Sneak Preview of EW ElectroForecast

Jan. 10, 2003
Even though many electrical manufacturers, distributors, reps and contractors see a gloomy short term, bright spots are starting to appear on the horizon.

Even though many electrical manufacturers, distributors, reps and contractors see a gloomy short term, bright spots are starting to appear on the horizon.

“I see 2003 continuing to be a flat year, with some limited growth,” said Hank Bergson, president, National Electrical Manufacturers Representatives Association (NEMRA), Tarrytown, N.Y. “I don't think we're going to get any worse than 2002, but I don't see a lot of recovery. Maybe we'll see some growth toward the end of the year.”

All things considered, many electrical businesses would be happy to have flat or even somewhat weakened markets in 2003. Compared to the shellacking some Wall Street industrial and high-tech sector stocks took during the past two years, flat looks good. The outlook for some large corporations is downright frightening.

It's been said that these are the times that try mens' souls, and at least one electrical distributor is concerned that some electrical companies are not up to the task. “With a weak economy and shrinking margins, some electrical distributors might not be smart in their strategy to weather this storm,” said Jim Warshauer, president, Warshauer Electric Supply Co., Tinton Falls, N.J. “Desperate people can do some stupid things.”

Warshauer Electric cut costs last year by being more selective on lines carried and contractors sold to. “We prefer to work with manufacturers who work with us and who are very easy to do business with,” said Warshauer.

One bright sign of the times: most economists expect that — overall — 2003 will be a better year than the gloomy 2002. McGraw-Hill Construction Group's 2003 construction forecast predicts the U.S. economy will grow about 3 percent in 2003, but expects total construction spending to drop 1 percent from 2002 levels.

Over the past two years, the construction industry has exhibited a split personality, said Robert Murray, chief economist of McGraw-Hill Construction Group, New York.

“On the plus side, single-family housing has been robust, advancing to the point that 2002 saw the highest level of new starts in over two decades,” Murray said. “Public works, supported by elevated contracting for highways and bridges, has maintained the steady growth present at the end of the 1990s. Institutional building, led by the school construction boom, achieved a record high in 2001 and should come close to matching that amount in 2002.”

The hot spots in the Southeast for Hughes Supply Inc., Orlando, Fla., run true with the McGraw-Hill Construction Forecast. Andrew Ott, the company's regional vice president, electrical, is planning for a 2 percent to 3 percent sales increase, with residential and government work, schools, wastewater treatment and roadway lighting being the strongest markets.

However, Ott sees some danger signals ahead. “The general lack of confidence in the economy has certainly impacted new development in general,” Ott said. “High vacancy rates for commercial office space does not bode well for a near-term turnaround for this sector. Tourism, while showing some recent improvement, continues to be soft.”

The nation's largest distributor also expects business to improve in 2003. “While we will not see the huge sales jump we saw in 1999 and 2000, nor the industry-wide slump suffered in 2002, we do expect to see improvements and to have a solid performance in 2003,” said Dennis DeSousa, senior vice president, sales and marketing, Graybar Electric Co., St. Louis. “Based on economic data and forecasts, we anticipate growth in education, health care, government and industrial MRO.”

Malcolm O'Hagan, president of the National Electrical Manufacturers Association (NEMA), Rosslyn, Va., said while he believes the construction industry would derive some benefit from an improving economy in 2003, it will also have to deal with several constraints. “The states and the federal government are now under fiscal stress due to diminished tax revenues arising from the 2001 recession,” he said.

Some electrical firms are discovering new market niches to sustain themselves during the downturn. Savvy companies are turning away from their traditional bread-and-butter business toward more specialized areas during this recession.

With more than 60,000 electrical contracting firms nationwide, some electrical contractors are weathering the tough times more profitably than others. Electrical contractors who have been through economic troughs before are simply shifting manpower from markets that have gone south into new market segments. For instance, firms that specialized in Internet data centers during the boom times are turning to commercial data and power rewiring after the short-lived dot-com boom and bust.

Jeff Levy, president of Emcor Group, Norwalk, Conn., the nation's third largest electrical contractor with 2001 sales of $1.37 billion, said his company has shifted its focus from the commercial sector to the education, health-care, water, waste, and transportation markets.

“We've been able to redeploy the forces,” Levy said. “The contractors who were doing steel mills are now doing power plants, and the ones who were doing office buildings are now doing hospitals. We have the flexibility in our company to move into sectors as they become more active.”

Bob Zamarripa, president/CEO OneSource Distributors, San Diego, Calif., sees municipalities (cities, schools and water districts), aerospace and defense, life science, food and beverage, oil and gas, and industrial electrical contracting as the strongest market segments.

Zamarripa also said an economic slowdown provides opportunity to gain market share. All in all, he is “very bullish” for 2003.

“I am expecting significant growth from our Los Angeles, Orange, and San Diego County regional sales teams. I certainly don't have much optimism from our industrial high-tech manufacturers and OEMs. Additionally, no one is willing to give out turnaround times in these markets.”

On the East Coast, stealing market share has long been the plan at Colonial Electric Supply, King of Prussia, Pa. “In 2002, we actually had 14 percent growth,” said Peter Bellwoar, the company's vice president, sales and marketing. “Of course, the economy isn't growing: We're just taking market share,” he said.

Colonial's business plan and motto is 10/10 — that is, 10 percent growth each year for 10 years. So far the plan has paid off. Last year, Colonial did $90 million worth of business. Bellwoar said commercial construction will be the company's strongest market, followed by residential. He expects the industrial market will again be Colonial's weakest segment.

Stealing market share is also the secret behind W.A.C. Lighting's success. Leonard Schwartz, vice president of sales and marketing for the Garden City, N.Y., manufacturer of custom-designed lighting fixtures, kiddingly told his sales reps last year that the company is not going to participate in the recession. “And every one made their targeted sales figures last year,” he said.

Schwartz expects another good year for W.A.C. Lighting because of increased market share — and a still-thriving niche in the upscale residential projects and remodeling. W.A.C. Lighting finished its 2002 fiscal year in November up 20 percent over last year. For 2003, the company forecasts growth to be 29 percent ahead of 2002.

One rep agrees with the economists who say the booming residential construction will stay above the peak years of the 1990s, and that housing will remain one of the few bright spots in the economy.

“We see residential to continue strong as long as the interest rates stay low,” said Gregory Reynolds, president, Flynn and Reynolds Agency Inc., a manufacturers' representative based in Lowell, Mass. “The low interest rates and the lack of good places to invest money are creating a boom in the residential market for us,” he said.

Even more crucial to the electrical industry and the overall U.S. economy is the health of the industrial market. Although the industrial market is expected to slowly improve this year, it's still recovering from one of its worst years ever.

“Every year we think plant construction can't get worse,” said McGraw-Hill's Murray. “In 2002 it did. Manufacturers are moving production overseas.”

“I think industrial construction is the linchpin of the economy,” said NEMRA president Hank Bergson. “It's the heart and the soul of our business. The industrial sector is the engine that drives an awful lot of what we do.”

Colonial Electric Supply's Peter Bellwoar also finds the outlook troubling for industrial construction. “A staggering amount of manufacturing jobs have left the Philadelphia area, and they're not coming back.”