0.01

0.55

stable

F

-0.32

-0.63

Metal-Cutting Machine Tools

3541

-3.34

-1.61

stable

C

-1.62

-0.83

Machine Tool Accessories

3545

0.16

0.10

rising

D

3.35

4.25

Power Driven Hand Tools

3546

-0.21

-0.19

stable

F-

-0.58

-0.68

Welding Apparatus

3548

0.77

0.49

stable

C

-1.82

-1.57

Pumps and Pumping Equipment

3561

1.56

1.12

stable

A+

-1.47

-0.60

Air and Gas Compressors

3563

1.48

1.26

stable

B

-1.47

-0.60

Speed Changers, Drives and Gears

3566

1.26

1.55

stable

A

-0.20

-0.32

Transformers

3612

-1.43

-0.87

rising

F-

-1.22

-0.89

Motors and Generators

3621

0.23

0.32

stable

F-

-0.09

1.14

Process Control Instruments

3823

1.47

1.84

stable

A

0.15

0.55

Fluid Meters and Counting Devices

3824

1.49

1.86

stable

A

0.15

0.55

Instruments to Measure Electricity

3825

0.51

0.57

stable

A

6.76

8.10





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