Michael D. Locker, president of New York-based consultant Locker Associates Inc., said he believes appliance manufacturers will continue to move assets offshore.
"Soon the major trend will be moving production overseas, which is a major issue," Locker said, noting one example of the trend there are no U.S.-made air conditioners anymore. "If we lose our customer base we won't have anything left."
Maintaining production domestically is the real challenge, he said. "It all has to do with productivity. They need to lower their costs to be competitive with lower labor cost overseas. So through productivity, lower man-hours, they can offset higher labor costs. They can do it through technology, leaner manufacturing, lower inventory, a whole series of things. But the simple way is just move it; throw up your hands toward the route of least resistance. Problems with manufacturing abroad are perceived to be less problematic than honing domestic production."
While the high cost of commodities, like carbon steel, is a major factor, it isn't what's holding appliance makers back from manufacturing their products, service center executives said, offering their analysis of the market.
"Steel is just one component," according to Gary Hamity, president of Chicago-based service center Mapes & Sprowl Steel Ltd., which specializes in porcelain-enameled steel. "Appliances are steel intensive, but if demand is there they'll get their steel. Range tops made of glass are of strong interest, but not because of steel prices. Steel is still cheaper than aluminum, stainless and glass."
Lawrence "Bo" Burr, president and chief executive officer of Twinsburg, Ohio,-based Atlas Steel Products Co., agreed. "Demand is demand," he said. "There's just not the accompanying demand without the houses being built."
What's more, carbon steel is less expensive than a few years ago, when appliance manufacturers were at full tilt. "In 2004, business went nuts for carbon," Burr said. "It was a perfect storm of demand such as we hadn't seen in decades."
Spot market prices for carbon cold-rolled sheet, the material commonly used in appliances, was around $610 a ton at the end of June, way up from $280 in late 2001 but much less than the September 2004 peak of $800 a ton.
What is happening, however, is that producers are consolidating and moving production offshore. "(It's) what happened sometime back in small appliances and is happening now in things like barbecue grills," Burr said. "But so far American manufacturing is just dealing with volume falloff."
Despite the appliance chill, Burr remains optimistic on the market's outlook. "When you talk housing starts you can almost end the conversation," he said. "Housing is very far down, which is dragging appliances with them. We're not enjoying quite the volume we'd hoped for at this point of the year."
However, there could be a positive trend on the horizon if the Federal Reserve Board lowers interest rates, possibly heating up housing market sales and builds, Burr said. "Earlier this year there was hope that the Fed would move rates a bit downward," he said. "A lot of speculation says that won't happen now, but we're still optimistic."
Hamity said he believes the appliance industry's softness is a reflection of overall market demand for appliances relative to housing, which is consistent historically. "But we concentrate on selling into the high-end market and mostly in the high-end range market," he said. "That's not as volatile as the more middle- to lower-end pricing products. It's a little softer but it's not significant."
However, Hamity said that the high-end appliance makers are attempting to expand into the more price-competitive market. "So growth in the high-end is slower," he said. "They're getting their price points down, but then they're more into the general housing market. But there's a lot of renovation going on, and that's still a very popular area to use high-end ranges."
Burr held a similar view. "There's certainly a low-end buy and a high-end buy in appliances," he said, adding that the high-end buy hasn't been affected as dramatically.
Once manufacturers switch from traditional 300-series stainless to a lower-nickel-containing grade or even another product, they might not switch back even if stainless prices drop. "Substitution is a big issue in appliances," Burr said. "Everybody is looking at 201 and alternatives to 304. Since there is considerable work and expense related to re-engineering specs, it isn't an instantaneous switch, so they've not totally switched to 201. But it may be a battle to go back. You've pointed people in a direction because of cost and they may never return."
While it doesn't touch the still-hot stainless market, Mapes & Sprowl's porcelain-enameled steel is used in many of the higher-end products, which are characterized by bright colors, though not the harvest gold and avocado green of yesteryear. "There's more interest in colors and design of kitchens," Hamity said. "Stainless has been a great product. I won't say it's run its course, but designers are always looking for something new. Old is new. It may not be the entire kitchen, but they will complement some stainless appliances with a cobalt-blue range. It adds a little flair."
As for stainless, its use is still strong, analysts said, but substitution is looming because of its high price. The cost of nickel, a main ingredient in stainless, has pushed stainless' price to new heights.
"Stainless is definitely trying to be replaced with stainless lookalikes," Hamity said. "But it's too early to tell how that's going to be accepted in the marketplace."