For a great many springmakers, 2006 is turning out to be a fairly robust year. Can we expect more of the same in the coming 12 months? Maybe so. Of course problems and variables always lurk around the corner, and 2007 is no exception. Many springmakers are keeping a wary eye on such matters as the decline of domestic automaking, competition from China, unpredictable changes in the price of steel and even the normal rhythm of the business cycle.
As for 2006, here are some typical reports:
• At Diamond Wire Spring, with four locations around the country, president Donald Fazio reports: “Sales are up 10 percent so far in 2006, and profits are satisfactory.”
• Suhm Spring Works, which sells many of its products to the booming oil-field equipment industry, is experiencing rapid growth. “Our revenues have increased about 20 percent, after increasing around 15 percent in 2005, and profits have kept pace,” says company president Russell Morgan.
• Jackson Spring & Manufacturing, where half the revenues derive from the automotive industry, reports a 15 to 20 percent increase in both sales and profit for 2006. “However, those figures represent a rebound from a rough 2005,” notes owner Robert Kupczak. “The market is still not what it was, at least for us.”
• For MW Industries, 2006 has extended the favorable results of the previous year. “We just finished our fiscal year about eight percent ahead on sales and about 27 percent on profitability,” reports president Dan Sebastian.
Steady growth
The springmaking experience in 2006 is partly accounted for by the robust economic climate. The gross domestic product (GDP) for 2006 is expected to come in around 3.6 percent, a level virtually equivalent to that of 2005, according to Sophia Koropeckyj at Moody’s Economy.com, a research firm based in the Philadelphia suburb of West Chester, PA.
"Damage from the decline of the domestic auto industry may extend beyond its direct suppliers."
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The first quarter of 2006 saw a stronger-than-expected economy, according to Koropeckyj, but activity quickly waned in the second quarter, as pressure from rising energy prices dampened consumer spending. That trend has pretty much continued. “In 2007, we expect the GDP to slow to a 3.0 percent level. That is pretty much the level of growth that the economy normally experiences over the long-term. So the expansion of the past few years is maturing somewhat and moderating from its recent elevated activity.”
Business confidence, an important driver for growth, remains strong. However, Economy.com expects a softening in capital investment, declining from its recent eight-percent annualized rate to seven percent in 2006 and four percent in 2007. “Many manufacturers are feeling strong pressures from higher costs of energy and other inputs,” explains Koropeckyj. “It’s true, though, that they are also able to pass through those costs better than they have been, thanks to strength of market demand.”
Productivity growth also remains quite strong, according to Koropeckyj. Fears that a tightening labor market would lead to higher wages have not come to pass, due to the greater incidence of outsourcing and efficiency improvements. Koropeckyj expects a four-percent productivity boost in 2006 and five percent in 2007.
Trouble spots
Springmakers expect a fairly decent 2007. The devil, as always, is in the details. Some areas to watch in the coming 12 months:
• Autos. Springmakers serving the automotive industry face the problem of adjusting to a softened market. Kupczak attributes this year’s sales rebound to a willingness to revamp every corner of the company, expand into new areas and take on more specialty work. “We took a different attitude toward our business,” he reports. “We took a hard look at what we were doing and why we were doing it. We decided exactly where we wanted to raise prices in an environment that is not very friendly toward that type of thing. We made a decision that we were prepared to walk from some business if we couldn’t get the pricing that we needed.”
Too, damage from the decline of the domestic auto industry may extend beyond its direct suppliers. “With all of those GM and Ford plants shutting down over the next couple of years, who knows what the effect will be on the general economy?” poses Fazio. “So many people feed off the automotive companies that there could be an indirect effect even on springmakers who are not suppliers to the automotive industry.”
• China. “The biggest threat to us is that our customers have the wherewithal to set up plants in China and make products there, and then buy their springs locally,” says Fazio.
• Currency valuations. The dollar stabilized in 2005 but has weakened this year. Koropeckyj expects the dollar to continue to weaken against the Japanese yen and the Chinese yuan in 2007 but remain stable against the Euro and the Canadian dollar.
“We are seeing continued pressure from currency valuations, particularly from Asia and China,” says Sebastian. “Although China has re-
evaluated its currency, more is needed. If it were truly valued, Chinese products would be 20 percent to 30 percent higher.”
• Energy costs. Economists were surprised by the recent spike in fuel costs, which they had expected to moderate through 2006 because of a balance in the fundamental levers of supply and demand. “Fuel costs did come down early in 2006, and that helped the economy,” says Koropeckyj. “Then prices surged and now are at a record high. The reason for this is the risk premium1 and speculative buying resulting from the unrest in the Mideast.” Koropeckyj does not expect prices to decline in the near-term. “We still expect prices to moderate in 2007, based upon the fundamentals.2”
• Raw materials. Despite a recent spike in steel prices due to accelerated global demand, Koropeckyj expects them to stay fairly flat through the end of 2006 and decline a bit next year. The Producer Price Index for steel mill products, which rose nine percent in 2005, is expected to rise only two percent in 2006 and 2007. One reason is a moderation of demand; another is the fact that China has become a net exporter of steel, helping to curb price gains.
Self-improvement
Like Jackson Spring, other springmakers are taking steps to enhance profitability. Suhm Spring is reaping the benefits today from its low-cost production center in Mexico, established four years ago. And computerization has helped the company in its drive to reduce or eliminate mistakes and losses by valuing each job on its own, in terms of materials and labor costs. “Computerized tracking has helped us improve our operation by allowing us to see our mistakes a lot easier, catching things that happen over and over, and that affect the bottom line,” notes Morgan. One reason for Suhm Spring’s continuing success is its “job shop” emphasis on small-
quantity, high-value specialty spring products rather than large 20,000- or 100,000-piece jobs. “Some companies doing high-quantity jobs are running into a lot of price pressure from China, where it is much cheaper to do that kind of work,” says Morgan.
Sebastian points to a couple of driving forces for MW’s profitability figure, which is about four points better than what was anticipated. “First, our core markets have been relatively strong; second, our company has focused on cost reduction programs which have been very successful. We have teams assigned to analyze individual areas, such as labor, energy and everything else going into operating costs.”
Springmakers, then, are positioning their operations for continuing success by attending to detail and launching mechanisms to reduce the impact of economic stresses. Much of this should soften the impact of the eventual downturn in the business cycle. “We are in a good period, but it won’t last forever,” acknowledges Morgan. “There will be a downturn; we just don’t know when. Hopefully it won’t be that great.”
Notes
1. In finance, a “risk premium” is the monetary difference between the guaranteed return and the possible return on an investment. Concerning oil, increased prices are the result of fears that terror attacks could severely crimp the world’s oil pipeline — what traders call the “terror risk premium.”
2. In the case of energy costs, “fundamentals” refers to supply and demand by business and consumers. Factors that aren’t fundamentals include things like political activity or discovery of a pipeline that’s become so rusty, it must be shut down. v
