April 2009 - Looking back at the manufacturing landscape at the turn of the century, thick, black smoke billowing out of a factory was the measure of productivity. Fast-forward to today, and the face of industry is almost unrecognizable--and for the better. Environmentally hazardous production processes are taking a back seat to sustainable business practices. Unsafe work environments are no longer acceptable. The stereotypical characteristics of a blue-collar world are hard to find in 2009.
Therefore, decade-long fever charts and comparative exercises only go so far in gauging the health of today’s manufacturing. It’s just not apples to apples anymore.
Since the Wall Street crash of 1929, there have been 12 recessions, and only three have shown weaker manufacturing activity than what we have today. Since the energy crisis recession of the early 1980s, the manufacturing index is showing the lowest results recorded.
To try and get a grip on what’s truly happening in the forming and fabricating industry, FFJournal took the next logical approach: Talk to those who live it every day. And the members of our editorial advisory board aren’t just living it, they exemplify it.
International influences
Today’s business environment is hardly confined to the borders of the continental United States. The marketplace is a global one, and what happens here can directly affect what happens elsewhere. And vice versa.
"The price difference [in products produced overseas compared to products produced in the United States] is because of low labor costs and the low cost of manufacturing in general," says Thomas Burdel, vice president of sales and marketing for Prima North America Inc. "In terms of environmental protection, our companies have to bear high costs to stay in compliance with clean-air regulations. If other countries had the same kind of clean-air requirements, there would be nothing wrong in terms of removing tariffs. But they’re necessary in order to avoid that disadvantage."
Although business is taking place on a global playing field, some players have more of a rookie status than others, causing dissension in some key areas. China and India have been targeted time and time again. Frank Arteaga, head of product management, market region NAFTA, for Bystronic Inc., delivers that sentiment.
"If we had more tariffs on products imported into the U.S. from, for example, China, we’d have more of our products produced here," says Arteaga. "So many of our products have been sent overseas because of the economic advantage. If we took away that economic advantage, we could retain more business here." But opinions are bound to vary from industry to industry and from company to company.
"Fair trade depends on who you ask and what industry that person is in," says Ron Whitley, president and COO of Ranger Steel LP. "As far as the steel business goes, we have a reasonably fair trade environment today, particularly if you’re making reference to developed countries, such as in Western Europe. You have to apply the same standards and principles that we operate under here in the United States, however, to make the determination. These standards include environmental issues, labor issues and safety issues and the taxing aspect associated with that. It’s less fair in lesser-developed countries that don’t have to adhere to those standards."
But how does one country hold another accountable for responsible business practices? FFJ’s board members contemplate that issue on a regular basis.
"It’s a double-edged sword," says Richard Seif, senior vice president of global marketing for the The Lincoln Electric Co. "Except for some special technology, such as for defense or aerospace, I think that open competitiveness works. And it’s up to us to learn how to compete in the world. We have a new automation center of excellence for welding. We’re stimulating our customers to look into automated methods to improve quality, productivity and safety. With automation, our customers can compete and win globally."
"Tariffs can be appropriate, but it becomes a slippery political slope," says Phil Gilbert, managing director at P&M Corporate Finance LLC. "To the extent that it’s used to redress a wrong, which is a subsidy of some kind, whether it’s a cheap yuan, subsidized energy prices or some kind of tax subsidy that people are getting, it’s fine. But it’s a short hop from there to propping up an industry that’s not competitive."
To put it into perspective, Gilbert offers European countries that share a relatively similar status with the United States as an example.
"China is going to overtake the United States in per-capita emissions, and that’s the problem," says Gilbert. "The environment has to be dealt with at some level, but doing it through tariffs doesn’t seem like the right way. Europe makes the United States look like anarchists in terms of environmental responsibility, and yet they continue to trade globally. They have environmental taxes, and their social costs far outweigh ours. So if Europe decided to put up barriers, and I’m sure that they have their fair share, it goes back to the same thing: Tariffs shouldn’t be used for protectionist purposes. To use tariffs to level the playing field for social misalignment or environmental cost alignment is a misuse of the tool. And anything that we’re doing that’s political in nature instead of redress-related is making the United States less competitive."
He continues by offering other scenarios. "[They] can help domestic producers, but the problem arises when companies downstream have higher prices than their global competitors," says Gilbert. "A reality of disadvantaged material costs can encourage those downstream suppliers to move offshore."
William Bossard, president of Salvagnini America Inc., follows up that statement by looking downstream. "Will tariffs keep jobs in the United States? Sure they will," he says. "It’s clear that they do, but then you have to take a deeper look at that. The question then is, are we keeping the right jobs in the United States? And are we keeping jobs here that don’t have a comparative advantage in the world market? In the end, tariffs will only raise the price of the particular product, be it made here in the Untied States or on an export basis."
"The current U.S. recession significantly reduced demand for exports from Mexico. In response, Mexico has actually slashed tariffs on something like 5,000 categories of goods in an effort to remain cost competitive with countries like China," Gilbert says. "Reduced tariffs in Mexico, in conjunction with increased shipping costs from the U.S. to China, means it is becoming cheaper for the U.S. to do business in Mexico. Production there has become higher quality, and it’s easier for people to rationalize moving production 200 miles from the end customer instead of 6,000."
And although the discussion of international relationships will continue to be debated, talk of America’s neighbors to the north and south is a logical next step. "When NAFTA opened up Canada and Mexico, our market shares and activity in both of those countries improved," says Seif. "We know how to compete, and we placed manufacturing facilities in both countries. When we supplement those plants with what we do in the United States, it makes for a more powerful offering to our customers."
No matter the location, there’s an undeniable sense of expansion in the marketplace. "I don’t believe protectionism is the answer. The economy is going to become even more global coming out of this recession," says Stewart Cramer, president of LAI International Inc. "For example, a lot of the big projects moving forward are going to have to be international. A lot of that work can be found in the aerospace industry, and some of the major projects that NASA is developing, which we hope to be a part of, can’t be done by the United States alone. Many major companies are truly global, and I don’t think there’s a way to unwind this."
Domestic directions
On Feb. 13, Congress approved the largest stimulus bill in U.S. history: the American Recovery and Reinvestment Act of 2009. Its impact is yet to be seen, but its potential is flooding the minds of FFJ’s board members.
"The American Recovery and Reinvestment Act is quite extensive, and I don’t think that anyone has fully absorbed it yet, but what caught my attention were the clauses in effect to ‘Buy America,’" says Arteaga. "If the ‘Buy America’ provision means that there will be more tariffs on imported goods to entice people to buy goods here or produce goods here, it’ll be beneficial to the U.S. economy."
"Business is so beat up and so anemic, and there’s so much demand that’s been sidelined or suppressed because people are looking for the bottom in this market," says Whitley. "Anything along the lines of the American Recovery and Reinvestment Act or stimulus activity to potentially enter the business world in 2009 is highly welcomed. But it’s currently too early to tell what the effect is really going to be."
Allocating the nearly $790 billion must have been quite the endeavor, but it seems tracking that cash will be just as tough. The amount alloted to infrastructure projects is, undoubtedly, one for FFJ’s board members to keep a close eye on.
"Any tax incentives that would lead up to investments for upgrading, reinforcing or adding to our infrastructure, whether it be bridges, tunnels or any kind of heavy-type construction, will be beneficial to the steel industry," says Whitley. "Heavy infrastructure is something that we’re quite hopeful will stimulate business either late this year or next year."
Burdel reiterates, however, that prudent measures can go far. No matter the number of new projects set for the upcoming months and years, the international nature of the marketplace may dictate to what degree the stimulus bill will be embraced.
"We have to be sensitive to our trade partners, though," says Burdel. "It’s a global recession; it’s not just a U.S. recession. I can understand why the ‘Buy America’ bill is on the table, but it has to be done in a proper way that’s not hurting our overseas partners. If we have a fair-trade partner, it’ll ultimately benefit both parties. Therefore, the ‘Buy America’ provision is understandable."
"There are enough clauses in the ‘Buy America’ provision to prevent senseless protectionism of American sources," says Cramer. "But it gives some preference to supporting manufacturing here, which is what I think the act is all about."
No matter the company, it’s almost impossible to not dip into the international bucket.
"We buy steel from all over the world and try to remain competitive," says Seif. "We have relationships with mills in the United States and buy from them, but we’d like to retain the opportunity to buy from whomever based on quality and offering. On the flip side of the coin, we export about 30 percent of what we make, and so we wouldn’t want other countries to retaliate because of ideas like protectionism. Our exports are a big part of our business.
"The heart says that ‘Buy America’ is the right thing to do, but the practical side doesn’t think so--not in a global economy," he says. "It’s truly an integrated global market."
Despite the type or frequency of overseas transactions and a company’s reaction to the stimulus bill, tax incentives are one way the federal government can stimulate success. The bonus depreciation act, which allows companies to depreciate 50 percent of new equipment during the first year of ownership; the capital equipment deduction, which allows small business to write off equipment purchases up to $250,000; and the law enacted for companies with annual revenues below $15 million to carry back net operating losses for five years, are a handful of tools companies can use to their advantage.
"If companies buy new equipment, they can depreciate a big part of it," says Burdel. "The caveat is that it only helps if the company makes money. Anything that the government does, however, such as the depreciation credit to help companies buy new equipment, is key to staying competitive with the rest of the world."
Cramer says the extension announcement of the incentives was welcome news.
"We’re taking advantage of the R&D tax credit, and as I understand it, that’s going to continue, which is a good thing," says Cramer. "It’s been a big push from the aerospace industry, and the AIA has advocated for its extension. We’re doing more R&D now that the economy has gotten tighter, and we’ve put more into R&D in order to look for better ways to do things fundamentally.
"The accelerated depreciation is another we’ve taken advantage of," he says. "Last year, we bought a CNC mill and a couple of waterjets, and we’re still growing."
In terms of those who are taking advantage, Bossard laments the lack of participants. "To a large degree, talking with a number of companies each week, there’s a major gap in education about what programs are available and how they could be applied for or used," he says. "Something as simple as the provision to extend the accelerated depreciation for capital equipment investment--it’s mind-boggling that the majority had no idea that it was even on the table this year."
In-house insurance
External issues, such as international policy and domestic laws, have their effect on companies. But these topics have the potential to change with new administrations or with new countries entering the global marketplace. In-house initiatives, however, are where companies find total control. FFJ’s board members discussed the positive impact internal strategies have on their businesses.
"Lean manufacturing has been a journey since the inception of the company," says René DeMoura, director of R&D at Begneaud Mfg. "Our motto is ‘Innovation through common sense,’ and we’ve been practicing lean from day one. We didn’t call it lean, but the principles were for us akin to common sense, and since those first attempts, we’ve refined the methods we’ve used to become efficient and lean. There’s always room for improvement, but you need a commitment to continually improve."
Implementing in-house strategies to examine and improve efficiency can be done alone, but also with the help of consultants. Efforts related to bringing experts on-site can carry a hefty cost. Bossard thanks the efforts of individual states that help companies go lean.
"I give much to the credit of several states that have state-sponsored and -reimbursed training programs for companies that want to take their employees and run through some programs," he says. "We do a lot of training with our customers that fall under the category of state reimbursement to raise the education level of their employees. Part of that is in the concept of different manufacturing approaches, be it lean or Six Sigma. I certainly don’t see any national initiative on that. It’s almost exclusively falling in the privy of individual states."
And Begneaud is one of many companies that has looked to its state government and organizations for support.
"We’ve had many people come from the outside and do lean manufacturing seminars," says DeMoura. "We’ve partnered with the Manufacturers Extension Program of Louisiana. We did what’s called a current state map, which is an exercise in lean that maps a job from the point that it came in all the way through the process, from quote to cash. You get into detail of where that job goes and how much time is spent in each operation.
"Then you go back and you do a future state, which allows a company to dissect a process and find the areas where there’s waste," he continues. "You get to involve the people that actually do the processes, and you get to extract ideas and improvements from them."
Involving employees on an individual basis has proven valuable for incorporating lean efforts, as well as for fortifying a business from the ground up.
"At one of our facilities, we trained 111 employees and had 390 ideas and suggestions come out of the initial meetings," says Cramer. "There’s never an end to continuous improvement, and when you turn to your employees, they know what’s a drag to do, what takes longer than they think it should and what could be done better."
When it comes to gaining a competitive edge, a company with manufacturing excellence will almost always find that leg up.
"We have quite a few things in place to make sure that our manufacturing costs don’t go through the roof," says Burdel. "This starts by having a trained workforce. One big thing that we have to do as a nation, however, is to make manufacturing a desirable trade. And our government has to stand up and make initiatives to decide how people are going to move forward."
"It’s a world-class economy and a world-based economy," says Bossard. "People in Maine and Texas and South Carolina are competing with companies in Europe and Asia. They’re competing for the investment dollar of the consumer. You either compete on quality and features, or you compete on cost.
"The basic U.S. manufacturing industry is doing well, considering the current economic situation, and especially if you consider the fact that it’s positioned with an excellent labor source and good, quality products," says Whitley. "There are factories here that make their products in an extremely efficient manner. Labor-intensive goods aren’t what’s best for the United States, but where there’s talent needed to make something, the United States should be in a good position for the future."
"The relative bright spot is that not only are the indexes low, but in most cases, they’re continuing to fall," Gilbert says. "When you look at all of the index activity, however, there are two exceptions: production and backlog. Both are still below 50, which means that things are still getting worse. But the numbers are trending up, which means that they’re getting worse at a slower rate while the other indexes are getting worse at a faster rate. You’ve got to hit rock bottom for manufacturing to regain its footing. And so while I’m bearish on the economy, if the trends in production and backlog hold, we could hit that bottom around Q3. Anectodally, we’re hearing encouraging news from a number of non-auto manufacturing and logistics companies relative to March activity levels.
"Once we’re there, demand will have stabilized, at a much lower level of course, but it gives the credit markets comfort because there’s a little better forward visibility," he continues. "Even now, the credit markets are beginning to creep open. Instead of just falling off the cliff, we can start climbing back up the hill. People will get a little more comfortable, credit will become more available and demand will begin to increase."
"There’s no place like home, from a manufacturing standpoint," says Seif. "We have good people here, the right tools and the willingness to compete. If we say that manufacturing is doomed, you’re throwing in your chips too soon." FFJ
