State of the Industry
annual growth, it is projecting an
annual growth of approximately three
percent for 2010. This is consistent
with an economic recovery occurring
sometime between midyear 2009 and
early 2010. Beyond 2010 the forecast
is for a return to historical economic
expansion levels.
This forecast is one of a number of
potential scenarios and is based on the
assumption that the current recession, despite being very severe, is
none-the-less “typical.” That is, a cyclical corrective response within the
economy to such disruptive factors as
over capacity, excess inventories, inflation, deflation, disruptive technological developments and regional growth
among other factors. However, there
are other scenarios that suggest that
as regional economies are undergoing
fundamental structural changes, the
economic patterns of the past two to
three decades were basically debt-driven and that growth is now unsustainable. This would mean that the
coatings industry will have to identify
those fundamental changes that are
occurring and adjust regional, product
and manufacturing strategies accordingly. Example, how valid is the stam-
Chart 1
pede by coatings companies to open
production facilities in China?
Following a difficult 2009, the construction sector is forecast to recover as
this will be the basis for most stimulus
plans. Construction growth, however, is
unlikely to return to the high levels
experienced during recent years, particularly in North America and in Western
Europe. Decorative coatings and wood
finishes are forecast to grow as the construction market rebounds. Industrial
maintenance and protective coatings
will grow in response to infrastructure
spending and the recovery in non-resi-dential construction spending. This will
be particularly evident in the leading
Western economies. As was previously
discussed, industrial coatings will generally follow overall end use builds.
Recovery in the manufacturing sector is
much more difficult to forecast. In general, manufacturing growth is likely to be
concentrated in the developing world.
MANEUVERING THROUGH
THE DOWNTURN
The global economic downturn is affecting companies across the entire coating
industry value chain. Raw material
suppliers, formulators, distributors and
applicators are all struggling to manage
declining demand. Companies must
take action to address the current market conditions. In order to effectively
maneuver through this downturn, Orr
& Boss recommends that companies
focus on three key strategies: reducing
operating costs, reducing working capital and managing top line sales.
To reduce operating costs companies
must take a hard look at business
processes, work flows and organizational structures to identify means of eliminating non-value added activities while
preserving the ability to meet customer
requirements. These efforts must cross
all areas of the business. In addition,
companies need to identify ways to
reduce material and energy waste. Raw
materials are by far a company’s largest
component of cost, so minor savings can
have a major impact. Furthermore, savings related to material and energy
management will immediately impact
the bottom line.
Working capital requirements for
specialty chemicals manufacturers and
formulated products companies can be
as high as 40% of sales. These requirements tie up significant resources and
affect the borrowing ability of the business. Two key areas that companies
can target are inventories and receivables. The challenge with optimizing
these areas is maintaining service levels while reducing working capital.
Lowering working capital at the
expense of losing key customers is not a
sustainable strategy.
The effects of the global downturn are
felt across the value chain, including
your customers. Their needs and expectations have likely changed as they
attempt to manage these difficult market conditions. Suppliers must be able
to adapt to these changes. Pricing
strategies, credit terms, product mix
and service offerings may need to be
altered to meet these shifting needs. In
addition, the present economic climate
may present new market opportunities.
Businesses that are able to respond will
