Industry outlook: Bouncing off the bottom
April 01, 2010 - MMH Editorial
Across the industry, across the country and across the globe, it was unanimous: Every segment of the materials handling industry took a hit in 2009. Experts predicted a contraction last year, but underestimated the breadth of the economic decline.
That was then, and this is now. Once again, industry experts are in agreement: The worst is behind us and the signs are pointing to a better 2010 and beyond.
“We can clearly say, that we have seen the turn from the materials handling industry being in free fall to it starting to feel as if there is a floor under us again,” says John Nofsinger, CEO of the Material Handling Industry of America (MHIA, 704-676-1190, http://www.mhia.org)), the trade organization that represents the industry. “We started to see hints of a recovery in the second quarter of 2009, and we're now seeing renewed optimism.”
MHIA's optimism is backed up by recent economic data. The Gross Domestic Product increased by 2.7% in the three quarters through winter 2010 and will keep growing at about a 2.5% to 3.0% annual pace through 2011, according to Jim Haughey, chief economist with Reed Business Information's Construction Data Group. Much of that growth is being driven by a surge in equipment exports and an expansion of manufacturing production, which increased by nearly 6% in the six months through January 2010 and will increase 9% more by the end of 2011.
Still, while the industry is gently bouncing off the bottom, this is a subpar recovery after a deep recession, Haughey cautions.
Modern's Survey says…
's Readers share Haughey's cautious optimism, according to our recent 2010 State of the Industry study conducted for Modern Materials Handling by the research department of parent company Reed Business Information. The annual survey, which was e-mailed to Modern readers in February and yielded 353 respondents, tracks market changes during the last year and aims to understand the current state, trends and practices in manufacturing, warehousing and distribution.
Last year was a mixed bag, according to our respondents. Spend levels on materials handling solutions for 67% of the responding companies remained steady. The remaining were evenly split: 16% say spending on materials handling equipment increased, while 17% say spending fell.
The industry outlook for 2010 and beyond is encouraging. Nine out of 10 companies say that spending on materials handling will either increase or remain the same during the next year. Only 8% say spending will drop.
Still, that optimism is tempered. While nearly 31% of respondents say they are moving forward with intended plans, 48% say they are taking a wait-and-see approach.
The Material Handling Equipment Manufacturing (MHEM) forecast, conducted by MHIA, provides a solid foundation for predicting the market outlook. What do those numbers say?
Last year, MHEM numbers led MHIA to predict a relatively modest contraction for the industry of 18% to 20%. The actual decline was closer to 37%.
For 2010, MHEM numbers are predicting a relatively positive forecast, with growth in orders in the 6% to 8.5% range. “Material handling suppliers are starting with a smaller order book going into 2010, but order books will be up by the end of the year,” Nofsinger says.
Although shipments of materials handling products contracted by 34% in 2009, Nofsinger says the contraction is done and shipments are expected to grow 1% to 2% this year. While the global economy has yet to rebound from the economic downturn, exports of materials handling equipment, which dropped from $5.8 billion to $3.7 billion in 2009, are expected to increase in 2010 to about $3.8 billion. Imports of materials handling equipment are forecasted to see a similar slight uptick from $3.7 billion in 2009 to $3.8 billion this year.
Still, shipments and exports have a way to go before they return to pre-recession levels.
“Going into 2010, I anticipate progressive, continued, gradual growth,” says Nofsinger. “But I don't expect to see a return to 2007 levels until 2012 or beyond.”
Automatic identification and data capture
The automatic identification and data capture (AIDC) market also expected a contraction in 2009, according to a report released by Venture Development Corporation (VDC, 508-653-9000, http://www.vdccorp.com)). However, last year the data capture market was considered “a speck of brightness for the next 12 months.”
“Our prediction that the market would contract came true,” says Tom Wimmer, director of auto ID and transaction automation practice at VDC. “Unfortunately, we missed the severity of the contraction.”
So what will get the attention of CIOs in 2010? Wimmer continues to see near-term growth opportunities in emerging geographic and vertical markets, especially in Asia and Latin America where demand for AIDC technology is rapidly increasing. Additionally, Wimmer believes compelling growth opportunities can be found in health care, commercial service, government and segments within retail.
“The rubber meets the road when you start thinking about applications because that's what generates sales,” Wimmer says. “We think there are a lot of promising applications within health care around patient safety. Concern about patient safety has driven interest in asset management within hospitals to ensure patients have what they need when they need it.”
More effectively managing assets and people, and tracking them throughout an enterprise or supply chain has become increasingly important, Wimmer says. This ties back to post-9/11 security interests and these safety and security issues are supported by our survey findings (see table above).
The trend in warehousing operations, according to Wimmer, is toward multi-modal data capture that takes the many AIDC technologies—bar code, RFID and voice—and combines them to provide benefits across the enterprise.
Soft market for software
Supply chain management software, which is comprised of solutions such as supply chain planning and network design (SCP), manufacturing execution (MES), warehouse management (WMS) and transportation management (TMS), was not immune to the downturn either.
Last year, Steve Banker, service director of supply chain management at ARC Advisory Group (781-471-1000, http://www.arcweb.com)) predicted that the market would contract about 5%. Unfortunately, Banker says, things were a lot tougher than expected and the market took a bigger hit. In the WMS market, even the big players were down significantly, he adds.
Although the annual results from its annual WMS study are not yet available, Banker is optimistic about 2010. He says, “I think we'll gradually come out of it in the coming year and spending will start to increase. If the market could grow by 1% the suppliers would be thrilled.”
Lift truck market
The slide in the lift truck market was also steeper than expected. The hope was that 2009 would be a year of adjustment rather than recession. Jeff Rufener, president of the Industrial Truck Association (ITA, 202-296-9880, http://www.indtrk.org)) and vice president of marketing for Mitsubishi Caterpillar Forklift America, tells us that he was surprised by the pace and depth of the downturn.
“Our industry is cyclical,” says Rufener, “and we've had recessions in the past, but I didn't think it would be possible to fluctuate more than 35%. Last year surpassed that figure, and we ended up being down about 40% from where we were in 2008.”
The bright side: History tells us that the lift truck industry always recovers and even comes back to top previous record levels. Still, Rufener is characterizing 2010 as a recovery year. “We bottomed out and will grow modestly by about 7% over 2009,” he says. “Still, single-digit growth is not going to provide a lot of relief for the financial strain that the industry is under.”
One strain is that the tight credit market will likely continue to be an issue in 2010. That could affect how much inventory distributors are willing to carry in light of the pressures they are facing. “Is it a game changer?” Rufener asks. “We have to contemplate that and how it will affect relationships with end users.”
Other events have resulted in profound and lasting changes in the lift truck market, including government regulations regarding fuel and noise emissions, the cost of fossil fuel, and advances in electric truck technology that enable performance to be closer to internal combustion engine trucks.
Internal combustion products are shrinking in the overall market. In 2005, 55% of the materials handling equipment in Classes 1 through 5 were electric; in 2009, electric trucks accounted for 68% of the market. He also reports that ITA members are predicting 2010 will be another big year for electrics, as they strive to meet regulations and keep fuel costs down. “We do think that sales of internal combustion engine trucks will improve as the economy improves,” says Rufener.
What CEMA sees
Another report shedding a positive light comes from the Conveyor Equipment Manufacturers Association (CEMA). CEMA executive vice president Bob Reinfried says the organization's latest report shows that conveyor orders increased 19% over December 2008 and booked orders are up 1% from November 2009. CEMA also reported that December 2009 shipments were up 12% over November 2009, but down 24% from December 2008.
“From what I'm hearing throughout the industry, everyone is optimistic that we've bottomed out,” Reinfried says. “Quotes are picking up and it looks like things are loosening up a bit. As a result, we're expecting new orders to pick up. But it will take a while for shipments to start to increase. It will be a slow recovery and I wouldn't expect much more than a 2% to 3% increase in 2010.”