Clothes Washer Manufacturer 

Impact Analysis 

DOE Workshop 

December 14-15, 1998 U.S. Department of Energy 

--Q 

Office of Energy Efficiency 

and Renewable Energy ,...... 

1000 Independence Avenue, SW ..........._ 

Washington, DC 20585 

D 

0 
., 

Clothes Washer Manufacturer Impact Analysis Methodology 

December 9, 1998 

1 
'"' 

Generic Analytical Framework Legislative Requirements 

In determining whether a standard is economically justified, DOE is 

required to consider: 

[~ "The economic impact of the standard on manufacturers and on the 

consumers of the products subject to such a standard." 

1tJ "The impact of any lessening of competition, as determined in writing 

by the Attorney General, that is likely to result from the imposition of 

the standard." 

December 9, 1998 

2 
General Analytical Framework 

The clothes washer manufacturer impact analysis will be conducted 

in three phases .. 

Phase 1 

Industry Profile 

Industry Cash Flow 

Phase 3 

Manufacturer Subgroup Analysis 

December 9, 1998 

3 
Clothes Washer Manufacturer Impact Analysis Methodology 

December 9, 1998 

4 
(• 

Industry Profile Manufacturer Market Share 

An industry profile of the U.S. clothes washer industry was 

constructed to help the Department in conducting the engineering, 

national impacts and the manufacturer impact analyses. 

l~ Information on the industry profile is presented in Chapter 3 of the 

preliminary Technical Support Document (TSO) 

[~ Industry profile was used to arrive at: 

industry cost structure 

shipments 

manufacturer and retail prices and mark-ups 

manufacturer market shares and plant locations 

product characteristics, etc. 

December 9, 1998 

5 
Clothes Washer Manufacturer Impact Analysis Methodology 

December 9. 1998 

6 
Industry Cash Flow GRIM Description 

The Department is using the Government Regulatory Impact Model 

(GRIM) to conduct the Industry Cash Flow Analysis. 

l-./J GRIM is a tool that helps identify the financial impacts of energy 

efficiency and other regulations on manufacturers. 

• Based on conventional analysis of discounted cash 

flows 

• Creates full computations of cash flow for both base 

case (as is) and standards case (with regulation) 

• Computes Industry Values (NPV) for both scenarios 

• Offers numerical and graphical comparisons 

December 9, 1998 

7 
Industry Cash Flow GRIM Description 

GRIM uses manufacturer prices, manufacturing costs, shipments, and 

financial information to calculate cash flows used for arriving at the 

industry value. 

Manufacturer Prices ~ Manufacturing Costs 

Shipments 

Cash Flow 

December 9, 1998 

8 
•) 

Industry Cash Flow GRIM Results 

The Industry Cash Flow will be presented both with (Standards Case) 

and without standards (Base Case) 

....... 

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t----; L._.21&_) 

98.9: 

9 
Industry Cash Flow Base Case 

For the preliminary Base Case Industry Cash Flow, information was 

obtained from the following sources: 

(~ Manufacturer price information from AHAM Fact Book and Current 

Industrial Reports 

ri/J Manufacturing costs were estimated using the industry cost 

structure developed from manufacturers' 10-K statements and the 

Census of Manufactures (CM) 

1i/J Financial information (e.g., tax rate, working capital, depreciation, 

etc.) is obtained from manufacturers' 10-K-statements and other 

publicly available industry statistics (e.g., S&P Reports, Valueline 

Industry Statistics) 

[~ Preliminary future shipments were obtained using current industry 

shipment statistic_s and a historical growth rate of 2.3°/o 

December 9, 1998 

10 
I . ., 

Industry Cash Flow Manufacturer Price 

Manufacturer prices have remained fairly stable over the period 1990-

1996. 

Manufacturer Prices 

$350 

$300 

$250 

1 986 1988 1990 1992 1994 1996 

--+--Current Industrial Reports 

--e-AHAM Fact Book 

..... ~ 

A manufacturer price of $285.90 was used iri the Base Case. 

December 9, 1998 

11 
Industry Cash Flow Baseline Costs 

A clothes washer industry cost structure was obtained from a topdown analysis of the appliance industry and used to estimate the 

disaggregated costs of a baseline clothes washer. 

SG&A 

18.3% 

11.7% 

Income 

from 

Operations 

6.0% 

Labor 

10.2% 

+ 

Material 

52.0%. .. . ' . ' . . ' . ' ~ 

.l.1 

Material Cost 148.7 

Labor Cost 29.3 

Overhead Cost 23.5 {excl. deprecation) 

Depredation 10.0 

SG&A 52.3 

R&D 5.2 

December 9, 1998 

12 
·) 

Industry Cash Flow Financial Information 

The Department analyzed publicly available sources of "industry" 

financial information to characterize the clothes washer industry's 

historical financial statistics. 

Sources of Information ! Financial Information ·; 

j 

• SEC-10K reports 

• Company's Annual Reports 

• Moody's Company Data 

Reports 

• S&P's stock reports 

• Value line industry composites 

• Dow Jones Financial Services 

• Working Capital 

• SG&A 

• R&D 

• Depreciation 

• Capital Expenditures 

• Effective tax rate 

10.50°/o 

18.00o/o 

1.80% 

3.51% 

4.43% 

42.80% 

A weighted average cost of capital (WACC) was estimated using 

historical values of cost of debt, cost of equity, and capital structure. 

December 9, 1998 

" 

13 
Industry Cash Flow Shipments 

The historical annual growth. rate of 2.3o/o over the last eleven ·years 

was used for the preliminary shipments forecast. 

Clothes Washer Shipments 

.8 

0 7 ·-E 6 

-UJ 5 ... 

; 4 

[ 3 ·-

~ 2 ~ 

c 1 

:::> 

1985 

. ' . 

Source: AHAM Fact Book 

1990 1995 

·Year 

· Year Shipments ,_ .. .,.-...,,,., .... ,,,,. ___ ~-,,_,,,_.,-~,-·,,_ _____ ,...,_ __ 

(million) 

2000 

Shipment forecasts will be revised based on future shipments data 

from the National Energy Savings (NES) spreadsheet. 

December 9, 1998 

14 
Industry Cash Flow Shipments 

Shipment values used in GRIM will be obtained from the National 

Energy Savings (NES) spreadsheet 

t-./J N ES uses shipment values to identify the national energy savings 

potential of clothes washer energy efficiency standards 

r"Ji Using shipment values from NES will ensure that the shipment 

inputs are consistent with other parts of the clothes washer 

regulatory impact analyses 

f~ LBNL is developing price-volume relationship to forecast shipments 

for the clothes washer rulemaking 

December 9, 1998 

' 

·I 

15 
.• 

Industry Cash Flow Base Case NPV 

A Preliminary Base Case NPV of $885.6 million was calculated for the 

U.S. clothes washer industry. -

....... 

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L--------i i- ...... ····--l 

!-------- .2~:9-..i : 97.5 J 

[ .. :: __ (~-6.il ! 189.9 i 

,------ -1 

r---· (123.o)l 

r~=~~~=~1 ~-_Jl23f>)~ I -

r---·66s·i r-·--92,91 

r----i 

. 0.3754 J 

i 371.1 I r---·--1 

r---·~1 

'----------·--oecGmber 9, 1998 

16 
Industry Cash Flow Modifications to GRIM 

Some modifications and enhancements have been made to the 

"original" GRIM primarily to account for growth in shipments. 

ii/J SG&A is assumed to be a function of revenues 

r:-'1 

tY-J Depreciation and "ordinary" Capital Expenditures for the Base Case 

are calculated as a percentage of revenues 

1Ji Incremental capital expenditures to meet standards will be scaled 

to meet standard case shipments 

December 9, 1998 

17 
Industry Cash Flow Standard Case Cash Flow 

For the preliminary Standard Case Industry Cash Flow, information 

was obtained from the following sources: 

[i/J Manufacturing costs for achieving different efficiency levels were 

obtained from the AHAM data submittal 

~ Manufacturer prices were estimated by using a markup over 

man ufactu ring costs 

l-./J Financial information (e.g., tax rate, working capital, depreciation, 

etc.) is obtained from manufacturers' 10-K statements and other 

publicly available industry statistics (e.g., S&P Reports, ValueLine 

Industry Statistics) - same as Base Case. 

ri/J Preliminary future shipments were the same as shipments in the 

Base Case. 

December 9, 1998 

18 
Industry Cash Flow Manufacturing Costs 

Incremental manufacturing costs associated with meeting different 

efficiency levels were obtained from AHAM. 

AHAM Data Submittal-Shipment weighted average of most likely values ---·-·-·------- r 1 ··- : --r-·-- ·--- · --=i=---- -~··~ .. -----·-"· -,-----t-- I i --·-· --··- -·---- -~~-- Product Characterisics Variable Costs Total Total Incremen. No. of ·-·-..------ ··-- '-¥--~---·-·- ------------ __________ ,._, 

-- --- Percent MEF Cost Per Unit (a) Variable Fixed - Mfg.~~!~-- Re~pondents "--~---T-----T -·-·--.-- .. ----.. -·¥ ¥ -·-

.!mPr~~~~-1!! Materials Labor Overhead . --~~~-~s (j) - Costs (o) --· (p_>._ _____ ~-.. -·--··~-·-··---- ------------· -·· ~~-· ~-----

(b) _...,.._..._...., ..... -. ..... -·-""""'~ _<:_f!..:..f!Jk ~le~:.~~-- (g) (h) (i) ($per Unit) ($per Unit) ($per Unit) J~_P.er ~-nit2. ---------~~ ·----~---

_____ ..._...._....,.,, __ ,._ ------ --.-.-··-·~·--·-.. - __ ,.,._k ..... ~-......... _...._, 

[1] [2] [12] [ 13] [14] [ 15] [22] [23] 

Baseline 0.817 

5 0.860 $0.01 $0.01 $0.00 $0.02 $0.07 $0.09 5 

10 0.908 . $0.25 $0.04 $0.01 $0.30 $0.61 $0.91 5 

15 0.%1 $3.18 $0.10 $0.04 $3.32 $1.01 $4.33 5 

20 1.021 $10.71 ($0.02) ($1.80) $8.89 $6.21 $15.10 5 

25 1.089 $36.14 $8.61 $0.09 $44.84 $19.29 $64.13 5 

35 1.257 $86.73 $10.94 $7.78 $105.45 $22.72 $128.17 5 

40 1.362 $87.15 $10.94 $7.78 $105.87 $22.72 $128.59 5 

45 1.485 $125.58 $15.52 $14.51 $155.61 $24.67 $180.28 4 

50 1.634 $132.40 $15.68 $14.51 $162.59 $24.67 $187.26 4 

December 9, 1998 

19 
Industry Cash Flow Manufacturer Price 

DOE used a mark-up approach to estimate post-standard 

manufacturer price. 

Post Standard - Baseline + [ Incremental x Manufacturer l 

Manufacturer Price Mfg. Price Mfg. Cost Mark-up 

t.t DOE estimated a Baseline manufacturer mark-up of 1 .35. 

Methodology used for calculating the Baseline manufacturer 

mark-up was obtained from industry cost structure 

!i/J Mark-ups for Post-Standard manufacturer prices are estimated using 

different scenarios: 

Mark-up (price) resulting in maintenance of industry value 

Mark-up (price) that results in loss of industry value equal to new 

capital investments 

Fixed Mark-up of 1.18 (as per ANOPR LCC analysis) 

December 9, 1998 

20 
o) 

Industry Cash Flow Financial Assumptions 

Standard Case SG&A is assumed to be a function of revenues. 

"Original" GRIM assumed SG&A expense to be a constant dollar 

amount both in the Base Case and Standard Case; and this amount 

was equal to the Base Year SG&A. 

- Since shipments were constant this model implicitly assumed 

SG&A varied with shipments 

- In the .current GRIM, SG&A is calculated as a percentage of 

revenues. 

December 9, 1998 

21 
Industry Cash Flow Timing of Investments 

December 9, 1998 

22 
a. 

::::s 

~ .. 

«I 

== 

Industry Cash Flow Preliminary Standard Case Results 

The markup needed to maintain industry value depends on the 

relative proportion of fixed to variable costs. 

Markup vs. Efficiency Level 

1.9 

1.8 

1.7 

1.6 

1.5 

1.4 

1.3 

1.2 

1.1 

1 

1 2 3 4 5 6 7 8 

Efficiency Level 

3.50 

-IA. 

0 3.00 (.) 

Cl) 

:c 

«I 

·;: 

2.50 «I 

> 

..: 

u 

.5 

2.00 0 

,, -

Cl) 

>< 

u::: 

1.50 ..: 

u 

.5 

0 

1.00 0 

;:; 

«I 

a: 

0.50 

9 

-+-Mark-ups for 

Constant NPV 

- Ratio of Fixed to 

Var. Cost 

December 9, 1998 

23 
" 

Industry Cash Flow Preliminary Standard Case Results 

Markups needed to maintain industry value ahd those needed to 

cover incremental variable costs bound the range of possible 

outcomes. 

$1,000.00 . 2 

$800.00 1.8 

$600.00 1.6 

$400.00 1.4 

:::::" 

·e liml Capital Expenditure 

• • {h 

- $200.00 ~,,_ • • • • 1.2 Cl) 

... .- ;::, 

.. Q. :c ;::, 

-+- Markup for Constant c $0.00 1 .ll: Cl) ... Q. Ill 

>< 1 :!: NPV 

w 

ca 

.. ($200.00) 0.8 

·a 

Ill _.,_.Markup that results (.) 

in decrease in NPV ($400.00) 0.6 by Capital Exp. 

($600.00) 0.4 

($800.00) 0.2 

($1,000.00) 0 

Efficiency Level December 9, 1998 

24 
•) 

Industry Cash Flow Preliminary Standard Case Results 

Using a 1.18 markup results in a big loss in industry value. 

600 

400 

:::- 'e 200 · 

0 '·"''·'·'"'"'''"" "" -

> a. 

z 

-800 

Standard Case NPV 

(Base Case NPV = $885.6 mil) 

Efficiency Level 

-+-Base Case 

_._SWA, Markup =1.35 

-sw A, Markup =1.27 

-+-SWA, Markup=1.18 

December 9, 1998 

25 
Industry Cash Flow 2-Phase Standard 

A version of GRIM was created in order to account.for a 2-phase 

standard. · 

r~ The first phase is assumed to be a V-axis level (i.e., 5°/o - 25°/o 

efficiency improvement) and the second phase an H-axis level 

(35°/o ·_ 50%} 

rJi This model assumes that the investment costs of achieving a 2-

phase standard are additive 

l~ The first phase investment costs are depreciated over the period in 

which the first phase standard is applicable 

[~ There is a provision for entering different mark-up assumptions for 

the 2 phases 

December 9, 1998 

26 
Industry Cash Flow Uncertainty Analysis 

The Department will use the entire distribution of costs {as provided 

by AHAM) in GRIM to incorporate uncertainty in the industry cash 

flow analysis. 

l~ The version of GRIM distributed with· the preliminary TSO uses 

shipment weighted average costs 

- Allows stakeholders to conduct scenario analysis on key 

variables (e.g. mark-up, shipments) 

rJi AOL has prepared a crystal ball version of GRIM which uses 

individual manufacturer data submittals to incorporate uncertainty 

- This approach ensures that relationships between fixed and 

variable cost data are captured and maintains confidentiality 

- AOL will work with AHAM to perform the computations 

- The entire range and distribution of "industry" impacts will be 

reported 

December 9, 1998 

27 
Industry Cash Flow Aggregation Process 

Individual manufacturer's cash flows will be aggregated to arrive at 

the Industry Cash Flow (and to prevent disclosure of firm-specific 

information). 

- . 

Manufacturer 1: Cash Flow 

GRIM +----·Ill . "• 

Industry Cash Flow 

Manufacturer 2: Cash Flow 

1------i. GRIM -----ttll 

' • . , 

Ill Ill 

• • ' ,•: .. 

• • • • • II 

• • • • 

• • 

• • 

Manufacturer n: Cash Flow 

•---GRIM 

December 9, 1998 

28 
Clothes Washer Manufacturer Impact Analysis Methodology 

December 9, 1998 

29 
Subgroup Impact Analysis Interview Guide 

AOL will conduct manufacturer interviews to identify impacts on 

different manufacturers. 

r-./J AOL has developed a questionnaire to guide the interviews and invites 

comments and suggestions on its content from all interested parties 

(VJ The purpose of the interviews is to ensure that the range of impacts on 

different manufacturers is reported to the Department 

- Interviews provide a means to identify manufacturer specific 

issues and any variances with the industry cashflow 

December 9, 1998 

30 
Subgroup Impact Analysis 

The interviews will cover a range of topics. 

r:·" tY.-J 

r~--4 ,yJ 

r:·4 tVJ 

,~······· I I ...__ ,._) 

r: I: LY.J 

,~ ....... .. i ! 

l.. ... J 

Current Organizational Characteristics 

Industry Infrastructure - .. '. 

Manufacturer Cash Flow Analysis 

Competitive Impacts Assessment 

Employment Impacts Assessment 

Manufacturing Capacity Impacts Assessment 

Topics Covered 

December 9, 1998 

31 
Subgroup Impact Analysis Organizational Characteristics 

DOE is interested in better understanding the current organizational 

characteristics of each manufacturer. 

!"i/J The Department's interest is focused toward the plant or profit center 

directly concerned with clothes washer production. 

- The details of production levels, product mix, costs, and other 

variables are not generally public information at the plant level, so 

the Department invites manufacturers to discuss these and other 

characteristics confidentially to the extent practical. 

!"i/J The organizational setting within which the plant operates is important to 

round out the Department's understanding of the impact that new 

energy-efficiency standards might have on future clothes washer 

man ufactu ring. 

December 9, 1998 

32 
Subgroup Impact Analysis Industry Infrastructure 

DOE is interested in better understanding the current industry 

infrastructure and how it would be affected by new energy efficiency 

standa_rds. 

riJ DOE is especially interested in two general segments of the industry 

infrastructure. 

- Major customer types, and the distribution channels through 

which clothes washers reach the end user. 

- Major suppliers, the trade allies which would be most strongly 

affected by new energy efficiency standards. 

l-./J The industry infrastructure on the supply side can be affected 

directly by significant changes in manufacturer's product mix or 

location of production. 

- DOE would like to identify any suppliers that may be impacted 

by change in the product mix resulting from standards. 

December 9, 1998 

33 
Subgroup Impact Analysis Manufacturer Cash Flow Analysis 

AOL wishes to discuss fully the results of the Industry Cash Flow with 

each manufacturer and identify manufacturer specific variances. 

,~---·-··· ! I L _) 

r--J 

lV-J 

Each manufacturer will have a version of GRIM that includes 

discrete manufacturer costs for all percentiles reported by AHAM 

- Each manufacturer can, if desired, input its own data and 

assumptions to develop its own expected cash flow 

- Alternatively, manufacturers can select the percentile values that 

represent their costs at different efficiency levels 

AOL will discuss and report the variances in key variables and 

impacts for manufacturers that differ from industry averages 

December 9, 1998 

34 
Subgroup Impact Analysis Manufacturer Cash Flow Analysis 

AOL will also look at other possible ways of conducting the subgroup analysis. 

r"i/J AOL proposes to work with AHAM to identify appropriate subgroups of manufacturers and use their cost data submittals for 

identifying the impacts on them : 

riJ AOL also proposes to use the manufacturing cost assessment 

model developed for the reverse-engineering analysis to obtain 

additional insight on the impacts of production volume on 

man uf actu ring costs 

December 9, 1998 

35 
Subgroup Impact Analysis Competitive Impacts 

DOE will solicit early involvement of the Department of Justice in 

structuring the competitive impact assessment. 

lf/J Competitive Analysis will focus on assessing the impacts to smaller, 

significant manufacturers. 

rf/J DOJ has offered to participate in drafting questions to be used in 

manufacturer interviews. 

["Ji Questions will pertain to an assessment of the likeliness of increased 

concentration levels and other market conditions that could lead to. 

non-competitive pricing behavior. 

-Asymmetrical cost increases to some manufacturers 

-Increased proportion of fixed costs potentially increasing 

business risk 

-Barriers to market entry (proprietary technologies, etc.) 

December 9, 1998 

36 
Subgroup Impact Analysis Employment Impacts 

The employment impacts of new energy efficiency standards is an 

· important consideration in the rulemaking process. 

[i/J DOE seeks to explore current trends in clothes washer production 

employment and solicit manufacturer views on how employment 

patterns might be affected by new energy efficiency standards. 

r-./J Interviews will be used to establish differences in workforce ski.lls 

required under different levels of energy-efficiency standards. 

r~ Secondary employment impacts of new energy efficiency standards 

could occur particularly for important suppliers, and this is a topic for 

discussion as well. 

December 9, 1998 

37 
Subgroup Impact Analysis Manufacturing Capacity Impacts 

An energy efficiency standard could change capacity utilization for 

the clothes washer in a number of ways. 

[~ Energy-efficiency standards could bring about manufacturing 

capacity impacts that can be best anticipated by the manufacturers. 

-DOE is interested in manufacturer views on this issue. 

December 9, 1998 

38 
Clothes Washer Manufacturer Impact A~alysis Methodology 

December 9, 1998 

. 39 
.it' 

... ~ . ·:... 

Next Steps 

Draft Schedule for Clothes Washer Manufacturing Impact Analysis. 

• End of Workshop Comment Period 

• Refined MIA methodology 

• · Begin preliminary manufacturer interviews 

• Obtain elasticity from consumer survey 

• Obtain Shipments from NES 

• Complete Industry Cash flow 

• Begin manufacturer interviews 

0 

Feb 2, 1999 

·Feb 15, 1999 

Feb 15, 1999 

March 15, 1999 

March 29, 1999 

April 15, 1999 

April 15, 1999 

· December 9. 1998 

40