Appliance Industry Banking on Stimulus

With residential construction and remodeling so slow, production of home appliances is moribund. But appliance manufacturers, and their metals suppliers, are hopeful the federal stimulus package will turn around the economy, as well as demand for new energy-efficient ranges, refrigerators and laundry machines.

By Dan Markham, Senior Editor

For the beleaguered appliance market, one phrase provides a ray of hope—economic stimulus.

Beaten by the decline in housing starts and the financial crisis that has made access to credit a pipe dream for many consumers, the appliance industry was encouraged when the federal stimulus bill signed in February contained provisions for the appliance market. The bill includes $300 million to fund the Energy Efficient Rebate Program, designed to both encourage the purchase of appliances and cut down on domestic energy use. Through the program, consumers will receive rebates to help offset the higher cost of more energy-efficient Energy Star-rated appliances, including refrigerator-freezers, dishwashers and clothes washers.

“This has been our top legislative focus. Thank goodness $300 million made it into the final bill,” says Jill Notini, spokesperson for the Association of Home Appliance Manufacturers in Washington, D.C. “It helps the manufacturers in terms of a major spur in spending. And it helps the consumers short term and long term, with an initial rebate and long-term energy savings.”

Money for the rebate program will be funneled through and administered by the states. Some states already have programs to spur purchase of Energy Star appliances, while others must create them. For those with existing programs, the states could choose to expand the dollar amounts available to consumers or keep the program going longer.

Energy Star appliances are defined as products that perform a certain percentage above baseline appliances in terms of energy efficiency. With refrigerators, for example, the figure is 20 percent more efficient than traditional appliances.

AHAM estimates that if every home replaced its older appliances with Energy Star models, it would save more than $10 billion in utility costs.

“Replacing older, less efficient appliances with Energy Star products is the single most cost-effective step a consumer can take to save money and energy,” says Joseph McGwire, president of AHAM.

With the dramatic increase in utility costs in 2008, demand for Energy Star appliances was already on the uptick in the United States Of the dishwashers, refrigerators and clothes washers shipped in 2008, 55 percent were Energy Star, up from 51 percent in 2007.

Manufacturers are taking notice of that trend in consumer preference. “We worked hard to prepare our product line to meet higher efficiencies,” says Jeff Warther, manager of residential cooling products for Carrier Corp., Farmington, Conn. “And we’re working on some really high-efficiency equipment moving toward 2010.”

February’s federal bailout actually was the second boost the industry got from Washington. In the smaller November 2008 bailout package, Congress extended the manufacturers tax credit for production of super efficient appliances, those that go beyond Energy Star standards.

“We had that passed as part of the first bailout bill, so that was big,” Notini says. “But the second bill is great because it directly impacts the consumer who reaps the rewards for choosing energy efficiency.”

However, some industry watchers aren’t certain the February bill offers sufficient punch. “The stimulus is not as helpful as it could be, but it’s clearly something we need,” says Evan Barrington, vice president of economic development for the Stevenson Co., a Louisville, Ky.-based analysis firm that follows the appliance industry.

Barrington says the stimulus will work well for consumers who must replace certain appliances, and can then choose more expensive, more energy-efficient models. He’s less certain how many will be inspired to buy simply for the energy upgrade.

“In the short term, is that rebate going to drive people to make appliance purchases?” Barrington asks. “I’m not sure we’re going to get as much stimulative impact early on as we might have with something more direct.”

His bigger hope is that the stimulus bill can simply help restore consumer confidence.

“Consumers are very scared, so they’re hunkering down. They won’t buy. Businesses in response see their sales slow, so they cut back and lay people off. With more layoffs, consumers get more scared,” he says. “The purpose of the stimulus package is to help turn that thinking around.”

Whatever the impact, the stimulus is one of the few factors trending in the right direction. Other signals point to more difficult times for a sector that has been on a downward spiral since the end of 2006 (see chart).

John Anton, an analyst with IHS Global Insight, Lexington, Mass., says industrial production of appliances will be off 70 percent from the baseline period established earlier in the decade, and he expects no quick recovery. The appliance market will only rebound to 85 percent of its baseline production by 2012, and it could take until 2018 for the market to return to its earlier level, he predicts.

Much of the downturn is tied to the bottoming of the U.S. housing market. New-home starts have plummeted since 2007, taking appliance demand with them.

“It’s definitely related. It’s in lockstep,” says John Zemon, describing the correlation between construction of new houses and production of new appliances to equip them. Zemon is the vice president of stainless sales and marketing for Atlas Steel Products, Twinsburg, Ohio.

In January, new-home production fell to a seasonally adjusted annual rate of 466,000 units, according to the National Association of Home Builders in Washington, D.C.

There was a slight rebound in February, with a bump in multifamily units increasing starts 22.2 percent to a seasonally adjusted 583,000 units. But such percentages can be misleading.

“Housing starts are down around 500,000,” says Anton, who made the estimate before NAHB released its most recent data. “If it goes up to 600,000, that will be a whopping 20 percent increase, but 600,000 is still only one-third of what it was in the middle of the decade. If you look at percent changes, you can get a completely false picture of the recovery. We’ll see some very big percent changes in 2011 and 2012. But the level will still be atrocious for years.”

It isn’t just the paltry number of new homes that will continue to drag down appliance demand. Many home remodeling projects have also been put on hold due to the recessionary economy. With rising unemployment and cratering consumer confidence, homeowners are only buying appliances when absolutely necessary. “If the water heater is spewing water onto the floor, you’ve got to fix it,” Anton says. “But no one in their right mind is remodeling their kitchen right now. Remodeling is discretionary, and discretionary spending is down completely.”

Moreover, even those with secure jobs who still want to remodel may have trouble getting financing. With so many homeowners under water—owing more on their home than its current market value—taking out a second mortgage is not an option.

Jim Delaney, president of global accounts for Chicago-based Ryerson, says there are no pockets of positive demand in the appliance sector. “The weakness in demand is broad based, with no areas showing appreciably better performance than others. The same is true for metal products, with carbon, stainless and aluminum sales to appliance makers all suffering in the current environment.”

One reason for future optimism is the slowing of the trend toward foreign manufacture of appliance products.

“The Chinese supply chain has gotten long and unwieldy for a lot of people,” Zemon says. “We’re seeing more jobs that were sourced overseas kind of coming back.”

Anton says a weak U.S. dollar and strong product quality should favor American manufacturers for years to come. “The dollar should be a weak currency for the next decade or more. It strengthened temporarily just as a safe haven, but the fundamentals are still quite weak. That bodes well for U.S. manufacturing,” he says.

Additionally, some Chinese-made products are suffering from an unsatisfactory failure rate. “With appliances, if it’s under warranty and it breaks once, customers will forgive you. If it breaks a second time, you’ve lost a customer forever,” Anton says.

Some manufacturers have actually repatriated production to this country

to regain control of workmanship. “Appliance makers make quality products, and the cost disadvantage they’ve suffered [at the hand of foreign competitors] has become less meaningful. It will be a difficult and extended recovery, but the U.S. appliance industry should come back,” Anton adds.

Carrier’s Warther is eager for the first signs of that comeback. “Even if it’s going to be slow, we’re all looking forward to seeing at least a slight recovery.”

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Thursday, March 22, 2018