There is a rule of thumb in economic circles that a chronic price inflation cycle does not set in until wages start increasing, triggering a wage-price spiral.
That rule of thumb is going to be seriously tested in the upcoming months. US business has done almost all that is possible to cut costs on the wage front significantly through outsourcing.
However, given the extreme monetary inflation stressing almost all other inputs to the corporate product management income statements, prices look ready to start moving much higher across the board, in any business impacted by material and energy costs.
THE ECONOMIC TIMES
Surging costs catch up with corporate America
2 Jul, 2008, 0110 hrs IST
REUTERS
BOSTON: US manufacturers are turning to price increases as their only way to offset record-high energy bills and surging raw material costs, deciding that the risk of losing some sales is worth preserving profit margins. The moves are a sign that companies are running out of ways to offset the rise in key costs including oil, natural gas, steel and aluminum, while betting their customers will have little choice but to accept higher prices.
Manufacturers including Navistar International and OshKosh Corp over the past week have told investors they plan to raise prices. "Companies are definitely getting more aggressive in terms of raising prices," said Kurt Spieler, a fund manager at the Fort Collins, Colorado-based First Focus Growth Opportunities Fund, whose key industrial holdings include L-3 Communications Holdings Inc, Joy Global and Agco Corp.
"Initially they tried to manage their profitability through productivity improvements, becoming more efficient, some cost cutting. But now with the extent of the rise in raw material costs, that's just not sufficient," Spieler said.
"The interesting part will be how much the prices that they're increasing will stick in a pretty tough economic environment." The question of whether price increases will stick -- and will be phased in quickly enough -- was one that haunted investors in United Parcel Service Inc, the world's largest package delivery company, and its main US rival FedEx Corp last month.
Both companies cut their profit forecasts, citing higher oil prices, and analysts warned the fuel surcharges the companies were imposing did not seem to be coming in fast enough to offset more expensive energy costs.
'GET IT IN PRICE'
Navistar, a maker of trucks and engines, has locked in its pricing on steel and aluminum through the rest of this year, said Chief Executive David Ustian. The company expects its energy bills to go up again next year, and to offset that, he said it will have to raise prices as well as look for ways to trim other costs. To justify higher prices to customers, Navistar will offer more fuel-efficient products that will save them money in the long run.
"Commodities are a challenge for the entire country and certainly in the trucking industry," Ustian told investors on Monday. "The real answer to it ... is get it in price." Navistar is not alone in bracing for more cost pressures. A survey by consultant RSM McGladrey of 912 manufacturing and distribution companies, which will be released next week, found that more than 80 percent expected energy, raw materials and shipping costs to rise at least 6 percent over the course of the year.
"We continue to experience headwinds in our manufacturing costs that impact progress against our productivity targets," Rich Kramer, who heads Goodyear's North American tire operations told investors. "We continue to attack all of our costs aggressively." "There's a lot of things we can do in the factories to take variable labor (costs) out, to take actions around energy," Kramer said.
PUTTING THE BOTTOM LINE FIRST
OshKosh plans to raise prices on its fire trucks, concrete mixers and other large vehicles 3 percent to 9 percent, scale back capital spending and look for other ways to cut costs to cope with higher energy and steel prices. "We haven't had significant pushback from customers, our competitors seem to be similarly increasing prices," Robert Bohn, OshKosh's CEO, told investors last week. OshKosh's competitors include Navistar, Federal Signal Corp and Terex Corp.
But any time a business raises prices it runs the risk of losing sales. The fact that companies are moving to raise prices suggests they may be looking to protect profit margins in the face of a slowing U.S. economy. "Just as the perceptions of consumers can affect their spending decisions, the confidence of manufacturers can certainly have an impact on their behavior," said Michael Goodman, director of economic and public policy research at the University of Massachusetts' Donahue Institute.
"In a different economic environment, someone might take a loss-leader to gain market share or to open up a new avenue of business. But the willingness to do something like that is going to be directly related to confidence."
