Can distributors fight off the Asian flu?
Distributors had a great 1997 and predict a similar '98 unless the Asian flu strikes during the second half
By John R Johnson -- Industrial Distribution, 6/1/1998
Newton, Mass.-- At the start of 1998, there were two economic concerns facing distributors. The first was El Nino, which with summer approaching seems to have passed, but not before slowing business in areas effected by heavy rains and adverse weather.The second concern -- the ongoing crisis in Asia -- is still just that; a concern. So far, Asia has not had the drastic negative effect many had predicted on the American economy. In fact, the nation's economy grew at a 4.2 percent rate in the first quarter, higher than many had predicted. However, the National Assn. of Purchasing Management's monthly business index fell from 54.8 to 52.9 in March, signaling a cooling of the economy in that period, as the Asian financial crisis played a role in slowing U.S. exports. And many distributors are keeping an eye out for a turn for the worse.
"The greatest concern is still the impact of the Asian economic situation on ex-ports and im-ports," the NAPM report of purchasers said.
Applied Industrial Technologies, the Cleveland, Ohio-based power transmission distributor, doesn't do a lot of business overseas, but Applied chairman Jack Dannemiller has seen a slowdown in the textile and paper industries, which have been affected by a slowdown in Asia, and in the tobacco segments.
"We don't sell a whole lot overseas, but we see those three segments in decline for us the last nine months," says Dannemiller. "We can't quite figure out what's happening with tobacco, other than some regulations, but their demands for products have been slowing. We think the economy will be decent again. We've seen 3.5 percent real growth which is not exciting, but it's still growth."
Kaman Corp., parent company of Kaman Industrial Technologies, notes in its first-quarter report that "The Asian flu is beginning to be felt in North American industry, which is [Kaman's] primary customers. However, the level of impact that will be felt going forward is not yet clear. So, we're watching closely and will adjust accordingly."
"I do have some concern about how exports to Japan and the rest of Asia will be affected in the next quarter," says Jack Cahill, president of Kaman Industrial. "We do quite a bit of business with semiconductor companies, and we're beginning to see them get stretched a bit. A good percentage of the market is in great shape, but there will be some ripple from the Asian flu."
The crisis in Asia has had a two-sided effect for many distributors. Fastenal, for example, reported in its first-quarter report that financial results for the first quarter of 1998 reflected impacts from weather and the turmoil in Asian economies.
The Asian economic turmoil created three effects -- two adverse and one favorable. The favorable effect came from 20 percent lower prices compared to a year ago on low-carbon and stainless steel fasteners imported from the Far East. To the extent that Fastenal was able to retain the cost advantage, the company's gross margins improved. But these lower costs also affected Fastenal's revenues because some of the lower costs were passed on to customers in the competitive marketplace. The second negative effect was the lower sales of Fastenal's products to customers who export to the Far East.
Adverse weather diminished Fastenal's sales on the East and West coasts in the months of January and February. A major winter storm in the second week of March impacted sales in the midsection of the country.
Robert McCollum, president of R.S. Hughes Co., Inc., Sunnyvale, Calif., says the Asian situation is starting to slow sales slightly to some of his customers in the electronics industry. "We're seeing a little impact, but not huge," he says.
However, even some companies that didn't fare well in 1997 and in the first quarter of 1998 are hopeful for the remainder of the year. Noland Co., which has four divisions, including industrial, electrical, plumbing and air conditioning, says sales were hurt by bad weather in the first quarter. But, the company is hopeful that 1998 will be a very strong year.
"Record rainfall in our 14-state territory during January and February slowed new construction, thereby delaying deliveries of our products," says Noland chairman Lloyd U. Noland III. "While we don't want to minimize our concern over the first-quarter sales shortfall, we remain somewhat bullish in our outlook for the remainder of the year. The company is sound and there is pent-up demand for our products and services in the construction sector."
Despite the uncertainties of the economy, distributor confidence in current business conditions increased for both the short-term and long-term, according to a recent study released by Arthur Andersen. The distributors' ranking for the year-ahead index climbed to 111.2, its highest level since the first quarter of 1997.
And the nation's purchasing executives predict economic growth will be somewhat higher in the second half of 1998, according to the 55th Semiannual Economic Forecast issued by the Manufacturing Business Survey Committee of the National Assn. of Purchasing Management. While 76 percent expect their 1998 revenues to be greater than in 1997, the respondents expect a 6.4 percent net increase in overall revenues, compared to the 7.8 percent gain predicted in December 1997.
"Purchasing executives report a similar level of optimism for the coming year than they did a year ago, with 81 percent expecting business in the first half of 1998 to be better than or the same as the second half of 1997," says Norbert J. Ore, C.P.M., chair of the NAPM report and director of corporate purchasing at Chesapeake Corp.
Industries expecting the greatest improvement in revenue over 1997 are (listed in order): paper; printing and publishing; chemicals; furniture; fabricated metals; miscellaneous -- a preponderance of jewelry, toys, sporting goods and musical instruments.
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