Personnel recruitment will be key
to continued success in PVF channel

BY MORRIS R. BESCHLOSS
PVF and economic analyst

As another dynamic business year gets underway, it’s a good time to reflect on the remarkable changes impacting the PVF sector, as well as the industry in general. Last year saw a major surge in mergers, acquisitions and buyouts, which seemed to accelerate as the year-end approached.

With such unprecedented activity reaching a new peak, powered by unprecedented global monetary liquidity, many believe that the days of the independent owners are increasingly numbered. Although this is supposed to be particularly true of manufacturing, distribution is supposedly headed in a similar direction.

But nothing is further from the truth. While headlines are made by the Phelps Dodge/Freeport-McMoRan merger and investment banker Goldman Sachs taking a majority stake in PVF distributor leader McJunkin, the commitment to independence is still active and well. Looking at the PVF sector’s landscape throughout the nation, there are more examples of independent ownership flourishing than there are incidences of family abdication.

Although most of such family ownership in America’s PVF industry is concentrated in distribution, there are also many examples -- large and small -- in manufacturing. This only happens if the multi-generational flame keeps burning brightly. It all depends on the commitment of the business’ controlling family that continues to be actively involved in running these operations. Obviously, such multi-generational continuity is dependent on the availability of such family members willing to keep carrying the torch.

Many of the most successful PVF corporate businesses have not allowed the fire of individual entrepreneurship to be extinguished. In distribution, Ferguson and Hajoca are great examples. Although both are in the multi-billion-dollar category and run as corporate enterprises, their personnel are predominantly drawn and trained from within the industry.

In manufacturing, Victaulic, Bonney Forge, Weldbend, Nibco and A.Y. McDonald are great examples of family ownership and/or management. They continue to do well because the young trainees coming up from below are enthusiastic about being part of our great PVF sector.

As pipe, valves and fittings continue to be the fastest-growing sector of the PHCP industry, there is plenty of room for both well-managed corporate entities, as well as multi-generational family businesses.

The key in making this great industry sector -- exceeding $25 billion annually -- increasingly successful is selling its attractiveness to the forthcoming generation. It’s up to both segments -- corporate and family owned -- to attract the best and the brightest, who must be committed to the idea that our particular industry represents a basis for an exciting future. It’s up to all of us to continue to make this happen.

Purchasing power parity reshuffles international GDP standings

Purchasing power parity is not a phrase with which a casual economic observer is familiar. To put it simply, it represents the real value of products manufactured and distributed within a national economy. These are inevitably at variance with the global powers’ gross domestic product, which are valued in dollars. Purchasing power parity also represents the real purchasing power of goods and services generated within these economies. This factor severely distorts the cost disparity represented by each of the world’s leading nations’ gross domestic product.

A significant example is China. If the real value of that nation’s yuan’s purchasing powers were equalized among the world’s major currencies, it would probably be reflated by 20% or 30%. It’s generally accepted that China has pegged its currency to the U.S. dollar in order to keep its exports globally competitive, which it has long succeeded in accomplishing.

On a global basis, China’s purchasing power would not only greatly exceed its currency value, but would benefit by the far cheaper prices paid for comparable manufactured products and services generated domestically. At present, China is slowly allowing the yuan’s value to creep up, so as not to disturb its internal employment objectives. But it’s still a far cry from its real value versus the dollar.

A more realistic interpretation would allow China to leapfrog Germany as the world’s third-largest economy, putting it well on track to challenge Japan for the No. 2 spot in the next few years.

But the increasing crisis over the currency balance between the U.S. and China has become an increasingly bitter point of contention between the U.S. and China. America’s widening trade gap with China has generated the highest trade deficit any nation has ever achieved against the U.S. It has also made American products more expensive vis-a-vis the Chinese yuan, thwarting attempts to break American products quickly enough into the fast-growing Chinese economy.

With the European Union’s euro on a roll, just the reverse of the Chinese experience is taking place in the relationship between the U.S. and its European trading partners. Such major U.S. giant industries as Boeing aircraft, construction machinery and high-tech products are becoming increasingly competitive in Europe. Even some agricultural products are finding new openings. Conversely, Europe is finding it harder to sell in the U.S., while its citizens are overwhelming American tourist facilities due to the low prices made available by the strong euro.

Although world currencies are constantly shifting their comparable values, the monetary focal point will remain on the U.S.-China controversy.

At the present rate, the Chinese trade deficit will exceed last year’s $201.66 billion, or about one-fourth of America’s total current account deficit.

This is grist for the mill of Senators Charles Schumer (D-N.Y.), Lindsey Graham (R-S.C.) and TV commentator Lou Dobbs, who want to legislate against further Chinese incursion. This could mean a new round of tariff pressures emanating from such increasingly influential protectionist spokesmen.

With Democrats controlling Congress, any move toward protectionism could mean higher consumer prices if Congress is successful in instituting new tariffs. Should this happen, America’s shoppers may wake up too late to take remedial action.

Are China and India headed for economic collision?

Which will become the most effective global economy in the long term -- China or India? With a combined population of 2.5 billion, these Asiatic economic superpowers represent more than one-third of the global population.

Although many observers tend to lump these two giants together as the future world powers destined to dominate the global economic spectrum, the concept of “Chindia” is turning out to be a myth.

Focusing on different strategies currently, the Asian economic titans are bound to eventually collide, as both internal population growth, industrialization and product line expansion force increasing competition on the two nations’ forward motion.

At present, the India-China rivalry operates on different tracks. China, which jumped off the world economic starting blocks almost 25 years ago, has primarily concentrated on luring global manufacturers of major commodity products. Beijing has used prodigious low-cost labor and facilities to make production and worldwide distribution from Chinese bases feasible. This has made China a world leader in fabricated copper, iron and steel manufactured goods on behalf of well-known global conglomerates.

Only recently has China branched into high technology and international name brands that the Japanese did so successfully in the 1980s and early 1990s. In fact, the Chinese economic directorate has announced an accelerated shift in this direction as a national strategy, which it hopes will slow the growth based on cheap labor and high-volume commodities.

India, on the other hand, broke into its present growth mode in 1990, when then Finance Minister (now Prime Minister) Manmohan Singh decided to focus on high technology as the instrument of India’s export development. Utilizing the highly educated engineering talent that had previously been absorbed by the Western nations, where these students matriculated, Singh circumvented the old-style bureaucratic infrastructure which had been India’s modus operandi since British colonial days.

Duplicating America’s Silicon Valley in the Indian city of Bangalore, India has vaulted into global high technology leadership. At the present rate of expansion, India is destined to become the world leader in high technology production, components and service.

Coming from such disparate economic objectives, the budding India-China rivalry has been kept at low ebb, but changing circumstances are forcing these relatively friendly neighbors into increasing confrontation.

As the only two members of the world’s billion-person-plus population club, each must create 15 million new jobs every year just to absorb its young people into the employment pool. This will inevitably produce a confrontation of available manufacturing jobs.

Surprisingly, the cost advantage goes to India where blue collar workers receive only one half the wages of comparable employment in China.

But a major question is which nation offers the greatest motivation for extended global economic growth.

China has achieved its success through a regimented single-party control state, which avoids the obstacles of internal bickering over economic reform. However, as previous national examples of control from the top have shown, this method tends engender increasing corruption from those entrusted to make the system work.

India, on the other hand, benefits from the strength of market economies, which are more closely attuned to the needs and sensitivities of its global clients. Although benefitting from the lack of interference by political operatives, India’s commercial apparatus will find itself running head on into the traditional bureaucracy that inhibits much of the conventional manufacturing businesses.

As each of the mega-economies compete not only for each other’s markets, as well as the requisite natural resources, this increasing confrontation between the world’s largest capitalist nation and the globe’s mightiest socialist one will be closely observed. This may eventually answer the question as to which system can be more effective under today’s changing circumstances.

Value-added economies prove world’s most successful

With record global liquidity circulating around the world markets, it’s becoming increasingly apparent that the global value-added economies are outstripping the natural resource extractionists in building up their foreign reserves.

Conventional wisdom would normally give the commodity-rich economies a major advantage, with prices for oil, natural gas, gold, silver, uranium, manganese, etc., generating near all-time-high prices. With the OPEC oil barons raking in several hundred billion dollars this year, these Islamist giants would seem to be salting away dollars, euros and yen in massive numbers. But, strangely enough, this buildup of currency reserves is not taking place.

With practically no domestic industry of consequence in any of these major oil producers, most of such mega-billions generated go to government-financed welfare schemes, excessive personal spending by the ruling cliques and arming thousands of partisans. This comes from a desire to increase geopolitical power, typified by Iranian and Venezuelan regimes. It also reflects fear of internal terrorism such as exists in Saudi Arabia. The Saudis hope to avoid internal unrest by supporting extremist religious schools at home, as well as in other parts of the world.

When analyzing the world’s extractionist nations with the largest foreign reserves, only Russia has generated triple digit revenues. Practically pauperized during the post-Soviet 1990s, Russia has combined its massive oil exports and natural gas resources to regain the political leverage it lost after the breakup of the Soviet Union.

Even after satisfying its domestic use, Russia’s stranglehold on natural gas to all its former Soviet satellites, as well as partial control over Western European needs, generates increased geopolitical power. Russia’s natural resource exports are supplemented by armament shipments, which makes the Russians a leading global armament supplier.

This has allowed Russia to prepay its foreign debt, strengthen its currency (the ruble) and qualify for membership in the World Trade Organization.

But when it comes to adding value to raw materials, the U.S., China, Japan, Germany, Britain and smaller industrialized economies set the pace.

Leading the pack is China, which grows its foreign reserves by $20 billion a month. Despite its announced intention to curb exports and shift into higher gear domestically, Beijing is finding its overheated export engine hard to slow down.

Other than Russia, all other triple-digit foreign reserves holders are located in Southeast Asia. It should come as no surprise that Taiwan -- overwhelmingly populated by ethnic Chinese -- has amassed over $260 billion, third only to mainland China and Japan in foreign currency reserves. This is amazing when one considers that Taiwan’s population is 22 million, in contrast to China’s 1.4 billion.

Singapore, whose population is primarily Chinese, trails with $130 billion. Only South Korea with $230 billion and India with $158 billion are not dependent on a Chinese-based economic infrastructure.

To dramatize the creative disparity between a leading world extractionist nation and a value-added one are oil-rich Saudi Arabia and tiny Israel, each having foreign reserves in the mid-$20-billion range.

Other major retainers of foreign reserves are energy-abundant Mexico at $84 billion, Thailand at $60 billion and Brazil at $71 billion.

Brazil, previously known as the “land of tomorrow,” has finally gotten its act together. Covering two-thirds of South America’s land area, and with a population approaching 200 million, Brazil has developed a balanced economy of agricultural, as well as industrial producers.

However, the unexpected growth of consumer sectors in increasing parts of the world is putting ever greater pressure on raw materials, especially metals and oil. Further production cuts by OPEC could also boost the price of crude oil well above $60 in the foreseeable future.

           

Morris R. Beschloss, a 50-year veteran of the pipe, valves and fittings industry, serves as PVF and economic analyst for The Wholesaler.