Archive for December, 2012

Indiana Manufacturers Have Weathered the Storm of the Great Recession

Tuesday, December 18th, 2012

According to results of the 2012 Indiana Manufacturing Survey: “Halftime” for Indiana Manufacturing, Indiana manufacturers have weathered the storm of the Great Recession and are well positioned to compete in the future., The report, commissioned by Katz, Sapper & Miller certified public accounting firm, was conducted by Scott A. Brown, Partner, Katz, Sapper & Miller, LLP in conjunction with Mark Frohlich, associate professor of operations management and Steven Jones, associate professor of finance  on the faculty of the Kelley School of Business Indianapolis, Indiana University.

This report has tracked Indiana manufacturing for six years, from the end of the economic boom through the Great Recession to the present. The authors “view the past year as a ‘halftime’ break for Indiana manufacturing after what proved to be an incredibly difficult first half.”

The vast majority of companies surveyed (82%) responded at the company level, while 10% are individual plants and 7% are divisions of larger organizations. Privately owned companies represent 87% of respondents and the other 13% are publicly traded companies. The average number of employees is 306, and the largest organization has 8,000 employees.

About 40% of companies rely on job shop-type production, and 41% use batch manufacturing. Very few companies operate assembly lines (8%) or continuous flow processes (11%), both of which are capital intensive and used to produce relatively standardized, high-volume items.

The three largest industry groups represented are industrial equipment (19%), automotive (19%), and aerospace and defense (10%). Another 18% of respondents are almost evenly distributed between high-tech (5%), healthcare (6%), and furniture/home goods (7%).

In the past four years since the financial crisis of late 2008, “manufacturers have faced challenges ranging from credit crunches and supplier bankruptcies to slumping consumer demand, soaring energy costs, and relentless foreign competition.” The report chronicles that “in 2008-09, Indiana manufacturers were mainly focused on cost-cutting and economic survival. By 2010-11, targeted investments aimed at growth began to reappear on the agendas of many manufacturers.” Now, four years later, “a significant majority now report that their business is either ‘healthy’ or ‘stable,’ with tougher times behind them” and “investment for growth is a priority for many companies around the state,” while “almost three out of every four manufacturers surveyed are investing for growth.”

“From a financial perspective, I think it small- to medium-sized manufacturers have made it through the Great Recession, and they’re starting to recover,” said Jones. “That is revealed in the survey responses indicating there’s less concern about working capital management and renewed focus on investment strategy, rather than cost cutting.”

“One in 10 companies surveyed plan to open new manufacturing facilities in Indiana over the next two years, and 44 percent rate their financial performance as “healthy,” a significant increase from last year’s response of 30 percent.”

The survey did find that net profit margins increased more for firms that introduced new products sometime in the two years prior. In the 2012 survey findings, the companies introducing new products increased to 44% (up from 38% in 2011), and they saw a 24% improvement in net profit margin (down from 26% in 2011.

According to survey 2012 survey results, business strategies have changed from 2011. In 2011, “the two most important underlying dimensions were superior product design and fast and reliable delivery along with superior customer service.” In 2012, “superior quality and lower selling prices have emerged as the two most important underlying dimensions on which manufacturers are differentiating their businesses.”

The authors “research reveals three key ways strategies are shifting as we move beyond the Great Recession toward a new era that is likely to be even more competitive:”

  1. Keep focused on the customer – strategies increasingly feature superior quality and lower prices, along with superior product design and customer service.
  2. Don’t underestimate the importance of technology – leading-edge technologies are playing a critical role in advancing these companies in conjunction with process improvement programs such as Lean and Six Sigma, advanced automation, and smart manufacturing technologies.
  3. Collaboration remains critical – partnerships and collaboration with up- and downstream customers and suppliers in the supply chain

Frohlich and Jones recommend, “Indiana manufacturing companies stay focused on the customer, avoid underestimating the importance of technology and know that collaboration remains critical.”

“These results indicate a reason to be optimistic about the manufacturing sector and jobs investment in the State of Indiana,” said Jones.

A slightly higher percentage of companies are “on-shoring” (aka “reshoring”) manufacturing back into the United States. When asked if they expect to relocate or onshore any manufacturing back to the United States during 2012-13, or alternatively, do they plan on relocating, or offshoring, any production outside the United States during 2012-2013, 9% indicated they intend to onshore and 8% intend to offshore. The top four reasons why companies are “reshoring” were:  better control over production (60%), proximity to customers and main markets (50%), closer to key suppliers (40%), and reduce total “landed” costs; i.e., customs/duties, transportation, warehousing, etch (40%). The main reasons for offshoring manufacturing out of the United States are:  lower offshore labor costs and proximity to customers in new markets.

“What now are recognized as systematic errors in offshoring over the past 10-15 years were a lot of mistakes based on myopic financial decision making,” said Jones. “Firms made offshoring decisions assuming exchange rates wouldn’t change, which is wholly unrealistic in currency markets. Many made these financial decisions using only the data in front of them. Additionally, the real cost of labor has gone up in China. All of this represents what, in retrospect, may be an excessive amount of offshoring in the previous decade.”

The survey revealed that the main reasons for Indiana’s competitive edge include:

  • Better access to new technologies
  • Better control over production
  • Locations closer to customers, markets and suppliers
  • Great accounting and auditing oversight

The report states, “The major remaining concern for the state is having a trained workforce that is qualified to pursue advanced manufacturing strategies.”

“These results clearly indicate a growing concern about access to an adequately trained Hoosier workforce, more so than in past years,” the report reads. “Consistent with the previous results indicating growing concerns about worker training, only 30 percent of respondents view Indiana’s workforce as a competitive advantage for the state.”

The authors conclude that “While Indiana’s manufacturers still face strong global competition, their practices and products are beginning to permeate all elements of operations; opening up new markets and sources of demand; driving innovation; and even changing industry cost structures.”

This report shows where Indiana’s manufacturers are right now, but the question is what to do next? The report indicates “a strong sense among Indiana’s manufacturers that execution is now the challenge to bringing about the new era of manufacturing. Confidence among business leaders about their progress toward this new era is strong, and their companies are taking concrete steps towards improving manufacturing…While today’s business environment provides a multitude of new challenges to manage, it also offers significant opportunities for those who can master its dynamics.”

The survey found that a new manufacturing era is on the horizon, and “there is widespread agreement about what the next era of manufacturing will look like. It is one where manufacturing is not only a separate strategic initiative, but also something fully integrated into the strategy and operations of a company. For example, manufacturers will need to develop a broader sense of what value creation means to customers as a whole.”

The underlying tone in this year’s report is that “the next five years could well determine not only the fate of some firms, but also, in significant ways, the success of Indiana and that of our country in the global economy for years to come…Manufacturing can and should continue to thrive if the right policies and strategies are pursued. Real and fundamental changes are continuing to take place across manufacturing in all kinds of capabilities.”

The authors conclude that “the message is clear: Indiana (and American) manufacturing has survived a tough first half. Now it must move forward to remain competitive in the future.”

This report is another example of how American manufacturers can survive and even grow and prosper in the face of global competition. The companies doing the best have implemented many of the recommendations contained in the chapter ? “What can manufacturers do to save themselves? ? in my book, Can American Manufacturing be Saved? Why we should and how we can. Innovative new products, fast, reliable delivery, superior customer service in conjunction with applying the principles and tools of Lean and Six Sigma are a few of the suggestions from this chapter. I encourage everyone to read the new 2012 edition of my book to find out what you can do as a manufacturer to grow and succeed, what national policies need to be changed and implemented to foster success of this critical sector of our economy, and what you can do as an individual to save American manufacturing.

 

 

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Chinese Innovation Mercantilism is Hurting American Manufacturers

Tuesday, December 11th, 2012

On Wednesday, December 5, 2012, Robert D. Atkinson, President of the Information Technology and Innovation Foundation (ITIF), testified before the House Science Committee Subcommittee on Investigations and Oversight in a hearing on “The Impact of International Technology Transfer on American Research and Development.” His testimony was based on his book, Innovation Economics: The Race for Global Advantage (Yale University Press, 2012) and the ITIF report, “Enough is Enough:  Confronting Chinese Innovation Mercantilism,” released February 2012.

Atkinson began his testimony by stating, “A nation’s investments in research and development (R&D) are vital to its ability to develop the next-generation technologies, products, and services that keep a country and its firms competitive in global markets. Until recently, corporate R&D was generally not very mobile, certainly not in comparison to manufacturing. But in a “flat world” companies can increasingly locate R&D activities anywhere skilled researchers are located…. the United States has seen its relative competitive advantage in R&D and advanced technology industries decline. While the United States still leads the world in aggregate R&D dollars invested, on a per-capita basis it is falling behind.”

He testified that the “decline in America’s innovative edge is due to a number of factors, not the least of which are failures of federal policy, such as an unwillingness to make permanent and expand the R&D tax credit, limitations on high-skill immigration, and stagnant federal funding for R&D. But the decline is also related to unfair practices by other nations that collectively ITIF has termed as ‘innovation mercantilism.’”

The ITIF report cited above states that these policies “include currency manipulation, relatively high tariffs (three times higher than U.S. tariffs), and tax incentives for exports.” In addition, “some policies help Chinese firms while discriminating against foreign establishments in China. These policies include “discriminatory government procurement; controls on foreign purchases designed to force technology transfer to China; land grants and rent subsidies to Chinese-owned firms; preferential loans from banks; tax incentives for Chinese-owned firms; cash subsidies; benefits to state-owned enterprises; generous export financing; government-sanctioned monopolies; a weak and discriminatory patent system; joint-venture requirements; forced technology transfer; intellectual property theft; cyber-espionage to steal intellectual property (IP); domestic technology standards; direct discrimination against foreign firms; limits on imports and sales by foreign firms; onerous regulatory certification requirements; and limiting exports of critical materials in order to deny foreign firms key inputs.”

The report explains that “in the last decade China has accumulated $3.2 trillion worth of foreign exchange reserves and now enjoys the world’s largest current account balance. In 2011, it ran a $276.5 billion trade surplus with the United States. This ‘accomplishment’ stems largely from the fact that China is practicing economic mercantilism on an unprecedented scale. China seeks not merely competitive advantage, but absolute advantage. In other words, China’s strategy is to win in virtually all industries, especially advanced technology products and services… China’s policies represent a departure from traditional competition and international trade norms. Autarky [a policy of national self-sufficiency], not trade, defines China’s goal. As such China’s economic strategy consists of two main objectives: 1) develop and support all industries that can expand exports, especially higher value-added ones, and reduce imports; 2) and do this in a way that ensures that Chinese-owned firms win.”

The report states that “because China is so large and because its distortive mercantilist policies are so extensive, these policies have done significant damage to the United States and other economies…The theft of intellectual property and forced technology transfer reduce revenues going to innovators, making it more difficult for them to reinvest in R&D. The manipulation of standards and other import restrictions balkanizes global markets, keeping them smaller than they otherwise would be, thereby raising global production costs…if Chinese policies continue to be based on absolute advantage and mercantilism…the results will be more of the same: the loss of U.S. industrial and high-tech output, and the jobs and GDP growth that go with it.”

Chinese mercantilist policies are unprecedented in their scope and size. Atkinson testified, “A principal arrow in China’s innovation mercantilist quiver is to force requirements on foreign companies with respect to intellectual property, technology transfer, or domestic sourcing of production as a condition of market access. While China’s accession agreement to the WTO contains rules forbidding it from tying foreign direct investment to requirements to transfer technology to the country, the rules are largely ignored.”

He added, “Rather than doing the hard work to build its domestic technology industries, or better yet focus on raising productivity in low-producing Chinese industries, China decided it would be much easier and faster simply to take the technology from foreign companies… China’s government unabashedly forces multinational companies in technology-based industries—including IT, air transportation, power generation, high-speed rail, agricultural sciences, and electric automobiles—to share their technologies with Chinese state-owned or influenced enterprises as a condition of operating in the country.”

The ITIF report explains that in 2006, “China made the strategic decision to shift to a “China Inc.” development model focused on helping Chinese firms, often at the expense of foreign firms. Chinese leaders decided that attracting commodity-based production facilities from multinational corporations (MNCs) was no longer the goal…The path to prosperity and autonomy was now to be ‘indigenous innovation’…”

The document “advocating this shift was ‘The Guidelines for the Implementation of the National Medium- and Long-term Program for Science and Technology Development (2006-2020)’…to ‘create an environment for encouraging innovation independently, promote enterprises to become the main body of making technological innovation and strive to build an innovative-type country.’”

Some 402 technologies, from intelligent automobiles to integrated circuits to high performance computers were included so that China could seek the capability to master virtually all advanced technologies, with the focus on Chinese firms gaining those capabilities through indigenous innovation.

However, China is not alone in trying to force the transfer of technology and R&D from foreign multinationals ? Indonesia, Malaysia, India, Portugal, and Venezuela have the same goal.

Why do so many nations engine in innovation mercantilism? Atkinson testified that there are two principle reasons. “First, these nations have embraced a particular and fundamentally limited model of economic growth that holds that the best way to grow an economy is through exports and shifting production to higher-value (e.g., innovation-based) production. Moreover, they don’t want to wait the 20 to 50 years it will take to naturally move up the value chain through actions like improving education, research capabilities, and infrastructure, as nations like the United States did. They want to get there now and the only way to do this is to short-circuit the process through innovation mercantilism. This explains much of China’s economic policies. The Chinese know that to achieve the level of technological sophistication and innovation that America enjoys will take them at least half a century if they rely on only their own internal actions. So they are intent on stealing and pressuring as much of American (and other advanced nations’) technology as they can to their own companies. If you can’t build it, steal it, is their modus operendi.”

Atkinson added that the second reason why these nations do this is because they don’t believe in the rule of law and the principles of free trade like Western nations and much of Europe do. These nations also “work on the ‘guilt’ of Western, developed nations. The narrative goes like this: the West has used its imperialist powers to gain its wealth, including at the expense of poor, developing nations and now it wants to “pull the ladder” up after it. This means turning a blind eye to intellectual property and giving our technology, including pharmaceutical drugs, to nations almost for free. After all, we are rich and they are poor because we are rich.”

The reality is that forced technology transfer is enabling China and other nations to gain global market share. It is doing “considerable harm to U.S. technology companies and to the U.S. economy, if for no other reason than reducing their profits and ability to reinvest in the next wave of innovation.”

Atkinson posed the question, “So what should the U.S. government do? He responded that “this is a difficult question because if there were easy solutions, they would have been done by now.” He recommended the following actions:

  • Try to do more through conventional trade dispute channels and expand funding for the U.S. Trade Representative’s Office (USTR) so it can do more.
  • Ensure that future bilateral trade and investment treaties (BIT) contain strong and enforceable provisions against forced technology and R&D transfer.
  • Congress should make it clear that it will not judge any administration by whether a BIT with China is concluded, but rather by if the United States made a strong effort to conclude a treaty that provided full protection against mercantilist practices like forced transfer of R&D.
  • Congress should pass legislation that allows firms to ask the Department of Justice for an exemption to coordinate actions regarding technology transfer and investment to other nations.
  • Congress should exclude mercantilists from the Generalized System of Preferences (GSP).

Finally, he recommended that the United States actively explore alternatives to the WTO and  pursue a two-pronged trade strategy, continuing as best it can to improve conventional trade organizations like the WTO, but also creating alternative “play-by-the-rules” clubs of like-minded countries.

He concluded his testimony stating, “Pressured or mandatory technology transfer by other nations has, is, and will continue to negatively impact American R&D and innovation capabilities. It’s time for the federal government to step up its actions to fight this corrosive mercantilist practice.”

Curbing Chinese mercantilism must become a key priority of our trade policy if we want to address this serious threat to American manufacturers and the U. S. economy.

 

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How Some Manufacturers are Successful in Competing Globally

Tuesday, December 4th, 2012

While attending the FABTECH Expo in Las Vegas last month, I interviewed several companies that all or the majority of their manufacturing in the U. S. to find out what they are doing to successfully compete in the global marketplace.

The first company was Laserstar Technologies, located Riverside, RI, and I interviewed Peter Tkocz, Regional Sales Mgr., southwestern States. Laserstar makes laser welding and marking equipment using the “free-moving” concept they development, enabling users to eliminate costly fixturing devices, benefit from pin-point accuracy, increase the range of assembly and repair applications and minimize the potential hazards of heat damage. Peter told me that the company is 55 years old and started making jewelry. When jewelry making went overseas in the 1990s, he said that the company had to reinvent itself and get into new markets to survive. They set a goal to enhance the quality, performance, and innovation of their products, programs and services on a continuing basis and became a “lean” manufacturing company.

Since, then, they have developed a diverse customer base of six major markets:

  • Medical – cardiac pacemakers, defibrillators, guide wires, catheters, hearing aids, orthodontic appliances, prosthetics and surgical tools
  • Dental – crowns and bridges, partial and implant fabrication and repair.
  • Electronics – a wide variety of different materials, component parts or final assemblies
  • Aerospace
  • Micro technology – wide range complex applications for laser welding and marking
  • Tool and die repair – ideal for modifications and repairs on molds, tools and dies as the process is quick, precise and will not damage surrounding surfaces.
  • Jewelry – a fast fix to repair jewelry and eyeglasses, and their new Fiber star machine can weld down to 12 microns, which is critical for high-end gem stones

LaserStar’s Research & Development laboratory is focused on inventing new technologies that change markets and create business opportunities, utilizing input from customers. Laserstar sells through learning centers vs. distributors, and the three learning centers at their headquarters in Rhode Island, California, and Florida. Their laser education courses provide a solid foundation of fundamental laser welding and laser marking skill sets to immediately gain a revenue impact for the new or existing iWeld, LaserStar or FiberStar laser welding or laser engraving system.

I next interviewed Dan Moiré, Sr. V. P. Sales of TRYSTAR, located in Faribault, Minnesota. TRYSTAR is a leading domestic manufacturer and international distributor of portable and permanent power solutions, industrial cables and power accessories. The company began operations as Bridgewater Tech, an industrial cable wholesaler founded in 1991. It wasn’t long before they realized there was room for innovation and improvement in the safety and performance of the products they were selling. As a result, they began manufacturing their own welding and grounding cables under the TRYSTAR brand in 1993.

As the superiority of TRYSTAR cables became evident throughout the industry, they expanded operations to offer customers greater versatility and reliability in the field, and as the brand became well known, the company transitioned from Bridgewater Tech to TRYSTAR.

Dan Said that today, TRYSTAR offers a wide range of capabilities specifically designed with the end-user in mind. They provide efficient, customized solutions, made with only the highest quality raw materials, manufactured on site, and serviced by their own professionals. Their factory is as vertically integrated as possible, and they provide customers with a full range of professionally packaged industrial products and services. They even extrude their own cable and do sheet metal fabrication and welding in-house.

TRYSTAR was the first to…

  • introduce sequential foot-marking to the welding cable industry, reducing the chance of waste
  • introduce custom-printed, colored cable, reducing the chance of theft on the job site
  • market a color-coded, insulated inner safety liner, designed to alert the cable’s user to any damage or wear and minimize problems in the field
  • produce a true Arctic weather cable that remains flexible to -57°C
  • introduce an improved clear-sheathed grounding cable that is flexible from -40°C to +105°C, allowing for safer grounding of high power lines during outages
  • introduce environmentally responsible, recyclable packaging for cable products
  • provide direct-to-market, completely assembled cable products, with unique and specific job identifiers, delivered directly to the job site

Kevin Duhamel, Product Sales Mgr at Gorbel was my next interview. Gorbel has over 30 years experience providing overhead handling solutions to customers in a wide range of industries. They have a comprehensive line of Crane Technology products, including work station bridge cranes, patented track cranes, I-beam jib cranes, gantries, and work station jib cranes. They also have an exciting line of Ergonomic Lifting products, featuring our G-Force® Intelligent Lifting Device, our Easy Arm® Intelligent Lifting Arm, and our G-Jib®. Their newest line, Tether Track Fall Arrest Safety Systems, provides a turnkey fall protection solution that exceeds OSHA safety standards. –

They have been in business since 1977 and are the largest U. S. manufacturer of lifting devices and cranes. Kevin said that their G-Force unit can lift up to 1320 lbs with higher speed and precision than chain hoists. They have two manufacturing plants in the U. S. – Fishers, NY and Pell City, AL – and sell to Europe, Canada, Mexico, and South America from their U. S. plant. They have a plant in Tianjin, China to market to customers such as John Deere and Caterpillar that have plants in China. About 90% of their business comes from North America and Mexico. They are very vertically integrated and qualified to have their product stickers say “Made in USA.”

I met and spoke to several of the top executives at TigerStop, located in Vancouver, WA, including president and founder Spencer Dick. Spencer founded TigerStop in 1994 and focuses on developing new product lines and enhancing their current products to simplify production processes for their customers.

TigerStop® LLC, is the global leader in stop/gauge and pusher systems that includes precision measuring systems, saws, and material handling equipment. National Sales Mgr., Erland Russell, told me that their products can easily integrate with most machinery used in the woodworking, metal, fenestration and plastics industries. He said that one of their models can measure and precisely saw material up to 20 ft. in length. TigerStop maintains an aggressive research and development program with over 100 patents awarded or pending.

TigerStop’s manufacturing is very vertically integrated in their Vancouver plant, but they also have an additional manufacturing and distribution facility in Wierden, Netherlands. The TigerStop distribution network spans six continents and their products are supported in five languages. TigerStop provides world-class customer support through experienced service technicians, on-going dealer training, and online technical resources.

Next, I interviewed Mike Albrecht, National Sales Mgr., at the Scotchman Industries booth. Scotchman Industries, Inc. is a leading manufacturer of metal fabrication equipment, accessories, and custom tools, such as ironworkers, cold saws, band saws, tube and pipe notchers, and measuring systems for nearly half a century.

Art Kroetch founded Scotchman Industries in the early 1960s to make and sell farm-related products, such as pickup stock racks, corral panels, gates and chutes. In 1966, Scotchman Industries purchased the patent for a hydraulic ironworker, the first machine of its kind in the world, and began manufacturing ironworkers. This machine, using hydraulic pressure, created up to a 35-ton force that could punch, bend and shear metal.

In 1978, Scotchman Industries purchased Excel Manufacturing Ltd. of Winnipeg, Manitoba, Canada, and was able to provide a line of ironworkers that ranged from 30-ton to 90-ton capacities for the world market. Today, Scotchman Industries, Inc. has a complete line of thirteen different ironworkers, ranging in capacities from 45 to 150 tons, with component tool design, and a fully integrated European style; both are available in either single or dual operator models. Scotchman has successfully acquired and maintained a large portion of the ironworker market.

Scotchman Industries is proud to be an American manufacturer who has always been export-minded. The company was given the President’s “E” Certificate for Exports in 1981 by the Secretary of Commerce, for excellence in its increased exporting of products. Today Scotchman Industries continues to export their products to many countries around the world.

Scotchman is located in Philip, SD; Mike said that all of their products are manufactured in the USA. They have donated equipment to the Workshops for Warriors located here in San Diego, CA.

Finally, I interviewed Heather Gaynor, Marketing Communications Mgr., at Swagelok, located in Solon, OH. Swagelok is a privately-held company that manufactures designs, manufactures, and delivers an expanding range of the highest quality fluid system products and solutions, such as tube fittings, valves, regulators, hoses and other products that are vital to fluid system solutions in industries such as power generation, oil and gas production, chemical processing, biopharmaceutical, research, semi-conductor manufacturing and more. They manufacture everything in the U. S. and are very vertically integrated.

Swagelok products and services are delivered locally through a network of more than 200 authorized sales and service centers that support customers in 57 countries on six continents.

While the products and services of the companies I interviewed are quite different, there are common threads:

  • All of the products are sold to other businesses (referred to as B-B) instead of to consumers.
  • The products fill specific needs and requirements of other manufacturers.
  • All of the companies manufacture their products in America.
  • The companies export their products to other companies

In addition, three of the six companies are privately held so that that management isn’t under the pressure to maximize quarterly profits and can focus on long-term company goals.

What this shows is that American manufacturers with unique products that satisfy customers’ needs can compete successfully in business-to-business global markets where the predatory mercantilist countries of China, Korea and India haven’t targeted to take over the market and destroy their American competition. If American manufacturers truly had a level playing field provided by “smart” trade agreements instead of the current lopsided, dumb agreements we have in place now, they would be able to compete successfully in the global marketplace. It is time to address the predatory mercantilist practices of these countries. Designating China as a currency manipulator would be a good start!

 

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