U.S. manufacturing got walloped during the Great Recession. It lost 20% of its output and 15% of its workforce. “That’s second only to the Great Depression of the 1930s, when it lost about half its total output,”says Cliff Waldman,chief economist for the Manufacturers Alliance for Productivity and Innovation (MAPI), a manufacturing leadership organization.
And it wasn’t an isolated hit. Waldman and economist Mark Schweitzer, senior vice president at the Cleveland Federal Reserve, both say that the economy was still reeling from the recession of the early 2000s. The United States was just coming out of that recession when the terrorist attacks on the World Trade Center in September 2001 shook the economy again. It still hadn’t recovered when the U.S. housing market began crumbling in 2008. So much trauma in less than a decade sent the U.S. economy spiraling into the Great Recession. Manufacturing capacity utilization fell 8 percentage points during that time, a significant drop.
The manufacturing economy bottomed out in mid-2009. But by the end of that year, things were looking up—manufacturing was recovering faster than the rest of the overall economy. “In fact, it was helping to pull the overall economy out of the bottom of the Great Recession,” says Waldman.
But it wasn’t long before weaknesses in other parts of the world began to take their toll. The financial shock in the U.S. housing sector in 2008 reverberated in Europe and emerging markets beginning in 2009, resulting in the nearly unheard-of event of contraction of the global gross domestic product, not just the U.S. GDP.
Fear shifted from the stability of the U.S. financial system to the stability of the Euro, as the economy of Greece was on the brink of collapse, and worry spread that other countries would follow. And China’s predicted slowdown from more than 10% year-over-year growth was anticipated but still worrisome.
The impact of these global problems: From 2013 through 2016, manufacturing growth slowed to a paltry 0.6%. “That’s a risky situation,” says Waldman, who calls 2.5% to 3% growth healthy. “That’s a pivot point where if we don’t get out of it, this sector could start sliding again.”
While the factory sector still hasn’t recovered from the Great Recession, says Waldman, being 4% to 5% lower than its pre-recession peak, it is showing some rallying signs. Manufacturing employment was up every month from January to April 2017 (it dipped slightly in May) and output grew 2.7% in the first quarter of 2017.
An overall cautious mindset toward expansion among manufacturers since the recession means they’re in a “pretty good position,” in the event of a downturn, says Schweitzer. “We haven’t seen a lot of boom times in manufacturing over the expansion. So there are not a lot of things to significantly pull back on.”
This brings us to some soul-searching. Has U.S. manufacturing fully recovered from the last recession? Are companies in a position to better absorb a down- shift in the economy? Have they learned anything that will help them weather the next storm, real or figurative?
Lights, Camera ... Hurricane
City Theatrical, a small New Jersey manufacturer that makes specialized lighting for the entertainment industry, felt the hit and then some. “Our industry is very sensitive to the economy,” says President Gary Fails, a lighting designer and tinkerer who started the company in the 1990s after improvising his own gadgets when available equipment fell short. But the company saw the slowdown as a chance to regroup. It invested more in R&D—“we’ve always been very good at inventing to meet the demands of the market”—and beefed up its anemic sales staff.
Performance was “mediocre” during that period, and then in 2012, just as the economy was picking up and theater owners could finally afford new equipment again, the company experienced a more literal wallop: Hurricane Sandy. Post-storm, “our entire building had 39 inches of water in it,” recalls Fails. The plant was located in a federal flood zone, so insurance was limited.
But City Theatrical was able to dry out, rebuild and rebound. The company kept a strong balance sheet through the recession, staying current on its bills and strengthening its relationships with suppliers, who liked them enough to extend them credit after the hurricane. “They became our bank during the next six months,” says Fails.
Though City Theatrical is a small company with gumption to spare, it’s got a lot in common with large manufacturers who came out swinging after the recession: a conservative view on debt and investment in R&D, better machinery and people during the slow times.
City Theatrical is now double its pre-recession size, employing 40 people and expanding its product lines.
But Fails isn’t ready to forget the lessons from the dark times. He’s keeping close watch on competition from China and cybersecurity concerns.
“I looked at our charts, and our previous recession was 2001. After the [9/11] terrorist attacks, the economy slowed down. Just prior to both of those we were growing strongly—substantial upward growth—but both really stopped us dead in our tracks. History has taught us that when it happens, it’s pretty devastating.”
Like Fails, many manufacturers took such a protracted beating from 2000 to 2010 that even years later, they don’t stick their necks out, says MAPI’s Waldman. “I do think there is this constant fear of making sure your balance sheets are liquid, so markets don’t’ attack your liquidity like they did in the fall of 2008 and 2009.”
A Talent Crisis?
Julie Fream, president and CEO of the Original Equipment Suppliers Association (OESA), says the mood among the automotive suppliers she represents is good “for the remainder of the year, into next year.” Auto sales in the U.S. hit record levels in 2016 and appear to be holding steady so far in 2017.
Fream says that since the 2008-’09 government bailout of the auto industry during the recession, suppliers have kept a closer eye on their fixed costs, from infrastructure and inventory to people, “to make sure it is something they can manage if volume takes a downturn.”
The biggest concern going forward for OESA is availability of talent, as suppliers position themselves for a segmented future that includes both traditional parts and technologically sophisticated components for connected, electrified and autonomous vehicles. With volumes high but flattening, “the challenge becomes companies knowing they can comfortably and confidently take on the next program,” says Fream. “As you develop and commit to new business, are you going to have the staff in place that you need?”
And it’s not just engineers they need. “We also don’t have enough skilled trades,” she says. “Frankly, we don’t have enough skilled production workers— people with the ability to run complex, computerized machinery on the production line. It’s a real concern, and we have to work to develop the workforce we’re going to need in the future because it’s only going to be more challenging as people retire.” Skilled electricians, “what you might call traditionally pipefitters,” are in high demand to make that complex factory machinery, says Fream.
That will be the case even if volume goes down, Fream points out. It still takes the same number of R&D engineers to develop a new vehicle and skilled tradespeople to produce it, whether it sells 50,000 or 200,000 units.
The Daily Downturn
“I think that a company that doesn’t plan every day for its downturn is being extremely naïve,” says Peter Anthony, CEO of automotive supplier UGN, a company also doubly battered by the auto bailout and then a natural disaster— the tsunami in 2011 that paralyzed the Japanese auto industry for six months. Thanks to lean practices implemented beginning in 2002, the company was well positioned for the recession, and in 2010, its revenues grew by $100 million in a year.
“Cash for clunkers helped that,” says Anthony, “but we did not forget how difficult it was” during the recession “and we kept all those cost containment measures in place.” Investing in an ERP system in 2009 “allowed us to dig in and manage the business. Before ’09, at the end of the month, we’d say, ‘How do we think this month will turn out?’ Now we know. Labor efficiencies, equipment uptime—we’re able to really gauge that and use the metrics to guide our business.”
UGN leaders also remembered some lessons they’d learned about talent. When the tsunami hit, UGN issued furloughs. The company had laid people off during the recession and “we lost a lot of our knowledge and it hurt us,” says Anthony. “In ’11, we said, ‘We’ll continue to pay your benefits, and you can come back and work for us when this is all over.’”
Wabash National, the Indiana-based $2 billion truck and trailer manufacturer that won an Industry Week Best Plants award in 2012, had good timing on its side. The company completed a lean transformation in 2008, right before its business dropped dramatically. It cut three low-volume dry-van manufacturing lines and reduced its assembly lines from six to three, as well as standardized subassemblies, improved process flows, and introduced mixed-model production.
President and Chief Operating Officer Brent Yeagy, who in his Best Plants award story quipped that the lean fruit was so low-hanging that “you had to bend down to reach it,” says that the overhaul not only saved the company, but set it on a path for growth that continues today. In 2012, the company acquired the Walker Group, the largest tank trailer manufacturer in North America.
Implementing lean, says Yeagy, has freed up the company “to use its energy for growth-related activity.” Strategic acquisitions have brought more diversity in its product lines, which reduces risk. In 2012, the company’s dry van business accounted for just over 80% of its revenue. It’s now just under 60%. And the company has plans to move into an adjacent market--food, dairy and beverage processing equipment--to diversify even further.
With all that diversity and reduced costs, Yeagy is feeling pretty good about his company’s ability to weather any economic downturns that might come its way. “In the last four years, we’ve hit record levels in almost every measure,”he says.“Return on invested capital, revenue, operating margin, operating margin dollars. And our stock has shown very aggressive growth through this period, and it’s really started to affect how our investors look at us as a company.”
When he talks about keys to thriving in adversity, Dr. John Young, the immunologist turned head of North American integrated plastics manufacturer Inteplast Group, strikes a familiar refrain: implementing lean principles, investing in R&D and automation even during slow times and being conservative about debt. The $2 billion private company, which has a workforce of 7,500, established both its headquarters and the bulk of its manufacturing operations in the United States in 1991, when similar companies were looking to pull up stakes for Asia, Mexico and South America.
“We had to do things differently,” he says. “Economy of scale, automation. And there were market niches that we could do well. We started out with commodity products, and we’ve become more and more specialized over the years.”
In 2008, Young and the group of investors behind him, some of them Asian, were “fully aware of the downward spiral” in Asia, and, beginning to see its effects on the rest of the world. Material costs for resin, petrochemicals and oil were “free-falling.” Worried about the instability, he and his team implemented a ‘zero lean’ system in the summer of that year. “We wanted to have zero inventory in materials, in intermediate products, in finished goods. Whatever the customer needed, we would make and ship out.” Companies that had too much raw material on hand saw falling prices and had a “massive cash flow problem. We had no cash flow problem.”
Feeling flush, Inteplast (photo of one of its production floors at left) actually lowered prices of its products “because our customers, they were in trouble,” Young says. It created a lot of goodwill, and loyal customers.
Inteplast also stayed away from making any acquisitions or expanding operations during that time. “In 2007, when the market was so high, I knew there was a bubble,” Young says. “There was no way real estate could be worth 10 times—however many times— over previous year. You weren’t seeing value. Everybody was buying real estate, buying companies. There was so much money in the equity market.
“I said, ‘No way. It was not sustainable.’ So we did not invest in any company. And guess what happened? We had no loans; we paid back every single loan we had. We were debt free. So in 2009, 2010, 2011, even 2013 when nobody had enough money to survive, we bought so many companies. It was a once-in-a-lifetime opportunity.”
Inteplast is back in stealth mode now, investing in automation, paying off loans and adding perks for employees like increased 401(k) matching, an all-star recognition program with a weeklong retreat in Texas and more educational opportunities. Inteplast hasn’t bought a company in a year.
“Right now, I see the same thing,” Young says. “It’s a bubble. People have so much money. Everybody’s buying something, at levels which I can only say is irresponsible. I know they will crash.”
Young isn’t alone in being extra-cautious on the spending front. The Fed’s Schweitzer says his contacts in the banking industry tell him they’re eager to make more loans, “but the companies aren’t really pushing for additional borrowing.” Things may be looking up, but no one’s breaking out the champagne. Then again, a lot of manufacturers don’t really care for champagne, when a nice cold beer does the job just as well.