### Clothes Washer Manufacturer ImpactAnalysis 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., ClothesWasher Manufacturer ImpactAnalysis Methodology

December9, 1998 1'"' Generic Analytical Framework Legislative Requirements 

### In determiningwhether a standard iseconomicallyjustified, 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."

December9, 1998 2General 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 3Clothes Washer Manufacturer Impact Analysis Methodology

December 9, 1998 4(• Industry Profile ManufacturerMarketShare 

### An industry profileofthe U.S. clothes washer industrywas constructed to helpthe 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 manufacturerand retail prices and mark-ups manufacturer market shares and plant locations product characteristics, etc.

December 9, 1998 5Clothes Washer Manufacturer Impact Analysis Methodology

December 9. 1998 6Industry Cash Flow GRIMDescription 

### The Department is using the Government Regulatory Impact Model (GRIM) to conductthe 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 7Industry Cash Flow GRIMDescription 

### GRIM uses manufacturer prices, manufacturing costs, shipments, and financial information to calculate cash flows used for arriving atthe industryvalue.

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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## ~=d~:~J l ' [.....**~.2.PXl t==--==~~j**  ' i . ·499:9\**·~:::.::~Il** ! ....---·····-..**··~-·····[ ~--·-..·--·i**  L---**_17_~-QJ** t----; L._.21&_) 98.9:

9Industry Cash Flow Base Case 

### Forthe preliminary Base Case Industry Cash Flow, information was obtained from thefollowing 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 10I . ., IndustryCash Flow ManufacturerPrice 

### Manufacturer prices have remained fairly stable overthe period 1990- 1996. Manufacturer Prices $350
$300
$2501 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 11Industry Cash Flow Baseline Costs 

### A clothes washer industry cost structure was obtained from atopdown analysis ofthe appliance industry and used toestimatethe disaggregated costs ofa 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 ofcapital (WACC) was estimated using historical values of cost of debt, cost ofequity, and capital structure.

December 9, 1998 "

13Industry Cash Flow Shipments 

### The historical annual growth.rate of

### 2.3o/o overthe lasteleven ·years was used forthe 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 

### Shipmentforecasts will be revised based on future shipments data fromthe National Energy Savings (NES) spreadsheet.
December 9, 1998 14Industry Cash Flow Shipments Shipmentvalues used in GRIM will be obtained from the National Energy Savings (NES) spreadsheet 

## t-./J NES uses shipment values to identify the national energy savings potential ofclothes washer energy efficiency standards 

## r"Ji Using shipmentvalues 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 ·I

15

### .• Industry Cash Flow Base Case NPV 

### A Preliminary Base Case NPV of$885.6 million was calculated forthe 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 16Industry Cash Flow Modifications to GRIM 

### Some modifications and enhancements have been madetothe "original" GRIM primarilyto accountfor 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

December9, 1998 17Industry Cash Flow StandardCase Cash Flow 

### Forthe 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 manufacturing 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 18Industry Cash Flow Manufacturing Costs Incremental manufacturing costs associated with meeting different efficiency levels were obtained from AHAM. AHAM Data Submittal-Shipmentweighted average of most likely values 

# ---·-·-·------- r 1 ··- : 

# --r-·-- ·--- · 

# --=i=----**-~··~**

# ..-----·-"· -,-----t-- I i --·-· --··- -·----

# -~~-- Product Characterisics VariableCosts Total Total Incremen. No. of ·-·-..------ ··--**'-¥--~---·-·-** ---- --------

## __________,._,-- --- Percent MEF Cost PerUnit (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) ($perUnit) ($perUnit) ($perUnit)**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 19Industry Cash Flow ManufacturerPrice 

### DOE used a mark-up approach toestimate 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 20o) Industry Cash Flow FinancialAssumptions 

### 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 21Industry Cash Flow Timing ofInvestments

December 9, 1998 22a. ::::s**~** 

# .. «I == Industry Cash Flow PreliminaryStandard Case Results 

### The markup needed to maintain industryvalue depends on the relative proportion offixed tovariable 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 PreliminaryStandard 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 :::::" limlCapital Expenditure 

### ·e 

### • 

## • {h**~,,_** 

## • • 

## • 

# - $200.00 

### • 1.2 Cl) ... 

### .- ;::, 

# .. Q. :c ;::, -+- Markup for Constant c $0.00 1 .ll: Cl) ... Ill Q. 1 :!: NPV >< w ca ($200.00) 0.8 

# .. ·a _.,_.Markup that results Ill (.) 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 PreliminaryStandard Case Results 

### Using a 1.18 markup results in a big loss in industryvalue.

600 400 :::- 

### 'e 200 · 0 '·"''·'·'"'"'''"" "" 

# - > a. z

-800 Standard Case NPV (Base Case NPV=$885.6 mil)

Efficiency Level -+-BaseCase _._SWA, Markup =1.35 -sw A, Markup =1.27 -+-SWA, Markup=1.18

December9, 1998 25Industry Cash Flow 2-Phase Standard 

### A version of GRIM was created in orderto account.fora 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 overthe period in which the first phase standard is applicable

## [~ There is a provision for entering different mark-up assumptions for the 2 phases

December9, 1998 26Industry Cash Flow UncertaintyAnalysis 

### The Department will usethe entire distribution ofcosts {as provided byAHAM) 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 27Industry Cash Flow Aggregation Process 

### Individual manufacturer's cash flowswill be aggregated to arrive at the Industry Cash Flow (and to prevent disclosureoffirm-specific information).

- . Manufacturer 1: Cash Flow GRIM +----·Ill . "• Industry Cash Flow Manufacturer2: Cash Flow
1------i. GRIM -----ttll ' • . , Ill Ill 

### • • ' ,•: .. • • 

### • • • II • • • • • • • • Manufacturer n: Cash Flow •---GRIM

December9, 1998 28Clothes Washer Manufacturer Impact Analysis Methodology

December 9, 1998 29Subgroup ImpactAnalysis Interview Guide 

### AOL will conduct manufacturer interviewsto 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 ofthe 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 anyvariances with the industry cashflow

December 9, 1998 30Subgroup ImpactAnalysis 

### The interviewswill cover a range oftopics. 

# 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

December9, 1998 31Subgroup ImpactAnalysis Organizational Characteristics 

### DOE is interested in better understandingthe current organizational characteristics ofeach 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 ofthe impact that new energy-efficiency standards might have on future clothes washer manufacturing.

December 9, 1998 32Subgroup ImpactAnalysis IndustryInfrastructure 

### DOE is interested in better understandingthe current industry infrastructure and how itwould be affected by new energy efficiency standa_rds. 

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

- Major customertypes, 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.

December9, 1998 33Subgroup ImpactAnalysis ManufacturerCash FlowAnalysis 

### AOL wishes to discussfullythe results ofthe Industry Cash Flowwith each manufacturerand identify manufacturerspecificvariances.**,~---·-···** ! 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 differfrom industry averages

December 9, 1998 34Subgroup ImpactAnalysis ManufacturerCash FlowAnalysis 

### AOL will also lookat other possibleways ofconducting the subgroupanalysis. 

### 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 usethe manufacturing cost assessment model developed for the reverse-engineering analysis to obtain additional insight on the impacts of production volume on manufacturing costs

December 9, 1998 35Subgroup ImpactAnalysis Competitive Impacts 

### DOE will solicitearly involvement ofthe Department ofJustice 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 36Subgroup ImpactAnalysis 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 manufacturerviews 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 37Subgroup ImpactAnalysis Manufacturing Capacity Impacts 

### An energy efficiency standard could change capacity utilization for the clothes washer in a number ofways.

### [~ Energy-efficiency standards could bring about manufacturing capacity impacts that can be best anticipated by the manufacturers. -DOE is interested in manufacturerviews on this issue.

December 9, 1998 38Clothes Washer Manufacturer Impact**A~alysis** Methodology

December 9, 1998

. 39.it'

...**~** . ·:... Next Steps 

### Draft Schedulefor Clothes Washer Manufacturing ImpactAnalysis.
• End ofWorkshop 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