GLG News by William Faris

Implications: Continued tunnel vision of business segments makes the problems harder to solve rather than easier. This reminds anyone me of rearrainging the deck chairs as the Titanic goes down Logistics has been long envisioned as a chain. attempts to favor one link in the chain are never going to be successful unless the whole process improves

Analysis: Years ago the harvard Business review published a landmark paper called the marketing myopia and discussed the railroads lack of vision. they failed to see that they were in the transportation and logistics business and not in the "railroad busienss" per se.

Now the AAR congratualtes President elect Obama on his election and his favorable atitude toward infrastructure.

Perhaps they missed the issue that the stock market has fallen nearly 1,000 points on news of that election. Perhaps they feel that the need to shp goods by rail or any other means is entirely dependent on market demand.

It would have been a lot better to suggest to the new administration get creative to get the economy moving forward. No economy can continue to provide jobs and support for infrastructure when investment capital is locked up, confidencce is drained and business taxes are increased.

Here we are losing 500 points a day in the market and our leaders are arguing about gay marriage

The message by the railroad industry is Pure pandering at a time when we need leadership

Implications: Cost is sometimes harder to calculate than it might seem. Some manufacturers had to experience the true cost of stock out and business interruption before they saw that the US may be a low cost place to manufacture

Analysis: Over the course of the last several years many manufacturers have pulled up stakes and decided to buld assemblies or subassemblies overseas due to lower costs.
Certainly assembly costs seemed lower, and also there were government incentives in foreign markets as well as comonents pricing that seemed lower.
It now appears that many have now discovered that the US may be the lowest cost place to manufacture when you consider the many costs like stock outs, components that dont conform, port charges, freight, business interruptions, training and othercosts.
It seems that north american workers can be very efficient, and can offer greater flexibility to markets.
dont be surprised if some of those jobs that went overseas don't return in some form or fashion. they may not be done the same way, but there is great advantage to have the manufacturing near the markets

Implications: Strategic implications for foreign oil mean that the US needs to get more control of its apetite for this essential commodity. The university teaches other courses beyonf econ 101 which Mr Stein needs to study before he embarks on such very thin ice. Oil is essential to this economy and as such it can be a weapon for or against us. the same can be said of other commodities, but not of the Mini Cooper or Mr. Bean. I would suggest that Mr Sten Put down his double latte and join the real world

Analysis: Mr. Stein lacks even the most basic appreciaton o the implications of energy. What the candidates are concerned about, is foreign oil in the hands of rogue nations who will use it as a threat to Democracy and the American way of life.

While we have no complaint with importing energy to and from countries like Canada who are well run and stable, and who partner with us in an attempt to improve life for its citizens. However the same is not true of rogue nations such as Iran, Venezuella and others. In fact Cuba and China now have a  joint venture off the coast of the island nation just 90 miles from our beaches.

Independence from terrorists, and dictators is a good thing. Mr Stein has aparently not lived and travelled extensively in the Middle East as I have. if he had, he might not want to put the future of his driving in his Mini in the hands of these despots.

In fact Mr. Sten probably has not spent much time away from his beach or else he would learn that the Ozarks are not a great oil producing region and Beverly Hills is not a desireable place to live in the opinion of those of us who do live in energy producing areas.

I suggest that the LA Times look for a writer who actually knows somethign about which he speaks.

Implications: North America and the US in particular have become addicted to cheap energy and it has become a way of life. Like most complex issues it will take a complex solution. the complexity is not in the steps to be taken, but in the actual execution

Analysis: Energy consumption is a hot topic this summer, all puns intended.
from the gas crunch to our air conditioning costs we are reminded about the dependence of our country and way of life on cheap energy.

The solution is clearly rooted in many small steps. Americans need to consume less. this is easy to say, but its tough to get the soccer mom to give up the 8,000 pound suburban with dual temp A/C for her golden retrievers. People need to walk more, not just for their well being, but also for the energy saving. car pooling is another step that is essential before we build another highway. Any trip to the golden state is an illustration of the issue.

In addition we need to reduce dependence on foreign oil. the Pickens plan is a great start. It makes all the sense to sue the Naturl gas resources we already have. Nuclear and Wind power can also help as we transition to to new technologies

Another obvious step is we need to drill where the North Amerian oil exists. If that means ANWAR or offshore, then its imperitive that we start now. If Ms. pelosi continues to block any attempt on a vote, then her party should pay the price at the polls for her pea brained position.

Finally, the leadership needs to penalize speculators who drive up the cost of these resources to the point that they lose all interest in this commodity.

Its a complex formula, but we need to start.

Implications: Energy independence is a strategic and immediate initiative that needs to be engaged in the same way that President Kennedy addressed our need to lead in space technology. In both cases our economic system and our very survival as a civilization depend on it T. Boone Pickens is offering leadership and insight.

Analysis: Boone Pickens is an oilman and he knows the energy business from the inside. His proposal makes a lot of sense and is realistioc and attainable.
Automobiles have the technology already to run on Natural gas and North America is blessed with abundant reserves of that resource. In addition we have Solare and wind power that can augment fossil fuels to reduce our dependence on overseas supplies.

Interestingly, some of the largest reserves of oil are located in some of the least friendly nations. The Gulf states, Nigeria, Russia and Venezuella all are unreliable allies.

Nancy pelosi has blocked all attempts to drill offshore and in ANWAR in spite of the fact that the Chinese are drilling off Cuba.

The USA this is a matter of survival. its true we cannot drill our way out of the mess we are in, but with Wind, Solar, natural gas and other resources as well as some behavior modification of the SUV generation, we can once again lead the world

Implications: energy independence is a wonderful thing, but it is not without some ramifications. Is it better to have lower mileage and performance in MPG and higher food prices?

Analysis: Ethanol has a number of issues that come with its main advantage of energy independence. First of all since it is a Bio-fuel, it has the effect of raising the price on food products at a time when inflation is already ugly.
Secondly it does not perform in normal gasoline engines as well. In an unscientific but often repeated study my 4 vehicles get about 10% worse MPG with Ethanol blends.
Thirdly, there are claims that it also causes harmful corrosive effects on engine internal parts. Jaguar found that on the AJ-8 original engines that had Nikosil coating on the cylinder walls, there was a dramatic effect of certain aditives.
Are the negative effcts offset by the main benefit of energy independence? The answer is, it depends. If you have to replace the engine in your $93,000 Jaguar it is clearly a poor choice. If it only lowers your MPG by 10% it may be acceptable.
In any event, the choice will probably be a strategic one done at the national level, but it may make a market for Non-ethanol products

Implications: JCI has not brough real value with the acquisition of York. The resulting company will once again be top heavy, over burdened with corporate stucture, and unresponsive to customers.

Analysis:  If history has taught us anything it is that conglomerates do not serve the market well.
Carrier is an excellent example. prior to the UTC takeover, Carrier had dedicated people, a dominant market share, and a good knowlege of how to serve their customers. Most of the leaders hip at carrier had come from thh industry. Today they are losing share, and distribution due to the Corporate cultiure and management from the Gold Building (UTC).
Just look at what they have done to some fine brands such as Magic Aire, Day and Night, Payne, and Bryant.
JCI is falling into the same trap. York could once boast that it was the largest independently owned manufacturer in North America. The Conglomerate corporate culture will suffocate leadersip from within. Don't be surproised to see fewer innovative products, less flexibility, and greater structure.
acquisition serves to impress wall strret, but not the core customers. In a realively short time the losses in competitiveness will far overcome any gains in consolidation.
Ask yourself two key questions: First, since goodman global has taken so much market share recently, who did they take it from?
Secondly, Why did they take it? The key is to serve the market, not the corporate consolidators

Implications: It has been long known that the low cost supplier has an advantage in HVAC. Secondly, Rheem lacks brand awareness in the eyes of many consumers. Nordyne does not.

Analysis: Nordyne has an extremely affiant process and will gain share and margin due to the added sales, Secondly their brands are all household names that are quickly recognized by homeowners

Rheem has made some progress with some of their divisions such as their parts side, but they continue to offer units that do not fit what consumers want

Implications: Trane will continue to lose share and increasing pressure on Rheem/Ruud is inevitable. The major winner in 2007 was Goodman who continued to gain share asCarrier and York traded partners this year as well as Bryant and Nordyne 

Analysis: It is becoming more difficult for the smaller brands like Rheem/Ruud and others to compete for the big players

Some people estimate that carrier lost $700 million in sales when it parted company with USACD. Part of that may come back as big blue tries to build its 22 stores in SoCal, but much of the commercial business is lost through arrogance and management myopia.

Trane is going to lose punch as IR takes responsibility for the HVAC side. The once powerful alignment of plumbing and A/C is going away, and companies like Fergusson cannot be left with uncompetitive products.

Goodman has continued to lead the way with price point, and in this world of 13 SEER and higher products, Goodman has adapted a Wal-Mart type strategy. They are offering "plain Jane" products at resonable prices.

Implications: As companies like Ferguson/Wolsely and Watsco grow theyput more pressure on small local wholesalers and suppliers to deal with a mega distributor. At this point Ferguson may be the largest supplier of black pipe in the world. Secondly, thier size makes them difficult to do business with on standard terms for distributors and therefore they may get deals that are not available to all. This makes small stores and small chains less competitive

Analysis: Stegman says Acquisitions traditionally represent 50% of Ferguson's growth, and he sees no change in sight. The biggest challange will be to keep these branches focussed and profitable, and to keep the staff motivated and alligned.
It is on thing to recapitlize an underfunded distributor, but it is far more difficult to grow that business. Ferguson has shown no aptitude at making significant strength in HVAC

Implications: The article mentions that nearly all toys and 70% of US shoes come from China along with many other goods. 

The US trade policy and imposition of duties on China could damage a long-standing trade relationship and cause global markets to suffer.

Analysis: Every toy in the US, 70% of shoes, and 15% of clothes are manufactured in China.  The Chinese government is outraged at the US duties and retaliation is a possibility.  This "turmoil in US-China trade" could lead to inflation, and have a negative impact on US-China imports and exports. Global markets do not like uncertainty.

Implications: In this article William Sutton makes reference to two key points.

His first point is that Govenment is considering several responses to what they believe is global warming. The lack of a national program can cause individual states to proffer many and various programs which will be difficult for the industry to incorporate.

His second point is that growing economies overseas means growing market for HVAC products.

Analysis: Mr. Sutton has opened some interesting topics, and he has glossed over the fact that the new 13 SEER rule has forced OEM manufacturers to insist on changeouts of the evaporators as well as the metering devices. The combination of the higher prices on outdoor units, replacing indoor units and valves will have a restraining effect on the US market for 2007. Although shipments were down by about 10% last year, it will recover only slowly.

The second point is more basic. The economies which are growing overseas do not have the same type of construction as North America. Certainly China, Vietnam, India, Malaysia and other tend to use more mini-split units rather than residential central units.

Few ARI manufacturers offer serious products for this application. Again I would suggest caution with this forecast.

Implications: Although this article highlights 10 trends, I found that section number 2 and 7 to be very interesting.

Professor Dittman writes, "..many companies are just now realizing that risk (in off shore supply) might be the greatest potential cost".  In addition, Professor Mahmoodi of Clarkson writes, "These are the three basic drivers of EVA: Revenue growth, cost reduction, and asset reduction".

Managing the overlap of these two key thoughts is essential.

Analysis: These two key points are driving supply chain logistics.

Recent experience in industrial supply reveals that many manufacturers have been lured to form deals with suppliers in China, India, Vietnam and others.  While the cost saving benefits appear to be outstanding, the risk of business and supply interruption can quickly overcome those gains. An example was the inability of many Air conditioning OEM's to supply TXV valves in the summer of 2006.

Unfortunately many accountants have had a hard time estimating the value of lost sales when they calculate the cost/benefit ratio.

Implications: The year 2007 is going to be an interesting year as globalization changes the way the HVAC industry does business. More components are coming in from overseas than ever before and the quality is better and the prices are cheaper than domestic sources. The article mentiones that Not only China, but components also from India, Vietnam, Pakistan and Malysia are on the increase and so is port traffic. They state, "For 2006 container trade volume is growing at more than doublethe rate of overall ecconomic growth".

Analysis: HVAC manufacturers are in a cost squeeze caused by the 13 SEER regulations, increased material costs, installation costs, transport costs, and distribution. They are searching aggressively for cost reductions to give them more margin between the sell price and manufactured cost. Typically the purchased material such as motors, compressors, valves and compressors make up about 65% of the manufactured cost.

However, there is no doubt that this is the time when HVAC builders in North America will look to import components and save money.

Although Port congestion and exchange rate do not yet appear to be an issue, the fact of extremely long supply lines may prove an issue. I believe manufacturers will look to cut deals with a few suppliers and build in the flexibility with some North American reserves.

The winner of this game can be the low cost supplier in 2007.

Implications: Castle Group which operates 27 wholesale stores in Florida is being acquired by Wolseley group of UK. Wolseley already owns stores across the US and Canada operating under Ferguson, Familian, and ACR names. In a related article Wolseley reported sales of more than $25 Billion US. They also reported 10 years of growth including 25.8% for the most recent period.

Analysis: The entire HVACR industry is experiencing an effort in consolidation. Home depot bought Apex, and Hughes supply. This latest move by Wolseley continues the pattern. It gives the major wholesalers a strong purchasing position on metals and with asian factories. With Watsco, Lennox and others in the hunt, the individual distributors are looking at their position. What do I sell to these people, what is my business worth? What if I don't and they come in and compete with me. Its the same effect of the grocery store competing with Wal Mart.