Enterprise Minnesota Magazine - February 2011

HELPING MANUFACTURERS GROW PROFITABLY

Exit Interview

In one of his last interviews as CEO of the National Association of Manufacturers, John Engler discusses how Congress rediscovered the industry, his own definition of innovation, and challenges in attracting the next generation of manufacturers.

Bob Kill :I'd like to start with your opinion of the state of manufacturing. There is a lot of uncertainty surrounding both small and large manufacturers and you are at the center of the hurricane, so to speak. Where do you see the challenges and the opportunities for manufacturers today?

John Engler :Well, with 9.8 percent unemployment in the nation as we do this interview, I think that we are perhaps poised to have a manufacturing moment in the country, where people return to focusing on that economic activity which actually creates wealth. You've either got to make it or grow it or process it to make this economy work, and I think the creation of value in the making of things is a virtue that is becoming rediscovered.

When I say it's manufacturing's moment, I think that many policy makers are rediscovering the fact that the United States still manufactures 21 percent of global manufacturing output. In Washington, what people understand is that states have long competed vigorously for manufacturing jobs. Minnesota competes against Wisconsin or Illinois, for example. What's not so well understood is that other nations are working just like the states to attract our jobs and, if you're talking about South America or Asia, they've actually got faster growing economies so there are some lucrative investment opportunities there. We have to explain to legislators that U.S.- based manufacturing needs to be strong at home, but it also needs to be competitive on a global basis because if it's not, it's at risk.

In NAM's manufacturing strategy, we believe that three things are really important. One, the United States ought to be the best place for a company to be headquartered. Two, the United States ought to be the best place for a company to do the bulk of its research and development. And three, the United States ought to be a great manufacturing location to meet the needs of the North American market as well as be an export platform for the world. Those three goals are the bedrock on which our organization builds.

Bob Kill:Last year in our State of Manufacturing survey, the number one concern was health care, number two was tight credit, and three was a looming shortage of skilled workers. How do we get parents and students excited about manufacturing so that instead of going to the New York finance district, students want to focus on making something?

John Engler:Well, I think you have to go back to the economics of it. Manufacturing jobs are high paying jobs. The average compensation for a manufacturing job is dramatically higher than it is in the service sector or the retail sector. So, let's explain that. Let's also debunk the perception of manufacturing as being somehow dirty and dark, with cold, foreboding, Dickens-era plants. Today, you've got a well-lit, clean, modern, often high-tech facility. It's really a sophisticated process. It's an amazingly different world that's out there.

You have to also explain what kind of training is needed. We don't have many jobs today where you can just show up with a strong back willing to work. More and more of our jobs require additional training beyond high school. That doesn't mean you have to go to a four-year college. It may be a two-year community college program. It may be a 19-week technical program, which is followed up with a couple of weeks of refresher training each year. You can go as far as you want to go, but I think every person growing up today needs to realize the importance of being a productive person in their education. Today, an average high school diploma probably represents more than a $100,000 investment on a part-tax basis in that young person. Use it. Get prepared, and then use that to launch your career.

Bob Kill:One of the topics that we often hear is a little baffling to small and medium sized manufacturers is exporting, yet it's also a way for them to grow more rapidly. How can we help make it easier for them to become the 3Ms of the world?

John Engler:I think this is such a good question, because you're right. We're 4 percent of the world's population here, and we have some pretty saturated markets. Most Americans have a lot of stuff, but the reality is, we're not an emerging, developing nation. We're pretty developed.

We've actually got a program here that's a piece of this puzzle. We just announced it in the first part of December, and it's with the Department of Commerce and FedEx as a partner. We're working with companies that are already exporting to see if we can't use the FedEx logistics of the Department of Commerce to help identify where the potential markets are for their products, to help increase exports. About 70 percent of NAM members who are in the small or medium categories do export something.

Today, you've got to look beyond competing with other U.S. states, and I think the Internet plays a big role in this. We also think that some of the financing institutions are becoming much more savvy. You see banks really focusing on this. There is a host of these institutions that are out there. There are the FedExs of the world and groups like ours that are trying to help people move in that direction. That's all positive, but you do have to have an export strategy today. If you're a supplier to a global company, you're almost being told that you have to supply in Europe and in Asia, so you've got to figure out what that strategy is. Failure to do that, I think, makes you very vulnerable to being acquired by somebody else who will do it.

Bob Kill:While we're on the topic of exports, a related topic is one I call home-sourcing, or having a supply chain that's geographically close. Are there opportunities for manufacturers to use this home-sourcing approach to be better suppliers to the larger companies? Is that happening now?

John Engler:Yes, there is anecdotal evidence and written evidence. We did a study where we looked at some of this. Just taking the food area for example, because there are so many food safety concerns, being able to make the supply chain tighter to accommodate those and other quality concerns has paid some dividends for companies.

Part of this involves companies that lost opportunities to countries overseas a long time ago. Now, those businesses are going back with leaner operations and saying, I want to re-compete for your business. I know of companies in more remote, rural areas that are now fully competitive with an Asian competitor.

Bob Kill:As I mentioned earlier in our interview, our 2010 State of Manufacturing poll uncovered the cost of health care as manufacturing executives' number-one concern. Now, we've got a plan for reform and they're wondering, "What's really in it?" Among the small and medium sized manufacturers, there seems to be a hiring freeze because of this. Do you see this happening?

John Engler:Unfortunately, it's not just small and medium-sized businesses that this is happening to. There is a lot of apprehension and it's also one of the reasons that you see businesses hiring temporary workers, because people are hedging their bets. I would say that hiring freezes are probably also a result of uncertainty over demand and the fragility of the recovery because people are asking, is it over or are we going to have a second dip?

Speaker Pelosi was not kidding when she said that we have to pass the health reform bill to find out what's in it. There was no way of knowing because in so many key areas, no decision was made by Congress. They threw it over to the Department of Health and Human Services to figure it out. What's the definition of medical loss ratio, for example? What's included in other definitions? I think one thing that will get changed immediately is the requirement to report every expense over $600. That's a paperwork nightmare for businesses and I think that's going to be repealed early on in the new Congress.

Bob Kill:What is your definition of innovation?

John Engler:Well, there is no manufacturer that doesn't do innovation, because if they don't, they're not going to be around for very long. They'll be quickly in the ranks of former companies that will be sold off or shut down. I think innovation is everything from the way in which we do our work, the process of the manufacturing itself, the way in which we deploy and train our work force, to the type of product that we're building.

When we talk about the U.S. companies being nimble and being innovative, it's because they can adapt to changes. If energy prices rise, suddenly we're figuring out how to make our manufacturing process more energy efficient. If the cost of raw materials goes through the roof, we're trying to figure out what might be an alternative to that component and how could we do this differently. We've been inspired from the very beginning by this, and we can't lose that edge. Part of it is good, old American ingenuity, but it's also common sense.

I think that we have a gift for manufacturing and it truly has served that nation well. Look what we've done in the area of pharmaceuticals. Look what we've done in the area of medical tools and technology. Remarkable things have been done to help improve the quality of life, to prolong life itself. But what bothers me today is that we're now spending more time just trying to get somebody to say, yes, you can go ahead, where in other places they say, yes, you can do it and they've gone ahead and done it and they've already gone to market with it. If you think about this country's building, the Pentagon was built in something like 16 months, the Empire State Building in less than two years. You couldn't get the permit to build any of those today in the time that we actually announced them, designed them, built them and occupied them. That's got to change; we can't stifle that. At the same time, we've got to recognize that because the world is more aggressive and more competitive, there are people out there who are ready to steal intellectual property and we'd better defend that, too.

Bob Kill:Are you seeing manufacturers being more environmentally friendly, or integrating green into their lean initiatives?

John Engler:Yes. We would argue that a more environmentally aware manufacturer might revisit the question of energy efficiency in particular, because there we've found the value proposition to be pretty attractive. Energy is becoming more and more expensive, so investing in more efficient energy has a short return on investment, often between eight and 24 months. Big companies have been doing this all along and it's resulted in bigger savings, but in many cases, those big companies have a larger capital budget to put towards lighting efficiency improvements.

We also have in our membership some great manufacturing companies like Honeywell and Johnson Controls and Siemens that have looked at smaller manufacturers' spaces and have offered to help them upgrade their lighting in exchange for being paid out of the savings that the smaller companies realize. That's a pretty attractive deal. But again, green is simply the business of lean: how do I take my existing resource base and make that go further? How do I do a better job with those resources? That encompasses everything from the quality of my product to the process of making it.

Bob Kill:Any last comments?

John Engler:When I said this is manufacturing's moment, I think it's time to be advocating across the board for agenda items that help address our country's global competitiveness. We are not in this by ourselves. We do not have the ability to raise the draw bridges, and so whether it's trade, energy policy, regulatory policy or tax policy, we've got to understand where we're standing in the world today and what we need to do to reestablish the momentum that we've enjoyed for such a long period of time.

There are some things that are simply a function of size. It will be hard over a long haul to be larger than a country that has a population four times the size of ours. That's just going to be hard. On the other hand, to be the best regardless of size is a goal that's well within our grasp, and something that we ought to focus on.

This will, though, require that everybody work. We do not have the capacity as a nation to carry 25 percent of our population that is unproductive. Everybody's got to become productive, and for young people, regardless of circumstances of birth or location in the country, you're all going to be needed, so you all need to get ready.

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