Keith Lyons, like many others in the appliance manufacturing industry, is dealing with a decline in demand for his product. So how's he coping? The appliance door fabricator is laying off employees, keeping a close watch on inventories and diversifying his company's customers.

"Volumes with each of our customers have gone down," says Lyons, president of H.L. Lyons Co., a fabricator in Louisville, Ky. His customers include Whirlpool, GE Appliance, Amana, Viking and Maytag. "Our sales are down 20 to 30 percent from a year ago. Sales really started to fall in October and November."

The national housing slump has become more critical since starting late last fall and the beginning of this year, and it's filtered down to hurt appliance manufacturers and their suppliers, including fabricators and formers.

Home builders remained considerably downbeat as market conditions continued to erode in May, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), released in mid-June. The HMI fell a single point to 18, matching the record low set in December 2007. The series began in January 1985.

"Despite the Federal Reserve's concerted efforts to lower short-term interest rates, free up credit markets and shore up the national economy, the housing market has shown no evidence of improvement thus far," says David Seiders, NAHB chief economist. "In fact, conditions have continued to deteriorate in recent times. The latest HMI shows that even fewer builders now foresee market conditions improving over the next six months compared with our April survey."

Remodeling is faring a bit better. According to the NAHB Remodeling Market Index (RMI) in May, remodeling activity remained steady the first quarter of 2008. The current market conditions indicator moved up to 41.8 from 40.9 in the fourth quarter of last year, while the future expectations measure showed no change from the previous quarter at 37.9.

The RMI measures remodeler perceptions of market demand for current and future residential remodeling projects. Any number above 50 indicates that the majority of remodelers view market conditions as improving. The RMI has been running below 50 since the final quarter of 2005.

Seiders isn't optimistic about this year. "The remodeling market continues to show weakness, following the downturn in the overall housing market," he says. "We expect there to be some further erosion in 2008, with a gradual recovery in 2009."

The home appliance industry is following suit. In late April, the Association of Home Appliance Manufacturers (AHAM) reported that all U.S. major home appliance shipments went from 26,445,600 in 2007 to 23,586,400 this year (to date), a 10.8 percent decline. Shipments for the AHAM 6 (washers, dryers, dishwashers, refrigerators, freezers, and ranges and ovens) were down 9.1 percent from 2007 to 2008.

Down the most dramatically were trash compactors (18.1 percent), room air conditioners (17.6 percent) and surface cooking units (16.1 percent). Faring the best were dehumidifier shipments, which were up 29.3 percent, and upright freezers, up 0.9 percent. The shipments include the imported or domestically produced U.S. market and don't include export shipments.

Viking, Sub-Zero, Wolf, Frigidaire and Whirlpool, which owns Maytag, KitchenAid, Jenn-Air, Amana, Brastemp and others, would not comment for this story.

"The question is, 'Are we going to have an upturn at the end of the year?' and no one knows the answer to that," says Laura Spingola, president of Trade Resources Ltd., Chicago, an international market development firm that provides international market research and promotional services.

An April 24 BusinessWeek.com story stated that Whirlpool reported a 24 percent drop in earnings for the first quarter. Strong results overseas helped declines in its North American business.

"Besides rising material and oil-related costs, higher selling, general and administrative costs related to new product launches, and advertising spending also reduced the company's operating profits," BusinessWeek.com reported. "Whirlpool's earnings miss comes at a time when U.S. consumers are feeling the pinch from higher energy and food prices and worry about how long and deep a recession may be. Consumer sentiment hit a 25-year low in March."

Although Whirlpool projects a decline in U.S. shipments this year, it forecasts a 5 percent to 8 percent increase in 2008 shipments in Latin America and a 5 percent to 10 percent upswing in Asia.

Weathering the storm
Lyons says the drop in housing starts, rampant foreclosures and a slower-than-expected housing remodeling market has hit his business hard. He's laid off more than 25 of his 400 employees and is pursuing more industrial and agricultural business. Industrial work includes large metal fabrications for heating and air conditioning companies and metal fabrication for electrical cabinets for utility companies. On the agricultural side, H.L. Lyons Co. is doing fabrication work on tractors and seeders. Lyons also has stepped up advertising by sending out more mailers and brochures to potential customers' purchasing agents.

"I keep hearing the economy will get better before the end of the year," says Lyons. "But I think it's going to get worse. The price of metal is up 30 to 40 percent. The price of gas and food is up. No one is doing anything to stop this."

He points to the fact that GE Appliance may soon be sold to a Korean (LG) or Chinese (Haier) appliance company and the negative impact it will have on U.S. fabricators and stampers. "About 23,000 people were employed at our GE Appliance Park in Louisville. Now it's less than 5,000."

Lyons' company, which his father started in the 1950s, was sold to a private equity company last fall because Lyons says he needed help growing the business.

Not everyone is feeling the pain of a lagging economy, however. David Yundt, vice president of stainless products at Main Steel Polishing Co., Tinton Falls, N.J., which polishes stainless steel for a host of appliance companies, is doing well. "In the last two years, stainless has become a popular choice for appliances among U.S. consumers," he says. "Our business is up 27 to 28 percent compared to 5 percent eight years ago. We're holding our own. Our niche has saved us during a down market."

Yundt says the companies that are hurting are those dealing with carbon steel products such as painted ranges and dishwashers. Stainless is carbon steel mixed with chrome and nickel. It's polished rather than painted.

Imports, exports
Spingola says the change in import-export numbers from the end of 2007 to the first quarter of this year tell the story.

The December 2007 Major Appliance Trade Report, which reflects the preliminary year-end release from the U.S. Department of Commerce, states that major appliance exports increased 5.2 percent to 5.9 million units in 2007.ÊThe dollar value of exports increased 5.6 percent to $2 billion during this time. Large increases in exports were shown in small washing machines, air conditioners, dishwashers, large refrigerator-freezer combinations, and ovens and ranges.

The same report showed that major appliance imports decreased 1 percent to 44.8 million units while the dollar value of imports increased 4.7 percent to $7.5 billion through 2007. Some of the larger declines occurred in small household refrigerators, small washing machines, electric ranges with microwave ovens and large dehumidifiers.

By comparison, in the first four months of this year, home appliance imports were down 22 percent. Exports dropped 10.2 percent in the same period.

Spingola says U.S. exports of all major appliances to countries such as China, Vietnam, Honduras and Saudi Arabia were up dramatically. "That's most likely a function of the low value of the dollar and a way for the appliance companies to deal with declining domestic business," she says.

Imports and exports of tooling- and machining-related products such as sheet metal, crowns and closings, machining tools that cut and form metal, and special dies and tools are increasing, although imports are much higher than exports, Spingola says. In 2007, the import of these materials totaled $12.5 billion while exports were $7 billion. Imports came from China, the Netherlands, Mexico and Sweden. The largest markets for export work are Canada, Mexico and China, in that order. "These countries are coming on as customers to us for products such as sheet metal work, metal cutting and metalforming, and dies and tools."

Spingola says although the struggling housing industry is hurting the appliance industry, industries such as transportation equipment, mining, construction and locomotives are going strong. "Companies like Caterpillar are doing phenomenally well," she says. "They're capitalizing on the growing economies in Asia, South America and Eastern Europe. Any shop that can diversify its customer base can weather the housing slump."

Viewpoint from China
"In general, U.S. manufacturers are looking to overseas markets to pick up where weak demand in the United States is leaving off," says Chip Chaikin, partner at the Shanghai Liaison Office of Blue Point Capital Partners. "Appliance demand in China and developing Asia is still growing dramatically, as you can imagine. Owning a refrigerator and, increasingly, a washer and dryer, is becoming an expected part of middle-class life here. And those who can afford it are quickly growing in number."

Chaikin says several of the U.S. appliance companies, including GE Appliance and Whirlpool, are in Asia in some capacity.

He explains that Asians' appliance needs are different than Americans'; Asians typically have smaller homes, shop every day and own fewer clothes. "The desire [in Asia] is typically for much smaller appliances than are typical in the United States, so new models are needed," he says. "The Chinese also prefer lower-cost, simple models [like Haier], and it's tough for high-overhead foreign brands to compete other than in the small, high-end niches. Exporting models from the United States doesn't work."

Chaikin says suppliers in China aren't faring well. "They're getting whacked by the appreciation of the renminbi [the currency of the mainland of the People's Republic of China], the reduced export tariff rebates and rising labor rates," he says. "The better ones have focused heavily on supplying components to the western OEMs, and they're seeing weakening demand."

What other trends are Chaikin seeing in Asia as a result of the struggling U.S. housing market? "Suppliers who supply into housing-based industries such as furniture, building materials and appliances are hurting," he says. "They've been growing capacity to keep up with growing demand, and now the demand is slowing quickly, leaving excess capacity and brutal competition. Chinese suppliers who had been focused on the U.S. market are trying to quickly refocus on Europe and the local market, but it's tough." FFJ