Industrial Market 101

Selling a package of products ranging from tiny wire terminals to towering motor control centers and the latest in wireless technology, as well as stocking and talking knowledgeably about the hundreds of related products, is not an easy task. This article provides an overview of the industrial market for newcomers to the electrical wholesaling business, as well as for industry veterans who want to brush up on the basic trends shaping this market or discover new strategies for scaring up industrial sales opportunities.

While the electrical systems are often much larger in industrial facilities than in the commercial market, with a few notable exceptions such as PLCs, industrial sensors and hazardous locations equipment, the products used in the industrial market are in the same basic product families as those used in commercial applications.

One thing about the industrial market has held true over the years — when it’s strong, business can be very, very good for the electrical wholesaling industry. But when your industrial customers are suffering from a dearth of demand for their products and they are not building new production lines or refurbishing existing facilities, business is tough. Over the past few years, the U.S. industrial market has been one of the busiest areas of the entire construction market because of the trend toward onshoring factories and the construction of new factories for electric vehicles and EV batteries (see chart on this page).

The industrial market is a huge part of the U.S. economy, and in some areas of the country it’s doing particularly well, such as in areas where auto manufacturers are building new factories for electric vehicles of ICE (internal combustion engine) vehicles or renovating existing facilities. And when the auto industry is expanding, it also creates sales opportunities in feeder industries. Along with the auto plants themselves, you have hundreds of companies manufacturing equipment for new cars, including tires, seats, headlamps, sound systems and a gazillion other OEM products.

Construction data from the U.S. Census Bureau points toward huge growth in the factories that produce equipment for the computer, electronic and electrical industries. Through May, spending in these areas is up +234.5% to $112.4 billion according to U.S. Census data.

Dodge Data & Analytics says some major federal legislation has stimulated much of this growth and encouraged manufacturers to invest in the United States. “The CHIPS Act, passed in 2022, supports an increase in the number of semiconductor plants (or fabs) within the U.S. to counteract the growing influence of China in this market, according to the company’s Mid-Year 2023 Construction Outlook. “Also, the Inflation Reduction Act of 2022 (IRA) provides funding to improve supply chains and bolster new investment in domestic manufacturing. These two pieces of legislation will keep manufacturing construction starts well above historic norms this year.”

DATA THAT MATTERS

If you want to get a snapshot of the industrial market’s health on a national basis, here are several good economic indicators to track:

• Capacity utilization
  Machine-tool orders
• Purchasing Managers Index
• Non-defense durable goods orders, excluding transportation
• Manufacturing employment
• Manufacturers’ shipments
• Baker-Hughes rig count (if you are interested in the oil & gas market)

 Capacity utilization. This statistic follows manufacturers’ industrial capacity and how much of it is being used. According to the Federal Reserve Board, total capacity utilization was at 78.9% in June 2023, -1.6 points less than in Junee 2022. As rule of thumb, when the capacity utilization number hits 80%, manufacturers will look to expand capacity. Check this website for current data: www.federalreserve.gov/releases/g17/Current/.

Machine-tool orders. The Association for Manufacturing Technology, provides regional and national U.S. orders data of domestic and imported machine tools and related equipment. Analysis of manufacturing technology orders provides aleading economic indicator as manufacturing industries invest in capital metalworking equipment to increase capacity and improve productivity. These machines on the factory floor do the actual shaping, cutting, bending, forming and perform other manufacturing processes.

The most recent data from the association said orders increased +8.6% over April 2023 but fell short of May 2022 orders by -16.7%. Annual orders for 2023 increased to $2.1 billion, nearly -15% behind orders for the same period in 2022. To track monthly data go to www.amtonline.org.

 “May orders increased but not enough to make up for the record decline we saw in April,” said Douglas K. Woods, president of AMT, in the press release. “Job shops increased orders at a slightly faster pace than the general market, but many large consumers of manufacturing technology decreased orders for the second month in a row. Significant growth from typically smaller consumers of manufacturing technology highlights some interesting changes in how and where goods are manufactured, particularly in anticipation of government spending programs.”

Interestingly, AMT said orders from manufacturers of electrical equipment are at the highest monthly level of 2023, and that this puts the industry on pace to make the second-largest investment in manufacturing technology since 2018. “Much of the current investment stems from efforts to mitigate strains on the grid caused by unusual weather patterns,” the release said. “However, more investment from this sector may be on the horizon. The Grid Resilience and Innovation Partnership (GRIP) program, part of the 2021 Bipartisan Infrastructure Act, is expected to send notification of approved projects by the summer of 2023, which may spur more investment in manufacturing technology from this industry.”

Manufacturers’ New Orders - Nondefense Capital Goods Excluding Aircraft. In its “FRED” treasure trove of economic statistics, the Federal Reserve Bank of St. Louis offers this report in an easy-to-digest downloadable format through this link: https://fred.stlouisfed.org/series/NEWORDER. The latest data showed that orders in June 2023 of $74,079 million were up +1.9% YOY from $72,732 million in June 2022.

Purchasing Managers Index (PMI). The Institute for Supply Management (ISM), Tempe, AZ, formerly known as the National Association of Purchasing Managers (NAPM), offers a wide variety of statistics on the purchasing activity of manufacturers and service companies on its website, www.instituteforsupplymanagement.org. One of the many useful statistics on this site is the Purchasing Managers Index, which tracks purchasing activity on a national basis, as well as by industry. Many economists rely on this data as leading indicator of future industrial purchasing. Any reading over 50 in the index points toward a healthy purchasing climate. ISM’s Manufacturing PMI has spent the past 12 months under the 50-point mark.

THE BIGGEST MARKET TRENDS

Construction of EV and semiconductor plants. The construction of factories producing semiconductors, electric vehicles and EV batteries. It’s been quite some time since the industrial market has seen a surge in the construction of factories in the auto and computer industries in any way similar to what we now see. Traditional auto manufacturers including Ford, GM, Toyota, Nissan, Hyundai and EV specialists including Tesla, Lucid and Rivian are all investing billion in EV plants, and Panasonic has broken ground on a massive EV battery plant in Kansas. In the semiconductors industry, Intel, Skywater Technology, Global Foundaries, Taiwan Semiconductor, and Texas Instruments are all building new facilities or adding to existing factories.

One measure of the amount of industrial construction is the U.S. Census Dept. monthly data on the Value of Private Construction Put In Place. Through June, it  reported $108,819 million in spending of computer/electronic/electrical facilities, a +236.65% increase.

A recent report from the U.S. Treasury Dept. said the financial incentives from the Biden Administration has contributed to a “striking surge” in construction spending for manufacturing facilities. “Today, the computer/electronic segment is the dominant component of U.S. manufacturing construction,” the report said. Importantly, the boom in this segment has not been offset by reduced spending on other manufacturing construction segments, which are largely consistent with long-term levels. In fact, construction for chemical, transportation and food/beverage manufacturing is also up from 2022, albeit much less than the computer/electronic sector.

“This rise in the spending began in the months before the CHIPS Act passed, as many factors beyond policy contribute to construction spending. Still, the legislation has played a critical part in continuing and expanding this trend.”

The report also noted that according to the Semiconductor Industry Association, more than 50 new semiconductor ecosystem projects have been announced in the wake of the CHIPS Act, and also cited a Deutsch Bank report that said 18 new chipmaking facilities will have started construction between 2021 and 2023.

Maintenance, repair and modernization of electrical systems continue to account for about half of all electrical work performed in industrial facilities. New construction of industrial facilities often directly depends on demand for the products that the plant produces. It’s also affected by local or national economic trends and the financial health of that company. As in any new construction market, distributors ride the ups and downs of new industrial facility construction. When the construction of new industrial facilities is hot, the sales potential is huge. But when customers are not building new facilities, distributors must take advantage of the more consistent demand for electrical products needed for the repair, retrofit and modernization of existing buildings.

The nice thing about this market is that it’s seldom as cost-sensitive as new construction work. The gross sales dollars may not be as big, but the profit margins tend to be much higher. Customers need distributors that can react immediately on their demands for repair products, and price is seldom as much of an object when a key assembly line is down because of a malfunctioning electrical component.

A relatively small group of manufacturers produce huge amounts of the products for the industrial market. Full-line distributors aren’t big players in the industrial market unless they stock at least one of the following lines: ABB (which acquired GE Industrial for $2.8 billion in 2018), Rockwell Automation/Allen-Bradley Co., Schneider Electric, Eaton or Siemens. ABB These companies provide not only industrial control and motor-related products, but broad distribution equipment and switchgear packages, too.

Integrated-supply arrangements evolved and survived. A decade ago, you could not pick up an industry publication without reading about a new integrated supply agreement. In these arrangements, noncompeting distributors of industrial, MRO and construction products band together to offer mutual customers a single-supply source for many MRO needs. These integrated-supply partnerships tend to target the largest industrials, but they also work for large companies with multiple facilities such as Fortune 500 companies and utilities.

During the dot-com era, more than a dozen of these groups existed, as dot-com companies from outside the distribution industry, with names like purchasingcenter.com, totalmro.com and equalfooting.com, thought they could replace existing channels of distribution by taking all of this business online.

These dot-com entrepreneurs burned through their venture funding, and many distributors with an interest in integrated supply or national accounts are now part of at least two large groups, each with a slightly different background and focus: Vantage Group, Crystal Lake, IL.; and SupplyForce, King of Prussia, PA. SupplyForce spun off from Affiliated Distributors in 1999 and in 2014 merged with Vanguard National Alliance, Malborough, MA, to provide nationwide support of national contracts for Rockwell Automation distributors.

More electrical contractors are being hired to do on-site maintenance work at manufacturing facilities. This trend has been happening for years because your industrial customers can cut operating costs by farming out their electrical service work. This is an important trend for electrical distributors, because it can change the buying influences. Check with industrially oriented electrical contractors in your market to see if they are involved in this type of work.

As the automation of the factory floor has evolved over the past 30 years, end users have been able to monitor, collect and process unprecedented amounts of information. For years, distributors provided the hardware that made this happen, such as programmable logic controllers, sensors, relays, pilot lights, variable speed drives, enclosures, cabling and related connectors.

But as the need to collect and process this information increased, distributors’ customers began asking for high-speed communications systems to carry information from the factory floor to the corner office, or to other facilities. Along with conventional industrial communications networks constructed of shielded twisted-pair cable, coaxial cable or fiber-optic cabling, IP-enabled sensors and sometimes WiFi networks now send data wirelessly to the cloud over the internet. It’s one example of how the IoT is now changing the electrical market.

It’s no longer enough to just provide the “nuts-and-bolts” for the factory floor. Distributors’ customers are looking for a one-stop solution in supply and software programming. In fact, the software has become such a big part of the sale that products such as PLCs that were once considered the highest of high tech have become commodities.

All the major players in industrial automation have built up their software capabilities. As Electrical Wholesaling reported several years ago, “Manufacturers in the industrial automation space have grasped the potential of building a robust industrial data platform and this year actively positioned themselves through acquisitions and internal structural changes to pursue the industrial IoT (IIoT) as a primary emphasis for future growth. We’re now seeing a high-stakes race among large industrially oriented electrical manufacturers to realize the IIoT’s potential, each seeking to establish a standard software platform for gathering and interpreting data in the manufacturing, process, infrastructure, utility and related industries.”

This trend means that distributors either must have the programming capabilities on staff or partner with companies such as systems integrators that have this expertise. Remote management of an industrial facility’s electrical system over the web helps alert maintenance personnel of blown breakers, power fluctuations, energy usage and dozens of other electrical measurements.

OSHA has gotten more serious about trying to stop electrical accidents on the job. The Occupational Safety and Health Administration (OSHA) continues to enforce its regulations to make industrial plants safer workplaces, and these regulations have created sales opportunities for electrical distributors. The “lockout-tagout” rules require industrial facilities to use specially designed lockout tags to ensure the circuits electricians are working on cannot be inadvertently energized by other workers. Other requirements call for proper signage, GFCI protection of many electrical circuits, and frequent inspection of portable cords to ensure that they are always in safe working order.

New products that do jobs better, faster or at less cost than traditional electrical products will continue to attract customer interest. For instance, IoT-enabled equipment is now a reality; new types of cable tray systems offer customers more options in wiring systems; the move toward modular electrical equipment has increased the demand for multiple-contact connectors; and ever-more efficient lighting systems offer solid ROIs. They offer real-world benefits to your customers — and provide a solid sales opportunity.