Spring 08 Issue
Special Report - Manufacturing 2008
2008 Export Surge
Six Years in the Making
Posted: July 31, 2008
Washington Output Grows
Metal Trades Boom
Mom and Pop Go Global
Asia Bound
Workers at the Nucor steel plant in West Seattle earn more than $95,000 per year while making products that include steel billets that weigh two to three tons each.
Such wages and weights might seem like heavy handicaps in the “flat earth” economics of the new global economy, but in real life the world is round, not flat, and from our corner of it the well-paid Nucor workers now regularly ship a small but profitable slice of their output 5,000 to 7,000 miles across the Pacific Ocean for conversion into rebar that will help hold up Asian highways, bridges, and high rises.
The weak dollar plays a role in this man-bites-dog of international commerce, but the real drivers are product availability and handling costs.
With Russia, China, and India consuming as much steel as they can make or import, it is difficult to find raw steel billets in other Asian counties – and when steel is available, it is both expensive and hard to handle, with billets usually sold in enormous bulk lots of up to 20,000 metric tons each.
These conditions create a demand for smaller, cheaper loads that are easier to move and store. Nucor managers called to let the steel traders know about these opportunities last year and learned “we had fallen off the radar screen,” according to plant manager Matt Lyons. “The traders called back and said they had forgotten there was a steel mill in Seattle. It turned out we were in a good position because of our access to deepwater ports in both Seattle and Tacoma.”
Nucor paired up with the Seattle-based shipper MacMillan-Piper, and in December the two companies began using containers to ship billets to Indonesia, Taiwan, and Vietnam. Because the billets are so heavy, each container can only carry a single layer of them. As forklift operator Dave Arnold recently loaded a layer of billets into a container at a MacMillan-Piper shipping yard, he observed, “I never thought we’d ship steel to Asia.”
But ship steel they do, and so it goes as the Washington manufacturing base extends a multi-billion-dollar production boom that is just about as remarkable as it is generally not remarked on.
Driven to Drink
Symptoms of our present economic angst began to show up statistically in the last half of 2007 in a vast database maintained by the Washington State Department of Revenue. The database is comprised of gross business revenue reports that must be filed for tax purposes by all companies for their operations inside the state, and as 2007 drew to a close the reports began to show signs of the slowdown.
Compared to 2006, revenues for banks and software publishing companies fell 1%, telecommunications company revenues dropped 5%, real estate firms slumped 6%, law firm billings declined 8%, insurance agency revenues sunk 10%, and retail was showing modest growth of just 4%.
It was enough to drive some to doctors, bartenders, and bookkeepers– and those trends showed up in the data too. Business revenues for health care climbed 21%, revenues for drinking establishments rose 26%, and accounting income zoomed up 60%. But shining amid the gathering gloom, manufacturing revenues were up 11% and on pace to surpass the record $122 billion that manufacturing companies contributed to the state economy in 2006.
Many experts would attribute such growth to the weaker dollar. However, as with Nucor’s Asia-bound billets, the real story is both more complex and more interesting, as demonstrated by a survey of state revenue and job records for the period between 2002 and 2006. Those years were picked for the survey because 2002 was the statewide low point for the last recession and 2006 is the most recent year for which full data sets are available. Data was updated to 2007 and into 2008 when it was possible to do so.
Northwest Industrial Index
The survey was conducted through the Northwest Industrial Index, a new tool for gauging the health of the state’s industrial base. The program possesses the capacity to track revenue and job data for 473 subsectors of manufacturing that are defined by the North American Industrial Classification System (NAICS). At that level of detail, it is possible not only to distinguish between the contrasting fortunes of companies that make, say, wood products and food products, but it is also possible to differentiate between sub sectors of wood products and to track their impacts on other economic sectors.
For example, the 2002–2006 survey period captured a time of rapid growth in construction. That drove strong revenue and job growth in Washington’s long-suffering wood products sector. Wood product revenues as a whole rose 56% to $8.7 billion and jobs grew 15% to more than 20,000.
Within wood products, revenue growth was even stronger for the two largest subsectors of wood products, where sawmill revenues were up 66%, while plywood producers doubled revenues with 100% growth. And these positive impacts rippled throughout the industrial economy. For instance, companies that make sawmill equipment recorded 189% revenue growth to $191 million, and the boost extended outside manufacturing, with wholesale lumber distributors experiencing 70% revenue growth to $3.7 billion while their payrolls grew 31% to more than 4,000.
The “index” aspect of the research program is based on the revenue and job growth recorded by the entire private sector of the Washington State economy, making it possible to identify industrial sectors that may be growing faster than the economy as a whole, and those that may be lagging behind. During the survey period, overall private-sector revenues grew by 39% while jobs grew by 12%, suggesting wood products and related sectors were faring better than the overall business base.
Like any research model, the Index is limited. Revenues are not the same as profits, and the state data can only provide a rearview look at the economy that may be up to six months old due to the time that is required for the state to compile the information. For instance, long before the sub-prime lending crisis made the news, companies making wood products and other building supplies in our state began to slump with the slowdown in U.S. construction.
However, the state data is also supplemented by broader information about manufacturing that is available through federal export reports and private surveys, including a monthly regional report compiled by the National Association of Purchasing Managers– Western Washington. Statistics are also augmented by interviews with actual companies to see if the statistical trends ring true.
Put it all together, and the result is a picture of Washington State manufacturing that is far more comprehensive – and more positive – than the ones that regularly dominate the news media and most government reports.
From 2002 through 2006, while the national news trumpeted the growing U.S. trade imbalance, the rise of China, and the chronic woes of U.S. automakers, Washington State manufacturing was on a remarkable run, fueled in the first portion of the period by the dramatic growth in construction and in the second phase by the dramatic turnaround of The Boeing Company’scommercial aircraft division.
Since hitting a low point in 2004, aircraft manufacturing revenues grew by 43% to $32.7 billion by the end of 2006, and the growth rate through 2007 was over 22%.
Even better numbers were put up by small companies in other sectors that rarely reach the civic radar screen. The survey identified ten other manufacturing sectors that experienced faster revenue or job growth than the economy as a whole, and if you want to better understand this unheralded upside of the state’s manufacturing base, one of the best places to start is with The Vaughan Company outside tiny Montesano in rural southwestern Washington.
A One-Man Welding Shop
The company was founded in 1963 by a man named Jim Vaughan, who up to that point owned a gas station and a oneman welding shop. Vaughan’s welding customers included local farmers who experienced chronic breakdowns in the pumps that they used to wash out their barns.
Sucking up the wastewater, the pumps clogged with manure, baling wire, and other debris. Vaughan tried to fix the problem by welding fingerlike lengths of steel across the pump intake valves. When positioned just right, the steel fingers meshed with the spinning impeller blades to create a scissor action that chopped up the gunk as it entered the pump, vastly improving machine productivity and longevity.
Vaughan secured a patent for his invention and opened a small factory.
Today, 11 of his grandchildren and other relatives work with 70 coworkers to design, build, and sell “Vaughan Chopper Pumps” to customers in more than 60 countries.
Vaughan’s initial vision for the business was much more modest, according to his granddaughter Suzanne Vaughan, the company’s director of international sales.
“He used to tell my grandmother, ‘Hazel, someday we’ll sell these pumps east of the mountains.’ He meant the Cascades. Now, the only continent where we aren’t selling pumps is Antarctica.”
Hot Metal
The Vaughan Company’s success is admirable, but according to the 2002–2006 survey it was not truly exceptional. The company belongs to a cluster of machine manufacturers, metal fabricators, and metal makers that is sometimes referred to as the metal trades. These are the companies that make the metal products, parts, machines, and other mechanical contraptions that turn the wheels of modern industry.
Six years ago such companies were among the U.S. “metal benders” that many experts believed were doomed to economic obsolescence. However, instead of lumbering toward the tar pits of oblivion these sectors were on the brink of dramatic growth.
From 2002 through 2006, Washington metal trade companies collectively recorded revenue growth of 105%, to $12.9 billion. That was more than double the revenue growth rate for the private sector as a whole, and while some of the increase was due to inflated commodity prices for bulk metal, the growth rates were actually better for companies making machines – up 117% – while metal fabricator revenues grew by a respectable 74%.
Jobs in machine making and fabricating also grew faster than the economy as a whole, rising almost 15% to 33,000.
Part of the growth was fueled by increased productivity: perworker revenue in the cluster jumped from $180,000 in 2002 to $322,000 in 2006.
But an extra boost came from exports. From 2002 through 2007, Washington metal trade exports grew by 192% to more than $3.6 billion. That was double the 91% growth rate for all state exports, and these exports represented 28% of metal trades revenues.
Revenue growth for all three sectors continued throughout 2007, with metal makers up 19%, metal fabricators up 14%, and machine makers up 11%.
The Top Ten
These numbers were good enough to land metal makers, fabricators, and machine makers on the list of the top ten sectors that outperformed the overall economy for revenue or job growth during the 2002–2006 survey period. Others on the list included boat makers, companies making beverages (mostly wine), furniture makers, businesses making electrical appliances and systems, and companies making wood products and building supplies.
Boeing did not make the list because the survey period included three straight years – 2002, 2003, and 2004 – when aircraft revenues and jobs declined. Meanwhile, companies making aircraft parts made the growth list due to their success selling to Airbus and other customers during the Boeing downturn.
Also missing from the list is truck-maker Paccar, but this is due to the limitations of relying on state data, not the nature of truck making in our state. Truck revenues are not reported by the state because the sector is so dominated by Paccar it would violate state rules that protect the confidentiality of individual companies. However, the survey period included some outstanding years for Paccar, including 2005, when the company posted a $1 billion profit and earned a U.S. presidential National Medal of Technology. It was the 67th year in a row that Paccar turned a profit.
Like all surveys of past behavior, the state data tells us nothing about future performance. Yet in a world where the past often proves to be prelude, the survey provides a few revelations that would seem to bode well.
Wealth Creation
First and foremost, manufacturing remains by far the leading source of wealth creation in Washington State through its capacity to produce goods “here” that can be sold “there,” bringing back export dollars that make our economic pie bigger.
Unlike many other regions of the US, in Washington manufacturing is also (so far) even retaining its share of the state economy in spite of global changes and the rise of service sectors. Manufacturing accounted for about 22% of all private-sector revenues in 2006, the same share it held in 1994. So with Boeing possessing a record backlog of aircraft and defense orders valued at $327 billion, it appears that manufacturing will remain a big part of our state’s economy for years to come.
Of course, great as Boeing is, the ten growth sectors identified in the 2002–2006 survey also helped to identify some less-obvious strengths of the state’s manufacturing base.
Only two of the ten growth sectors produced consumer goods: beverages and furniture. The other eight produced capital goods that are sold to other businesses and, in the era of the “China price” and the Wal-Mart retail phenomenon, the focus on capital goods helps to insulate our state from the pain felt in other regions that relied on companies making consumer goods. And while times are now tough for companies making wood products and other building supplies, those sectors will pick up again when construction does.
The growth sectors are also dominated by companies that are extremely small. In 2006, according to state records, the ten growth sectors included more than 5,683 companies that averaged just 20 workers each. In the metal trades, the average number was even lower with an average of 16 workers per business. In an era of rapid change and emerging opportunities, we’re blessed with a nimble base that can adapt quickly – and it does.
Moreover, while these companies are small, they exert a large and growing collective impact.
From 2002 through 2006, the small companies that dominate the growth sectors enjoyed collective revenue growth of 69%, and in 2006 their output was valued at $34.8 billion. That was $2.1 billion more than revenues from aircraft manufacturing, and the 69% revenue growth rate for these small firms was a major reason why the 2002–2004 Boeing downturn did not have the negative impact that it otherwise would have.
The growth of the metal-trade cluster also highlights the strategic advantage of our place in the world.
Much is made of our proximity to Asia and its export opportunities, and those definitely are assets. But closer to home the greater Pacific Northwest remains a major hub for large-scale development and production of oil and natural gas, agriculture, timber, and commercial fishing. As one of the newest parts of North America, the region will also continue to see major construction activity for generations to come. Each of these activities drives demand for mechanical equipment and related parts, and – to a great extent– local companies continue to meet these needs.
But the manufacturing base also faces major long-term challenges. It may be a strategic advantage to have a diverse bunch of small manufacturers today, but such companies are extremely thin when it comes to management, and that makes them vulnerable to the ever-growing volumes of red tape and regulations that are produced by every legislative session and nearly every city council or county commission meeting.
And in spite of the highly publicized reports about declines in “U.S. factory jobs,” manufacturing faces a growing shortage of technical professionals. The overall job numbers in Washington manufacturing are now about 18% below the all-time high achieved in 1998, but there may be no better time than the present to be an aspiring engineer, welder, or machine operator, especially when you factor in baby boomer retirements and continued job growth in some manufacturing sectors.
At the same time, our education and workforce development systems appear to be years away from understanding this labor need, let alone meeting it. Thanks to poor reporting by the news media and government agencies, manufacturing is viewed by many as a rusting relic of the past instead of a pathway to a rewarding future.
Father Doesn’t Always Know Best
Forget cowboys. Many parents don’t want their kids to grow up to be manufacturers. Ask Matt Lyons, the general managerof the Nucor plant. When Lyons went to work at the West Seattle steel mill 21 years ago his father was aghast. “He said, ‘What the heck are you doing taking a job in a steel mill?’ ”
The protest possessed resonance because Lyon’s father worked at the West Seattle mill, as did his grandfather. Lyons was the first college graduate in the family, earning a degree in mechanical engineering from Washington State University, and his dad, understandably, didn’t want Matt to become a third-generation steel worker.
But Lyons felt the old mill offered a target-rich learning environment for a beginning engineer and he assured his dad he would only stay for a few years. However, Lyons soon met a young lady at the plant who was the customer service supervisor. They wound up getting married and raising a family. Last year, he was promoted to general manager. This year he hit the 21-year mark.
However, the old mill is not the same one Lyons walked into back 1987.
In 2002, the West Seattle plant was purchased by Nucor Steel, based in Charlotte, North Carolina. Nucor nearly went under during the 1980s recession that decimated much of the U.S. steel industry, but under its legendary CEO Ken Iverson, Nucor emerged as one of the largest steel producers in North America, energized by a corporate culture driven by a pledge of no layoffs and generous incentive pay for those workers who can match the company’s high expectations for safety and production.
When Nucor bought the old Seattle plant, no one lost his or her job, except for the previous general manager. This fact not only underscored Nucor’s commitment to no layoffs, it also helped to highlight the behavioral changes that then took place under Nucor’s progressive management practices.
Employing the exact same employees and production equipment, the workers reduced their accident/injury rate by 28% during their first year under Nucor management and the plant’s accident rate remains more than 50% below the industry average. At the very same time, production rose 23% during the first year, nearly matching the rate by which injuries fell, and under Nucor’s incentive-based pay system, pay began to rise with output, with base pay and profit sharing eventually growing by 46% to provide average compensation of $95,000 per worker.
New equipment will allow the plant to increase its annual output by 35% to nearly 1.1 million tons, and the company will be expanding its payroll of 290 employees by 20 to 25 new workers. The company is already beginning to look around for the new production workers.
One person who won’t be hired is Lyon’s eldest son, who followed his dad’s footsteps to WSU and an engineering degree, but who can’t follow him into the Nucor mill. Nucor forbids general managers from hiring relatives. Matt’s son took a job at Genie Industries in Redmond.
All in the Family
Family experience can help drive home what educators don’t– namely, in the 21st Century, manufacturing continues to provide strong career paths to rewarding futures. Which takes us back to The Vaughan Company outside tiny Montesano where 11 grandchildren and other relatives of Jim and Hazel Vaughan design, make, improve and sell Vaughan “chopper pumps” in 60 countries around the world.
In addition to granddaughter Suzanne, the marketing director, the payroll includes grandson Dale, who is company president and Suzanne’s brother.
It is difficult to visit them without feeling optimistic about the enduring success of U.S. industry and the American capacity to design, build, and sell better mousetraps.
Almost from its inception, The Vaughan Company occasionally sold pumps to international buyers who heard about their unique chopping characteristics. But the company didn’t begin to develop a real export program until two decades ago, using the assistance of the U.S. Department of Commerce. Over the past five years, the effort has paid off as export sales grew by more than 80%.
The weaker dollar helped, but the primary selling point remains Grandpa Jim’s innovation. While Jim and Hazel defined their company’s economic horizon by the Cascade Mountains, granddaughter Suzanne sees no limits. Sales growth slowed to 6% in 2007 but the future looks bright.
“Ours is one of those products that is required by certain businesses regardless of the economy,” she said. “There is always a new customer. The company just keeps growing.”
