Industrialmachine2008

Industrial Machinery Industry

INTELLIGENCE REPORT2008

INDUSTRIAL MACHINERY INDUSTRYMARKET FORECAST AND ANALYSISNAICS 3331-3339

© 2008 DVIRC

Growing Business Value

Strategic View:

• Mature Industry 1

• Business Cycle – Cyclical Industry 2

• Export products to developing countries (China, India, Russia) • Product innovation – highly specialized machinery • Procyclical Industry – will be affected by low GDP growth in 2008

Financial Trends:

• U.S. Projected Revenues in 2008: $582 Billion • Forecast revenue growth for 2008: 4.2% • Elevated Operating Expenses will increase by 4.7% in 2008 (increased price of raw materials) • Total industry employment - small decrease by (-0.1%) in 2008 • Average Hourly Earnings will increase to $18.63 an hour in 2008 (2.9%) increase from previous year - just above 2007 real inflation • Sluggish growth for benefits in 2008 - sporadic elimination of benefits

Market Trends:

• Continuous Productivity Enhancement - plays very important role in cost management • Increased negotiation power for manufacturers over unionized labor costs (global competition) • Introduction of two tier wage structure • Manufacturers pay more attention to inventory reduction, improved supply chain management, focusing on leading product lines • New orders for associated markets confirm the outlook for slower growth in 2008 • Material handling equipment is above previous year levels but generally slowing

INDUSTRIAL MACHINERY INDUSTRY

1. Mature industries are those whose trends follow that of the macro economy. Due to the slow pace of natural growth within the industry, competition for market share is the largest source of expansion for companies within the industry. As a result profit margins usually weaken in the phase of maturity.2. Business Cycle Reaction - cyclical industry profitability tracks the business cycle.

© 2008 DVIRC

Macro Drivers:

• “South – South” trade deals ($1.9 billion from China to Africa) on infrastructure development - might erode U.S. and European market share • Weak U.S. dollar will benefit industrial machinery exports • Preparations for 2008 Olympics in China - significant demand increase for construction, transportation, electrical power generators and other industrial machinery equipment • Strong global demand will offset slower domestic demand - favorable financing • Slow GDP growth in 2009 will have negative effect on the industry • Foreign competition is becoming technologically savvy – aggressive local governmental subsidies • Canada will remain primary market for U.S. industrial machinery

Industry Drivers:

• Strong demand in 2008 for mining, exploratory and power generating equipment • Nonresidential investments are still (regardless of the recent slow down) offsetting residential slow down • Driving demand for commercial space utilization – space utilization equipment • Manufacturers’ drive to improve productivity - bust in spending on industrial machinery • Demand for extraction, processing, refinery equipment and storage will remain strong – high demand for crude oil • Investments in technological updates - waste, labor and energy cost reduction – demand for automation equipment • Alternative fuels - boosting demand for industrial high-tech equipment (not enough skilled professionals) • Automotive industry decline – decreased demand for metalworking and power equipment but increased demand for standardization equipment to improve profitability, reduce cost and reaction time to market forces

Pricing: • High commodity prices will remain strong - crude oil over $110 a barrel in 2008 • In 2008 producers will still pass higher costs on to their customers • Producers Pricing Power – medium • Specialized machinery pricing will remain high • Strong price increase in 2008 for exploratory, power generation and mining equipment • Labor cost - important cost containment

INTELLIGENCE REPORT

© 2008 DVIRC

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Source: Bureau of Labor Statistics; Moody’s Economy.com; Lexus Nexus; Integra; Deloitte; Department of Commerce, Global Insight, Inc.; Harvard Business Review; Hoovers; Integra; McKinsey Quarterly; ING Foreign Exchange Wholesale Banking; Economist Intelligence Unit; Harvard Business Review; Edgar; Federal Reserve Bank; PricewatherhouseCoopers Healthcare Indicators; Hospital Statistics; Bruegel Brussels Belgium; Standard & Poors; Security Price Index; American Petroleum Institute; Wall Street Journal; Consumer Confidence Board; Federal Energy Regulatory Commission.