Kurek: It’s a pivotal time for manufacturing

Karen Kurek, the national manufacturing and distribution practice leader with McGladrey LLP, spoke with CFE Media about the state of the industry, and the upcoming challenges that await the sector.

By Bob Vavra August 21, 2012

For seven years, McGladrey LLP has polled industry executives in its Manufacturing and Distribution Monitor survey to gather insights on the specific characteristics of organizations that are thriving and growing. The result is an exceptional and unique perspective of privately owned or private equity-owned companies across the country.

Karen Kurek, a McGladrey partner and the firm’s national manufacturing and distribution practice leader, shared some of the trends she has seen in recent Monitor surveys, the primary concerns of industry executives and the steps companies are taking to continue their growth. In her keynote address at the IANA Global Automation and Manufacturing Summit in Chicago on Sept. 12, Kurek will present highlights of the latest McGladrey Monitor survey, which was launched this past June.

She spoke with CFE Media about the state of the industry, and the upcoming challenges that await the sector.

CFE: Assess the state of U.S. manufacturing, both in this country and as it compares with the rest of the world. 

Kurek: In our survey of manufacturers and distributors earlier this year, the number of thriving and growing companies almost doubled in 2011 compared to the 2010 figures. Some industry sectors — notably automotive and industrial equipment —gained new life after being hit particularly hard by an uncommonly weak economy. From this perspective, it seemed as if the industry could be on the cusp of a true renaissance and leading the economic recovery.

In fact, despite a slow economic recovery in the U.S. overall, manufacturing has been a key driver of GPD growth for the past 18 to 24 months. Particularly in states such as Indiana and Oregon, the economic influence of the industry is strong. According to the Bureau of Labor Statistics, year-to-date the manufacturing sector has contributed 17% of all net job creation in the economy. And the Census Bureau noted a strong rise in durable goods orders and, year-over-year, manufacturing construction is up nearly 27%.

Nevertheless, it isn’t all about growth. In the midst of the federal gridlock and fluctuating commodity prices, it can be difficult to feel optimistic about the prospects for future growth. Manufacturers are acting with caution and watching expenses. Global economic uncertainties have had an impact on growth, as the fiscal struggles in Europe and elsewhere are felt around the world. New orders and exports contracted recently, according to the Institute for Supply Management, and have fallen below 50 on its Purchasing Managers’ Index for the first time since July 2009.  

CFE: The last three years have seen consistent but choppy growth in manufacturing. What’s needed to smooth it out? Is the answer policy-driven, or are there things manufacturers can do themselves to help the process? 

Kurek: Free trade agreements, research and development credits, and corporate tax rates are among the issues some industry advocates say need to be addressed if the U.S. manufacturing industry is to remain competitive.

This is a pivotal time for the industry and there are a number of key issues that could have an impact on growth and the industry’s ability to be competitive on the global market.

As you know, the Bush-era tax credits are set to expire at the end of the year. As some 70% of domestic goods producers operate as “S” corporations or partnerships, where business income is “passed-through” and taxed at the individual income rate, a rise in taxes on a personal level or for investment income could lower profits that that might otherwise be used for hiring or big-ticket capital improvements.

Larger manufacturers (typically “C” corporations) can face a top U.S. corporate tax bite of up to 35%, the highest corporate income tax rate in the world. To be competitive on the global stage, U.S. manufacturers seek a reduction in the corporate income tax rate to no higher than 25%. In addition, manufacturers of all sizes want a permanent R&D tax credit, which would provide a stable financial incentive for investments in innovation.

As the manufacturing sector accounted for about one-third of all U.S. energy consumption in 2011, fluctuations in prices for petroleum, natural gas and electricity have had a profound impact on manufacturers. So industry associations are strongly pushing for policies that would increase domestic energy production.

Increasingly, manufacturers pass on rising costs to their customers through blanket increases, selective price increases or a surcharge. This may help smooth that choppy growth somewhat, but inconsistent processes can lead to underpriced products, sales force confusion and lost profits. To effectively translate strategy into actionable plans, a pricing program needs to be data driven. Pricing should be based on the value delivered, not what a product costs. To justify increases, the key is to communicate the value proposition.

We have also seen a strong correlation between those companies that consistently deploy process improvement and quality programs and those that are thriving and growing. Nearly 70% of organizations with an advanced culture of continuous improvement are thriving; compared to only approximately 40% of companies without an emphasis on continuous improvement. 

CFE: Are the days of 8% year-over-year growth in the manufacturing sector pretty much gone, or are there opportunities for large, expansive growth in this sector – or in any sector, for that matter?

Kurek: In our survey last fall, 71% of respondents overall reported that they export to countries outside the U.S. But a striking finding was the correlation between a growth in exports and a company’s health: 60% of those companies that were thriving had increased their exports, a significantly higher percentage than those companies that were simply holding their own. In other words, exporting sales was recognized by those thriving companies as a key driver for growth.

The most common driving force for these manufacturers and distributors to export was, not surprisingly, customer and/or key client demand. But the challenges evolve as that impulse evolves into strategy. Following the first foray into an offshore market, where challenges mainly relate to transaction processing issues, these challenges shift to more strategic issues, such as foreign competition and market acceptability, as the companies gain more experience with global expansion.

There is a rising level of interest in exporting to various locations, notably Brazil, Central and South America. The Free Trade Agreements with Colombia, Panama and South Korea will undoubtedly attract interest in those countries as well. 

CFE: Talk about the re-shoring of U.S. jobs. What’s driving that decision? How is it different from the decision to move manufacturing jobs offshore in the first place?

Kurek: The decision to re-shore is being driven by a rising dissatisfaction with rising labor costs, supply chain disruption, product quality risks and freight expense increases, not to mention intellectual property infringement. Increasingly, manufacturers are concluding that production operations are more expensive than they had originally foreseen. In particular, companies serving a North American customer base are making the strategic decision to bring more cost-effective production back to the U.S.

Less has been written about the practice of “near-shoring,” which involves outsourcing production to relatively close non-U.S. locations (such as Mexico, Canada or Central America). Similar to re-shoring, this approach cuts freight costs, shortens delivery timelines and makes it easier to maintain oversight of product engineering and quality.

Whether a company decides to near-shore or re-shore, the decision is being driven by strategic concerns for quality, operational efficiency and costs. 

CFE: Five-year plans are tough to make these days with as much volatility in the market as we’ve seen, but if you were to look out five years, what will manufacturing look like, both in the U.S. and globally?

Kurek: I don’t like to predict the future, in particular because there are a number of issues that need to be resolved before we can have any impression of what to expect. But I firmly believe it is important for the U.S. economy to have a strong industrial base. The long-term health of the manufacturing industry is critical to the long-term success of the country.

In addition to the issues we’ve already discussed, there is a shortage of skilled manufacturing labor across the country could dampen growth. In fact, this is an issue we discussed last year and it continues to be a challenge for the industry.

To develop a workforce that can handle modern, high-tech manufacturing, one solution being promoted is the Manufacturing Skill Standards Council (MSSC) certification program. MSSC is a nationwide, industry-based skill standards, assessment and certification system for all sectors of manufacturing. The goal is to train and credential the U.S. workforce with high-performance knowledge and skills necessary to boost the productivity, innovation and competitiveness of domestic manufacturers.

In addition, there is also a long-standing call for greater investment in STEM (science, technology, engineering and mathematics) education, where the U.S. lags behind global peers such as China, South Korea and Germany.

Here in the U.S., it is unlikely there will be much in the way of significant legislation until after this year’s election. That said, industry leaders want to make sure that policy decisions and regulatory reforms keep U.S. manufacturing competitive in the global market.

Despite this uncertainty, executives appear to be optimistic about their own companies. This optimism may stem, in part, from businesses that are global in nature and not tied exclusively to the U.S. economy.