Woods: End the uncertainty so manufacturing can grow
Doug Woods is leading the effort to move the Association for Manufacturing Technology toward a broad-based manufacturing organization. His efforts to lead the expansion of IMTS from a machine tool event to one that includes automation, maintenance and mechanical sessions has made the biennial IMTS the premier North American manufacturing event.
Douglas K. Woods joined AMT as its president in April 2009. Prior to that, he held a number of executive positions at several machine tool companies, including President and CEO of Liberty Precision Industries, and president of Parlec Inc. He also held key management positions at Alliance Tool Corp. and its parent company, Cross and Trecker. Woods was AMT’s chairman of the Board of Directors in 2005-06 and served on its Board of Directors from 2000 through 2008.
Woods spoke with CFE Media about the short-term challenges and long-term needs of the manufacturing sector.
CFE: Why are you optimistic about manufacturing? What’s the good news?
Woods: In general, things are looking up for the manufacturing technology market. The market is expected to finish on a nice 10-15% growth in orders for 2012 over 2011. This is phenomenal, taken in perspective. In 2010, the industry realized a 91% gain in 2010 over 2009 and another 66% last year.
Capacity utilization rates for durable manufacturing are near 80%, with some very important sectors doing much better. The fabricating metal products sector is operating at a near 85% rate. The industry that represents more than a third of all orders placed for production equipment in the U.S.—the job shop industry—is a part of this industry group and is expanding capacity at a rapid rate. Typically, a capacity utilization rate of more than 75% represents a shift in an industry’s orders going from being for replacement to becoming orders to support expansion.
Over 80% supposedly means a rapid increase in capital expenditures to support expansion of production capabilities.
The fastest paced expansion is in the industrial machinery sector where capacity utilization has exceeded 85% for months and also is the sector that included the manufacturing technology industry—AMT’s members.
Not quite at the 80% level but, close on the heels of the “over 80” crowd is the motor vehicle parts sector. This industry is realizing the impact of cars bought in 2008 and 2009 as a part of incentive and the cash for clunkers programs coming into the age and mileage that requires higher maintenance levels. These programs led to millions of cars being bought outside the normal cyclical levels. Concurrently, the new car production levels of 2012 continue to float upwards slowly requiring unexpected volumes of production.
U.S. corporate profitability is very strong. Cash is king in the manufacturing sector. It helps support expansion while financing customer purchases and greasing the supply chain.
The BRIC countries are very solid with only a slight yellow light on China.
On our 10 indicators list (below) are all on a GREEN track with the exception of Consumer Sentiment (which has been yellow) and housing starts (which has been red). However, even housing starts have had a noticeable uptick in the past three months.
- Capacity Utlization
- Purchasing Managers’ Index
- Orders for Mfg Durable Goods
- 30 year mortgage rates
- AAA Bond yields
- Light Vehicle Sales
- Baltic Dry Index
- The Restaurant Index
- Consumer Sentiment
- Housing Starts
Another positive for manufacturing is the increasing trend toward reshoring and onshoring. The momentum started a couple years ago and continues to grow as more and more manufactures are taking advantage of new manufacturing technology and equipment to minimize the need to chase low cost labor all over the world.
AMT is a Platinum Sponsor of the Reshoring Initative which provides a tool free of charge that companies can use to evaluate the real cost of manufacturing abroad. It’s called the Total Cost of Ownership (TCO) tool and is available at www.reshorenow.org.
CFE: Then what are the specific challenges still in front of us?
Woods: The best analysts working this industry suggest that we could see some hesitation in order activity in the last couple of months due to political uncertainty. Control of the White House and the Senate will be decided in November. There are also major issues outstanding on the legislative agenda that could have a significant impact on our industry, most notably whether or not to extend the Bush-era tax cuts and dozens tax provisions that expired or are expiring at the end of the year.
The President supports letting the tax cuts expire on incomes over $250,000. That hits many successful small manufacturers that file individual tax returns for their businesses. The R&D tax credit expired for the 14h time last year. Bonus depreciation and Section 179 expensing amounts decreased significantly. These all play a critical role in investment decisions. It’s no wonder that companies who put 2-to-5 year business plans together to run their companies are wary about making long-term commitments.
Other challenges exist as well. The Federal Reserve has not said there will be a QE3, but they have not guaranteed there won’t be additional easing either. The potential of inflation that this would introduce into the economy on top of the strengthening of the dollar relative to the euro could slow our export expansion and the continued growth of domestic expansion of production capacity.
The U.S. government seems to be aimed at helping to spur growth and aid in pulling Europe out of their malaise. Truly, the challenges in Europe have little short-term impact on our industry as long as the dollar/euro rate doesn’t lead to an overvalued dollar.
The other major issue on the horizon is whether or not China can get itself back on track with double digit growth. Their efforts to push a stimulus package out that will generate enough momentum to put their economy back on a path of comfortable growth will be key to what happens with the markets in Asia.
CFE: In a presidential election year, manufacturing and jobs will be the pivotal issue. What should a balanced U.S. manufacturing policy look like for the president in 2013?
Woods: AMT’s Manufacturing Mandate emphasizes the importance of greater coordination of services between government agencies and increased collaboration between government, industry and educational institutions as central to the execution of a national manufacturing strategy.
According to our Mandate, the mission of the strategy must be threefold.
First, we need government to increase R&D and spur innovation in manufacturing technology. We need to increase our global competitiveness by addressing the disadvantages American manufacturers face domestically and abroad. Lastly, we must address the skilled labor shortage and commit to building a workforce for the 21st century workplace. AMT calls it a “Smartforce.”
The Obama Administration has taken some good initial steps, but strengthening the manufacturing sector will not happen overnight. Whoever is elected to lead the country in November must continue to focus strengthening manufacturing.
CFE: What things are manufacturers now doing for themselves? What are the biggest areas of weakness you’ve seen in plants and facilities that could make a difference?
Woods: The most significant issue or weakness in American manufacturing identified by manufacturers concerning the factory floor it is the shortage of skilled labor. There are bottlenecks in the supply chain that are bound to push up prices on critical components, and backlogs are likely to continue growing. These issues are worrisome but they will correct themselves in the mid-term – 6-12 months.
However, building “Smartforce” prepared for the 21st century workplace is likely to take a generation or more to resolve and that’s after we start to work on alleviating the problem which hasn’t happened yet. The manufacturing workforce is missing a generation of supply in the 25-35 year old crowd. We can’t make that up.
Even if people in that age group wanted to repurpose themselves and develop a second career, it would be 5-to-10 years before they were up to speed on the technology, skill and craftsmanship necessary to keep America manufacturing competitive.
The second greatest weakness is the 20% cost burden that U.S. manufacturers face relative to their foreign competition in overseas markets. The U.S. boasts the highest corporate tax rate in the world. Over regulation is also a major impediment to competitiveness, particularly for small businesses. The Small Business Administration reports that small businesses bear a disproportionate share of the federal regulatory burden. Add to those costs the extraordinary tort liabilities in the U.S., increasing health and energy costs, and higher priced raw materials for manufacturing. It’s a wonder U.S. goods are at all competitive.
CFE: IMTS is an international show. What should a global manufacturing strategy look like, and what’s the role for the U.S. in such a strategy?
Woods: Most importantly, there needs to be level the playing field on which to compete for all manufacturers in the global market.
On the regulatory front, that means supporting initiatives that require that the “good” regulations which promote safety and quality of life are put enforced in other countries. Unilateral actions rarely have an impact. Some of the regulations that are unique to the U.S. provide improvements to the quality of life, and likewise, there are U.S. trade laws that eschew equity and fairness issues. There are also regulations that provide little value but have significant compliance costs. The U.S. should tackle regulatory reform at the same time we try to bring other nations up to a basic standard to maintain a quality of life measure in safety, ecology and equity (like IPR protections).
An overhaul of the U.S. tax system to eliminate the complexity, loopholes and make it border adjustable is long overdue. In fact, a recent survey of AMT members found that over 1/3 of them believe that the U.S. government could most help business by enacting comprehensive tax reform.
We need to more effectively use U.S. trade laws to ensure other countries play fairly in the markets and to negotiate free trade agreements that guarantee free trade for both sides with markets that matter, like Brazil.
In trade negotiations, we should separate manufacturing issues from agricultural issues. Progress in international talks and the WTO rounds have stalled because the U.S. continues to tie talks about improvements in trade, IPR and non-tariff barriers to positions in the agricultural sector.
CFE: The big issue AMT has addressed is the Skills Gap. Talk about that problem, what the keys are to bringing more young people, veterans and minorities into manufacturing, what’s keeping it from happening now, and what AMT’s role in that effort is and will be.
Woods: The biggest issue facing AMT member companies with regard to the Skills Gap is our inability to attract young people from the limited pool of talent that is available and coming into the manufacturing workforce today. As smaller manufacturing companies, we have not been as adept at recruiting as larger manufacturing companies which are able to devote more resources in time, money and effort at recruiting.
We’re beginning to work more closely now with the educational institutions, mostly community colleges and engineering schools that can provide our members with a consistent pipeline of skilled/qualified individuals. We’re encouraging our members to get engaged with schools in their local area to help instructors close small funding gaps, to develop internship programs, and to develop mentoring programs at the schools.
A model that works quite well is the model that President Obama mentioned in his State of the Union Address in January where a dozen manufacturing companies in the Charlotte, N.C. area are working with Central Piedmont Community College in an internship program.
Large manufacturing companies have connected directly with schools for years, and they are seeing the payoffs now.
In addition, our members want to attract former military service personnel to jobs as service managers, field service technicians, etc., Large companies especially in the telecomm space have a competitive advantage in attracting service technicians. They have already mapped military job functions to existing job functions within their organization on their career sites making the transition from the military easy. AMT Members can do that too working locally with their Veteran’s Affairs offices.