US manufacturers restructure and survive

By Hal Weitzman in Chicago

Mark Schurman, who works for Herman Miller, an office furniture maker based in south-western Michigan, dreads to think what would have happened to the company had it not restructured since the last US recession.

“We lost about 40 per cent of our business in the space of about 18 months between 2001 and 2003,” he says. “If we hadn’t made the changes we’ve made, I don’t believe we could have survived.”

Those changes – chiefly, slashing costs and diversifying internationally – have made the manufacturer more productive than ever and, it hopes, better-placed to weather any economic downturn in the US.

While it expects $2bn in sales this year – similar to the end of the 1990s – its workforce of 6,000 is almost half what it was then.

Herman Miller’s story is typical. With fears of recession growing in the US, the manufacturing sector would traditionally have been gripped by morbid anxiety. But in Darwinian fashion, those companies that have survived are leaner and more plugged in to the global economy.

There are obvious exceptions – most notably in the motor industry, which continues to suffer. But in general, it seems that that which has not killed US manufacturing has made it stronger, and many companies are confident in the face of a possible downturn.

Video: Manufacturers survive by going lean

Francesco Guerrera says US manufacturing has prepared for the downturn by slimming down and diversifying overseas

Midwest states, where manufacturing is concentrated, are among the most productive in the country.

The top five US states in terms of manufacturing productivity are all in the region: Indiana, Minnesota, Michigan, Ohio and Iowa.

Much of this higher productivity has resulted from job cuts: Michigan also has the highest unemployment in the US, while Ohio has the fourth-highest.

While some companies have simply reduced their headcount, others have outsourced jobs overseas.

Some manufacturers have also lowered pay: for example, Caterpillar, the construction equipment-maker, has benefited from a two-tier wage system since the 1990s.

The flipside of a smaller workforce is more mechanisation. That has been driven by several factors, says Harsh Chitale, vice-president for global business strategy at Honeywell Process Solutions, which advises companies on how to improve their production.

Mr Chitale says the increasing need for energy efficiency, environmental regulations – such as those on greenhouse gas emissions – and the shortage of skilled labour have all prompted manufacturers to invest in new equipment.

The introduction of leaner production techniques has enabled many manufacturers to cut costs and improve their efficiency. Mary An­dringa, president and chief executive of Vermeer Manufacturing, a directional drill manufacturer in Pella, Iowa, says the last recession taught her a harsh lesson about the need to reduce inventory. The company switched from “batch” to “continuous flow” production, with impressive results.

“We’ve reduced all our lead times across the process,” says Ms Andringa. “In 2000, when we made wood chippers in batches, from raw steel to out-the-door took about 50 days. Now it’s two and a half days.”

Cutting jobs, outsourcing, mechanisation and leaner production may have lowered costs, but many manufacturers have also learnt that their best chance of survival is not to depend on the North American market.

Large manufacturers such as General Electric, Caterpillar and John Deere have offset falling sales at home by increasing their market share internationally, driven by growth in emerging economies and the weak dollar.

Many smaller manufacturers have followed their lead. Erick Ajax, vice-president of EJ Ajax, a metal stampings supplier with 50 employees in Fridley, Minnesota, says his company’s international expansion makes him “cautiously optimistic” in spite of the prevailing gloom.

“Our single largest order ever came last year from Saudi Arabia,” he says. “And we’re selling a lot to China, Mexico and Canada. Those export markets help smooth some of the bumps out of the road.”

Nonetheless, a report by the National Association of Manufacturers found that one-third of small and medium-sized US manufacturers had no sales outside the US and did not purchase materials or components internationally.

Chris McMahon of Baird, the financial services company, says such companies could find themselves hit by a US downturn, which may herald a wave of consolidation. He notes that, unlike previous recessions, many industrial manufacturers have clean balance sheets.

“Their financial flexibility and purchasing power is much greater than in previous downturns,” he says. “You’ve got a lot of very healthy companies out there who could well look at this market as an opportunity to play offence instead of defence.”