Archive for May, 2014

Columbus Castings has learned how to survive and thrive in challenging marketl

Tuesday, May 20th, 2014

The metal casting industry has been one of the hardest hit by competition from China and India, but some companies have been able to survive and even prosper despite the combined onslaught of intense offshore competition and the Great Recession. That has now put them in the position to benefit from reshoring trend. I recently had the pleasure of interviewing Megan McCuan, Communications and Development Coordinator, of Columbus Castings in Columbus, Ohio, which is the largest single site steel foundry in North America.

Columbus Castings manufactures steel castings for the freight and passenger rail cars, locomotives, mining equipment, industrial magnets, construction equipment, agricultural equipment, and other heavy industrial industries. They produce high-quality industrial castings from 100 to70, 000 pounds. The company has about one million sq. ft. of space in 14-15 buildings, covering an area of 90 + acres, including 22 acres under roof, with access to 19 miles of rail. Columbus Castings currently has 695 employees, and most employees have long time experience. Some of their employees have been there for as long as 30-50 years.

The company’s roots date back to 1881 when the Murray-Hayden Foundry, a small iron foundry, served a growing agricultural based economy. The business flourished when it began manufacturing iron couplers for the infant rail industry and in 1891, the name was changed to the Buckeye Automatic Car Coupler Company.

As the American rail industry expanded, the operation was relocated to a larger facility, and the name was changed to the Buckeye Malleable Iron and Coupler Company to reflect its new emphasis on iron couplers. As the American rail industry growth boomed through the early 1900’s, the demand for iron couplers soon exceeded capacity, and the business moved to the present day location in 1902.

As the industry demand for stronger, tougher products, the foundry changed to steelmaking and the name of the business was changed to the Buckeye Steel Castings Company. In 1967, Buckeye Steel became the flagship company of Buckeye International Inc., which was formed as a parent company for purchasing other non-foundry related businesses. Buckeye International was acquired by Worthington Industries Inc. in 1980, in a stock for stock merger. Buckeye Steel remained an operating subsidiary of Worthington Industries until 1999, when it was sold to Key Equity Capital in a leveraged buy-out. Buckeye Steel operated as a stand-alone entity until December 2002, when bankruptcy was filed after the double blow of a weak freight rail market in 2000 followed by the devastating economic effects of 9/11 and the intense competition from China, which proved too much for the debt burdened business.

That could have been the end of the story, but the former President of Worthington Industries, Don Malenick, had different idea. Don had recently retired after 40 plus years from Worthington, where he had held the position of President for the final 26 years. He had an in-depth understanding of the potential value of the facility and also maintained his love for the steel industry in the Central Ohio area. He assembled a team of investors to purchase the assets of the business out of bankruptcy, as well as a team of veteran railroad foundry men to start the new business.

The new entity, Columbus Steel Castings, was based on a business model designed to be the lowest cost and highest integrity supplier of cast steel products in the industries it serves. The business was formed with a “pro-employee”, “union-free” philosophy, created to engage its employee’s talents to the fullest. When the business does well and makes a profit, then all eligible employees share in the success. As a “Pay for Performance” company, the wage and salary compensation is based on an employee’s contribution to the bottom line. Employees are incited to work hard as a team and find ways to do their jobs better, faster and safer.

The company experienced a slight upturn in their rail business from 2004 to 2007, while their industrial market was slow and steady. In 2008, Protostar Partners, LLC purchased Columbus Steel Castings and renamed the company Columbus Castings.

Their rail business slowed in the fall of 2008 after the economic crash that led to the Great Recession in 2009-2010. The demand for freight cars dropped during the recession, and they had to lay off employees.

In 2011, they implemented a new sales plan and focused on their quality and on-time delivery. They responded to the shift of their customers from coal cars to tankers for natural gas in 2012 when the natural gas industry boomed in the upper Midwest. They are currently marketing more to tank car customers and featuring new materials for sand castings for this market.

Richard T. Ruebusch took over as President and CEO in 2012 after having held numerous senior level executive level positions that included 14 years experience at global foundries. In order to be more competitive in the global economy, the company became ISO 9001:2008 Certified. They also started lean manufacturing training as both Mr. Ruebusch and their V. P. of Operations, Randy Parish, have extensive lean manufacturing backgrounds. As a result of implementing lean, the company has achieved a 30% improvement in cycle times and reduced their lead times. Columbus can now produce and ship average components in less than 12 days, ad large components take only around nine weeks.

While, China is still a big competitor for rail car components, the company is getting some work back from offshore. As oil prices increased, costs to ship massive steel castings from China reduced profit margins for their customers and long deliveries became a disadvantage. Columbus can produce and deliver high-quality steel castings in less time than it would take to ship them from overseas. Ms. McCuan said that Caterpillar had a factory in India and brought the work back to the U.S. in 2012, and Columbus was able to get part of the reshored business.

In November 2013, Columbus landed the largest order in its 130-year history. The deal with Nippon Sharyo USA Inc. for railcar undercarriages could be worth up to $70 million to the manufacturer and added more than 50 jobs at the foundry. Nippon’s end customer is Amtrak, which is in the midst of an extensive replacement of its passenger railcars. “If they exercise all their options, this will keep us at full capacity until 2021,” CEO Rick Ruebusch said. “In addition to the Nippon deal, the manufacturer also has orders from additional Amtrak suppliers CAF USA and Hyundai Rote Co. for the same railcar components.”

Columbus utilizes “green” practices, such as thermal sand reclamation, and the company has two new design projects: one of which is a new “knuckle” that is a rail component that goes on the end of rail car to fasten it to another car. They are also working on reducing the weight of parts without reducing performance.

Their “Open Door” policy assures every employee an opportunity to voice his or her concerns about the business and their employment. The company’s management knows that their business is only as good as their people, and the development and recognition of the best people will assure continued growth and improvement of the company in the future.

Mr. Ruebush said, “The main factor contributing to the success of our company since recovering from the Great Recession was becoming a diverse manufacturer. In past times, our company was too focused on freight rail. We are building business levels in our industrial business unit, as well as in our mass transit (passenger rail) business as demonstrated with the recent largest order in the company’s history with the announcement of our $72MM contract with Amtrak and Nippon Sharyo.”

It certainly looks like Columbus Casting is well on its way to achieving its goal of being the best large steel casting company in the world. If the U. S. had a national manufacturing strategy that supported American manufacturers to help them become winners in the global trade wars, more American companies would be able to achieve the same kind of worthy goal for their industry. We need a strategy for prosperity for American-owned businesses and not just the large multinational corporations. It’s time for our elected leaders to address the predatory mercantilist trade policies of foreign countries, such as currency manipulation, product dumping, government subsidies, and intellectual property theft that put American manufacturers at a disadvantage in the global marketplace. This is the only way we will be able to create the higher paying manufacturing jobs we need to grow our middle class and reduce our trade deficit and national debt.

Posted in Economy, Jobs, Manufacturing, Reshoring, Trade Policy | 1 Comment »

California’s Metalworking Industry is a Leader in Technology and Environmental Consciousness

Tuesday, May 13th, 2014

The California Metals Coalition (CMC) held their 41st annual meeting in Anaheim on May 8-9th, 2013. Over 150 business leaders from metalworking companies and the industry’s service providers attended the meeting. The California Metals Coalition membership is a diverse representation of the state’s metals industry. Membership in CMC is corporate, and the employees of each facility are individual members of the organization. The member companies are small businesses ? the average number of employees per company is only 50, so without an organization to be the voice and advocate for the metalworking industry in California, these companies and this industry would have no influence on statewide policies affecting them.

California’s metalworking industry began when metalworking facilities were established in1848 to manufacture the tools that led to the start of the gold rush and birth of our state in 1850. Today, California is home to 6,100 metalworking facilities, employing approximately 213,500 Californians, providing high-paying manufacturing jobs, health benefits, and a solid economic foundation to the Golden State. This level of employment represents 18% of California’s 1.2 million manufacturing jobs. This industry generates $12.2 billion in goods and services and $7.9 billion in wages for the economy.

The types of services provided by member companies includes: sand, permanent mold, investment, rubber/plaster mold, and die casting, machining, forging, metal fabrication and welding, metal stamping, metal finishing, metal raw materials, metal recycling, and tools and dies.

According to CMC data, in the metalworking industry, 8 out of 10 employees are considered ethnic minorities or reside in communities of concern. Living-wage employment for this diverse workforce can be found in working-class communities throughout the state because the average full-time hourly wage is $18.00 (not including benefits) or $37,000 per year. Jobs provided by this industry are the path to the middle class for many Californians.

What do these companies make? Metal manufacturers make the parts that go into solar panels, electric cars, medical devices, airplanes, unmanned vehicles, ships for the Navy and private companies, products for the military and defense industry, and thousands of other applications. Metalworking products and services are a direct reflection of the innovation and hard work put forth by California’s workforce and business owners.

Californians discard enough aluminum each day to build five Boeing 737 jets, and California metalworking companies recycle millions of tons of discarded metal each year. Metal is recycled and used as the primary material source to build components that fly our planes, housings that spin renewable-energy windmills, medical devices that keep our families safe, and defense items used by our troops. California metalworking companies recycle about 1,830,000 tons of metal per year, and every ton of waste that is recycled rather than disposed in landfill produces $275 more in goods and services.

The keynote speaker of the conference was Jerome Horton, Chairman of the Board of Equalization, who acknowledged the importance of this industry to the economy of California by mentioning some of the above data. He said that the BOE is helping California companies grow and had worked with the California Metals Coalition and other organizations to obtain the new manufacturers exemption tax credit that was signed into law by Governor Brown as part of Assembly Bill 93 and Senate Bill 90. This exemption will become effective July 1, 2014 and expires on July 1, 2022. It applies to specified NAICS codes, applicable to the whole metalworking industry and has a $200 million limitation. Tax-exempt property must be used 50% or more in one of the following activities:

  • Manufacturing, processing, refining, fabrication, or recycling tangible property
  • Research and development
  • Maintaining, repairing, measuring, or testing any qualified property
  • As a special purpose building and/or foundation

The BOE expanded the meaning of this tax credit to apply to tooling, whether it is retained or sold. Tooling must be either manufacturing by a company or purchased, be used in the manufacturing process, and have a life of over one year.

He also outlined the benefits of the new employee hiring credit that replaces the tax credits offered by Enterprise Zones that have been eliminated. This tax credit is based on wages of $12-$28/hour. There is a maximum of $56,000 per employee over five years, and the credit is equal to 35% each year.

The BOE has a much larger reserve than they need and are starting to refund monies to California companies. Last year the sales tax revenue increased from $52 billion to $56 billion, which helped enable the state budget to be balanced, but the State still has $300 billion in debt.

Kimberly Ritter-Martinez, Chief Economist for the Kyser Center for Economic Research at the Los Angeles Economic Development Corporation was the next speaker. She provided an overview and comparison of the national economy and the state economy. If California were a country, it would be the 9th largest economy measured by Gross Regional Product in the world. However, California is lagging the national average in creating jobs, so that the unemployment rate in March was 8.1% compared to 6.7% nationwide. Jobs in durable goods manufacturing only increased by .8% for the state. She predicted 2.4% growth in the State GRG in 2014, and 2.9% in 2015.

Although California is losing businesses to other states, the LAEDC has helped companies such as Space X and American Apparel stay in California.

Jack Broadbent, Executive Office of the Bay Area Air Quality Management District, was added to Thursday’s schedule of speakers as he had a conflict with attending on Friday as originally scheduled. The Bay area District was established in 1955, includes 9 counties with a population of seven million, and covers 5,540 square miles. The purpose of the Bay Area District was to improve air quality by reducing particulate matter, noxious odors, reduce visible emissions, and reduce future emissions. The California Air Pollution Control Officers Association (CAPCOA) was formed to coordinate the rules of many local and statewide agencies involved in air quality.

In 2013, two new rules were adopted after extensive consultation with industry and other stakeholders. Rule 12-13 applies to foundries and forges, and Rule 6-4 applies to metal recycling operations. The Bay Area District led the state in creating an Emissions Minimization Plan to focus on fugitive emissions by reducing particulate matter, toxics, and odors. It incorporates continuous improvement via on-going facility assessments and Plan updates. All the draft plans have been received, and the next step will be a determination of District completeness, a public review period, District review and approval, followed by facility implementation.

In the Q & A period, I asked if the air pollution being transported by the trade winds from China is being taken into consideration, and he said that they have had to adjust the base of the ambient air quality because of the transported pollution. He has been to China five times in the past three years, and he said that China’s particulate matter in their air is more than 10 times the U. S. standard.

Brian Johnson, Deputy Director of the Department of Toxic Substances Control (DTSC) was the next speaker. He briefly described the Hazardous Waste Management program and the new Policy and Program Support Division that was formed after restructuring last year. The metalworking industry is getting a great deal of attention by the legislature, regulators, and the community around specific metals sites. A Hazardous Waste Reduction Initiative was introduced into the legislature last year, and a Safer Emissions Products Initiative is on the horizon. The Department is using 17 categories of pollution burden data of Census Track ratings to prioritize their response to community complaints for specific metals sites.

The next topic was workmen’s compensation insurance, and State Senator Ted Gaines (R) who is a candidate for Insurance Commissioner described how his long experience as an insurance agent would be beneficial to working with the metalworking industry to improve this insurance program. A panel of five members of CMC shared their experiences with regard to this issue. Of note, is the fact that California has some of the highest workmen’s compensation rates of any other state for certain industries. For example, the California rate for die casting companies is 5 times the rate in Mississippi.

The issues discussed at this conference demonstrate why the metalworking industry is challenged in doing business in California. However, many of these companies, especially foundries and forgers, cannot easily pick up stakes and move to other states. The high cost of doing business in California has resulted in more companies going out of business rather than moving to another state.

Adding to these challenges has been the fierce competition this industry has experienced from China in the past decade. CMC Executive Director, James Simonelli, told me that in the year 2000, the industry had about 325,000 employees. This means that the current employment of 213,500 is 40% less than it was 14 years ago. The good news is that all of the attendees to whom I spoke were experiencing some “reshoring” of parts coming back from China.

When compared to manufacturing facilities around the world, California is the place to find the most technologically advanced, and environmentally conscious metal manufacturers. California’s metalworking industry is arguably the world’s leader for efficient, clean, and safe metal manufacturing.

Posted in Economy, Environment, Jobs, Manufacturing, Reshoring, Taxes/Regulations | No Comments »

Nearsourcing is the Next Best Thing to Reshoring

Tuesday, May 6th, 2014

The basic definition of nearsourcing is to source outside your own facility, but within your own region and not on the other side of the globe. Nearsourcing may have a different meaning depending on the region in which you are located in the United States. For the purposes of this article, the definition of nearsourcing means sourcing in Mexico, which is the meaning understood in California and in other states along the international border with Mexico.

As much as it is would be desirable for all the manufacturing we lost to offshoring in China to return to the United States, it is an unrealistic expectation in the global economy. As logistics costs continue to increase worldwide, sourcing regionally will become the most reasonable course of action for companies with a global market.

Although reshoring through returning manufacturing to America is gaining momentum as wages and logistics costs rise in China, there is still a substantial cost differential for high volume and/or high labor content products. What is a good solution to this problem? Nearsourcing to Mexico may be the right answer.

Nearsourcing to Mexico by U. S. manufacturers began in the 1965 after the “maquila program was initiated in 1965 during the Diaz Ordaz presidency as a means of attracting foreign investment, increasing exports, and fostering industrialization along the U.S./Mexico border” By the mid 1980s there were thousands of maquiladoras in cities along Mexico’s border with the U. S. Some of my first customers when I started my rep agency in 1985 were maquiladoras owned by U. S. corporations in Tijuana, Baja California, Mexico.

For many years, Americans crossed the border to work in the maquiladora plants as engineers, purchasing agents, department heads, and plant managers, but gradually Americans were replaced by Mexican nationals, first the engineers, then purchasing agents, then department heads, and more recently as plant or general managers.

Prior to NAFTA, all production that was generated in the Mexican plants had to return to the country of origin or had to go to a third country. During the first phase of NAFTA from 1994-2000, the maquiladoras continued to benefit from the waiver of Mexican import duties on raw materials while also benefitting from the preferential duty rates on those products that satisfy NAFTA rules of origin. Since then, duties on raw materials that originate in non-NAFTA countries increased, but not as much as originally anticipated. During the second phase of NAFTA, changing rules made it gradually more difficult to sell to the maquiladoras because persons wishing to conduct business at maquiladoras had  to purchase a FN certificate (by the day or year), provide written proof of an appointment, and within a few years, have a passport. If a company was caught having a visitor that didn’t have written proof of an advance appointment, the company was fined. Thus, it became illegal to do what is called “cold calling” on prospects without an appointment.

During the early 2000s, the maquila industry was hit hard by the U. S. recession of 2001-2002, and hundreds of maquiladoras closed along the border. Since I read, write, and speak Spanish, I subscribed to a maquila industry newsletter, and every issue was filled with names of companies that were closing plants in Mexico. Many foreign companies in Tijuana abandoned the equipment in their plants to be sold in auction to pay benefits to the Mexican government for employees that had lost their jobs when the plants closed. I had a business acquaintance who survived the U. S. recession by acting as the Mexican government’s representative to handle the auctions.

The recession coincided with China becoming part of the World Trade Organization and the beginning of the trend to move manufacturing to China. Many U. S., Japanese, and Korean companies chose to move manufacturing to China rather than resume manufacturing in Mexico. The effects of the recession of 2008-2009 were not as severe as the previous recession on the maquila industry, but it meant that it took nearly the whole decade of the 2000s for the maquila industry in the Baja California, Mexico cities of Tijuana, Tecate, and Mexicali to get back to the level of manufacturing they had in the year 2000.

In my opinion, the San Diego region lost less manufacturing to China than other parts of California and the U.S. because so many regional manufacturers already had long-established plants in Tijuana and Mexicali and didn’t see enough cost savings to move manufacturing to China. This was aided by the fact that San Diego’s manufacturing industry has always had more high mix, low volume products than either Silicon Valley or the Los Angeles region.

There was one industry that could not move manufacturing to China and that has remained especially strong in Baja California:  the aerospace and defense industry. According to the report “Aerospace & Defense Manufacturing in Mexico,” released in August 2013. “Mexico is home to more than 260 aerospace manufacturing facilities and a 31,000 strong, highly-skilled direct industry workforce.” Major U. S. defense companies such as BAE Systems, Lockheed Martin, and Delphi established plants in Mexico during the late 19890s and early 1990s. Baja California leads with 28% of Mexico’s aerospace and defense industry exports, and Baja California has the only Binational Aerospace Cluster in Mexico.

“Mexico currently attracts 5% of the total number of licenses granted by the State Department of the United States for the production of dual use goods and technologies.” Mexico has been proactive in pursuing more aerospace and defense business by joining the Bilateral Aviation Safety Agreement (BASA) between the U. S. and Mexico, the international Wassenaar Arrangement (WA), and the Nuclear Suppliers Group.

Some of San Diego’s aerospace and defense industries that have manufacturing plants in Baja California include:  BAE Systems, Cubic Corporation, Gulfstream, Lockheed Martin, and UTC Aerospace Systems. Other U. S. aerospace and defense manufacturers in Baja California are Delphi Connection Systems, Eaton Aerospace, and Honeywell. The state of Queretaro, a few hours south of Mexico City, is home to such companies as Bombardier Aerospace, GE Infrastructure, ITR, Curtiss Wright, and Eurocopter.

Under NAFTA, the Buy American Act requirement for the U. S. Department of Defense to purchase products that contain a minimum of 50% of U. S. produced content is waived, so defense and aerospace companies are allowed to purchase products made in Mexico and Canada.

Also, under “the Manufacturing, Maquiladora and Export Service Decree, the IMMEX program allows for goods, raw materials and components to be imported into Mexico on a temporary basis, duty-free and VAT-free, as long as they are returned abroad within the established timeframes (most are 18 mos.”

In addition, a Special Aerospace Tariff Section 9806.00.06 “allows for free imports to assemble and manufacture aircraft or aircraft parts when companies have the Certificate of Approval to Produce issued by the Ministry of communications and Transportation.” Section 9806.00.05 allows “gods for repair or maintenance of aircraft or aircraft parts…to also be free of tariffs and have administrative advantages for companies.”

You may ask when nearsourcing is the best decision if you cannot achieve enough cost savings to return manufacturing to the U. S. It may be the best decision in the following cases:

  • Proximity to U. S. customers is important
  • Product labor content is between 20-30%
  • High mix, variable products, mid volume production
  • Intellectual Property protection is important
  • Faster delivery/responsiveness than from Asia
  • Product has substantial U.S. part content
  • Mexico/Latin America are key markets
  • NAFTA benefits fit your products

For California manufacturers, especially in southern California and San Diego, the main advantages of nearsourcing in Baja California compared to China and other parts from Asia are:

  • Right across the border from San Diego
  • Minimal Intellectual Property risk  because of strong Mexican Intellectual Property laws
  • Labor costs are now 14.6% cheaper than China
  • Lower utility rates
  • Direct connection to major transportation centers
  • Industrial real estate lease rates that are 1/3 less than China
  • Mexico’s workforce is highly skilled and educated
  • Low average turnover rate of 2.6% reported in 2011
  • Mexico graduates more engineers/year than U.S. (about 115,000 vs. about 50,000)

As a strong advocate for American manufacturing, I want as much as manufacturing as possible to reshore to create more good paying jobs in order to rebuild our middle class. However, I would rather see U. S. companies nearsource parts in Mexico than source them halfway around the world in China. The Mexican government isn’t using the U. S. dollars they gain from our trade deficit to build up their military, and Mexico doesn’t have any nuclear missiles aimed at the U. S. as does China. It is an advantage to our country if Mexico creates more good-paying jobs in the manufacturing industry to grow their middle class. To me, nearsourcing to Mexico seems like a win-win solution for strengthening the middle class of both countries.

Posted in Manufacturing, Nearsourcing, Reshoring | No Comments »