2012 State of the Industry
A recessionary mindset in the global economy stalled the U.S. and global economic recovery in 2011, but the U.S. economy is projected to improve in 2012, fueling an uptick in demand in the U.S. specialty fabrics industry; Europe’s debt woes are expected to constrain growth worldwide while China seeks growth in its domestic economy.
Specialty Fabrics Review | February 2012
By Jeff Rasmussen
Successful suppliers and end product manufacturers (EPMs) found it necessary to revamp their business operations over the past few years in response to economic realities. But in 2011, many of them began to realize cost savings from the production and distribution efficiencies they’d implemented; some have even achieved double-digit sales increases.
Six of the eight end product market segments IFAI monitors regularly achieved single-digit sales growth or were flat in 2011, a marked improvement over 2010 when only four segments were growing or flat.
Hiring the right people to carry out their strategic plans, state-of-the-art equipment and lean manufacturing practices have helped successful organizations produce new, higher quality products and price them so they reflect superior value. Increasingly, EPMs have diversified into non-fabric-oriented markets to help them grow revenue and fuel projects for the fabric side of their businesses.
Inconsistencies in the world market
The world market for specialty fabrics grew about 2.5–3 percent in 2010 as economies across the globe improved. In 2011, the world market for specialty fabrics is expected to grow about 2.5 percent as growth in global GDP should reach 4 percent and remain the same in 2012.
Consumers worldwide, however, remain concerned about the soft labor market, personal finances, tight credit, and their ability to buy things they want and need. The Asia Pacific region and the Middle East are exceptions, according to the Nielsen Global Consumer Confidence Index. Nonetheless, weak economic figures, slowing manufacturing performance and inflation in Asia, an intensifying debt crisis in Europe and continuing political instability in the Middle East, combined with rising household expenses in the U.S., have taken their toll on consumers’ fragile confidence.
A mixed but upbeat recovery
In 2011, the overall business and sales environment improved for many industry participants. Some manufacturers, even in the traditional markets, did slightly better than in 2010—especially the marine market, which bounced back from a decrease in growth of 7 percent in 2010 to an increase in growth of about 4 percent in 2011.
Residential and non-residential construction in 2011 decreased about 2.0 percent and 2.8 percent respectively, dampening sales growth prospects for awnings, fabric structures, and geosynthetics. 2011 sales performance results were a bit of a mix for EPMs in the U.S. fabric graphics market; some achieved single-digit growth while others were flat; some even experienced their worst sales in years.
According to the National Association of Home Builders Remodeling Market Index (RMI), consumers remain cautious. Homeowners may be interested in having remodeling work (such as awnings) done, but are in a “wait-and-see” mode.
The sentiment among those participants at IFAI Expo Americas 2011 is that a recovery is underway. They reported small, positive gains in growth in 2011, but felt 2012 and 2013 could be breakthrough years in which they achieve 4–6 percent growth. In fact, some participants reported they are already achieving double-digit sales growth and expect to see more of the same in 2012.
Sales in the U.S. specialty fabrics industry increased about 1.5 percent in 2011. Sales projections for highly fabricated products (which includes specialty fabrics) in the U.S. for 2012–2013 are expected to see increases of 2–3 percent per year—a much more upbeat forecast for the specialty fabrics market than at this time last year when it was projected to decrease slightly in 2012–2013.
What’s holding things back?
The last few years have been trying, but many industry participants began to see better results in sales and profitability in 2011 due in large part to their efforts in revamping their businesses to meet today’s challenges. Market conditions that restrained sustained growth for the specialty fabrics market in 2011 included:
Tight credit. Although there’s been slight improvement in 2011, the credit lending market remains tight. A November 2011 study by the American Institute of Architects reports that the persistent lack of construction financing in 2011 accounted for 20 percent of stalled projects across the U.S. There has been some easing in credit in the big banks, and credit conditions for small businesses have gradually improved in the waning months of 2011, but loans from small and regional banks remain difficult to get. The credit picture for EPMs is expected to improve in 2012.
High unemployment. Unemployment averaged about 9 percent in 2011, a noticeable improvement compared to 9.6 percent in 2010. The Federal Reserve Board forecasts that U.S. unemployment figures will improve in 2012, ranging from 8.2–8.5 percent.
High raw material costs. High oil prices have kept raw material costs high as well. Oil is projected to remain high in 2012 ($100 per bbl. on average). The effect of gasoline prices carried over to some specialty fabric markets particularly sensitive to consumer spending habits.
Import and pricing pressures. Worldwide imports of specialty fabrics in the U.S. decreased 3 percent as of November-YTD 2011. Imports of most Asian commodity specialty fabrics have adversely affected the sales and profitability of U.S. players in traditional specialty fabric markets such as tents, awnings, fabric graphics and tarpaulins. High-end markets continue to be more insulated.
Despite the roadblocks, the U.S. economy is recovering. GDP in the first half of 2011 started extremely slow at 0.85 percent, but the rate of expansion began to pick up in the second half with GDP reaching 2.3 percent, which helped boost year-end 2011 GDP to 1.7 percent. The unemployment rate and GDP growth is expected to improve gradually. They are not expected to exceed longer run rates, which the Federal Reserve views as necessary for maximum employment and stable prices, for another 3–4 years.
Suppliers and EPMs respond
Specialty fabric organizations that have survived the economic turmoil over the past few years have made significant investments to improve efficiencies in their organizations, and many have instituted a culture in their businesses that emphasizes innovation in improving existing products and introducing new products. These organizations place a strong emphasis on their services, such as conducting product quality assurance checks and communicating this effectively so their customers understand the value of the products and services they are purchasing. Successful suppliers and EPMs have also spent money on training their workforce, holding them accountable for results.
Mills surviving in the U.S. specialty fabrics industry continue to invest in new plants and new material-producing equipment, believing that they cannot afford to ignore the latest improvements in productivity and quality, or they risk losing their standing in the marketplace to their competitors. This mentality has led to an increase in the capacity utilization rate for specialty fabric mills operating in the U.S. from a 56 percent rate in 2009 to 73.4 percent in 2011.
Key U.S. markets
There are four key U.S. markets within the specialty fabric industry—all impacted by different forces and economic drivers: military, construction, transportation and recreation.
Military. The military segment covers safety and protective products for troops, firefighters and law enforcement. A driving force behind product development for the firefighter, law enforcement and industrial markets, the military’s influence on the safety and protective market should continue well into 2012, despite the final withdrawal of U.S. troops deployed in Iraq in December 2011.
Although spending on textiles and clothing decreased 10 percent in 2011, the level of spending for textiles and clothing for U.S. troops by the U.S. Defense Logistics Agency (DLA) will remain substantial in 2012.
Construction. The use of geosynthetics in construction has traditionally grown in the U.S. at about 5–6 percent annually. Growth was down 3–5 percent in 2011 and is expected to remain down at 2–3 percent in 2012. Geosynthetics, manufactured by about 50 companies for the U.S. marketplace, include geotextiles and geogrids, which are used in erosion control, road construction and other infrastructures.
In early November 2011, the U.S. Senate Environment & Public Works Committee voted in support of a two-year surface transportation bill that would maintain current authorization levels and institute a host of important policy reforms. This was a critical step toward addressing the nation’s enormous infrastructure challenges. The funding for public road and bridge construction will remain at 2009 funding levels until, hopefully, Congress acts on the new bill in 2012.
Transportation. The largest segment affected in terms of dollars is transportation—the automobile and light vehicle market, where 2010 saw a noticeable improvement in unit sales, reaching 11.6 million light vehicles sold, which continued in 2011 with approximately 12.7 million light vehicles sold. This market looks to be a source for growth in the U.S. specialty fabrics industry, as each new light vehicle includes an average of 33.5 square yards of fabric.
Recreation. The recreation market includes awnings and marine fabrics, which improved somewhat in 2011, largely because of the commercial awning segment. A key area of growth was the recover market, which enabled commercial building owners to update awnings at a lower cost than replacement. A major factor contributing to slow growth in the U.S.-Canadian 2011 residential awnings and canopy market has been tepid housing sales, expected to continue for another three years.
The U.S. and Canadian marine fabric market improved significantly in 2011, and the marine end product market was up about 4–5 percent in 2011, due in part to the refurbishment and upgrades of existing boats. Sales for the 2011 OEM market were up across the board for the first time in five years—only 1–2 percent, but boat manufacturers report they felt the bump in sales in 2011, a nice change over previous years.
China still holds a commanding lead in the U.S. specialty fabric import market with a 51.7 percent market share. Total specialty fabric imports into the U.S. decreased about 3 percent in 2011, much lower than in 2010 when it increased 21 percent. India, Pakistan, Mexico, South Korea, Canada, and Vietnam represent the second tier of participants in the 2011 U.S. specialty fabric import market.
Regarding U.S. exports, Mexico is number one in the U.S. specialty fabric export market, accounting for a 37 percent share in 2011—a drop-off from the 39 percent share it garnered in 2010; Canada is a distant second at 18 percent and Hong Kong holds a 5.4 percent share. Total U.S. specialty fabric exports increased about 8 percent in 2011.
The fastest growth in specialty fabrics consumption is centered in Asia, with 45 percent of the projected 2011 world market.
China’s market growth. Over the past 20 years, China’s consumption of specialty fabrics has grown about 10 percent per year. Production, investment, sales and foreign trade were growing in China early in 2011; however, raw materials, labor costs and interest rates restrained further growth as small and medium-sized companies suffered slower sales and squeezed margins from the higher costs of materials and labor.
The major specialty fabrics made in China are middle- and lower-grade products and intermediate materials: highly technical and added-value products are still dependent on imports.
China is planning on driving economic growth in the next five years by focusing more on domestic consumption and less on exports. Given China’s low labor costs relative to the U.S. and Europe, and with the opportunity to serve a large set of internal specialty fabrics markets, it is forecast that China’s specialty fabrics industry will continue to possess advantages in the global market.
India’s fragmented market. India’s specialty fabric and nonwoven industry is highly fragmented and still in its infancy. There is no state-of-the-art technology in place compared to global players in the U.S., Europe, and China. Unlike the traditional textile industry in India, the specialty fabric industry is import intensive, providing a base for a very interesting market for export-oriented manufacturers from Europe and elsewhere.
India’s share of the global specialty fabric market was about 9 percent in 2010 and is expected to be about the same in 2011. About 67 percent of their production is of commodities; only 33 percent is of high-end products.
The textile industry in India has been undergoing a major reorientation from apparel to specialty fabric applications, which are growing at twice the rate of the apparel market in India.
The focus of the Indian government is on upgrading geosynthetics and increasing the use of automotive textiles (nonwovens) for large auto industry participants, such as OEMs.
While the U.S. specialty fabrics industry is expected to increase by 1.5 percent in 2011, EPMs who focus on producing and selling high value products and services—safety and protection, geosynthetics, smart fabrics, medical textiles, wide-format digital textile printing (particularly soft signage) and eco-friendly materials—may achieve solid growth in 2012, as high as double digits, in spite of continued low demand for products and services, high raw material costs, international competition and tight credit.
In August 2011, IFAI surveyed its U.S. EPM members to better understand the general health of their businesses, using the state of their sales and employee headcounts as metrics. Results indicated that the business climate for them improved significantly in 2011 over 2010; well over half of the respondents anticipated favorable sales reports for 2011.
One of the biggest problems in the current specialty fabrics industry is a lack of depth in the industry. Before 2009, EPMs placed orders with suppliers for six months out or more. Today, EPMs are more conservative and generally won’t place orders out for more than one to two months. They don’t want to be caught with too much inventory in the event of another severe economic downturn.
Successful players in the specialty fabrics industry have seen opportunities in the marketplace and have taken advantage of them. They believe that investing in product and service innovation is critical to the success of their business in any economy, but especially in one that is slow-growing. U.S. specialty fabrics industry participants may need to pursue opportunities in the larger global marketplace to reap the benefits from the continued improvement in the business climate.