The PVC-U Window market in Europe

An analysis of some key issues affecting company performance

M Rigby (Michael Rigby Associates), G H Arnold (Godfrey Arnold Associates)

INTRODUCTION

The PVC-U window market has undoubtedly been the rising star of the European PVC business over the past 30 years. From modest beginnings in Germany in the 60's and 70's the introduction of PVC-U windows in the UK and other European countries in the early 80's provided another platform for rapid growth during the last twenty years. PVC window profiles are now the second largest single application for PVC after pipe but face a number of critical issues in parts of Western Europe where the market is reaching maturity.

SCOPE

The overall objective of the research programme summarised in this paper was to analyse the key technical and commercial elements in the window profile manufacturing chain and to provide the industry with a solid basis on which they can make further decisions on investment and product development. The main part of this research work to provide this data has been carried out in the UK window market but work to replicate this in the wider European market has been started.

EUROPEAN MARKET BREAKDOWN

The use of PVC-U for window profile in Western Europe has grown to such an extent that it now forms about 13% of the total PVC market - and just over 60% of the rigid profile market - consuming 750kt. of PVC polymer in 1998.(Chart I). Germany, the UK and France currently account for about 85% of this total. PVC-U is also taking an increasing share of materials used for window profilesii (Chart II) with an estimated 36.6% market share in 1998. The end use of profiles has varied from market to market with ., for example , replacement windows providing the largest sector of business in the UK for many years. However - growth is now being also seen in the new building market which is one reason for the continuing growth being achieved in the UK window market.

There has also been considerable growth in parts of Eastern Europe and Turkey over recent years. It is estimated that these markets account for a further 200kt. of polymer of which Turkey, the former Soviet States and Poland accounted for over 80%. This volume is subject to considerable fluctuation since it depends on the economies of these countries remaining healthy and stable.

The growth in the UK window market - and including doors and conservatories - in the period 1994-1999 rose 27.5%. About one third of this growth arose from the displacement of imported profiles while the remainder is real growth in the market.

The European window business also provides excellent opportunities for imports and exports. Raw material including polymer and compound as well as additives are freely available across borders and profile and finished frames are also part of the trade. The general situation for PVC-U window profile and for finished frames and doors is seen in Table I.

Table I - Table of imports and exports (ktonnes)

	Flow	Total	EU	Non EU
PVC-U window profile	Imports	161	148.8	12.2
	Exports	286.5	172.8	113.7
	Exports/import balance	125.5	24	101.5
PVC-U window/door frames	Imports	97.4	63.4	34
	Exports	91.9	68.3	23.6
	Exports/imports balance	-5.5	4.9	-10.4

The most prominent exporter of profile is Germany with some 40% of profile manufactured being exported fairly evenly between EU and non EU countries. There is also - albeit a smaller quantity - an export business in finished frames and doors. Once again Germany is the largest exporter (25% of the total quantity) although its imports of frames are actually twice as great as its exports.

PVC-U technology is very similar across Europe and the majority of the material and machinery companies operate global businesses. Obviously these markets are at various degrees of maturity and stages in their life cycle but in general machinery and material developments are available to all customers who inevitably find themselves operating in a highly competitive environment and find that the major issues they face are similar. Window profile is the second largest single application for PVC in Europe and there are almost 100 extrusion companies supplying profiles into this market. However, the wide range of tonnage outputs produced by companies working in a single application sector is a very unusual feature in the PVC business. It differs from other large application sectors such as pipe and cable covering in that it has not seen , so far, the domination of the market by just a few companies. The table below shows that the top 20% in terms of volume used for each large market ( Germany, UK and France) the percentage of volume used by these companies lies at the relatively low levels of between 40% and 60% of the total market. One reason for this is that the investment required to purchase extrusion lines is relatively low especially when compared to other technologies such as calendering.

However, despite significant investment in technology, comparatively little investment has been put into the branding and marketing side of the business which has resulted in fabricators discerning little or no difference between systems companies. In this situation systems companies are less able to support and maintain a premium price for their product. This, together with over supply, leads to commodity style purchasing which then drives prices down even further. The structure of the window profile manufacturing and fabrication sector in the UK in 1998 results in a situation where there were 31 system manufacturers who have an average output of less than 7 Kt./company although we are now seeing an active start to more significant rationalisation.

It is interesting to examine the UK situation in a bit more detail. During the period 1997/9 a number of British companies were merged with others , or were purchased by larger companies, or were sold to venture capital companies and management buy outs, or went out of business altogether. During this relatively short period of about 18 months about 40% of the total UK business was affected by this reorganisation. At the end of 1999 there were just 22 individual companies operating in the systems business although full rationalisation had not necessarily taken place in all the companies affected. The actual output per company thus increases to about 10Kt - an increase of significant proportions. In France the equivalent output is about 6Kt/ company.

By comparison, in Germany there are about 25 major manufacturers giving an average output of nearly 19kt. per company. This is still well above the company output being achieved in the UK. However, ignoring profile exports the differences due to the home markets themselves are not so great with the output per company dropping to 9.5. and 11.5 Kt. respectively for the UK and Germany.

The pace of change has been rapid in the UK and is almost certainly going to continue. Other markets have taken many years to consolidate against a background of poor financial results in an effort to construct a stable platform. There may well be a similar scenario in the window sector.

A number of common technological elements have an impact on the profitability of the operation. These include: a) PVC-U window profile extrusion is a very large, competitive business and, therefore, efforts need to be concentrated on efficient and low cost profile production, b) the volume used and the number of systems offered by a profile manufacturer has a significant impact on efficiency and equipment utilisation and c) effective use needs to be made of the available capacity. Our investigations have been focused largely on quantifying and benchmarking the industry against these factors.

THE UK WINDOW SECTOR

Our research which so far has concentrated largely on the UK market has examined factors which have influenced production and demand. Similar factors will also affect other window markets in Europe. After a number of false starts in the 70's the industry really started to take off in the early 80's and the market has almost doubled in the last eight years and grown by 31% in the period 1995-8. Growth over recent years has been fed largely by new markets such as conservatories and new build. As the rate of growth from these markets settles back we estimate lower overall growth of the window market in the medium term. PVC-U compound consumption reached a level of 227kt. in 1998. This translates to a reduced level of 218kt. of profile delivered to fabricators after taking into account factors such as extrusion yields and stock build.

The continual developments of extrusion and ancillary machinery, including the important area of tooling, have been responsible for some significant improvements in output rates over recent years. In the UK window market there were 488 extrusion lines available for profile extrusion in 1998, of which we estimate that 25% are capable of high speed extrusion, and the distribution of these is shown in Chart IV. If we examine the yield per extruder in the same way we see that the larger companies show substantially higher output yields than the group of medium size and smaller companies. As would be expected the smallest volumes made by the trade extruder element in this sector have the lowest yields per extruder. Of course this is not the whole story and is just one of the benchmarks which can be used in assessing competitiveness and efficiency. Nevertheless, this yardstick does have a major bearing on capacity issues and also helps to identify the operations which may be running at lower unit costs.

These yield measurements can be used in different ways to compare operations. In the UK the average yield per extruder across the whole window business is 465 tonnes/ line assuming all extruders are available and being used. We have found, indeed, that many companies retain older extruders even when these are redundant to requirements. Ultimately it is demand which is the most important factor determining whether the available extruders are actually required.

Average yields per extrusion line rise significantly with increase in total volume produced. With the largest companies achieving average yields of just under 600 tonnes / machine and the smallest companies operating about 275 tonnes/ machine. However, the yield can vary widely even for similar size operations and in the group of the 10 largest profile manufacturers the yield range is 220 tonnes to 1010 tonnes per line. In Germany the average output is believed to be somewhat higher at about 550 tonnes/ line - or 15% greater than in the UK but the gap is closing. The higher yield due to a number of factors which include a) a greater proportion of high speed extruders in use in Germany, b) a wider use of dual extrusion lines which can more fully utilise the capacity of the high speed extruders, c) higher overall machine utilisation and d) the higher cost of energy which increases emphasis on obtaining optimum output from extruders. A detailed analysis of the actual output from the range of extruders available in the UK for window profile, after allowances have been made for downtime required for maintenance and other factors, has led to the conclusion that the industry is operating at just under 60% of its capacity. This level has been much the same for a few years. Nevertheless, investment in new extruders and lines continues apace and any downturn in demand could result in a restructuring exercise as companies try to consolidate their position but at a lower gross margin.

Idle capacity has not been distributed evenly across the sector. Companies with seasonal peaks in sales carry more surplus capacity than others with less sales fluctuation and companies gaining market share generally have less idle capacity than those losing volume. As surplus capacity builds up there is a temptation for many companies to re-employ it at lower prices resulting in lower profitability which leads in turn to retaliation from competitors and eventually to the status quo on surplus capacity.

Best practice has shown that tool changes can be effected in less than an hour compared to an industry average of about three hours. If tool changes were generally brought down to an hour then this in itself would add over-capacity to what is an already dangerously high level. Making some conservative assumptions on growth and the continuing penetration of higher performance extruders and assuming a 70% utilisation factor we estimate that over a five year period the number of extruders required to satisfy the market need would be about 350 compared to the 488 currently in place or a reduction of nearly 30%.

Efficiency and capacity use is also linked with the number of systems each company offers. Systems companies find it very difficult to rid themselves of 'obsolete' systems and, therefore, the numbers of systems do not actually vary much from year to year. In 1998, there were 88 systems available from 31 companies - only a small reduction on the numbers of systems available in earlier years. Although small companies may only manufacture one system both large and small companies make anything up to 7 systems. Table III shows, however, that the larger companies are able to use their equipment more efficiently as they can extrude more than 50% more per profile than the middle range of companies who in turn will extrude about twice as much per profile than the bottom third of companies. This means that for every tonne of profile produced by the smallest companies the largest companies can extrude 3 tonnes and the medium size companies 2 tonnes of profile. It is clear that many of the smaller operations have realised this large negative factor and have taken steps over the past year or two to decrease the gap to remain on competitive terms.

Average tonnes per profile

Systems extruders ranked by volume	Profile output ktonnes	Associated number of systems	Average tonnage per system	Associated number of profiles	Average tonnes per profile1998
Top 10	131.8	43	3065	1217	98
Next 10	67.4	28	2407	1051	63
Next 11	13.5	17	794	370	34

It is conventional to quote volumes of materials used in any particular sector of the PVC market and for the raw material manufacturer this is the key piece of information required to enable them to formulate sales and marketing plans. However, it is the real window market which is of greater interest to the systems companies. We have already shown that imports and exports are important elements of this market and a model of supply and demand has been developed, and combined with stock build and prices to determine the value of this 'real' market. This has been done in detail over a five year period. Over this period the UK market demand for windows increased by 21% while the value of the market increased by 13%. It is also interesting to compare price indices for this period as shown in Table IV. It will be seen that against a background of an 15% fall in material prices the price of main frame profile dropped by 6%. There was quite a contrast between 1997 and 1998 with the systems companies recovering price levels against a rapidly dropping raw material price. However, during 1999 the price of raw materials has increased to levels not seen since 1994/5 and it is doubtful whether the industry in the UK had the ability to pass on these rapid price increases. Purchasing power has passed from the systems companies to the larger customers. Intense competition is likely to ensure that the smaller and medium sized firms take the pain of price rises from the systems manufacturer. The effect of this will be to tip the balance of competitive advantage further towards larger fabricators- and thus boomerang back on systems companies some time later. While that is specifically the UK situation there is little reason to believe that such a scenario does not pertain in the German and French markets also.

Index of prices per tonne

Product	1994	1995	1996	1997	1998
Compound	100	119	96	92	85
Mainframe white profile- UK origin	100	101	94	88	94

In the UK there has been a strong relationship between raw material prices and the profitability of systems companies. The last time there was a surge in raw material prices - in 1994/5 - a number of systems companies almost went to the brink and one or two were only kept afloat by the intervention of their raw material suppliers. Prices eased just in time to save a number of firms but the majority of companies engaged in significant restructuring in order to survive, Companies who had decided to quit the business changed their minds as margins picked up. Since then selling prices have eroded further although many companies enjoyed quite good margins because of the historically very low material prices. The price rises in 1999 mean that again margins will be doubly squeezed as selling prices continue to fall and this might well be the trigger for further concentration of the market.

FUTURE DEVELOPMENTS

There are a number of parameters which are critical to the growth of the window market. These include building stock, home ownership levels, income, competing materials, technical developments and product preferences These factors drive the market and lessons are being learnt in the UK market which can apply to other countries.

The UK window market is still seen as a growth area by the companies involved in the business although saturation is now looming. Their forecast of volume growth for the period 1998-2003 was 12%, against a stagnant price level. Below trend volume increases are expected in both the public and private home improvement sectors while more encouragingly volumes for private and public new build markets are expected to grow by between 16% and 22%. However, as with much crystal ball gazing there is a wide spread of opinion and many different scenarios would affect this average view. Other developments are also going to have a major impact on the window industry. We have already discussed the issue of tool change times which will provide a means of consolidating the investment in equipment by those companies who are able to follow this route. Another aspect is the issue of thinner wall, or lower weight profiles. Whether this trend finally results in the systems companies being able to enhance their margins is not clear at this time but at least the introduction of such systems will enable them to attack more markets such as new build in a more competitive manner.

The recycling of PVC-U windows is going to have an increasing impact on prime material usage. In the UK we estimate that about 7kt. of recycled PVC-U from windows is reground and supplied to the systems companies for reuse. At present all but a small proportion of this is obtained from fabrication waste and as windows are estimated as having a thirty to forty year life this is what we would expect. However, in Germany the situation is somewhat different and in 1997 it is estimated that 3kt. of used windows were collected, specially treated in purpose built plants and the PVC-U recycled for further use in windows - generally as the inner layer of a coextruded window profile. Much larger quantities of fabrication waste were also reused. It is estimated that across Europe in 1997 , 18 Kt. of post use windows were in the waste stream. It is estimated that this will increase to 50 Kt. over the next ten years.

Other factors such as higher extrusion speeds and an increasing use of twin strand die techniques will almost certainly continue to favour the larger companies who are able to benefit from the higher investment required. Environmental issues such as replacement of lead stabilisers by alternative non toxic stabilising systems will continue to make their impact as has started to happen in a significant way already in Germany but such development can only be a further bastion to defend PVC-U against the introduction of alternative materials.

In markets such as Germany and the UK there is still some growth despite the fact that these markets may be regarded as mature. Growth will be even greater in the less developed markets. Eastern Europe and Turkey have already seen an explosion in PVC-U consumption in the last few years.

The UK industry - and by analogy - other established window markets have to face the challenge of improving margins and it seems inevitable that rationalisation will continue. Research has shown that in 1998 in the UK the top 20 companies(or 2/3 of those manufacturing full systems) accounted for 90% of industry output so the tail is probably unsustainably long.

The biggest single problem facing the industry is the imbalance between productive capacity and demand levels , and the effect that has on corporate behaviour. This factor - which is a result of the industry's actions aimed to increase market share by increasing production is now facing its downside.

The high growth rates of the past look unrealistic and the scope will narrow for further sales penetration. The stock of housing available for refurbishment is rapidly declining. The implications of confronting these harsher market conditions will require a whole range of responses including greater price flexibility, more efforts to control end user markets by stronger branding, contractual changes, perhaps forward integration into fabrication. We will probably see more effective use of existing assets, restructuring of assets, disposal of surplus stocks and yet further attacks on costs. The pace in the UK of change has suddenly started to accelerate - and there are also signs of this happening in Germany - though it would seem that the changes here have been comparatively slow.

Some commercial developments thought to have been unique in the UK are now also seen in Germany. What we are undoubtedly experiencing is the emergence of some global features and issues of the PVC-U window market, even though their precise expression will almost certainly continue to be different in each national market.

In the UK three or four groups are now actively working to achieve a level of 'critical mass' which they believe will give them leadership over prices and margins and the power generally to influence markets and competitors.

In many more mature markets this critical mass begins to have an effect at around 20-25% of the market , although clear market leverage is not normally attained until a company holds a third of the market. The full benefits are, however, only experienced if relative size advantage is gained by one company being significantly larger than the next in rank. In this classic , and relatively common, situation, the largest company tends to take the bulk of the market profits, the next in rank takes a lower but respectable profit and so on downwards. Apart from companies with strong niche positions most companies thus get starved of profits.

This neat market model is, however, thwarted if three or four companies achieve roughly similar market shares and then indulge in pricing battles. This is the potential scenario in the UK but is actually the situation in the German window market where the result has been a weakening stalemate supported by strong export markets or overseas subsidiaries. In both markets power and financial health will not be achieved until relative critical mass has been achieved.

The two leading European window markets are different in structure yet the basic issues are similar. Both markets have to learn from each other and we believe there is just time to move the prospects of a 'lose-lose' to a 'win-win' scenario.

It is not too late to admit that there has been a costly and near fatal misunderstanding of classic marketing theory. The principle of superior force and relative advantage does not guarantee success, but full frontal battles between equals almost always end in tears all round.

REFERENCES

1. The PVC-U Window and Cellular Foam Profile industry in the UK and the Republic of Ireland - 1998. Michael Rigby Associates, UK, 1999
2. Grunddaten zum Fenster- und Baumarkt. VFF Verband der Fenster- und Fassadenhersteller e.V. Frankfurt, 1997