Without a clear national economic strategy, companies are proceeding with caution
October 2012 - In a season when the manufacturing community is reasonably upbeat, concerns still weigh heavily on this important segment of America’s industrial economy. Business activity levels are generally good and continuing to rise, FFJournal editorial advisory board members report.
But even as economic indicators on the manufacturing front inch upward, companies face an array of challenges, some old and some new. Among them, two things seem to be on the minds of many: the dampening effect of widespread uncertainty and the importance of skilled labor.
Life is good
“Manufacturing is busy,” says William Bossard, president of Hamilton, Ohio-based Salvagnini America Inc., which makes machinery for processing sheet metal. “Everybody seems to be making product and working multiple shifts. Depending on industry sector, people are either in the peak season or between peak seasons.” Bossard also notes that after the general downsizing and belt-tightening of the last few years, “firms are being very judicious about adding variable and/or fixed costs,” which has increased margins and raised profitability.
Troy Roberts, president of Aida-America, Dayton, Ohio, says, “Sales and results have been strong the last several years and we believe this trend will continue for the near to mid-term.” The company makes metalforming equipment to manufacture parts for the automotive and appliance industries. With the average age of a light vehicle in the U.S. approaching 11 years, Roberts says a significant amount of capacity needs to be built in the automotive supply chain to accommodate the expected increase in auto sales over the next several years. “A lot of metalforming capacity left the North American production system during the financial crisis period, and much of the capacity that’s left is not capable of processing the advanced materials automotive OEMs require to meet new safety and fuel economy standards.”
“What we’re seeing in the U.S. is that manufacturing has been strong,” says Frank Arteaga, head of product marketing, Market Region NAFTA, for Elgin, Ill.-based Bystronic Inc., which makes laser, waterjet and bending equipment. “The demand for new machinery is strong. People are investing in machinery, in automation and also in new technologies, like fiber laser technology.” Some of that demand is coming from reshoring, he says. “It has been ramping up over the last three years, and we’re seeing more of that.”
“We see almost universal positive signs on both the supply and demand sides,” says Phil Gilbert, managing director of P&M Corporate Finance, Detroit. “2008 to 2010 separated the wheat from the chaff in the business world. Companies that had flexible infrastructures, strong processes and excellence in management in many cases had record, or near-record, years in that downturn because they were able to adjust their operating structures quickly enough to react to the market and stay ahead of the change. So now, coming out of that period, demand has picked up and they’re operating leaner than they were before. The result is they have a bounty of growth opportunity and a lean cost structure.”
On the other hand, even for healthy job shops, the picture is a little less rosy. Joe Moretti, president of Service Metal Fabricating Inc., Rockaway, N.J., says, “I felt like the recession was really coming to an end and now it feels like it’s getting worse.” Although his company is doing well, he’s not without concern.
“Most of our work is somehow directly or indirectly related to government, which makes me nervous,” he says. “We have customers that do bridge work and other things that are heavily funded by the government. We also do a lot of military work and deal with customers who build machinery and sell it to the government. I get concerned that so much of the business is supported by that sector.”
Speaking of government…
The manufacturing community would be far more likely to aggressively invest in the future if there was not such widespread uncertainty, says Nick Ostrowski, general manager of marketing for Amada America Inc., Buena Park, Calif. The company makes cutting, bending and punching machinery for metal fabrication.
“The main reason some segments are not purchasing at this point is because of uncertainty,” Ostrowski says. “Almost 2⁄3 of our customers are job shops. These are family-owned businesses. They don’t know what the full impact of health care legislation is going to be, for example.” The specter of being singled out for heavy taxation only adds to the uncertainty.
Potentially vanishing tax incentives are another concern. “Every year there’s a tax incentive for people to buy capital equipment,” Ostrowski says. “We take full advantage of that. We know what the tax laws are. We print up sales fliers and promotional items that outline what the tax advantages are to capital equipment depreciation that allows a sizable tax advantage.” That tax incentive has been in place for several years. However, it is lower for 2012, and there’s some question whether it will be available in 2013. OEMs are left not knowing whether to get ready for the end-of-year surge in demand or to make alternative plans. It also affects a firm’s sales strategy.
“With that uncertainty and our own uncertainty about what the future holds for us in the next quarter, it means that you have to go out there and justify your existence, and your worth, and your value and the value of your products to the customer base,” Ostrowski says. “The OEM has to validate why the customer needs to invest.”
“The federal government is contributing more uncertainty in the economy than any other source,” says Salvagnini’s Bossard. One result is that purchasing decisions that can be put off often are.
“It’s not Democratic, and it’s not Republican; it’s just general inactivity,” Bossard says. “I don’t know what my tax rate is going to be next year, and I don’t know what my insurance payment is going to be next year. How do you run a business with large unknowns like that? To a large degree, we all slap our fingers over our eyes, and we split them apart just a little bit, and we run as fast as we can and hope we don’t do something that we can’t recover from, based on whatever comes out of Washington.”
But the potential effects of continued uncertainty go far beyond the decision to buy a piece of capital equipment.
“The uncertainty relative to labor regulations, the uncertainty related to taxes, the uncertainty related to government regulations, is directly and meaningfully impacting business decisions that owners are making,” says P&M’s Gilbert. “If it’s harder to get rid of somebody, if the costs of employing somebody go up and up, a robot becomes cheaper and cheaper. Locating in Mexico becomes more and more attractive. I’m not suggesting we should be ruthless, but the uncertainties created by government intervention are resulting in business decisions that are going to exacerbate the problems.”
Finding competent people
Are all companies having difficulty keeping a full complement of skilled workers on the payroll? Many perhaps, but not all. “We’re doing pretty well,” says Bystronic’s Arteaga. “We hire salespeople and technicians nationwide. If we’re looking for a person on the West Coast, we can pick Washington, California or Oregon.” Because the firm typically is not confined to a local area, it is easier for Bystronic to broaden its search. “When people are looking for a person in a particular area, that’s really difficult, because you’re at the mercy of what’s available in that local area,” he says. “Fewer people now are willing to take long commutes.”
“As a machinery builder and distribution company, our difficulty is finding service engineers,” says Bossard. “We hear a lot from people we interview for service positions that they don’t want to travel all the time. People are saying, ‘I really like the job, I’m well-qualified, I’m not in a position where I want to leave my family on a weekly basis.’ It’s a personal choice, and I can respect that.”
Other times, Bossard says, the trick is to find people with the right skill set. “At the moment, the labor pool looks to me like all of the really good people are already employed. And because things are as tender as they are, none of those really good people are interested in looking on the other side of the fence at greener pastures.”
“We used to be a pretty portable society,” Bossard says. “We’d pick up and move from state to state, or region to region, and do whatever we wanted to do. But over the last four years, people have gotten a lot more stationary.” Part of that has to do with the housing market. It’s difficult to sell and difficult to buy. “We’re not nearly as portable as we used to be, simply because of the homebuilding/homeowner situation.”
In more stationary settings, such as job shops, the challenges can be quite different. “This has been a severe correction,” says Service Metal’s Moretti. “Service Metal is doing pretty well, but my guys are scared all the time. I try to keep them calm, but they’re nervous. Their friends are losing their jobs or paying more for their benefits, and it’s nerve-wracking.” On the other hand, Moretti says in some ways it helps. “I have a motivated crew—probably more motivated than I’ve ever had in my life, but you don’t want people working under this kind of pressure. It’s a little too much pressure on the working man.”
Besides trying to simply reassure his employees, Moretti says the company has kept up the level of its benefits. “I try to keep the benefits the same,” he says. “Our goal is to not raise the benefit contribution. We very much want a family guy working for us, and we do take care of them on the medical benefits side. But in the world around them, that’s not what’s happening, so they’re still nervous.”
Moretti admits the cost of medical benefits is something he gets nervous about, too. “Medical costs are probably the one thing that keep me up at night, more than anything,” he says.
For LAI International Inc., Scottsdale, Ariz., the personnel issue has an additional twist. The company manufacturers precision-engineered finished parts, components and subassemblies for various advanced technology industries, including aerospace. “It’s extremely difficult to find technical talent in the aerospace defense market segments,” says Patrick J. “P.J.” Gruetzmacher, chief executive officer and president of LAI. “That is because most university students these days are foreign nationals, so we’re competing for the U.S. students—because you can’t have foreign nationals on the defense programs and many of the aerospace programs are dual-use, so you still can’t use them. Among the U.S. students, you’re competing for their talents across a whole multitude of industries and it’s very difficult to get people excited about joining the aerospace industry with all its volatility.”
Manufacturing data and trends
Updated: August 8, 2012
One of the ways Gruetzmacher is tackling the problem is by launching an initiative to reach out to local schools. “We need to partner with our technical colleges and community colleges, like the MITs and the Cal Polys, and sponsor programs,” Gruetzmacher says. “One of the things that we’re taking a hard look at is when we’re faced with a challenge internally, involving the local schools in helping us solve the problem. That would give the professors an opportunity to put the students in a real-world situation, and it also would be an opportunity for the professor to advance his training by also putting himself into a real-world situation, to freshen his skill set.”
Gruetzmacher says LAI is working to partner with the local community colleges in each of its five plant locations. “In the goals and objectives for 2013, each of my staff members is going to partner with a local school and figure out how they can help,” Gruetzmacher says. “We, as a nation, have been lazy about this, expecting the students who are coming out of school to be well-prepared in the specific areas that we need, and that all we need to do is post a job opening and they will come. But that approach is not working. We have to reinvest in our community colleges, in our universities, reinvest in our communities and we have to reeducate—and in some cases—fund some of these initiatives because it’s not being done at this point. Corporate America owes it to our future generations to help them identify future career paths by getting more involved and truly driving the curriculum around what we’re looking for.”
What lies ahead?
“I think everybody is positioned,” says Amada’s Ostrowski. “The OEMs are positioned, and the second and third levels of job shops are positioned to be aggressively successful. However, with so much uncertainty in the air, any business that’s out there must be pursued more aggressively than ever.”
And yet, the fact that companies are holding back is, for the moment, perhaps appropriate. “The scars haven’t healed from the last downturn and that’s a positive,” says P&M’s Gilbert. “People aren’t becoming frivolous. Banks still have discipline in lending. They’re clearly more flexible, but they’re still disciplined, which is an important component to avoid over exuberance. The downside really is that the very things that are making these businesses thrive are going to create challenges from an employment standpoint.”
“From a manufacturing perspective, supply is strong and demand is strong,” Gilbert says. “The challenge really is landing and retaining skilled folks, and at a country-wide level, figuring out how we get people employed.”
Gilbert says the United States also has one important additional thing in its favor. “Several years ago, we formed an association of advisory firms like mine around the world,” Gilbert says. “When I talk to these firms in Europe, or in India, the message is different than in the U.S. Here, there is a fundamental positive outlook, and I think entrepreneurs are positive genetically. There’s a lot of uncertainty, but there’s also a lot of optimism. Things are getting better. Margins are OK, et cetera. You get none of that coming out of Europe and none of that coming out of India. I do think that while we have some clouds of uncertainty in the U.S., at least we’re starting from a fundamental bullishness, or a fundamental optimism, and I don’t think that’s necessarily shared by the rest of the world right now. So that is a fundamental positive we’ve got going for us.” FFJ
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