Present Strength and Future Promise
As all of Minnesota's economic sectors emerge from tehe recession, manufacturing's contribution to the recovery will be critical
BY KATE PETERSON
Even before the economic downturn brought news of cancelled shifts, reduced overtime, plant closings and laid-off workers, manufacturing in Minnesota and the United States appeared troubled at best. Offshore production of the most visible manufactured goods--clothes, toys and
consumer electronics, for example--made it seem as though manufacturing had shifted entirely outside the U.S.
In reality, manufacturing in the U.S. and in Minnesota remains remarkably healthy. According to a 2009 report by the Manufacturing Institute, the research arm of the National Association of Manufacturers, the United States still has the largest manufacturing sector in the
world, and its market share, around 20 percent, has held steady for 30 years. The same report credits manufacturing with contributing $34 billion to Minnesota's economy each year.
As all of Minnesota's economic sectors emerge from the bruising recession, manufacturing will make a critical contribution to the recovery. Once the economy regains its footing, these nimble companies, which continually improve their operations and develop new products to
reach both domestic and export markets, will continue to fuel growth across the state.
One firm's effect
No company better exemplifies the role manufacturing can play in the Minnesota economy than SAGE Electrochromics. The Faribault-based company's SageGlass product is an electronically tintable glass for building windows and skylights which can be changed with the press of a
button, or programmed to respond to changing sunlight and heat conditions. SAGE's development of a quality product for the expanding energy efficiency market has allowed it to build a solid and growing operation.
When it started in 1989, SAGE consisted of just three people: founder John Van Dine and two scientists. The company now employs nearly 100, including scientists, managers, salesand marketing experts, and manufacturing employees, whose earnings range from $13 per hour for entry
level positions to $23 per hour for strongly skilled personnel. SAGE employees enjoy a broad menu of benefits, including health care coverage, a 401(k), disability insurance and four weeks of vacation each year.
France-based Saint-Gobain, the world's largest window manufacturer, recently made an $80 million strategic equity investment in SAGE, which will construct a 300,000 square foot advanced electrochromic glass manufacturing facility next to its headquarters in Faribault. In
November, SAGE broke ground on the new operation, which will employ 200 construction workers. The new facility is projected to come on-line in the fourth quarter of 2012, boosting employment by another 160 workers.
SAGE contributes to the economy not only through direct employment and taxes, but also through its use of local services, ranging from catering companies and snow-removal firms to local hotels and restaurants. In addition, the company works with regional educational
institutions for recruiting, training and retraining, says Van Dine, the company's president and CEO. SAGE also relies on area professionals for accounting, legal and other business services, and it contracts with Minnesota packaging companies and transportation firms to deliver
input materials and ship its final products.
Though difficult to quantify, Faribault also garners something of an image boost from SAGE's presence. The sleek glass and steel building, along with the massive hole in the ground next door for a project that will more than double SAGE's physical presence, announces to
drivers as they head by on I-35 that Faribault is home to a growing industrial sector.
At the same time, there is something of a critical mass mentality for manufacturers, with additional operations in a particular area making that area more appealing to other firms because of access to services, skilled employees, and a well-developed infrastructure. Van Dine
says when he moved the company to Minnesota from New Jersey in 1989 it was for that very reason. "I coined the term 'Silicon Valley of the window industry,' to describe not just Minnesota, but also Iowa, Wisconsin and now North Dakota, with Marvin Windows. You want a concentration
of industry," he says.
While SAGE's profound contribution to the fabric of Minnesota's economy is certainly notable, it isn't unusual. Across Minnesota, manufacturers play similar roles, bolstering the state's economy through the broad, positive ripple effect they create. These firms not only
generate high-paying and benefit-rich jobs for their own employees, but they contribute to the employment of many others as well, pay taxes and make the areas where they are located attractive to other businesses.
Manufacturing's broad and deep impact
Clearly, manufacturers of all sizes suffered during the recent economic downturn. Still, state figures show that manufacturing still represents 14 percent of all jobs in the state, amounting to more than 300,170 employees. Totaling $16.1 billion, manufacturing wages are
typically higher than those in other sectors, amounting to about 16 percent of all wages paid in the state in 2009. At the same time, manufacturing employees are more likely to receive medical coverage and retirement benefits than workers in most other industries.
Anecdotally, the experiences of companies like SAGE indicate that manufacturing activity reaches deep into the rest of the economy--and research bears that out. According to the Department of Employment and Economic Development (DEED), each Minnesota manufacturing job supports
1.7 jobs elsewhere in the economy through supplier purchases and employee spending. According to the Manufacturing Institute this "multiplier effect" is more profound for manufacturing than any other sector of the economy.
Manufacturing also provides critical diversity to the state's economic regions. Many Minnesota industries are concentrated in particular geographic areas of the state-- mining and timber production in the northeast, agriculture in the south and west, and health care in the
Twin Cities and Rochester, for example--but manufacturing permeates the entire state.
The Minnesota Manufacturers Register reports that while the east central region of the state boasts nearly 240,000 manufacturing jobs, smaller, but still notable concentrations--in the tens of thousands--are sprinkled throughout the rest of the state. The diversity that
manufacturing adds to different geographic regions within the state can buffer those areas when other dominant industries face downturns.
Benefits to other sectors
In each of these geographic areas, manufacturing's presence enhances the local economy through the multiplier effect, as well as through other complex interactions among industries. Manufacturing truly reaches across and into other critical sectors of the economy to boost
their overall impact. Consider just three: transportation, education and finance.
Minnesota's DEED estimates that 160,000 residents are employed in the transportation sector, earning an average of $16.18 per hour. While many Minnesota industries employ the services of the transportation industry, manufacturing's reliance on transportation is typically a
Take SAGE's transportation and logistics needs for example. "We have in-bound logistics for various materials, some within the state, some outside," says Van Dine. "Outbound, we have a local company for fabricating containers and a local shipping company for taking the
product all around the country."
A little considered by-product from manufacturing's health is the impact on all users of transportation services. Richard Murphy, Jr., president and CEO of Murphy Warehouse, a Minneapolis-based shipping and logistics company, describes the economics of two-way transportation.
"In Minnesota, one of the things we recognize is that we are not the center of the distribution world," Murphy says, citing places like Kansas City and Chicago as the true hubs. That means shipments to Minnesota come to stay--or at least to stay in the region. So, unless
trucking companies and rail lines can count on goods to fill their vehicles when they head back out of the state, the cost of inbound shipping will rise for all inbound shipments, says Murphy, who is also the past chair of the Council of Supply Chain Management Professionals.
"They don't like to send empty trucks or empty railcars back out of the state," Murphy says of transportation firms. A strong manufacturing base helps promote a balance between inbound and outbound shipments, he says.
The interaction between education and manufacturing has also been mutually beneficial. Many manufacturers rely on educational institutions--from major universities to community colleges and technical school--for recruiting and training. At the same time, these institutions
gain valuable insight from manufacturers, which they can use to tailor their instruction across a variety of programs.
Manufacturers also provide great assistance to the educational institutions that help prepare the future workforce. Mike Gramse, president of MRG Tool and Die in Faribault, is the past president of the Minnesota Precision Manufacturers Association. He points out that
manufacturers play a key advisory role with community colleges, keeping them apprised of their needs and sometimes providing employees who can offer expertise and instruction in the classroom. In addition he says, "We provide scholarship money, and equipment and materials for
Keith Stover is the president of South Central College, which offers credit-based and non-credit programs in North Mankato and Faribault. Stover says the creditbased programs for manufacturing have suffered in recent years because of lack of enrollment. While overall
enrollment in the college has grown considerably, enrollment in the manufacturing program has declined, to the point that the institution suspended the manufacturing program at the Faribault campus.
Though credit-based programs have faced setbacks in recent years, Stover says the college's non-credit programs, which provide instruction directly to company employees, are booming. "We serve over 15,000 students annually with some kind of instruction that's business
based," he says. Stover adds that the college's intimate relationships with manufacturers have allowed it to develop expertise in a number of the process improvement trends that started in manufacturing and migrated to other economic sectors. "We're Lean-certified, Six-Sigma
certified, and we've taught Total Quality Management," Stover says, noting that working with manufacturers who have achieved those designations helps his institution improve instruction.
One of the companies South Central has worked with is SAGE, which has a fairly extensive network of connections with different educational institutions. "We have training programs going on with Minnesota State in Mankato and the local technical college. Our scientists
interact with the material scientists at the U of M. We also recruit from there," says Van Dine. He points out that SAGE's human resources department continually interacts with leaders of different educational institutions as they anticipate upcoming demands. "Our growth in the
future will be rapid and we will need to have the ability to recruit and train the personnel," he says.
Minnesota's financial sector is also impacted by the health of manufacturing. Fred Zimmerman, a professor emeritus at the University of St. Thomas in St. Paul, says that when the manufacturing sector slows, banks have to look elsewhere to make loans. Zimmerman, who taught in
St. Thomas's engineering department and is co-author of the book, Manufacturing Works, suggests that when there is a decline in "legitimate business," banks and other financial institutions end up making "less savory" investments, such as those in the subprime mortgage market.
For Milwaukee-based M&I Bank, which has a significant presence in Minnesota, lending to manufacturers is critical. Chip Howard, senior vice president and regional manager of commercial banking for M&I Bank's Minneapolis arm, estimates between 50 and 60 percent of the
bank's Minnesota commercial lending portfolio (excluding commercial real estate), is in manufacturing of one kind or another.
Howard says M&I's commercial customers have experienced steady increases in demand over the last three to six months. As a banker, Howard loves to see the manufacturing rebound. "As a general rule, manufacturing companies employ more people than distribution and sales
entities," he says. And what banks benefit from more than anything is having more people with good jobs, says Howard.
Citing 3M Corporation 30 to 40 years ago, Howard explains the effect on the entire community when a manufacturer is strong and growing. "They grew up here, manufacturing a variety of products. They spawned a subculture of supply companies, printers, assemblers and other
companies that helped 3M make and distribute products," he says. Today, manufacturers still need a whole array of companies that help get the final product to the market place, he says. "There's a web the manufacturer builds in a community that we all benefit from."
The dynamics that make manufacturing such a critical part of the state's economic foundation will certainly persist in the future. Minnesota can count on the strong multiplier effect that enhances non-manufacturing job creation, as well as the positive interplay among other
sectors of the economy.
Perhaps most critically, these positive results can be greatly magnified because manufacturing, like no other industrial sector, is well-positioned to take advantage of rapidly growing export markets. Nationwide, nearly 60 percent of all exports are in manufactured goods. And
as the rest of the world emerged from recession in 2010, Minnesota manufactured exports surged, with growth in each of the first three quarters growing by 16 percent or more compared to 2009.
Companies of all sizes can now take advantage of global trade, through savvy use of the Internet and utilization of government programs that make exporting easier, especially for smaller manufacturers. The Manufacturing Institute says that the portion of small- and
medium-sized manufacturers reporting that exports account for more than 25 percent of their sales more than tripled, from 3.8, in 2001 to 12.8 in 2008.
The falling value of the dollar, combined with increased productivity in U.S. manufacturing, has opened export opportunities for companies across Minnesota. Dale Andersen is CEO of Delkor, a 105-employee company in Alexandria that designs and manufactures automated packaging
systems for manufacturers, primarily food companies. Andersen says he took part in a Minnesota Trade Office mission to South America in late 2009 and because of the trip, secured a $1 million contract with a company in Ecuador. "It opened our eyes to the fact that we are
competitive," Andersen says.
Gramse, whose MRG Tool and Die employs 52, also sells internationally. While most of MRG's customer base is in the upper Midwest, the company has had success selling in other countries as well, including Mexico. MRG's products are competitive, Gramse says, because they are
often customized projects that require very highly skilled labor. Manufacturing such items isn't any less expensive in countries with cheaper labor--in fact, in many cases it isn't even possible because of the level of expertise required.
Looking ahead, export markets offer great growth potential. Van Dine says the North American market has been good for SAGE, though it's been soft because of the recession. He's confident the domestic market will improve as the economy rebounds, but at the same time, Van Dine
says, "The growth rates in some other markets dwarf what we're doing here in the U.S." SAGE has already had sales success in Italy, Switzerland, Australia and Russia, he says. The strategic partnership with Saint-Gobain is certain to increase international sales as well.
The future in exports looks even brighter because so many manufacturers took the opportunity to improve their competitiveness during the recession. "2009 was a year of getting things righted, right-sized and realigned," says Howard of M&I.
Even though 2010 sales for many business borrowers were not back to 2007-2008 levels, Howard says productivity and profitability were comparable because companies had earnestly reviewed their operations, scaled back labor hours where possible, added new technology when
appropriate, and worked with different business partners to enhance sales and distribution. Now, these leaner, healthier, better-connected firms are poised for growth, and the benefits to the state's economy will be dramatic.