Investing in the Future of American Manufacturing
Manufacturers respond to demand by expanding US operations
Made in America. That phrase is not as prevalent as it once was. According to the U.S. Bureau of Labor Statistics (BLS), manufacturing job losses totaled more than 2 million employees, or 15 percent of its workforce, during the 2007-2009 time span.
However, there could be a light at the end of the tunnel. After years of declining job figures, American manufacturing may finally be back. This is further evidenced by a BLS report that announced the addition of more than 600,000 manufacturing jobs since January 2010.
Need further evidence? The Air-Conditioning, Heating, and Refrigeration Institute’s (AHRI) HVAC shipment data reveals year-to-year increases across numerous equipment categories. Shipments of central air conditioners and air-source heat pumps increased 16 percent, central air conditioner shipments increased 17.1 percent, and heat pump shipments increased 14.2 percent over the same period in 2014.
Additionally, a study from the Reshoring Initiative said that 60,000 manufacturing jobs were added in the U.S. in 2014 through reshoring, where American companies bring jobs back to the U.S. or foreign companies move production to the U.S. And, Deloitte and the Manufacturing Institute predict 3.5 million manufacturing jobs will be necessary over the next decade, due in part to growth, but also to replace aging baby boomers who make up the majority of the current workforce.
A GROWING WORKFORCE
When demand is strong, supply is sure to follow.
Daikin Industries Ltd. recently held a groundbreaking ceremony at the future location of a consolidated HVAC equipment engineering, manufacturing, and logistics campus in Waller, Texas. The location will also feature expansion capacity to accommodate projected growth. It’s the company’s largest major investment in North American HVAC manufacturing operations, totaling approximately $417 million. The facility is expected to employ up to 4,000 individuals.
“While I can’t speak for all HVAC manufacturers in North America, I can assess that our manufacturing footprint in North America is growing rapidly as a direct result of the success achieved by our distributors and independent dealers,” said Takeshi Ebisu, CEO, Goodman Mfg. Co. “On a global basis, Daikin has made a commitment to manufacturing HVAC systems in-country as compared to importing products into a given market. This allows for reduced shipping costs, faster deliveries, and additional support for our distributors and in-
Daikin started manufacturing VRV units in its Houston facility more than a year ago, whereas, previously, all VRV units were imported.
“In simple terms, our sales growth created the need for additional manufacturing space,” Ebisu noted. “Our current facilities did not allow for adequate expansion. As a result, we decided to build a new facility that would consolidate all of our manufacturing, logistics, engineering, marketing, and other support functions under one roof.”
In choosing the Texas location, Daikin considered workforce availability, climate, ease of shipping across North America, and several other factors. And, despite the recent severe weather and major flooding in the Houston area, Daikin is on schedule to open the new facility in 2016, Ebisu noted.
A strong manufacturing market is also leading Uponor North America to expand its manufacturing facilities. Uponor recently announced an $18 million expansion project at its Apple Valley, Minnesota, headquarters. The project will add an additional 88,000 square feet for lean manufacturing, office space, and additional manufacturing equipment for producing crosslinked polyethylene (PEX) pipe used in plumbing, radiant heating/cooling, and fire-safety systems.
“There’s obviously a strong domestic demand,” said Bill Gray, president, Uponor North America. “The residential and multi-housing uptick has driven some of that, as well as trends like green building and new technologies. With the return in demand in the North American housing market, we find now we’ve grown to the point where we see the need for future manufacturing capacity.”
The new facility is expected to be completed in December and will provide more than 100 jobs over the next two to three years.
“It could be more, depending on the demand,” Gray noted.
NOT FULLY RECOVERED
Even as Bristol Compressors celebrates 40 years in business and the addition of 110 new full-time positions this past spring, Ed Gniewek, CEO, said he isn’t convinced HVAC manufacturing in the U.S. is growing as swiftly as some believe.
“The evidence is kind of circumstantial, but, if you trickle back 30-40 years, everything that a person used, whether it be electronics, household goods, clothing — anything — was made in the U.S., or at least in North America,” he said. “Less and less is being produced in the U.S. I’ve been in manufacturing for more than 30 years, and I’ve seen this happening.”
Despite this, Bristol Compressors has enjoyed a 26 percent growth in sales in 2015, allowing the company to add the 110 full-time manufacturing positions at its Bristol, Virginia, plant.
“Much of our growth is occurring internationally,” said Joel Moseley, senior vice president, sales and marketing, Bristol Compressors. “Our compression technology performs very well in challenging HVACR system conditions. The perception in the U.S. unitary industry is that Bristol’s products are an underperforming technology. However, when you consider the performance design of refrigeration, geothermal, and other unique products in the Middle East, they lend themselves very well to our technology, and that’s where we’re seeing growth. With the future environmental drivers and governmental requirements for lower-GWP (global warming potential) refrigerants, the industry will have to deal with even higher-pressure and higher-temperature refrigerants. This is a non-issue for our products. We welcome the challenges.”
Bristol Compressors is also reinvesting back into the business. “All of our products are manufactured here in the U.S., but the majority of our volume is exported,” Moseley said. “It’s a testament to being a lean, global manufacturing leader, even though we are in a higher labor cost region of the world.”
According to Gniewek, Bristol Compressors is focusing on research and development in products as well as engineering. Additionally, the manufacturer also recently renovated its assembly lines. “Our company has been studying and testing new environmentally friendly refrigerants. A lot of money has and will continue to go into that effort. This increases our capability to bring new products to the market that are compliant with the ever-changing efficiency and refrigerant requirements, and that’s not just in the U.S., that’s on a global basis. We’re excited about the future, and we’re well-positioned to capitalize on market changes.”
Gary Bedard, vice president and general manager, Lennox Residential, Lennox Intl. Inc., said while shipment data indicates the industry has been up over the last several years, it’s growing from a relatively low base.
“As the economy improves and the number of households increases, new construction picks up,” Bedard said. “In addition, economic growth brings jobs and jobs bring confidence and disposable income. These factors drive the replacement market, but, for the HVAC market, there are other dynamics at play, as well.
“In 2008, shipments in the U.S. for HVAC equipment were about 7.5 million units,” he continued. “And, in 2014, that number has climbed to more than 9 million units, and that’s just residential units shipped in the U.S. Now, that sounds impressive until you realize that, in 2004, the U.S. market shipped about 10.5 million units.”
According to Bedard, the recent growth in the market is due to pent-up demand theory, which affirms that after the 2006 change to 13-SEER efficiency, shipments of replacement air conditioners and heat pumps have not kept up with the assumed failure rates in the installed base.
“What this means is the consumers have been put off by three things: higher retail pricing due to the higher efficiency, a refrigerant change that also tends to increase the cost, and, finally, the largest recession in most of our lifetimes. All of these factors have led them to defer the replacement of their air conditioning units. So, what we’ve seen recently is the impact of this pent-up demand. But, keep in mind, we still haven’t reached the level of shipments in 2004.”
Federal regulations are also impacting the growth of the HVAC market.
“If you remember the three factors from pent-up demand, two of the three had to do with government regulations,” Bedard explained. “The third one, arguably the largest, is the recession. But, clearly, both of those regulatory changes have had an enormous impact. If you step back and look, the market grew in 2004, 2005, and 2006, and it kind of fell off in 2007. Regulations have had an impact on the overall size of the industry.
“The regulations are well intended, and they have certain benefits to society, but they can also have an impact on the size of the industry, and that’s really where the jobs impact comes in,” Bedard continued. “If consumers choose not to replace units due to the higher cost of product, it’s kind of a double whammy. Not only do you lose the manufacturing, distribution, and contracting jobs that go along with the installation, but you also lose the presumed efficiency improvements because the homeowner is essentially keeping existing units in service longer and those units are usually less efficient.”
Matt Lattanzi, director of warranty and technical services, Nortek Global HVAC, agrees that federal regulations are a major cause of the slowly recovering economy.
“The magnitude of new regulations facing the industry is greater today than I’ve seen in my 20-plus year HVAC career,” Lattanzi said. “Additionally, we’re seeing more issues with the new regulations. For example, new standards are being developed without a finalized test procedure. This means manufacturers have no way to develop products to the new standard as we don’t know how the equipment will be tested for conformance to the standard. In another example, we are seeing way too much overlap with new regulations, which is causing manufacturers to potentially redesign the same appliances in very short periods of time. All of this, ultimately, drives up cost to the consumer, which makes many consumers delay — or eliminate — the purchase of a replacement system.”
One regulation poised to significantly impact HVAC manufacturers is the U.S. Department of Energy’s (DOE) proposed rule to raise the national minimum energy-efficiency standard for residential nonweatherized gas furnaces from the current 78 percent AFUE — which is set to increase to 80 percent in November — to 92 percent while also setting new efficiency standards for electrical consumption in standby mode.
“It’s difficult to predict the impact on manufacturing jobs, but we do not anticipate a positive one,” Lattanzi noted. “The proposed rule will create significant issues in the marketplace, including condensate disposal, venting, issues with vent sizes (particularly with shared-water heaters), and, of course, the increased cost to consumers. Additionally, a condensing furnace does not make sense to a consumer living in Texas, so forcing a condensing furnace in that market could lead to fuel switching. All of these issues could quite possibly decrease demand for furnaces, which will not help grow jobs in our industry.
“To prevent this from happening, the proposed rule needs to be overhauled by a knowledgeable group of stakeholders and rewritten to ensure it makes economic sense, saves energy, and does not harm the consumer,” Lattanzi said.
Publication date: 7/6/2015