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Spotlight: Nathan Weaks (continued)
 Introduction
Traditionally, machine tool companies have relied heavily on the domestic automotive industry. Now, with U.S. automotive manufacturers facing the perfect storm of high gas prices, rising commodity prices, a lack of available credit, and low consumer confidence, the prospects for major capital equipment investment look slim. If machine tool companies are going to survive they need to look to other industries that are growing, as well as exploit the export market by taking advantage of the relatively weak U.S. dollar.
In this interview, Nathan Weaks provides an analysis of the problems facing the U.S. economy and examines some of the strategies machine tool companies can employ to survive.
How would you describe the overall state of the U.S. economy?
Starting in October 2007, the Leading Economic Indicators took a negative turn. For five straight months they declined at an average rate of almost four percent. Then in March and April, the Leading Indicators increased by the smallest of margins—+.1 percent each month. In the last two months, they went negative again, to -.1 and -.2 percents. In the last nine months, the Leading Economic Indicators have declined at an annual rate of just over 2 percent. We still have not had a recession, but growth has slowed to the smallest of margins, and we aren't out of the woods yet. I am seeing more economists predicting we won't see a pickup in economic growth until the second half of 2009, which means we have another year of sitting on pins and needles.
Interestingly, the Purchasing Manager’s Index managed to climb into positive territory in June at 50.2. The last time it was above 50 was in January, at 50.7. It dropped to 48.3 in February, but then has been climbing back ever since.
Two things are helping U.S. manufacturing. One is the low value of the dollar helping exports. Take away oil imports and the rest of trade is balanced. As proof of this, there is a shortage of shipping containers leaving the U.S. Also, more companies are beginning to bring production back to the U.S. A combination of high ocean freight and inland freight, the weak dollar, steel and other commodity prices increasing even faster in foreign markets, and China reducing their VAT rebate by 10 percent for those exporting out of China, have all helped shift things to where it is economically more feasible to produce certain types of products. Products that are small, high value-added and mass produced still make sense. Large products and short run production items are likely to make less sense because of the aforementioned factors.
I believe we are going to teeter on the brink of recession for at least the next year. The government has to be very careful not to mismanage something and make it even worse. For example, if the government had not supported Freddie Mac and Fannie Mae, the very issue of government credibility on quasi-governmental agencies would have been called into question. The effects could have been chilling. The question now becomes how many billions of dollars of bailouts are we going to end up with before everything is done? We are also going to end up with over a $500 billion national government deficit for the next fiscal year.
So you don't think we are in a recession?
Actually, people have stopped asking me this question as much over the past few weeks. I believe this is because most people just assume we are in a recession. I don't think we are. First quarter economic data indicates we had one percent economic growth. The first look at second quarter numbers indicates we might still have one percent growth. The definition of “recession” is two or more consecutive quarters in which economic growth is negative. So, if we are in a recession, it just started and we won't be able to confirm it for another three to six months.
Now let me make several points related to this. First, one percent growth feels like an economic slowdown, because compared with the three to five percent growth we have been accustomed to for most of the past 25 years, it is a slowdown.
Second, there are definitely parts of our nation that are in recession. Geographically, Michigan is in recession and its neighboring states, Ohio and Indiana, are either in recession or very close. By market segments, there is no doubt that automotive, airlines, housing, and banking are in recession.
In contrast, energy, steel, mining, and agriculture are all in their boom cycles. These are segments that witnessed some very tough times during most of the 1980s and 1990s. It is simply time for them to “recycle.” If you talk to people from Texas you will get an entirely different perspective on the economy than from a person from Michigan.
Our economy is large and diversified. At any given time there are some sectors having good times and some having bad times. Those having good times tend to over-expand and gradually reach a point when they turn downward. Likewise, those having tough times tend to contract until there is an undersupply and therefore higher prices/profits for their sectors. Right now, we are at one of those crossroads when a group of sectors that were doing well have reversed, and a group doing poorly are now going strong.
What role does the relative weakness in the U.S. dollar play?
It has definitely helped exports. At Automatic Feed, our exports are very strong. Normally, exports make up between 20 to 25 percent of our business. Today, though, it's 50 percent, so it's a significantly higher proportion. A weak dollar has advantages and disadvantages. The advantage is that you can export to other markets, and that makes it harder for imports to come in and compete against us. We will get a larger share of the domestic market. The disadvantage is that we were used to buying cheap imported goods, and all of a sudden they are more expensive.
You mentioned that your exports are strong. Where are the growing economies?
We are doing our first project in Russia. Before the Berlin Wall came down and its economy collapsed, Russia was selling about four to five million vehicles a year. At the same time the U.S. market was about 12 million, and we have grown to 16 million. The Russian economy went the opposite way after the Wall fell. At the bottom of their market, they were selling less than one million vehicles a year. Their economy gradually improved to two million. One thing that many people don't realize is that Russia is the second largest exporter of oil after Saudi Arabia. So Russia has been a big beneficiary of high oil prices, and now things are starting to sell. We got the opportunity because of the weak U.S. dollar, and for the first time in 20-25 years the Russians have some money to spend.
What's the impact of the credit crunch on machine tool companies?
I'm aware of several companies in our industry that are having trouble getting credit. I can state from firsthand experience that credit availability has been significantly reduced. I went to seven banks with a request for quotes. A year ago I would have received seven positive responses. This year, I received three interested responses. One banker told me that 75 percent of deals that they would have approved a year ago are not acceptable this year. Bankers want to see cash on the balance sheet. Because machine tool companies have long lead times, they can tie up a lot of money in work-in-process. In my 25 years in the industry, I've rarely been concerned with how much cash we have, but more concerned with current ratios and margins. For the first time ever, I had a banker raise the issue of cash ratio. I've not heard that in 25 years, which demonstrates just how concerned bankers are and how tight credit is right now.
What are your predictions for the automotive industry?
Every automotive company has lowered its outlook for U.S. sales. Most of the companies have already made a couple of revisions to the 2008 and 2009 estimates, and they have always been downward. Most companies are expecting around 14 million vehicles. The all-time peak was a couple of years ago at 17.2 million, and we have been at 16.5 million to 16.8 million since then. Last year, we dipped to around 15.8 million, so things are still pretty good. Historically, the auto industry will have about three to five good years, and then they have a year where they drop 25 percent. Recently, we haven't had one of those 25 percent down years. Part of the reason is that the auto industry has given such good sales incentives. Sometimes people can be induced to buy if you offer a good enough deal. I believe that credit availability will have an effect, and the car market is definitely getting softer. Based on past downturns, companies may be hoping for the 14 million, but I can see 13 to 13.5 million if historical trends return.
What are some of the opportunities for machine tool companies outside of the automotive industry?
We are doing a lot of work for the energy industry in wind power and coal mining. As wind power is an emerging industry, it has never had an infrastructure or supplier base. In the case of the coal industry, it's been down for so many years that their supply base has disappeared. The same type of equipment we use to make machine tools can be used to make wind towers and mining equipment. We picked up a fair amount of work from that sector. You just have to be flexible. When the cheese moves you have to move with it!
What's the outlook for the machine tool industry?
For the past 18 months, machine tool orders have been down 30-40 percent from their peak in 1998. However, they are up 100 percent from the bottom that we hit in late 2002. Compared to the two extremes in the last 10 years, machine tool orders have been right in the middle of the peak and the trough during this past 18 months, with no clear trend of breaking out in either direction.
From speaking with several other companies, I can again emphasize that machine tool companies who tend to be doing better than others are those who are selling to the industries that are doing well, such as energy, mining and steel. Also, the more that a company has built up their exporting capabilities, the better they are likely to be performing.
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Ben Boldt is founder and principle consultant at Visionary Solution Resources, Inc. (VSR). Boldt has over 35 years of consulting in operations and business management. His vast experience includes the leadership of successful consulting and turnaround efforts in a variety of industries. During the past 15 years, he has focused on working with engineer-to-order companies, including several Encompix customers. 