Thank you Formtek!

Time files. The twelve years here have gone quickly. Strangely, I can reflect back to different periods of time, and they don’t seem long past. The last few months have been a personal struggle; reflecting on what I could do and how I could stay with this organization forever, then posit that if I am going to make a change, for my family’s interest, the time is now. The tug of staying here with this wonderful team has been a steady force, making this decision all the more difficult. Some of you have told me that making a move like this is brave. This is a good company made up of great people, and there is some risk in trading this for unknown challenges. For those that see this change as bravery and am happy for the new future ahead, thank you, your sincere feelings will fuel me through the uncertainty.

I have struggled to come up with what to say, and how I may thank everyone here. I could go around and thank everyone for something, and that is a reflection of the healthy team we have here. Instead, to emphasize the magnitude of their significance, I want to focus on a few.

The thanks start and end with Brian. He knows this, as I have told him many times. He is the one that hired me and that pushed for me when Joe didn’t want me because I was too young. Brian selflessly stepped aside so I could be the sales manager and he stayed with the organization. Without his short-term sacrifice, I would have not not had the growth and opportunities that I do today.

It is also important for me to thank Bruce and Darren. They have been extremely supportive of my development. A lot of the things I have worked on or crazy back to back travel itineraries were not assignments from them, but instead was my pursuit of opportunities that I saw for the business. I have benefited tremendously from being provided that latitude and hope that these development efforts will be beneficial for the organization for years after I am gone.

The last one I want to single out is Paul. He and I have traveled a lot of places, in search of sales, as well as setting up and tearing down numerous trade shows. For the past 10 years, we have spoken, skyped or texted almost every single day. I consider Paul a true friend, and my future will not be the same without this daily interaction.

I could not think of how best to sum up all the moments and experiences that have occurred over the years. Recently I read The Tao of Pooh, and I came across a passage the seemed like a perfect fit to describe my time at Formtek:

“The honey doesn’t taste so good once it is being eaten; the goal doesn’t mean so much once it is reached; the reward is not so rewarding once it has been given. If we add up all the rewards in our lives, we won’t have very much. But if we add up the spaces between the rewards, we’ll come up with quite a bit. And if we add up the rewards and the spaces, then we’ll have everything–every minute of the time that we spent. What if we could enjoy it?”

I have enjoyed my time at Formtek. Not only the high points of our success, the rewards, but the process and path to those successes, the time in between. I can say that I came in to work here, striving for success and how we could be our best.

I leave here fondly thinking of Formtek.

Good luck, all the best, and thank you very much!

March 23, 2018March 23, 2018

Section 232 Steel Tariff Developments

Encouraging 232 Developments

As I have been very critical of the seemingly overreaching Section 232 action on Steel, I read some encouraging news that is important to share. According do the US Trade Representative, the Section 232 tariffs are being delayed for countries currently negotiating exemptions. As reported by the American Metal Market, those temporarily exempted countries include the European Union, Argentina, Australia, Brazil and South Korea.

These currently exempted countries, along with Canada and Mexico, account for greater than 50% of our steel imported to the US annually, and in-kind more than 15% of our overall steel consumption. Noticeably absent from this list is Japan, which is a source of high tech steels used in a variety of industries.

In discussions with market participants, I have recently heard of 35% price increases from distributors on various grades of steel, and a datapoint of 25% increase on tool steel that is made in Germany. With this latest news, what will distributors do? Will they scale back those announced price increases, as their savvy customers know the origin of the material they buy?

In the meantime, and even if steelmakers and steel distributors do not scale back on these price increases, those in the steel industry are experiencing high margins, at a level we have not seen in years.

Scrap has been the primary driver of steel prices in the US for decades. Year to date, the price of steel is up 30% but the price of steel scrap is up less than 10%. So what is driving the price increases?

Tax Increases? No
Wages? No
Natural Gas? No
Electricity? No

Its difficult to point the price increases to anything other than the Section 232 hype machine, on top of the protectionist agenda that has been raising steel prices since November 2016. Steel pricing is up 3 times more than steel scrap so far in 2018

How do you push back on these price increases? It is time to be opportunistic. There is certainly a steel distributor somewhere, who is will to move their inventory at a more modest price increase than those who are aggressively going to the 25-35% price increase range described above. Go back to your vendor and talk through the increases and the rationale above, regarding the origin of the material. If they are a good vendor and a real partner, they should come to the table and find some compromise on these price increases. After all, this is why we develop relationships with vendors and not just treat them like a number to be replaced as soon as there is a lower price elsewhere.

March 14, 2018March 19, 2018

Where Are the Women in Manufacturing

How do we get women passionate for science into manufacturing

Last week, diving deep into the speculative end of the Section 232 Steel tariff pool, and prepping for a trip to China, I neglected to keep tabs on a couple job postings that we have listed. Since the beginning of the year, we have been looking for someone with a technical background to develop a mid-level sales position. Getting back to them now, and looking through all the candidates, it struck me, where are the women in manufacturing?

In the roughly two months of receiving resumes, there have been a wide range of applicants, both qualified and not, but through it all, zero female candidates. No gender diversity, across LinkedIn, alumni job boards, local classifieds and recruiters. Seeing this, I am both perplexed and concerned: is this female candidate void a mirror, reflecting our deficiency, or a window to see the larger issue in the industry?

Or maybe it is both and the fact is that we have a long way to go. It feels like support for STEM is everywhere. For the last several years, coaching high schoolers, there were many girls I worked with who were good students with an interest in math and science and a work ethic I admired. I would hire any of them to work in this role, but besides not being old enough to work in manufacturing, they also have no interest. It seems that all the support of students in STEM is only the beginning. We also have to connect and inspire girls to the opportunities in manufacturing and other technical industries.

Eighteen years ago when I was entering university to study mechanical engineering, it was generally accepted that females studying engineering were rare. At the time, roughly 1/3 of the engineering student population were female and that fraction was generous, I do not recall a class as an undergraduate or a teaching assistant where 1/3 of the students were women.

Fast forward to now, and despite a decade of intense STEM support across the country, alumni relations informed me the rate of female enrollment is unchanged from when I was in college. WHAT?! How is that possible? I realize it is a midsize school, and there may be some big-name programs elsewhere that can tout growth of female enrollment, but this is not an isolated problem. How are there not more females interested in engineering? If the broad topic of engineering is not gaining interest, then the subset of manufacturing does not have a chance!

My view is distorted by my spheres of influence. Working with manufacturing companies every day and participating in a technical advisory at the local community college, I am almost constantly surrounded by like-minded people who support STEM and increasing opportunities in our industry. Plus, I infer the connection between STEM and technical careers, but that may be a leap for others outside of technical industries. As a high school coach, on the other hand, with many student’s parents being doctors, lawyers, business owners, and entrepreneurs, the fact that I worked in manufacturing was overlooked in favor of the more altruistic label as a volunteer youth athletics, so there is certainly some negative bias to overcome.

And even if we succeed in encouraging teenagers to pursue these technical careers, there are several years before they will be in the workforce. What about filling the immediate roles that are available? How do we motivate and attract women to this industry and careers? The point above, regarding my influences and connections, is that I do not have the answers.

A few years ago we hired a sales person that came from selling wholesale beauty products to salons. When she was going to college for fashion, did she think one day she would be helping maintenance workers troubleshoot hydraulic components and selling them replacement parts? Doubtful. And you know what, she is awesome at it! How did we get her? Pure luck. Human resources or I cannot claim any special insight. This is not to pat ourselves on the back. Being lucky is not going to solve the gender imbalance in manufacturing.

So what do we do? To paraphrase Sheryl Sandberg, how do we overcome them not doing something where they do not see themselves? I can think of several great women leaders in manufacturing that I have had an opportunity to work with, but the reality is, on the scale that the industry needs, there are not enough of them that can serve as role models for students. Women in Manufacturing is a great organization and I hope they can build even more momentum to encourage their peers to be a force in this industry.

And how else can we grow manufacturing? Take a chance! Reach across and embrace candidates from other industries. Manufacturing can be taught and if someone has the interest and willingness to learn and apply themselves, there is no doubt the employee and business will benefit. With the impending retail apocalypse, how many experienced store managers and key holders could kick butt given a chance in manufacturing? Probably thousands. Let’s figure out how to attract them, and ambitious individuals from other areas, to the opportunities in manufacturing.

March 6, 2018March 19, 2018

Section 232 Steel Tariffs – How to Respond

On heels of the Commerce Departments Section 232 Report, the Trump Administration indicated they will impose aluminum and steel tariffs on those imported materials: 25% on Steel and 10% on aluminum. As written about previously, there are several concerns about the basis of the section 232 report and its assumptions of how steel is a national security concern. With the steel tariffs imminent, it is time to move from critiquing the report to considering what effects this may have on business and in the market. What situations could this protectionist move cause? How will interest rates affect consumers of steel? How will steel sourcing change the trucking market.

Inventory

Inventory costs will increase, a concern for manufacturers that fund their inventory through revolving credit. This will decrease how much inventory they can effectively carry or it will impede them from using their credit line for other needs, such as unplanned maintenance. With the Federal Reserve expected to increase interest rates three times this year, that will amplify the inventory challenge for manufacturers by making it more expensive to service their credit facilities.

Challenge: Cost Increases

Response: ???

Raise Prices?

When input costs increase, particularly raw materials, there are a few options in response. Manufacturers could raise prices. In an expanding market, it is possible to do so with minimal concern of losing market share. But in a tight market, and in the current environment, where customers could search for another vendor, who may have a lower price as they are working off older, less expensive inventory, there is a potential to lose business.

Product Redesign

The challenge can be put to engineering to redesign products to decrease the requirement of expensive materials. Is the material cost impact enough that a product can be redesigned to use non-metallic material? For example, with the cost of steel going up and oil remaining steady, could a manufactured sheet metal component be replaced by molded plastic? This has already occurred in consumer products, such as Honda’s polymer lawn mower deck.

Lean Lean Lean

Manufacturing operations may review how to reduce the non-material costs of production. This is typically thought of as reducing labor, which can be accomplished by re-evaluating the manufacturing process and adopting automation. Depending on the industry and whether the manufacturer is an OEM or a subcontractor will change whether selling price can be adjusted, product redesigned or changes in the manufacturing process.

The Capital Question

One solution is increasing automation. Those well-capitalized manufacturing companies can invest in more automation to reduce the labor component of their manufactured product cost. Hopefully, the employee can be redeployed on some other function in the business, and based on the shortage of technical workers, this should be realistic.

In an environment where raw material costs and interest rates are increasing, the investment in automation is limited to those that can pay cash for capital expenditures or are able to service an increased debt load. The option of investing in capital equipment is limited to those with sufficient, unused cash in the bank, as increased material cost and stagnant prices reduce cash flow.

Choices: Inaction and Investment

For those companies manufacturing who have used the last 8 years to right the balance sheet and build a rainy day fund, this is a time to separate themselves from illiquid competitors. The question then becomes strategy:

Do you keep prices down, absorb the cost increase and wait out competitors, who cannot do so, in an effort to gain market share?
Do you take this as a challenge to make that next step in automation, to decrease the labor cost of the product being manufactured?

The biggest concern I see is these market challenges causing a greater dichotomy among manufacturers of steel products. As mentioned in the previous review of the Section 232, right after the Commerce Department’s announcement, a local midwest distributor took the opportunity send out 15% price increases on steel material. Manufacturers can invest in automation, to reduce labor, as a way to counteract that material cost increase. For those manufacturers that have not been able to pay down debt and do not have the flexibility to invest in automation, the gap will expand between them and their market’s leaders.

February 21, 2018March 3, 2018

What will Section 232 Action on Steel do to US Manufacturing?

“Steel prices make up only a fraction of the retail cost of a car or truck. In other industries, such as canned beverages and food, “it’s even more trivial… a fraction of 1 cent,” stated Commerce Secretary Wilbur Ross to address the Section 232 report for Steel and Aluminum.

That’s great; rising steel prices will have a limited effect on the cost basis for the end manufacturer of complex products like automobiles (or appliances), but what about the fabricators and manufacturers who provide the components to those end products? Manufacturing suppliers will most certainly get squeezed as they buy more expensive raw material and are unable to pass on that increased cost to the automakers.

And why does that matter? The manufacturers of metal components employ 16 times more people than the 140,000 American steelworkers. Notwithstanding Section 232 action triggering a trade ware on the international stage, close to home it is difficult to disconnect such a move from having a negative effect on small and medium manufacturers.

An op-ed piece in the Wall Street Journal recently, put a thoughtful perspective on the concern threat of 232 action costing American jobs. As a point of reference, if we look to the Section 201 action taken during the second Bush administration, the temporary import relief to steel industry through tariffs, had a negative impact, raising costs and resulting in job losses. At that time, I recall a Tier 1 automotive supplier telling me they lost a long-term contract, at a Big 3 automaker, for a steel dashboard support component. The Big 3 buyer’s new source, overseas, had a price for the complete part that was less than the domestic supplier’s raw material cost. Due to situations like this across the country, it is estimated that roughly 200,000 jobs were lost in American steel-consuming industries due to that section 201 relief. For comparison, there were roughly 187,500 people employed in the US steel industries. Sadly, many were sacrificed to protect jobs of the few.

Why overreach and protect the primary industries like steel and aluminum? Its hard to set aside the deep pockets to lobby for those two industries, compared to the much larger and less organized small and medium business manufacturers. And perception? Fortunately, steel is a defined, census tracked industry. So let us look at a little Q&A to debunk some populist fodder of our threats and benefits.

Question 1: How much steel is China sending to the US?

Answer: Not much. 2.2% of total steel imports are from China, which is less than 1% of total US consumption. Surprisingly, Russia, which the US has numerous sanctions against, supplies 3x more steel to the US than China.

Question 2: What percentage of steel used in the US is domestic or foreign made?

Answer: Roughly 70% is domestic and 30% is imported.

Question 3: What is the current capacity utilization rate of the US steelmaking industry?

Answer: 75.9% as of February 19, 2018, up 0.8%-points from the previous week.

It is easy to look at the statistics and think, “Oh, we are at 75% utilization capacity and 70% of the steel we consume is domestic, so if we increase to 100% capacity, then we will only need to import 5% of our needs. Math!”

Nooooooooooooooooo…It is not that simple. Steel is a catch-all term, of which there are many types: carbon, alloy, electrical, among others. On top of that, those types come in many forms: ingots, bar, plate, and coil. The capacity available in the US is not being utilized for various reasons, particularly efficiency and need. There are other mills that produce those same products as the idled facilities, but much more productively, so those mills are profitable at a lower steel price. Once steel prices rise, through tariffs or supply-demand dynamics, then the less productive mills can get in the game. That would displace some imports, but not all. At idled mills, there are some products and grades of steel that are not in demand. As higher grades of materials are specified in industries, such as the latest generation of ultra-high strength steels (UHSS) in automotive applications, or Grade 80 material for metal roofing and construction, it has left mild or commercial quality (CQ) steel capacity less needed. There is not enough capacity of the sophisticated alloys available domestically, and there is too much capacity of common materials. Thus, effectively utilizing 100% of domestic steel capacity is not possible. We could not build enough ‘bridges to nowhere’ to utilize some of the idled capacity.

What is happening now? This week, a metals buyer told me their primary steel supplier informed 15% price increases were coming. This announcement was four days after the section 232 report’s release. How much does 15% matter? In high volume, competitive industries like construction or tubing, material costs make up 70-90% of the selling price of the product. Will those manufacturers pass on the material cost? To make money they will have to raise prices and they may lose some orders in the short term while cheaper inventory at competitors gets absorbed in the market.

And what else will happen? Imports of finished products will go up, which will hurt the manufacturers of value-added products. Like the automotive example with the dashboard support component, supply chain experts will resource overseas as they will be able to find finished products that are less expensive than their domestic vendors raw material cost. It took the Commerce Department 10 months to submit their Section 232 report on the steel and aluminum industry. How long would it take them to identify all the industries that consume these materials, who will be hurt by finished goods imports displacing their products in the market?

With history as an indication, we would be foolish to ignore the effects of Section 201 action to protect the steel industry in the early 2000s. A move by the government to proceed with Section 232 protection, whether it is through tariffs, quotas or minim prices, will be a detriment to competitiveness and employment in the broader American manufacturing landscape.

Sources:

https://tradingeconomics.com/united-states/steel-production

https://www.census.gov/foreign-trade/Press-Release/2017pr/02/steel/index.html

http://www.steel.org/about-aisi/statistics.aspx

https://www.wsj.com/articles/how-to-punish-american-workers-1519078840