CHAPTER 12. PRELIMINARY MANUFACTURER IMPACT ANALYSIS

TABLE OF CONTENTS

12.1 INTRODUCTION

......................................................................................................... 12-1

12.2 METHODOLOGY

........................................................................................................ 12-1

12.2.1 Phase I: Industry Profile

................................................................................... 12-2

12.2.2 Phase II: Industry Cash-Flow Analysis and Interview Guide

.......................... 12-2

12.2.2.1 Industry Cash-Flow Analysis

......................................................... 12-2

12.2.2.2 Interview Guide

.............................................................................. 12-2

12.2.3 Phase III: Subgroup Analysis

........................................................................... 12-2

12.2.3.1 Manufacturer Inte rviews

................................................................ 12-3

12.2.3.2 Revised Industry Cash-Flow Analysis

........................................... 12-3

12.2.3.3 Manufacturer Subgroup Analysis

................................................... 12-3

12.2.3.4 Competitive Impact Assessment

.................................................... 12-3

12.2.3.5 Manufacturing Capacity Impact

..................................................... 12-4

12.2.3.6 Employment Impact

....................................................................... 12-4

12.2.3.7 Cumulative Regulatory Burden

...................................................... 12-4

12.3 PRELIMINARY MANUFACTURER IMPACT ANALYSIS RESULTS

................... 12-4

12.3.1 Industry Overview

............................................................................................ 12-4

12.3.1.1 Industry Cost Structure

................................................................... 12-5

12.3.1.2 Inventory Levels

............................................................................. 12-6

12.3.2 Interview Topics and Preliminary Findings

..................................................... 12-7

12.3.2.1 Market Shares and Industry Consolidation

.................................... 12-7

12.3.2.2 Production and Pr oduct Mix

........................................................... 12-8

12.3.2.3 Cumulative Regulatory Burden

...................................................... 12-9

12.3.3 Overall Key Issues

.......................................................................................... 12-10

12.3.3.1 Customer Impact

.......................................................................... 12-10

12.3.3.2 Product Repairs versus Product Replacement

.............................. 12-10

12.3.3.3 Shipments

..................................................................................... 12-10

12.3.3.4 Impact on Profitability and Outlook

............................................. 12-11

12.3.3.5 Impact on Small Manufacturers

................................................... 12-11

12.3.3.6 Impact on Competitiveness of Manufacturers

.............................. 12-11

LIST OF TABLES

Table 12.3.1 Walk-in Cooler and Freezer Industry Employment and Earnings

................... 12-5

Table 12.3.2 Walk-in Cooler and Freezer I ndustry Material and Payroll Costs

................... 12-6

Table 12.3.3 Walk-in Cooler and Freeze r Industry End-of-Year Inventory

......................... 12-6 Table 12.3.4 Full Production Capacity Utilization Rates

..................................................... 12-7

12-iCHAPTER 12 PRELIMINARY MANUFACTURER IMPACT ANALYSIS

12.1 INTRODUCTION

The purpose of the manufacturer impact analysis (MIA) is to identify and quantify the likely impacts of energy conservation standards on manufacturers. In the Notice of Proposed Rulemaking (NOPR) stage of the analysis, DOE considers a wide range of quantitative and qualitative industry impacts that might occur due to an energy conservation standard. For example, a particular standard level could require change s in manufacturing practices, equipment, raw materials, etc. DOE fully analyzes these impacts during the NOPR stage.

DOE announced changes to the preliminary anal ysis MIA format through a report issued to Congress on January 31, 2006 (as required by section 141 of the Energy Policy Act of 2005 (EPACT 2005), entitled “Energy Cons ervation Standards Activities.” 1 As a result, DOE collects, evaluates, and reports preliminary MIA informa tion in the preliminary analysis (as opposed to waiting for the NOPR stage). Such preliminary information includes market data, market shares, industry consolidation, product mix, key issues , conversion costs, foreign competition, and cumulative regulatory burden information, if ava ilable. DOE solicits this information during the preliminary manufacturer interviews and reports the results in this chapter.

To the extent appropriate for this rulema king, DOE applies the methodology described below to evaluate energy conservation sta ndards for walk in coolers and freezers.

12.2 METHODOLOGY

DOE conducts the MIA in three phases. In Phase I, DOE creates an industry profile to characterize the industry and conducts a prelimin ary MIA to identify important issues that require consideration. Se ction 12.3.1 of this chapter presents initial findings of the Phase I analysis. In Phase II, DOE prepares an indus try cash flow model a nd a detailed interview questionnaire to guide subsequent discussions w ith manufacturers. In Phase III, DOE interviews manufacturers and assesses the impacts of energy conservation standards both quantitatively and qualitatively. DOE assesses industry and subgro up cash flow impacts and industry net present value (INPV) using the Government Regulatory Impact Model (GRIM). Fo r additional details on the GRIM, see section 12.2.2.1. DOE also asse sses impacts on competition, manufacturing capacity, employment, and regulatory burden based on manufacturer interv iews and discussions. The NOPR and technical support document (TSD) present results of the Phase II and III analyses.

1 This report is available on the DOE website at www.eere.energy.gov/buildings/appliance_standards/2006_schedule_setting.html

.

12-112.2.1 Phase I: Industry Profile

In Phase I of the MIA, DOE collects pertinent qualitative and quantitative financial and market information. This includes data on wage s, employment, industry costs, and capacity

utilization rates for manufacturers of walk in coolers and freezers. Sources of information include reports published by industry groups, tr ade journals, the U.S. Census Bureau, and Securities Exchange Commission (SEC) 10-K fili ngs. In addition, DOE relies on information from its market and technology assessment, engineering analysis, life-cycle cost analysis, and consumer price analysis to characterize the walk in cooler and freezer manufacturing industry.

12.2.2 Phase II: Industry Cash-Flow Analysis and Interview Guide

In Phase II, DOE performs a preliminary indus try cash-flow analysis and prepares written guidelines for interviewing manufacturers.

12.2.2.1 Industry Cash-Flow Analysis

The GRIM is a financial model that anal yzes the impacts of energy conservation standards. Energy conservation standards may affect investment , production costs, and revenue through changes in prices and, possibly, shipment s. The GRIM uses several factors to determine a series of annual cash flows for the year that energy conservation standards become effective and for several years after imple mentation. These factors include annual expected revenues, costs of sales, selling and gene ral administration costs, taxes, a nd capital expenditures. Inputs to the GRIM include financial information, manufacturing costs, shipment forecasts, and price forecasts developed in other analyses. The fi nancial information is developed from publicly

available data and confidentiall y submitted manufacturer information. DOE compares the results of the GRIM against baseline projections in whic h no energy conservation standards are in place. The financial impact of energy conservation standa rds is the difference between the two sets of

discounted annual cash flows.

12.2.2.2 Interview Guide

DOE conducts interviews with manufacturers to gather in formation on the effects of energy conservation standards on revenues, costs, direct employment, capital assets, and industry competitiveness. Before the interviews, which occur in Phase III, DOE distributes an interview guide to help identify the impacts of energy c onservation standards on i ndividual manufacturers or subgroups of manufacturers. Interview guide topics include: production costs; shipment projections; market share; produc t mix; conversion costs; markups and profitability; competition; manufacturing capacity; cumulative regulato ry burden; and other relevant topics.

12.2.3 Phase III: Subgroup Analysis

Phase III activities take place after publica tion of the preliminary analysis. These

activities include manufacturer in terviews; revision of the industry cash-flow analysis; a manufacturer subgroup analysis; an assessment of the impacts on industry competition, manufacturing capacity, direct employment, cumu lative regulatory burden, as well as other qualitative impacts.

12-212.2.3.1 Manufacturer Interviews

DOE conducts detailed interviews with manufacturers to gain insight into the potential impacts of energy conservation standards on sale s, direct employment, capital assets, and industry competitiveness. The interview process is critical to the MIA because it provides an opportunity for manufacturers to privately expre ss their views on important issues. Interviews are scheduled well in advance to provide every op portunity for manufacturers to be available for comment. Although a written response to the questionnaire is acceptable, DOE prefers interactive interviews, which he lp clarify responses and provide the opportunity to identify additional issues not specifically addressed in the interview questionna ire. A non-disclosureagreement allows confidential or sensitive information to be considered in DOE’s decisionmaking process. Confidential in formation will not be made available in the public record. At most, sensitive or confidential in formation may be aggregated and presented in industry-wide representations.

DOE supplements the information gathered in Phase I and the cash flow analysis performed in Phase II with information ga thered during manufacturer interviews.

12.2.3.2 Revised Industry Cash-Flow Analysis

As discussed, DOE requests information a bout profitability impac ts, necessary plant changes, and other manufacturing impacts during th e interview process. DOE revises its industry

cash flow model based on the feedback it receives in comments and during interviews.

12.2.3.3 Manufacturer Subgroup Analysis

Using average cost assumptions to devel op an industry cash flow estimate will not adequately assess differential impacts among ma nufacturer subgroups. Smaller manufacturers, niche players, and manufacturers exhibiting a cost structure that differs largely from the industry average could be more negatively affected. Id eally, DOE would consider the impact on every firm individually; however, it typically uses the results of the industry characterization to group manufacturers with similar characteristics. During the interviews, DOE discusses the potential subgroups that have been identified for th e analysis. DOE asks manufacturers and other interested parties to suggest what subgroups or characteristics are most appropriate for the analysis.

12.2.3.4 Competitive Impact Assessment

Section 342 (6)(B)(i)(V) of the Energy Policy Act of 1992 (EPCA) directs DOE to consider any lessening of competition likely to result from the imposition of standards. EPCA further directs the U.S. Attorney General to determine the impacts, if any, of any decrease in competition. DOE attempts to gath er and report firm-specific fi nancial informa tion and impacts wherever possible. DOE bases the competitive impact assessment on manufacturer cost data and other information collected from interviews. When assessing competitive impacts, DOE’s interviews generally focus on assessing asymmetrical cost increases, the potential increase in business risks from an increased proportion of fixe d costs, and potential barriers to market entry ( e.g ., proprietary technologies). Th e competitive analysis will also focus on assessing any differential impacts to smaller manufacturers.

12-312.2.3.5 Manufacturing Capacity Impact

One of the significant outcomes of ener gy conservation standards can be the obsolescence of existing manufacturing assets, in cluding tooling and other investments. The manufacturer interview guide presents a seri es of questions to help identify impacts on manufacturing capacity, specifically capacity utilization and plant location decisions in the United States with and without energy conser vation standards. The interview guide also addresses the ability of manufacturers to upgrad e or remodel existing facilities to accommodate the new requirements; the nature and value of stranded assets, if any; and estimates for any one

time restructuring or other charges, where applicable.

12.2.3.6 Employment Impact

The impact of energy conservation sta ndards on employment is an important consideration in the rulemaking process. To as sess how domestic employ ment patterns might be affected, the interview process explores current employment trends in the walk in coolers and freezers industry and solicits manufacturer views on changes in employment patterns that may result from increased standard levels. The employment impacts section of the interview guide focuses on current employment levels at production facilities; expected future employment levels with and without an energy conservation standard; differences in workforce skills; and employee retraining.

12.2.3.7 Cumulative Regulatory Burden

DOE seeks to mitigate the overlapping effects on manufacturers due to energy conservation standards and other regulatory actions. DOE analyzes and considers the impact on manufacturers of multip le, product-specific regulatory actions.

12.3 PRELIMINARY MANUFACTURER IMPACT ANALYSIS RESULTS

During the preliminary activities phase, DOE conducted a preliminary evaluation of the impact of potential energy conservation standard s on the walk-in cooler and freezer industry.

The primary sources of information for this analysis the U.S. Census, industry reports, and interviews with manufacturers of walk-in equipment, c onducted during the summer of 2009. To maintain confidentiality, DOE only reports aggregated information here. DOE does not disclose company-specific information, nor doe s it identify the individual manufacturers that

disclosed information.

12.3.1 Industry Overview

The following section summarizes publicly available industry data.

12-412.3.1.1 Industry Cost Structure

DOE is unaware of any publicly available industry-wide cost data specific to only

manufacturers of walk in coolers and walk in freezers. DOE examined the North American Industry Classification System (NAICS) codes fo r small business sizes and determined that walk-in cooler and freezer manufacturing is classified as a subset under NAICS code 333415 ( Air-Conditioning and Warm Air Heating Equipment and Commercial and Industrial Refrigeration Equipment Manufacturing ). Therefore, DOE presents the data below as a broader industry proxy for the walk in cooler and fr eezer industry, which, in combination with information gained in interviews, inform DOE’s analysis of the industry cost structure. DOE recognizes that not all manufacturers of walk-in cooler and freezer equipment may classify themselves under NAICS code 333415, particular ly those that only manufacture WICF envelopes. However, DOE was unable to find a nother NAICS code that corresponded closely to envelope manufacturing. DOE will conduct additional research to determine if a more appropriate code can be used. If DOE determines that a different NAICS industry code should be used to represent WICF envelope manufacturers, DOE will report the following data for that industry separately.

DOE obtained the below data from U.S. Census Bureau, Annual Survey of Manufacturers, Statistics for Industry Groups and Industries from 2002-2007.

Table 12.3.1 presents the walk-in cooler and freezer employment levels and earnings

from 2002 to 2007. The statistics illust rate approximately an 8-percent decrease in production workers and overall number of employees from 2002 to 2007.

Table 12.3.1 Employment and Earnings for the Air-Conditioning and Warm Air Heating Equipment and Commercial and Industrial Refrigeration Equipment Manufacturing Industry

Year Production Workers All Employees Annual Payroll ($000s)

2002 80,400 108,252 3,815,129

2003 77,471 104,646 3,775,799

2004 73,559 99,669 3,707,969

2005 76,011 102,354 3,942,808

2006 74,909 98,097 4,019,813

2007 73,993 100,284 3,975,785

Source: U.S. Census Bureau. Annual Survey of Manufacturers, 2002-2007

Table 12.3.2 presents the costs of materials and industry payroll as a percentage of shipment value from 2002 to 2007. The cost of mate rials as a percentage of shipment value has steadily increased from 2002 to 2007. The cost of payroll for production workers and the cost of total payroll have declined by 17.3 pe rcent and 16.1 percent, respectively.

12-5Table 12.3.2 Air-Conditioning and Warm Air Heating Equipment and Commercial and Industrial Refrigeration Equipment Manufacturing Industry Material and Payroll Costs

Year Cost of Materials (percent of shipment value) Cost of Payroll

for Production Workers (percent of shipment value) Cost of Total Payroll (percent of shipment value)

2002 49.36 9.83 15.85

2003 50.59 9.53 15.39

2004 51.81 8.99 14.57

2005 53.78 8.52 13.78

2006 53.17 8.87 13.80

2007 55.52 8.12 13.29

Source: U.S. Census Bureau. Annual Survey of Manufacturers, 2002-2007

12.3.1.2 Inventory Levels

Table 12.3.3 shows the year-end inventory for the Air-Conditioning and Warm Air Heating Equipment and Commerc ial and Industrial Refrigera tion Equipment Manufacturing industry obtained from the U.S. Census Bureau, Annual Survey of Manufacturers, Statistics for Industry Groups and Industries from 2002 to 2007. Year-end inventory refers to the amount of inventory a manufacturer has on hand at year e nd, which includes work-in-progress and finished goods. Again, DOE presents these data as a broade r measure of the walk in coolers and freezers industry. The industry’s end-of-year inventory from 2002 to 2007 increased when expressed both in dollars and as a percentage of shipment value.

Table 12.3.3 End-of-Year Inventory for th e Air-Conditioning and Warm Air Heating Equipment and Commercial and Industrial Refrigeration Equipment Manufacturing Industry

Year End-of-Year Inventory ($000s) End-of-Year Inventory (percent of shipment value)

2002 2,302,012 9.57

2003 2,376,827 9.69

2004 2,473,932 9.72

2005 2,687,441 9.39

2006 2,887,139 9.91

2007 3,011,358 10.07

Source: U.S. Census Bureau. Annual Survey of Manufacturers, 2002-2007

DOE obtained full production capacity utilization rates from the U.S. Census Bureau, “Current Industrial Reports,” Survey of Plant Capacity from 2002 to 2006. Table 12.3.4 presents production capacity utilization rates for NAICS code 333415. Full production capacity is defined as the maximum level of produc tion an establishment could attain under normal operating

conditions. In the Survey of Plant Capacity report, the full production utili zation rate is a ratio of the actual level of operations to the full production level.

12-6Table 12.3.4 Air-Conditioning and Warm Air Heating Equipment and Commercial and Industrial Refrigeration Equipment Manufacturing Industry Full Production Capacity

Utilization Rates

Year Air Conditioning and Warm Air Heat ing Equipment and Commercial and Industrial Refrigeration Eq uipment Manufacturing (%)

2002 60

2003 62

2004 60

2005 66

2006 63

Source: U.S. Census Bureau. 2007 Current Industrial Reports: Table 1a - Full Production Capacity Utilization Rates by Industry: Fourth Quarters 2002 through 2006. November 2007

12.3.2 Interview Topics and Preliminary Findings

The following section summarizes information gathered during interviews held during the summer of 2009 for the preliminary MIA.

12.3.2.1 Market Shares and Industry Consolidation

Energy conservation standards can alter the competitive dynamics of the marketplace, prompting companies to enter the market, exit the market, or merge with other companies. The preliminary MIA interview questions asked manufacturers to share their perspectives on industry consolidation both in the absence of energy c onservation standards and assuming standards at various efficiency levels. The interview qu estions focused on gathering information that

assessed:

 current and anticipated market share in the event of standards;

 disproportionate cost increases to some manufacturers;

 likelihood of industry consolidation;

 increased proportion of fixed costs potentially increasing business risks; and

 potential barriers to market entry (e.g., proprietary technologies).

The need to assess anti-competitive effects of proposed energy conservation standards derives from the need to protect consumer intere sts. During the interviews, DOE also solicited information to determine whether energy conser vation standards could re sult in disproportionate economic or performance penalties for particular consumer or user subgroups. Manufacturers were also asked if energy cons ervation standards could result in products that would be more or less desirable to consumers due to changes in product functionality, utility, or other features.

Market Shares. DOE inquired about current market shares of manufacturers in the walk-in cooler and freezer industry and how t hose shares might change after an energy conservation standard. One manufacturer said that a new standard could help them, but that they expect their market share to go down before it go es up, in part because the company could lose a price advantage on materials. Another manufacture r said that they do expect their market share to change once standards become effective, regard less of where the levels are set, but it could not

determine whether it would increase or decrease. Another manufacturer said the effect of any

12-7standard on its market share would depend on the le vel of enforcement. This company said that if the standards are not enforced, then it woul d impact the market share of those players not necessarily complying with standards. One manufa cturer said that they would not expect their market share to change once standards become eff ective. This firm hopes that the standards will be fair and that people will comply, although they also said that there is no mechanism for compliance. This firm gave the example of the California regulations and stated that there are no penalties for non-compliance; so many comp etitors do not adhere to the standard.

Industry Consolidation. The walk-in cooler and freezer industry is relatively fragmented but has seen some consolidation in recent years. Manufacturers were generally mixed on how standards might affect consolidatio n. Most manufacturers expect consolidation to continue regardless of any standards, and several manufacturers said they would expect consolidation to increase as a result of standards. One firm said that some companies would go out of business or be acquired in the face of standards, while another thought standards would spur additional market entrants as well as vertical integration, expecting suppliers and customers to potentially enter the market. A common theme from manufacturers was that enforcement would play a major role in how standards might alter the market. In general, manufacturers stated that the greater the level of enforcement, the greater the level of consolidation that would

ensue.

12.3.2.2 Production and Product Mix

DOE requested manufacturers’ feedback on wh at they perceived to be the possible impact of energy conservation standards on prof itability. For instance, the capital and product conversion outlays may be required to upgrade or re design products before they have reached the end of their useful life, which could result in reduced cash flow a nd stranded investments. Higher energy conservation standards could also resu lt in higher per-unit costs that could cause consumers to shift to less expe nsive products, if available.

Product Mix. Currently, a significant percentage of the overall market’s production is

customized to the customer’s needs. Several manufacturers expressed concern that a stringent standard may affect their ability to customize th eir products. One manufact urer pointed out that approximately 70 percent of walk-i n cooler and freezer equipment is custom-made, and that an overly stringent standard could hurt the custom products market. Other manufacturers stated that 70-80 percent of their sales are custom equipment. One manufacturer asserted that a reasonable energy conservation standard for walk-in cooler s and freezers would allow for cost-effective, customized products to be developed. One firm al so said that water-cooled units could be the only choice for tall buildings under a new sta ndard, though not for water-restricted areas, because, water-cooled units are sometimes more efficient in certain indoor environments, and end-users in tall buildings could not site the condensing unit outdoors.

Product Utility. Some manufacturers expressed c oncerns that energy conservation standards might require changes in product functionality, utility, and other features that would make products less desirable to consumers. Some manufacturers were concerned that larger sized

walk-in coolers and freezers could become a problem under a more stringent energy conservation standard. For example, if the insula tion standard in the industry required panels to be thicker, this would be less desirable to customers because the larger walk-in units would leave

12-8the customer with less available refrigerated space. This firm said that more stringent standards could reduce flexibility to cater to specific applications, which would reduce the functionality of the equipment. For example, this firm said that you could have an efficient product at a specific evaporator temperature, but need to operate at different one for the standard. This manufacturer

also said that without enforcement of the new st andard, the service of walk-in cooler and freezer equipment would be more expensive with the comp lex systems. They said that there could be a shift from service professionals that change part s to diagnosticians, as seen in cars, and this would substantially increase costs. Manufact urers stated that new unproven technologies required by any new standards could pr esent challenges to product reliability.

12.3.2.3 Cumulative Regulatory Burden

While any one regulation may not impose a significant burden on manufacturers, the combined effects of several impending regulatio ns may have serious consequences for some manufacturers, groups of manufacturers, or an enti re industry. Assessing the impact of a single regulation may overlook this cumulative regulatory burden. For the cumulative regulatory burden analysis, DOE describes other significant e quipment-specific regulati ons that could affect

walk-in cooler and freezer manufactu rers or their parent companies.

Based on its own research and discussions with manufacturers, DOE identified several regulations relevant to walk-in coolers and freezers, including:

 Refrigerant switch

 General DOE regulations

 Building codes and other

Refrigerant. Due to the phase-out of chlorofluorocarbons (CFCs) and hydrochlorofluorocarbons (HCFCs), the walk-in c ooler and freezer industry had to transition to non-ozone-depleting refrigerants. As a result, th e industry has transitioned to hydrofluorocarbon

based (HFC-based) refrigerants in its wa lk-in cooler and freezer equipment.

Testing Costs. One manufacturer expressed a concern with the potential costs to meet testing requirements or to do outside testing. This firm said that the costs would be about $5,000

- $10,000 per product to test meet fire and safety crit eria of Underwriters Laboratories. Another manufacturer said that their testing costs would be 1.5 to 2.0 percent of sales for all of the regulations that they comply with. According to one manufacturer, these overall regulatory burden issues add about 10 to 20 percen t to the cost of doing business.

Building Codes and Other Regulations. Several manufacturers are concerned with requirements for the National Sa nitation Foundation’s (NSF) certification requirements, which carry significant compliance costs. International, state, and local building codes present additional costs, including permit and inspection fees. Manufacturers also referenced disposal requirements they must comply with. One major problem, according to several firms, is the potential for conflicting regulations where a company cannot meet both, such as fire codes and the Montreal protocol for blowing agents.

12-912.3.3 Overall Key Issues

Perhaps the most important aspect of the pr eliminary MIA is the opportunity it creates for DOE to identify key manufacturer issues earl y in the development of energy conservation standards. During preliminary interviews, manufacturers identified several major issues that are detailed in the following sections.

12.3.3.1 Customer Impact

One manufacturer said that a new standard would have a negative impact on customers, down to the variety of foods and services that they could offer. This firm argued that a more stringent standard could make it more difficult fo r customers to buy fresh refrigerated foods.

One manufacturer said that unsophisticated cu stomers may be hurt by the new standard.

Several manufacturers said that small users/subgroups would be disproportionately affected, as these groups are more concerned about upfront costs than life cycle cost savings. They stated that

convenience stores would be more affected than restaurants under the standard, because 75 percent of the equipment used in convenience stores is custom, which could potentially be

restricted at certain standard levels. One ma nufacturer argued it would have to pass the costs along to customers, which would reduce new business starts and increase failures.

12.3.3.2 Product Repairs versus Product Replacement

Several manufacturers noted that an energy c onservation standard could cause a trend to repair walk-in coolers and freezers rather than replace them. One manufacturer said that because prices would go up under the new standard, customers would prefer to repair their existing equipment upon failure rather than purchase new replacement equipment. Several manufacturers pointed out that customers may al so opt to purchase several reach-in products rather than a single walk-in. Another manufacturer noted that currently customers are already repairing rather than replacing their units.

12.3.3.3 Shipments

Shipment projections can be a significan t factor in determining the manufacturing impacts of energy conservation standards. The interviews provide an opportunity for manufacturers to share information that can help DOE quantify the magnitude of any changes in shipments resulting from energy conservation standards.

Several manufacturers expect shipments of wa lk-in coolers and freezers would decrease with standards because unit prices would incr ease. One manufacturer stated that a high

incremental cost increase due to standards would drive lower total shipments, as consumers opt to repair rather than replace units, as discusse d above. The manufacturer further stated that higher first cost would deter new businesses a nd restaurants from starting. The manufacturer estimated that a 5 percent cost increase would result in a 5 percent decrease in industry shipments; a 10 percent cost increase would resu lt in a 7.5 percent shipment decrease; and a 25 percent cost increase would result in a 15 percent shipment decrease. Another firm estimated that a 5 percent price increase would lead to a 5 percent decline in shipments and a 10 percent

12-10price increase would drive down sales by 20 percent due to business closures and substitutions by consumers.

On the other hand, a different manufacturer stated that standards would not change industry shipments unless the price increase was si gnificant. The firm pr ojected, for example, that a 25 percent increase would lower shipments by 5-10 percent. However, a 50 percent increase would drive shipments down by 10 to 15 percent and likely prohibit some new restaurants from opening.

12.3.3.4 Impact on Profitability and Outlook

DOE interviewed manufacturers about any potenti al change in their outlook that could arise from energy conservation standards.

One manufacturer said that a new standard, if reasonable, could help potentially help their business competitively because they are confident of their ability to comply. However, most firms expressed concern that stringent st andards could result in higher production costs, lower shipments, and lower margins. In te rms of conversion costs, several manufacturers expressed concerns that the new standard may force them to switch from board stock foam to polyurethane foam, which would require significan t investments in the machinery necessary to produce the polyurethane foam. One manufacturer said that there are fewer suppliers of the type of board stock foam that complies with EISA for a four-inch panel.

One firm explained that th e walk-in cooler and freezer industry is not a high margin industry, and small increases in costs can dramati cally affect profitability. Shipping costs, for instance, which are a significant portion of the cost structure and do not benefit from economies of scale, could increase with la rger, heavier units. A manufacturer argued that it is possible that shipments could decrease under st andards but still require more de livery trucks because of the larger units.

12.3.3.5 Impact on Small Manufacturers

Several manufacturers said that small businesses would be at a competitive disadvantage under the standard because the capital investments required would have to be spread over fewer units. Because the smaller companies produce fewer units, it is more difficult for them to make a profit at the wholesale price. Another manufacturer said that a strict standard may also affect OEMs that make a portion of the product themselves, and these firm s may not have the ability to

meet the standard. A different manufacturer said that their outlook would only change if the

standards were enforced.

12.3.3.6 Impact on Competitiveness of Manufacturers

One manufacturer said that whether the ne w standard would have an effect on the competitiveness of manufacturers in the industry de pends on enforcement. This firm said that the competitive landscape would remain about the same unless rules were enforced. Assuming aggressive enforcement, many smaller players wh o may not be in compliance currently would go out of business. Another manufacturer stated that a standard’s effect on industry competition depends on how stringent the standard is. If the st andard is reasonable, this firm said that there

12-11would not be a drastic effect. Some manufacturers stated that strong enforcement would benefit their competitive position.

12-12