Are price reductions a mean to keep market share and profit in textile machinery?
BY VIRGINIA F. BODMER-ALTURA
The rumours that a prominent Swiss Textile Machine manufacturer protects its world market share by lowering prices was quite vivid. Competitors were shaking their heads because it looks like a break of some unwritten law and understanding within the entire sector
Now we have the proof that Swiss Rieter made such pricing amendments. It is officially stated in the latest Rieter’s half year statement. Okay, you might think they had a sound reasoning since their contracts became obsolete on January 15, 2015 when the SNB Swiss National Bank decided to no longer to support the EUR exchange rate it had defended for some three years with the aim that the Swiss Franc becomes too strong because of the world’s worsening geopolitical situation and the restricted means of the SNB to continue to stem itself against the tide of a stronger Swiss currency. The SNB has weigh the overall Swiss interests. The critic of Swiss industrial sectors is not ceasing up today, most of all the Swissmem criticised the move of SNB, at the same time it stated that the sector of the metal industry would be definitely damaged, mostly the SMEs, the small to medium size firms would not be able to “swallow” the increase of 20 % of their products overnight, these were and for customers in the Eurozone where their major markets are. The SNB’s move would destroy the backbone of this industrial segment to which also textile machinery and its sub-suppliers belong.
It was to be expected that these firms will make use of short time working schemes and outsource some of their production to more favourable cost sites, in order to compensate the unexpected levy of insurance coverage of a steady currency relation of the Swiss Franc towards the Euro. The SNB stated that this measure was temporary, thus a change of its policy was to be expected, however, the question remained, when such a change would take place. The shock initiated by the SNB came – by nature of its business – unexpectedly. The reactions and adaptations were markedly.
Of course, every company has the right to seek the necessary amendments in order to cover its worldwide market situation, to protect its margins and its business. No doubt about that. But the move of a market leader in the spinning sector is of weight, will also have an impact on its competitors. It is true that the products of Rieter became 20 % dearer on January 15, 2015, and that its competitors in the Eurozone arena were able to offer their products more advantageous quoting in Euros. I underline the autonomy of each company to take its own decisions. Rieter claims now that it had to amend the conditions of its existing contracts with customers also practically overnight in order to stay competitive, and not being forced to accept order cancellations, and, at the same time the company needed to try to protect its margins, because such are the basis for the future of the company.
Well, the company is also operating in a very competitive field, and its measures taken are affecting its keenest competitors. In the past, and this went over years, it was an unwritten law that undercutting prices were no longer the name of the game. Each company and competitors calculated their product prices on the basis of the value of their innovations and the customers’ acceptance to pay for these added values.
I understand the urgency to take measures to counteract the measures of the SNB. But I question if the measures taken by Rieter will not have a future effect on general pricing in the textile machinery sector, particularly when these are taken by a renowned world market leader, because this attitude will have an effect on the world market, and it might imply that in the future there will be again a price war and that the position of the customers will become stronger to dictate how much these are willing to pay for a textile machine, depending on its possible added value in view to their company’s situation. This could hamper the business of textile machinery worldwide, and a lot more than the particular conduct of the Swiss company. Particularly under the aspect of the upcoming keen Chinese competition.
At the presentation of the half year results of Rieter, the management defended its actions and tried to minimise the effects of their amendments, even though these left some traces in the company semester results. In the report of this time lapse, one finds the following comment “Short term profitability improvement measures have been released to counteract the potential negative impact on top and bottom line of the stronger Swiss Franc. In addition, Rieter will streamline production and reduce purchasing volume in Switzerland”. Of course these effects are predominantly on orders deriving from supplies directly from Switzerland. The company has implied also internal countermeasures, such as a reduction of reducing material costs, meaning to switch from suppliers from Switzerland to a more advantageous cost basis, however this negatively effects its sub-suppliers in Switzerland that have bet on the Rieter trump card in their production. Entrepreneurship always implies also economic responsibility to the home country. However the effect on the sub-supplier might be drastic and the latest forecast of Swissmem seems to confirm this, because these companies have little means to counteract the Swiss cost factor. There are rumours that around a dozen or more companies might be forced to close down.
In addition, Rieter will make amendments in its own Swiss production, meaning that the production volume will be adjusted to market conditions, and this means also a reduction of its workforce. Another aspect that will affect the overall the overall company’s responsibility to its native country.
The company remains in a sort of split actions that may not simply play to the benefit of the company. In the conference call for analysts the management commented “that the price concessions will also affect orders in the second half of 2015, however counter actions are taken. We do not take orders from areas that traditionally bank on Swiss production, where we have to make price reductions. We know that this is a particular challenge to face, thus we will adopt the production volume in Winterthur over the next 12 months.”
Rieter further comments the situation: “Rieter’s exposure to the Swiss Franc has decreased over the last years. Short term profitability improvement measures have been released to counteract the potential negative impact on top and bottom line of the stronger Swiss Franc. In addition, Rieter will streamline production and reduce purchasing volume in Switzerland. As a result and depending on the effective currency scenario in 2015, the negative impact on operating profitability (EBIT) compared to 2014 is currently estimated in the range of 100 – 200 base points.” Sales currency denomination in 2014 was as follows: 40% of sales in Swiss Francs, 37% in euros and 23% in US dollars and local currencies, thus the effect of not taking orders resulting in Swiss Francs, this does also mean that Rieter will have to take the risk of the currency effects resulting when billing in other currencies. Usually orders in Swiss Francs bear also higher margins.
Rieter has also to accept lower down payments, because of lower order intake, but is betting on success of the upcoming ITMA Milano where the company will present its innovations, among an air jet solution for polyester yarn. But this time ITMA is in November, and the direct impact of such orders a lot lower on 2015, but it will influence definitely 2016. Rieter bets on “that the deflation scenario in yarns and fibre prices will change to an inflation scenario in 2015, and the first signs are already visible.” The comment at the conference call for analysts in view to ITMA was “that customers tell us that they will order during or after ITMA, after they witnessed all the innovations and added value that is offered by the entire sector. But of course, we cannot be sure that they will really order. That is another challenge, and that is why Rieter is cautious in view to its forecast. In addition, some traditional markets show signs of weakness, such as China and Turkey. The comment of the management on Turkey was, “that this is the Rieter market for premium machines, the market is low right now, but Rieter is well positioned to benefit of an upturn of the market.” In China the company feels that it is well placed with its own production there and to benefit of government actions as a local company. And to the general market conditions, the management of Rieter commented, “it depends of the right direction politically, geo-politically and the outcome of the excessive financing situation”, all issues that the company cannot influence.
What does Rieter try to accomplish with (internal) measures during the second half of 2015? Rieter will continue to invest in R&D for the benefit of the customer and by innovation, namely to improve the profitability of spinners by improvement of yarn property, by helping to reduce material costs, by further reducing energy costs, automation and machine productivity, all of these are added values for the customer. In addition, Rieter proposes value based pricing (the customer has to be convinced of these values), internally at Rieter a further optimised utilisation of existing capacities, improvement of product margins, reduction of structural costs, and setting priorities adjusted to master challenges of new currency scenario. Based on the said above, Rieter expects sales in the first semester 2015 to be around the level of the first semester of 2014. The full year 2015 is currently expected to show lower sales volumes than 2014 due to the slower order intake at Machines & Systems. As a result, EBIT and net profit in 2015 is expected at lower levels than in 2014.
Let us return again to the price reductions, I still feel that this is a double sided sword over the heads of Rieter and its competitors, especially when considering the imponderables of customers, markets and general framework, plus the effect on the business conduct of competitors, not only from the Eurozone, but worldwide.