CHAPTER 12: PRELIMINARY MANUFACTURER IMPACT ANALYSIS

TABLE OF CONTENTS

12.1 INTRODUCTION ......................................................................................................... 12­1

12.2 METHODOLOGY ........................................................................................................ 12­1

12.2.1 Phase 1: Industry Profile................................................................................... 12­2

12.2.2 Phase 2: Industry Cash­Flow Analysis and Interview Guide ........................... 12­2

12.2.2.1 Industry Cash­Flow Analysis............................................................ 12­2

12.2.2.2 Interview Guide ................................................................................ 12­2

12.2.3 Phase 3: Subgroup Analysis.............................................................................. 12­2

12.2.3.1 Manufacturer Interviews................................................................... 12­3

12.2.3.2 Revised Industry Cash­Flow Analysis.............................................. 12­3

12.2.3.3 Manufacturer Subgroup Analysis..................................................... 12­3

12.2.3.4 Competitive Impact Analysis............................................................ 12­3

12.2.3.5 Manufacturing Capacity Impact ....................................................... 12­4

12.2.3.6 Employment Impact.......................................................................... 12­4

12.2.3.7 Cumulative Regulatory Burden ........................................................ 12­4

12.3 PRELIMINARY MANUFACTURER IMPACT OVERVIEW.................................... 12­4

12.3.1 Overview of Industry Data................................................................................. 12­5

12.3.1.1 Industry Cost Structure ..................................................................... 12­5

12.3.1.2 Inventory Levels and Capacity Utilization Rates............................. 12­6

12.3.2 Preliminary Manufacturing Interview Overview............................................... 12­7

12.3.2.1 Key Issues......................................................................................... 12­7

12.3.2.2 Production and Product Mix ............................................................. 12­7

12.3.2.3 Compliance Costs............................................................................. 12­7

12.3.2.4 Exports, Foreign Competition, and Outsourcing .............................. 12­8

12.3.2.5 Market Shares and Industry Consolidation....................................... 12­8

12.3.2.6 Cumulative Burden ........................................................................... 12­8

12.4 SUMMARY OF MAJOR ISSUES FROM PRELIMINARY MIA .............................. 12­9

12.4.1 Capital Expenses to Produce Standards­Compliant Small Electric Motors ...... 12­9

12.4.2 Maintaining Product Availability and Features................................................. 12­9

12.4.3 Enforcement of Standards.................................................................................. 12­9

LIST OF TABLES

Table 12.3.1 Motor and Generator Employment and Earnings.................................. 12­5

Table 12.3.2 Motor and Generator Industry Census Data .......................................... 12­6

Table 12.3.3 Motor and Generator Industry Census Data .......................................... 12­6

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

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CHAPTER 12. PRELIMINARY MANUFACTURER IMPACT ANALYSIS

12.1 INTRODUCTION

The purpose of the manufacturer impact analysis (MIA) is to identify and quantify the

potential impacts of energy conservation standards on manufacturers. The Process Rule provides

guidance for conducting this analysis with input from manufacturers and other interested parties.

The U.S. Department of Energy (DOE) will apply this methodology to its evaluation of standards

to the extent that it is appropriate for developing energy conservation standards for the small

electric motors covered under the preliminary analyses. The Process Rule provides guidelines

for considering financial impacts and a wide range of quantitative and qualitative industry

impacts that might occur after adoption of a standard. For example, a particular standard level

could require changes in manufacturing practices for small electric motors. DOE will identify

and analyze these impacts through interviews with manufacturers and other stakeholders during

the notice of proposed rulemaking (NOPR) stage of its analysis.

DOE announced changes to the 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)),

1 entitled Energy Conservation Standards Activities. Previously, DOE did not report any MIA

results until the notice of proposed rulemaking stage (NOPR). However, under this new format,

DOE collected, evaluated, and reported preliminary information and data in the period preceding

the NOPR phase. Such preliminary information includes efficiency and market data, key issues,

production mixes, conversion costs, foreign competition, market shares, industry consolidation,

and cumulative regulatory information. DOE solicited this information during the preliminary

manufacturer interviews and reports the results in this chapter. The appendices to this chapter

include copies of the interview guides that DOE distributed to manufacturers to gather

information for the preliminary MIA and other preliminary analyses.

12.2 METHODOLOGY

DOE will conduct the MIA in three phases. In Phase 1, DOE will create an industry

profile to characterize the industry and conduct a preliminary MIA to identify important issues

that require consideration. Sections 12.3 and 12.4 present DOE’s initial findings from the Phase

1 analysis. In Phase 2, DOE will prepare an industry cash­flow model and an interview

questionnaire to guide subsequent discussions. In Phase 3, DOE will interview manufacturers

and assess the impacts of standards both quantitatively and qualitatively. DOE will assess

industry and subgroup cash flow and net present value (NPV) using the Government Regulatory

Impact Model (GRIM). DOE will then assess impacts on competition, manufacturing capacity,

employment, and regulatory burden based on the manufacturer interviews and discussions. DOE

will conduct Phases 2 and 3 in the NOPR phase of the rulemaking.

1 This report is available on the DOE website at

www.eere.energy.gov/buildings/appliance_standards/pdfs/congressional_report_0807.pdf.

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12.2.1 Phase 1: Industry Profile

In Phase 1 of the manufacturer impact analysis, DOE collects qualitative and quantitative

financial and market information. This information includes wages, employment, and industry

costs for small electric motors. Sources include reports published by industry groups, trade

journals, the U.S. Census Bureau, and copies of Securities Exchange Commission (SEC) 10­K

filings. DOE will also rely on information from its market and technology assessment,

engineering analysis, life­cycle cost analysis, and analysis of consumer prices to characterize the

small electric motor manufacturing industry.

12.2.2 Phase 2: Industry Cash­Flow Analysis and Interview Guide

In Phase 2, DOE will perform a preliminary industry cash­flow analysis and prepare

written guidelines for interviewing manufacturers.

12.2.2.1 Industry Cash­Flow Analysis

DOE will use the GRIM to analyze the financial impacts of energy conservation

standards on the small electric motor industry. Standards may require additional investment,

raise production costs, and affect revenue through higher prices and possibly lower sales. The

GRIM uses several factors to determine a series of annual cash flows for the year that standards

become effective and for several subsequent years. These factors include annual expected

revenues; sales costs; selling and general administration costs; taxes; and capital expenditures

related to depreciation, new standards, and maintenance. Inputs to the GRIM include

manufacturing costs, shipment forecasts, and price forecasts developed in other analyses. DOE

develops another input, financial information, based on publicly available data and confidentially

submitted manufacturer information. DOE compares the results of the GRIM against baseline

projections where no standards are in place. The financial impact of new standards is the

difference between the two sets of discounted annual cash flows.

12.2.2.2 Interview Guide

DOE will conduct interviews with manufacturers to gather information on the effects of

standards on revenues and finances, direct employment, capital assets, and industry

competitiveness. These interviews will take place during Phase 3 of the MIA. Before the

interviews, DOE will distribute an interview guide that will help identify the impacts of

standards on individual manufacturers or subgroups of manufacturers. The interview guide will

likely cover current organizational characteristics; industry infrastructure; manufacturer cashflow analysis; and assessments of the impact on competition, employment, and manufacturing

capacity.

12.2.3 Phase 3: Subgroup Analysis

Phase 3 activities will occur after publication of the notice of public meeting (NOPM).

These activities will include manufacturer interviews; revision of the industry cash­flow

analysis; a manufacturer subgroup cash­flow analysis; and assessment of the impacts on

competition, manufacturing capacity, employment, and the cumulative regulatory burden.

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12.2.3.1 Manufacturer Interviews

DOE will supplement the information gathered in Phase 1 and the cash­flow analysis

performed in Phase 2 with information gathered during interviews with manufacturers during

Phase 3. The interview process has a key role in the manufacturer impact analyses, because it

provides an opportunity for interested parties to express their views privately on important

issues. This allows consideration of confidential or sensitive information during the rulemaking

decision.

DOE will conduct detailed interviews with manufacturers to gain insight into the

potential impacts of standards on sales, direct employment, capital assets, and industry

competitiveness. Both qualitative and quantitative information are valuable. Interviewees

schedule meetings well in advance to provide every opportunity for key individuals’

participation and comment. Although a written response to the questionnaire is acceptable, DOE

prefers an interactive interview process, which helps clarify responses and provides the

opportunity to identify additional issues.

DOE asks all manufacturers who participate in the interviews to identify all confidential

information provided during and after the interview. DOE will consider all information

transmitted in its decision­making process; however, will not make confidential information

available in the public record. Also, DOE will ask participants to identify any information they

wish to include in the public record but do not want attributed to them.

12.2.3.2 Revised Industry Cash­Flow Analysis

In Phase 2 of the MIA, DOE will prepare a preliminary GRIM. During the interviews,

DOE will seek comments about the values DOE selected for the parameters. DOE will use the

feedback provided during the interviews to revise its industry cash­flow model.

12.2.3.3 Manufacturer Subgroup Analysis

Using average cost assumptions to develop an industry cash­flow estimate is not adequate

for assessing differential impacts among subgroups of manufacturers. Standards could

negatively affect smaller manufacturers, niche players, or manufacturers exhibiting a cost

structure that differs largely from the industry average. Ideally, DOE would consider the

individual impact on each firm. However, DOE typically uses the results of the industry

characterization to group manufacturers with similar characteristics. During the interviews,

DOE will discuss the potential subgroups that have been identified for the analysis. DOE will

ask manufacturers and other stakeholders to suggest which subgroups or characteristics are most

appropriate for the analysis.

12.2.3.4 Competitive Impact Analysis

Section 342(a)(6)(B)(i)(V) of the Energy Policy and Conservation Act (EPCA), 42

U.S.C. 6313(a)(6)(B)(i)(V), directs DOE to consider any lessening of competition likely to result

from imposition of standards. It further directs the U.S. Attorney General to determine the

impacts, if any, of any decrease in competition. DOE will make a determined effort to gather

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and report firm­specific financial information and impacts. The competitive analysis will focus

on assessing the impacts on smaller manufacturers. Manufacturing cost data and information

collected from interviews with manufacturers will provide the basis of the assessment. The

manufacturer interviews will focus on gathering information that would help in assessing

asymmetrical cost increases to some manufacturers, the potential increase in business risks from

an increased proportion of fixed costs, and potential barriers to market entry (e.g., proprietary

technologies).

12.2.3.5 Manufacturing Capacity Impact

A potentially significant outcome of standards is the obsolescence of existing

manufacturing assets, including tooling and investment. The manufacturer interview guide will

have a series of questions to help identify impacts on manufacturing capacity, specifically

capacity utilization and plant location decisions in the United States and North America with and

without a standard; the ability of manufacturers to upgrade or remodel existing facilities to

accommodate the new requirements; the nature and value of stranded assets, if any; and

estimates for any one­time restructuring or other charges, where applicable.

12.2.3.6 Employment Impact

The impact of new energy conservation standards on employment is an important

consideration in the rulemaking process. To assess affects on domestic employment patterns, the

interviews will explore current employment trends in the motor industry and solicit manufacturer

views on changes in employment patterns that may result from increased standard levels. The

employment impacts section of the interview guide will focus on current employment levels

associated with manufacturers at each production facility, expected future employment levels

with and without a standard, differences in workforce skills, and issues related to employee

retraining.

12.2.3.7 Cumulative Regulatory Burden

DOE seeks to mitigate the overlapping effects on manufacturers of standards and other

regulatory actions affecting the same equipment or companies. Based on its own research and

discussions with manufacturers, DOE has yet to identify regulations that cover the same set of

motors covered in the preliminary analyses.

12.3 PRELIMINARY MANUFACTURER IMPACT OVERVIEW

During the period preceding the NOPR, DOE identified qualitative and quantitative

public financial and market information to help evaluate the impact of potential new regulations

on small electric motor manufacturer financial performance, manufacturing capacity and

employment levels, and product utility and innovation. DOE also researched the cumulative

burden that industry may face from the overlapping effect of new or recent energy conservation

standards or other regulatory action affecting the same product or industry.

In addition to researching publicly available data, DOE conducted interviews with

manufacturers primarily to identify key issues and gain insights into the qualitative impacts of

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energy conservation standards. The primary sources of this information were interviews with

manufacturers of small electric motors conducted during the last quarter of 2007 and the first

quarter of fiscal year 2008. To maintain confidentiality, DOE did not identify the individual

manufacturers that disclosed information. Instead, the evaluation only reports aggregated

information and does not disclose sensitive or company­specific information. DOE used an

interview guide to gather responses from multiple manufacturers on several issues. Appendix

12A contains a copy of the preliminary manufacturer interview guide DOE used for small

electric motor manufacturers.

The following sections summarize publicly available data as well as information gathered

during interviews for the preliminary manufacturer impact analysis. Section 12.3.1 summarizes

the publicly available industry data. Section 12.3.2 outlines the general interview structure and

summarizes the issues discussed during the preliminary MIA interviews. Section 12.4 addresses

major manufacturer­related issues for motors covered in the preliminary analyses.

12.3.1 Overview of Industry Data

DOE compiled industry data to assess the motor industry cost structure and

manufacturing utilization and capitalization rates. The following sections summarize public data

DOE obtained from U.S. Census Bureau reports.

12.3.1.1 Industry Cost Structure

DOE developed the motor and generator industry cost structure from the U.S. Census

Bureau, Annual Survey of Manufacturers, Statistics for Industry Groups and Industries: 2005.

Table 12.3.1 presents the motor industry employment levels and earnings for this period. The

data show about an 18­percent decrease in the number of production workers, and about a 13­

percent decrease in the overall number of employees in the industry.

i Table 12.3.1 Motor and Generator Employment and Earnings

Year Production Workers All Employees Payroll for All Employees

(thousand 2005 dollars)

2002 41,272 54,906 1,840,379

2003 36,357 49,409 1,739,725

2004 34,944 48,143 1,755,630

2005 33,989 47,580 1,831,619

Table 12.3.2 presents the costs of materials and industry payroll as a percentage of

shipment value from 2002 to 2005. The cost of materials increased in that period, whereas the

cost of payroll (both production and total) decreased.

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ii Table 12.3.2 Motor and Generator Industry Census Data

Year

Cost of Materials

(% of shipment

value)

Cost of Payroll for

Production Workers

(% of shipment value)

Cost of Total Payroll:

Production + Administration

(% of shipment value)

2002 47.0 12.8 32.9

2003 48.3 11.9 30.7

2004 50.0 10.8 27.8

2005 51.3 9.8 25.6

12.3.1.2 Inventory Levels and Capacity Utilization Rates

Table 12.3.3 shows the year­end inventory for the motors industry obtained from the U.S.

Census Bureau, Annual Survey of Manufacturers, Statistics for Industry Groups and Industries:

2005. The dollar amount of end­of­year inventory has increased, but the inventory as a

percentage of annual shipment value has decreased slightly.

iii Table 12.3.3 Motor and Generator Industry Census Data

Year End­of­Year Inventory

(thousand 2005 dollars)

End­of­Year Inventory

(% of shipment value)

2002 1,252,225 13.7

2003 1,242,783 13.4

2004 1,384,081 13.4

2005 1,496,582 13.0

DOE obtained full production capacity utilization rates from the U.S. Census Bureau,

Current Industrial Reports, Survey of Plant Capacity from 2001 to 2005. Table 12.3.4 shows

production capacity utilization rates for the motor and generator industry. Full production

capacity is defined as the maximum level of production that an establishment could attain under

normal operating conditions. In the Survey of Plant Capacity report, the full production

utilization rate is a ratio of the actual level of operations to the full production level.

iv Table 12.3.4 Full Production Capacity Utilization Rates

Year Motor and Generator Manufacturing (%)

2001 61

2002 60

2003 62

2004 75

2005 59

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12.3.2 Preliminary Manufacturing Interview Overview

In addition to reviewing publicly available data, DOE interviewed manufacturers for a

preliminary manufacturer impact analysis. The following section highlights topics discussed

during these interviews.

12.3.2.1 Key Issues

Perhaps the most important aspect of the preliminary MIA is the opportunity that it

creates for DOE to identify key manufacturer issues early in the development of new standards.

During the interviews, DOE engages manufacturers in a discussion about what they perceive as

the key issues in the rulemaking. Key issues in previous rulemakings have included concerns

over patents that may prevent some companies from implementing higher­efficiency designs.

12.3.2.2 Production and Product Mix

DOE asks manufacturers what they perceive as the possible impact of new standards on

profitability. For instance, the capital and product conversion outlays needed to upgrade or

redesign products before they have reached the end of their useful life may create significant

conversion costs, resulting in reduced cash flow and stranded investments. Higher energy

conservation standards may also result in higher per­unit costs that could cause consumers to

shift to less costly products.

12.3.2.3 Compliance Costs

During the interviews, DOE asks manufacturers to quantify and explain both the capital

and the product conversion costs necessary to raise the energy efficiency of their product lines to

the proposed standard levels. In some instances, manufacturers may meet proposed standard

levels by modifying existing products. In other cases, the necessary changes may entail a

complete product­line redesign. In these situations, an increase in a standard will cause

manufacturers to incur one­time conversion capital expenditures and product­conversion

expenses. Conversion capital expenditures are one­time investments in property, plant, and

equipment. Product­conversion expenses include one­time investments in research, product

development, testing, and marketing.

A potentially significant outcome of new standards is the obsolescence of existing

manufacturing assets, including tooling and other capital investment. The interview guide

includes questions to identify impacts on manufacturing capacity. DOE developed these

questions to understand the impact of potential new standards on four areas:

• U.S. and North American manufacturing capacity;

• capacity utilization and plant location decisions in the United States and North America

with and without standards;

• the ability of manufacturers to upgrade or remodel existing facilities to accommodate a

new product mix; and

• the nature and value of stranded assets, if any.

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DOE will explore current trends in production employment and solicit manufacturer views on

changes in employment patterns resulting from new energy conservation standards. Information

from manufacturers about employment impacts help DOE to understand current employment

levels associated with manufacturing at each production facility, expected future employment

levels with and without new standards, and differences in workforce skills and issues related to

retraining.

12.3.2.4 Exports, Foreign Competition, and Outsourcing

Energy conservation standards for small electric motors can affect projected export sales,

the portion of the domestic market served by foreign competition, and domestic production

levels. The preliminary MIA interview questions examined manufacturer views on the impacts

new standards would have on exports, foreign competition, and outsourcing.

12.3.2.5 Market Shares and Industry Consolidation

New 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 ask manufacturers to share their perspectives on industry consolidation

both in the absence of new standards and assuming new standards at various efficiency levels.

The interview questions focus on information that helps DOE assess disproportionate cost

increases to some manufacturers, increased proportion of fixed costs potentially increasing

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

The need to assess anticompetitive effects of proposed standards comes from the need to

protect consumer interests. During the interviews, DOE solicits information to understand

whether new standards could result in disproportionate economic or performance penalties for

particular consumer or user subgroups. Manufacturers are also asked whether new standards

could result in more or less desirable products due to changes in product functionality, utility, or

other features.

12.3.2.6 Cumulative Burden

A single regulation might not impose a significant burden on manufacturers, but several

impending regulations may have a combined effect with serious consequences for individual

manufacturers, groups of manufacturers, or entire industries. Assessing the impact of a single

regulation may overlook this cumulative regulatory burden.

Expenditures associated with meeting other regulations are an important aspect of DOE’s

consideration of the “cumulative regulatory burden” that the industry faces. The interviews help

DOE identify the level and timing of investments that manufacturers expect to incur because of

these regulations. DOE also asks manufacturers which circumstances will allow them to make

expenditures related to regulations and standards.

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12.4 SUMMARY OF MAJOR ISSUES FROM PRELIMINARY MIA

DOE conducted a series of preliminary interviews with manufacturers to assess their

concerns about the potential impact of a regulatory standard for small electric motors. In

general, manufacturers identified three major issues of concern: (1) capital expenditure to retool

in response to the standards, (2) maintaining product availability and consumer­oriented features,

and (3) enforcement of the new standards.

12.4.1 Capital Expenses to Produce Standards­Compliant Small Electric Motors

The manufacturers DOE interviewed expressed concern over the costs they would incur

in order to produce standards­compliant small electric motors. Large manufacturers of electric

motors, who produce the small electric motors covered by the preliminary analyses as well as

many other categories of motors, dominate the majority of the small electric motors market.

Manufacturers indicated that the proportion of covered small electric motors represents a small

share of the manufacturer’s overall business. The increased stringency at each standard level

will force manufacturers to increase the amount of capital expenditure, potentially forcing an

investment in new lamination dies, winding tooling, and testing equipment, and even re­allotting

factory floor space. If the standard is set too high, manufacturers indicated that they may simply

stop producing small electric motors rather than develop standards­compliant units.

Small manufacturers of small electric motors represent a fraction of the overall national

market, and they also have fewer sources from which to raise money for an investment. DOE is

concerned that small manufacturers may choose to leave the small electric motors market

altogether instead of dealing with the extra difficulty of raising the capital necessary for a small

electric motors regulation.

12.4.2 Maintaining Product Availability and Features

Manufacturers expressed concern about the impact on typical motor characteristics that

may result from the selection of an efficiency level that is too high. Specifically, manufacturers

are concerned that small electric motors will need to increase diameter, length, and other

dimensions if efficiency levels are pushed high enough. Some horsepower ratings may also

consolidate, eliminating some of today’s standard ratings from the market. Manufacturers

expressed concerned over the ability to retrofit newer, potentially larger motors into existing

applications. End users would then have to choose another horsepower or another motor

category that is not covered, or modify the application to allow installation of the standardscompliant small electric motor.

12.4.3 Enforcement of Standards

Manufacturers also expressed major concerns about the feasibility of enforcing the

energy conservation standard. If an efficiency level is established, the standard will require some

investment for all manufacturers that choose to continue to produce small electric motors.

Manufacturers expressed concern about the inability to enforce the standard level, particularly

for motors embedded in other equipment. They worry that their investment in standards

compliance may put them at a competitive disadvantage to less scrupulous manufacturers. This

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concern was expressed particularly in the context of foreign companies importing non­compliant

motors (potentially as a part of some other equipment) that may put U.S. manufacturers at a

competitive disadvantage.

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REFERENCES

i

U.S. Census Bureau. 2005 Annual Survey of Manufacturers. Statistics for Industry Groups and

Industries: 2005. Table 2. Statistics for Industry Groups and Industries: 2005 and Earlier

Years. November 2006, www.census.gov/prod/2006pubs/am0531gs1.pdf. (Last accessed April

9, 2008.) The April 9, 2008, material from this website is available in Docket No. EERE­2007­

BT­STD­0007. For more information, contact Brenda Edwards at (202) 586­2945.

iiU.S. Census Bureau. 2005 Annual Survey of Manufacturers. Statistics for Industry Groups and

Industries: 2005. Table 2. Statistics for Industry Groups and Industries: 2005 and Earlier

Years and Table 7. Value of Shipments by Industry: 2005 and 2004. November 2006,

www.census.gov/prod/2006pubs/am0531gs1.pdf. (Last accessed April 9, 2008.) The April 9,

2008, material from this website is available in Docket No. EERE­2007­BT­STD­0007. For

more information, contact Brenda Edwards at (202) 586­2945.

iiiU.S. Census Bureau. 2005 Annual Survey of Manufacturers. Statistics for Industry Groups and

Industries: 2005. Table 6. Value of Manufacturers’ Inventories by Stage of Fabrication for

Industry Groups and Industries: Beginning and End of Year. November 2006,

www.census.gov/prod/2006pubs/am0531gs1.pdf. (Last accessed April 9, 2008.) The April 9,

2008, material from this website is available in Docket No. EERE­2007­BT­STD­0007. For

more information, contact Brenda Edwards at (202) 586­2945.

ivU.S. Census Bureau. Current Industrial Reports. Survey of Plant Capacity: 2005. Table 1a.

Full Production Capacity Utilization Rates by Industry: Fourth Quarters 2001 through 2005.

January 2007, www.census.gov/prod/2007pubs/mqc1­05.pdf. (Last accessed April 9, 2008.)

The April 9, 2008, material from this website is available in Docket No. EERE­2007­BT­STD0007. For more information, contact Brenda Edwards at (202) 586­2945.

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