January 2010 - 2010 SURVEY METHODOLOGY
FFJournal e-mailed surveys to 1,249 fabricators and 1,241 OEMs in October 2009. Out of the 99 surveys that were opened, we received a response rate of 52 percent, or 51 total usable returns. By industry sector, we received usable responses from 21 fabricators and 30 OEMs.
Those surveyed were randomly selected on an nth-name basis from the circulation of FFJournal. Fabricators FFJournal used: fabricated metal products (including metal cans and shipping containers; cutlery, hand tools and general hardware; heating equipment and plumbing fixtures; fabricated structural metal products; screw machine products (bolts, nuts, screws, rivets and washers); metal forgings and stampings; coating, engraving and allied services; ordance and accessories; and miscellaneous fabricated metal products).
OEMs FFJournal used: machinery, except electrical (including engines and turbines; farm/garden machinery and equipment; construction, mining, materials handling machinery and equipment; metalworking machinery and equipment; special industry machinery; general industrial machinery and equipment; computer and office equipment; refrigeration and service industry machinery; and miscellaneous industrial and commercial machinery and equipment); electric and electronic equipment (including electric transmission and distribution equipment; electrical industrial apparatus; household appliances; electric lighting and wiring equipment; household audio and video and audio recordings; communications equipment; electronic components and accessories; and miscellaneous electrical machinery, equipment and supplies); transportation equipment (including motor vehicles and motor vehicle equipment; aircraft and parts; ship/boat building and repairing; railroad equipment; motorcycles, bicycles and parts; guided missiles and space vehicles and parts; and miscellaneous transportation equipment).
Job titles surveyed included corporate officials, president-owner, vice president, general manager, treasurer-secretary, controller, chief engineer, plant manager, production superintendent, department managers, chief metallurgist, chief chemist, engineers, metallurgists, designers, production men, chemists, supervisors, foremen, and purchasing and sales personnel.

In 2009, the down economy spurred a lot of talk--and not just conversations around the watercooler. Companies communicated with both partners and competitors regarding business conditions and strategies.

Throughout the year, FFJournal talked to fabricators and OEMs and discussed the economic environment, as well as what it meant for the health and future of the industry. It was an unprecedented year, and as time passed, the tone of our conversations became more upbeat.

The results of our Fourth Annual Industry Survey suggest the worst is behind us. Fabricators and OEMs had a lot to say regarding the events of 2009, but in general, their outlook is positive. Markets that consistently posted down numbers all year started to show signs of a turnaround.

Ninety-five percent of surveyed fabricators said they expect orders to increase or stay the same in 2010. For OEMs, it was 97 percent.

When FFJ’s survey was taken in October 2009, the PMI posted a three-year high of 55.7, a welcomed increase from the year-to-date average, which was 44.3. The gains were propelled by orders, as well as exports.

Jerry Leary, president of Koike Aronson Inc. (Ransome), Arcade, N.Y., a supplier of advanced cutting machines, welding positioning equipment, portable welding and cutting machines, and gas systems, says he anticipates orders to continue growing.

"We look at increases from two areas," he says. "Our base business, less new products, is looking at a 4 percent increase in [welding] positioners and cutting machines. Then we’re looking for an additional 13 to 14 percent increase in business from our new products, such as the waterjet machine, new beveler, Plate Pro Extreme and the anti-drift device for positioners."

Numbers like 14 percent are a departure from what FFJ’s audience was looking at last year. In December 2008, the PMI plummeted to 32.9. As of press time, the November 2009 PMI had tapered off a bit from the October high, but according to survey results, the majority of respondents have a positive outlook for 2010.

"We’ve held up pretty well in a rough year, but we’re hopeful that next year will be a better year than this one," says Stewart Cramer, president of LAI International Inc., Scottsdale, Ariz., a large precision fabricator that specializes in aerospace, power generation, defense, medical, electronics and other advanced technology industries. "We’re starting to see some larger volumes and new orders. Next year looks better than 2009, and 2011 looks better still. We’re always optimistic about the future."

Finding quality labor
With baby boomers getting closer to retirement, the past few years have been filled with concern regarding where labor will come from and whether that labor will be qualified. For 2010 at least, some of those workers will come from other industries that are shedding numbers for recessionary reasons. With layoffs happening elsewhere, the burden of filling spots is lessened.

"It’s been easier to find skilled employees lately because the people who are in those skilled positions in other companies are losing their jobs because companies are closing and because there are fewer hours at those companies," says John Baker, president of General A & E, Hackensack, N.J., a small precision metal fabricator specializing in military, aerospace and high-tech commercial industries. "Some of them are concerned, particularly those who have been put on three- or four-day weeks, for their job security."

The responses regarding the difficulty of finding qualified engineers and computer work personnel reinforces the idea that widespread layoffs have increased the number of these employees seeking work. Last year, 80 percent of fabricators said it was very difficult to fill computer personnel spots, whereas this year, not a single respondent said the same. Filling the shoes of machine operators, however, continues to pose challenges.

"It’s still difficult to find people who are in those positions in the factory that are highly skilled because a lot of companies that employ these people now want to keep a core of highly skilled people at their firm, and they’re protecting those specific people," Baker explains. "At my factory, we have, let’s say, a dozen different types of machine operators. There’s only one type, the press brake operators, who set up machines to bend metal, and those are the only ones that we’re having great difficulty finding. Although it’s possible to do it, and it’s a little easier than it was before, it’s still difficult."

Leary agrees that the labor situation isn’t as severe as it has been, but he recognizes the special circumstances, such as displaced engineers from other industries, that could be a temporary solution. "As the economy gets better, I think it’s going to be more difficult [to fill these spots] because prior to 2009, it was the most difficult position to fill," he says. "We look for both mechanical and electrical engineers, with electrical being the most difficult to fill right now."

When the pool of potential employees is shallow, training can act as a safety net for concerned employers.

In terms of machine operators, Leary says he doesn’t foresee problems because of newly established in-house training initiatives.

"We’ve implemented a machinist apprenticeship program that works out well for us," he explains. "The person will have a journeyman’s certificate at the end of a four-year program. We work with several of the local high schools and technical schools to administer this program."

Starting small
Although the survey doesn’t indicate a substantial increase of in-house training programs, many respondents are participating in programs that target young adults long before they ever hit the workforce.

"The other thing that you hear about in our industry is the need to get kids into science, technology, engineering and math," says Cramer. "The average age in the aerospace industry is in the upper 40s. An entire generation is getting ready to retire, and there isn’t a large enough worker population coming up behind them to replace them. To bring today’s kids into technical fields, we need to inspire them. I was inspired by the Apollo programs as a kid. I remember it extremely well, and it’s what drove me and many of my college classmates into aerospace engineering. We need similar projects today."

Roger Sustar, president of Fredon Corp., Mentor, Ohio, a job shop that produces precision machined parts for aircraft, aerospace, defense, locomotive and medical applications, feels the same way. He also believes parents are integral to showing young people the opportunities that are available in the metals industry.

To help spark interest among teens, Fredon worked with Learning for Life, a subsidiary of the Boy Scouts, to create a manufacturing career education program called Explorer Post 2600 (also known as the Canons of Fredon).

   "My thrust in life is to convince a mother that we have a successful career for her child," says Sustar. "Most of the career fairs that we go to, I buy about 150 long-stem roses for any moms who are willing to come and talk to us. A lot of the mothers that bring their kids into the [program] are bringing other kids in the neighborhood because they think so highly of what we’ve done. This is our 17th year, and we have 13 kids in the program this year. We worked with the juvenile judge to reach out to some kids who are having troubles. That’s what people don’t seem to understand--it takes a lot of us to make the world go around."

Automated alternatives
For companies that can’t find the employees they need or can’t hire additional workers, automation can be the answer. Fifty-three percent of OEMs and 57 percent of fabricators are considering adding equipment automation. When asked about prioritizing the future purchase of specific types of equipment, many respondents manually entered "automation" instead of going with the suggested answers.

General A & E is discovering automation can be an essential addition. It adopted a program to train someone to run a robot welder, which the company recently purchased. Since then, three others have been trained to operate the machine.

"We don’t want to buy machines that are a little faster, a little of this, a little of that," says Baker. "What we would place our priority on is labor-saving equipment, equipment that’s going to allow our employees to do more functions rather than just do the existing function faster."

Medical matters
As of press time, the Senate passed a major health care bill. But health care had been on people’s minds far before that. It was cited as a major concern among FFJ’s survey respondents.

Health care was ranked first and second for OEMs and fabricators, respectively.

"I don’t think people recognize that depending on how this bill turns out, it may kill a lot of small businesses," says Baker. "It will certainly have an adverse effect on their profits. This is something that the only way to control it, really, and the only way to improve the situation is that government take consideration of what they’re doing when they pass this bill so that it’s not something that’s going to adversely affect business." FFJ

BROAD REACH
OEMs and fabricators consider diversification for further business security

With a year of uncertainty finally behind fabricators and OEMs, they’re taking a look at how they’ve conducted business and how they plan to do so moving forward. According to the survey, 62 percent of fabricators say it will be important to diversify their operations. How a company goes about doing this is the tricky part, and the equation is different from business to business.

"It’s going to be important to get new customers, but we don’t necessarily want to diversify by market segment," says John Baker., president of General A & E, Hackensack, N.J., a small precision metal fabricator that employs 10 to 20 employees. "So we might want to stay in the electronics and aerospace industries because we feel that’s where the higher-margin work is."

Entering new segments necessitates a close look at a company’s expertise and how it can be parlayed into new areas. It also requires a close examination of potential markets, including the wind tower industry, says Scott Pagenkopf, director of product management at Hammersmith Mfg. & Sales Inc., Overland Park, Kan., a large fabricator that employs more than 100.

"When you talk about opportunities in energy, you’re talking about wind," says Pagenkopf. "But ‘Big’ wind isn’t going to mature in North America to where it’s competitive for the $50 million and under companies for at least two years. But regardless, you have to be ready for it. Even if you’re not heavily active in whatever marketspace you’re going to try and get involved in, you’re going to have to gain experience. You have to do the minor leagues before you think you can step right in. You have to become experienced, and that’s where diversification becomes important.

"You have to determine whether those markets are a good fit," he continues. "[For] Hammersmith, as an example, when we added a waterjet last year, that opened up our imagination. Two points come from that, though. One is the experience of generating ideas. Two, now what are you going to do with it? What slot are you going to eyeball to put resources, efforts and cash and nose around that campsite a little bit? What are you going to do about wind? What are you going to do with the waterjet, and what marketplace are you directing your resources and efforts into? You can go into many different sectors."

For companies that do not consider diversification a top priority, striving to stay well-informed remains key. One survey respondent who didn’t plan to diversify in the upcoming year reinforced that sentiment by saying, "We’re as diverse as we can be now, but we continue to follow the markets and adjust with them."

Examining equipment
  The type of equipment a company has or plans to purchase often dictates how and where it can expand. According to the survey, if a company had intentions of purchasing new equipment, the potential purchases were evenly split, with 19 percent of fabricators choosing a punch press as the most probable.

  Pagenkopf says getting a company’s feet wet in terms of new equipment can bring a business like Hammersmith one step closer to determining whether there’s a competitive opportunity.

  "Anyone who’s not walking their perimeter and saying, ‘What else can I do with what I have?’ will be left behind," he says. "It all becomes laymanized. Everyone has a machining center. Everyone knows a metal treater of some sort, like a galvanizer, for example. That’s common in our marketplace. So what are you going to do differently? You’d better find out if you can play in a different market or see where that equipment ends up taking you."

Location, location, location
Following potential markets inevitably allows a company to determine where industry activity is taking place. And FFJ’s survey tracks where readers are seeing that activity. Whether it’s on the West Coast or on the West Bank, the results indicate which areas are picking up the pace or tapering off.

Compared to last year’s survey, it appears that growth is continuing in the same areas of the world. Stateside, the Southeast still is showing signs of prosperity. This year, 50 percent of OEMs chose the region as their No. 1 pick for potential growth, with 43 percent of fabricators saying the same. Last year, 21 percent of OEMs and 36 percent of fabricators felt this way.

"The Gulf Coast states with shipyards are strong right now," says Jerry Leary, president of Koike Aronson Inc. (Ransome), Arcade, N.Y. "Actually, anywhere where there is a shipyard in the United States, they seem to be doing well. Also, the Virginia and North Carolina areas are the strongest for us right now."

Internationally, Asia continues to be a major force. Fifty-two percent of fabricators and 60 percent of OEMs consider it to be the No. 1 emerging market. Mexico and Brazil are gaining ground, according to this year’s survey. However, some respondents, such as Leary, don’t consider them to be a major threat.

"[Overseas competition is affecting our operations] less now than it did before," he says. "Mainly the exchange rates have been a little more favorable because the dollar has sunk a little. The other big contributing factor is the quality of the foreign competition’s products. For the last three years, they’ve been bad, and it’s had an impact on their sales. We see this continuing going forward. This is equipment coming out of China."

Leary says areas like Brazil and Mexico might be considered as potential growth spots for companies like Koike.

"It’s our ability to expand in the growth areas like Brazil," he says. "We have to do this. There’s good business for us in some places outside the United States, and we have to do things differently to expand our business there, probably by putting our own facilities there and some of our own people."

Depending on the company, overseas opportunities vary. This year, FFJ’s survey points to continued growth in Asia, Mexico and Brazil. Pagenkopf explains how his company watches activity and determines the validity of that activity.

"I was looking at [Brazil and Mexico] from the perspective of our Vale Products product line," says Pagenkopf. "You have to watch secondary markets and tertiary markets--used markets--to see what the distribution of your product or hardware ends up being. And we see a lot of activity in northern South America and Mexico for our product type. That’s usually due to development, in our case at least, because of the nature of the products."

The products in question are tools affixed to the back of bulldozers and tractors for site preparation.

Pagenkopf says he has seen an increase in construction in certain areas. Often, for building projects, rock and gravel have to be removed or leveled, and Hammersmith’s products are made for just that.

"We’re seeing the product distribution going out like a wave," he says. "We see them going into Mexico and then South America and then maybe the Middle East. We see them where there’s increased development."  FFJ

DOLLARS AND CENTS
Fluctuating material costs reinforce the importance of communication

Pricing always presents challenges throughout the supply chain. This requires companies to maintain an open line of communication with customers, according to many survey respondents.

  Fifty percent of OEMs said steel prices are having a negative effect on their operations. According to Stewart Cramer, president of LAI International Inc., price volatility makes it difficult to manage costs.

  "We struggle with the volatility of material pricing because more and more, we’re being asked to look at multiyear, fixed-price contracts," says Cramer. "We’ve learned to be careful about quoting out year material costs. We’ve also adjusted our practices to better protect both us and our customers from changes in material pricing."

  Cramer cites times when he has informed customers of the potential need to re-quote material pricing at the time the company receives an order. He has explained that the company will adjust its pricing up or down as necessary.

"We also work with customers to help them to procure material at the most favorable price," he says. "Sometimes that means aggregating buys to purchase a mill run or to lock in a favorable price. This has necessitated a great deal more coordination and communication with customers to ensure that we have real clarity of their expectations and needs. We’ve been able to hedge our risks with these approaches. We’ve managed to save our customers money, as well."

Opening the door to pricing discussions not only mitigates major fluctuations, but it is also therapeutic for those who have had to grapple with the ups and downs alone.

"In general, we treat material as a cost-plus kind of proposition wherever we can," says Cramer. "We don’t charge a great deal of margin on raw materials, and when the purchased material is 80 percent of the top-line value of a contract, there’s no way to offset material cost volatility. A 5 percent change in material price on a job that’s 80 percent material could put you underwater. We’ve had to work much more closely with customers to mitigate this risk. Generally, they’re understanding. It’s not in their interest to force a supplier out of business. There was a time when you could absorb a 2 or 3 percent increase in material cost in your margin. We just can’t mark up material enough to offset that kind of change in this economy and still win jobs."

Across the board, fabricators and OEMs have brought their customers along for the pricing roller coaster ride. Behind health care, pricing ranked at the top of the list of concerns, according to OEM respondents. For fabricators, it was the No. 1 concern.

"We really need to have a different kind of relationship with our customers when we’re buying raw materials," says Cramer. "We want to be tightly connected, and risk sharing has to be a two-way street. If you bid [on] a job based on a certain material price, and then the material price goes down significantly, you have to be willing to share that benefit with your customer if you want your customer to work with you when prices go up. Ultimately, suppliers and customers have to have a dialogue regarding shared risks and have to work together to mitigate them. Being a risk-sharing partner with your customers is a good way to grow your business and to help your customers to grow theirs--a win for everyone."

  John Baker, president of General A & E, Hackensack, N.J., agrees that it wouldn’t be fair for customers to shoulder the burden as far as pricing is concerned.

"For a lot of our customers, their purchasing agents are people who aren’t getting raises," he explains. "And so they look at us and say, ‘Why should you get a raise? Why should we give you more for your product?’

"We have costs that we have no control over, like the cost of raw materials," he continues. "Aluminum has gone up 50 percent or more in the last six months. That’s not something we can absorb. What can be done about it? Well, we have to educate our customers a little better. We have to explain what causes our costs to go up."

All survey respondents hope 2010 is a better year for their companies and the overall industry. Although there are plenty of factors they can’t control, they will focus their energy and resources on those they can. Whether it’s communicating with customers or implementing in-house training, with any luck, actions taken today will yield benefits in the not-too-distant future. FFJ