Editorial Advisory Board Roundtable

A different world

By FFJournal staff

Editorial Advisory Board
Frank Arteaga
, Head of Product Management, Market Region NAFTA, Bystronic Inc.
William E. Bossard, President, Salvagnini America Inc.
Thomas Burdel, VP, Special Projects, Prima Finn-Power North America Inc.
Stewart Cramer, President, LAI International Inc.
René De Moura, Director, R&D, Begneaud Mfg.
Phil Gilbert, Managing Director, P&M Corporate Finance LLC
Joe Moretti, President, Service Metal Fabricating Inc.
Nick Ostrowski, General Manager, Marketing, Amada America Inc.
Troy Roberts, President, Aida-America
Richard Seif, Sr. VP, Global Marketing and Product Development, The Lincoln Electric Co.
Ron Whitley, President & COO , Ranger Steel LP

April 2010 - When the going gets tough, the tough get going. As it relates to the manufacturing industry, that means companies assess the situation, then they begin to do what needs to be done.

In the case of the Great Recession, as it’s been dubbed, this often meant streamlining, sometimes rightsizing, and almost always, doing more with less.

The consensus among FFJournal’s editorial advisory board members is that the worst seems to be behind us and that things are beginning to improve, albeit slowly.

And even though challenges remain, there seems to be a sense of cautious optimism that 2010 will be a better year than 2009.

Going forward, though, the business world in which OEMs, fabricators and service centers operate might look different, according to several board members, including Ron Whitley, president and COO of Ranger Steel LP, Houston.

"Over the last eight or nine or 10 years, the steel industry has enjoyed several good years of prosperity, and we were all feeling good about the steel business, and we added layers of people and--let’s call it like it is'fat,'" he says. "Now, we find that the world is different, and we’ve had to change all of our business models somewhat."

Additionally, several FFJournaleditorial advisory board members say their companies have changed the way they go to market in the current economic climate.

"We’re much more aggressive, and we’re much more focused on specific, targeted accounts," says Stewart Cramer, president of LAI International Inc., Scottsdale, Ariz. "We’ve changed our pricing models, as well. We’ve taken on a lot more risk in purchasing material or equipment to do a job than we have done historically."

He also says LAI International has worked hard to begin identifying better leading indicators of what’s coming. This has yielded enterprisewide changes.

"We’ve tightened up our management practices somewhat," says Cramer. "I think we dialogue a lot more about business development, sales and customer requirements than we had historically. We always talked about that, but I think there’s an urgency to the dialogue that’s different."

Bill Bossard, president of Salvagnini America Inc., Hamilton, Ohio, says it’s too early to definitively know the long-term effects of the recession on the manufacturing industry but that they likely lie in the answer to one question in particular.

"Do we return to doing business the way we did before, or does this whole recession cause a fundamental shift in the approach of capital equipment investment, in terms of new technologies, alternative technologies, more automation, less automation?" he says. "So, with a great deal of expectation, I don’t know where the industry is going to go. Is it going to be, ‘Let’s return to where we were in 2007’? Or is there going to be a fundamental rethinking in terms of, when employment comes back, investment begins to increase?

"Customers I talk to are seeing lower lot sizes, more part numbers and shortened delivery times," he continues. "This creates a manufacturing environment that has an extremely high degree of variability (low lot size and many part numbers) and requires a high velocity of manufacture (shortened delivery). This is the reality that will require the fundamental shift in investment strategy."

Bossard also says that although the Great Recession took a large toll on the entire economy, not just the manufacturing sector, business conditions never stay the same, for better or worse.

"We go through cycles with insourcing, outsourcing, China, Mexico and everything else like that, and then people begin to bring products back into factories here in the U.S. and Canada from an outsourced position," he says. "So it’s a constant pendulum back and forth, trying to figure out where that point of low-cost manufacturing is. And the general sentiment of the customers and prospective customers that I talk to is that we can’t continue to do things the way we’ve done them in the past. How that exactly translates on into the future has yet to be seen."

Making a move
Most of FFJournal’s editorial advisory board members were familiar with the concept of backshoring, or bringing production back to North America that had been sent overseas.

Some of the board members said their companies have experienced this firsthand, including René De Moura, director of research and development at Begneaud Mfg., Lafayette, La.

"What I’m seeing is that some of the larger companies have brought their manufacturing offshore, and 80 percent of what they need done with manufacturing is going like a dream," he says. "But there’s roughly 20 percent that requires the technological skill that doesn’t exist in those developing countries, and there have been repercussions there.

"That’s where a niche is for us," he adds. "I’d say it’s been going on for a while with us. I think it’s just spotlighted more now because of the recession."

Thomas Burdel, vice president of special projects at Prima Finn-Power North America Inc., Arlington Heights, Ill., says different customers have told him they have benefited from backshoring.

"I’ve talked to customers who have lost orders to Chinese companies, only to have the orders come back to them," he says. "For example, a closures company actually sent a job overseas because it was cheaper to manufacture there, but then it came back here. I’ve heard that manufacturing orders are coming back to the U.S. after parts were manufactured overseas [because] they couldn’t get the quality, or the deliveries--sometimes you need a part right away, and it takes too long to get it from overseas. In many cases, it’s more economical to make it here."

Phil Gilbert, managing director at P&M Corporate Finance LLC, Southfield, Mich., says several indicators support the notion that these occurrences aren’t isolated incidents.

"Backshoring is among the most interesting and potentially the most impactful trend in the next few years for middle-market forming and fabricating companies," he says. "I think the pendulum is beginning to swing back in favor of the Western countries."

Gilbert also says backshoring isn’t limited to North America. Rather, Western Europe is also experiencing the trend.

"The Sloan Foundation recently completed a survey on global components sourcing, and their findings were actually pretty startling: Large multinationals are relocating less-automated processes back into plants in higher-wage regions," he says. "What the study found is that flexibility trumps automation at comparable levels of quality so that what they gain in flexibility mitigates any incremental wage costs."

Gilbert cites two examples of U.S. companies bringing manufacturing work back to North America from overseas.

"In one situation, NCR, which makes ATMs, among other equipment, has relocated most of their sophisticated lines to Georgia from India and China," he says. "In this situation, the driver was better integration of engineering and manufacturing--NCR felt that because they had kept their engineering domestic that they weren’t getting all the efficiencies on the manufacturing side that were available by having those two competencies grouped more closely together.

"GE has also recently announced that they’re re-sourcing two plants of hybrid water heaters from China back to the United States. They aren’t making this move out of charity--they’re making the move because it’s a good business decision for them."

Gilbert also describes backshoring as something positive "in an otherwise fairly dismal economic environment." He cautions, though, that the United States isn’t the only country to profit from the trend.

"It’s good news, but there’s also a little bit of bad news because not all the plants are going to end up in the United States," he says. "Mexico has been an early beneficiary of this trend partially because of all the maquiladora sourcing that went on over the last couple of decades. In many situations, Mexican plants benefit from both skilled, flexible workforces and lower-wage cost scales."

For companies that do business internationally, the forecast for some regions looks fairly healthy in regard to 2010 orders.

"The most robust areas are the Asia areas, which are mainly China and India, that have remained pretty steady in their activity," says Richard Seif, senior vice president of global marketing and product development at The Lincoln Electric Co., Cleveland. "We’ve also seen some order pickup from the Middle East and North Africa, based on accelerated oil and gas activity. And also, the whole MENA region (the Middle East and North Africa) was severely hit with the oil crunch, and so now that’s starting to come back as oil pricing rises to $80 per barrel."

Bossard agrees with the sentiment about positive returns in Asia. He also says certain European countries are faring relatively well, although others are struggling a bit.

"Internationally, our company is doing quite well in Asia and Europe--both geographic sectors are well ahead of plans for our fiscal year, and from talking with my colleagues over there, business continues to be pretty good," says Bossard. "Italy is still lagging behind quite a bit in terms of capital investment. Italy is supporting capital investment with ‘fiscal benefits,’ much like the accelerated depreciation advantage here in the U.S. available in 2009. [But] Germany has picked up significantly and is certainly well on its road back to where we see strong performance. Scandinavia is doing very well. France is down a bit, Spain is down a bit. The old East Bloc countries of Europe--investment is holding up quite well there. So it’s a various mixture of what’s going on.

"And in Asia, on the other hand, the entirety of Southeast Asia, plus even Northern Asia--Korea, Japan--our offices in Asia are doing very well," he continues. "And in Australia, business activities are good there. [Elsewhere], our subsidiary in Brazil is also doing very well."

Frank Arteaga, head of product management for the NAFTA market region at Bystronic Inc., Hauppauge, N.Y., also says business is relatively brisk in Asia. Additionally, he says this bounce-back will hopefully foreshadow things to come in the rest of the world.

"Internationally, we have seen that our subsidiaries in the Asian markets are recovering quickly, and activity and orders are on their way back to their pre-recession levels," says Arteaga. "This is a positive signal, as the world economic crisis affected Asia early in 2008, in contrast to the U.S., which occurred later in that year."

In regard to the NAFTA region, Nick Ostrowski, general manager of marketing at Amada America Inc., Buena Park, Calif., says Mexico has weathered the financial storm pretty well.

"Speaking in relative terms, all throughout this recession, Mexico has been fairly healthy, given that it’s exceeded, I think, expectations," he says. "The prospects in Mexico are good. I don’t think they’ve been affected nearly as much as the U.S., and we’re actually doing quite well in Mexico."

Burdel, too, says he sees more activity coming from Mexico. He also says orders seem to be picking up in Canada, but this isn’t a countrywide phenomenon.

"Canada seems to be better, and it also seems that Canada wasn’t as severely affected as we were--with the exception of Calgary," says Burdel. "They are dependent on oil, and when oil went down, a lot of companies didn’t make any more investments. It was like hitting a wall in that area. We did very well there until 2008, when the bottom fell out."

Homeward bound
In regard to the state of domestic orders, several OEM board members say things are better than they were in the recent past (although relatively similar year to date) and appear poised to improve.

"Fourth quarters always end on a good note, and last year was no different, relatively speaking--2009 was a difficult year, but fourth quarter, as usual, was the best quarter," says Ostrowski. "My initial expectation is the first quarter [of 2010] isn’t going to be any better than 2009, but we do expect things to pick up through the second, third and fourth quarter. We’re already seeing more quote activity than we did last year for the same period.

"We see 2010 being a better year--relatively speaking," he continues. "I’m not going to say that it’s going to be a banner year by any stretch of the imagination, but we expect it to be a better year."

For Seif, the state of domestic orders varies according to product category. The outlook for both, however, is cautiously optimistic.

"I would characterize the orders for consumables, which are the expense items that go into products, are up over the average of last year in the neighborhood of 4 to 6 percent, which shows that manufacturing has picked up, and it’s a good barometer because consumables cut across many of the segments in manufacturing," he says. "On the other hand, with capital equipment, it’s still down because a lot of the small companies and sole proprietorships are strapped for cash, and companies haven’t necessarily reinvested in new capacity based on economic conditions.

"I think the best forecast would just be inching up in both categories," he continues. "For the last couple of months, we’ve seen some inching up in the consumable orders, which again represent the manufacturing side. I would say, again, the capital equipment is more of a wild card, but I think that we’ve at least seen more activity, even in the automotive sector, as the weeks in 2010 have progressed."

Burdel also says orders seem to be picking up slightly on the domestic side and that for Prima Finn-Power, one event in particular seemed to spark activity among customers.

"The economy has not recovered yet, of course, but there is a lot more activity," he says. "The bottom has been reached, and it is beginning to pick up again. After FabTech, activity also increased, which helped create a positive turning point in the industry."

Arteaga says domestic order activity is rising but that challenges remain, one being accessibility to credit.

"Quote and project activity has been on the increase since the end of 2009 and continues to gain momentum in 2010," he says. "Lenders have tightened their requirements for loan approvals, and so it has become more challenging for companies to gain access to credit. [Also], company inventories are below normal levels, new orders are on the increase, manufacturing activity is on the rise, but there’s still a lot of unused machine capacity available."

Money, money, money
The responses of FFJournal’s editorial advisory board members vary in regard to how they characterize the credit situation for their companies.

One board member describes it as "terrible," and several echo the sentiment. Others, however, say credit hasn’t been a problem.

"I would characterize the credit markets for middle-market companies as back from the dead but still on life support," says Gilbert. "The challenges that are causing this situation include: Middle-market lenders continue to have capital issues. Their commercial real estate portfolios aren’t in great shape, they continue to have commercial loans that are problematic and the banks have regulators that are breathing down their necks. And so the emphasis for a lot of commercial lenders is on managing their existing portfolio, not on new credit."

Gilbert also says reduced forward visibility on cash flow and earnings for companies that want to borrow and collateral values that have tumbled over the last 18 to 24 months contribute to the tight credit conditions.

"These conditions make bankers nervous in today’s market," he says. "It’s [also] difficult for middle-market companies to rely on commercial real estate as collateral because that is a segment of the portfolio that the regulators are all over, to the point of limiting the amount of a bank’s portfolio that can be in commercial real estate, whether or not it’s owner-occupied.

"So what does it mean?" he continues. "There is a strong orientation toward asset-based loans, where the amount of credit available is a percentage of the hard-asset collateral. Second, the advance rate against these assets is more conservative than it used to be. We’re beginning to see banks willing to consider cash flow components again. However, not surprisingly, the cash flow piece of the structure is small with a quick payback. Finally, ‘story’ transactions are hard to get done, so companies that have blemishes or are coming off of particularly difficult recent histories are going to have a hard time getting new credit. But what we’re seeing banks do is work with these companies, where there’s hope, to extend the credit facility."

Overall, Gilbert says his expectation is that things are going to continue to improve slowly over the next 12 to 18 months.

"We’ve seen loan pricing drop and credit availability slowly getting better," he says. "But for companies, three things are absolutely critical: They need to have strong cash flow, they need to actively manage their credit relationship with their lender and they need to stay ahead of issues."

Next generation
One issue Begneaud Mfg. is trying to tackle is a lack of workforce development and experienced workers, says De Moura.

"We see that as one of the big challenges, getting the new generation of manufacturers, inventors and innovators to believe in the manufacturing industry and see the career opportunities there," he says. "We feel that can happen--and needs to happen rapidly so that [with] the manufacturing industry, the picture is no longer painted as dirty jobs or ‘My kid’s not going to work in the plant.’"

De Moura also says Begneaud Mfg. puts a high priority on internal training, despite the fact that the recession has forced the company to cut back on these endeavors.

"We spend a lot of time, effort and value in training the workforce," he says. "And we’re actually proud of the fact that in our area, we’ve had a positive impact on training a workforce to do jobs that cause businesses to crop up that most would call our competition. We view it a little bit differently than that. There’s enough work for everyone, and it’s good that the industry is growing in that way."

"I think we all have learned a good lesson from the recession: What you thought can’t happen can happen," says Whitley. "But it builds character, and it’s amazing what you can handle." FFJ


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