The table is set for another year of growth in 2000, and it looks like the party won't end anytime soon. Part 1.
Editor's note: Welcome to the first of what will become an annual editorial feature from the Intertec Electrical Group: ElectroForecast. By blending interviews with electrical contractors, engineers, electrical distributors, electrical manufacturers and manufacturers' reps with forecasts from economists tracking the construction industry, we hope to offer you a snapshot of where the electrical construction industry is headed in the year to come. In this year's article, ElectroForecast 2000, you will get an early lead on the hot markets as well as the dogs, as well as insight from electrical professionals on the industry trends that they believe will have the most impact on their own companies, and the electrical construction industry as a whole.
It's tough to find many pessimists in the electrical construction industry who aren't looking forward to another solid business year in 2000. While some markets-like utility construction, airports and factory construction look better than others-the distributors, manufacturers, contractors and economists contacted for this article are upbeat about next year's business prospects for the electrical industry.
According to the McGraw-Hill's Outlook 2000 Forecast, the U.S. construction market is expected to enjoy another year of record growth. While the $429.3 billion in total construction forecast for 2000 is flat compared to 1999's $428.1 billion, McGraw-Hill's economists say the construction market is flattening out at a level never seen before. Even better news for the electrical industry is the fact that these economists as well as other experts in construction economics see construction work rolling along at this level of growth for several more years.
One manufacturer with a national perspective on the electrical construction market sees a healthy market overall, but a few regional pockets of slow growth. "Like 1999, the construction side of the sales equation looks excellent from coast to coast, but the industrial side looks spotty," said Alan Sipe, senior vice president of sales and marketing, Klein Tools, Inc., Chicago, Ill. "Several industrial areas look excellent, such as the Northwest and New England. The West is going great, and the Midwest continues its steady climb. The remainder is regionally spotty."
Another manufacturer sees a strong but not growing market. "We expect the year to be basically flat, but it is flat at a very high level," says Wayne Murphy, distribution manager, Cutler-Hammer, Pittsburgh, Pa. "We had expected several percent growth in 1999 and that it is what we got, although we expected it in both manufacturing and construction. Construction was better than expected; manufacturing and the equipment for plants was weaker. In 2000, the West and South will continue to grow and the semiconductor industry looks like it will really expand."
Roddy MacDonald, vice president and general manager of electrical cables at BICCGeneral, Highland Heights, Ky., says the wire and cable market is looking for a better year in 2000. While demand for wire and cable was high in 1999, he says price deterioration was a problem, particularly in building wire.
"We believe that demand for wire and cable will remain approximately level with 1999. In the past, product price deflation was supported in part by productivity gains. These gains were underpinned by a continued reduction in material costs. We have seen this change over the last quarter of 1999, particularly with PVC pricing. Given that product pricing and profitability are at historic lows, it's important that these costs are reflected in final product selling price.
"We see potential throughout the U.S. and expanded opportunities in both Canada and Mexico. Our emphasis remains focused on profitable growth rather than market share or volume."
In the lighting industry, Mike Colotti, vice president, Osram Sylvania, Inc., Danvers, Mass., anticipates another year of growth for his company's energy-saving lamps that focus on high-quality light output.
"With inflation in check and interest rates continuing at current levels, there is significant opportunity to upgrade and promote energy-saving products," he says. "We anticipate high single-digit growth for 2000. The South and Southwest should be solid performers."
Atlanta will be one of the hottest construction markets in the Sunbelt, a region several respondents pegged for fast-track growth in 2000. Vann Cleveland, director of business development, Cleveland Electric, Atlanta, Ga., says there's a lot of construction activity because of all the businesses moving into the area. "When businesses move into an area, you have growth surrounding that--including schools, hospitals, transportation, churches, wastewater treatment plants and other peripheral industries."
Cleveland says the hottest segments of Atlanta's electrical construction market will be telecommunications, and the installation of power for installations such as data centers, rail systems, hospitals, universities, wastewater treatment plants and R&D facilities.
However, Fox-Rowden-McBrayer, Inc., Norcross, Ga., forecasts more modest growth in the Atlanta market. "Small- to medium-size projects are vibrant, but a void exists at the large-project sector and with major industrial expansions," say Ken McBrayer, Eddie Jordan and Bob Rowden, this rep firm's principals.
The San Francisco market area, with major airport construction and a healthy commercial construction market is another pocket of growth. One of the largest electrical contractors in the area, Cupertino Electric, Sunnyvale, Calif., is banking on construction of facilities for computer-related companies to remain strong and propel the company to a record year in 2000, with 20% growth to more than $300 million in revenues, says Kevin Kilgore, the company's director of marketing.
"We expect continued positive, steady growth across most market segments, but strongest growth will be in the communications industry: e-commerce, data centers and biotech facilities," he says.
Labor shortages could restrain growth: Kilgore sees two potential danger signals ahead: a lack of skilled employees and the volatility of a local economy that's linked so closely to the dot.com world of Internet companies. He is concerned about what could happen if e-commerce implodes.
"Market caps for high-tech stocks are artificially high, with nothing tangible to back them up. Also, we are worried about the talent pool. Where will we get qualified employees? It's a problem at every level in the company: craftsmen, management, engineers and MIS. We need to attract and retain good employees. It's a huge challenge. We need an ongoing training effort if we want our company to grow and evolve, and we need to keep training people to find solutions for our customers."
Larry Plunkett, president, Sachs Electric, St. Louis, Mo., and Tony Mann, vice president, E-J Electric Installation, Long Island City, N.Y., are quite optimistic about the business prospects for their companies in 2000. But they have similar concerns about labor. Says Plunkett, "Our biggest challenge is the availability of qualified people: craftsmen and management." Mann echoes Plunkett's concerns on labor shortages: "That's the key thing for us. Labor shortages are the biggest challenges, and it's a problem all across the country."
Cleveland Electric is having similar difficulties finding skilled workers. The company is looking at 15% growth next year, but Vann Cleveland says getting qualified labor is a challenge. "We're a union contractor, so it doesn't affect us too much. But you still need people going through the apprenticeship program. Because the economy is so strong right now, you have to compete with other businesses to get people into the program."
Hank Bergson, president, National Electrical Manufacturers Representatives Association (NEMRA), Tarrytown, N.Y., also sees a solid business climate next year, but is concerned about labor shortages. "There's a tremendous pent-up demand for construction, and our biggest problem in the U.S. is getting people in the building trades, as opposed to having the capital or the interest to do the building."
The cost of E-commerce: Several respondents had concerns about the e-commerce investment that they need to make. Bill Casey, principal, Bill Casey Electric Sales, Inc., Bensenville, Ill., believes online purchasing will change the emphasis of most reps. "Our concentration will shift away from drudgeries like order entry, filing and accounting," he says. "Conversely, our emphasis will shift more toward being an educator, demonstrator, facilitator and troubleshooter that helps makes all aspects of business run smoothly for our distributors.
"Server upgrades, e-mail, Internet service providers and people with computer knowledge all come at cost. However, we think these costs will hit a bell curve and gradually begin to come down. Moreover, as those costs begin to decline, we believe the Internet's power and usefulness will increase."
These investments have been and will continue to be significant. For instance, the IT investment that one North Carolina independent rep made over the past two years has grown 500%.
"We have invested in a Web site, new hardware and software, computer software training, systems maintenance, etc.," says Sam Johnson, principal, Electra-Tek, Carolinas, Inc., Greensboro, N.C. "We have made progress, but we are not where we need to be to stay competitive in the next three years. Our expenditures will likely grow another 300% to 500% in the next two years to try and keep up."
The respondents from Fox-Rowden-McBrayer knows they must continue their commitment to e-commerce, too. "We budgeted approximately $250,000 for the year 2000. Our biggest single issue is adapting to multiple manufacturers' systems through our workstations and the training issues and inefficiencies this creates. Because of the productivity gains required to be successful (and profitable), we only envision the investment growing."
Malcolm O'Hagan, president, National Electrical Manufacturers Association (NEMA), Rosslyn, Va., says combining e-commerce with globalization makes up a "dynamite combination that is blowing away the traditional business model" in the electrical industry.
"You now have to compete with companies from all parts of the globe, and information which heretofore could have given you a competitive advantage is now up on the net for everyone to see," he says. "There is no place to hide anymore, no way to fudge on product and pricing information. But as always, there are enormous opportunities for those forward-looking companies that quickly learn to play by the new rules."
Several respondents emphasized that they are carefully tailoring their e-commerce initiatives to the needs of their customers, instead of racing full-speed into the online world. Larry Stern, president, Standard Electric Supply Co., Milwaukee, Wis., says while his company is now installing a new computer system with online purchasing capabilities, there isn't yet a huge demand from his industrial customers to buy online. Steve Riordan, president and CEO, CSC, Carol Stream, Ill., agrees with Stern's views. His customers are not clamoring for online purchasing, but he is factoring this capability into his short-term business plan.
"We're developing an e-business strategy, and we will have a portal for our customers that will allow them to do business electronically. with us by the end of 2000. To us, it's nothing more than an alternative channel for our customers to do business with us. It's not a replacement for the way we do business today."
Warren Electric Co., Houston, Texas, also plans to open a Web storefront. But Cheryl Thompson-Draper, chairman of the board, says customers still like the personal touch. "Everybody talks about purchasing online, and they are interested in it if they think it will lower their costs. A segment of it will go to the Internet, but it's just like catalogs. Catalogs did not put Sears out of business."
Here is a quick look at the 2000 business prospects for several key segments of the electrical construction market: residential, utilities, airports, factories and office construction. In Part 2 of ElectroForecast in next month's issue, we will cover stores and shopping centers, airports, hotels, institutional facilities, schools and universities.
Residential. Over the past decade, the housing market enjoyed one of its strongest runs ever, and in 1999 it's estimated that housing starts hit 1.235 units. This is a 4% gain over 1998, and the highest level since 1978, according to McGraw-Hill's F.W. Dodge business unit. Those numbers will be tough to maintain in the future, and Dodge forecasts that single-family starts will slide 7% to 1.150 units. Multi-family construction is expected to grow 1% to 420,000 units next year, and at a 5% pace or better in the Northeast, North Central states, and West.
Mortgage rates are expected to stay reasonably low next year, and this will spur some homebuyers to commit to purchases. But it's a demographic fact of life that as Baby Boomers age and pass through their core home-buying years, demand for new homes will slow down because there won't be as many potential buyers in the market.
These demographics have a more direct effect on electrical distributors' business than many companies realize. While single-family housing construction will taper off in the coming years because of the graying of the Boomers, school construction and renovation remains strong, because there's a huge demographic bulge of SOBs and DOBs (Sons of Boomers and Daughters of Boomers) now of elementary school age. Five-to-10 years from now, you can expect to see new construction and retrofits at colleges and universities pick up, as the SOBs and DOBs move on through their college years. Watch the projected enrollment figures for your elementary schools and high schools if you want to get a sense of how fast the local single-family housing market may grow in the future.
Another key demographic statistic to watch if you want to get a handle on the growth prospects of housing construction in your market are estimated population growth figures. These have a direct and immediate impact on housing starts and all types of commercial, retail and institutional construction. They are available in the reference department of any good business library in a publications called Sales & Marketing Management magazine's "1999 Survey of Buying Power."
This resource paints a picture of some regions of the country losing population or experiencing slow to no growth, such as many mature markets in the Northeast and Midwest, and other areas, often in the Sunbelt and Mountain states continuing to grow at an explosive rate. For instance, according to the Sales & Marketing Management report, the following markets will see population increases of more than 20% by 2004:
The Denver metropolitan area's Douglas County (+25.5%) Loudoun County, Va. (+21.4%), a Washington, D.C. suburb Flagler County, Fla., near Daytona Beach (+20.2%) Forsyth (+22.3%) and Paulding (+21.9%) counties in suburban Atlanta Nye County near Las Vegas (+20.8%) Austin, Texas' Williamson County (+22%)
Utilities. The utility market will be by some measures the fastest-growing of any business segment in the construction market. Utility construction doubled in 1999 over 1998 to $6.2 billion, and McGraw-Hill's forecast says this market will grow 10% in 2000.
The construction and renovation of power plants has also had a boost from federal and state legislation, as well as from utility deregulation. Utility deregulation, now slowly but surely inching its way across the U.S., means your local utility no longer has the power lines locked up in your market. Because of state and federal laws, all consumers of electricity will be able to buy their power from a variety of vendors. It's not unlike the scenario that occurred when a federal law opened up the long-distance telephone service to multiple vendors, breaking up Ma Bell's monopoly on long-distance calls. Twenty-four states have passed electricity deregulation programs, most in high-cost energy areas like the Northeast and West, according to McGraw-Hill's Construction Outlook 2000 forecast.
The bottom line is that because utilities no longer will have a monopoly on their local markets, they will have to compete in the open market. That means they now want to trim costs wherever possible, and are more willing to retrofit their current facilities so that they produce power more efficiently, or build new plants that produce more for less.
Paul Madson, president, Border States Industries, Inc., Fargo, N.D., points to the power problems in Chicago last summer that were traced to a poorly maintained electrical grid as an example of why utilities are rebuilding their infrastructure. "Many utilities have let their maintenance deteriorate to the point where they finally have do something to ensure the supply of dependable power to their customers."
Madson says Borders States, which has focused on utility business for many years, had a good year in the utility market last year, and he expects another strong performance next year. He sees a direct relationship between deregulation and the fact Border States has more sole-sourcing agreements with electric utilities than with industrials.
"In the new competitive environment, they realize they must operate more efficiently," he says. "They are outsourcing many of the functions they used to perform like logistics and purchasing, and that has worked to our benefit." And as electric utilities look for new ways to grow to replace lost revenue from a more competitive market, they have gotten into the installation of a variety of different types of energy-efficient electrical systems. Some of them are either buying electrical contractors to do this work for them, or sub-contracting this work to electrical contractors.
This past year, UtilCorp., Kansas City, Mo., an electric utility, bought a stake in Quanta Electrical Services, Houston, Texas, and now operates the electrical contractor as an installation arm (See "Living Large,"Electrical Wholesaling, Dec. 1999, p. 52.)
Offices. On a national basis, office construction is poised for another strong year of growth, with plenty of new projects on the drawing boards or underway in surburbia and in the downtown areas of some cities. While McGraw-Hill's Construction Information Group is forecasting a 3% decline in office construction to 280 million sq. ft., that's a very high level.
Office-vacancy rates determine the amount of new construction to a large degree, and they inched up slightly during 1999, according to CB Ellis. This research firm said office vacancies in suburbia were at about 10% at mid-year, but that downtown office vacancies were actually moving on a more positive track, to 9.1% at mid-year, down from 9.7% during the same period in 1998. Through September, 1999, the Top 10 markets in terms of square footage of new office construction were Washington, D.C., Atlanta, Seattle, Chicago, Phoenix, Dallas, Boston, Denver, Minneapolis and Tampa-St. Petersburg, according to the Outlook 2000 report.
Overbuilding is always a concern with new office construction, but economists agree that as long as commercial lenders do not finance an inordinate amount of speculative construction, this shouldn't be a problem, at least not on the scale of the 1980s, when tax breaks for office construction fueled a building craze that sent vacancy rates skyrocketing.
In the office market perhaps more than any other, it's important to remember most construction forecasts don't factor in renovation work. These numbers are tough to get at. Office renovation continues to be a huge business opportunity for electrical distributors and electrical contractors, particularly with the retrofit of voice/data systems, the installation of more energy-efficient lighting systems, new dimming systems, security cabling and fire-alarm systems and backup power equipment.
Everyone is looking at retrofit work in voice/data to be the fastest growing type of retrofit work in the office construction market, and most industry analysts believe it will continue to grow at double-digit rates for the foreseeable future. The need for ever-larger computer systems and networks and high-speed Internet access will support this work for many years to come.