How Many Masters?

Dec. 21, 2004
Particularly with Sarbanes-Oxley imposing added costs on public companies, being private can look increasingly attractive to U.S. manufacturers. But the situation is not that simple, and especially for innovators, being private may not be the best option.

Richard C. Cook figures that U.S. manufacturers doing under $100 million in business annually "probably" can't afford to be publicly traded. Compliance costs associated with the 2002 Sarbanes-Oxley Act, federal legislation designed to strengthen financial reporting and executive responsibility in the wake of earlier corporate misdeeds, simply "will eat up too much of your profit," asserts Cook, CEO of MAPICS Inc., a publicly traded Alpharetta, Ga.-based producer of manufacturing software. At the same time, Cook doesn't foresee "a lot" of public manufacturers being driven private. "There will be reasons to go private, and people will do that." But "you are going to see a greater amount of mergers of [smaller] public companies" as they seek the benefits of business synergies, he predicts. Charles M. "Chuck" Swoboda, president and CEO of Cree Inc., pretty much dismisses Sarbanes-Oxley as "just a cost of doing business" although compliance has increased his company's costs "probably by a couple of cents per share." Swoboda's major concern is having ready access to capital for his technology-intensive company, which anticipates a $250 million to $300 million top line this year. Founded in 1987 and originally private and funded mainly by financial angels, the Durham, N.C.-based maker of semiconductor materials and devices since has been public 1993. "Frankly, we could not pull off what we're trying to execute -- developing an entire new materials system and technology and [then] manufacturing it -- without being public," states Swoboda. "That access to capital -- and what it allows us to do in terms of pursuing new technology -- has really been a critical piece of our success." For U.S. manufacturers, the bottom line on success right now is not as simple as being private or being public, for there's much more in play than financial reporting rules. Consider innovation. "One person has a bigger impact in a smaller, private organization, and that's why you see most of the innovation coming from small companies," insists Jerry McDermott, vice president of Technical Concepts LLC, Mundelein, Ill., a privately held designer and maker of touch-free washroom products. But what about the spectacular success of such very large privately held manufacturers as Mars Inc., the candy company, and S.C. Johnson & Son Inc., the consumer products company? Lincoln Plating, Briggs & Stratton Corp. and Cree Inc. illustrate how innovation, in different ways, is very successfully at work among manufacturers large and smaller, public and private. Long-Term View For Marc LeBaron, chairman and CEO of Lincoln Plating, a 325-employee Lincoln, Neb.-based firm specializing in the functional and decorative finishing and plating of steel, aluminum and brass, being private and midsize is a plus. Because the $53.6 million company isn't tied to quarterly financials and Wall Street analysts' verdicts, the 52-year-old firm can continue to look long term and decide what's right for it. Yet the company, which has its roots in electroplating, is venturing into a new area to create greater value for customers. Since 2000, the company has been doing upstream and downstream supply-chain management for such customers as Harley-Davidson and Pella Windows -- and averaged "well over" 20% growth in its own revenues. LeBaron explains: "What we are doing in many cases today is going in [and] developing suppliers for the product -- suppliers that understand the integrated nature of manufacturing and finishing. And we will then outsource . . . the actual stamping [and] machining, but manage that supply chain [and] still do the core finishing. And we'll do logistics management -- could be warehousing, could be secondary assembly services, could be just a whole variety of things." The integrated supply chain services business unit in 2003 accounted for 50% of company sales. "The perception is that platers are not sophisticated enough or big enough to handle supply chain issues," says LeBaron. "Since launching our supply chain business unit . . . we have doubled our sales, increased our staff by 20% and launched an 80,000 square-foot expansion project." Doing Public Right Meanwhile, agility and innovation are market differentiators for Wauwatosa, Wisc.-based Briggs & Stratton Corp., a publicly traded manufacturer of aluminum alloy low-horsepower gasoline engines that, with $1.66 billion in sales in fiscal 2003, is more than 20 times the size of privately held Lincoln Plating. Despite its size and shareholder obligations, the 96-year-old company has remained nimble enough to survive and thrive. "We are agile. We're in a global market. We battled off the Japanese 10 [or] 15 years ago, [and] we're in the battle of our lives now with the Chinese competitors," says Paul Neylon, Briggs & Stratton's senior vice president of the engine products division. Neylon credits Briggs & Stratton Chairman, President and CEO John S. Shiely, whom he describes as "really good at looking out over the horizon and looking around the corners," for providing "marching orders and direction" and then encouraging "us to take chances." Example: Briggs & Stratton is investing in machines that make oval and barrel-shaped automotive-style pistons in a single pass and, compared with purchased pistons, reduce cost by more than $1 per piston. Six of the machines, which cost about $1.5 million each to install, are in place at the company's Poplar Bluff, Mo., plant. "There isn't anybody else that has got that kind of machine in our industry," claims Neylon. What's more "all kinds" of product innovations are debuting this year, including a lawnmower fuel tank cap that drips an additive into the gasoline to keep it from going "stale" and making the mower difficult to start, adds Neylon. Failure to start is "one of the primary reasons" consumers return their walk-behind mowers to Sears, he relates. "It's . . . an irritant to consumers [and] is very, very costly to Sears, and so we tried to come up with a way to fix that situation," says Neylon. In Need Of Capital Coupling production and innovation is the hallmark of 1,100-employee publicly traded Cree, a company that CEO Swoboda terms a "next-generation" U.S. manufacturer. For example, in the late 1990s Cree created blue light-emitting diodes (LEDs) bright enough to illuminate automobile dashboards. And now its technology lights cellphones and personal digital assistants as well. "Manufacturing execution is a huge piece of our business. But [we] leverage some really unique [materials] technology knowledge and understanding to do that," Swoboda explains. "We do manufacturing and product development concurrently in the same place," a contrast to the practice of inventing something and then throwing it over the wall to manufacturing. "There is no wall here," he stresses. But that takes money -- lots of money. During the last 18 months, Cree's capital expenditures alone have totaled more than $110 million. "As a semiconductor manufacturer that has to build factories and put a lot of capital equipment in place, we could never take the risk or push the business ahead as aggressively as we are without [the] access to capital [that being public gives us]," Swoboda emphasizes. For example, the blue dashboard LEDs went from an R&D project to mass production for Volkswagen AG in less than 12 months. "Essentially, we had to almost over-invest to ensure our success," he relates. "Access to capital -- and the fact that our shareholders understood we were a [risk-taking] technology company -- gave us the opportunity to take some very aggressive steps, which have worked out tremendously. I think [in] every Volkswagen today the dashboard is still backlit with blue LEDs." Cree's business has extended into a new generation of LEDs, blue lasers, and wireless infrastructure and power-switching technologies. "Cree is about building a business model and finding a way to win. . . . And while there's significant risk in our business and all the technology, I would say that of the 1,100 employees, about 99% believe we can make this happen and do even more tomorrow than we've done today."

About the Author

John McClenahen | Former Senior Editor, IndustryWeek

 John S. McClenahen, is an occasional essayist on the Web site of IndustryWeek, the executive management publication from which he retired in 2006. He began his journalism career as a broadcast journalist at Westinghouse Broadcasting’s KYW in Cleveland, Ohio. In May 1967, he joined Penton Media Inc. in Cleveland and in September 1967 was transferred to Washington, DC, the base from which for nearly 40 years he wrote primarily about national and international economics and politics, and corporate social responsibility.
      McClenahen, a native of Ohio now residing in Maryland, is an award-winning writer and photographer. He is the author of three books of poetry, most recently An Unexpected Poet (2013), and several books of photographs, including Black, White, and Shades of Grey (2014). He also is the author of a children’s book, Henry at His Beach (2014).
      His photograph “Provincetown: Fog Rising 2004” was selected for the Smithsonian Institution’s 2011 juried exhibition Artists at Work and displayed in the S. Dillon Ripley Center at the Smithsonian Institution in Washington, D.C., from June until October 2011. Five of his photographs are in the collection of St. Lawrence University and displayed on campus in Canton, New York.
      John McClenahen’s essay “Incorporating America: Whitman in Context” was designated one of the five best works published in The Journal of Graduate Liberal Studies during the twelve-year editorship of R. Barry Leavis of Rollins College. John McClenahen’s several journalism prizes include the coveted Jesse H. Neal Award. He also is the author of the commemorative poem “Upon 50 Years,” celebrating the fiftieth anniversary of the founding of Wolfson College Cambridge, and appearing in “The Wolfson Review.”
      John McClenahen received a B.A. (English with a minor in government) from St. Lawrence University, an M.A., (English) from Western Reserve University, and a Master of Arts in Liberal Studies from Georgetown University, where he also pursued doctoral studies. At St. Lawrence University, he was elected to academic honor societies in English and government and to Omicron Delta Kappa, the University’s highest undergraduate honor. John McClenahen was a participant in the 32nd Annual Wharton Seminars for Journalists at the Wharton School at the University of Pennsylvania in Philadelphia. During the Easter Term of the 1986 academic year, John McClenahen was the first American to hold a prestigious Press Fellowship at Wolfson College, Cambridge, in the United Kingdom.
      John McClenahen has served on the Editorial Board of Confluence: The Journal of Graduate Liberal Studies and was co-founder and first editor of Liberal Studies at Georgetown. He has been a volunteer researcher on the William Steinway Diary Project at the Smithsonian Institution, Washington, D.C., and has been an assistant professorial lecturer at The George Washington University in Washington, D.C.


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