Mcilvaine Insights

 

No. 199   May 24, 2022


 

       World Event Impacts on AWE Suppliers

       Sea Change in the Pump and Valve Markets

 

World Event Impacts on AWE Suppliers

Significant events affecting the AWE markets include the following.

1.     Continued Lockdown in China

 

Many AWE products made outside China depend on Chinese parts. A number of international suppliers export from manufacturing plants in China. AWE products are also being sold to Chinese manufacturers of chemicals, semiconductors, and power plants. The continued lockdown in China is having significant impact on these markets. The chances that COVID can be controlled by the lockdown are minimal. The cases are temporarily reduced. But as soon as the lockdown is lifted there will be high rates of transmission of this virus. China does not have effective vaccines.
 

With a highly transmissible virus you need a vaccine which is 95% effective. The basic principle is that you have to reach a level where one infected person causes less than one transmission. The lockdown does this temporarily. However, China is interfacing with the world. New sources are introduced from individuals outside the lockdown area.

The only lockdown strategy which will work is permanent isolation of China from the world. China should quickly acquire mRNA vaccines and reach the levels of immunity being achieved in the U.S. and Europe.

 

Chinese masking policy has been inconsistent. Workers in the lockdown areas have the latest in masks and PPE but masking requirements have not been adequate. In fact, masking can be an extremely effective option. What is lacking is understanding, measurement, and use, based on fitted filter efficiency. McIlvaine was in constant contact with ASTM committee members creating the mask standard which is now available. Agreement was available to standardize on a way to rate efficiency and pressure drop but not fit.



Efficient N95 masks, which have a loose fit, will only filter a portion of the incoming air. The more efficient and resistant the media, the more air will flow around rather than penetrate.



There are very accurate ways to test fitted filter efficiency. These are individual tests and very expensive. McIlvaine proposed that tests be made on five head shapes using plastic molds. This approach creates a stand for ASTM similar to efficiency and pressure drop but much more meaningful. If any live additional testing is needed it can be done with iPhones which will show if masks are improperly worn.

 

China will need to rely on masking until they can vaccinate everyone with more effective vaccines. The Chinese impact on the world economy will depend on alternative lock down options.

 

2. Russian Signs of Faltering in Ukraine

Putin did not discuss a war declaration in a May Day speech. He spent time as usual painting Ukrainians as Nazis in partnership with the West to invade Russia. But he did not threaten a full scale mobilization. Some  pundits believe that there would be significant resistance to drafting  conscripts. At the same time, Russia is demonstrating a lack of success in the Ukrainian offensive. Poorly maintained equipment, poor leadership, and poor morale all have been evident in the new campaign in the East. Longer term Russia has 2% of the capability of the West to provide equipment and ammunition. The U.S. howitzers have a longer range than the Russian. The U.S. shoulder-fired drones have had lethal effect. There are more than 10 million Ukrainian  men and women willing to risk their lives. By contrast the 200,000 Russian troops have been reduced by 25% due to injury or death.

The question is now whether Ukraine should strive to completely remove Russia from its soil or settle for a return to the February 24 status.

President Macron of France favors a settlement which would eventually bring Russia into a European community. He points out that the UK is not part of the EU. Therefore it is not imperative to grant Ukraine EU membership. He proposes a European community  which includes the EU countries plus aspiring members and others such as the UK. Russia could be encouraged to adopt a non-aggressive pledge, draw back out of eastern Ukraine, and  gain the benefits of community membership.

This might not happen under a Putin regime, but he is mortal and is even rumored to have cancer.

The various scenarios for ending the war range from nuclear devastation to a prosperous European community. The outcome  will have major impacts on AWE suppliers.

3. Economic Factors

Inflation is tied into the balance between supply and demand. There is a pent-up demand which is backed up by high levels of available cash for homeowners and businesses. The semiconductor demand has outstripped supply. This has caused delays in automobile production. AWE suppliers are unable to obtain all the parts they need. Prices for parts are rising. So AWE product prices are also increasing. The most valuable group would be scrubber and precipitator suppliers.

Most of the revenue comes from large units which are fabricated by local metal fabrication companies rather than the designer. So essentially all the hardware and components are outsourced. Contracts for large systems take months or even years to execute.

It is common for suppliers to provide variable rather than fixed price proposals which allow price adjustments commensurate to the inflation rate.

There is core inflation which is in contrast to temporary factors such as oil prices. Core inflation includes wages and other factors which are not  likely to be reversed.

The high level of savings will be changed if there is a recession. Increases in interest rates will increase the cost of mortgages and will have some effect on demand. In the U.S., the Federal Reserve is increasing rates in 0.5% increments and hopes to slow down inflation without leading the U.S. into a recession.

Europe is greatly impacted by the Russian invasion. Alternative energy supplies are needed. The cost and availability will be major economic factors.

The impact of COVID and new variants remains an unknown variable. Africa and much of Asia remain vulnerable with low vaccination rates. Hundreds of millions of new COVID cases means many new variants. So far, the variants have been more transmissible but so far not more deadly.

 

Sea Change in the Pump and Valve Markets

Digital technology is creating a sea change in the markets and profit potential for pump and valve suppliers. It will create the fairest of winds for those who adapt. For those who do not it will be a Tsunami.

The total combined pump and valve market is over $200 billion per year. The performance  needs include severe, critical, unique and general service. All except general can be considered high performance. The revenues in high performance applications are over $80 billion per year.

The sea change is taking place in all segments but is critical to the high performance  products.

Here is the evolution which makes this sea change so important

        High performance products are sold by demonstrating lowest total cost of ownership (LTCO).

        The supplier must understand the customerís needs in order to develop an LTCO product.

        Digital technology such as condition and performance monitoring provides evidence of LTCO.

        Purchasers have avoided new and better products previously due to challenges in determining LTCO.

        The supplier who can validate LTCO can now easily reach new markets and customers.

        Digital technology pinpoints product weaknesses and provides a guide for product improvement.

        With the expanded market the supplier can afford the R&D for product improvement.

        The supplier develops unique knowledge about the role his product can play in lowering customer TCO.

        This knowledge allows the supplier to become a solutions provider who with 24-7 access can help minimize TCO over the life of the plant.

The tsunami for those suppliers who donít adapt includes usurpation of the LTCO role by the digital systems integrators. They can reduce the pump or valve supplier role to just delivery of specified hardware.

There is one major hurdle to catching the fair winds. While vast amounts of digital evidence is now available, the organization and access to it is at best 50% vast.

McIlvaine is working with the media as well as suppliers serving the pump and valve industry to assist them in organizing predicate and disputed evidence relative to valve and pump choices. .

This organization of knowledge can be considered an Industrial Internet of Wisdom (IIoW) which is integral to IIoT. More detailed information is found at

Pumps World Market Report

Industrial Valves: World Market Report

Industrial IoT and Remote O&M Report

Bob McIlvaine can answer your questions at 847-226-2391  rmcilvaine@mcilvainecompany.com

 

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