April 1, 2011

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MANUFACTURING

Utah Business Staff

April 1, 2011

Utah doubled its exports over the past five years, ranking it first among all states in exports. The state boasted nearly $14 billion in exports last year, and local manufacturers say they are operating smarter and leaner—and bringing processes back from overseas. We’d like to give a special thank you to Lew Cramer, CEO of World Trade Center Utah, for moderating the discussion and to Holland & Hart for hosting the event. Lew Cramer, World Trade Center Utah Franz Kolb, Governor’s Office of Economic Development; Ragula Bhaskar, FatPipe, Inc. Scott Bruce, Rio Tinto Kennecott KC Ericksen, Orbit Irrigation Brian Bowers, Mity-Lite Tom Dickson, BlendTec Richard Thomsen, Bank of American Fork Cory R. Moore, Big-D Construction Susan D. Johnson, Futura Industries Mark Suchan, Malt-O-Meal Tyler Kimball, Namifiers Mark Ritchie, Black Diamond Collin Sorensen, MEP Utah Mike Bouwhuis, Davis Applied Technology College Brady Jensen, Holland & Hart The state as a whole had eight months of economic expansion. How are Utah’s manufacturers doing? BHASKAR: Spending by individuals has gone up, but spending by companies is still holding. Hopefully the companies will now start feeling comfortable enough to start boosting up their capital budget expense. People are willing to now talk again about needing new products, new features, and making productive deals in their business. JOHNSON: Obviously, some sectors were up and other sectors were down. We’re the largest manufacturer of boat windshields in probably the world. And there weren’t many boats built in the last two years, so that segment went down by about 99 percent. Those manufacturers who are highly diversified were very fortunate, where you’ve got a lot of different market exposure. So that helps us and protected us a great deal. We make Class A truck parts for Freightliner and Kenworth and Peterbilt, Western Star, all their grilles. There weren’t a lot of Class A trucks sold is the last two years, so we’re lucky that about seven years ago we really started focusing on alternative energy and particularly PV. We don’t do a lot of concentrated solar part manufacturing, but a lot of mounting systems, and that helped us a great deal through this downturn. Have any of you had a major advancement or experience during the last year? JENSEN: We’ve had a great experience with Tom and his company over the last year. Back in June we had a jury verdict come back in favor of Blendtec for a little over $11 million. Just recently, Judge Campbell listened to the arguments regarding willfulness, and she doubled the damages and then tacked on some additional damages for interest, for a total damage award of nearly $24 million. That’s the largest patent award here in Utah, and we’re thrilled with that. DICKSON: The people we just won this lawsuit against, who seven years ago stole our jar and took it to their commercial market, have done close to $60 million in sales off that jar. It enabled them to go throughout the world in over 100 countries and compete with us and take a lot of our business away. In the next 30 days, Costco wants to go with either us or Vita-Mix, and so it’s quite a competition right now. We could take over the market. We’ve tooled a jar that will fit on the home machine, so there’s millions of machines they’ve sold with the old plunger, and now we can put our patented jar on a Vita-Mix for the home. So this is going to take them by surprise. SUCHAN: For Malt-O-Meal, we’re in a flat market. The cereal business is a mature market. We’re the fastest-growing cereal company in America, though, because we’ve been value before value was cool. So we’ve seen some pretty good years with some of our retail partners like Wal-Mart, where we’re a big part of their sales. The challenges for us are diversifying into other areas. We’ve started several different brands in the organic or natural side, which has seen tremendous growth. We’re outpacing our competitors significantly in those markets and also in oatmeal and hot cereal as people look for more healthy options. We’ve been lucky to resonate with the value consumer, and we’re up to about $700 million in sales. We just passed Post as the third largest ready-to-eat manufacturer. How are costs affecting you? SUCHAN: For us, it’s commodities. Sugar prices have really taken a jump recently. We’ll continue to try to work on the agronomy side to figure ways to develop wheat locally. BRUCE: Costs are being driven by international demand. Utah is fortunate to have copper here in the state. Our pricing is driven by the commodities, and all commodities are going up, so it’s eventually going to go downstream. RITCHIE: Black Diamond is seeing, as is everyone, tremendous upward pressure in the cost of the materials that go into all of our product. For us, everything from petroleum-based products for ski boots to aluminum for carabiners to materials that go into textiles for the high-tech stuff that we make—everything is going up. What’s really interesting is that over the last 15 years, anybody who has been able to offshore or outsource—in our case, to our own manufacturing operation—or to other factories in Asia, for example, those folks no longer have the ability to push down on their costs. You can’t squeeze people any more. So what we’re seeing is that the last 15 years of costs being pushed down continuously are going away, and it becomes a much different landscape as it relates to retail pricing. I think retail pricing for outdoor products will start going up at a reasonably rapid rate, because there’s nowhere to squeeze anymore. CRAMER: Franz and I do a lot of international work, and we’ve seen the China price has now moved down to Vietnam. And I even had a person saying, “Vietnam will move to Uzbekistan.” So the labor costs are being shared around. There’s no doubt that we’re in a worldwide market now, and we’re competing against folks in a different way than we’ve ever done before. BHASKAR: Another problem is that commodity consumption in India and China has gone up dramatically with the standard of living, so overall demand has gone up, whether it’s gold or wheat or soybeans or copper or aluminum. Worldwide demand has gone up, and we’re just facing the effects of that in the U.S. JOHNSON: What we’ve experienced in the last three years is economic Darwinism. A lot of producers that were able to prosper during times of the cheap China prices are going out of business—they managed their business and their balance sheets poorly and they’ve gone out of business. Half the extruders in this country went out of business in the last two years. Partly the economy and partly China. China dumped a billion pounds of metal into this market below the cost of raw material. But those extruders have heavily leveraged balance sheets, and one of the most important things for a manufacturing leader is to control your processes in nominal all the time. Variation is extremely bad for your business. BHASKAR: All the manufacturers who offshored, outsourced—there’s all sorts of manufacturing expertise, so if you want to make a certain type of glass, you don’t have experts in the U.S., but those manufacturers who do have that expertise are now able to prosper. ERICKSON: We do a lot of dual sources. We make some of the same stuff here and then leverage it against some of the stuff overseas that can be made for less money, which makes a lot of sense. I read the Wall Street Journal a number of months ago, and they’re saying there’s no appreciable inflation on commodities. Who are they kidding? We’re seeing massive increases in metals, plastics, everything. The other problem we have is that the retailers haven’t been willing to say, “Give us an increase.” So the margins are being squeezed, and it’s only a matter of time before this volcano erupts. I think you’re going to see massive increases in the States. That’s my opinion. BOWERS: Just for people to get an idea about the scale of cost increases, we track all of our inputs against indexes. ABS sheet plastic and polypropylene—both materials are up 70 percent in the last 18 months. Aluminum, up 25 percent in the last 18 months. Steel, up 42 percent. When you start to get an idea about scale, that’s a really big hit to the inputs that we have. I think that it’s right at some point that has to break loose. The customer sooner or later is going to have to pay for that, but I just don’t know when. What other things keep you up at night? THOMSEN: Bankers have many sleepless nights, let me tell you. Our manufacturers are continually getting negatively impacted by the economy. It’s been a very negative atmosphere, and in this segment, you guys aren’t borrowing much. You’re frightened to death from what we see. We’ve had less equipment financing, less usage of lines of credit, real estate expansion in manufacturing has stopped. That was the case in 2010. However, we are amazed at how our pipeline in the last month has significantly improved. It’s almost a threefold increase in our pipeline for manufacturers. There is a real increase in expectation of adding a new manufacturing facility or adding equipment, anticipation of expansion, wanting a larger credit line. And this has just occurred within the last month. Maybe this a fluke, but we’re pretty excited because we’re a community bank and very micro. Main Street America appears to really be growing again and expanding; and as a bank, our problem is you’re not borrowing. We have put aside a section of our capital in our excess reserves directed toward manufacturing, a scenario we want to expand into. And I’m sure other banks wish to do the same. You’re key to the economy, and we see a real improvement just within the last few weeks. JOHNSON: You’re probably never going to go back to 113 percent loan deposit ratio, because in those days those were the same people, the economic Darwinism I’m talking about. I think that people overstretched their leverage. And I know that the banks are looking to place money now, but maybe there’s going to be a fundamental shoot in your business, too. SORENSEN: In this room, we have some industry rock stars. We talked about innovation and new products and things like that, but if we look at the broader landscape of the 4,000 small manufacturers, a lot of them don’t have that same mindset. They are cautious; they’ve tried to ride what they currently have for as long as they have, and there’s a mind shift change at MEP we’re trying to communicate. This week the number one selling tablet device is being discontinued, which is something that traditionally we think unfoundable. But Apple is doing that—reintroducing the iPad. That same mentality needs to get down to all the manufacturers in the state—that innovation really is where we’re going to be able to drive up profitability when we have products that folks are willing to pay a premium for. If we take the iPad, it’s not the cheapest, but it has features and integration with other things that people are willing to pay a premium for. And if we can get all manufacturers thinking that, then there’s huge potential in Utah. That’s where most of these manufacturers started was on some great innovation. And over time, many of those have lost that. We need to get that back into the manufacturing culture in the state, that everybody needs to be looking at how can we make our product better, even if it is the number one selling device in the market. How can we continue to keep it in that position? Innovation is going to play a huge role going forward in companies’ success dealing with some of the challenges with increased pricing and overseas competition. CRAMER: I appreciate the phrase you used, which was “manufacturing culture.” Really every high school junior in this state ought to come to Orbit or to Blendtec and just walk and see Tom tinkering on the floor—it’s exciting to see that happen. Whether it’s Martin Doors shipping garage doors all over the planet, it’s coming out of Utah, and it has to be the heart and soul of what we’re doing here. That culture has to be part of it. DICKSON: Our costs are coming down, and our price on our product is going up because of the popularity. There’s only two parts not made in America. One was our four-inch blade that goes in the big jar. And we’ve brought that now to the tool room and these guys have figured out how to make this blade twice as thick and four times as strong as anything else. And it costs us now one-half of what it costs in China. So no more Chinese blades. BRUCE: Just to go off on that, we’re talking about a skill that was lost and then had to leave. One of the things that I’m concerned about is a skilled workforce preparing for these higher tech jobs. This is a very optimistic room right at the moment; but I recall right before 2008 we were competing for high-skilled workers with each other, and Utah didn’t have enough. BHASKAR: We still have that problem. The high-tech arena, we do have 4,000 companies, but they’re already three-man, five-man, 10-man operations. If you want a skill, you need salespeople, you need marketing people, and it’s hard to find skilled salespeople, marketing people, or even people who are willing to be trained. KOLB: The key to success for all of us here in Utah is skill-based education. We need to make sure that we understand that there is opportunity, that a Ph.D. is important, a master’s is important in business, but if you don’t know the basics of business, that’s just a piece of paper. Some of the apprenticeship systems are extremely important, because what you need is trained people that will be able to compete not only with the workforce in the rest of the United States but also overseas. I’m excited that what I’m hearing here is that we are now bringing stuff back into the United States and have it manufactured here, and we can compete. Utah has always had one of the most productive workforces in the United States. Do we have a skilled enough workforce? Do you think we’re making progress in Utah generally in the last few years or are we heading backwards? ERICKSON: Looking at the individuals we’re hiring out of the major universities in engineering, we’re getting really, really good people and they’re sticking around and they’re very, very innovative. We’re out-innovating our competition today, and that’s what’s growing our company. The thing we see, though, is in the manufacturing sector, people who are technicians in injection molding and extruding and those kinds of things are very limited. We’re having a very difficult time finding individuals who have quality work and education to come in and work on machines and equipment and keep things running. Part of the problem is we’ve got a lot of high-tech medical companies here, and when they’re selling medical equipment at a real premium versus others who aren’t selling their products at that level, it’s very easy for them to come in and get a good technician and steal him. JOHNSON: And the government. Whenever Williams goes through its high-water point, they come over and take people. They pay them two, three dollars more an hour, full benefits, and we think, “Well, that’s my tax money.” Utah has an opportunity to bypass the states that we compete with in the West to be the top at effectiveness. I would use higher ed as an example. We’ve got seven institutions of higher ed in this state of 2.5 million people, and I keep thinking, “Can we afford this? Is this even smart?” We think very small. Our legislature is worried about whether their health exchange is going to pay for ingrown toenail surgery rather than worry about, “How do we take this big chunk of money we spend on higher ed and use it most effectively?” What other things would you tell the governor or the legislature that we ought to be improving here in the state? BHASKAR: Companies that knew how to work the system were coming and getting incentives from the government. For every company that knew how to work the system and hired a person to do it for them, there were 100 companies that didn’t know what was going on. And we’re not the beneficiaries, but actually paying for those companies that did get incentives. What we should see is the overall reduction on incentives for any company above a certain threshold salary, that we do incentives for them to hire so that Sue doesn’t have to do paperwork and explain why she wants to move to California to get in the sector. If you make it overall lower cost for hiring by training incentives across the board and publicize that, all of the people in this room would benefit, and many of the companies would benefit, other than a few companies that seem to get most of the money. JOHNSON: And Utah would benefit. BOWERS: I think it suggests a larger problem, too, because we’re putting those incentives toward drawing companies out of state into Utah. But implicitly, it’s saying that we don’t believe that we have the talent, the ideas, to really drive and grow an economy in Utah from inside. So my question becomes, where is the university innovation pipeline to industry that’s spinning off lots of creative companies and ideas? Here we are a company that’s really gone successfully through the recession because of alternative energy investment. Where are the other alternative energy companies in the state? Why is there not a pipeline of innovative current technologies being developed and those companies developing? That’s how we get to a Silicon Valley-type economy, not by importing all the other states through incentives. BHASKAR: I think there are two components; one is to get our own local talent. There’s been some success in that, but we also should have a system for attractive companies from out of state. The reason is Goldman Sachs is not going to be homegrown. We need a Goldman Sachs or a Morgan Stanley. And other states, too, have amazing incentive programs. At the same time, if we have a better structure for homegrown companies, I think we benefit from both. But we should not walk away from a good deal of somebody wanting to come to the state because there are states that will give you a $25 million check to move in. We can’t afford to do that because we’re a small state. KOLB: I could give an example. I met a gentleman from Norway who wants to invest $700 million into a solar park in Southern Utah. He’s got installations all over the world, so it’s not kind of a wishful-thinking individual. Now he needs to make sure that he can take his energy that wants to produce in Southern Utah into the grid, because otherwise, the deal doesn’t make sense. So it’s important that we create an environment for certain technologies and energy. We need to be open-minded and collaborative, because if this gentleman would not have come to Utah, he would have gone to New Mexico. I had a German journalist here a couple of months ago, and he interviewed me. After we were done, he said, “I know why Utah is so successful.” He says, “Because it’s a state that is small enough that it’s reinventing itself periodically.” And I really think there’s a lot of wisdom in that. We are small enough we can do things. What about the greenness of your manufacturing these days? KIMBALL: It’s become more of a term that’s used for being more efficient, eliminating waste and improving your processes. As far as improving the greenness of an entire industry, it needs to be an industry trend because you have to capitalize on the economies of scale of what your suppliers bring to you. When you’re the first one out there, your expenses tend to be so high that it’s difficult to compete. You can market the greenness and charge a little higher price for that, but that only goes so far. So generally, when it comes to some of the raw materials that are used—we use a lot of inks in our business because we are branding the products that we make. It has to make sense for the industry. It has to be something we can bring in at a lower cost because the industry, in general, is using the product. But we found that at worst, most of our green initiatives are cost equal. We may have to pay an extra person to come in and do the green things, but the savings that we make over eliminating waste or recycling actually makes it so it’s positive. ERICKSON: For most of the retailers today, if you don’t have a green program in your company and you’re building toward their standards, you don’t do business with them. And so I think they’re forcing everyone to become greener. Our company’s really going down a trail of producing better products, greener products, and that’s making us a lot better by this whole initiative. BRUCE: I agree. You can source green, you can operate green, you can supply green. It is really a supply chain type of issue, in my opinion. And if it’s not all the way around, all the way across, it can be expensive. It’s a bit tough, energy intensive, a lot of environmental around it, you know. But you do have to invest costs to be the leader amongst those who are also in your business. How are you doing on international markets? Are there opportunities for exports? What’s the dollar doing to you? What kind of outsourcing is taking place? KIMBALL: You have two sides to it, of course. You have your supply chain side as well as your marketing side. For our supply chain side, we have commodity prices increasing, we’ve talked about incentives for companies coming in. We’ve actually forecasted every process that we don’t do in-house and when they can bring it in. Are costs overall going up? Yes. But as a brand manufacturer in the United States here close by, we’ve marketed our ability to have faster turnaround times and to have control over processes, so that we can have greater control over those things and have a better outcome for our clients. On the other side, we just opened an office in Germany this last year and have started selling some of our products there. But our true marketing success has come from faster turnaround time and being able to get our clients what they want in days. We have a same-day turnaround as our goal in all of the products. BHASKAR: Currencies in all the major countries that trade with the U.S. are being highly managed by each of the countries. So currencies are not applicable as much as the prices of underlying commodities. If you look at most of the countries in the last two years, it’s the same narrow band that they’ve been managed by. ERICKSON: From the supply chain point of view, by automating and being really smart with your tooling and things like that, we found that you can bring it back to the United States and compete. BOWERS: We’ve had fairly good success with Central and South America recently. They’re getting to a place where, as their economies mature, they can take on products that are at higher value, higher durability. As far as outsourcing, China continues to just be a great place for “me-too” products. So if you’re not intending to innovate in a product but you want access to be able to sell a product, it’s easy to just go there and get the me-too product. But in general, we’re trying to get out of that. We’re trying to meet innovation, and we’ve brought back quite a few of our products that had gone to China and been able to operationally improve what we’re doing to the extent that it’s more economic to produce them in Orem than to outsource them. How do you protect your IP internationally? BHASKAR: We have eight patents, 150 claims, and what we find is the moment you publish the patent, somebody in the world is striking the same cord differently, but you have no protection. ERICKSON: It’s extremely expensive to go worldwide with patent products, especially if you don’t know the success of the product. So you patent in the United States, and you get the NAFTA issue with Mexico and Canada, but you don’t get it anywhere else. So it’s a crapshoot. KOLB: It’s important that we know that when you put your international strategy together, there are certain tier one, tier two and tier three companies, especially when it comes to patenting. You need to consider the type of patent enforcement—can we really enforce it or is it just wishful thinking? JENSEN: China has been a very difficult place to enforce your IP. It is getting better. We’ve heard of stories where people have been successful in enforcing their patent and trademarks. If you have some kind of business tie with somebody in China, that helps you enforce it better. Something to consider is their history in IP is pretty short-lived. Their patent laws go back maybe 30 years, whereas we’ve got a couple centuries of dealing with patents. So they’re trying to figure out who they are and what their patent system would be. Mike, tell us a little bit about what you’re doing up there at Davis Applied Tech. BOUWHUIS: We feel like we’re very much a part of the manufacturing process because we provide the human talent, we provide the new skills training. We were very active in the last four years in the composites industry. Several years ago, Adam Aircraft and ATK and Hill Air Force Base encouraged us to go from metal manufacturing training to composites manufacturing training. We flew all over the United States to the best sites in the country and created a program in which we’re now supplying manufacturers to ATK, Hill Air Force Base, and now Janicki Industries. We’re up to about 120 trainees every day. ATK announced that they will be moving into a 600,000-square-foot facility just off of Freeport Center, and they will require 800 trainees over the next few years. We also have a plan right now to take a 120,000-square-foot building in the Freeport Center and convert it into a manufacturing center of excellence for ATK, Lifetime, and all the companies that are in the Freeport Center—using a concept of bringing some of their equipment in, our expertise in providing training for all of their incoming employees, designed or specifically set up for their needs, and then creating a campus in an industrial park in which we’d invite Weber State and our programs to cohabitate and provide all the trainings from frontline worker all the way up to the manufacturing engineer. Also, we’re seeing something that I haven’t seen for three years, and that’s manufacturing jobs coming back, especially in the machining area.
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