Articles in Category: Manufacturing

Last Friday, several of us from the combined MetalMiner/SpendMatters team spent the afternoon with a local manufacturer (we’ll share details of our visit later this week). My other half and I decided to mix work with pleasure and take this specific tour as we are in the final stages of a home renovation and hope to complete our new kitchen for the fall. The impetus for the tour involved looking at a production innovation we had not previously heard of specifically a new scratch resistant stainless steel countertop (you didn’t think we’d opt for a non-metallic surface did you?) The tour proved interesting on a number of fronts and the collective MetalMiner team had several interesting post-tour conversations. The first one came from a colleague/friend who joined us on the tour and posed this question: don’t you think the marketing of Ëœpoor China quality’ has been overdone? In other words, isn’t the quality message simply over-played and tired?   After all, our friend argued, Chinese imports are up and clearly there is an enormous appetite on the part of the American consumer for Chinese produced goods. It’s hard to disagree with that statement.   In fact, our trade deficit with China continued to increase according to the latest economic numbers. So, what’s the real beef with Chinese produced products? We’ll return to that in a minute.

My friend’s questioning got me thinking because we saw several things on our plant tour that suggested to me where/how US manufacturers have created successful “niches (we say niches because many of the mass produced products are no longer made here). We will summarize three areas here now: the first product innovation generated only through the connection or close collaboration if you will between the engineering/manufacturing side of a company and the marketing side. The second, the strategic advantages of high mix low volume operations and finally the third, the ability to produce in a “mass customized manner.

Let’s start with the first clearly American manufacturers (or any country’s manufacturers) can gain competitive advantage (and insight) by rapidly solving a customer’s problem. In this case, the manufacturer we visited produces stainless steel sinks, counters etc. When a sales person from the manufacturer went to visit a client (a showroom featuring the counter tops) the sales rep saw a bunch of towels covering the stainless counter, in effect hiding the counter top. When queried by the sales person as to why the towels were there, someone from the showroom said the surface scratches so easily that they needed cover the counters to maintain the look. But according to the manufacturer, that is the exact opposite way to show stainless. Instead, the manufacturer quickly devised a way to create a scratch free surface (which we can attest to, works) that solved the problem and allowed the showroom to remove the towels. Can the process be copied? Sure, but in the meantime, the manufacturer had created a product innovation distinguishing its products from all competitors (domestic and foreign). Read more

My TweetDeck was abuzz with tweets yesterday morning about a new bill that President Obama will have signed into law yesterday afternoon. Cleverly named the Manufacturing Enhancement Act of 2010, the bill while certainly helpful to US manufacturing can hardly be considered either comprehensive or complete. The bill’s actual name, the “Miscellaneous Tariff Bill commonly known as HR4380 specifically only covers the reduction of a range of import tariffs for materials and chemicals. You can view the complete text of the bill via this link. Some of the materials include flat screen plasma displays, golf club heads but also a range of chemicals and compounds such as Caprolactone-neopentylglycol copolymer, nickel carbonate and ortho nitro phinol, as examples.

But as this post from NAM (National Association of Manufacturers) points out, the legislation does not address several key aspects in order to truly “enhance manufacturing. For example, it doesn’t address any strategies for lowering trade barriers on imports of US products in foreign markets.  NAM calls for the adoption of free trade acts specifically for Panama and South Korea as examples of policies required to help double US exports, a policy plank of President Obama’s. NAM names over a dozen policy initiatives in a report entitled: Blueprint to Double Exports in Five Years that Congress would need to enact to ensure the success of the export initiative. Some of these changes involve export control changes, intellectual property protection, logistics, infrastructure investment, foreign trade compliance with WTO rules along with many others.

We have a little button that sits in our office that says “easy. When you hit it, the speaker says, “That was easy. We’d be clicking that button about this bill, though we understand that Republicans had held it up. It’s a non-controversial bill that has stood the test of time as it has been repeatedly introduced and signed into law by several previous administrations. With few controversial elements this law represents a “no-brainer. But to get US manufacturing moving again, the real work lies ahead.

–Lisa Reisman

For those of you who missed an interesting essay by Andy Grove, co-founder and former CEO of Intel, you can read “How to Make an American Job Before It’s Too Late: Andy Grove, right here. For those of you looking for the Reader’s Digest version, we can summarize his main points in the following ways. First, he takes a punch to something that NY Times columnist Thomas Friedman said in a recent article entitled: Start-Ups, Not Bailouts, according to Thomas, “Let tired old companies that do commodity manufacturing die if they have to. If Washington really wants to create jobs, he write, it should back start-ups. Grove says simply that Friedman is wrong. He points to the necessity of the “scaling process which involves the capital investment to grow a business beyond a start-up to one which requires factories and American jobs. Though this theme permeates Grove’s essay, he argues several other points worth noting. He argues that job creation must become the “number one priority of state economic policy. He goes on to say that government really has the largest most strategic role in seeing this happen. Finally, he suggests some financial incentives, not too dissimilar to those proposed by Warren Buffet in levying an import tax on goods that come into the US that don’t have a corresponding equal export value. In this case, Grove suggests a tax be placed on any products that come into the US with offshore labor.

The article discusses the US high tech industry starting with Intel but then moves to alternative energy and the advanced battery market. His comments however, are not without controversy. In a well-argued piece by Forbes entitled: How to Kill the American Job, author Reihan Salam argues that Grove suggests using trade barriers and government subsidies to solve the problem of American jobs whereas Salam dismisses the notion that job and income growth will come from the US manufacturing sector (it will come from the caring professions as an example). Instead, Salam argues for tax reforms to improve work incentives, entitlement reform and less “bashing China. He then examines marginal tax rates and says, “large cumulative increases in the tax burden lead to institutional and cultural shifts that are difficult to reverse: Firms become less likely to hire, workers take longer vacations and trade taxable income for leisure, overall spending levels grow slowly or flatten. Finally, Salam concludes that what Grove is arguing for “larger and more intrusive government will, “¦destroy more American jobs than off-shoring ever has or ever will.

But let’s take a step back for a second. Grove discusses a key metric: the employment cost-effectiveness of a company. To get at the number, one takes the initial investment and any fund-raising investments (this could include an IPO) then one divides this number by the number of employees at the company ten years later. Grove says for Intel this number equated to $3600 per job (adjusting for inflation) and for National Semiconductor, this number was $2000. Now, the cost is $100,000 per job. And those costs get levied on a company through regulatory burdens, increased health care costs, wage etc. US manufacturers lose their edge when other countries peg their currencies at less than the free-floating rate (e.g. China, South Korea, etc)

One might conclude Grove argues for big government, subsidies and high taxes (that’s what Salam accuses Grove of arguing for anyways). But hold on a second. What do we call these massive stimulus programs? How about the enormous regulatory burdens placed on US employers for health care, as well as tax increases poised to kick in by January of 2011? Folks, we already have massive government intervention. Why wouldn’t we argue for gulp “incentives, tax breaks and reduced regulatory burdens and even taxes on products with off-shored labor content (as Grove suggests) to stimulate the scale that Groves is talking about? Or, do we really think we’ll survive as the “knowledge economy or the “caring professions helping hand economy? I don’t know but financial advisors always seem to suggest the best investment strategy is a diversified one. Are we prepared to walk from US manufacturing?

–Lisa Reisman

How to disentangle the upbeat from the downbeat reports on the US economy? We have had plenty of both in recent weeks and trying to make sense of the real state of the economy is a tough call. The analysis isn’t helped by the fact we are in a transitory stage with many stimulus measures such as support for the housing market having just finished which has had profound short term effects. Given more time, these may not look so bad but on a month by month change they look pretty dire.

On the plus side, manufacturing appears to be doing well. The private sector has been investing in plant and equipment again, partly out of a renewed confidence in the future and partly because they invested so little last year that investment plans are slipping well behind schedule and some plant and equipment needs replacing. A Wall Street Journal article details some major and minor investment plans for US corporations. Engine-maker Cummins Inc. plans to increase capital spending to $400 million this year, up nearly 30% from 2009. The company needs to meet increased demand fueled by rising sales of trucks and off-road engines in India and China, and an expected increase in demand for fuel-injection and emission-control systems that can meet new air-quality and fuel-efficiency standards. Meanwhile, Fedex is upping investment this year to $3.2bn from $2.8bn last year of which two thirds is earmarked for growth in their business and only one third to sustain current services. The shipping giant is buying new aircraft, bringing mothballed ones out of service and building new sorting facilities. Aircraft orders have distorted US figures in recent months, making some months look high and others low but non defense capital equipment orders excluding aircraft have risen steadily, up 2.1% from April to May and 18.4% above last year’s low base. And that is part of the problem. Year over year comparisons are against the biggest fall on record, unless the world had come to an end in 2009 this year was bound to be higher than last year. It makes more sense to look at month over month figures to see if growth is sustained and the general trend is upward.

What seems to have created the uncertainty is a combination of recent poor housing data coupled with concerns about the wider global economy. In the US growth has been downgraded slightly to 2.7% from earlier estimates of 3% for the first quarter 2010, but it was still the third consecutive quarter of growth and will almost certainly be followed by another quarter of growth for April to June. Although the IMF is forecasting in its latest World Economic Outlook that global economic growth will be at 4.2% for this year and 4.3% for next there is still a prevailing sense of fear over debt problems in Europe and a slowing of growth in China which is sapping confidence and giving rise to expectations for a double dip. Our expectation is China, India and other emerging markets will continue to grow strongly albeit at lower rates in the second half than the breakneck pace in late 2009 and early 2010. I believe the US market will also continue to expand. Employment is currently a worry with figures being distorted by the census but firms at least in the manufacturing sector are beginning to hire again. Not until employment levels improve and people feel confident about their jobs however will the housing market show consistent signs of recovery. Concerns about China are overblown. The country will have good months and bad but on the whole growth is being well managed. Provided that debt worries in Europe do not escalate over the summer the fear factor will retreat and confidence will return. So a lot is riding on the mandarins in Brussels and the markets reading of their handling of developments when put in those terms may be it’s not all clear sailing.

–Stuart Burns

Tata invested some $440 million in designing the car, moving (following local objections at the original site) and then building the production facilities for the Nano according to this report. How accurate this figure is remains debatable. A significant portion of the R&D cost was pushed onto suppliers but let’s take the number at face value. Nanos have been selling like hot cakes and Tata appears to be facing only two significant challenges. The first is the cars have an unfortunate propensity to burst into flames. Four have gone up in smoke over the last six months with varying displays of pyrotechnics from a gentle smoking to outright bonfire. Fortunately nobody has been injured. The first three Tata say were due to a faulty electrics switch under the steering wheel. The last one appears as if it may be more serious as it started at the rear of the car where the engine is housed – the company is still investigating. The second challenge is the cost of raw materials has risen sharply since the car was launched as a concept in 2003 with the target price of $2,500 equivalent. The dollar equivalence has dropped in recent years as the Rupee has strengthened putting the target under pressure but nevertheless the concept of a drier safer but not much more expensive equivalent to a scooter still holds.  Tata’s logic was easy to follow. India is a developing country with a rising and highly aspirational middle class for whom a cheap car is high on the list of must haves. Tata’s purchase of Britain’s Land Rover-Jaguar in 2008 for US$2.3bn according to this BBC report is harder to understand. Tata has made some efforts to market the Land Rover 4×4’s in India but the price tag will prove prohibitive after import taxes. Although 4×4’s should be hugely popular on Indian roads, the reality is the market for gas guzzling western technology is very limited.

Geely’s recent purchase of Volvo however has much more to commend it. Geely is understood to have $2.7bn of funding to invest in Volvo including the sale price of about US$1.8bn according to a Telegraph article. Geely’s chairman Li Shufu said the company would maintain its Swedish heritage with its own management and headquarters in Gothenburg. However, Volvo will develop manufacturing capability in China while maintaining the firm’s manufacturing centers in Sweden and Belgium. China is rapidly developing its engineering skill base through such deals, having bought MG Rover and IBM’s personal computing arm. Airbus is also building planes in China.

Although Europe and the US are currently Volvo’s two main markets, Geely has said it wants to develop the firm’s Chinese business to be of equal size to its non-Chinese business. Geely is the 12th largest automaker in China but the second largest that is not at least part state owned. Buying Volvo gives the firm access to technology and an international footprint that would otherwise takes years to develop. As the Boston Globe puts it this is Geely’s bid to break out of the basement.

Are emerging market manufacturers purchases of established western rivals an act of egotism or good long-term investments? Often it looks like the former. You have to wonder what Tata is really going to do with Jaguar Land Rover or with Corus Steel, but Geely’s purchase of Volvo does have much to commend it.  Ford-Volvo’s technology is world class and it was apparently security of that technology that was more of a sticking point in the company sale than the price. Geely is looking to build substantial manufacturing facilities and a supply chain in China to make the Volvo line up for the local market. Quite how Geely is going to improve Volvo’s European operations economics to get them making money though remains uncertain. Expect to see component manufacture move to Geely’s China supply chain over the coming years as the new owners struggle to bring the European operations back into the black.

–Stuart Burns

We have spent a lot of time recently talking about and evangelizing the concept of getting one’s arms around all of the variables that impact the price (the forecast if you will) of a particular metal. I had the opportunity to speak with a senior sourcing professional at a Fortune 50 firm last week. We began talking about forecasting and why forecasting has become so difficult for so many organizations (including research organizations). It all seems to come down to those variables and perhaps more important, those “moving variables. When we agreed that R2 values (statistics talk sorry) start to fall down when projecting prices out by even 16 weeks this individual said to me, “how much of a price change is due to supply and demand factors (e.g. the explainable) and how much is the price change attributable to an ever-growing “unexplainable portion of the total? It’s that “un-explainable portion that, quite frankly, needs some explaining!

Let’s examine five economic gauges that I caught just yesterday by reading the Wall Street Journal among other press releases I receive on a regular basis:

  1. Domestic manufacturing capacity it’s up by .2% from January growing from 72.5% to 72.7%. According to the WSJ, the 40-year average capacity rate is 80.6%. Bad weather may take part of the blame for sluggish numbers. So we’ll give this economic indicator an anemic thumbs up.
  2. Weekly raw steel production Last week utilization increased from 69.6% to 70.9%, according to the American Iron and Steel Institute in their latest news release. We’ll assume (big assumption yes) that the increase in capacity has been heavily orchestrated by the mills to match demand and not “too much capacity coming on too fast. Though for buying organizations, steel prices have increased, from an overall economic perspective, we’ll take this announcement as another thumbs up.
  3. Home Builders’ Home Building Index this measures “builders’ sentiment which declined from 17 to 15. Housing starts also declined. We’ll count this as “one indicator. That’s an obvious thumbs-down.
  4. Inflation rising steel prices not withstanding, too many parts of the economy remain sluggish (e.g. wood products remains at 52.6% capacity utilization). Consumer inflation requires less slack across the entire economy, according to the Wall Street Journal. Thumbs up from an overall economic standpoint.
  5. Import and Export Prices – The import price index fell by .3% largely due to lower fuel prices (this represents a second economic indicator supporting the inflation finding above)

We’ll throw in a 6th indicator for good measure. The PPI came out this morning. Finished goods prices fell .6%, however, “On an
unadjusted basis, prices for finished goods advanced 4.4 percent for the 12 months ended February 2010, their fourth consecutive 12-month increase.” PPI remains something to watch particularly because of the change in direction noted in February.

Why do we draw on each of these measures you may ask – because some of these indicators begin to explain the unexplainable. As commodity volatility has become a standard operating condition for all metal buying organizations, our forecasting tools and resources need to become more robust. The interplay of variables such as the five above along with dozens of others should become a part of every metal buying organizations commodity dashboard.

Check out our Price Forecast page to learn more about MetalMiner’s research and price forecast modeling services.

–Lisa Reisman

No this is not an archive article from the 1960’s this is 2010 and the US manufacturing sector is buoyant. No doubt aided and abetted by a very weak dollar, US manufacturers are finding their products both competitive and in demand around the world according to the LA Times. Unfortunately manufacturing’s share of the economy has all but halved since the late 70’s to just 11.5% but producers across a wide range of metal goods from new industrials like Nano Solar Inc to established global leaders like Caterpillar are seeing export sales up. Caterpillar exports more than most companies even make in total so when their exports pick up 20% we are talking big numbers. Export sales are up from $10.5bn last year to $12.6bn this year and the firm is hiring again says the Central Illinois News.

President Obama is trying to double exports in five years and increase research and development to 3% of the nation’s economic output. However, he can’t take any credit for the current surge — that is largely down to the weak dollar. The challenge will be maintaining that export performance and limiting imports if the currency comes back, without risking a trade war by taking overly protectionist steps. The country cannot afford the tax incentives necessary to boost R&D while it is running such huge public debt and federal deficits, laudable as the objective is.

Supporters point to the nation’s abundance of private capital and its history of turning creative ideas into commercial products. They point to continued U.S. leadership in such key industries as aerospace, biotech, optical communications and memory chips. Notably, Intel’s $2.5-billion retooling of its wafer plant in New Mexico, for example, will soon make a 32-nanometer processor, two generations ahead of the chip that Intel’s new China factory will churn out this year. But one or two success stories like this are not a substitute for developing the clusters of R&D, high tech manufacturing and support services required to keep the US at the forefront of modern manufacturing. The reality is as manufacturing is shifted overseas, the supply chains are lost and bringing that manufacturing back in the future becomes increasingly difficult without those established supply chain services. Fortunately in the metals industries although manufacturing capabilities have been slimmed down in the last 20 years the US is still home to some of the most sophisticated steel and non ferrous metal forging, rolling, extruding and treating companies in the world, but their numbers are dwindling. Take aluminum extruders for example. Where rolling companies have weathered the recession relatively well, several extruders have gone out of business like Indalex. Some facilities will be preserved but many will be closed down permanently.

Although it is highly encouraging to hear US manufacturers are doing well presently we would suggest there should be no let up in the government seeking to find ways of encouraging manufacturing enterprise with a favorable tax and regulatory regime because the dollar will not always be weak. As we know only too well the good times do not last forever.

–Stuart Burns

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