"Industry Insight" is a weekly series that examines sectors through what's known as the five forces of competition, which can help separate the winners from the losers. Come back every Monday to see which industries and companies will be put under review.
FAIRFIELD, Conn. (
) -- Green technology had been gaining traction before the economy melted down last year, but the movement was low on funds. Ironically, government aid meant to reverse the recession may restart the revolution.
The U.S. and China have injected more than a trillion dollars into their economies. China has earmarked 21% of its $585 billion in stimulus for power transmission and recently ordered transformers from Germany-based
for an estimated $426 million. Orders of this size will likely stoke profits for makers of industrial electrical equipment.
Thirty years ago, Michael Porter of the Harvard Business School in Boston described five forces that influence competition. Let's use them to size up makers of electrical equipment.
Degree of rivalry:
In this industry, Siemens competes with big players such as
of Fairfield, Conn., and
of Switzerland. GE produces everything from reactors to wind turbines, while ABB mainly deals in the nuts and bolts of power generation and transmission.
The number of huge companies in this field makes it seem crowded, but there are more than enough large-scale projects in the world to keep the major firms fed. With an average return on equity of more than 20% and an average profit margin of 10%, it's clear these companies are profiting despite the competition.
Bargaining power of customers:
In other industries, companies are liable to cut their prices as they compete for jobs. This is less likely to happen with industrial electrical equipment. These products are highly specialized and technical, making it difficult for customers to find comparable products at lower prices. And because these products have relatively few buyers, their prices are less likely to be pushed down by free-market forces.
Bargaining power of suppliers:
Companies that provide parts and materials to these firms have little negotiating power. The components used in these complex electrical systems have little value until they're part of the finished product. Suppliers of the raw components are a dime a dozen and can easily be replaced.
The complicated nature of this equipment would also make it difficult for suppliers to cut out the middlemen and sell directly to end customers. These suppliers usually lack the skill and sophistication to build these products.
Threat of new entrants:
Siemens and GE have dominated this industry for decades. To run with the big boys, a new company would need an impressive war chest and lots of cash.
With hundreds of millions of dollars at stake, governments look for companies with proven track records and dependable products. Upstarts wouldn't have the credibility and connections of established firms.
Threat of substitutes:
Hot new technologies, such as those in green energy, would pose a threat to an industry leader that lacks a competing product. In solar equipment, for example, companies like
are becoming more viable as their technology becomes cheaper.
With talks of creating massive solar fields in North Africa and the American Southwest, solar companies may soon have the juice to compete with traditional power sources on price and performance. If that becomes a reality, competition might become tight, but the major firms would have the capacity to develop their own brands of solar technology.
Demand for industrial electrical equipment is building even as the economy lumbers along. When the economy turns the corner, these products will sell at a breakneck rate as countries and companies restart tabled projects, making this industry a hot place to invest.
-- Reported by David MacDougall in Boston.
Prior to joining TheStreet.com Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level II CFA candidate.