Pumps & Systems, January 2008

Critical Issues

The three critical issues facing our industry over the next 12-18 months are the increased competition from globalization, cost inflation for raw materials and an increasing scarcity of qualified technical talent.


Increased competition from globalization is nothing new and by now is an accepted fact of life. Globalization is also a two-edged sword. While it makes foreign markets more accessible to domestic suppliers with the resources to take advantage of the opportunities, it also opens our markets to foreign-based competition.

 

Overall, the global consumer does benefit, as this increased competition increases service levels and puts downward pressure on pricing. Of course, all this also puts downward pressure on suppliers' margins. Over the past few years, domestic pump suppliers have responded well to the challenge, with global market shares held by domestic pump suppliers now higher than they were a decade ago.

Cost inflation for raw materials will also continue in the near future as rapid industrialization has caused worldwide demand for most commodities, not only metals, to outpace supply. We have already seen continuing price increases for raw materials over the past decade, and with increased globalization and competition limiting pump suppliers' ability to pass these costs on, operating margins are inevitably coming under pressure as well. 

The third critical issue we face is a general scarcity of qualified technical talent. A generation of leaning out operations, downsizing, and salary increases that have not kept up with inflation have contributed to a flight of technical talent from the industry. Reversing this process will take time, but in the interim it is contributing to inflationary wage increases for most of the technical positions we need to fill. 

To continue to meet profit expectations, pump suppliers must find ways to meet these challenges while still serving the customer and staying one step ahead of the competition-domestic or not. Speed to market with new and innovative products, continuous operational improvement using Six Sigma methodologies, and staying close to the customer are critical.

Current Trends

All business trends continue to point to China, India and, to a lesser extent, Eastern Europe as the most attractive emerging pump markets. Their evolving infrastructures will continue to offer opportunities in the clean water, wastewater, and energy sectors. As their economies mature their demand for chemicals and petrochemicals-two very pump intensive industries-will increase accordingly. And, while some cooling off of the Chinese economy is predicted (as it is every year), their strong growth rate over the past 10 years will continue for at least one more business cycle.

In North America, buying in the oil and gas sector remains strong. With pent-up demand for additional refining capacity and the price of oil approaching $100 per barrel, activity in the API sector remains the best we have seen in over a decade.

With the exception of the API sectors and several smaller niche markets, however, the North American pump market overall will remain flat over the next few years. Annual growth rates are expected in the low single digits through at least 2010, and with inflation expected to be in the same 2 to 3 percent range, real (i.e., inflation adjusted) growth over this period will be essentially zero. 

Technologies Offering the Most Competitive Impact

From a technology standpoint, buyers welcome any technology that lowers price or adds to product reliability. Global sourcing and lean manufacturing are helping to offset increasing material and labor costs. Recent advances with both metal and non-metal components are also adding to pump life and reliability. Other advances with microprocessor controlled pumping, preventive maintenance tools and increased efficiencies are lowering users' operating costs as well. 

Additional Insights

Despite adversities, opportunities in the pump industry abound. Pumps are a worldwide $30 billion industry, with one third of that coming from North America alone.

The challenges of competing globally, changing market dynamics, forming strategic alliances, lowering costs and meeting customer demands for price and delivery are the same not only for pump manufacturers, but also for all manufacturers, in all industries, everywhere. The companies that find the way to do this and stay close to the customer in the process, will not only survive, but thrive.