Volume 6 Issue 2 March 2005
Sure, Vinyl Is the Market Leader, But
Learn How to Plan
for Continued Growth and Survival in This Competitive Market
by Abe Gaskins
As Will Farrell said on “Saturday Night Live” in 2000, while satirically portraying then presidential hopeful George W. Bush,: “Strategery.” That is the “word” with which all window manufacturers are struggling. In the last two decades the fenestration distribution system has been challenged to look into a crystal ball in order to develop a plan for growth and/or survival. Figuratively speaking, the problem is that the power supply to the crystal ball in question is intermittent and gives a somewhat opaque view.
Charting Vinyl’s Growth
Twenty years ago, the channels of distribution in the window business were more complex than they are today. At that time, most companies focused their resources within three distinct market segments of the window business: wood, aluminum and the infantile vinyl segment. Rarely did a wood company cross over into aluminum. Likewise, it was uncommon to see an aluminum company make the transition into wood. Vinyl was not considered a significant market segment; made up of many companies doing fewer than $5 million in sales. Most of these companies were start-up ventures and were capitalized poorly.
Then, in the mid-80s, vinyl began to grow significantly and mid- to large-sized companies began to enter the vinyl market. Typically, the aluminum segment began to react and started producing vinyl windows. As the market was evolving, the capital market of the late 1980s made the fenestration industry ripe for further change, bringing a rage of mergers and acquisitions.
Consolidation was the buzzword from the late 1980s to the late 1990s. Gone were the days of small and even middle-sized fabricators, or so went the conventional wisdom. Some of the consolidation players conquered and subsequently burned much like ancient Rome of 2000 years ago. Reliant and AAPC were two of the behemoths that fell to financial pressures and failure to read the crystal ball correctly.
Throughout this time the underlying market was changing as vinyl surged through the growth phase of its product lifecycle. By the end of the 1990s, vinyl windows had grown to just under 50 percent of the overall window market. All this leads to the current status quo. Vinyl has entered the mature stage of the product lifecycle and will probably maintain an extended run.
One would think that after twenty years of flux that the dust would be ready to find a happy home on which to settle. From my perspective there seems to be a constant infusion of energy to keep the dust swirling. Today, it has crossed over into the other market segments not unlike the giant Trojan horse that entered Troy more than two millennia ago. (It kind of snuck in and subsequently overran the opposition.)
Obviously, you see all-vinyl units in the field today, but you also see vinyl in the jambliners of traditional shop built-windows, in premium clad double-hung window units, in door sweeps and in just about any air infiltration interface. Vinyl is omnipresent. Given the fact that this material appears to be in an extended mature stage, the sixty four thousand dollar question becomes: what is going to influence the vinyl market tomorrow?
The price of raw material is a major influence. Salt, which is in abundant supply, is the core material for polyvinyl chloride (PVC/vinyl). To produce PVC, the salt molecule is cracked into sodium and chloride. Vinyl’s pricing has risen significantly in the last year because of classic supply and demand issues. Wood’s pricing keeps tracking upwards and so does aluminum. All in all no one can predict future pricing, but it is probably safe to say that vinyl will level out in pricing.
Competing With Foreign Companies
The industry today is being affected by domestic and foreign influences. There is an increased concern about the potential influx of vinyl product from China. Having traveled to this country extensively in the last year and a half, I have found that the Chinese are eager to enter the American market. Already Chinese manufacturers are providing tooling to the extrusion side of the business, as our company has sourced extrusion dies from here. It is my observation that extrusion die technology is flowing to China from all points on the globe because its labor market has such a substantial pricing advantage. As a case in point, Japan has been producing quality capstock for years (a process wherein vinyl profile is produced with a dark color on the outside and a lighter color on the inside). I was in a Chinese manufacturing concern and was told that this technology originated in Japan but flowed to China because it is cheaper to manufacture there. From this I can extrapolate that China has become a clearinghouse for extrusion die technology. My company has been one of the first extrusion companies to import Chinese extrusion tooling. Most extrusion manufacturing companies are importing dies with and without capstocking from Europe. As of this date, capstocked product in the United States has been priced out of the market because of the pricing from Europe. Tomorrow the pricing formula will change, which will probably mean that more product will be introduced with capstocking as manufacturers try to differentiate within the market.
Most capstocking in the United States has been limited to lighter colors. Dark colors are not available for window profiles because the host PVC material cannot tolerate the heat build-up associated with the darker colors. PVC suppliers are trying to rectify this problem. Today, no PVC compound suppliers will absolutely guarantee that certain dark colors will not cause the PVC to heat distort. If, and when, the network of PVC suppliers works out these technical bugs, you are going to see more capstocking. Whether it becomes a staple product or a specialty niche product is a question that will have to play out as window manufacturers and extruders test the market with this new technology.
The ultimate paradox is that China brings with it further threats as well as further opportunities.
This year’s election has brought the issue of America’s unemployment within the scope of political debate. China’s immense population means that it has a huge underlying employment issue. Six percent unemployment in the United States means that roughly 15 million people are looking for a job. In China six percent unemployment means that roughly 72 million people are looking for employment: roughly equivalent to 30 percent of the United States population.
Herein lays one of the major sources of all the political ballyhoo about China. China has such large unemployment issues, (or underemployment as some call it), that it has pegged the exchange rate at a number that will encourage further exportation from here to the United States. This means that the potential for completed fenestration product from China could possibly be in the mix.
Today’s political and economic stance is pretty much laissez faire. Policy makers have created this climate. If one were to take a snapshot of today’s policy, business leaders must formulate plans knowing that the market will dictate whether product can be viably shipped from China: not political sanctions.
Unless political forces intervene, it is highly possible that product will begin to flow from the Chinese waters. Time will tell if the channels of distribution will be influenced by such a possibility. Typically it takes about 30 days for product to reach the port of entry into the United States from China. The custom nature of window and door distribution seems to mean that only standardized product will be entering the United States. This precludes the idea that custom product will appear on the horizon from the Far East.
Opportunities and/or threats do, however, exist for such items as a standard 3- by 5-foot single hung, or perhaps standard patio doors. Major questions arise concerning whether Chinese extruders will be able to meet the stringent quality standards that American extruders meet. A lot of concern about the quality of the PVC that goes into the product has to be considered. For example, titanium dioxide (TiO2) is one of the major ingredients in PVC compound that guards against ultraviolet degradation. Industry standards dictate that nine to ten parts of TiO2 be provided for each 100 parts of resin. This minor ingredient by weight contributes disproportionately to the cost of the base PVC compound. How can the fenestration industry be assured that product is not imported with adequate TiO2? If enough TiO2 is not in the compound, then the product will fail in the field at some later date. By the time the material begins to fail, tens of thousands of units could be in the field, creating a huge product liability.
Another major issue is whether Chinese extruders will use lead (Pb) as a heat stabilizer instead of tin (Sn). Environmental regulatory authorities mandate that American extruders use tin as a heat stabilizer.
If companies start importing these products without verifying these types of issues, the industry could be irrevocably damaged.
New Considerations for Companies
Another way that companies are beginning to test the market is with paints. The paint technology is ahead of the PVC suppliers in this game. Today the paint industry has reflective pigments that actually reflect the infrared heat spectrum of light. As a consequence, it is possible to provide an all-vinyl fenestration product that will withstand the harsh heat of the sun.
Since coating is still considered a niche, the price point for this product has remained relatively high.
As the vinyl market enters the mature stage, all this background information leads to a somewhat clearer crystal ball.
It is true that all extruders are reacting to the fact that more window manufacturers are vertically integrating and have begun extruding their own product. As a result, many extruders are beginning to introduce upper-end vinyl product. All of this is the result of product differentiation, market maturity, technology and market forces. As extruders and manufactures introduce more upper-end product there will be more opportunity to merge the coating technology with product proliferation.
This means the industry is slated for another round of change. Painted product or capstock product is priced such that the cost of this finished fenestration product is out of the range of the single-hung market. As more upper end vinyl product is introduced, the blending of paint, capstocking and wood with vinyl will probably begin to be seen more frequently.
Another factor to consider is simulated divide lites (SDL). SDL was introduced into the market by the wood industry. The product is a cellular foam that is applied to the surface of the glass on both the inside and the outside of the glass unit. It is adhered to the glass by an extremely weather proof adhesive tape.
Vinyl manufacturers are responding to this need by designing windows with a setback on the glass large enough to accept SDL. The curb appeal has resulted in a large pull by the end consumer. Once an SDL unit is installed in a subdivision, it can dominate the rest of the subdivision quickly, transforming a niche within the subdivision to a must have.
Today, the SDL market is highly localized. Certain areas are a hot bed for such value-added product.
What all this means is that today’s vinyl manufacturers must be able to provide a “Volkswagen bug” on time to the market at a reasonable price and must look for other value-added products with which to differentiate itself in this ever changing market.
On a larger scope, all manufactures must realize that geo-political forces are a real issue. Today’s fenestration industry must balance the checkbook, service the market with existing product and look forward to what the future will bring.
Who knows, maybe some other material will surface, leading to the tremendous change that PVC has brought to the window and door industry. One thing is for sure: you have to get up in the morning and hit the ground running. This reminds me of a quote from Dwight D. Eisenhower: “Plans are nothing, but planning is everything.”
Abe Gaskins is president of MGM Industries in Hendersonville, Tenn.
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