ST. PAUL, MN (December 1, 2004)- By this time the last thing you need is one more industry wag telling you that 2005 looks great. It's been so long in coming that the recovery of the power products market is almost anti-climatic. Just in case your name is Rip Van Winkle, let's say it one more time - the year ahead looks great for all sectors of the power products industry! We will find issues to wring our hands about, but most of them will involve getting things out the door and using this opportunity to optimize income and capture market share. By the way, competition is not going to let up in the least!

North American markets are strongly on track for profits as growth for engine shipments and installations in North American markets is expected to be up by more than 9% in 2005. As 2004 comes to a close, consider the inertia behind the current market for North American produced products:

• Fourteen consecutive quarters of increasing economic productivity
• Capacity utilization in excess of 81% and growing faster than the late 1990's
• Corporate profits at record levels
• Dollar exchange rates at 10-year lows
• Public works spending at 20-year highs
• Energy costs are at high levels and increases in driving preferences amount to high efficiency

We could go on, but the point is this market is set up for more jobs, more construction work, plant expansions, capital equipment purchases, strong foreign sales and with new emission deadlines there will be more work for engineers and technology investment. Whew! It just doesn't get any better.

North American trends in most sectors show on average a unit horsepower increase. As a result we see output in total horsepower growing faster than units. The result is that the $16 billion original equipment engine market will grow by almost 15% in 2005.

On Highway

Heavy trucks have always led the way into market recoveries. How is 40% to get things started? That is how much class 8 truck shipments increased in a year when new emissions limits kicked in. Truck shipments are up overall and some interesting changes include the shifting shares among various weight classes. New vehicles and new power train options are fueling strong growth in the class III and IV sectors for delivery vehicles. Light vehicle diesels are in the pipeline and will sustain some momentum compared to the SUV and light truck sectors that ultimately are affected by higher fuel costs. Even North America car and light truck shipments are holding steady despite five years of unusually strong incentive laden sales. What is interesting is that new vehicles from both domestic and transplant manufacturers are capturing a bigger share of the market and several new announcements of new or expanded engine production capacity are emerging. This means that North American produced engines for on highway installations will grow by 10% in 2005.

Agricultural Machinery

Farmers had a good year in 2004 and equipment replacements are strong as the year ends. Low interest rates and the threat of rates going higher are making current purchases attractive. One interesting aspect in agricultural machinery has been the continued strong growth of small tractor imports from Eastern Europe and Latin America. The trend to fewer and bigger units on the farm continues, but we expect shipments in the industry to be up by 12% in 2005.

Construction and Industrial

Public works construction has been strong throughout the past year in all regions of North America. The public sector will be there again in 2005 and commercial construction is expected to grow strongly as well. Factories and offices are filling up and capital equipment spending on items like forklifts and utility vehicles will benefit. It is hard to imagine that the housing market can be sustained in the face of rising interest rates. We expect this process to slow a bit and thus slow the growth in demand for light equipment as well. Nonetheless, shipments will increase in the year ahead by about 5% for light equipment and 13% for heavy equipment. Materials handling shipments are also expected to be up by 18% in 2005.

Power Generation

Year-over-year increases of 35% to 40% have been reported by North American producers during 2004. We expect another strong performance out of these producers in 2005. Our PowerTracker™ survey estimates shipments should grow nicely in the next 12 months. Inventories are now well under control and for many power ranges backlogs are long and growing. Supply problems for both alternators and engines in this sector are the biggest topic of concern. Rising energy costs have also played into the hands of the marginal cogeneration applications. The growth in power generation has been spurred on by a booming energy sector, heavy commercial construction, strong exports and continued concerns over grid reliability. Even without gen set activity from hurricanes, wars and other natural disasters, gen set shipments from North American based producers will be up by 20% in the coming year.

Power Sports, Marine & Lawn & Garden

A better economy will push demand for leisure products but higher interest rates - higher monthly payments - will be a bit of a damper for this market. The growth in interest rates will still not be enough to stall this sector in the coming year though and we expect shipments to be up 4% overall. ATV's are providing the biggest growth in numbers, utility vehicles are providing the biggest growth rates and motorcycles are once again providing the biggest growth in dollars. Motorcycle growth rates are slowing though - you can get a Harley these days. Some innovative products like sport boats are estimated to be up 30% in the year ahead according to dealers. On the commercial side, the strong energy sector and increased inland waterway traffic will increase demand by 15% in 2005.

Opportunities and Challenges

It is difficult to produce any market commentary about the power products industry these days without mentioning two subjects: China and emissions. We do not think 2005 will be the year we see a big impact from Chinese imports, but look around a bit and you will find the early signs of a coming tide. Major engine producers have established themselves in China, but Chinese companies are also looking toward North America with products that look an awful lot like Honda's and Yanmar's. Equipment OEM's are trying to decide if they should be moving production into China or ramping up sourcing from China. All players need to be proactive in their thinking about how they should react to initiatives and strategies emerging in China.

Changes in emissions regulations mean that within the next five to six years North American OEM's will be installing more than 1 million diesel particulate filters per year into their products. This represents a major technology shift and a more than $1 billion per year market. We all like to groan about the huge cost impact of emissions regulations but let's face it - the push these requirements give to technology is tremendous. Once electronics and sophisticated materials are on board we suddenly find all kinds of other productive uses for these capabilities and the results are evident. The environment around us and productive advantages of new equipment will be improved, which will result in an increase in the quality of life for everyone who starts an engine.

As 2005 comes over the horizon, we see big opportunities for companies in the power products industry in North America and even abroad. We are going to see an amazing increase in business initiatives in the year ahead. Come to think of it, let's say it one more time - 2005 will be a successful year for the power products industry!

Power Systems Research is a global market research and consulting company specializing in the engine, original equipment, and components industries. Since the company was founded in 1976, Power Systems Research has been the authoritative source of market information and business intelligence to the power products and drivetrain industry. Power Systems Research is headquartered in St. Paul, Minnesota and provides market data and customized project work to the world's leading vehicle and equipment OEMs and component suppliers. The company has a global presence with operations in Detroit, Brussels and Tokyo. Further information is available at http://www.powersys.com.