Technology, political will, and a focus on the customer could lead to a rebirth of manufacturing in the United States.
By Russ Banham
Ten years ago, American manufacturing was an oxymoron, as so much of what was sold by domestic manufacturers was produced outside the nation’s borders. This paradigm may now be altering, promising a new age for U.S. businesses that make things. How could manufacturing, a sector that has lost more than 35% of its jobs since 1979, return to its former glory?
A key factor in the change is President Donald Trump, who has pledged to return domestic factory jobs lost to foreign sources of cheap labor. The White House also seeks a reduction in the corporate income tax rate, wants to allow companies to be able to immediately deduct capital spending for tax purposes, and vows to peel back an assortment of regulations that Trump says put U.S. companies at a competitive disadvantage—all good news for American manufacturers.
At the same time, the U.S. economy is relatively strong. The stock market has posted more than $3 trillion in paper gains since the Presidential election, jobless claims are at a four-decade low, and business and consumer optimism are sunnier than Yuma, Arizona. Moreover, the much-watched ISM Manufacturing Report’s Purchasing Managers’ Index, which tracks movements in production, new orders, inventories, and employment, hit 57.7 in February, its highest level since October 2014.
Last, but far from least, are the extraordinary efficiency and productivity enhancements offered to manufacturers by such remarkable technologies as robotics, 3-D printing, and smart factory equipment embedded with semiconductors and sensors.
Those various developments herald what analysts optimistically call the Fourth Industrial Revolution, following the three previous ones—the introductions of the power loom in 1784 and the automobile assembly line in 1913, and the move from analog electronic and mechanical devices to digital technology in the 1990s. “We’re much closer to the ability for manufacturers to create products nearer to the source and nearly on demand,” says Mark Patel, a partner in McKinsey & Co.’s advanced industries practice.
GREASING THE ENGINE
Political pressure from the Trump administration is forcing companies to contemplate whether to manufacture on the home front. Several companies are bringing at least part of their production back to American shores—some in expectation that President Trump’s proposed tax and regulatory policies get implemented. Intel, for instance, announced a $7 billion investment in a new factory in Arizona that will create 3,000 jobs. GM is ponying up $1 billion to increase vehicle production domestically, and also plans to shift production elements from Mexico to Michigan, generating about 2,000 jobs. Competitor Fiat will invest $1 billion in plants in Michigan and Ohio, producing 2,000 jobs.
Foreign manufacturers are also planting stakes in the U.S. Foxconn, the large Taiwan-based contract manufacturing concern, plans to build a $7 billion plant making television displays on American shores. And German chemical company Bayer AG has promised the president that, if it gets the green light to merge with Monsanto, it will invest $8 billion in R&D domestically, maintain Monsanto’s 9,000-strong U.S. workforce, and create 3,000 new jobs.
Not every manufacturer is eager to relinquish overseas production, however. Milwaukee-based Rexnord recently finalized plans to close a ball bearings factory in Indianapolis and move the operation to Mexico, at a loss of some 350 U.S. jobs. Rexnord reportedly will pay Mexican machinists $3 per hour compared to the $25-per-hour rate paid to U.S. machinists.
But the resurgence of U.S. manufacturing is not just about the location of plants. For manufacturing CFOs entrusted with profitably allocating their organization’s capital, there may be better areas in which to spend money, such as mergers and acquisitions, new equipment, smart technologies, worker training, and research and development. Leveraging automated production processes like 3-D additive and subtractive manufacturing allows for rapid prototyping. And smart factory equipment embedded with sensors that report on how machines are performing—their stresses and failures—maximizes maintenance and minimizes downtime.
Obviously, such capital allocation decisions are not for the faint of heart. Feasting on today’s state-of-the-art plants, equipment, and software may end up looking foolhardy if the global economy stagnates. “Many of the decisions to be made right now in manufacturing are financial in nature, making the role of the CFO more critical than ever,” says Bob McCutcheon, PwC’s industrial products leader. “This will require finance to have a deep understanding of all the moving parts.”
To learn where some U.S. manufacturers are placing their bets, we interviewed the CFOs of Armstrong Flooring, Polaris Industries, and Marvin Windows and Doors. Each CFO laid out a different array of capital priorities, but they also spoke of a common goal: less focus on cost cutting, more attention to customers’ needs. And that manufacturing renaissance? It may look different than what the president and other politicians envision.
MEASURE TWICE, CUT ONCE
Jim Macaulay, CFO of Marvin Windows and Doors, agrees that domestic manufacturing is at the threshold of a revival. “Certainly U.S. manufacturing is making a recovery, thanks to leaner manufacturing techniques and the wide deployment of productivity-enhancing technologies,” he says.
Among the investments that Marvin has made are Computer Numerical Control (CNC) machines that are directed by computers to produce components on demand, reducing setup and inventory costs. For example, at a plant in Oregon that manufactures different-sized wood pieces, the company recently installed new laser visualization CNC machines that give operators a good look at a board before cutting it, to ensure “maximum yield”—the largest piece of wood possible from a single block of lumber.
The new CNC machines leverage X-ray technology to “see” inside the wood before it is cut, to visualize the knot and grain structure and the presence of defects. Previously, Marvin relied on the eyes of shop foremen to identify anomalies. “The computer inside the machine instantly analyzes the visual image to decide the best places to cut, increasing yield while reducing human intervention,” Macaulay says.
Marvin also has invested in embedding semiconductors and sensors inside factory equipment to calculate temperature, vibration, moisture, and other conditions. If a piece of equipment exceeds a particular temperature, the machine signals a possible problem for corrective actions. Information from the various sensing technologies flows to a central location where the measurements are displayed and monitored. “We’re better able to anticipate [equipment] failures and preventively assign repairs at off-times to maintain production efficiencies,” Macaulay says.
Since the machines are connected to each other in the Internet of Things, a problem often can be self-corrected—one machine automatically speeding up to allow another to slow down and cool off, obviating the possibility of one machine’s failure bringing all production to a halt, he adds.
How does the CFO approach the many internal requests for funding that clutter his desk? “The question I always ask is, Will this project enhance the customer’s experience?” says Macaulay. “Innovation is crucial, as long as it provides for a better customer experience. That’s equally as important as a project’s cost-reduction opportunities.”
ENJOYING THE RIDE
Like many cost-conscious domestic manufacturers, Polaris Industries, maker of snowmobiles, Indian Motorcycles, and all-terrain vehicles, has a significant volume of its off-road vehicle production in Mexico. Aside from the cheaper cost of labor, the company maintains that vehicles made south of the border also are closer to those states that make up a sizable portion of the market for the company’s products.
But Polaris is also investing heavily in U.S. manufacturing. Last year the company christened a 600,000-square-foot, state-of-the art manufacturing facility in Huntsville, Alabama, where it builds its Ranger utility vehicle and the Slingshot three-wheel motorcycle. Once the factory is operating at capacity, the company expects to have 2,000 workers humming away. The multifunctional plant comprises vehicle assembly, chassis and body painting, welding, fabrication, and injection molding.
“Ten years ago, we tended to look for low-cost labor solutions, which the factory in Huntsville runs counter to,” says Mike Speetzen, Polaris’s executive vice president and CFO. “But we’ve more than made up the difference with lean manufacturing, highly skilled labor, and enhanced automation across the production lines.”
The new plant features state-of-the-art robotics that use precise calibrations to improve engineering tolerances and manufacturing efficiency. “The mindset here has changed from cost reductions to investing money for a payoff down the road,” Speetzen says.
In addition to spending $142 million on the Huntsville plant, Speetzen dug into the corporate wallet last year to acquire Transamerican Auto Parts, a manufacturer of Jeep and truck accessories with 170-plus retail stores, for $665 million. Speetzen also plans to increase the company’s R&D investments this year by 15%: “Innovation is critical to our business. Seventy to eighty percent of our revenue has come from products introduced in the last three years,” he says.
Polaris’s capital allocation plans have also changed. “It used to be all about cost-cutting, but now we realize that you have to spend money to save money,” he says. “The easy way out is to cut jobs or take costs out. We now look down the road at whether or not a particular [expenditure] will further our market position or the experiences of the riders of our vehicles,” Speetzen says.
DIAMOND IN THE ROUGH
Fast-changing consumer preferences have compelled Armstrong Flooring, a maker of wood, vinyl, engineered stone, linoleum, and other flooring products, to continually invest in innovation. One example is the company’s decision to expand its production capacity for making newer types of flooring like its LVT (luxury vinyl tile) line, a durable floor material composed of polymers, plasticizer, limestone, and cultured diamonds. The one-of-a-kind flooring can realistically simulate hardwood, ceramic tile, slate, or natural stone.
“The high-end segment of the flooring market is the highest growth market,” says Jay Thompson, Armstrong Flooring’s senior vice president and CFO. “It’s such a fast growing category that it’s cannibalizing a lot of traditional flooring products like carpets and wood.”
To manufacture the new product, a second production line was built on an industrial brownfield site at Armstrong’s Lancaster, Pa.–based plant. “We’re very scrupulous [about] where we invest our capital,” says Thompson. “But the current climate for manufacturing, given the president’s assurances of tax and regulatory relief, is guiding us to lean forward to leverage more of our capital in profitable projects, of which the LVT plant is one.”
Spun off as an independent public company last year from Armstrong World Industries, Armstrong Flooring is looking to turn around several years of sluggish growth. Capital spending of $37.6 million last year is pegged to increase to about $50 million this year, with roughly $20 million earmarked for productivity and innovation projects.
“We’re investing in R&D, new product development, and marketing concepts to quickly move new products to market,” says Thompson. “We also have 17 plants worldwide, 14 of them in the U.S., needing a fair amount of repair and maintenance spending to remain viable. On top of that, we’re looking to drive greater efficiency, investing in automation to reduce waste and [increase] throughput.”
Armstrong Flooring is another company that has returned to manufacturing in the U.S. from foreign locales. In 2015, the company closed its scraped engineered hardwood flooring facility in Kunshan, China, onshoring the manufacture in Somerset, Kentucky. The decision was driven by the increasing cost of freight and labor in China and the growing demand for the flooring type domestically. “It just makes sense to move production closer to where we actually sell a product,” Thompson says.
Onshoring also eliminates several months in product lead time and improves Armstrong’s response to those fast-changing consumer preferences. “Manufacturing domestically made this a smart move for the business, helping us to restore our wood business to an acceptable return on capital,” Thompson says.
Like other manufacturers, innovation is the fuel igniting Armstrong’s capital allocation decisions. “We broadly lay out what we think our capital needs are going to be across three areas—the need to maintain current equipment, to drive efficiency in the business, and to accelerate new product development to be first to market with a new flooring,” says Thompson. “That gives us a target level of spending in the strategic plan. We then build this out project by project.”
The three CFOs interviewed all expressed a degree of optimism that has been absent in manufacturing, recalling the excitement surrounding lean manufacturing, Six Sigma, and just-in-time production concepts that consumed manufacturing attention at the end of the last century. Shortly thereafter, though, the focus switched to conserving capital through labor cost arbitrage. Will this resurgence prove longer lasting?
The confluence of time-saving, efficiency-gaining, and information-rich technologies has definitely put the manufacturing sector back on track, leading to greater productivity and higher profit margins. But the investment choices by manufacturing companies are not necessarily going to boost the total number of jobs for minimally skilled U.S. workers. Indeed, the skilled worker that can operate highly automated equipment on the shop floor is the one that will be in demand. And those workers have proven tough to find in the U.S. in the last few years.
Manufacturers, perhaps helped by the government, will have to find a way to solve that problem. And policymakers will have to refrain from protectionist measures that could make U.S.–made products less appealing in international markets. If both of those conditions are satisfied, the future looks pretty darn good for Made in America.
Russ Banham is the author of 24 books and a longtime contributor to CFO.