Manufacturing Forecast: Go Lean, Go International Or Go Away

By Taryn Plumb Special to the Worcester Business Journal
December 22, 2008

Construction continues at Evergreen Solar’s solar panel manufacturing facility in Devens.

The U.S. isn’t alone in its woes: Around the globe, many economies are caving.

And, when it comes to projecting the local manufacturing market, the world economy is often the most accurate barometer.

“I have to believe that we’re going to get hit just like everybody else,” said Jack Healy of the Massachusetts Manufacturing Extension Partnership in Worcester. The sector “had been growing until we had this meltdown.”

Still, statistics haven’t reflected any dives thus far; they’ve actually shown strong gains.

The Massachusetts export market grew 14.3 percent in the first two quarters of 2008; the third quarter, meanwhile, saw a 15.5 percent increase, according to Julia Dvorko, Central Massachusetts regional program director for the Massachusetts Export Center.

The industry’s largest export sectors have remained the same since 2005; topping the list are computer and electronic equipment, chemical equipment, transportation equipment and industrial machinery, according to Dvorko. This year, there’s also been a spike in primary metal manufacturing, she said. Also doing well are medical equipment, optics and analytical instrumentation.

Defending Themselves

As in the past, Canada was the largest export market for Bay State companies this year, followed by Germany, the United Kingdom, the Netherlands, Japan, China, Taiwan, Mexico, France and Korea, Dvorko said.

All told, the industry flourished in 2008 due to the weakening dollar and strong overseas demand.

However, several factors will likely translate into a sluggish market in 2009. For instance, Dvorko said, the German economy is in recession, Great Britain is experiencing tough times, European banks are struggling and China is also slowing down. “A lot of big markets aren’t doing well,” she said.

Meanwhile, payment delays have ensued in emerging markets, such as Russia, the Ukraine, Iceland and Brazil.

Into next year, the ever-empowered dollar will continue to work against such exports. “There’s certainly going to be a slowdown,” said Dvorko. “The strengthening of the dollar is going to be inevitable.”

Healy, for his part, couldn’t project just how hard the industry would be hit, but he did note that there will be some stabilizing factors.

For starters, one-third of manufacturers in the state are directly related to defense, a traditionally stable sector. Many others specialize in capital goods and equipment and aerospace, neither of which has seen significant downward trends. The aerospace market is also “still holding very well,” Healy said.

Uncertain Generation

Even so, local manufacturers might be viewing 2009 through a dark lens.

Ted Lapres, president and CEO of Clinton-based plastics manufacturer Nypro Inc., agreed that uncertainty will dominate 2009.

“There’s more uncertainty going into 2009 that we’ve seen in a generation or more,” said Lapres. “I don’t think anyone really knows how deep this impact’s going to be.”

One bright spot for Nypro is deflating oil prices. Earlier in the year, when oil costs grew dramatically, resin prices inflated accordingly. That, in turn, hit molders and plastics companies. But oil’s recent price plunge could provide a bit of a boost, Lapres said.

November kicked off the real slowdown: For Nypro, that meant double-digit decreases in weekly sales. Worldwide utilization of molding machines dropped off 10 percent in the fourth quarter; the mobile handset market also saw a “rapid decline,” Lapres said. Meanwhile, health care and packaging, two of the company’s larger markets, have been lurching, but are steadier overall than many other sectors.

As 2009 unfolds, more companies will be tightening up on operations and limiting cash flow. Lapres projected that the industry may also see some consolidation. “In general, most manufacturers are expecting the first half of 2009 to be soft, to be down,” he said.

The China Strategy

Howard A. Greis of machine tool manufacturer Kinefac Corp. in Worcester offered his thoughts on the coming months, and they were weary.

“Like most manufacturers, we are deeply concerned about the future,” he said.

He added that a growing difficulty for companies to get access to funds has decreased capital expenditures across the U.S. But because the machine tool industry has always been “lagging,” Kinefac only tends to see impacts in the budgets for the coming year. “Thus far, we have seen some small decline,” he said, but added, “surprisingly, it is not yet significant.”

Filling in any shortfalls will be the company’s presence in China, where it employs one full-time person and is currently adding another. Similarly, the company has invested in a new line of larger PowerBox thread and form rolling machines, which cater to the aerospace, energy and nuclear markets. Greis sees all three of those sectors continuing to grow in the U.S. and Asia within the next several years.

In addition to facing overall economic uncertainties, many manufacturers will have to deal with this continued challenge: A lagging workforce.

Between 1984 and 2000, Massachusetts lost roughly 224,000 workers, according to a study by the Center for Urban and Regional Policy at Northeastern University. Between 2000 and 2006, another 104,000, close to 26 percent of the workforce, disappeared. Researchers expect those numbers to continue on a downward slope.

Still, many companies have adapted to lean staff, Healy said. Some have intentionally skinnied down their workforces, and are effectively producing more with far fewer employees.

Many thriving manufacturers have slimmed down in other ways, as well, most notably through lean manufacturing. Healy said the practice can give companies a “chameleon-like” quality. It can also act as an insurance policy in economic downturns.

For every dollar reduced with lean manufacturing, companies see $5 in additional sales, Healy explained. Locally, companies that have adopted pared-down tactics made a combined $110 million in cost reductions and have seen a combined $535 million in additional sales.

Into the future, companies will continue to be protected if they keep their eyes on innovation and always stay on the lookout for new product lines and markets, Healy said.

All told, that’s the local manufacturing market’s strength: Its versatility. Whatever happens, it’ll find its footing, Healy contends.

“Our manufacturing in the state has changed considerably, and I would imagine that, after this scenario this year, it will change again,” he said. “I don’t think it’s going to be for the negative, I think it’s going to be for the positive.”

Taryn Plumb is a freelance writer based in Worcester.