End Uses and End Users of Small Electric Motors.
Fractional horsepower electric motors are used in virtually every sector of the U.S. economy, mostly installed as components of original equipment. Thus, developments in this industry are likely to have widespread ramifications throughout business. There are three types: general purpose AC (alternating current); general purpose DC (direct current); and special purpose DC. They come in small sizes (a few inches), weigh little (a few ounces), and have just four parts (stator, rotor, an enclosure for bearings, lubrication, etc., and a shaft). AJI three have undergone evolutionary technical changes in recent decades, and further refinements are expected. The key technological and marketing trends are toward modules and miniaturization.
These small motors have five major end uses: motor vehicles; appliances and other consumer durables; heating and cooling machinery; computers and office equipment; and various industrial machines. Unlike many other machinery components, replacement demand for fractional horsepower motors is limited, since these small motors often last longer than the end-use product itself. Relevant statistics on both product and market categories for the United States during the 19892008 period are shown in Table 1. The percentage distribution among sectors is changing, but at a very slow pace. In 1998, the figures for the five sectors were, respectively, 35, 15, 15, 14, and 21 percent, quite similar to the 1989 data.
The light vehicle market will remain the largest user of fractional horsepower motors due to the wide range of applications, but its relative importance will shrink from the current thirty-five to thirty-two percent by 2008. A saturation level has been reached for power accessories for new passenger cars. However, the new light truck and van market will provide growth opportunities for two reasons. First, demand for such vehicles is still growing faster than that for cars. Second, while the trucks traditionally have been less laden with accessories, drivers of such trucks now want more comfort and gadgetry. Truck and van makers are eager to please customers; furthermore, an "all-comfort" truck commands a higher price and delivers fatter margins to manufactures.
The appliance and related durable sector is another mature market. Included here are makers of washers, refrigerators, ranges, dishwashers, etc., as well as those who offer vacuum cleaners, household fans, and the largest single category, food preparation equipment. The original equipment manufacturers (OEMs) in this sector also demand better performing (smaller, quieter, more energy efficient) small motors to meet their own and households' preferences. Furthermore, these QEMs exert strong pricing pressures, emulating the action of light vehicle manufacturers. Since vendors are routinely scrutinized, it is no surprise that suppliers to this sector are also engaged in "relationship marketing," eager to remain on the "short list."
The heating and air-conditioning market is one area where there is both OEM demand and a definite replacement demand. The latter occurs because working conditions for small motors are demanding (dirt, soot, etc.) and also because it is easy and cost-efficient to replace small motors.
The computer and office equipment market remains an important destination for higher quality, more sophisticated fractional horsepower motors; this segment will increase its relative share from 14.0 to 16.5 percent of total demand during the current decade. Small motors are built into computers, copiers, and fax machines. Peripheral office equipment demand is likely to remain strong, since such machines use small motors for disk drives, tape drives, rollers, etc.
The industrial and commercial machinery market utilizes small motors in many applications. The industrial subsector uses the fractional horsepower motors in automation, materials handling, off-highway, and other equipment. The commercial subsector uses the small motors in food preparation, medical, and telecommunications equipment as well as in vending machines. A third sub-sector consists of aerospace goods, recreational vehicles, and exercise equipment. Consumer demand for various recreational vehicles should be a positive factor for growth, but the other uses constitute mature markets.
Economic-Market Environment and International Trade
The demand for fractional horsepower motors fluctuates chiefly in response to trends in the key end-use industries whose products incorporate these devices. Conditions in the motor-vehicle sector--which takes thirty-five percent of all small motors--are especially crucial. Activity in this sector, in turn, is dependent on consumer confidence, interest rates, and inflation. Inasmuch as the confluence of these three has been favorable, good times in the automotive industry has meant good times for small motor manufacturers, too.
The 1990s also saw expansion of other major markets for small motors, with computers and office equipment leading the way, followed by appliances, other durables, and heating and cooling applications. The industrial machinery sector did well, responding to capital investment, but aerospace markets held stable due to slow government defense spending. On the whole, however, Table 1 shows that each sector is expected to show a decline of one to two percentage points during 1998-2003 compared to 1998-1989 in its use of small motors.
The demand for fractional horsepower motors is influenced not just by macroeconomic variables, but also by technological innovations, changes in the regulatory environment, and international activity. Innovations in industrial systems can affect both the level and the type of motors in demand. Government regulations and association rules can mandate higher product standards regarding safety and environment. Competition from foreign manufacturers impacts both pricing and other corporate strategies. Valeo SA of France, one of the top seven firms, just announced major job cuts and a shift in operations from North America and Western Europe to South America and Eastern Europe.
U.S. international trade in fractional horsepower motors has been strong and will continue to show faster growth than is the case for domestic shipments. Details are shown in Table 2. Imports will grow at about 5.8 percent annually, reaching $3.1 billion by 2003. The growth is fueled mostly by the labor cost advantages for manufacture of original equipment enjoyed by Mexico and Asia, which accounted for thirty-eight and thirty-nine percent of the total, respectively in 1998.
At the same time, U.S. and foreign producers are eyeing markets in Asia, Latin America, and Africa, which are expected to show faster growth rates than those in North America, Western Europe, and Japan. Thus, growth of exports, projected at 7.2 percent annually, should reach $950 million by 2003. Canada and Mexico constitute the two dominant export markets, together accounting for sixty percent of total exports. "Subfractional" brushless DC motors and 1/10 to 1 horsepower AC motors are the best export candidates; automotive applications will dominate.
Competitive Marketing Practices
Makers of small electric motors attempt to compete on the basis of both product design and technical performance and are eager to get away from commodity-like pricing. However, technological advances are evolutionary and the pressure on suppliers to keep prices down is very strong from the OEMs, especially car makers who account for over one-third of total demand.
In particular, product design can be of competitive advantage for those who can meet the QEMs' requirements for even further miniaturization, modularity, varying voltage levels, and variable --or at least smooth--speed (range can be 900 to 3,200 rpm). The print version of many manufacturers' catalogs is usually a thick book, listing thousands of configurations for hundreds of uses. Branding can be a distinct edge. Warranties are offered usually for twelve months from date of installation or twenty-four months from date of manufacture. Many of the large players emphasize both pre- and post-sale services.
In a mature marketplace, such as small electric motors, firms often focus on "market share capture," and we can expect further concentration. Right now, Emerson Electric and General Electric account for twenty-three percent of the U.S. market, with the next five firms taking another twenty-one percent.
Price competition in this industry is intense. The OEMs have great bargaining power and attempt to wrest price concessions from their suppliers. Low-cost foreign producers often attempt commodity-like pricing and have come to dominate large portions of the market. This is especially true for small motors with simpler technology and common materials, e.g. most AC induction motors. In contrast, U.S. firms and other Western firms are dominant for high-tech motors, e.g. those with variable speed drives, permanent magnets, and exotic materials. Small motors range in price from a few dollars for toys and clocks to over $200 per unit for aerospace applications.
Moreover, original equipment manufacturers of cars, appliances, machinery, etc. no longer want to be experts on all the parts going into their goods. Thus, the makers of small motors and motor-controls must offer more than reliable products and services; they must provide technical expertise, improved performance, and "total" solutions (including warranties)--all at prices often set by the QEMs.
Producers of fractional horsepower motors promote their ware by advertising in trade journals, direct mail, appearance at trade shows, catalogs, and now web-sites. But it can take years to build strong relationships with purchasing departments of OEMs; personal rapport, up-to-date products, sharp pricing, and firm delivery dates are a must. The Internet is a powerful new tool and is being increasingly utilized not just by building one's own web-site, but also by being prominently featured in "clearinghouses" and/or selected electronic catalogs of consolidators.
Distribution of small motors is achieved in a variety of ways. National or key accounts are handed directly by the producers' own sales force; smaller accounts via wholesalers, independent distributors, and parts dealers. Since the QEMs themselves are now scattered around the globe, the fractional horsepower motor manufacturers are following their customers and hence seek global distribution.
The fractional horsepower motor industry is a part of the broad electric motor industry. Many firms make both small and large motors, i.e. those with ratings below and above one horsepower. The fractional and integral motor makers also share numerous characteristics with the industrial machinery sector, such as mature and cyclical markets, as well as competition from foreign-based suppliers.
Toward the end of the 1990s, the top seven producers--Emerson Electric, General Electric, Valeo SA (France), A.O. Smith (which now includes Magnetek), Ametek, and Lear/UT Automotive--accounted for forty-four percent of total U.S. shipments. These firms offer a broad, technically advanced product line, and often target one or more major market segments. We can expect a heightened merger and acquisition policy in the coming years, especially if there is further consolidation among automotive manufacturers. Global presence will be a must for the top tier players as they wish to be near OEM locations.
Selected financial ratios for a sample of four large fractional horsepower motor makers are shown in Table 3. The economic expansion of the 1990s is reflected in these numbers, as both relative capital spending and profit margins have remained impressive. Makers of small motors are aware of business cycles and are eager to maintain relatively long-term debt to equity ratios. Maintaining these figures into the next ten years will require major efforts on the part of such firms. But so far, the companies have been able to answer the challenges.
Small motors continue to serve users in many specific applications and across a broad spectrum of industries. Though invisible for the most part, since they are incorporated into other equipment, they serve a vital function. Shipments of fractional horsepower motors in the USA will continue to expand in the coming years, though at a slower rate than that for durable goods at large. Total demand should rise from $8.6 billion in 1998 to $12.8 billion in 2008. Exports by U.S. producers will grow at a faster rate than domestic sales. However, imports still overshadow exports by a margin of over 3:1 in the U.S. marketplace and have captured significant portions of low-end applications.
In an industry that is over one hundred years old, technical advances are still being made. Nonetheless, it is a mature industry and companies are forced to play a "market share game" which they play via product improvements, aggressive pricing, smart promotion, global distribution, and via acquisitions. We can expect more mergers among both large and small producers. Within ten years, five producers are likely to control more than one-half of the U.S. market. But one of the best ways to remain competitive is to forge strong relationships with OEMs in one or more of the five major end-use categories (automotive, appliance, heating/cooling, computers! office equipment, and general industrial machinery). Remaining on the short or preferred vendor list is not easy, but can be done.
Michael Deneen is a senior analyst with The Freedonia Group in Cleveland, Ohio.
Andrew Gross is professor of marketing and international business at Cleveland State University, Cleveland, Ohio.
DEMAND AND SUPPLY FOR SMALL MOTORS, UNITED STATES, 1989-2008 Absolute Growth Annual (current $) Percent Item 1989 1998 2003 2008 98/89 Durable Goods Shipments ($bil) 1,403 2,155 2,664 3,357 4.9% $motors/000$ dur. goods 3.69 3.99 3.91 3.81 - Small Motors- Demand ($mil) 5,179 8,595 10,405 12,800 5.8 Light Vehicles (cars, vans) 1,830 3,010 3,500 4,140 5.7 Appliances & Other Cons. Dur. 776 1,270 1,500 1,770 5.6 Heating & Cooling 765 1,265 1,540 1,910 5.7 Computer & Office Equipment 596 1,195 1,550 2,115 8.0 Industrial Machinery & Misc. 1,212 1,855 2,315 2,865 4.8 Net Imports (mil $) 637 1,640 2,110 2,870 11.1 Small Motors- Supply (mil $) 4,542 6,955 8,295 9,930 4.8 Special Purp. AC & DC Motors 1,932 2,990 3,435 3,975 5.0 General Purpose AC Motors 1,875 2,770 3,405 4,205 4.4 General Purpose DC Motors 735 1,195 1,455 1750 5.5 Growth Item 03/98 Durable Goods Shipments ($bil) 4.3% $motors/000$ dur. goods - Small Motors- Demand ($mil) 3.9 Light Vehicles (cars, vans) 3.1 Appliances & Other Cons. Dur. 3.4 Heating & Cooling 4.0 Computer & Office Equipment 5.3 Industrial Machinery & Misc. 4.5 Net Imports (mil $) 5.2 Small Motors- Supply (mil $) 3.6 Special Purp. AC & DC Motors 2.8 General Purpose AC Motors 4.2 General Purpose DC Motors 4.0 Source: M. Deneen, Fractional Horsepower Motors, Industry Study #1117 (Cleveland: The Freedonia Group, 1999). U.S. INTERNATIONAL TRADE IN FRACTIONAL HORSEPOWER MOTORS ITEM 1989 1998 2003 2008 FHP Motor Shipments (mil $) 4,542 6,955 8,295 9,930 - exports (mil $) 263 670 950 1,350 + imports (mil $) 900 2,310 3,060 4,220 FHP Motor Demand (mil $) 5,179 8,595 10,405 12,800 Exports as % of Shipments 5.8% 9.6% 11.5% 13.6% Imports as % of Demand 17.4% 26.9% 29.4% 33.0% Source: M. Deneen, Fractional Horsepower Motors, Industry Study #1177 (Cleveland: The Freedonia Group, 1999) FINANCIAL RATIOS FOR SELECTED MANUFACTURERS OF SMALL MOTORS ITEM 1996 1997 1998 Net Profit Margin (% of sales) 9.0 9.6 8.8 Return on Equity (%) 18.8 21.8 20.5 Current Ratio 1.5 1.3 1.3 Inventory Turns (times/year) 6.5 6.7 6.8 Equity/Assets (%) 51.3 48.5 46.8 Long Term Debt/Equity (%) 17.7 11.7 19.3 Capital Spending/Sales (%) 4.6 4.7 4.6 Note: These numbers are a composite, based on a sample of four major/ representative companies: A.O. Smith, Baldor, Emerson Electric, and Franklin. Source: M. Deneen, Fractional Horsepower Motors, Industry Study #1177 (Cleveland: The Freedonia Group, 1999).
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|Author:||Deneen, Michael; Gross, Andrew|
|Date:||Apr 1, 2000|
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