Appendix B: Industry Overviews

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Industry Overviews

Medical Devices and Instruments

Definition

The Medical Device industry is a broad category that we have split into two main areas: medical equipment and instruments.

Further definition by SIC Code follows:

3821 Laboratory Apparatus And Furniture

3826 Analytical Instruments

3827 Optical Instruments and Lenses

3841 Surgical and Medical Instruments

3842 Surgical Appliances and Supplies

3843 Dental Equipment and Supplies

3844 X-Ray Apparatus and Tubes

3845 Electromedical Equipment

3851 Ophthalmic Goods

NAICS Equivalents

3345 Medical Instrument

3391 Medical Equipment and Supplies

42145 Medical, Dental, and Hospital Equipment and Supplies

Industry Overview and Current Trends

The major trend impacting the cluster is that the aging population is driving demand for products and services. The tight labor market, especially in nursing and technician positions, is driving medical device and equipment firms to design products that reduce labor needs. Taking a closer look at each sector within the industry, we see there are specific industry modes of operation and trends that will help in understanding this diverse and dynamic industry.

Medical Devices.The United States is the global leader in medical devices accounting for close to half of the world’s medical equipment market. Medical devices can include a wide range of products. The most profitable product areas comprise innovative high-technology products such as implantable and external cardiac defibrillators, orthopedic devices, and sophisticated diagnostic imaging systems designed for highly specific markets. Cardiac devices and orthopedics are dominated by a small number of players like Medtronic, Guidant, and Stryker. However, many small and midsize companies design and manufacture specialty equipment and devices across many disciplines. New products are the engine that drives growth in the medical device industry. The companies in this sector must be robust financially to weather research and development, clinical trials, and FDA approvals. Managed care’s influence continues to bring strong pressure to medical device companies to cut costs. There is strong demand by hospitals for equipment that can reduce labor expense, improve labor productivity, and reduce patient stays. Outpatient procedures will also continue to grow and replace lengthy hospital stays. Dramatic growth is predicted for the medical device sector led by expected new product launches in cardiology. The aging population is probably the most prominent factor in driving this growth.

Medical Appliances and Supplies.Unlike value-added medical devices, medical appliances and supplies are comprised of commodity-type items such as kits, trays, gloves, gowns, syringes, and other disposable medical supplies. The medical supply market is a mature business dominated by a relatively small number of big manufacturers such as Tyco International and Johnson & Johnson. The medical appliances and supplies sector is characterized by low margins, high volume, and long-term contracts with hospital management chains and large customers. As with medical devices, there is significant pressure on medical and hospital suppliers to cut costs. The improvement of existing products, technical support of products, and compliance with governmental regulations for the protection of consumers are key factors for success in this highly competitive environment. However, the demand for supplies is predicted to remain strong due to the favorable demographics as the population ages.

Eyewear. Eyewear is included in medical products and services to address the continued changes in the eyewear and care industries. This sector includes eyeglasses and contact lenses. Eyeglasses account for the lion’s share of the market, but the fastest growing segment is disposable soft contact lenses. The U.S. eyeglasses market is highly fragmented. The contact lens market is dominated by a few small players including Bausch & Lomb and Johnson & Johnson. The demand for eyewear is rooted in the growth of consumer demographics as baby boomers started to need reading glasses. While eyewear does and continues to grow, increased industry competition and the increasing popularity of laser corrective surgery are threatening that growth.

Industry Importance Factors

What factors do medical device companies rate the highest in business concerns and location considerations? Understanding the industry, how it works, and the current business environment will guide us to the answer. Below is a table of site location factors as related to the different sectors of the biotech services industry and a discussion of the most important factors.

Site Location Factors


382
Measuring & Controlling Devices

384
Medical Instruments

3851
Opthalmic Goods

Access to Markets




Geographic Proximity

High

High

Medium

Transportation Svcs Cost-Goods

Medium

Medium

Medium

Transportation Svcs Avail-Rail

Low

Low

Low

Transportation Svcs Avail-Truck

Low

Low

Low

Transportation Svcs Avail-Water

Low

Low

Low

Transportation Svcs Avail-Air

Low

Low

Medium

Telecommunications Services

Low

Low

Low

Access to Resources




Energy Dependability

High

High

High

Energy Cost

Low

Low

Low

Water Availability/Cost

Low

Low

Low

Raw Materials

Low

Low

Low

Intermediate Mfg Products

High

High

High

Business/Prof/Tech Svcs

High

High

High

Work Force




Executive, Administrative & Managerial

Medium

Medium

Low

Professional Specialty

Medium

Low

Low

Technical

High

Medium

Medium

Sales

Low

Low

Low

Administrative Support

Low

Low

Low

Service

Low

Low

Low

Farming, Forestry & Fishing

Low

Low

Low

Precision Production & Repair

Medium

Medium

High

Operators & Assemblers

Medium

High

High

Handlers, Equipment Cleaners & Laborers

Low

Medium

Low

Transportation & Material Moving

Low

Low

Low

Effective Cost of Skilled Labor

High

High

High

Effective Cost of Unskilled Labor

High

High

High

Reliability

High

High

High

Land Availability

Low

Low

Low

Land Cost

Low

Low

Low

Built Space Availability

Medium

Medium

Medium

Built Space Cost

Medium

Medium

Medium

Construction Costs

Low

Low

Low

Financial Capital




Seed

Low

Low

Low

Debt

Medium

Medium

Medium

Venture

Medium

Medium

Medium

Public Sector Impacts-Invest




S/L Government Quality

Low

Low

Low

Secondary Education Quality

Medium

High

Medium

Higher Education Quality

Low

High

Low

Local Transport/Commuting

Low

Medium

Low

Water/Wastewater Systems

Low

Medium

Low

Business Incentives

Low

Medium

Low

Public Sector Impacts-Costs




Regulatory Policies

Medium

Medium

Medium

Worker Compensation Costs

Medium

Medium

Medium

Unemployment Insurance Costs

Medium

Medium

Medium

Business Taxes

Medium

Medium

Medium

Quality of Life




Cost of Living (ex Housing)

Low

Low

Low

Housing Costs

Medium

Medium

Medium

Personal/Property Security

Medium

Medium

Medium

Climate/Physical Environment

Medium

Medium

Medium

Recreational/Cultural Opportunities

Low

Low

Low

Area Image

Medium

Medium

Medium

Source: Applied Economics, Scottsdale, AZ

The site location factors that are most important to the biotech industry have been identified. The analysis is based upon 51 key site location factors in seven major categories including access to markets, access to resources, workforce, real estate, financial capital, public sector impacts, and quality of life.

The medical products sector has moderate need for technical professionals and a high need for a skilled precision production and repair labor force as well as available operators and assemblers. The cost of labor is a major expense and, therefore, a priority for medical products companies. Additionally, an available quality education program is an important factor for the medical products industry. For the most part, the medical products sector does not necessarily have the same need to locate near research universities or hospital environments. The needed workforce for the medical products sector includes scientists, technicians, machine operators, and managerial/administrative occupations.

Geographic proximity to a supplier and customer base and transportation costs of goods are central factors while the availability of air services holds moderate importance. Energy dependability is ranked high in all areas of medical products since they undertake very precise, high-tech production, or operations in many cases. Access to production inputs, specifically intermediate manufacturing products, is also ranked high across the board. Real estate costs and availability shows importance primarily in built space and an incubator environment. Regulatory policies as well as taxes, worker compensation costs, and unemployment insurance costs are of moderate importance to the industry. The medical industry is a sector steeped in regulation, and those regulations continue to have major influence. Quality of life factors, as with healthcare services, are becoming more and more key to location and expansion decisions. Attracting the skilled labor needed for the medical industry is linked to the available quality of life. Overall operating costs for medical products industries will be a factor in the location decision given that cost pressures are evident in every sector.

Light Manufacturing

Definition

The light manufacturing industry is a broad category covering many types including wood products, plastics, electrical equipment, and metal.

Further definition by SIC Code follows

24 Lumber and Wood Products

308 Miscellaneous Plastics Products

34 Fabricated Structural Metal Products

36 Electronic & other Electrical Equipment

NAICS Equivalents

3321 Forging and Stamping

3323 Architectural and Structural Metals Manufacturing

3324 Boiler, Tank and Shipping Container Manufacturing

3328 Coating, Engraving, Heat Treating and Other Activity

3329 Miscellaneous Fabricated Metal Product Mfg.

3334 HVAC & Commercial Refrigeration Equipment Mfg

3339 Other General Purpose Machinery Manufacturing

3399 Other Miscellaneous Manufacturing

326113 Unsupported Plastics Film and Sheet

326121 Unsupported Plastics Profile Shape

32613 Laminated Plastics Plate, Sheet and Shapes

326122 Plastics Pipe and Pipe Fittings

32616 Plastics Bottles

32615 Urethane and Other Foam Products

32614 Polystyrene Foam Products

325991 Custom Compounding of Purchased Resins

326191 Plastics Plumbing Fixtures

326199 All Other Plastics Products

3342 Communications Equipment Manufacturing

3344 Semiconductor & Other Electronic Component Manufacturing

Industry Overview and Current Trends

The state of the economy has had an impact on the performance and livelihood of all manufacturing industries. The last couple of years have led to excess capacity and slow or non-existent expansion plans. The overall economy is rebounding slowly and still has a large impact on capital goods expenditures.

However, manufacturing industries continue to be driven by innovation with research and the application of that research. It is in the research, innovation, and engineering areas that the United States will continue to realize opportunities given the globalization of industries. Labor intensive industries are likely to locate in countries such as China where labor rates are low. The United States needs to take advantage of those manufacturing operations that apply emerging technologies and a highly skilled, knowledgeable workforce. This can be applied to Metal Fabrication, for example, by offering customized services and products as well as researching newer and more efficient ways to produce products.

Fabricated Structural Metal Products

Approximately 1.5 million people are employed in the U.S. fabricated metals industry, producing everything from nuts and bolts, and cutlery, to the most complicated aerospace components. Metal fabricators have enjoyed expanding orders in recent years. Much of the industry’s expansion can be attributed to overall growth in the domestic economy. Most industry sectors have expanded, housing developments have improved, and consumer spending has increased during the current expansion allowing growth within the industry.

A majority of metal fabricators are found where there is a high population; this gives rise to significant demands for housing. For instance, fabricated structures (e.g., metal doors, window and door frames, gutters and downspouts, fences and posts, prefabricated metal buildings, and sheet metal) and plumbing and heating equipment (e.g., plumbing fixtures, heating equipment) are inextricably tied to the performance of the construction industry. Other sectors, like cutlery, hand tools and hardware, are tied to consumer expenditures; whereas, component parts and services (e.g., plating, polishing and coating; screw machine parts; and metal forgings and stampings; and valves and pipe fittings) are likely to be located close to the final manufacturers.

Fabricated Metal Products. This category includes companies that fabricate, stamp or form iron, steel, or other metals into products such as structured components, auto and aircraft assemblies, tanks and vessels, and other industrial products. These types of companies will follow most of the same trends seen in industrial machinery and capitals goods. The health of this industry is largely dependent on capital goods spending and, therefore, the overall economic condition.

Additionally, forecasts for certain sectors within the industry are included below:

Shipments of food cans will show the fastest gains in the metal can industry, 2.3% per year between 2002 and 2007.

Shipments of metal windows and doors are expected to rise 5.5% annually through 2007 to $12.4 billion.

Shipments of sheet metal roofing, flooring, siding and building trim are projected to increase 2.2% per year through 2006 and reach $3.8 billion.

Shipments of sheet metal air conditioning ducts, stove pipe, furnace smoke pipes, elbows, culverts, flumes and irrigation pipes are forecast to increase 2.1% through 206 and reach $2.7 billion.

Source: Freedonia Focus, April 2003, May 2003, June 2003, and September 2003

Miscellaneous Plastic Products

Protective Packaging. The U.S. protective packaging industry, although dominated by large multinational corporations such as Sealed Air, primarily consists of small, privately held firms with annual sales of less than $40 million. Price, performance (i.e., functional properties) and quality are the primary marketing factors in the highly competitive protective packaging industry. Protective packaging demand in the U.S. reached $2.5 billion in 2002 after increasing four percent annually during the 1997-2002 period. Protective packaging encompasses a variety of plastic, paperboard and other materials used to safeguard, support and cushion products during shipping, handling and retail display.

Protective packaging demand is impacted by a number of factors including personal disposable income levels, population size, activity within various packaging end-use markets, retail sales, environmental considerations and the overall health of the economy. Retail sales are a significant prognosticator of protective packaging demand in that many durable goods such as appliances, electronics, automotive parts and furniture are packaged in paperboard corner edge protectors, molded expanded polystyrene end caps, and molded polyolefins and polyolefin rolls to protect the items from shock, vibration and scratches. Catalog and Internet sales also have a profound impact on protective packaging demand requirements. U.S. protective packaging demand will increase 5.3 percent annually through 2007 to reach $3.2 billion supported by the introduction of new, value-added products. Additionally, as the U.S. economy recovers from the recession that started in March 2001, durable goods shipments are projected for record healthy gains through 2007, which will boost demand for protective packaging products. Further advances will be limited by general saturation in most packaging sectors linking opportunities to market size gains attributable to the quantity of packaged goods being sold.

Plastics Pipe. The U.S. pipe industry can be characterized as highly competitive with a large number of producers, diverse applications and intense materials competition. The wide array of industry participants results from the need for producers to possess both expertise in the technology of the pipe materials involved as well as a knowledge of the required product development and manufacturing techniques. US demand for plastic pipe grew 2.9 percent per year between 1997 and 2002 to reach 8.3 billion pounds in 2002 valued at $3.8 billion. When measured in pounds, plastic pipe represented 13 percent of the total US pipe market. In footage terms, plastic pipe totaled 5.3 billion feet and accounted for 39 percent of the total pipe market in 2002. Plastic pipe experienced rapid gains throughout the 1990s, with annual growth of 7.8 percent between 1992 and 1999. Plastic pipe remains one of the most widely used types of pipe due to its lower installed cost and performance advantages over other materials.

Plastic pipe demand is influenced primarily by construction activity, which is highly dependent upon the outlook for economic growth and general business activity. Funding for public infrastructure projects such as highways and sewers is dependent upon government subsidies. Other factors that influence pipe demand include the physical condition and network capacity of existing pipes. Plastic pipe demand in the U.S. is expected to advance 3.5 percent annually through 2007 to 9.8 billion pounds, valued at $5 billion including resins, additives, processing and other costs. Growth in plastic pipe demand will continue to outpace growth for other pipe materials due to plastic’s advantages such as light weight, corrosion resistance, long service life, and lower installed costs.

Caps and Closures. Cap and closure demand in the U.S. totaled $4.6 billion in 2002 after increasing 5.7 percent per annum since 1997. Plastic caps and closures accounted for 70 percent of total U.S. cap and closure demand in 2002 and increased at the fastest rate, 5.7 percent annually between 1997 and 2002, to reach 117.8 billion units in 2002. Closures have been largely insulated from negative developments like packaging source reduction and have actually penetrated new applications such as paperboard liquid packaging. The use of multiple closures in applications like bottled water, sports drinks, and cosmetics and toiletries has also risen. A higher degree of volatility does occur within individual closure types based on trends in raw material costs and inter-material competition. Despite cost fluctuations, plastics have managed to sustain above-average growth over the past decade. This is true not only because plastics have taken market share from metal and, to a lesser extent, cork and paperboard but also because of the diversity of resins available and design flexibility advantages.

The cap and closure industry in the United States is dependent largely on container demand trends as well as changes in the container mix resulting from competition among various packaging media. The prospects of the container industry, in turn, are influenced by a range of factors, many of which are beyond the control of industry participants. Ultimately, the market for specific varieties of caps and closures is determined by the volume, types and characteristics of rigid containers used. Demand for caps and closures in the U.S. is projected to increase 3.1 percent annually through 2007 to nearly 200 billion units. Gains will continue to be driven by the penetration of closure-intensive plastic packaging at the expense of closureless containers like metal cans. Further advances will be stimulated by the development of novel closure applications like aseptic liquid food packaging and the increasing prevalence of plastic closures on paperboard cartons as well as the rising use of dual closure packaging configurations.

Containers. The plastic container industry in the U.S. encompasses about 500 firms, of which more than 200 supply plastic bottles and jars. Plastic containers are generally produced within a 200 to 300 mile radius of their source of demand – namely food, beverage and other consumer nondurable goods processors – as freight costs tend to discourage the shipping of empty bottles over long distances. Similarly, the high cost of transporting empty containers results in minimal competition from offshore producers. The U.S. plastic container market is dependent largely on trends in demand for consumer nondurables. These industries are, in turn, influenced by a number of factors, virtually all of which are beyond the control of industry participants. Key determinants include demographic factors and such macroeconomic variables as levels of personal consumption expenditures and overall economic growth and inflation.

Demand for plastic containers in the U.S. reached 11.2 billion pounds in 2001, rising five percent annually since 1996. In terms of units, demand rose 5.8 percent per annum between 1996 and 2001 to 120.8 billion units. Demand by value grew at a similar rate as units, climbing 5.7 percent annually to reach $11.4 billion in 2001. Among the plastic container varieties, which are made from high density polyethylene (HDPE), polyethylene terephthalate (PET) and other resins, are bottles and jars, pails and cans, tubs and cups, food trays and other food containers (egg cartons, produce baskets and squeeze tubes). Plastic container demand is projected to expand 4.2 percent per year through 2006 to 148 billion units as plastics continue to supplant competitive paperboard, metal and glass packaging across a broad range of applications. Plastic bottles will continue to dominate demand and will remain the fastest growing segment. Among other products, pails will have good opportunities for growth, while tubs and cups will continue to grow at the slowest pace.

Advanced Automotive Materials. Advanced material use in light vehicles is driven primarily by production of light vehicles. Advanced materials for automotive applications include metals such as aluminum, high strength and stainless steels, magnesium, powder metals, platinum group metals and titanium, and engineered plastics and thermoplastic elastomers. Demand drivers affecting the use of advanced materials in automotive applications include concerns regarding vehicle weight reduction with an eye toward improving fuel economy; increased safety requirements; control of vehicle noise, vibration and harshness levels; and issues regarding vehicle reliability and durability.

Demand for advanced plastics in North American light vehicles reached nearly 1.8 billion pounds in 2001 having increased 4.4 percent annually between 1996 and 2001. This segment includes engineered plastics and thermoplastic elastomers. In 2001, engineered plastics accounted for 79 percent of this total. Advanced plastics and elastomers demand in North American light vehicles is projected to increase 4.6 percent annually to 2.2 billion pounds in 2006. Thermoplastic elastomers and engineered plastics will exhibit better growth than commodity resins due to continued demand for higher performance plastics in underhood and other applications.

Plastic Lumber. Since the late 1980s, plastic and wood-plastic composite lumber have found increasing use in a variety of construction applications including decking, moldings, trim, fencing, windows and doors. Plastic and wood-plastic composite lumber are building materials that can substitute for wood in a variety of applications. Demand for plastic and wood-plastic composite lumber is generated by construction activity. Construction expenditures are, in turn, related to overall economic growth as well as other factors. The link to new construction activity imparts an element of cyclicality to demand for composite and plastic lumber, but the connection is reduced by the substantial applications for the materials in repair and improvement projects for both buildings and other construction. Cyclicality of demand for plastic and composite lumber has also been dampened by the effects of the fundamental, long-term increases in the acceptance of these alternative materials.

The U.S. composite and plastic lumber industry is highly fragmented, consisting of hundreds of companies ranging from small, regional producers to large, national concerns. Manufacturers typically specialize in one type of material, although some companies offer both composite and plastic lumber. Total demand in the U.S. for composite and plastic lumber grew 14.1 percent annually between 1996 and 2001, reaching 1.8 billion pounds valued at $1.1 billion. Through 2006, demand in value terms for composite and plastic lumber is forecast to increase nearly 13 percent annually, approaching $2 billion.

Additionally, here are some forecasts for the plastics industry:

  • Thermoplastic resins should continue to dominate the market, growing 16.2% over the forecast period to a value of $52.6 billion by 2007.
  • The thermoset sector is expected to experience more dynamic growth over the next five years and climb to $10.9 billion in 2007, representing a growth of 27.5%.
  • Unsupported film and sheet is expected to remain the market’s largest sector, accounting for 14.9% of total market share or $21.4 billion in 2002.
  • Both piping and laminated coat and sheet sectors are expected to achieve rapid growth over the forecast period, fuelled by increased construction and the need for more ready meal products, respectively.
  • The foam sector is expected to witness an average growth rate of 5.3% over the next five years as the automobile market slowly declines.

Source: Euromonitor, June 2003

Wood Products

Sub-Industry Review: Homebuilding

Since September 2004, our investment outlook for the homebuilding group has been neutral. We still believe that the typical builder's fundamentals remain very strong and that the growth we forecast for 2005 will be met with modestly higher overall valuations. But at the same time, because we think the range of valuations will also broaden, we expect a select group of builders to account for the higher aggregate P/E seen. We look for each of the homebuilders we cover to increase earnings at a double-digit rate in 2005. Because we think valuations for the group will be kept in check, as we believe investors are becoming increasingly sensitive to a potential cyclical turn, we think only select stocks in the group are undervalued. Through January 14, 2005, the S&P Homebuilding Index gained 3.5%, versus a 2.4% drop in the S&P 1500.

Sales of new single-family homes have been at or near record levels since 1998 aided largely by low mortgage rates. At about 5.75% to finish 2004, 30-year fixed mortgage rates were much closer to their all-time low of about 5.25% than their average of about 9.45%, which dates to 1971. These low borrowing rates have made homes significantly more affordable, another factor supporting record-high ownership levels, and large price increases throughout the U.S. have followed this increased demand. In 2005, although we look for a gradual rise in mortgage rates, compared to recent lows, we assume that solid job growth, another demand driver, will mostly offset any mortgage rate increase of less than about 125 basis points.

After five to seven years of steady volume increases and relatively large price gains, we judge the current homebuilding cycle is closer to the top than the bottom. And despite much broader industry diversification, in terms of geography, product and price, and what we view as a higher level of sophistication, we think the large builders remain very cyclical, yet less so than ever before. As such, compared to aggregate earnings per share, we think the average homebuilder's valuation will remain in the high single digits until peak earnings are achieved. Until then, though, and based partly on significant backlogs to start this year, we generally expect much higher volume growth, rising home prices and improving profit margins.

~William Mack, CFA

Sub-Industry Review: Home Furnishings

Our investment outlook for the S&P Home Furnishings Index is neutral although our opinions differ on individual stocks. We believe that some uncertainty about the strength of an economic recovery as well as the prospect of higher interest rates and rising raw material costs could limit valuation gains for home furnishings companies. Year to date through January 31, 2005, the S&P Home Furnishings Index declined 3.3%, compared to a 2.5% decline for the S&P 1500 Index. In 2004, the sub-industry index advanced 18.2%, compared with a 10.0% gain for the S&P 1500. The 5-year CAGR for the Home Furnishing Index is a rise of 12.1%, compared to a decline of 2.0% for the S&P 1500.

The home furnishings industry is fueled by the housing market, which generally responds to interest rates. Consumer confidence, another industry driver, has restrained sales of home furnishings as the Conference Board's Consumer Confidence Index has recently been well below the peak level reached in May 2000. In general, we are seeing that consumers are still hesitant to spend on big-ticket items such as furniture. Although U.S. housing sales fell sharply in the wake of the September 11 terrorist attacks, subsequent interest rate cuts have buoyed home sales to strong levels. Despite a recent rise in rates and expectations for additional rate hikes, S&P forecasts that housing starts rose 4.3% in 2004. S&P thinks the housing market will cool off in 2005 with a projected decline of 6.0%. Still, we think that sales of home furnishings are likely to receive a lagging benefit from strength in housing turnover.

The domestic home furnishings market has experienced minimal pricing power and low net margins as it competes with foreign manufactured goods, which may benefit from cheap labor and government subsidies. To remain competitive, we believe American home furnishings companies have been investing substantial capital in new machinery, updated equipment, and new information systems. We expect increased efficiency to help companies consolidate production into fewer domestic manufacturing facilities. Near term, we expect those companies with the cash flow to make acquisitions, reduce debt, and/or repurchase shares to continue to exhibit the strongest growth.

~Amy Glynn, CFA

Sub-Industry Review: Forest Products

Our outlook for the forest products sub-industry in 2005 is neutral. Longer term, we see the sub-industry being hindered by an oversupply of lumber and overcapacity in panels. Year to date through January 14, 2005, the S&P Forest Products Index was down 1.5% versus a 2.4% drop in the S&P 1500. We expect average wood products prices in 2005 to be equal to or slightly below 2004 levels based on our view that housing start could moderate slightly in 2005.

Starting in late spring 2003 through the fall of 2004, a healthier supply/demand balance for wood products emerged. The demand side of the equation was aided by strong housing starts, which reached 2.004 million (SAAR) in December 2004, up 10.9% from November 2004, but 3.0% below year-earlier levels. This increased demand met a temporary decline in supply as wet weather conditions in the U.S. South restricted access to timberlands, creating a market primed for price appreciation. After reaching highs of $453 per thousand board feet for lumber and $521 per thousand square feet for OSB, prices for these wood products declined. As of mid-January, lumber prices stood at $350 per thousand board feet, and OSB prices were $331 per thousand square feet. All told, we project that average wood product prices in 2005 will be equal to or slightly below 2004 levels based on our expectations that housing starts will decrease. However, despite this expected drop, we believe that starts will continue at a healthy pace in 2005. Our wood products outlook is also tempered by our expectation that wood capacity will also rise over the next few years based on announced capacity expansion plans.

The most recent news regarding the Canadian lumber dispute came on December 14, 2004 when the Department of Commerce announced that it lowered the duties levied on lumber entering the U.S. from Canada to 21.2%, from 27.2%, on shipments between May 2002 and March 2003. The new rate is to go into effect when the decision is published in the Federal Register, which usually takes two weeks. Because the new rate is below the previous rate, lumber producers will receive a refund for the amount they overpaid.

~Bryon J. Korutz

Electronic & Other Electronic Equipment

Communications Equipment

Wireline networks are being migrated to wireless. For equipment manufacturers, we have seen signs of improving industry fundamentals over the past several quarters, an upsurge in sequential quarterly revenue growth. Productivity gains and structural cost improvements should enable most equipment companies to generate higher profitability on any incremental sales recovery. The current rapid increase in data traffic gives telecom providers the opportunity to create new services, such as high-speed Internet and video access, to offset continued erosion in voice revenues. We regard network equipment upgrades, which help transport data more efficiently, as the key to creating new applications that restore growth in telecom services. Overall, Standard & Poor’s forecasts US carrier spending increasing in the low single digits during 2005. US spending on enterprise voice and data communications equipment totaled $94 billion in 2003, up 3.9% over 2002 after two years of flat growth according to the Telecommunications Industry Association. TIA expects the communications enterprise market to grow to $122 billion in 2007, for a solid compound annual growth rate of nearly 7%. Verizon Communications Inc., Project Lightspeed of SBC Communications, BellSouth Corp., ADC Telecommunications Inc., Adtran Inc., and Advanced Fiber Communications Inc. are companies that have benefited from this growth.

After years of limited sales, the Digital Video Recording market is set for strong growth. Market research firm, IDC, expects DVR unit shipments to more than double to 8.5 million units in 2004 and to some 28 million by 2008.

More recently, the consolidation arena has become more active. These deals enhanced the acquirer’s position in attractive niche growth markets. Looking ahead, Standard & Poor’s believes that most acquisition transactions will be on a smaller scale, mostly to fill gaps in product portfolios.

Copyright © 2005 by Standard & Poor’s All rights reserved.

Computers, Storage & Peripherals

The data storage industry has begun to rebound from the plummeting demand environment that began in 2000. The economic recovery that began in late 2001 has improved the overall environment. In 2003, real GDP rose 3.0% in the United States. If Standard & Poor’s projection is accurate, it would indicate that IT businesses are in an expansion phase, which we believe bodes well for the IT industry. Moreover, we think the overall economic improvement may be even more beneficial for the data storage industry, since we view the sector as a high priority for corporations. According to IT market research firm IDC, sales of disk storage systems rose 3.5% in dollar terms during the first quarter of 2004. If our forecast proves correct, revenues for such companies as EMC Corp. will surpass the $8 billion mark for the first time since 2000. IDC reports that during the first quarter of 2004, EMC claimed the top spot in the worldwide external disk storage systems market, with a share of 20.2%, eclipsing its nearest competitor, Hewlett-Packard, by 220 basis points. After suffering through considerable declines in both 2001 and 2002, worldwide factory revenues from disk storage systems started growing again according to IDC. The fourth quarter of 2003 was particularly strong with the market posting a 6.1% year-over-year increase. While a portion of this rise is related to gains from favorable foreign exchange, it is clear that improving customer demand also boosted results. This momentum continued through the first quarter of 2004 with a gain of 3.5% over the same period in 2003. Over the next six to 12 months, we believe the end-market environment will continue to enjoy a pickup in demand as corporations authorize additional spending on various storage offerings. Given the accelerating generation of new data, more organizations are realizing the critical need to increase their overall storage capacity. We regard this growth rate as respectable, given the industry’s recent performance and the likelihood that a strengthening U.S. currency will dampen revenues collected overseas.

Copyright © 2004 by Standard & Poor’s All rights reserved.

Computers: Commercial Services

Standard & Poor’s believes that the prolonged slump in spending on information technology (IT) products and services may be over. In 2003, the strengthening U.S. economy grew 3.1% compared with 0.5% in 2001 and 2.2% in 2002. The third quarter saw an 8.2% rise in real gross domestic product (GDP) — the fastest growth rate in nearly 20 years. There was continued improvement through 2004 with real GDP growth estimated by Standard & Poor’s at 4.4% by year-end. Typically, when corporations witness more demand, they decide to spend on improvements to IT infrastructure to seek cost efficiencies. This environment bodes well for IT service providers. Standard & Poor’s believes that spending on IT services increased 2% in 2003 and saw moderate momentum throughout 2004. According to IDC, an IT market research firm, outsourcing is expected to be the fastest growing segment of the *worldwide IT services market over the next several years, outpacing other sectors such as business consulting, project-oriented services, and support and training. IDC anticipates that overall spending on worldwide IT services will grow at a 7% compound annual rate through 2008 reaching $740 billion from $524 billion in 2003. IDC projects worldwide spending on outsourcing services alone, including business process outsourcing will steadily grow at a compound annual rate of 10% from 2003 to 2008 with the market eclipsing $400 billion by 2008. Demand for IT services by government agencies at the federal, state, and local levels is projected to be among the fastest growing vertical markets over the next few years. At the federal level, defense and homeland security are taking a large share of contracts for IT services. In 2003, the federal government awarded more than $115 billion in IT-related contracts, a 91% increase over 2002, according to Input, a market research firm focused on government and public sector business. The Department of Defense and the National Aeronautics and Space Administration accounted for approximately $90 billion of total government awards last year with the balance from civilian agencies.

Copyright © 2005 by Standard & Poor’s All rights reserved.

Computers: Hardware

The growth in PCs in 2004 is coming off an 11.9% rise in shipments in 2003. That double-digit performance marked a recovery after a two-year downturn that began in 2001 when PC shipments fell 3.9% according to IDC. In 2002, PC unit shipments rose a modest 1.9%. Standard & Poor's economists further project 3.5% growth in real GDP for 2005, which we believe supports our 8% unit growth forecast for the year. Currently, Standard & Poor's forecast for growth in worldwide PC unit shipments is a range of 7% to 12% per year for 2006 through 2009. Western Europe's PC shipments grew 19.2% year-over-year for the second quarter of 2004, according to IDC, as portable shipments continued to grow (up 25.7%), and desktop shipments growth improved (from an average of 8% over the prior three quarters to 15.9% in the second quarter). Of particular note was improvement in commercial sector demand in the second quarter according to IDC. This may have represented some buying ahead of the third quarter, typically a seasonally weak demand period, reflecting the summer holiday season. All of the top five PC vendors - Dell Inc., Hewlett-Packard Co. (HP), International Business Machines Corp. (IBM), Fujitsu Siemens Computers (Holding) BV, and Acer Inc. - experienced double-digit year-to-year unit growth in the second quarter of 2004, according to data from IDC.

Copyright © 2004 by Standard & Poor’s All rights reserved.

Computers: Networking

Looking beyond 2003, Standard & Poor’s believes that the industry may witness a recovery in 2004 and 2005, with annual sales growth of 8% to 12%, depending on the pace of economic growth. Furthermore, we concur with the projection put forth by most industry pundits for annual growth of 10% to 15% in the networking equipment industry over the next three to five years. Even during difficult economic times, carriers must invest in certain areas such as upgrades that make networks more efficient or less complex and thereby allow carriers to generate a better return on investment. Furthermore, the Internet’s growing complexity should also require further investments in networking infrastructure. New applications in streaming video, both to desktop computers as well as video-on-demand services to homes, should have key implications for networks as should the growing use — and usefulness — of wireless devices. LAN equipment: Ethernet switches to grow moderately. The LAN switch market is expected to see long-term growth from the migration to gigabit Ethernet and new 10-gigabit Ethernet solutions. IDC predicts gigabit Ethernet revenues will experience a compound annual growth rate (CAGR) of 46% between 2002 and 2007 while 10-gigabit Ethernet will show a growth rate of 125% per year. By way of contrast, fast Ethernet is expected to grow at a 6.4% CAGR during that period according to IDC.

Copyright © 2003 by Standard & Poor’s All rights reserved.

Computers: Software

Standard & Poor’s currently forecasts real GDP growth of 4.5% in 2004, following growth of 3.0% in 2003. Additionally, Standard & Poor’s projects a recovery in capital spending as measured by nonresidential fixed investment. Following a 7.2% decline in 2002, nonresidential fixed investment rose 3.3% in 2003 and will rebound an estimated 10.7% in 2004 and 8.4% in 2005 according to our projections. As capital spending begins to increase, Standard & Poor’s believes that software will benefit. Companies will invest in new hardware and will want to leverage their existing hardware infrastructures by installing upgraded and new software. Standard & Poor’s anticipates low to mid-single-digit sales growth for the enterprise software industry in 2004 driven by a stronger economy and a gradual loosening of IT budget purse strings. In our view, software will continue to play an important role in capital spending budgets, because companies will want to invest in systems and applications that can help them control expenses and improve productivity. Many corporations have made major investments in computer hardware in recent years and will focus now on software and services to improve their capabilities. In 2003, PC unit shipments increased 11.7% according to IDC. Estimates from IDC indicate that PC unit shipments will rise approximately 14.2% in 2004 and 10.5% in 2005. Among other events, the terrorist attacks of September 11, 2001 and, more recently, the August 2003 power outage in the United States and Canada have raised awareness of systems vulnerability. Internet security software will play a leading role in facilitating future growth in worldwide e-commerce. The worldwide market for Internet security software totaled an estimated $8.1 billion in 2003 according to IDC. The consulting firm projects a 14.7% compound annual growth rate (CAGR) through 2008 with revenue exceeding $16.0 billion that year.

Copyright © 2004 by Standard & Poor’s All rights reserved.

Semiconductor Equipment

In 2004, we expect to see very strong semiconductor equipment sales. We see the semiconductor industry as a whole entering the second year of a multiyear up cycle. In a recent conference call to Standard & Poor’s, the Semiconductor Industry Association noted that a typical up-cycle lasts six to nine quarters; using this assumption and dating the up cycle from the first quarter of 2003, the peak would occur between mid-2005 and early 2006. The North American semiconductor equipment book-to-bill ratio, published monthly by Semiconductor Equipment and Materials International (SEMI), a trade organization, also suggests a positive outlook. The book-to-bill ratio rose from a cyclical low of 0.44 in April 2001 to a high of 1.27 in May 2002. Chip categories that companies repeatedly cite as driving growth in the current recovery include wireless; broadband; consumer applications such as digital videodisc players, digital cameras, and home networks; automotive applications; and military/aerospace. Recently, chip sales for personal computers have also begun to grow. With US real gross domestic product (GDP) having grown an estimated 3.2% in 2003 and corporate profits improving, business demand is starting to pick up. International Business Machines Corp. (IBM) reported that its sales of mainframe computers grew 33% in the fourth quarter from a year earlier, while server and storage sales rose 18%. Standard & Poor’s projects real GDP growth of 4.5% in 2004. On the consumer side, tax rebates, low interest rates on mortgages and credit cards, and rising consumer confidence have spurred demand for electronic goods. Digital cameras and DVD players have been big sellers along with MP3 players and flat-screen TVs. From a positive point of view, we believe that recent severe underinvestment in chip equipment will boost spending as chipmakers are forced to add production capacity to keep up with demand.

Copyright © 2004 by Standard & Poor’s All rights reserved.

Semiconductors

Standard & Poor's believes the expansion will last into 2006 based on a general reluctance in the industry to spend on capacity additions during the protracted downturn of recent years. Standard & Poor’s sees demand coming from a variety of end-markets; the semiconductor industry is not just PC-driven anymore. Wafer fabrication plant capacity utilization moved above 90% in the fourth quarter of 2003 (91.9%, according to SIA data) and rose further to 93.4% in the first quarter of 2004. Fab utilization rates above 90% usually stimulate plant expansions and purchases of semiconductor capital equipment. Recent data indicate that this pattern is holding true. The drivers of rising semiconductor demand in 2004 include most major markets. Personal computers, which currently account for roughly 30% of semiconductor sales, are still a key driver. Wireless phones with increased functionality, including wireless Internet connectivity, ever-fancier games, and cameras, are also driving demand. Recordable DVD players, which are in an initial product ramp-up, have seen strong sales growth through certain periods, such as the first quarter of the year, that are traditionally slow for consumer electronics sales. Digital cameras are another growing product area.

Copyright © 2004 by Standard & Poor’s All rights reserved.

Telecommunications: Wireless

Increased competition is evident from wireless carriers’ boosting of handset subsidies and monthly service plan minutes of use to renew existing customer contacts or acquire new subscribers. A key indicator to gauge the industry’s outlook is evidence of aggressive pricing related to increased minutes of use or monthly pricing. We see the 2005–06 upgrade to enhanced data networks and to third generation (3G) handsets with Web-based capability potentially boosting growth. There is still plenty of opportunity for growth in wireless usage. Measured in terms of minutes, wireless use jumped 19% in 2003 from 2002, after having risen 35% in 2002 from 2001. The use of short messaging service (SMS) and other handset-based leisure and entertainment applications increased during 2003. As wireless carriers offer more minutes of use in their service plans, we expect growth in traffic volume and the introduction of enhanced non-voice services; however, the cost of service may not continue to decline at the same pace. We believe higher monthly customer churn due to increased competition may also contribute to lower net service revenue growth in the second half of 2004 and in 2005. The 11 largest US wireless carriers, tracked by Standard & Poor’s, had 156 million subscribers at June 30, 2004, or approximately 95% of the industry’s subscriber base.

Copyright © 2004 by Standard & Poor’s All rights reserved

Industry Importance Factors

Most of the significant site location factors for light manufacturing revolve around labor and workforce for the manufacturing industry. It would follow then that available education and training in disciplines, such as various engineering, precision manufacturing, and robotics, would be paramount. Worker compensation costs and unemployment insurance costs are usually of significant concern as well since much of manufacturing production work is done with complex machinery.

Other critical site location factors considered by the manufacturing industry include energy dependability, access to intermediate manufactured products, and the cost to transport goods. All of the above are important factors for most manufacturing intensive industries. Reliable and high-quality energy is a far greater consideration than the cost of energy since disruptions are very costly in lost production time and machinery configurations. Easy access to production inputs also becomes more important as the number of parts and required components grows. Many manufacturers have a high number of parts to track and assemble.

For the most part, quality of life and business incentives are not one of the main site location criteria. The quality of life consideration will become more important if top level executives are locating with the new site. Business incentives for locating a plant will only come into consideration at the end of a decision process. Incentives may also have less of an impact on the overall decision since the capital investment required for the location of a manufacturing facility is very high. Construction costs, built space cost and availability are other site factors that deserve mention as having importance for the manufacturing industry.

Geographic proximity to markets and the cost of transportation services are important factors to the plastics products industry. Other critical site location factors considered by this industry cluster include energy dependability and access to intermediate manufactured products. As with most manufacturing intensive industries, both are important factors.

Site Location Factors


34
Fab. Struct. Metal

308
Plastic

24
Wood Product

36
Electronic
Equipment

Access to Markets





Geographic Proximity

High

High

High

Low

Transportation Svcs Cost-Goods

High

High

Medium

Medium

Transportation Svcs Avail-Rail

Low

Low

Low

Low

Transportation Svcs Avail-Truck

Low

Low

Low

Low

Transportation Svcs Avail-Water

Low

Low

Low

Low

Transportation Svcs Avail-Air

Low

Low

Low

Low

Telecommunications Services

Low

Low

Low

Medium

Access to Resources





Energy Dependability

High

High

High

High

Energy Cost

Low

Medium

Medium

Low

Water Availability/Cost

Low

Low

Low

Low

Raw Materials

Low

Low

Low

Low

Intermediate Mfg Products

High

High

High

High

Business/Prof/Tech Svcs

Medium

Medium

Low

High

Work Force





Executive, Administrative & Managerial

Medium

Low

Low

Medium

Professional Specialty

Low

Low

Low

Medium

Technical

Low

Low

Low

High

Sales

Low

Low

Low

Low

Administrative Support

Low

Low

Low

Low

Service

Low

Low

Low

Low

Farming, Forestry & Fishing

Low

Low

Low

Low

Precision Production & Repair

Medium

Medium

Medium

High

Operators & Assemblers

High

High

Medium

Medium

Transportation & Material Moving

Low

Low

Medium

Low

Handlers, Equipment Cleaners & Laborers

Medium

High

High

Low

Effective Cost of Skilled Labor

Medium

High

High

High

Effective Cost of Unskilled Labor

Medium

High

High

High

Reliability

High

High

High

High

Space





Land Availability

Low

Low

Medium

Low

Land Cost

Medium

Low

High

Low

Built Space Availability

High

Medium

Medium

Medium

Built Space Cost

High

Medium

High

High

Construction Costs

Medium

Low

High

Low

Financial Capital





Seed

Low

Low

Low

Low

Debt

Medium

Medium

Medium

Medium

Venture

Medium

Medium

Medium

Medium

Public Sector Impacts-Invest





S/L Government Quality

Low

Low

Low

Low

Secondary Education Quality

Medium

Medium

Medium

Medium

Higher Education Quality

Low

Low

Low

Low

Local Transport/Commuting

Low

Low

Low

Medium

Water/Wastewater Systems

Low

Low

Low

Low

Business Incentives

Low

Low

Low

Low

Public Sector Impacts-Costs





Regulatory Policies

Medium

Low

Medium

Medium

Worker Compensation Costs

Medium

Low

High

Medium

Unemployment Insurance Costs

Medium

Low

Medium

Medium

Business Taxes

Medium

Low

Medium

Medium

Quality of Life





Cost of Living (ex Housing)

Low

Low

Low

Low

Housing Costs

Low

Low

Low

Low

Personal/Property Security

Medium

Medium

Medium

Medium

Climate/Physical Environment

Medium

Medium

Medium

Medium

Recreational/Cultural Opportunities

Low

Low

Low

Low

Area Image

Low

Low

Low

Low

Source: Applied Economics, Scottsdale, AZ

Biotechnology/ Research & Development

Definition

The biotech industry is a broad category that we have split into two main areas-- medical equipment and pharmaceuticals.

Further definition by SIC Code follows:

2833 Medicinals and Botanicals

2834 Pharmaceutical Preparations

2835 Diagnostic Substances

2836 Biological Products

8731 Commercial Physical Research

8734 Testing Laboratories

NAICS Equivalents

3254 Pharmaceuticals and Medicines

3345 Medical Instrument

3391 Medical Equipment and Supplies

42145 Medical, Dental, and Hospital Equipment and Supplies

54128 Testing Laboratories

54171 Research and Development in the Life Sciences

Industry Overview and Current Trends

Biotechnology is a broad category covering medical supplies, pharmaceuticals, eyewear, and laboratory instruments. The biotech industry is a dynamic and growing industry. The major trend impacting the cluster is that the aging population is driving demand for products and services. The tight labor market, especially in nursing and technician positions, is driving medical device and equipment firms to design products that reduce labor needs. Taking a closer look at each sector within the industry, we see there are specific industry modes of operation and trends that will help in understanding this diverse and dynamic industry.

Biotechnology. Biotechnology historically has referred to the application of biological and biochemical science to large-scale products, for the purpose of modifying human health, food supplies or the environment. Today the industry comprises many different practices of which some but not all involve the alteration of genetic material. A handful of companies, including Amgen, Genentech, Chiron, and Biogen, continue to dominate the biotechnology industry, though the industry is also flush with small drug development firms. The lines between pharmaceutical and biotechnology companies are becoming increasingly blurred. The major biotechnology companies are more mature and capitalized resulting in direct competition with pharmaceutical companies. In addition, biotechnology companies do not necessarily need the financial support from pharmaceutical counterparts. Biotechnology has been the darling of the healthcare sector over the past several years and will continue to garner attention, although a number of recent developments have lowered expectations in the industry. In particular, genomics and proteomics have promised a wealth of new drug development opportunities, but the timelines for these discoveries are being pushed further out. The questionable quality of certain drug pipelines, manufacturing constraints, and slowing FDA review times has also hampered the industry’s overall progress. Emerging areas to watch in the biotechnology sector include bioinformatics, proteomics, combinatorial chemistry, high-throughput screening (HTS), and biochips.

Specific sector highlights include:

Demand for biotechnology pharmaceuticals is projected to have yearly gains of 12.8% reaching a value of $42.6 billion by 2007.

Sub sectors of biotechnology pharmaceuticals include blood modifiers, hormones and related agents, antiviral agents, and other biotech pharmaceuticals (anti-inflammatory products, etc.). All sectors are expected to grow through 2007.

Applications for biotechnology drugs include the treatment of cancer, HIV/AIDS, Dialysis, Arthritis, Hepatitis, Diabetes, and Hemophilia. Again, all these applications are expected to grow through 2007 with arthritis applications growing the fastest with over 20% overall growth

Source: Freedonia, June 2003 and Standard and Poor’s

Pharmaceuticals. North America is not only the largest but also the fastest growing pharmaceutical market in the world. The strength of the U.S. pharmaceutical industry is attracting a steady influx of investments from foreign drug companies eager to share in the projected growth of the market. Although the demographic profile of an aging population and the rising incidence of chronic diseases will result in continued growth for the industry, the pharmaceutical industry’s profit growth is expected to slow over the next few years. Margins are likely to come under pressure from intensifying price constraints, a massive wave of patent expirations, and marked decline in research and development productivity. Despite these pressures, the pharmaceutical industry continues be a strong segment. Companies are investing heavily in research and development and forming partnerships with smaller biotech firms to develop new generations of drugs. However, the major new wave of biotechnology drugs may still be many years away. Merger and acquisition activity is expected to heat up again in the industry to pre-2001 levels.

Healthfoods. Healthfoods deserve special attention due to the explosion of interest and demand for this sector over the past few years. Products included in the healthfoods sector include artificial sweeteners, organic products, slimming aids, sports/health drinks, vitamins, and dietary supplements. Fueled by the strong economy prior to 2001 and increasing health consciousness among Americas, the market has increased by 51.3% over the past five years. The healthfood industry is concentrated with companies like American Home Products and General Nutrition dominating the market. Consolidation and new product development are two trends seen in this sector. The healthfood market is forecast to continue healthy growth with the most dynamic growth expected in organic products.

Industry Importance Factors

What factors do biotech companies weight the highest in business concerns and location considerations? Understanding the industry, how it works, and the current business environment will guide us to the answer. Below is a table of site location factors as related to the different sectors of the biotech services industry and a discussion of the most important factors.

Site Location Factors


283
Drugs

873
Research & Testing

Access to Markets



Geographic Proximity

High

High

Transportation Svcs Cost-Goods

High

High

Transportation Svcs Avail-Rail

Low

Low

Transportation Svcs Avail-Truck

Low

Low

Transportation Svcs Avail-Water

Low

Low

Transportation Svcs Avail-Air

Low

High

Telecommunications Services

Low

Medium

Access to Resources



Energy Dependability

High

High

Energy Cost

Low

Low

Water Availability/Cost

Low

Low

Raw Materials

Low

Low

Intermediate Mfg Products

High

High

Business/Prof/Tech Svcs

High

High

Work Force



Executive, Administrative & Managerial

Medium

Medium

Professional Specialty

Medium

High

Technical

Medium

High

Sales

Low

Low

Administrative Support

Low

Medium

Service

Low

Low

Farming, Forestry & Fishing

Low

Low

Precision Production & Repair

Medium

Low

Operators & Assemblers

Medium

Low

Handlers, Equipment Cleaners & Laborers

Medium

Low

Transportation & Material Moving

Low

Low

Effective Cost of Skilled Labor

High

High

Effective Cost of Unskilled Labor

High

High

Reliability

Medium

High

Land Availability

Low

Low

Land Cost

Medium

Low

Built Space Availability

High

Medium

Built Space Cost

High

Medium

Construction Costs

Medium

Low

Financial Capital



Seed

Low

Low

Debt

High

Medium

Venture

High

Medium

Public Sector Impacts-Invest



S/L Government Quality

Low

Low

Secondary Education Quality

Medium

Medium

Higher Education Quality

Medium

Medium

Local Transport/Commuting

Low

Low

Water/Wastewater Systems

Low

Low

Business Incentives

Low

Low

Public Sector Impacts-Costs



Regulatory Policies

High

Medium

Worker Compensation Costs

Medium

Medium

Unemployment Insurance Costs

Medium

Medium

Business Taxes

Medium

Medium

Quality of Life



Cost of Living (ex Housing)

Low

Low

Housing Costs

Medium

Medium

Personal/Property Security

Medium

Medium

Climate/Physical Environment

Medium

Medium

Recreational/Cultural Opportunities

Low

Low

Area Image

Medium

Medium

Source: Applied Economics, Scottsdale, AZ

The site location factors that are most important to the biotech industry have been identified. The analysis is based upon 51 key site location factors in seven major categories including access to markets, access to resources, workforce, real estate, financial capital, public sector impacts, and quality of life.

With pharmaceutical companies, the cost of skilled labor, reliability and the availability of professional and technical skilled employees are of high importance. Along the same line, secondary and higher education quality is a significant concern for the pharmaceutical industry. Access and proximity to a research university also plays a role in location decision. This will work well with the location of Winston-Salem and UNC. When looking at the needed pharmaceutical workforce, scientists, technicians, machine operators, and managerial/administrative occupations are at the top of the list.

The medical products sector has distinctive differences from the pharmaceutical sector in important workforce skills. They have moderate need for technical professionals and a high need for a skilled precision production and repair labor force as well as available operators and assemblers. As with pharmaceuticals, the cost of labor is a major expense and, therefore, a priority for medical products companies. Additionally, an available quality education program is an important factor for the medical products industry. For the most part, the medical products sector does not necessarily have the same need to locate near research university or hospital environments. The needed workforce for the medical products sector includes scientists, technicians, machine operators, and managerial/administrative occupations.

The medical products and the pharmaceutical sectors have similar important site location factors when looking beyond workforce needs. Geographic proximity to a supplier and customer base and transportation costs of goods are central factors while the availability of air services holds moderate importance. Energy dependability is ranked high in all areas of medical products and pharmaceuticals since they involve very precise, high-tech production or operations in many cases. Access to production inputs, specifically intermediate manufacturing products, is also ranked high across the board. Real estate costs and availability show importance primarily in built space and an incubator environment. Regulatory policies as well as taxes, worker compensation costs, and unemployment insurance costs are of moderate importance to the industry. The medical industry is steeped in regulation, and those regulations continue to have major influence. Quality of life factors, as with healthcare services, are becoming more and more key to location and expansion decisions. Attracting the skilled labor needed for the medical industry is linked to the available quality of life. Overall operating costs for medical products industries will be a factor in the location decision given that cost pressures are evident in every sector.

Design Industry

Definition

The research to identify companies in the Design industry will focus on key word searching of detailed product description within the following SIC Codes:

Further definition by SIC Code:

Advertising

7311 Advertising agencies

7312 Outdoor advertising agencies

7319 Advertising

7336 Commercial art and graphic design

738903 Advertising, promotional, and trade show services

738915 Lettering and sign painting services

Film and Video

7335 Commercial photography

733602 Film strip, slide and still film production

7812 Motion picture and video production

7819 Services allied to motion pictures

7822 Motion picture and tape distribution

7829 Motion picture distribution services

Software Design

7371 Custom computer programming devices

7372 Prepackaged software

7373 Computer integrated systems design

7379 Computer related devices

Engineering and Architectural Services

738906 Interior design services

8711 Engineering services

8712 Architectural services

Creative and Performing Arts

7911 Dance studios, schools, and halls

7922 Theatrical producers and services

7929 Entertainers and entertainment groups

899901 Artists and artists’ studios

899902 Art related services

899903 Commercial and literary writings

899904 Song writings

Miscellaneous design including fashion and industrial design

738918 Design services

NAICS Equivalents:

Advertising

54181 Advertising agencies

54185 Display advertising

54143 Graphic design services

Film and Video

51211 Motion picture and video production

51212 Motion picture and video distribution

512191 Teleproduction and other post production services

512199 Other motion picture and video industries

541922 Commercial photography

71151 Independent artists, writers, and performers

Software Design

541511 Custom computer programming

51121 Software publishers

541512 Computer systems design services

541519 Other computer design services

Engineering and Architectural Services

54133 Engineering services

54131 Architectural services

54141 Interior design services

Creative and Performing Arts

71111 Theater companies and dinner theaters

71112 Dance companies

71113 Musical groups and artists

71119 Other performing arts companies

71151 Independent artists, writers, and performers

71399 All other amusement and recreation industries

Miscellaneous design including fashion and industrial design

54142 Industrial design services

54149 Other specialized design services

Industry Overviews and Current Trends

The majority of the available trends tend to follow the larger, more defined clusters within the design industry. These clusters include advertising, film and video, software design, and engineering and architectural services. Overall, the Internet and new digital technologies will drive much of the growth within design sectors. A specific look at trends shaping each design cluster follows.

AdvertisingCompanies within the advertising industry primarily plan and create advertising campaigns for their clients and place advertising in television, radio, magazines, newspapers, direct mail, outdoor displays, and interactive electronic media. Advertising firms fall into two categories-- general advertising agencies and boutique shops. General advertising agencies plan and create marketing campaigns and place clients’ advertisements in the media. Boutique shops specialize in one area of the advertising agency. Examples of boutique shops include sales promotion, direct marketing/direct response, public relations, branding/logo/identity consultants, field marketing, interactive (Internet based), specialty, and sports marketing services. Often companies in these two categories operate under a larger holding company in order to offer the services of a full-service agency to their clients. As the name implies, a full-service agency can offer the whole advertising process to a client from creative work to production work to media planning and buying to post-buy analysis.

Growth within the advertising industry is likely to occur internationally as more and more clients expand their products and services overseas. Another growth strategy for advertising firms is to enter into or expand advertising markets and services through acquisitions. Trends likely to impact this industry include the proliferation of media. There are literally thousands of target groups for advertisers to reach now through multiple media channels. Some of these channels include the Internet (computers, laptops, cellular phones, handheld devices, etc.) and cable television. The types of media that advertisers can use to reach consumers have exploded. Examples include home shopping television networks, direct television infomercials, video game advertising, compact disc (CD) and digital videodisc (DVD) advertising, and sales/informational kiosks in retail and other environments.

Film and Video. The film and video sector focuses primarily on motion picture and television programming creation and distribution. There are seven major Hollywood studios in the motion picture production industry. They are Fox Filmed Entertainment, MGM, Paramount Pictures Corporation, Sony Pictures Entertainment, Universal Pictures, Walt Disney Studios Entertainment, and Warner Brothers. Over the past few years, independent films, traditionally known as movies not produced by the seven major studios, have had increasing success at the box office. However, many of the independent studios are affiliated and/or receive some assistance from the seven major studios. The motion picture industry can be broken into two sectors-- the new release sector and the re-release sector. The new release sector is by far the largest sector with a 92% market share in 2001. It is expected to grow 23.5% through 2006 to a value of $10 billion. The re-release sector, while much smaller, is forecast to grow 25% through 2006 to a value of $1 billion. The continued consumer acceptance and adaptation of the DVD along with the lower cost of re-releases will drive the re-release sector. Both in production and distribution, digital technology will have a huge impact within the industry over the next few years. Digital filmmaking is cheaper, allows for more creative freedom, and speeds up the production process. From a distribution standpoint, videos on demand delivered over a broadband Internet connection will greatly impact the industry over the next few years.

The television production industry is still dominated by four major broadcast networks-- ABC, CBS, NBC, and FOX; however, their market share continues to erode as more and more consumers turn to cable and satellite television for original programming. Digital applications such as TiVo, which records television programs to a high capacity hard drive rather than a much lower capacity video tape, will make great inroads into the television industry as consumers will be able to create their own viewing schedules. This will influence network television’s ability to delivery a particular audience to advertisers at a scheduled time.

Future growth in the industry will depend on the development of new ways to deliver programming to consumers. New delivery methods will encourage consumers to spend more to obtain a higher quality product, greater convenience, and more entertainment choices. Nostalgia-based programming will also see growth. According to projections for the U.S. Census Bureau, the portion of the U.S. population in the 45-to-64 year-old age bracket is expected to increase 20% in the next decade. This is much faster than the 9% rise projected for the overall population.

Software Design. Software design is a broad category including programming, software, and internet services. There are indications the industry’s downward cycle over the past few years may have reached a turning point in the first quarter of 2003, and a recovery is in process. For example, 88% fewer Internet companies failed in the first quarter of this year as compared to the same period in 2002.

As more and more companies learn how to apply the technological advances and innovations of the last few years, the potential for economic growth is enormous. Communication and information technology plays a large role in the production of knowledge and knowledge-based trends continue to affect business globally. The rate of innovation allowed by these technologies will create an increasing pace of business. The emerging technologies are too numerous to name, but we will take a closer look at this sector. There are specific industry modes of operation and trends that will help in understanding this dynamic sector.

Software. The Internet continues to play an important, if not dominant, role in the software industry as trends like online banking and payment systems, intranets and extranets, new programming languages, and e-commerce drive growth within the industry helping to create opportunities for companies focused in these areas. The increase in new non-PC devices (PDAs and mobile phones) to access the Internet will also drive new software development. As computer networks continue to be popular among businesses, software products that enhance network operations and capabilities should continue to sell as well. The move from a mainframe model to a client/server model has benefited those software companies involved in systems management software and middleware; both of these sectors are expected to see rapid growth as a result. However, despite the increase in networked PC’s, the market for mainframe software is strong and is expected to remain so. Mainframes are still more cost effective and better equipped to handle large, transaction-oriented applications such as payroll, and organizations have already invested large amounts of money in mainframe software applications guaranteeing the survival of such software for some time.

Currently, there is an ample supply of labor available in the industry as the economic slowdown forced many software companies to reduce their workforces; however, as the economy rebounds, the industry will again be hurt by a shortage of skilled workers. Other overall trends for the industry include increased merger and acquisition activity as the industry recovers and the plague of software piracy.

Computer Services. In general, the U.S. government, financial and insurance services, and healthcare insurance services are key markets for computer services companies. The computer services industry can be broken down into two primary categories-- professional services and processing services.

Professional services focuses on systems integration, custom software programming, outsourcing, and consulting and training. Systems integration is the creation of customized computer systems integrating various business functions. The U.S. Government is the largest user of systems integration services, and with the creation of the Department of Homeland Security and emphasis on fighting global terrorism, this sector should see substantial growth. In the private sector, competition amongst Fortune 500 companies is continuing to drive the demand for lower operating costs, which is leading to increased demand for customized systems integration services. Hardware vendors and the major accounting firms will be the largest beneficiaries. Custom software programming is used for companies either lacking skilled personnel or companies that need temporary skilled programmers for projects. Demand for these services is expected to continue; however, many companies are turning to prepackaged software options and systems integration to meet their programming needs. Rather than paying for expensive programming, many companies may only need to make minor programming modifications to these prepackaged options. One sector of the software industry likely to grow by leaps and bounds is enterprise resource planning (ERP). ERP systems typically automate complex back-office functions such as supply chain management. Recently, now that companies have successfully automated back-office operations, companies are focusing on front-office concerns such as sales automation. Outsourcing is hiring a computer services company to perform a company’s data processing and data management tasks. Outsourcing can include facilities management (data center is managed on-site), remote computing (data processing done off-site), and communications network management. Because outsourcing can significantly reduce a company’s data processing costs and help save on taxes, this sector will continue to grow. As technology continues to become more and more complex, there will also be demand for consulting and training services.

Processing service firms collect, organize, and store a company’s transactions and other data for record-keeping purposes. In most cases, these firms use their own computer facilities and software. Processing service firms fall into three categories: transaction processing, timesharing, and information services. Transaction processing is simply the outsourcing of back-office functions like payroll, insurance claims, and financial information. Payroll processing is likely to increase in demand, although this business is susceptible to the state of the economy. As unemployment increases, the demand for payroll processing decreases. However, the demand for insurance claims and financial information processing is expected to significantly increase. Timesharing is selling the use of a mainframe or other large computers for a period of time. Currently, this is not a big sector with only a small number of companies using these services. Information service firms provide access to and update proprietary information databases. As global competition continues to impact companies, access to timely and accurate information will become increasingly vital.

Internet. Freezes on IT spending, an uncertain economy, the threat of terrorism, and untrusting investors have hit Internet companies hard in the past years. However, the young industry has benefited from substantial market rationalization which has allowed the companies that survived the dot-com bust to emerge stronger and wiser. There are several Internet sectors likely to perform well in the next few years. These include online music sites like Apple Computer’s iTunes Music Store, search services like Google, auction sites like eBay, and travel sites like Orbitz.

Engineering and Architectural Services. Currently, residential buildings are the largest sector in the U.S. engineering and construction services market with nearly 44% of the total market value in 2002. However non residential buildings were the fastest growing sector growing 39% from 1998 through 2002. Major engineering companies include Bechtel Group, ABB Limited, Shaw Group, Jacobs Engineering Group, and Fluor. In general, the U.S. engineering and construction services market is expected to grow about 26% between 2003 and 2007. Public construction by the government, due to road maintenance and repair, is expected to drive a 27% growth rate from 2003 to 2007. However, market performance is heavily dependent on the overall U.S. economy, interest rates, inflation rates and government spending devoted to public construction.

Engineering and construction firms’ ability to attract and retain qualified engineers will be an important factor in determining future success. A science and engineering (S&E) brain drain is in full swing in businesses across the country. Turnover is high, the availability of young talent is declining and experienced talent is retiring early, says The Garrity Group Inc., a marketing/media organization located in St. Paul, Minn. More than a quarter of a million extra engineers are needed to keep pace with rising demand over the next decade according to research by the Department of Education and Employment. Much has been discussed about manufacturing jobs moving from the United States to overseas, but engineering and other technical white-collar jobs are also facing a migration of jobs to international locales in order to find enough engineers to satisfy their needs. India, Eastern Europe and other countries are providing highly educated and technically able staff that will work for a fraction of U.S. wages. There is also a trend to outsource engineering functions which will only encourage more jobs to be shipped offshore.

Industry Importance Factors

This section looks at the site location factors and occupational needs required for companies in the design industry. One of the most important site location factors for the majority of sectors in the design industries is the effective cost of both skilled and unskilled labor. Quality of life is extremely important to engineering firms, architectural firms, motion picture distribution, and advertising firms. As the design industry is part of the services sector of our economy, geographic proximity to market is vital. A skilled workforce is essential to all sectors of the design industry. Especially required are executive, administrative & managerial, professional specialty, and technical skills. Other critical site location factors for the design sectors include energy dependability, land cost and availability, and worker compensation and unemployment insurance costs for the motion picture industry, built space cost and availability, and the quality of secondary and higher education for engineering and architectural firms. High quality secondary and higher education is also a requirement for sectors of the motion picture industry and advertising agencies.

 

731 Advtsng. Agencies

733 Direct Mail Advertising

737
Comp.Services

7389 Misc. Bsns. Services

7812 Motion Picture Production

7819 Services Allied to Motion Pictures

782 Motion Picture Distribution

8711

Engrng.

Firms

8712

Archturl.

Firms

Access to Markets

                 

Geographic Proximity

High

High

High

High

Medium

Medium

High

High

Medium

Transportation Svcs Cost-Goods

Low

Low

Low

High

Medium

Medium

Low

Low

Low

Transportation Svcs Avail-Rail

Low

Low

Low

Low

Low

Low

Low

Low

Low

Transportation Svcs Avail-Truck

Low

Low

Low

Low

Low

Low

Low

Low

Low

Transportation Svcs Avail-Water

Low

Low

Low

Low

Low

Low

Low

Low

Low

Transportation Svcs Avail-Air

Low

Low

Low

Low

Low

Low

Low

Low

Low

Telecommunications Services

High

High

High

Medium

Medium

Medium

High

High

High

Access to Resources










Energy Dependability

Low

Low

High

Low

High

High

Low

Medium

Low

Energy Cost

Low

Low

Medium

Low

Low

Low

Low

Low

Low

Water Availability/Cost

Low

Low

Low

Low

Low

Low

Low

Low

Low

Raw Materials

Low

Low

Low

Low

Low

Low

Low

Low

Low

Intermediate Mfg Products

Low

Low

Low

Low

Medium

Medium

Low

Low

Low

Business/Prof/Tech Svcs

Medium

High

High

Low

Medium

Medium

Medium

Low

Low

Work Force










Executive, Administrative & Managerial

High

High

Medium

Low

High

High

Medium

Medium

Medium

Professional Specialty

Medium

High

Medium

Low

High

High

High

High

High

Technical

Low

Low

High

Low

High

High

Medium

High

High

Sales

Medium

Low

Low

Low

Medium

Medium

Medium

Low

Low

Administrative Support

Medium

High

Medium

Medium

High

High

Medium

Low

Low

Service

Low

Low

Low

High

Low

Low

Low

Low

Low

Farming, Forestry & Fishing

Low

Low

Low

Low

Low

Low

Low

Low

Low

Precision Production & Repair

Low

Low

Low

Low

Low

Low

Low

Low

Low

Operators & Assemblers

Low

Low

Low

Low

Medium

Medium

Low

Low

Low

Transportation & Material Moving

Low

Low

Low

Low

Medium

Medium

Low

Low

Low

Handlers, Equipment Cleaners & Laborers

Low

Low

Low

Low

Low

Low

Low

Low

Low

Effective Cost of Skilled Labor

Medium

High

Medium

High

High

High

Medium

Medium

Medium

Effective Cost of Unskilled Labor

Medium

High

Medium

High

High

High

Medium

Medium

Medium

Reliability

Low

High

Medium

Medium

High

High

Low

Low

Low

Space










Land Availability

Low

Low

Low

Low

High

High

Low

Low

Low

Land Cost

Low

Low

Low

Low

High

High

Low

Low

Low

Built Space Availability

Medium

Medium

Medium

Medium

Medium

Medium

Medium

High

High

Built Space Cost

Medium

Medium

Medium

Medium

Medium

Medium

Medium

High

Medium

Construction Costs

Low

Low

Low

Low

High

High

Low

Low

Low

Financial Capital










Seed

Low

Low

Medium

Low

Low

Low

Low

Low

Low

Debt

Low

Medium

Medium

High

Low

Low

High

Medium

Medium

Venture

Low

Low

Medium

Low

Low

Low

Low

Low

Low

Public Sector Impacts-Investment










S/L Government Quality

Low

Low

Low

Medium

Low

Low

Low

Low

Low

Secondary Education Quality

High

Medium

High

Medium

Medium

Medium

High

High

High

Higher Education Quality

High

Low

High

Low

Low

Low

High

High

High

Local Transport/ Commuting

Medium

Medium

High

Medium

Medium

Medium

Medium

Medium

Medium

Water/Wastewater Systems

Low

Low

Low

Low

Low

Low

Low

Low

Low

Business Incentives

Low

Medium

High

Low

Low

Low

Low

Low

Low

Public Sector Impacts-Costs










Regulatory Policies

Low

Low

Low

Low

Medium

Medium

Low

Low

Medium

Worker Compensation Costs

Low

Low

Medium

Medium

High

High

Low

Low

Low

Unemployment Insurance Costs

Low

Low

Medium

Medium

High

High

Low

Low

Low

Business Taxes

Medium

Low

Medium

Low

Medium

Medium

Low

Medium

Medium

Quality of Life










Cost of Living (ex Housing)

High

Low

High

Low

Low

Low

High

High

High

Housing Costs

High

Low

High

Low

Low

Low

High

High

High

Personal/Property Security

High

Medium

High

Low

Low

Low

High

High

High

Climate/Physical Environment

High

Low

High

Low

Low

Low

High

High

High

Recreational/Cultural Opportunities

High

Low

High

Low

Low

Low

High

High

High

Area Image

High

Low

High

Low

Low

Low

High

High

High

Source: Applied Economics, Scottsdale, AZ