Cullen's Reports

When looking at applications of batteries with greater than 25 Ah, the communications and UPS markets make up 90 percent of stationary battery sales. In 2001, the communications sector had approximately $429 million in sales in North America while the UPS total was just over $152 million. What happens in the telecommunications and UPS arenas will directly affect battery sales for this year and into the future. Therefore, important questions concerning these markets need to be answered. Is the Telecom sector purporting only doom and gloom for the Lead-acid industry? What about UPS, will there really be a plurality of opportunities for an “UP” market? Robert Cullen, Vice President of Sales & Marketing - Battery Separator Products for Hollingsworth & Vose Company, presented a well researched background of data for these segments of the industrial market at the May meeting of Battery Council International (BCI) Convention in Orlando, Florida.

As Mr. Robert Cullen spoke to the BCI Convention audience in Orlando, Florida, he described a U.S. Industrial Battery Market that had interrupted its 10 year growth pattern in 2001 by posting a 15% decline. One year ago, in May 2001, the prediction had been for a 5% growth. His message, “Don’t Shoot the Messenger,” described what happened and when the market is likely to recover. (Included data, unless otherwise noted, is from Mr. Cullen’s presentation.)

Unfortunately, the dark side of the market seems to perpetually confront us in the daily news. The CEOcast newsletter, on May 12th, exemplifies such negativism with its report, stating that the technology sector, in general, is not getting worse with “the one exception, the telecom sector, where the bad news is seemingly endless.”(Ref. #1) In Mr. Cullen’s report, he confirms this statement but also provides a ray of hope by saying, “CEOs remain gloomy while economists declare recovery.”

The euphoria of the seemingly endless rising markets faded in June of 2000 when escalating rates and energy costs caused manufacturing to slump while the stock market including tech investments, plunged. The telecom market, fell off a cliff in 2001 and is projected to continue downward by 11% in 2002.This gloom is accentuated by the newly discovered four billion dollar accounting fraud within Worldcom in late June.

News was not quite so discouraging for the UPS market because of the September 11th tragedy. As a result of this devastating event, a silver lining was created for UPS sales because the government and industry began to act on the impelling need to turn away from complete centralization of data to multiple backups and storage locations. This change resulted in more UPS with batteries for data storage centers. However, even with this positive jolt, the UPS market is projected to declare a slump of 6 percent this year.

In reading the daily news, one finds that the current situation is rather bleak. Gartner Dataquest reported in late May that overall global sales in mobile phones to consumers declined 3.8 percent in the first three months of the year, as cellphone makers and wireless operators had difficulty in producing new designs and applications to excite consumers. Ben Wood, Gartner Dataquest’s senior analyst, commented that overall sales were hurt by saturated markets in Europe, the removal of subsidies by telecoms and weak global economies.(Ref. #2) Siemen’s reported in the same time period that it was cutting about 23,000 jobs at its telecoms fixed line network, mobile handset and infrastructure and IT consultancy business. (Ref. #3) Bram Odshoorn of KPN Telecom NV of The Netherlands said, “The crisis (in the debt-burdened European telecoms sector) will last a couple of years. It will take years for companies to get rid of their debt situation.”(Ref. #4)

U.S. Stationary Power for Adobe Photoshop Image

Lead-acid: A Prior Forecast for 2001 vs. the Reality of 2001

When comparing the forecasted market for 2001 to the reality of the figures, the U.S. recession cost the Industrial Market $182 million in sales. Motive Power lost $54 million in sales while Stationary Power (including the Telecom and UPS markets) lost $128 million. The imploded Telecom market was off 21.4 percent.

Why the “BIG MISS” in the forecast for 2001? The general consensus by economists that the U.S. was going to avoid a recession was erroneous. For Telecom, there was strong backlog of orders still in the system at the beginning of the year 2001, but those orders seemed to disappear by June when the high-tech CaPex (Capital Expenditures) collapsed. Venture capital virtually stopped. “Couple this with the events of September 11th,” stated Mr. Cullen, “ and there was no way the industry or the economy would rebound as most economists predicted.”

Over in Japan, NTT DoCoMo, Inc., Japan’s top mobile telephone operator, said it expects to sign up 30 percent fewer new subscribers in the current business year as growth slows in the world’s number two market. DoCoMo reached only 89,000 3G subscribers by the end of its fiscal year, March 31, 2002, compared with its goal of 150,000. (Ref. #5)

Meanwhile, WORLDCOM is having difficulty staving off bancruptcy as their stock trading was recently halted on news of the accounting fraud. AT&T faces stiff competition from local wireless phone giants wading into long-distance territory. AT&T’s first quarter revenue fell 22 percent to $3.1 billion. With so many telecom bankruptcies, investors worry about AT&T’s debt load; recently, the Company’s bonds were trading at $.90 on the dollar.(Ref. #6) Meanwhile, U.S. based Motorola said it has gained some strength due to sales in China.

Research from RHK, Inc., a California research company supports the bleak news. RHK’s research says that in North America, spending by wireline telecom companies will fall 33% to 40% this year, from $77 billion in 2001 to between $46 to $51 billion. Carriers are using only about 35% capacity in the high-traffic, long-haul portions of their networks. Recovery will come, according to research conducted by Jeff Bounds of the Dallas Business Journal (Ref. #6) when:

The Internet The U.S. Internet is projected to grow from 149 million to 236 million by 2007. Globally, there will be 1.5 billion users by 2007. Estimations show that 59% will access via a wireless device by 2006...more batteries will be needed.U.S. Telecom CaPex Spending - Telecom companies such as AT&T, Verizon and Sprint had CaPex (capital expenditures) declines from $120 billion in 2000 to $75 billion in 2001, and the figure is forecasted to hit only $53 billion this year. Beyond 2003, CAPEX is projected to grow at least 10-12% annually. “These enormous expenditures are the result of a worldwide telecommunications infrastructure that is being built and redefined by the advent of new technologies in fiber optics, wireless and broadband communications systems,” remarked Mr. Cullen

The market for batteries in the Telecom sector will be driven by the infrastructure that is being built and redefined by the advent of new technologies in fiber optics, wireless and broadband communications systems.

Obviously, the reason for UPS growth is the expansion of the computer industry and its critical appplications demanding complete realiability of data. The latest driver in this market is the explosive growth of the Internet and network servers. (Data is from Robert Cullen’s presentation.)

The Wireless Market - Consolidation seems to be the key play in both the wireless infrastructure and wireless carrier markets. Globally, mobile subscribers increased by 242 million in 2001, with projections for growth to 246 million in 2002. In the U.S. markets, there are approximately 120 million subscribers with revenues of $85 billion (up 24%). However, the growth rate in the U.S. is slowing and profits are tight.

2.5 and 3.0G connections - In 2004 and 2005, 2.5G could see its heyday as 3G networks are deployed in the latter half of the decade. While North America is expected to be one of the first regions out of the starting block with 3G in 2004, it will fail to generate the momentum of Europe and Asia, producing a paltry 19.7 million 3G subscribers by 2007.

China May Lead the Charge

“China has now divided its Telecom monopoly into 4 units, and by joining in a pact with the U.S., has opened up its $50 billion market to American Companies. China will add 48 million phone lines in 2002 and will spend $20 billion a year updating its networks. Across Southeast Asia and Latin America, several countries will be investing $90 billion a year on Telecom structures,” commented Mr. Cullen as he discussed the enticing opportunities for U.S. companies.

By the end of 2002, there will still be a decline in the major markets, but not to the extent of last year; however, there will still be an 8-10 percent decline in telecom. The economic recovery forecasted for the U.S. in 2002 will be slow. It will not be enough to drive CapEx spending to new heights. “The Telecom industry will have to overcome some heavy debt burdens,” said Mr. Cullen, “and, I believe, continue a pattern of consolidations started in 2001.” In an interview on the recovery of the telecom CaPex by Barrons with Robert Gensler, a vice president of T. Rowe Price, the tone on recovery of the telecom CapEx is even more cautionary. Mr. Gensler says, “Capital spending is still negative. We remain very bearish on telecom equipment.... Average spending is now under 20% of sales, maybe as low as 16 or 17%. I see CapEx still lower in 2003.”(Ref. #8)

But, expected earnings in the Communications Services of the S&P 500 is expected to rise according to 2003 estimates by Thompson First Call; their data shows that estimates for 2002 are a negative 10 percent while estimates for 2003 are a plus 11 percent.

Mr. Cullen also notes some optimism for this market. “What all of these Telecom players are after is the exploding business of transmitting data and wireless access to the Internet. The new data networks under construction are expected to carry a 15-fold increase in data traffic between 2001 and 2005. Annual global spending on Telecom services, already over $750 billion, will grow to over $1 trillion by 2003. Much of that spending will be on data information.”

“Beginning in 2003, as the economy continues to improve and the Telecom debt loads work themselves down to a reasonable level, there should be some increased spending on infrastructure again, and the industry should enjoy a 6-8% growth trend through 2006.”

A glimpse of sunshine peaks through in viewing the outlook for the UPS market. Frost & Sullivan reports that after a dip in 2001, total revenues from services relating to single-and three-phase uninterruptible power supplies and direct current power systems are expected to climb through 2008. “Users are slowly abandoning the traditional tendency to wait for equipment emergencies before performing maintenance,” says Sara Bradford, Frost & Sullivan Industry Analyst. “Instead, they are increasingly adopting preventative schedules and ongoing monitoring services.” (Ref. #7)

“Distributed generation (DG) markets have to be reexamined after Enron, the California energy crisis and the uncertainty in the Middle East. Now power quality and reliability issues are proving themselves to be crucial,” said Atakan Ozbek, Director of Energy Research for Allied Business Intelligence. Power quality and industrial power supply markets are anticipated to see higher growth rates than residential markets.

Data for chart is from “Distributed Generation - Global Market Anaysis, Technology Assessment and Outlook,” by Allied Business Intelligence.

Robert Cullen had good news, too. “The second major segment in Stationary Power, after telecommunications, is UPS. Large UPS battery growth is forecasted at about 8.5% annually from 2003-2006, after a 6% decline in 2002. Spending on UPS equipment is expected to reach $4.5 billion. This, in turn, is expected to grow 7-10% yearly, according to market research from Data Quest.”

Enersys, Inc., (formerly Yuasa, Inc.) Reserve Power Group has a new family of spill containment systems. The system includes a 6- mil thick, flexible flame retardant plastic liner than fits snugly under and over the exterior barrier frame. This eliminates the need for special floor preparation treatment prior to installation. The new systems, for absorbing and neutralizing electrolyte leaks from wet Lead-acid batteries, are for any telecommunications, UPS, switchgear or utility application that requires a DC power supply.

The impetus for UPS growth will come because of the needs in the computer industry. Critical applications demand complete reliability of data. Another driver in this market is the explosive growth in the Internet and network servers. Although not specifically mentioned by Mr. Cullen, Lead-acid batteries may also increase as new distributed generation systems are deployed through the world. Lead-acid batteries can play an important role in start-ups, backups and as auxiliary power in a cost-effective price range.

Every year, U. S. businesses lose as much as $120 billion because of power reliability problems, according to a recent study by Primen, an independent energy firm. An earlier study by Duke Power showed that businesses lost, on average, $11,000 per momentary power outage; losses were significantly greater for firms with critical applications such as data centers and e-commerce operations. Thus, the need is obvious, and the Lead-acid industry has opportunities in spite of gloomy economy.

In Dr. Max Carey’s keynote to the BCI Convention, he talked about “Stepping up to Greatness - Leading through Challenging Times.” The choice is there; we can simply cry at the bad news or seek opportunities to find positive avenues.

The bears will growl about the daily negativism in the economy. They will concentrate on such news as: Telfon AB LM Ericsson, the world’s biggest producer of mobile networks, not returning to the black until sometime in 2003(Ref. #9); Lehman Brothers cutting estimates for U.S. wireless; and Adelphia Communications hurling toward bankruptcy. These bears will hibernate, lay dormant and wait for spring in the market.

But in the meantime, the bulls will thrust forward and look for opportunity. In support of the positive action, BD has found that many in the Lead-acid industry are seeking to offer “energy solutions” to increase business by not only offering batteries, but systems. One company, as an example, is Johnson Controls (JCI). In their recent strategic alliance with Eaton Corporation, these two companies are synergistically providing a total electric power reliability and quality package. Another company going beyond the selling of just batteries is Enersys. (See photo and caption on the previous page.) Panasonic sees a concept of long term warranty with its battery. (See photo on previous page.) The companies in each of these examples is perceiving needs of their customers, beyond their initial product. Ted Levitt in Marketing Myopia probably says it best - “You know what business you are in...(but going beyond nearsighted vision)... What business should you be in?”

Panasonic outlines factors behind ensuring long life in Telecom VRLA Batteries

1. High Tin Content - The grid can be made more durable by increasing the percentage of tin. (Panasonic uses 2.2 percent tin.)

2. Tight Seals that Last - With a high tin content in the battery plates, grid growth can be limited to 5 percent, not 15 percent, as the battery grid expands over time.

3. A Design that Limits Heat Exposure - A battery rack design with cooling channels increases cell ventilation.

4. Internal Materials that Reduce the Charging Current - Reducing the charging or float current, which maintains the battery’s Voltage, is critical to extending battery life. (Panasonic uses their own researched separator material which lowers float current by controlling the battery’s oxygen diffusion.)

Each company must decide - Do these times provide an opportunity to step up to greatness or to find new niches in the market ? What “outcomes” can be created for customers and prospects in the already identified markets?