Industry Capacity and the Road to Profitability

October 4th, 2011 by DWM Magazine

The residential windows industry has been suffering the worst downturn since the depression. Though I don’t have any depression-era stats, this guess is probably not far off. New housing fell from about 2.2 million new homes a year in 2006 to less than 500,000 this year. So let’s call it a 75 percent drop. And retrofit has fallen off as well, some 20 to 50 percent since last year depending on who you talk to. Marvin, an industry bellwether, has managed to lay off no one (honorable … but not good for the industry … read on). Most others did not fare so well. And then there are stories like JELD-WEN, a well-run quality player who couldn’t meet their debt obligations alone and ended up majority owned by a private equity firm–that story just wrapped up yesterday. In this midst are some two thousand plus smaller vinyl manufacturers, all suffering the same fates–or worse. And pretty much all of them are gasping for profits.

The basic problem here is supply versus demand. The industry built up supply capabilities to support $12 billion-plus per year of residential sales in the United States. That includes factories, trucks, salespeople, dealers, warehouses, installers, lineals, glass etc.–all the components that make a sale happen. And as is typical in any fall-off, no one really wants to yield market share so everyone keeps trying to hang onto every asset they can. And this very act is what leads to over supply and thus zero or negative margins.

The negative margin situation seems to be something no one wants to talk about. Dealers have cut their margins to where many can barely hang on. Manufacturers are selling product at negative gross margins, thus not able to absorb plant overhead. Meanwhile everyone waits for the elusive recovery.

I am here to state for the record: there won’t be one anytime soon. Give up the ghost. This downturn is unlike any other. The nation’s debt to GDP ratio is nearing 100 percent (at $16 trillion). It has only once been that high. That was right after World War 2, when we made nearly 50 percent of the world’s goods. Thus, we paid it off in ten years. Today we make less than 20 percent and that number is falling. We have had a trade deficit for 20 years. If we don’t export any goods (and services don’t export very well), we can never pay off our debt. Of course this is a simplification of the problem, but gets to the heart of the matter. The country has a revenue generation problem and an unemployed working and middle class that shows no sign of improving unless we find a way to bring back manufacturing to this country (Germany did so with great success over the past 15 years). And should interest rates increase (they will someday), the debt burden will become unbearable and eat up much of our earnings for a generation to come.

While we have all seen predictions of the impending recovery in housing starts, I will propose that we will never see 2.2 million new homes a year in our lifetime. Maybe we get to 800,000. Maybe. In 2015.

So if this is correct (and frankly, what do I know) then this industry MUST shed another 50 percent of its capacity at every level right now and forever. Just do it and get it done. Use this blog as an excuse to finally act. If we can get capacity in line with demand, then profits will rise and everyone will be healthy (albeit smaller). Until capacity is dramatically cut, profitability will remain elusive at all levels. As I said at the start of this column it is simple supply and demand.

Your call to action as you read this: cut–as an industry. We need everyone to participate to create a healthy environment that balances supply and demand and restores profits.

Or don’t and we can talk again in six months.

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  1. I agree that there is too much capacity and certainly that’s well known. But how can you speed up the process without getting into anti-trust territory? There is no easy or quick fix but I have faith that the market’s “invisible hand” will once again come to the rescue.

  2. If businesses in our industry shed 50% of the current capacity, it will also shed 50% of it’s work force+-. That makes those companies profitable but it leaves 50% of the industry work force out in the cold. How does that help. Please explain.

    Marvin’s approach has kept food on the table for all of their employees and kept them off the government payroll. How can that be bad?

    There is no doubt that we have lost our edge to the world economy. Our standard of living demands higher pay and as such has kept our exports down. We don’t manufacture more because we can’t compete with foreign goods. If we raise import taxes, the foreigners will raise prices and domestically we would become more competitive, but the foreigners would reciprocate with their own import tax and we would export less.

    I know we can’t live in a glass house, but surely, this huge country should be able to live with its own resources, for the most part. If we could enjoin our friendly neighbor to the North, it seems possible to live in relative seclusion. We have lived a false economy for many years, why not live one that is dependent on us rather than the rest of the world?

    China, as big as it is, and as much news as we hear about it’s expansion, only illustrates how we have succumbed to the world economy and its non parity of worker’s pay. Most people don’t recognize that China has run out of fresh water. They use it faster than it can be replenished. China will implode in my lifetime and I don’t have that much time left. Other countries like India have similar problems. Our farmers, using traditional farming methods are using up our water too. We need to innovate farming ( we already do it on a small scale). Americans need to wake up and get involved before we lose this country to dumbness. Our kids need a much better and obligatory education.

    Cutting capacity is just another short term fix. It’s a band aide on a festering wound.

  3. After you, Kev.

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