The U.S. Industrial Valve Marketplace
The valve market consists of thousands of competitors. Costly entry barriers. High risk. Expensive engineering content to customize manufacturing solutions. Limited, if any, growth in recent years.
Some valve companies have geographic niches; some have product niches. Others focus on specific industries. Even the largest have uneven industry penetration.
Intense pressures exist: Rising costs. Increased testing and qualification requirements. Reduced distributor sales and service staff. Shrinking end-user preventative maintenance budgets.
Caution is the word of the day from CEOs at Tyco, Flowserve, Emerson and Dresser at a recent association board meeting.
"The recurring theme in discussions was the grim outlook for the industrial valve industry over the next few years," says William S. Sandler, president of the Washington, D.C.-based Valve Manufacturers Association. "Agreed there are some end-user industries showing promise such as water and wastewater, and pharmaceutical, but overall the outlook is unfavorable."
Robert McIlvaine, president of the McIlvaine Co., opines, "There will be slight growth overall in 2003 in the United States. Some high growth opportunities will be offset by shrinkage in some industries. However, by 2004 growth will accelerate to 6% along with a more general rebound for the economy."
Sandler, more optimistic now, adds, "Most analysts feel that 2004 will be the turn-around year for the valve and actuator industry."
So which is it? Unfavorable and grim? High growth opportunities and turn-around? I know what FOX News would say: We report. You decide.
The Commercial MarketThe commercial segment facilitates the distribution of water, waste, and other fluids throughout a building or structure. Distributors know their customers look for an economical balance of performance and cost efficiency.
Most projects call for standardized items produced by many manufacturers: chiefly bronze and iron valves. Valves, primarily in the HVAC and plumbing markets, are being sold as commodity items. The low cost distributor usually wins.
Mac Jones, president of Valve Products Inc., notes, "While other markets have been up and down, mostly down lately, the commercial sector has been steady. That consistency helps us better serve our customers."
Analysts predict limited, if any, growth but foresee a few bright spots.
Public building construction, which includes prisons, church construction, and stores and shopping centers, will continue to show gains. Commercial or non-residential construction, including offices, warehouses and hotels, will continue to lag behind both residential and non-building construction.
The Industrial MarketThe industrial segment is the largest and most complex in the U.S. valve industry. And within this group is a patchwork of new and old, local and global, and small and large.
Most valve manufacturers participate in the chemical and petrochemical markets because of the vast assortment of valves required for the various applications. In the production of food and beverage products, pulp and paper products, and the production of various metals, including iron and steel, valves have long been indispensable components. The bulk of valves used are gate, globe, ball, butterfly and plug valves.
A limited number of companies compete in the generally specialized high-pressure steel products used in the drilling, production and gathering of crude oil and gas for the petroleum production and refining industry.
To boost revenues, valve manufacturers are expanding their traditional services with:
- application engineering - whereby valves can be specified in-house to match given functional requirements;
- bundling and fabrication of equipment to provide integrated flow control solutions;
- supply chain management for products;
- global life-cycle support for installed valves.
"We see the best prospects for future sales growth in the market for more sophisticated engineered products," says Tom Velan, executive vice president of sales at Velan Inc. "We are using our 50 years of valve experience and strong engineering capability to develop new world class products."
Valve distributor Sunbelt Supply in Houston, Texas, expands its business through traditional and non-traditional ways. For example, under multiple agreements with the Dow Chemical Co., Sunbelt stocks new manual and automated valves, as well as rebuilt valves. Re-supplying Dow from Sunbelt's inventory lowers Dow's labor costs, improves uptime and reduces the lifecycle cost of products.
The Power MarketFrom California to New York, the energy sector is increasingly the focus of attention. With national security and reliability concerns on the rise, the U.S. valve market is a part of the national debate on assurance programs -- an encouraging sign for increased spending in R&D and improved information sharing.
A report from the President's Commission on Critical Infrastructure Protection cites several trends including the consolidation of resources, downsizing, and reduced reserves/capacity. These trends will continue to keep strong the maintenance and replacement market for valves in addition to new construction opportunities -- with one caveat: provided the funding is made available.
Flowserve's Area Sales Manager, Jim Vinson, remains cautious: "Power is going to be flat for most of 2003. It will be late third quarter or fourth quarter before we see any resurgence. Utilities continue to be cautious while looking for positive signs from the business community. In the meantime, they are spending as little as possible for as long as they can."
Jones of Valve Products agrees, "Power is not likely to pick up until 2004 to 2005."
Circor International sees the power sector as a high-growth market. As does the McIlvaine Co., which promotes new power generation, as the single largest market opportunity in the United States today. McIlvaine forecasts billions of dollars will be allocated for combined cycle plants - each of which requires a sizable investment in valves. Plus, there are a significant number of coal-fired plants in the planning and construction stages.
The U.S. replacement valve market also holds promise. Many power plants use older control valve technologies that do not address the severe nature of today's power plant operations. The older design valves require constant maintenance and their performance is generally poor.
Four new valves recently installed in the LaCygne power plant by Kansas City Power & Light had an immediate impact on plant operations, including increased plant capacity and efficiency and reduced maintenance costs. In combination with several other modifications, the 4% heat rate reduction saves the plant $4 million per year.
The Water MarketMost valves are made of cast iron and are generally larger in size compared with valves for other industries. Included are waterworks gate valves, check valves and butterfly valves, as well as fire hydrants, certain types of sluice valves and fire protection sprinkler system valve products.
Winslow Management reports the U.S. water and quality systems market is approximately $86 billion. Construction accounts for 11% of the market, or about $9 billion. Equipment comprises 6%, or about $5 billion, and includes pumps, meters, control and treatment systems - and valves.
PVF opportunities arise due to increased public concern about drinking water and the decay of our infrastructure, which will require approximately $2 trillion over the next 20 years to upgrade.
In Baltimore County, Md., for example, valve distributors pursue their portion of the $45 million to $50 million annually invested in capital improvements to the sewage system, upgrading pumping stations and the maintenance of the wastewater treatment facilities.
Plus, increased federal funding including $823 million in 2001 for clean water, $2.1 billion for wastewater treatment and $90.3 million for counter-terrorism initiatives generate valve opportunities.
There are also public and private changes in ownership due to mergers and acquisitions that will create opportunities. Of the total water and wastewater industry, private sector firms control 31% of the market while regulated utilities make up 6% and municipalities comprise 63%.
ConsolidationConsolidation offers economies of combined operations such as sales, purchasing and overhead allocations. By lowering manufacturing costs and ensuring a stable supply of critical components, vertical integrators remove some of the risk in their businesses.
But consolidation has its detractors also. The Washington Post recently re-opened a long-standing debate as to whether synergy is a reachable goal. Even some of those who helped engineer the corporate marriages look upon them with a wary eye.
The real story may be the more than 1,000 small and medium-sized companies that control more than 80% of the valve industry. Despite all of the activity by the large consolidators, the top 10 valve manufacturers command less than 20% of the total valve market. Here are the three largest valve manufacturers in the world today:
Tyco International (NYSE: TYC), officially based in Pembroke, Bermuda, with multiple headquarters located in Exeter, N.H., New York City and Europe, generates $34 billion in revenues serving 100 countries with 250,000 employees.
Tyco Flow Control, a division of Tyco International, is the number one producer of valves, actuation and other controls, heat tracing products and thermal control systems in the world. It owns more than 60 individual brand names, including AVID, Biffi, Clarkson, Descote, Grinnell, Keystone, KTM, L&M Valve, MCF, Morin, Neotecha, Prince, Rovalve andVanessa. It offers the most complete line of products in the industry and provides complete solutions to customers' increasing requirements.
Tyco Flow Control has significantly increased market share in major industries served with strategic expansion in manufacturing, sales and service facilities around the world. Tyco's key market applications are in oil and gas, chemical, power generation, petrochemical, waterworks, pulp and paper, pharmaceutical, and in the food and beverage industries.
Flowserve Corporation (NYSE: FLS), based in Dallas, Texas, is the world's premier single-source provider of flow management products and related repair and replacement services. Flowserve's Flow Control Division is a leading global manufacturer of flow control products including control valves, quarter-turn valves, actuators, and complete valve automation systems branded under names like Atomac, Automax, Durco, Edward, Kammer, McCANNA, Noble Alloy, Valtek, Limitorque, Argus and Vogt.
Flowserve bolstered its position among the world's elite valve manufacturers when it acquired Invensys Flow Control Division for $535 million last year. Not shy about life-altering acquisitions - Flowserve acquired Ingersoll-Dresser Pumps for $775 million in 2000 - the company attacks integration swiftly and with overwhelming force, admitting temporary inefficiencies as it quickly moves production, inventories and people to new locations and resolves learning-curve issues.
"The transition was smooth, and still is. The flow control business is much more of a focus for Flowserve and that has really helped me compete in the marketplace," says Vinson, a former Invensys employee.
St. Louis, Mo.-based Emerson (NYSE: EMR) holds a leadership position with each of its 60-plus specialized divisions. Its 128,000 employees market under such recognizable brands as RIDGID tools, ClosetMaid organizers, In-Sink-Erator garbage disposals, Copeland Scroll, Emerson fans, Knaack storage equipment and Louisville Ladder.
Emerson Process Management, an Emerson business, is a leader in helping businesses automate their production, processing and distribution in the refining, oil and gas, chemical, pulp and paper, power, food and beverage, pharmaceutical, and other industries. The company combines superior products and technology with industry-specific engineering, consulting, project management and maintenance services. Emerson sells under brand names such as ASCO, Red-Hat, Daniel, DeltaV, Fisher, Micro Motion, PlantWeb, Rosemount, Westinghouse Process Control, Bettis, Dantorque and White-Rogers.
The Valve Market Controversy"Our data places the U.S. market at about $3 billion for industrial valves and the worldwide market at about $10 billion," says Sandler of the Valve Manufacturers Association. "I realize that there may be some definitional differences of what is an industrial valve, but not enough to account for the large difference."
McIlvaine of the McIlvaine Co., begs to differ: "We are continually updating and revising nearly 50,000 valve forecasts. Our numbers are considerably higher than VMA but only slightly higher than the Bureau of the Census. The U.S. market will be $8 billion in 2003 out of a world market of over $40 billion."
The VMA also estimates U.S. valve companies, many of which sell valves throughout the world, capture 40% of the worldwide market. This global reach will continue to fuel consolidation along industry, geographic and product lines.
The gap between a $10 billion and a $40 billion global valve market is significant for sure. But if you're like the typical reader -- a local player -- a billion here or a billion there doesn't mean that much to you. This year will be no different for the valve market. The valve business is tough. You need the expertise of your valve partners to work with you and identify opportunities to profitably grow your business.
The Traits of a Fragmented Valve MarketWith the combined market share of the 10 largest valve players in the world below 20%, and fewer than 100 manufacturers with revenues greater than $100 million, the valve market is labeled as a fragmented industry.
The valve market is characterized not only by many competitors but also by a generally weak bargaining position with suppliers and buyers. Marginal profitability can be the result. The strategic challenge for valve manufacturers - and for PVF distributors - is to cope by becoming one of the most successful firms, although able to garner only a modest market share.
To succeed requires a significant amount of local support that best can be provided by independent third-party sales organizations, with strong factory support. Many vendors rely on the distributors' breadth of experience that is gained through dealing with many different product lines.
Several other survival methods in use today include: increased value added, specialization by product type or product segment, specialization by customer type, specialization by type of order, a focused geographic area and backward integration.