Industrial Manufacturers: 2011 was Very Good, 2012 Should Be Even BetterWritten by John Egan for Industrial Info Resources (Sugar Land, Texas)--Industrial manufacturers dramatically increased their project spending in 2011, and the industry's outlook for 2012 is even brighter, David Pickering, Industrial Info's vice president of research for the Industrial Manufacturing Industry, said in an exclusive "Navigating the Currents of Change" interview.
According to data tracked by Industrial Info, through the end of September North American industrial manufacturers were on track to begin work on about $44.7 billion of capital and maintenance projects during 2011, a 91% increase over the $21.3 billion of projects they had scheduled to kick off in 2010.
Compared to 2010, scheduled project spending this year is slated to jump by more than 350% in both the Rocky Mountain and West Coast regions. Project spending in the Southeast is expected to increase nearly 200% compared to 2010. Scheduled spending in Canada should increase by more than $2 billion this year, driven by significant gains in Western Canada, Ontario and Atlantic Canada; however, spending in Mexico this year is expected to drop sharply compared to last year.
Click on the image at right for a graphic showing North American scheduled spending in 2011 compared to 2010.
Project spending in the Industrial Manufacturing Industry is largely driven by automakers and rail transportation projects. The fortunes of these segments are rising sharply because of the dramatic operational and capital-allocation improvements recorded this year by North American automakers and transportation companies, Pickering said.
The Big Three automakers are back, he continued, referring to leading U.S. automakers General Motors Company (NYSE:GM) (Detroit, Michigan), Ford Motor Company (NYSE:F) (Dearborn, Michigan) and Chrysler Group LLC (Auburn Hills, Michigan), which is now part of Fiat SpA (PINK:FIATY) (Turin, Italy). "For a few years, we didn't use the term 'Big Three,' because Chrysler had fallen on hard times and U.S. automakers were losing market share to Toyota (NYSE:TM). But that's all changed now: GM and Chrysler have repaid their government loans, GM is once again publicly traded, and Chrysler is scheduled to go public again. The future is looking quite bright for all three U.S. automakers."
Pickering noted that the Big Three automakers, along with major overseas automakers, reached an agreement with the Obama administration to dramatically increase the average fuel efficiency of their fleets, to about 50 miles per gallon by model year 2025. Meeting the new Corporate Average Fuel Efficiency (CAFE) standards "will be difficult for automakers to achieve," Pickering said. "But now that automakers have gotten with the program, getting consumers to sign on is the next challenge."
Consumer interest in more fuel-efficient vehicles, including electric and hybrid vehicles, has grown this year, driven by retail gasoline prices that exceeded $4 per gallon in some markets, he said. Tax incentives and aggressive promotion of electric and hybrid vehicles have helped make these vehicles more attractive to mainstream consumers. Pickering noted that most automakers are developing vehicles to compete with the Chevy Volt, Nissan Leaf and Toyota Prius. But he said it remains to be seen whether falling gas prices will sap consumer interest in these kinds of vehicles. Gasoline prices have fallen to less than $3 per gallon in some U.S. markets.
Public-private partnerships helped move a number of major commuter rail and light rail projects forward, Pickering said, noting that these partnerships are similar to Japan's Keiretsu approach to business, though without the interlocking ownership in each other's companies that characterizes the Keiretsu. "The most successful public-private rail partnerships consist of design firms, engineering & construction firms, investors and lenders, equipment suppliers and units of government coming together to share in the costs--and hoped-for benefits--of large projects. It works where no other model has because everyone has some skin in the game." For more on this issue, see September 30, 2011, article - Rail Projects Lead Planned Construction Starts for U.S. Industrial Manufacturing Industry.
In addition, Caterpillar Incorporated (NYSE:CAT) (Peoria, Illinois) and Intel Corporation (NASDAQ:INTC) (Santa Clara, California) have recently announced hefty increases in their U.S. project spending budgets.
Although there has been plenty of good news for industrial manufacturers in 2011, and notwithstanding the bright outlook for project spending in 2012, Pickering did note there is some disappointing news as well. He expects at least 100 North American plants in this industry to close this year; unemployment in the industry remains high, and the slow start of some capital projects this past summer means there will be somewhat fewer plants operating next spring.
Pickering noted that industrial plants in the North have closed and relocated to the South, which tends to have lower operating costs because unions there are less prevalent and powerful compared to the North. "If you've living in the North, you're seeing jobs leave. If you're living in the South, you're seeing jobs arrive. Whether that's good or bad depends on where you live," he concluded.
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