To state that 2009 was a turbulent year for the pump industry is a substantial understatement. The economy and its impact on business became a daily discussion while the industry struggled throughout the year to find sources of optimism and creative survival strategies. The focus has evolved into finding practical solutions to embrace and conquer the effects of the worst global economy since The Great Depression.
Dennis Wierzbicki, president of Grundfos Pumps, USA, says the first half of 2009 confirmed that "the industry would no longer be the same. It was not going to be a dip with a rebound right around the corner. A new base line was established, and with it also came the requirements to look at business differently."
Wierzbicki explains that while free cash flow and balance investments were a requirement for all companies-whether U.S., European or Asian-the economics of our industry required more focus on managing cash smarter. But that was not enough. The markets also changed.
With that change, specific questions surfaced that required action from all companies, no matter the size.
"How business is done and the overall changes as a result of this recession are still to be seen," Wierzbicki says. "With reductions in people across the industry, where will specifications and applications come from? Who will be the service providers? Where will energy savings and Lean principles need to be applied? And, of course, the involvement of the U.S. government has to be considered, whether providing stimulus for projects or taxes on business. We will have to manage our government in our industry.
"Regulation will be more present in the standards for our products. Whether it is energy efficiency, safe materials or contributions to a more energy efficient, sustainable U.S., the government will be active in setting our directions."
Other key solutions, according to Wierzbicki and other industry executives, include talent management, managing supply chains, improving process efficiency, and of course, listening to the needs of the customer.
"In the end, it is the customers' perception that matters," Wierzbicki says. "They are the key decision makers. Key users will let us know where to go. We need to continually listen to the markets and understand the needs of the customer. Interestingly enough, the customers' needs are what always seem to provide the compass to develop plans."
Gretchen McClain, president of ITT Fluid and Motion Control, agrees that keeping the customers' needs at the forefront makes a difference. "To succeed in today's market, you must keep your customer central to everything you do," she says. "Especially now, each member of my leadership team and I maintain close contact with our key customers and distributors to let them know we are there for them regardless of the market. Most important, successful companies make sure the team is aligned with their strategy and do not lose sight of long-term goals."
Business in 2009. . . Forecast for 2010
Many companies are identifying clear strategies for survival and growth when examining business in 2009 and looking ahead to the possibilities of 2010.
Randy Breaux, Baldor Electric Company's vice president of marketing, says he believes our industry has seen the worst of the recession. "Looking back, our distributors were first to react with inventory reductions, and then OEM customers suspended projects for an indefinite period of time," he says. "I believe we have weathered the full brunt of the storm, and conditions should gradually improve during the next six months or so.
"For 2010, we are not expecting a rapid increase in business, but a modest increase throughout the year. Our internal tracking of incoming orders has produced a positive trend line for the past couple of months. If that trend holds, we are confident that 2010 will be better than 2009."
For A.W. Chesterton Company, 2009 was a year of significant challenges-especially in the industrial process markets. "It was also a year to rethink overall business models and the future needs of our industry," explains President and CEO Brian O'Donnell. "Lower overall market demand caused sales reductions of 20 to 30 percent for many suppliers in contrast to their robust performance in 2008. That caused a large number of them to scramble to find expense offsets to try to minimize the impacts on their profitability.
"However, due to the increased competition between process plants for a smaller volume of business due to the recession, the driving need for supplier support to help improve productivity and efficiency became even more of a business imperative."
Many domestic and global industries slowed significantly, which led to quickly depleting inventory levels, according to Garlock Sealing Technologies President Dale Herold. "The reduced inventory levels changed how manufacturers supported the users with quicker responses required and reduced quantities ordered. Manufacturers were forced to change how they do business or allow market share loss. 2010 will be an interesting year. The general consensus is that economic recovery will be slow but stable, and the outlook for our business should mirror these trends."
Continued growth in the international market with some recovery of domestic industrial spending should be experienced in 2010, according to Kim M. Arnold, vice president sales, marketing and production engineering for Weir Specialty Pumps. "WSP reacted in advance of the crash with proactive focus internationally. Municipal projects have blessed us with larger than 2008 input. We will continue to increase our focus internationally and municipally while preparing for the inevitable industrial rebound."
Being proactive in the economy has also been a focus for Pulsafeeder President Brett Finley. "We have been able to stay ahead of downturn by actively working with our customers, suppliers and employees," he says. "We saw this downturn early enough and turned our focus to product innovation, supply chain management and customer service. These investments will carry us forward faster as we progress through 2010."
The drive for efficiency forced some innovative thinking about manufacturing systems down to the component level, says Lou Grice, Phoenix Contact's vice president of marketing. "While the overall market suffered, opportunities opened up for proven money-saving innovations-especially innovations that could produce savings in energy, time and space consumption. Recovery will occur in 2010, although slowly. Efficiency and sustainability will continue to be primary market drivers for the medium term. Those companies that can match their product offerings to customers' efficiency needs will win market share."
Among those opportunities in the overall market were oil and gas and water/wastewater pump manufacturers, which represented a mix of financial performances, says Dr. Samuel A. Lowry, president of Simerics, Inc. "These pump companies had to balance revenue losses with spending, great expectations for the future with the fluctuating needs of the moment and political rhetoric with economic reality," he explains.
"Overall, we successfully navigated this challenging year due to our customers' desire to develop the next generation of pumps. Research and development is the foundation of the pump industry's future. Regardless of economic calamity, the pump product engineer still has problems to solve. Even the most financially troubled pump manufacturer was focused on its products in 2009."
Chad Tuttle, COO Americas of CLYDEUNION Pumps, says he anticipates emerging markets will experience increased export trade in 2010, which should enhance the overall global economy. "Leading economists state that 2009's economic downturn is not anticipated to continue into 2010, and we expect to see a small market uptake as the emerging markets continue to expand, driving increased energy consumption," he says.
"The need for energy and water and their sustainability drive our business. We see key growth within the energy markets (nuclear power, conventional power, oil and gas) and in the water markets (reverse osmosis, etc.) in 2010 and beyond. The IEA (International Energy Agency) predicts some recovery in oil and gas consumption. Sustained economic growth in China and India and signs of a turnaround in other Asian countries would appear to support this assumption."
Wood Group ESP President and CEO Gareth C. Ford says lower revenues from the petroleum sector were offset by growth from his company's entry into the motor controls business and new geographic markets, giving him reason for optimism. "Additionally, our surface pumping technology led us to business in new industries," he says. "Although challenging, we finished 2009 above expectations. We are now recalling furloughed employees and hiring new ones. Panic-filled days appear to be behind us and perhaps we can breathe a collective sigh of relief. But what is next?"
Ford describes three possible scenarios that could affect global markets, each of which require careful planning and preparation.
- The bounce-back scenario. "The U.S. economy could experience growth rates as high as 5 percent, maybe higher." Ford predicts. "Earnings grow. Unemployment rates fall. The Fed can withdraw monetary stimulus and allow interest rates to rise. Inflation risks moderate. The dollar strengthens, emerging markets strengthen and suppliers benefit from world economic growth."
- The more-of-the-same scenario. "During late 2008 and early 2009, credit markets did not function normally for nearly six months and global trade collapsed," Ford says. " In this scenario, the United States experiences sub-par economic growth of 2 to 2.5 percent. Growth rate is insufficient to reduce the output gap and unemployment rates fall only slightly from their peak. Consumers remain cautious. The dollar remains weak and interest rates remain low. While government intervention has revived some credit markets and trade, it is unlikely that economies can recover quickly. Hence, this scenario suggests a longer period of recovery for companies damaged by the downturn."
- The slippery slope scenario. "Another scenario to the 2010 economic story could emerge. Low interest rates are unable to overcome the diminishing effects of the government's stimulus package. The economy slips back into recession or grows at less than 1 percent. There is pressure to enact another stimulus package that government cannot afford due to growing deficits. The dollar weakens further in the face of a sluggish economy. Corporate restructuring accelerates as companies adjust to declining revenues, enacting further cost cuts. Unemployment is stuck at 10 percent. Corporate growth is pegged to a few emerging markets accessible only to the larger well-financed suppliers."
Dan Bolen, owner of Dan Bolen & Associates, LLC, sees the industry outlook from a talent management and recruiting perspective. "We feel the major part of the recession is over, but hiring in 2010 will be cautious and slower than previous years," Bolen says. "Our contacts in the field indicate that 75 to 80 percent of the companies experienced the worst by third quarter 2009, and were looking for a more stable market, putting more confidence in industry overall.
"In the last three months, we have seen an increase in positions that have been on hold, particularly in the sales and marketing area. Many clients who have previously taken a 'wait and hold' attitude have now seen their sales level off and even increase in some cases. The availability of top candidates is the best I have seen in the 41 years I have been recruiting. Many hard-to-find candidates (such as mechanical engineers and sales and marketing candidates) are available now due to concerns their companies may be downsizing or laying off.
"Candidates are also more reasonable when it comes to salary requirements. We feel this will continue in 2010, so now is the best time to fill critical or key growth positions. This excess talent pool will start to dwindle more quickly by the end of 2010."
Impact of Stimulus Package
All year, Pumps & Systems has closely covered the impact of the American Recovery and Reinvestment Act, a $787 billion program that promised to create four million jobs and allowed for approximately $150 billion in emergency funding for public works infrastructure, with more than $7 million earmarked for drinking water and wastewater projects.
Our industry has yet to feel the full impact of this stimulus bill. Some see it as a positive force when looking ahead to 2010, while others see a negative effect thanks to the "Buy American" clause that has hindered companies who manufacture their products globally.
"When the stimulus program was first passed almost a year ago, a feeling of exuberance and joy pervaded as the figures were announced," Arnold says. "However, the actual result of this money injection stopped many projects that were close to bidding as owners waited to see how the stimulus money would affect their projects. The law of the undesirable result applied. Quote activity for most of 2009 has been extraordinarily high, leading to the notion that a 'tidal wave' of actual work may be building. EPA says it has committed more than 90 percent of the monies and seems confident it will disperse all funds before the February 2010 deadline.
"Nevertheless, after all of this high bid activity and monies allocated, order business has not increased. In fact, in recent discussions with members of the Associated General Contractors of America (AGC), they too are wondering where is all this work? That cannot be a good sign.
"Continued annual funding into the State Revolving Funds (SRF) is expected to be three to five times higher than previous administrations. If the Obama administration continues to support funding for water/wastewater infrastructure at these levels, we will be on the road to an unprecedented rebuilding of the nation's foundation. Municipal project work could have a bright future."
Danfoss North America President Robert Wilkins agrees that the stimulus bill has produced unintended negative consequences, as many projects have halted: "If anything, the stimulus package has had a negative effect to date on our business. Many municipal projects were held back waiting for stimulus funds to be released. We expect that to change in the near future. We anticipate that the stimulus package will increase opportunities as funding is released and municipalities start investing in their infrastructure. Staffing of government offices will certainly play a key role in dispersing stimulus funds."
Gino Mersino, president of MERSINO Dewatering, Inc., and its sister company, Global Pump Co., says that despite the promise of help from the stimulus package, he expects that the private market will remain stagnant for some time.
"We are slightly more optimistic about the public sector, thanks in part to the prospect of new projects resulting from the stimulus money being released to state and local governments," Mersino says. "Our sales departments at all branches and divisions will be closely watching these funds to track project timeframes and pending results. We expect many are doing the same to try to capitalize on these opportunities."
Finley says he believes Pulsafeeder's strong presence in the U.S. water market and operational footprint in Florida and New York positions his company for positive rewards from the stimulus package. However, red tape continues to slow the process for many companies. "Our metering pumps qualify for the stimulus package project funding, and the quote activity has been high from many of our water customers," he says. "The full effect of stimulus will still take time as many of our customers spent the better part of 2009 working on the required government funding request at the expense of current water projects. This delay early in 2009 will turn into more expedited requests for products in 2010.
"We have reduced cycle times and focused on providing turnkey pumps and systems to help our customers win these projects. Our water markets will be seeing the effects of the stimulus in the United States, and the power market will continue to be driven by environmental regulation. Depleted inventories and supply chain changes will impact the growth rate in industrial markets during the next 18 to 24 months. Great companies will continue to invest in innovation and people with a focus on cycle time reduction."
O'Donnell also finds reason for optimism surrounding stimulus possibilities for Chesterton. "Going into 2010, there is a great deal of hope that the economic stimulus efforts or the general economic improvement will lead to a significant uptick in sales," he says. "The reality is that the recession has forced most process industry end users to reevaluate cost structures, and reduce capacity by eliminating plants that have lower performance levels. Many plants are under pressure to address productivity and efficiency improvements like never before.
"It has become a matter of survival."
Matt Lorenz, vice president and general manager of Eaton Corporation's Industrial Control Division, is optimistic that government stimulus spending will drive demand for energy efficient products and services in segments including infrastructure (including water and wastewater), energy services, building efficiency and renewable power. "Stimulus spending presents an important opportunity and is likely to drive decisions related to energy efficiency, modernization and renovation, and new construction."
While the stimulus package has not significantly impacted Synchrony, Inc.'s revenues in 2009, its CEO and President Dr. Victor Iannello says he expects that more of his company's future opportunities will be energy-related projects. "Alternative energy projects include power from geothermal, solar, waste heat and co-generation," Iannello explains. "For each of these applications, electrical power is extracted from a fluid by expansion through a turbine. Each system requires efficient turbomachines that pump, compress and/or expand fluids.
"Because efficiency, performance and environmental compatibility are required, these are ideal applications for our high speed magnetic bearings, motors, generators and high performance power converters."
Waiting for government approval for projects that will actually produce orders continues to be one of the greatest obstacles for companies involved in stimulus-funded projects. One of the positive impacts of the stimulus package is the possibility of increased job opportunities, according to Bolen.
"As orders increase and backlogs fill, companies will focus on hiring additional sales and technical people," Bolen says. "When companies did not receive their stimulus funds in a timely manner, it held up projects, prevented them from making new hires and negatively affected our business. Once they had received funding, however, they were ready to initiate the hiring process.
"Some companies have been concerned that government rules and restrictions on the Stimulus Package are unclear and confusing. Therefore, they are choosing to delay making decisions until these rules become more clear and understandable. In 2010, we will know more about whether the Stimulus Package has increased major growth for companies affected by it."
Critical Issues and Strategies
Focus on Energy Efficiency
Producing and maintaining energy efficient products and systems continues to be at the forefront of industrial concerns and causes ongoing adjustments in regulations and standards. According to the Hydraulic Institute, pumps consume 5 percent of industry energy, and pumping systems account for nearly 20 percent of the world's electrical energy usage and range from 20 to 25 percent of the energy usage in certain industrial plant operations. Maintenance and repair is a significant component of pumping system life cycle costs, and an effective maintenance program can minimize these costs.
"One of the biggest trends is the increased focus on energy efficiency, which is driving the need for more technology such as higher efficiency motors and VFDs on motors," says Wilkins. "As an industry, we need to continue to raise the visibility of these substantial energy saving opportunities."
Iannello agrees. "Our industry is seeing a remarkable shift in the economic value that end users attribute to energy costs, regulation and environmental impact," he explains. "Those OEMs who recognize these trends and adapt their products will reap the benefits of increased market share and higher margins. The challenges presented by a weak economy and increased regulatory burden will be addressed through new product introductions and technological innovation."
To meet new energy efficiency standards, many facilities will need to adopt and implement a host of new and existing technologies, according to Lorenz. "These include VFDs, advanced overload relays, sophisticated electronic metering and monitoring products, and power management products to help make informed decisions that can improve operational efficiency. To propel energy efficiency, it is critical to provide support, education and training for plant operators, engineers and production workers."
The focus on energy efficiency is experienced throughout all segments of industry and within production of most parts and services. Even in the areas of exploration and prevention, energy efficiency is a concern. "Much of the pump efficiency efforts have centered on reducing cavitation, a concern for many pumps, especially at off-design conditions," says Lowry. "We have seen this trend spread to every pump category."
Reduce Operating Costs
"Customers will continue to monitor the economic recovery, and spending is likely to be controlled until they are sure conditions have improved," Lorenz says. "Reducing the total cost of ownership will continue to impact facilities' decisions. Typically, energy consumption is 90 percent of the total cost of owning a pump. Maintenance and repair are significant components of a pumping system's life cycle costs, and an effective maintenance program can minimize these costs. In demanding industrial applications, increasing uptime-reducing unforeseen downtime and mean time between failures-is imperative.
"Because many plants must run continuously, they cannot schedule outages for equipment maintenance. Remote monitoring solutions that continuously monitor key failure indicators help facilities respond to equipment problems sooner. Early detection of system degradation-through condition monitoring and predictive diagnostics-is critical to productivity and the bottom line. Improperly managed power distribution and quality can waste energy and increase downtime.
"The adoption and implementation of new and existing technologies-including variable frequency drives (VFDs), monitoring relays and soft starters-is key. Conforming to existing and future government energy efficiency regulations will be critical. The potential for future carbon cap and trade requirements could drive market trends."
Tuttle agrees: "Project execution, time management and costs that are accurate will improve business success. Life cycle cost and total cost of ownership is another area that continues to deserve focus and attention. How equipment performs within a system, reliability and energy efficiency will be additional critical issues in the pump industry."
Provide Superior Customer Service
Taking care of the customer continues to be at the forefront for Mersino. "To succeed in this current environment and be one of the companies left standing, it is important to separate from the pack in a tangible, meaningful way," he says. "The short-term solution is often to alter pricing; however, lowering prices inflicts harm on not just the industry but also the company. Cutting prices cannot sustain a company through a prolonged economic downturn. Global Pump Company and our sister company, MERSINO Dewatering, have been fortunate to thrive in recent years. This has not been accomplished by providing the cheapest products and services, but by providing the best value for those products and services.
"Our success is mostly the result of an unwavering focus on our customers. It is because of this focused commitment to our customers that we are able to maintain relationships that help sustain us even in troubled economic times."
Improve Plant Performance
Globally, it appears that the economic recovery will be relatively slow and the level of overcapacity will continue in many industries, according to O'Donnell. "Therefore, individual plant performance will make the difference in terms of which plants stay open and which do not," he says. "At Chesterton, we believe there will be an accelerated focus on plant performance improvement, but at the same time there will not be much money for investment. This will force plants to really assess what they can do to improve and push them to seek much more involvement by their supplier base.
"Suppliers who can bring knowledge-based solutions to specific plant performance issues will be key. Making sure we are focused on real ways to improve their competitive capability and be able to document and show it is extremely important. While many suppliers talk about the value they can add to help customers improve, few are able to follow-up month-after-month and year-after-year with the documented financial impacts and return for those efforts. That not only requires the knowledge and experience gained during a period of time, but the ability to effectively apply that knowledge to effect real change. This is where companies can add significant value-with extensive experience and process knowledge, and a detailed understanding of the underlying issues and problems."
Manage and Control Inventory
Inflation and channel inventory levels are by far the most significant challenges manufacturers will face in the coming months, according to Herold. "Most businesses are attempting to keep inventory levels as low as possible to maintain cash flow while product demand will certainly increase," he says. "This will lead to an imbalance between supply and demand and result in higher prices. The solution is ultimately a sustained economic recovery and a controlled inventory buildup. A controlled inventory buildup will require close communication between the customer, the distribution channel and the manufacturer."
Breaux agrees that because business will continue to recover at a slow pace during the first 12 months of 2010, "properly scheduling our manufacturing plants and maintaining the right level of inventories will remain a key issue. In the later 12 months, the possibilities of material shortages and inflation could be a potential challenge. Since the crystal ball gets somewhat cloudy after about six months, we will just have to wait and see what happens."
Business and Technology Trends
Find Turnkey Solutions
"Customers want to work with fewer suppliers and are looking for more turnkey solutions," Finley says. "Ease of installation, start-up and maintenance are key in product solutions going forward. We are seeing more customers focused on initial purchase price and less on full life cycle cost. Highly specifiable pumps and systems continue to be a focus trend in the water market."
Improve Process Efficiency
O'Donnell predicts that the next 12 to 18 months will be a critical time in the industrial process industry. "Plants that embrace programs to improve process efficiency, reduce energy usage and waste, and improve their environmental compliance and footprint will be the ones left to take advantage of the economic growth in 2010 and beyond," he says. "That will require them to shift their focus from short-term expense reductions, and make the investments in improvements that have significant long-term paybacks. Detailed process analysis, reliability improvement programs, waste and energy reduction programs will all provide long-term benefits and allow plants to compete more effectively."
Any technology that supports energy and manufacturing efficiency should be desirable, even when competing with less efficient, low-cost options, Grice says. "Legislative and market conditions are converging to support these broad market trends. Everything is in play to support these trends, from product design to delivery."
Herold agrees that efficiency improvements will be at the forefront. "Users will want products that consume less energy, less natural resources and less human resources. Such a product will allow users to maintain total costs and cash flow."
According to Arnold, "Higher efficiency/lower overall cost of ownership is becoming accepted as not only fiscally responsible, but also environmentally and morally imperative. This driver will pressure companies to redesign their products to meet the new customer demands or they will be left behind by owners, engineers and contractors."
The recession has not kept Baldor from investing in new product development, Breaux says. "We have several new products that will provide excellent opportunities in the near future. The Energy Independence and Security Act (EISA) will require motor manufacturers to produce higher efficiency motors. About half of the motors we produce will be affected. Because we are already the market leader in premium efficiency motors in breadth and width of product offering, it will not be a problem for us. We are ready now.
"Some competitors, particularly importers, may decide that producing higher efficiency motors is not worth the investments necessary to do so, and may choose to exit the U.S. market. This could drastically change the competitive landscape in the United States with regard to industrial electric motors."
"We are choosing to diversify our services, as well as the markets we serve," Mersino says. "We have increased our outreach to global markets and have enjoyed success installing, managing and consulting on pumping solution projects worldwide.
"We believe it is important to continue to reach out to new markets, while maintaining our strident focus on the customer relationships we have already developed."
Grice agrees that globalization continues to be a positive industry strategy. "The manufacturing sectors, especially machine builders, should be able to take advantage of current favorable export conditions that exist because of the weak U.S. dollar. Creating products that conform to international standards and approvals will be critical for success."
Tuttle explains that several market influences worldwide will be of interest in 2010 with potentially significant ramifications in the business world, including dramatic fluctuations in oil and gas prices, the recovery of the global economy, the green movement and global geopolitical stability. "We will have to see how these forces play out through 2010," he says. "Effective project management and execution that keep budgets from escalating as well as projects built on schedule and in operation as designed will be critical."
Improve Technology and Electronic Communications
Advancement in technology continues to strengthen industry, especially during an uncertain economy.
"Virtual testing through CFD simulation is speeding up and reducing the cost of product development," Lowry says. "Simulation is looking inside pumps to gain new knowledge not attainable through traditional means. Pump manufacturers use this knowledge to make better, more diverse products. When it comes to diversification, we are seeing our customers put their products, their knowhow and their pumps into new areas like reverse osmosis and medical applications.
"Ultimately, product development allows the pump maker the flexibility to shift and diversify in reaction to an unpredictable marketplace."
A key business technology for CLYDEUNION is electronic communications and the speed of today's processing systems. "Real-time communications driving accelerated global knowledge transfers, product development and increased customer intimacy will be more prevalent as this technology becomes globally aligned," Tuttle explains.
Manage Talent and Employment
Effectively managing talent can be critical during uncertain economic times, and according to Bolen, growth-oriented companies are looking at the whole picture. "The business trend for these companies is to cut staff and downsize so they have only top performers in all areas of the company, i.e., general management, sales and marketing, engineering and manufacturing," Bolen says. "Companies are eliminating multi-levels of management and consolidating departments and even product lines. This is necessary in recessions as becoming Lean eliminates deep profit losses.
"Hiring key employees for critical positions is absolutely necessary. The economy will experience a slow, but steady, growth. The positive side is companies will be hiring; however, top talent will be harder to find and no longer readily available to the market as the economy recovers. It is an excellent time to examine and rate general management, manufacturing, engineering and sales staff. Replacing non-performers with top talent is not only a smart thing to do but is absolutely necessary during recessionary times."
Arnold says the shortage of hydraulic engineering design talent will expose those who have neglected their mentoring, leadership development and R&D efforts. "Conversely, companies with the foresight and financial will to invest in this critical area for the future health and wellbeing of their bottom lines will drive innovation and invention. Those companies will be rewarded with growth and increasing good will."
Pumps & Systems will continue to cover these and other issues regarding the State of the Industry throughout 2010.