Hot Tip: Manufacturing

Dec. 21, 2004
Strategic investing promises to pay off now and into the new millennium.

Among manufacturers in the U.S., Asia, Europe, and Latin America, earnings and employment are trending down from the heady days of 1997 and 1998. The primary reason is pretty clear: The global economic crunch that began 19 months ago with the collapse of Thailand's currency is taking its toll on financial performance. But it will be temporary. For example, "When things turn around, you're going to see Gillette go right back up," predicts Gene Walden, financial analyst and author of The 100 Best Stocks to Own in America (1998, Dearborn Financial Publishing, 5th edition). "I think it's the best consumer products company in the world." In short, the folks who now discount manufacturing's future around the world are wrong -- just as wrong as were the "sages" who wrote off U.S. manufacturing in the early 1980s. "The conventional intelligence was that [the U.S.] would be No. 3 at best and Japan and Germany would be No. 1 and No. 2," recalls Armand V. Feigenbaum, president of General Systems Co. Inc., Pittsfield, Mass., an international quality consulting firm. "Well, it didn't happen that way." Thanks in major measure to the new manufacturing -- which encompasses R&D, executive leadership, marketing, and distribution as well as production, and which emphasizes value creation on a global scale -- investments in manufacturing have the potential to be profitable in 1999, the year 2000, and well into the new millennium. For example, such IndustryWeek Best-Managed Companies as Bristol-Myers Squibb Co., Johnson & Johnson, Merck & Co., Microsoft Corp., Nestl SA, L'Oreal SA, PepsiCo Inc., and Sony Corp. are among the global blue-chip manufacturers in funds that recently received favorable mentions from influential Washington Post investment columnist James K. Glassman. And while Glassman believes that "wild ups and downs are practically guaranteed" for investors in Asian stocks, Asia, "a huge marketplace," will recover, stresses Edward H. Tillinghast III, counsel and head of the workout and insolvency practice at Coudert Brothers, a New York-based international law firm. Nearly half a world away from Asia, manufacturing is vital to the economies of Europe. "More so than ever," insists Christophe de Callatay, director of communication and economic affairs at the Union of European Industrial & Employers Confederations (UNICE), Brussels. Adds Andre Chassagnol, capital equipment financial analyst at Meeschaert- Rousselle, a Paris brokerage firm, "Services industries are not favorites with investors, particularly in France and Germany. Manufacturing industry inspires more confidence." The automotive (especially in the wake of the Daimler-Benz/Chrysler merger), aerospace, agribusiness, biotech, defense-electronics, information-technology, pharmaceutical, and telecommunication industries are on the ascendancy in Europe, say de Callatay and Chassagnol. What Walden says in praise of Medtronic Inc., the Minneapolis-based medical-devices maker that tops his list of best U.S. stocks, could also be applied to many of the firms, large and small, all over the world that are daily redefining manufacturing. "They establish a niche. They build on that niche. They expand across the nation, and they expand around the world. They add new products. They acquire companies. And they are able to continue to build their product base [and] their customer base and really grow the business." Indeed, individual investors who strategically place their money on manufacturing will be paralleling what many of the best-managed companies that research, develop, produce, market, and distribute goods the world over are themselves doing. In his 1998 annual letter to shareholders, John F. Welch Jr., the hard-charging chairman and CEO of General Electric Co., Fairfield, Conn., stressed, "Today, we are determined, and poised, to do the same thing in Asia we have done in the United States, Europe, and Mexico: invest in the future." To be more attractive to investors, however, manufacturing needs work on its image, several industry experts insist. "There is an image problem," probably because people continue to think of manufacturers as metal benders and not as leaders in the production and use of information technology, suggests Herbert Moskowitz, a professor at Purdue University's Krannert School of Management, West Lafayette, Ind., and director of its Center for the Management of Manufacturing Enterprises. Even among business students, including those who should know better, the "glamour is in finance," he confirms. "In the pecking order, [manufacturing] is not going to be anywhere near finance or even marketing." "The public perception of manufacturing is that a lot of grease is involved," observes Hartford, Conn.-based Brett N. Silvers, chairman and CEO of First National Bank of New England. Many investors still regard manufacturing as an anachronism. Despite the last decade's emphasis on best practices and out-of-the-box thinking. Despite the information technology revolution that has swept from factory floors to CFOs' offices. Despite the dazzling speed with which cross-functional and cross-cultural teams are putting customers first by synergistically combining products and services. Despite the proliferation of high-tech and biotech facilities that are operating-room clean. Despite the entrepreneurial spirit that's taking hold in the world's reinvented and restructured mature corporations. Investors believe manufacturing is heavy and dirty, and performing poorly. In their minds, the old image of industry remains more powerful than the reality of the new manufacturing. Recently in Europe, in an effort to shed manufacturing's smokestack image, the French Employers Federation changed its name to the French Entrepreneurs Federation, relates UNICE's de Callatay. But more than a name change seems necessary. "There are a lot of companies in the U.S. and elsewhere that are clunkers," states Cleveland-based Paul Lowe, a vice president and head of the North American operations practice of A.T. Kearney Inc., a management-consulting firm. Like a 1950 Buick, clunker companies have a lot of horsepower, but don't accelerate very fast, don't slow down quickly, and "don't corner well at all," he analogizes. Interestingly, ex-engineer and ex-scientist CEOs-along with entrepreneurs -- must bear some of the blame for manufacturing's image problems, contends Patrick J. Yanahan Jr., president of USA Chicago, an international business-to-business advertising and marketing communications firm based in Chicago. "They tend to look at the products as well as the manufacturing process with priority, and they give marketing almost a tertiary importance." Yanahan also decries companies that promote "cutesy" images in their corporate advertising. "They're trying to develop obscure, artsy messages instead of talking about very direct customer benefits." In business schools across the U.S., manufacturing's image problem "begins with the naive notion among students that we are becoming a service-based economy," says William S. Lovejoy, a professor of operations management at the University of Michigan Business School, Ann Arbor. "Not only does this make the implicit assumption that services and manufacturing are different animals, when they are not, it also begs the question of where all the hardware in our lives will come from. We cannot run an economy by washing each other's imported cars." To be sure, some manufacturers remain underperformers or inconsistent performers. For example, "The people who have invested in General Motors really haven't participated in this tremendous stock-market run-up we've had," analyst Walden claims. And he notes that Seattle-based Boeing Co. is tightly tied to the commercial-aircraft purchase cycle. But in the U.S. and around the rest of the world, manufacturing possesses an attractive new dynamic -- if only investors will look behind the image. "Manufacturing by and large in the northeast U.S. is very much a first-class, clean, high-value-added, intellectual operation," emphasizes First National Bank's Silvers. If "you walk on to the floor of a first-class, well-managed, family-owned manufacturing business, it is pristine. It's a quality control-oriented environment. The people working the equipment . . . are well-trained technicians; these are not unskilled laborers." Significantly, to provide an additional source of capital for privately held, small and medium-sized companies in the Northeast, First National Bank hopes to open a liquid equity market for investors within 12 months. "While you've had some dislocations in very large, publicly held manufacturing businesses -- where some of it has gone away or gone overseas -- the real growth in our [U.S.] economy in general [and] particularly in the manufacturing sector is with small manufacturing companies that tend to be light on their feet and able to shift pretty quickly," says Thomas Bagley, senior managing partner of Deerfield, Ill.-based Pfingsten Partners LLC, an equity firm of former CEOs, COOs, presidents, and chairmen of the board who acquire privately held midwest-based manufacturing, publishing, and wholesale distribution companies. The growth of outsourcing is among the reasons Silvers remains bullish on smaller manufacturers in the Northeast. "The outsourcing by large companies naturally results in work for the small, independent companies -- provided they can meet the quality standards and the production times," he states. Another powerful force for manufacturing, says Silver, is the new generation of management. "The older-line New England companies, the places that were started by grandfathers or fathers have been falling into the hands of sons and daughters who are much more plugged into the global economy, much more astute about the application of technology to their businesses, and who have a great deal more marketing savvy." Focusing on publicly held firms across the country, Walden widens the scope of Silvers' and Bagley's praise for today's manufacturers. "The companies that have the best growth in terms of their stock price, earnings, and revenue -- companies that essentially are growing the fastest -- tend to be manufacturers," he asserts. What's more, says Walden, well-managed manufacturing firms "tend to be good and more consistent than any other segment of stock-market investing." Nevertheless, not every manufacturer deserves to get every investment dollar (or euro, yen, pound, peso, real, won, or yuan) that's available. Kearney's Lowe offers five criteria for evaluating manufacturing firms:

  • Agility. How well does the company respond to changes in markets, products, technology, and customer requirements?
  • Quality. Is quality consistently apparent throughout the organization?
  • Customer satisfaction. Does the company consistently delight the customer?
  • Innovation. Does the company have the ability to create and bring new products to market rapidly?
  • Economics. What is the company's cost base?
"Those are the things we normally look at that create value," says Lowe. "And I think investors today are certainly looking to have the value of their investment increase over time." For General Systems' Feigenbaum the No. 1 investment question is, "What is the company's renewal strategy?" Specifically, he wants to know how well management understands and uses supplier partnerships and other "process resources" better and more wisely. Four or five years ago, he says, power-generating turbines were a heavy-industry business that required you "to put your finger to your nose and hope for the best." Today, Feigenbaum believes it's a business renewed by management's attention to design, production, and quality processes that put a premium on customer value creation. What some investors fail to appreciate is that management, not technological leadership, makes the difference between winners and losers, even among today's high-flying biotech and infotech firms, insists Feigenbaum. Purdue's Moskowitz sounds much the same theme when talking about Welch and GE, a company that has powerfully combined manufacturing, services, and technology to create value for its shareholders. "Here's a dynamic guy. . . . He's just a good manager -- and more important, a leader," says Moskowitz. "And I'm sure there's an element of fear. If people aren't performing, they disappear pretty quickly." Michigan's Lovejoy, like Feigenbaum, would be selective in his manufacturing investments. "I would not invest in a firm unless it had some identifiable competitive advantages," says the professor. "A superior manufacturing firm will be as creative in designing unique and superior production processes as an innovation leader will be in unique and superior products. A manufacturing firm that can do that (and, even better, patent the process) is very worthy of investment," he says. "Building on the theme that technology, or anything you can buy in the market, cannot give you a sustainable advantage, it follows that the key to being a unique and superior manufacturing firm can be found in those things that are difficult to trade, like tacit knowledge and culture," states Lovejoy. "The Toyota production system was and is a cultural phenomenon. That is why it is so difficult to duplicate, even though its tactics can be described and communicated across firms. The system was the result of human genius in a supporting cultural context." Individual executive investors are more in touch with manufacturing's reality than are many venture capitalists, who tend to hold on to both their money and manufacturing images from the past, says Bo A.V. Carlsson, a professor of industrial economics at Case Western Reserve University, Cleveland. Walden's advice: "Buy good companies with good markets, companies that are increasing their revenue and earnings every year, and just basically have faith that, long-term, those companies are going to continue to grow and the stock price will ultimately reflect that -- despite all the games they play on Wall Street." Jack Gee contributed to this article from Paris.
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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