All posts by Tom DiChristopher

U.S. Satellite Industry Eyes Export Reform

Chuck Tabbert, vice president of sales and marketing at Ultra Communications, wanted to find out how export regulations on U.S.-made satellites affected his fellow semiconductor manufacturers. So he asked them three questions.

The first two questions asked companies how much of their regulated technology is available outside the U.S. The answer: most of it. The second question asked how much money they could make over the next five years if the government reformed export regulations.

The answer: $5 billion. And that’s for a component that accounts for just five to 10 percent of a complete satellite’s value.

American satellite manufacturers say they are losing their competitive edge because they face tougher export regulations than their European and Japanese competitors. The regulations are meant to keep countries like China from obtaining U.S. technology, but they also make it overly complicated to buy even the simplest satellite parts and components.

“What we’re basically doing is we’re handicapping the U.S. aerospace industry by putting some onerous reporting and licensing requirements on our products that are openly available throughout the world,” said Stanley Kennedy, a senior vice president and general manager at satellite maker Comtech AeroAstro.

At the same time, the Defense Department has slashed spending, reducing the industry’s most important revenue stream. Now, some parts and components companies are exiting the industry, putting the strength of the U.S. industry in jeopardy.

On May 17, the Armed Services Committee in the House of Representatives passed an amendment to the 2013 defense budget that gives the president authority to reform satellite exports.

The industry welcomed the news, but more than 10 years of tough export controls have taken a toll on satellite companies.

In 1995, American companies made 75 percent of all satellite sales, according to a recent report from the Aerospace Industry Association. By 2005, U.S. market share had plummeted to 25 percent. In a survey, AIA members said the regulations cost them $20.8 billion in revenue per year. Those losses prevent companies from creating about 27,000 jobs annually.

The U.S. regulations make European-made satellites, parts and components more attractive. Some foreign companies market their satellites and components as ITAR-free, a reference to the U.S. International Traffic in Arms Regulations.

The rules date back to a 1998 incident in which two American companies, Loral and Hughes, were accused of giving China sensitive information. A congressional commission concluded that the information could help China advance its ballistics missile program.

The commission responded by transferring jurisdiction over all satellites exports from the Commerce to State Department.

“The concerns out of that have actually held every transaction hostage to the detriment of the space industrial base, and ultimately the detriment of national security,” said Patricia Cooper, president of the Satellite Industry Association.

State’s policy is to classify every satellite part as munitions — even screws, bolts and brackets. When American companies sell munitions, they must make two assurances: they can track those munitions and they will only sell to 36 approved allies.

Here is an example. A British airplane manufacturer wants to buy U.S.-made screws, but the American company sells those screws to satellite manufacturers. Since the State Department considers the screws munitions, the regulations apply to them.

“As soon as that screw is in there, that entire plane becomes a box containing our screw. And we need to know where that box is going, who has access to it,” said Remy Nathan, vice president of the Aeronautic Industry Association.

That creates a problem for foreign companies that do not identify end-users. If a French company decides to sell a satellite containing American parts to an Italian telecoms company, the State Department must grant another license for those parts.

U.S. companies also face higher compliance costs than their European counterparts, which they pass on to customers, said Kennedy.

That creates a disincentive to buy American, and in turn, a disincentive for American manufacturers to provide parts for satellite makers. The loss of suppliers drives up costs because there is less competition.

“A number of very high tech third-tier suppliers are exiting and going into medical or other high quality manufacture,” said Kennedy. “Quite frankly, they have stopped selling just because of the onerous process.”

Ian Fichtenbaum, an associate at investment advisors Near Earth LLC, said blaming regulations is overly simplistic. He said uncertain growth prospects for the industry are a major factor.

“If the market were expanding in high single-digit or low double-digit growth for the year — as opposed to flat — I don’t think these companies would be exiting the market,” Fichtenbaum said.

Fichtenbaum also points to France’s willingness to guarantee loans for satellite exports. He sees that as a primary reason Iridium chose Cannes-based Thales Alenia over Lockheed Martin to build its next satellite network.

However, he said all of these issues are interrelated, and reforming export controls will be a boost to the market.

The House’s decision to give the president authority is the first step. The second step is part of a broader movement to reform high-tech goods, moving them from State to Commerce Department oversight.

At that point, hundreds of thousands of components could be traded more readily with 36 ally countries.

“That would allow our state manufacturers to re-enter with stronger competitiveness in the international market place,” said Cooper.

If that happens, the United States could have a stronger stake on the final frontier

Trade Gap for February Likely to Narrow

The trade deficit for February is expected to narrow slightly from the previous month. While purchases of petroleum products will add red ink to the balance sheet, a sharp drop in imports from China could provide deficit relief.

The average forecast in a Bloomberg survey of 70 economists put the deficit at $51.6 billion. The trade gap widened more than expected in both December and January, shooting up to the highest level since October 2008.

The United States imported more oil at higher prices in February. Purchases averaged 8.9 million barrels of oil per day, up from 8.56 million in January, according a report from the U.S. Energy Information Administration. Prices increased from $97.80 at the start of the month to $109.39 on February 24.

At the same time, China’s February trade deficit took observers by surprise, plummeting to $31.5 billion. Exports to the United States were down sharply.

Analysts are still not yet sure what caused the precipitous drop, but it may be due to large one-time purchases.

Recovery in exports to the European Union is unlikely. In January, the trade gap with the 27-member confederation widened to $8.5 billion. Weak demand in Europe may not be a game-changer, as the continent is not as big a source or destination for trade as Asia, said Jonathan Eaton, an economist at Pennsylvania State University.

“Obviously recession in Europe is going to be bad for U.S. exports, but I don’ think it’s really critical,” said Eaton.

Other factors, however, could push up imports.

February’s trade balance report is likely to reflect import trends in January because employment gains were similar. Look for imports of consumer goods and food and beverages to grow or remain steady.

Imports of industrial supplies and materials were also strong in January. This may not hold, as some economists have said businesses may have invested earlier in the year than expected, essentially robbing later months of hiring and purchases.

Last month, car and auto parts imports reached a record $25.3 billion, also due to the improving economy.

Harder to determine is the effect on exports. Exports of capital goods have tracked up steadily over the past two months.

Car and automotive parts exports started the year strong, reaping about $16 billion more in profits than in January last year, according to data from the U.S. Department of Commerce. Sustained growth in February could help the country’s balance sheet.

Emerging Markets Will Fuel Growth in Demand for U.S. Autos

By Tom DiChristopher

Demand for American cars has recovered more quickly in emerging markets than in developed countries since the recession. This year, that trend is likely to continue.

Last year, the value of American car exports worldwide outpaced the previous peak in 2008. Demand remains soft in Europe, but American car and automotive parts manufacturers stand to compensate with exports to emerging markets.

Many of those units are finding homes in China. Profits from U.S. car exports to China are up nearly 500% over the last five years, establishing the Asian powerhouse as the third most profitable market for U.S. vehicles.

The Middle East has also been a bright spot. American car factories sent 13 percent of their units to the region, up from 10 percent in 2007, according to research by Thomas Klier, senior economist at the Chicago Federal Reserve Bank.

Alabama-based MCM Custom Vehicles, a manufacturer of luxury after-market kits for GM trucks, has reaped the benefits of sales in Saudi Arabia and the United Arab Emirates.

Matt McSweeney, president, said MCM’s business was 80-90 percent domestic in 2007. By 2010, it was exporting 70 percent of its products. The ratio has evened out as the domestic car market has recovered, but McSweeny estimes 50-60 percent of his business remains abroad.

The United Arab Emirates, the 15th biggest importer of U.S. automotive parts, has become a lucrative market for the company.

“Their desire to have the bling, per se, that’s right up our alley. With the economy hurting here, and with gas going up, up, up — they don’t get anything but richer,” McSweeney said.

MCM recently outfitted two Cadillacs for customers in Nigeria. McSweeney would like to expand operations in Africa, but GM’s maintenance infrastructure isn’t large enough yet. And without more GM vehicles on Africa’s roads, McSweeney’s growth prospects on the continent are limited.

“It’s a parts and service issue more than willing buyer issue,” McSweeney said.

Last year, Nigeria cracked the top 10 list of most lucrative markets for American cars, up from number 16 in 2007.

Data from International Trade Administration, U.S. Dept. of Commerce

When it comes to exports, American factories are primarily profiting from sales of luxury vehicles. Since Americans buy a lot of high-priced cars, companies such as BMW, Mercedes and Volkswagon have set up manufacturing bases in the United States to be closer to their customers.

“We’re not exactly a low-cost country so if you’re looking for something smaller and lower there are a lot of other places it would be built,” said Tracy Handler, senior analyst at IHS.

Handler says that BMW has become a leading example of this trend. The company manufactures its X3, X5 and X6 models in Spartanburg, South Carolina. The plant exports 70 percent of its production.

Many of those luxury SUVs are going to China, but with other primary destinations in Italy, Canada and the United Kingdom, Spartanburg is exposed to the uncertainty in the economy this year, said Handler.

Daimler, which exports 53 percent of its Mercedes-Benz production from Tuscaloosa, Alabama, is in a safer position because its primary destinations are China, Germany and Russia.

Car exports to Russia registered the largest growth in profits between 2010 and 2011.

American-made Mercedes and BMWs – as well as Chevrolet and Ford trucks – are also finding customers in Brazil. Profits from car exports to Brazil have swelled over five years, from about $54.5 million to just over $400 million.

The market potential in Brazil is much larger, but high taxes keep foreign competitors from doing more business there. As Brazil’s economy continues to grow, however, the government may face pressure to abandon its policies and allow prices on imported luxury items to fall.

“Protectionist policies don’t tend to work long term,” said Handler.

At the same time that manufacturers are finding new buyers in emerging markets, the share of cars sent to NAFTA partners has continued to slip.

Car exports to NAFTA made up 64 percent of U.S. exports in 2007. Last year, they were 55 percent, said Klier.

Europe, too, accounts for a shrinking share. The continent imported 13 percent of U.S. car exports in 2011, down from 18 percent in 2007.

“When GDP is falling, it doesn’t help motor vehicle sales,” Klier said.

The losses in dollars have been substantial. While Germany remains the second largest purchaser of American cars, auto manufacturers made nearly $3 billion more in 2008 than they did last year.

Exports to Belgium, Finland, the Netherlands, Norway, Spain, Poland, and the Ukraine also remain below 2008 levels.

The move to establish global platforms for specific models stands to boost American exports when Europe does recover. This strategy also puts factories in a position to capitalize on strong recoveries in the domestic market.

“Long term we do expect to see some uptick in employment as the auto market as a whole comes back,” she said.

Trade Deficit Leaps as Demand Weakens in European Union and China

By Tom DiChristopher

The trade deficit swelled in January, registering the largest gap in more than three years, as exports to China and the European Union plummeted and oil imports surged.

Economists expected the deficit to widen only slightly. Instead, it leaped 4.18 percent from $50.4 billion in December, adjusted, to $52.6 billion in January, according to a report by the Department of Commerce.

The trade deficit with European Union expanded this month to $8.5 billion, a 40 percent increase over the January 2011 gap of $5.1 billion. Europe buys about one-fifth of U.S. exports.

European leaders are attempting to drive down debt, undoing the social welfare system that has helped to stabilize and propel growth in Europe in the process, said Adam Hersh, economist at the Center for American Progress, a liberal think tank. That decision will contribute to more volatile growth in the world.

Conversely, China is expanding its social safety net, which has limited fear of risk and spurred entrepreneurship, Hersh said.

The Chinese government recently revised its GDP growth targets downward to 7.5 percent, causing concern that demand for exports will slump.

The Chinese central government set the target to cool growth in some sectors and balance its economy. But local government officials in cities and townships make choices about new business and infrastructure to invest in, and they still have incentives to grow the economy quickly, Hersh said.

“Every time they set that target, they end up growing faster than that target,” Hersh said. He expects growth to slow, but not to 7.5 percent.

Steep declines in exports to China in January are not cause for immediate concern because those numbers are not seasonally adjusted and could represent an irregularity, such as a large, one-time purchase of capital goods, Hersh said. The report showed a 26 billion trade deficit with China, a 3.5 percent increase over the same month last year.

The oil deficit also grew to $67.5 billion in January. The price of oil ticked down from December, but oil imports by volume reached a five-month high.

Oil prices have since risen steadily. The average cost of a gallon of gas today is $3.76, up 15 percent from the average of $3.27 on January 1. The United States is the world’s largest importer of oil, so price increases hit its balance sheet particularly hard.

Americans imported a record number of cars in January. Industrial supplies and materials and capital goods also contributed to strong import numbers.

Economic recovery, particularly in employment, the housing market and automobile sales, is fueling imports, said Hugh Johnson, chairman and CIO of Hugh Johnson Advisors. However, if the trade balance continues to deteriorate beyond $55 billion, he said, job growth could begin to slow down.

“It’s not going to cripple the U.S. economy, because there are other things happening, but it would have a significant impact on U.S. growth,” Johnson said.

In the worst case scenario, competition for limited demand could lead foreign countries to close off U.S. export channels through tariffs and hidden trade barriers, said Alan Tonelson, research fellow at the U.S. Business & Industrial Council Educational Foundation.

Exports of services, capital goods and automotive vehicles and parts drove American export growth.

Despite these gains, Tonelson said manipulative trade practices, particularly in China, and a culture of borrowing from foreign creditors to purchase exports have contributed to the erosion of America’s manufactured goods export. The manufacturing trade deficit in January was $55.45 billion, larger than the total trade deficit.

“The fact that the manufacturing deficit on a yearly basis continues to exceed overall trade deficit ought to tell us that American domestic manufacturing remains saddled with major competitiveness problems,” Tonelson said.

Trade Gap Widens in December, Annual Deficit Biggest since 2008

By Tom DiChristopher

The U.S. trade deficit grew more than economists expected in December, as economic growth contributed to the highest import bill since July 2008.

A Bloomberg survey of 75 economists had estimated the trade deficit would increase to $48.1 billion from $47.1 billion last month.

The trade deficit hit $48.8 billion, according to a Commerce Department report issued Friday. The December numbers pushed the annual trade deficit for 2011 up to $558 billion, the highest since 2008.

The gap widened as imports outpaced exports, reflecting increased consumer sentiment buoyed by a recovering economy and decreasing unemployment.

This year’s trade deficit increased 11.6 percent over the 2010 gap of $500 billion. For 2011, the trade deficit for goods widened to $737.1 billion, an increase of $91.2 billion from the previous year.

The trade surplus in services did not register a significant change.

Exports continued to recover in December, surpassing 2008 levels for the first time after dipping in 2009. But the slowdown in Europe has exacerbated the United States’ trade deficit, said economists.

The trade gap with China also weighed on U.S. balance sheet. While the monthly deficit narrowed this month, the annual deficit grew to a record $295 billion.

Import of capital goods hit a record at $44.7 billion in December, suggesting companies are investing in production.

The trade deficit narrowed for the last two years, but this was largely due to decrease in global economic activity, said Claude Barfield, resident scholar at American Enterprise Institute, a conservative think tank.

“Imports and exports are up, not just in the United States, but around the world,” said Barfield. “World trade figures are going to continue to come back this year.”

Whether or not increased global trade would lead to greater employment in the United States was still uncertain.

Barfield said productivity gains were largely responsible for the boost in American manufacturing in 2011. If firms begin to feel more optimistic and cannot get more productivity out of their existing machines and workforce, they’ll have to add jobs to grow, he said.

Adam Hersh, an economist at the Center for American Progress, a liberal think tank, said that while exports are growing overall, the deteriorating deficit in high-tech goods is cause for concern.

“What that shows is that the high-tech goods that we’re staking our economic future on, our competitive edge in those industries is dulling,” Hersh said.

At the same time that the United States is losing competitiveness in high-tech industries, Hersh added, oil imports continue to drive up the trade deficit. The trade gap in petroleum products grew 23 percent to $326 billion in 2011.