Forecast 2007

“What’s good for General Motors is good for the country.”
    — Charles Erwin Wilson,
        president, General Motors, 1953

He didn’t really say that, you know. Even so, this “misquote of the century” has come to signify the best and worst of the American business spirit.

But there is no doubt that what’s good for manufacturing is good for the industries that serve it, especially MRO goods and services providers and the supply chains that deliver them. As manufacturing goes, so go the industries that support it. The question is, “What will manufacturing do next year?”

Two sources surveyed for this report offer a similar picture of the coming year: softer overall economic growth, constrained by interest rates, energy costs and employment. Dan North, chief economist for risk mitigation insurance firm Euler Hermes ACI, sees these macroeconomic factors combining to constrict overall Gross Domestic Product (GDP) growth to only 2 to 2.5 percent in 2007.

Other economists agree in point, but with a focus on manufacturing.

“In manufacturing, you’ll see a little slower growth next year than the five or six percent growth we’ve seen in the last couple of years,” says Dave Huether, chief economist, National Association of Manufacturers. “But we’ll likely still see manufacturing outpace the overall economy; it has been since late 2003.
That’s not saying every manufacturing sector will grow at four or five percent. Some will grow at six, eight, nine percent and others will grow in the two to three percent range.”

Bellwether industries: machine tools
Certain industrial categories are viewed as bellwethers; indicators of the overall strength of manufacturing. Machine tool consumption, for one, is a good predictor of near-term industrial activity. This relationship to such related industrial indicators as capacity utilization can be seen in the graph above. Produced from research conducted by the American Machine Tool Distributors Association (AMTDA) and the Association for Manufacturing Technology (AMT), the graph illustrates U.S. capacity utilization and machine tool consumption over the last 10 years.

This 10-year chart vividly shows the correlation between machine tool consumption (green line) and industrial capacity utilization (red) in United States industry. It also clearly indicates the industrial sector recovery in progress since 2003. CHART FROM AMTDA/AMT

From a high of $5.5 billion in 1997, machine tool usage fell to $2.1 billion in 2003. Since then it has rebounded to $3.1 billion in 2005 and is on track to finish 2006 with roughly $3.7 billion in total consumption. With a year-to-date total of $1.75 billion, June 2006 manufacturing technology consumption was up 23.9 percent compared with 2005.

“Since the recovery began in November 2003, orders have grown steadily, punctuated by June 2006’s 27 percent increase over June 2005,” said John B. Byrd III, AMT president. “Counter to concerns that the 32-month expansion is ready to turn, the market is still 35 percent lower than its 1997 peak. There is still a lot of room to grow.”

Bellwether industries: motors
Integral horsepower industrial motor sales are another bellwether indicator of manufacturing strength, and manufacturers in this sector are enjoying record growth. Baldor Electric, for example, has recently added 450,000 square feet to two manufacturing facilities.

“We are having an excellent year,” says John Malinowski, product marketing manager for Baldor Electric. “Our sales in 2005 ran 11 percent higher than 2004. For the first half of 2006, sales are up over 14 percent compared with 2005. We expect to do as well in 2007, barring any adverse changes in the economy.

Trends: Outsourcing for dollars
A major source of loss appears to be finally on the mend: Since the year 2000, the United States has lost some 3 million manufacturing jobs, but this trend is slowing. One reason is the strength of the US dollar. Throughout most of the 1990s, the high value of the dollar made it more cost effective to produce cheap goods overseas and import them into the United States.

But the dollar has been declining in value, so import prices have begun to rise. Bernard Baumohl, executive director of The Economic Outlook Group, projects that the exchange rate for the Dollar against the Yen will end 2006 at $1 to 105 Yen; and against the Euro at $1.33 to 1 Euro. In 2007 he predicts the Dollar will hit mid-year trade points of $1 to 100 Yen and $1.43 to 1 Euro.

Is this a bad thing?

“A gentle and sustained decline in the greenback should not be harmful to the economy,” Baumohl says. “Indeed, it’s a necessary first step if the U.S. is to make some progress in paring back its massive trade deficits.”

However, he cautions that other factors must also align here, including a growing global demand for U.S. products and a coinciding increase in federal and consumer saving habits here at home.

Today, companies moving overseas tend to be focusing more on opening markets in new regions, and less on producing products more cheaply for the U.S. market.

“You’ll still see U.S. manufacturers moving overseas, but that’s less of a phenomenon of finding a cheaper labor market to produce products to send back to the United States, than it is of investing in high-growth markets overseas to serve their customers,” Huether says. “A lot of it depends on the type of products. You don’t see detergent being exported to the United States. But if you’re a detergent manufacturer and you want to serve the Eastern European market, you build a plant there.”

Costs: The China syndrome
Ancient Chinese emperors believed they lived in the center of the universe. If they could see modern China, they might smile and say, “See? I told you so.” China’s boom has driven raw material costs to record highs and caused global shortages of key materials. Although China’s growth rate appears to have slowed and some raw material prices are beginning to stabilize as a result, experts advise that these signs are not harbingers of pricing downturns. For many raw material consumers, they have reached pricing’s peak and discovered it is a plateau.

As a result, it is impossible to discuss pricing challenges for U.S. producers without acknowledging the global demand driven by China — and India. These realities are forcing manufacturers to focus more than ever on supply chain management (SCM) strategies to streamline order, delivery and consumption cycles to minimize inventory liabilities. Supply chain experts estimate that successful supply chain management programs can routinely realize cost reductions of 30 percent compared to the prices companies have historically paid for goods and services.

A recent survey of MRO Today readers illustrates the importance of this: 72 percent of respondents say their most critical issue is cutting costs.

Fuel and energy costs have also soared and, while these too are showing signs of price correction, no one expects to see prices drop significantly over either the short or long term. If Mideast instability or new natural disasters drive oil to $90 a barrel, this would put gasoline between $4 and $5 a gallon. Gas at these prices for even a few months would greatly increase the risk of a full-blown recession, but at the levels they are now, that will not happen.

In addition, energy costs account for only 5 to 10 percent of total production costs, and manufacturing is still addressing these costs successfully with productivity increases.

Productivity and labor
While cutting costs is the number one concern of MRO Today survey respondents, increasing productivity is number two, and these two factors are intimately entwined. This “do more with less” conundrum is the crux of the challenge MRO professionals face today. Despite the jobs that have left and are leaving United States manufacturing (or perhaps because of them), the industry faces a potentially severe shortage of qualified workers in the coming years. In 2000, U. S. manufacturers employed 17.2 million workers. In mid-2006 that number was 14.2 million.

Facilities have fewer workers doing more work: During the last four quarters, manufacturing productivity has risen 4 percent. At 85.6 percent, June 2006 was the eighth straight month of capacity utilization over 82 percent, an indicator that the pursuit of reliability is spreading across and positively impacting the industry. This spotlights the third most critical issue for MRO Today readers: manpower and scheduling.

The aging national workforce is also impacting the labor pool. By 2012, workers aged 55 and older will increase from 14.3 percent to 19.1 percent of the total labor force. In coming years, recruiting and training, ranked number four on this year’s MRO Today survey, will take on more importance. And as new employees come online, standardized, universal training will become more critical.

One movement addressing recruiting and training right now is visual plant management. Managers are bridging the language barriers facing today’s multilingual workforce with universal visual management tools. This field is gaining momentum, sophistication and much-needed recognition across the industry. Gwendolyn Galsworth, a leading proponent of visual management, won a 2006 Shingo Prize for her superbly presented (and highly visual) book, “Visual Workplace, Visual Thinking.”

Can the productivity gains continue? Naturally, Lean experts certainly think so and they have countless examples of major gains realized in the third, fourth, fifth and subsequent rounds of improvement processes in manufacturing plants across many industries. But do economists think so?

Future productivity gains can be difficult for economists to forecast, but Federal Reserve Chairman Ben Bernanke for one is optimistic that U.S. manufacturing will continue to generate efficiency gains over the long term.

“A case can be made that the strong productivity growth of the post-1995 era is likely to continue for some time,” he told an economic and development conference in Greenville, S.C. Many companies have yet to reap the full benefits of capital equipment and related technology investments they have already made, he noted.

Another critical component is creating an agile workforce.

“Few jobs or occupations have not been affected in some way by the technological changes of recent years, a trend will certainly continue,” Bernanke said.

To ensure that productivity gains continue, he added that, “We (must) have a work force that is comfortable with and adaptable to new technologies.”

Getting LEAN — TPM, PdM, RCM and OEE
Manufacturing productivity gains in the United States are driven by combinations of 1) Automation and technology; 2) Lean manufacturing tools and processes such as Six Sigma; and 3) reduced downtime attributable to progressive maintenance programs like TPM (Total Predictive Maintenance) and RCM (Reliability Centered Maintenance). A fourth factor is the relative value of the dollar on the global exchange.

Manufacturing’s awareness of maintenance as a critical driver of OEE (Overall Equipment Effectiveness), productivity and profits is at an all time high. The MRO Today reader survey indicates that nearly 76 percent of respondents have Lean programs in place or underway — significantly higher than the industry average of 58 percent. MRO Today readers are also achieving better results than the national average; 65 percent of survey respondents cite significant gains through Lean programs, compared to less than 15 percent nationally.

Of companies reporting ongoing Lean programs, 55 percent train and “grow” their own lean leaders and techniques; 32 percent learn at Lean conferences; and 15 percent contract with outside “Sensei” consultants.

The race for reliability
Although it seems at times to be moving at a glacial pace, the Lean revolution continues. Corporate CEOs and CFOs are looking at maintenance functions in the light of reliability.

After decades of “fill the warehouse and fix it when it breaks” batch-production and reactive maintenance, Lean-conscious producers see reliability as a critical component both for baseline profitability and in the larger equation of global competitive viability.

To drive reliability, condition monitoring technologies are becoming increasingly sophisticated and automated. Next generation real-time wi-fi monitoring systems, using both machine-mounted sensors and portable data collection modules, are changing the way maintenance is planned, scheduled and performed. This trend will continue and accelerate in 2007.
The construction tie-in

The construction tie-in
Construction in the United States will generate $1.2 trillion in 2006. Although the residential housing market is cooling, commercial construction is heating up.

Clues to what the construction market holds for manufacturing lies in two factors: capacity utilization and production output. High levels of both, such as those existing in today’s market, can trigger demand for factory construction. According to FMI, a leading construction industry consultancy, from its recent low point in 2003, the manufacturing construction segment will finish up 14 percent higher in 2006 than 2005, at $32.9 billion.

In 2007, this is expected to grow a further 12 percent to $36.8 billion. But again, analysts caution that even with 12 percent growth in 2007, manufacturing construction levels could still be considered weak from a historical perspective. The recovery is underway but is by no means complete.

2007: The big picture
Manufacturing contributed $1.5 trillion to the U.S. economy in 2005, up from roughly $1.4 trillion in 2004. This is the first time in seven years that there was no significant erosion of manufacturing’s share of the economy. The Institute for Supply Management (ISM) and the Federal Reserve Board’s projections for 2006 overall stated that United States manufacturing revenues would grow 6.6 percent over 2005.

Other sources confirm these projections:
The National Association of Manufacturers (NAM) reports that from August 2005 to August 2006, the new orders for manufactured goods rose 7.8 percent.

Economists agree the U.S. economy and manufacturing growth will slow in 2007. Some sectors, such as those producing consumer durables or products associated with single family housing, will see the most noticeable declines.

However, manufacturers of business equipment, durable products, computers and machinery and manufacturers of associated products like fabricated metals and electronic products, will see fairly strong growth in 2007. As our “Consumption 2007”chart of projected growth by industry shows, this could be in the 5 to 10 percent range, depending on your sector. Of the 29 industry segments listed in the chart (not including “smart labels”), our average projected growth for 2007 is 5.8 percent.

This article appeared in the October/November 2006 issue of MRO Today magazine. Copyright 2006.

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