Arrow Gear -- A Case Study in How to Improve the U.S. Economy

Jan. 3, 2012
Investing in capacity for high tech manufacturing -- whether through private or public funds -- should be the primary focus of efforts to restore the U.S. economy.

While the recession that began in late 2008 appears to be far from easing its strangle-hold on the American economy, the impact on millions of citizens in the U.S. remains grim. Amidst a stubbornly high unemployment rate, everyone can certainly agree on what is needed -- jobs!

This, of course, leads to the key question; how are we going to create the good-paying jobs capable of supporting a middle-class lifestyle, and do so in a way that is sustainable?

As you ponder this question, what if you learned of a company that was able to actually increase its work force by 35% in the face of the most serious financial crisis this nation has seen since the Great Depression? What if you also learned that the products of this company were utilized in high-priced systems that were being exported, bringing revenue into the U.S. economy? Surely, the experience of this company could provide some valuable insights on how to deal with America's employment crisis and trade deficit?

The fact of the matter is that there is indeed such a company; Arrow Gear Company of Downers Grove, Illinois.

Arrow Gear, founded in 1947 by James J. Cervinka and Frank E. Pielsticker, is a manufacturer of high precision gears for a wide range of commercial and aerospace applications. As a leader in the gear industry, Arrow has invested millions of dollars in its state-of-the-art facility, and has been doing so for decades.

Arrow's position as a top producer of gearing products did not fully insulate them from the challenges of the recession, as many existing customers chose to put their orders on hold due to economic uncertainty. As a result, a series of layoffs were necessary at Arrow Gear, reducing its workforce of 240 to 180. However, as Arrow has done over the past decades of its 60 year history, times of change are seen as opportunity for new direction.

The Wind Power Market

One of the key strategies of the federal government in jumpstarting the economy in the aftermath of 2008 involved the infusion of stimulus money -- largely focused on the improvement of infrastructure. Aligning with environmental objectives, a high priority for this investment was that of alternative energy sources; specifically wind power. Wind power, while not a new technology, had previously received only minor attention in the United States. Most of the technology has been developed in Europe, and with a new emphasis for deployment in the U.S., American suppliers are grossly unequipped to meet projected demands for domestic consumption.

This problem of domestic production capacity received attention in the spring of 2010 when it was announced that A-Power Energy Generation Systems Ltd., based in Shenyang, China, would supply turbines for a $1.5 billion wind farm in Texas. The U.S. partners of the venture said that they would be seeking financial aid from stimulus funds.

This announcement led to some degree of backlash from legislators. Among these was U.S. Senator Charles Schumer (D-NY) who saw the use of stimulus funds for this project as essentially subsidizing green jobs outside the country with U.S. taxpayer dollars. Another was U.S. Senator Sherrod Brown (D-OH) who said, "We can't sit idly by while China races to the forefront of clean-energy projects at the expense of U.S. manufacturing, U.S. jobs and U.S. energy independence. And we certainly can't shoot ourselves in the foot by helping to finance Chinese clean-energy production."

Still, the fact remains that more than half of the world's wind and solar energy equipment is produced in Asia, and this lead is expected to widen. In 2009, China invested $34.5 billion in low-carbon energy, while the U.S. spent far less at $18.6 billion.

In view of this lack of U.S. capacity, Arrow saw an opportunity for expansion. However, supplying the massive gears for the colossal wind generating towers was not something Arrow was equipped for. At the time, Arrow's maximum size capability of 22" for the parallel axis gears used in these systems was much too small. To perform the majority of this type of work, Arrow would require a significant investment in new, larger equipment.

Foreseeing what was to come; in 2009 Arrow began focusing on the implementation of their expansion. Wishing to obtain assistance with the funding for this expansion, Arrow developed a proposal for the upgrade -- with a price tag of approximately $20 million. In view of the fact that stimulus money was comprised of American tax dollars aimed at stimulating the U.S. economy, it seemed reasonable that Arrow could find assistance with the funding allowing them to meet domestic industrial needs and create jobs in the process. Without this increased capacity, the alternative would be to purchase these systems from foreign suppliers, which would negatively impact the U.S. economy even further.

Arrow began their search for funding assistance by reaching out not only to Illinois state officials, but also to the appropriate federal representatives with their expansion proposal. But help could not be found. Even after reducing the projected budget to $10 million, by integrating outside vendors for turning and heat treating operations, Arrow's request for assistance with this expansion was declined.

The Blackhawk Helicopter

As one would suspect from a company that has successfully survived for more than 60 years, coming up to an impassible wall was not the end of the story.

Around this time, Arrow had been approached by Sikorsky for assistance in meeting production increases for the Blackhawk helicopter. Through discussions, Arrow learned that Sikorsky was planning this increase in production to meet the anticipated sales demand from both the U.S. military and foreign military sales of this workhorse aircraft.

In the initial meetings with Arrow, Sikorsky's General Manager expressed a strong interest in working with Arrow as a supplier of several gears that were to be used on the Blackhawk. But there was a problem in that Arrow did not have the capacity for the large gears used in the Blackhawk's design, and becoming equipped for this work would require a multi-million dollar expansion.

As before, Arrow reached out to state and federal resources, trying to secure assistance with the investment required in new equipment. And despite the fact that these high technology military systems were needed by U.S. war fighters, and would also benefit the U.S. economy through their export, Arrow's requests for assistance were still denied.

The Super Stallion

A third opportunity for Arrow presented itself in the form of the CH-53 Super Stallion which is also produced by Sikorsky. The new "K" version of the CH-53 had been developed, in part, for military operations in the mountainous regions of Afghanistan. The previous version was unable to carry a full payload to the tops of the Afghan mountains. The new "K" version is a significant improvement to this supply and transport aircraft. Equipped with the latest technology, the "K" version can fly substantially higher and farther without refueling than the previous version. This enhanced ability provides numerous strategic benefits to military personnel operating in this part of the world and will help to save lives of U.S. war fighters.

Arrow was approached by Sikorsky to produce prototype bevel gear sets to be used in the Super Stallion's three gearboxes. Notably, this project called into play Arrow's advanced gear design technology. Using Tooth Contact and Finite Element Analyses, Arrow was able to work with Sikorsky on refining the development of the gear tooth design, predicting tooth contact performance under load.

But again, the issue of size capacity to actually manufacture all the gears remained a problem, and the need for a significant and costly expansion was revisited. One last round of efforts to seek assistance with the sizable investment to supply this project was conducted. Arrow felt that steering taxpayer funds aimed at stimulating the economy toward a project that would create jobs, help the U.S. economy, and assist our military personnel for strategic and safety purposes would surely gain the support of government officials. Certainly these substantial benefits would warrant their attention. But as you might have guessed, Arrow's requests for support were again denied.

In the end, each of Arrow's attempts to seek financial assistance with their proposed expansion resulted in nothing. Of the stimulus funds available, none were applied to these promising projects that could directly create long-lasting jobs and help the U.S. economy. In fact, Arrow learned that of the approximately $106 million that was allocated to Illinois, nothing was invested into manufacturing.

Going It Alone

Finally, concluding that assistance would not be available, Arrow's CEO, James J. Cervinka, made the difficult decision to borrow the money required for the upgrade to accommodate larger gears for the Blackhawk and Super Stallion programs. Despite the fact that the U.S. economy was embattled in a serious recession, Arrow moved forward with the expansion of the equipment required for the increased size capacity. This investment came to approximately $4.5 millioin.

In the end, this investment allowed Arrow to substantially increase production capability. Now, instead of 22" (558.8mm) diameter parts -- Arrow can produce parts up to 36" (914.4mm). Obviously, the message of this significant size increase of over 60% is something that the company wants to actively promote.

The last of these new additions have recently been implemented. As a result, Arrow is now producing gears for the Blackhawk and CH-53K projects.

To facilitate these new projects, the company has added 65 jobs over the past year, returning the workforce to pre-recession levels. Notably, this increase of jobs had virtually nothing to do with the economy improving; rather it was the direct result of Arrow's expansion into a broader capacity through reinvestment. Being able to increase a company's workforce by 35% during the worst recession in decades certainly appears to be a prime example of how to create good-paying jobs despite a tough economy.

To appreciate the real benefit of what this workforce expansion has done, one must realize that the effects are more widespread than just providing income for 65 people. These 65 employees earn approximately $4.7 million with wages and benefits. This will yield $887,000 in Federal taxes, and $236,000 to the state of Illinois for income taxes. Beyond that, the net earnings of these employees are used to purchase goods and services, mostly within the local economy, thus benefiting numerous others through increased demand.

In addition, the expansion of Arrow means that tax dollars for defense systems are staying in the U.S., and the export of expensive, high technology products is bringing foreign capital into the U.S. economy. In addition to the Blackhawk and CH-53K programs, equipment from this expansion is used to produce lift fan gears for the F-35 (JSF) STOVL (Short Take Off and Vertical Landing) aircraft.

This story highlights not only the value of manufacturing, but also suggests the long-term benefit of stimulus money and other types of government support being directed to manufacturing. Clearly, the best way to restore a positive trend in the economic health of the U.S. is to focus on the manufacture of high technology products that the world wants to purchase. Investing in our capacity for high tech manufacturing -- whether through private or public funds -- should be the primary focus of efforts to restore our economy.

Many are in agreement that the answer to solving our deep economic problems lies in the manufacturing sector. With its inherent dynamics of creating wealth through adding value to raw material, manufacturing was responsible for the wealth-generating engine that made America a superpower in the first place. But the world has changed. Globalization, low-cost foreign labor and an almost insatiable appetite for cheap manufactured products have sent vast amounts of wealth out of the U.S. economy -- wealth that would otherwise have been used domestically for good-paying jobs.

Clearly, the U.S. is facing the prospect of redefining the standard of living for the middle class. However, the example shown by Arrow Gear Co. could indeed provide a blueprint on how the decline of the middle class can be avoided -- an action plan that should be implemented on the largest scale possible.

Joseph L. Arvin is president of Arrow Gear Company and Scott A. Newton is president of APEX Media Solutions. Arvin and Newton are founders and board members of the non-profit organization Citizens for American Manufacturing (CAM). In addition, they are the authors of "A Nation on Borrowed Time" which addresses the critical role of the industrial base in the U.S. Economy.

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