Manufacturing Outlook November 2019

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Manufacturing Outlook / November 2019

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TABLE OF CONTENTS

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5 Publisher LEWIS A WEISS Editor in Chief TIM GRADY Creative Director CRAIG ROVERE Contributing Writers ROYCE LOWE TIM GRADY NORBERT ORE ANDREA OLSON CHRIS KUEHL FRANCES BRUNELLE THOMAS R. CUTLER Production Manager LINDA HOPLER Current Circulation 45,200 Advertising ADVERTISE@MFGTALKRADIO.COM Editorial Office JACKET MEDIA CO. 75 LANE ROAD FAIRFIELD, NJ 07004 (973) 808-8300

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ENERGY OUTLOOK

PUBLISHER’S STATEMENT

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NEW

A word from our publisher

Energy and the environment

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MANUFACTURING TIDBITS 2020: The Year of Direct-to-Consumer Manufacturing *Editors note at bottom of Content page

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China and more

by Lydia Di Liello

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EUROZONE OUTLOOK

MANUFACTURING OUTLOOK

A look at Europe

A global look at manufacturing

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12 THE CREDIT MANAGER’S OUTLOOK

by Dr. Chris Kuehl

NORTH AMERICAN OUTLOOK Manufacturing in the US, Canada & Mexico

16 The cost, making and treating of metals

20 AUTOMOTIVE OUTLOOK Auto industry news

21 ISSUES OUTLOOK Issues around the globe

WHAT LEADERS SAY, IS NOT ALWAYS WHAT THEY DO

by Andrea (Belk) Olson, MSC

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METALS OUTLOOK

Colonizing the Cosmos

by Royce Lowe

SOUTH AMERICA OUTLOOK Brazil in the spotlight

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AEROSPACE OUTLOOK

25 ASIA OUTLOOK

PRICING NEGOTIATION STRATEGIES

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GLOBAL PMI OUTLOOK

by Norbert Ore

ISM MANUFACTURING REPORT ON BUSINESS

34 2020: MORE SMALL MANUFACTURING ACQUISITIONS PREDICTED

by Frances Brunelle

*Editor’s Note on Manufacturing Tidbits As we expand and deepen our coverage of the industry, Manufacturing Outlook now includes this new section, Manufacturing Tidbits, our on-the-scene coverage of people, places and things inside manufacturers just like you, where the real stories happen but often go unheralded because manufacturers are busy making things happen. So, we will cover their accomplishments here.

PUBLISHERS STATEMENT

PUBLISHER’S STATEMENT There is no doubt that manufacturing has slowed, but comments in the main stream media that manufacturing is in a recession are irresponsible and wrong. The ISM number has been below 50 since August, but that is not the definition of a manufacturing recession. The GDP average for 2019 remains around 2%, with the first quarter at 3.1%, the second at 2.0% and third at 1.6% pending revision. Clearly, there is an economic slowdown, but manufacturing is not in recession.

Be very careful reading the Bureau of Labor Statistics October manufacturing jobs report that reads, in part: “Manufacturing employment decreased by 36,000 in October. Within manufacturing, employment in motor vehicles and parts declined by 42,000, reflecting strike activity.” Let’s parse that a bit – the 36,000 includes the GM employees temporarily out on strike, so manufacturing in other sectors gained 6,000 jobs, but the BLS counts workers out on strike technically as an employment decrease.

Now, let’s be clear about a recession. A recession is defined as two consecutive quarters of negative GDP. To say that manufacturing is in a recession is misleading, but it catches one’s attention because it is alarming. What it tends to do, when repeated often enough, is to convince people that this prophecy is the truth, and the result is a self-fulfilling prophecy: people cut back on spending, demand drops, orders of goods drops, manufacturers reduce production and cut overhead expenses – and the first overhead expense cut are employees. This throws people out of work creating even less spending and accelerates the downward slide. It is like screaming “fire” in a crowded theater and then watching the panic in slow-motion. Putting people’s livelihoods at risk by promoting false narratives or ‘technical recessions’ is irresponsible reporting, in our opinion, but negative news prevails in the press.

The reality is that the U.S. GDP, as well as every other countrys’ GDP has softened, some more than others. Brexit created uncertainty in the EU followed by tariffs that sent some EU economies into negative GDP. The trade war with China softened their GDP; albeit, China rarely reports anything lower than 6% GDP. Until the tariffs and trade agreements are resolved, things will remain shaky, and when/if they are lifted, it will be some time before confidence in growth and the abeyance of uncertainty power strong economic change. Thus, we are back in the economic doldrums for awhile, although GDP is expected to operate on the positive side.

Other factors that often precede recessions, like high inflation, high interest rates to choke off high inflation, deflation or some kind of market bubble, are not present. So, don’t be misled. It is still a time for cautious optimism.

As you browse through the articles in this issue of Manufacturing Outlook, look for the silver lining stories. There is still positive, forward momentum in this economy. And for even more information on this, check out the many news stories and interviews at www.mfgtalkradio.com, as well as insightful economic updates on Manufacturing Matters with Cliff Waldman.

As always, let us know your reactions to the content of this ezine. We appreciate your insights. Information from the production floor, R&D, the C-Suite, and even shipping and transportation are all important parts of the mosaic of manufacturing.

Lewis A. Weiss Publisher Contact laweiss@mfgtalkradio.com or text “RADIO” to 66866 for comments, suggestions and ideas and guest requests for MFGTALKRADIO.COM podcast.

Lewis A Weiss, Publisher Manufacturing Outlook / November 2019

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2020: THE YEAR OF MANUFACTURING TIDBITS

DIRECT-TOCONSUMER MANUFACTURING

by THOMAS R. CUTLER

Half of all manufacturers are building direct-toconsumer channels, because today’s shoppers prefer to buy directly from brand manufacturers versus retailers. Direct-to-consumer manufacturers are expected to grow almost 20% per year, for the next five years, doubling the gross revenue in just a short five-year time span.

will go elsewhere. This 24/7 information is best accomplished with an automated booking engine.

With a unique auto-booking engine, inventory is tracked in real-time, automatically allocating available material and finished products to fulfill orders; if the order priority changes, inventory will be redistributed to fit the new production schedule.

Small manufacturers “get it.” They know how the consumer shops on-line. They are desperately seeking the must-have tools for scaling directto-consumer brands and Katana cloud-based manufacturing software is taking the lead by building integrations with popular e-commerce sales channels (such as Shopify and WooCommerce) and accounting tools (QuickBooks and Xero) to support smooth and automated workflows.

Visual and modern interfaces are no longer negotiable. Just as the consumer wants to see what

The SaaS model has mitigated the risks and investment required, leaving the upsides of manufacturing process.

Real-time inventory updates are critical in the D2C manufacturing environment. Failure to have accurate data ensures disappointed customers who

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Manufacturing Outlook / November 2019

MANUFACTURING TIDBITS

they are purchasing in advance; plant floor or back office solutions must be similarly presented with color-coded dashboards allowing even the smallest manufacturers to easily navigate business elements from sales channels to manufacturing operations.

No matter the inquiry or the inquirer, there is one centralized version of the truth.

a great relief to small manufacturers who rarely have an IT department and are happy to avoid the traditional solutions which take months to implement.

D2C Customer Results: Productivity, Inventory Control, and Implementation Time The small manufacturers report an average 80% productivity boost because taking care of the manufacturing schedule keeps stock under control.

The ability to properly return the focus to growing the business is the direct result.

Author Profile

Material Inventory Control is improved 3 times on average. Knowing exactly how much raw material is in stock and how much is missing to fulfill orders is critical, particularly for a small D2C manufacturer focused on both cost of customer acquisition and optimizing re-order rates from satisfied customers. The real-time overview of inventory and manufacturing operations removes any mystery.

Implementation time is less than 7 days which is

Best of all, it starts with a 14-day free trial.

Thomas R. Cutler is the President and CEO of Fort Lauderdale, Florida-based, TR Cutler, Inc., celebrating its 20th year. Cutler is the founder of the Manufacturing Media Consortium including more than 7000 journalists, editors, and economists writing about trends in manufacturing, industry, material handling, and process improvement. Cutler authors more than 1000 feature articles annually regarding the manufacturing sector. Cutler can be contacted at trcutler@trcutlerinc.com and followed on Twitter @ThomasRCutler.

Manufacturing Outlook / November 2019

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PRICING NEGOTIATION STRATEGIES

PRICING NEGOTIATION STRATEGIES

MOST IMPORTANT MANUFACTURING TREND FOR 2020

by LYDIA DI LIELLO

Negotiation is the art of letting someone else have your way. Nowhere is this as critical as the industrial sector where the variants of raw material pricing, shipping fluctuations, tariffs, and super thin margins spell profitability or bankruptcy.

customer to accept a price increase are all forms of negotiation. Manufacturing sales reps are regularly tasked to inform a good customer that prices are rising. When armed and prepared for the rationale of the price increase, the sales rep can prevail.

Manufacturing firms are increasing building muscle as chief pricing negotiators, understanding that it is both necessary and that this construct need not be a win/lose game. Preparation and perspective can make this an enjoyable and painless process which produce painless outcomes that meet expectations.

Defending pricing to a client and influencing a

Gathering insight for negotiation Some of the data accessed in Pricefx are precisely the kind of metrics and justification data to persuade the customer and enhance the negotiation outcomes. Insight is at the heart of a powerful pricing system. It is the essential ingredient in developing robust frameworks and weaponizing the data a manufacturing organization gathers, and too often the greatest challenge that face modern manufacturing operations.

The future of pricing will be defined by the implementation of cutting-edge machine learning and advanced simulation and visualization programs on a macro scale. These tools are relatively useless without a partner who can instruct an entire manufacturing team on the use and implementation of these data.

The biggest mistakes are the failure to define what is wanted and the justification for pricing increases.

Manufacturers must determine, in advance of a

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Manufacturing Outlook / November 2019

PRICING NEGOTIATION STRATEGIES

pricing negotiation, what is and is not acceptable.

“Willing to accept” implies that a company is not likely to get “exactly” what is wanted and willing to compromise.

Forecasts are key to manufacturing pricing negotiation strategies Manufacturing sales representatives who fail to critically and clearly understand both what the customer wants AND is willing to accept will have poor outcomes.

Managing pricing strategy is one of the most critical elements of maximizing earnings and profits. From price policy definitions to setup guidelines (including calculations and price simulations) the practice can be highly complex and impactful.

Trade-off options needed for a win/win In advance of a customer meeting, manufacturers must know those things that could be given up and still achieve the targeted pricing outcomes. These “trade-offs” define the negotiation process, a back and forth conversation in which each side gains and gives up something. Thinking through this strategy at the negotiation table is too late.

Preparation includes the data-driven results, including customer history, factors driving pricing variation, and rationale for the strategy. With so many economic fluctuations in the news daily, this pricing negotiation skillset is the most important manufacturing trend for 2020.

Author Profile Lydia Di Liello is the CEO and founder of Capital Pricing Consultants, a revenue management and business consultancy dedicated to significantly improving profitability for clients through strategic, operational, and tactical analysis and recommendations.

Di Liello brings more than 25 years of global revenue management, pricing expertise, and business leadership, delivering exceptional results, typically 3%-300% profit increase in as little as six months. She is a member of the Professional Pricing Society Board of Advisors and holds an MBA from Youngstown State University.

Follow Di Liello on Twitter at @LydiaDiLiello or contact her at lydia@capitalpricingconsultants.com Manufacturing Outlook / November 2019

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MANUFACTURING OUTLOOK

NOVEMBER 2019

MANUFACTURING OUTLOOK

by ROYCE LOWE

GLOBAL MANUFACTURING IMPROVES SLIGHTLY AND IS STRAINING TO GET BACK TO EXPANSION. THE ISM PMI SHOWS A SLIGHT IMPROVEMENT IN U.S. MANUFACTURING, THOUGH STILL IN CONTRACTION. CHINA CONTINUES ITS SLIGHT IMPROVEMENT. EUROPE STILL STRUGGLES. The world continues in the grip of uncertainty. This is doubtless affecting just about everything that influences a manufacturing economy. Time may heal most. Inflation is slow, consumer confidence is high, and no economic bubbles exist in housing or stocks or other financial instruments or sectors which typically foretell a recession.

The BLS jobs report for October shows the addition of 128,000 non-farm payroll jobs. The unemployment rate was at 3.6 percent. Manufacturing lost 36,000 jobs, but employment in motor vehicles and parts

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Manufacturing Outlook / November 2019

declined by 42,000, reflecting strike activity. Without the strike, manufacturing would have shown a gain of 6,000 jobs. The average monthly jobs gain for 2019, to date, is 167,000; for 2018 it was 223,000 jobs per month, but unemployment hovers near a 50-year record low.

The Bureau of Economic Analysis recently released its ‘advance’ estimate for the annual rate of real GDP growth in the third quarter of 2019, putting it at 1.9 percent. The figure for the second quarter of 2019 was 2.0 percent.

The ISM PMI figure for U.S. manufacturing recovered slightly to 48.3 percent in October from 47.8 percent in September, representing its third consecutive month in contraction. The overall economy grew for the 126th consecutive month.

IHS Markit’s remarks on the U.S., on the other hand, referred to a further modest improvement in

MANUFACTURING OUTLOOK

operating conditions in the manufacturing sector, noting faster expansions in production and new orders, with rates of growth pushing to six-month highs. Employment rose at the fastest pace since May and business confidence went to a four-month high.

October’s IHS PMI, at 51.3, was up from September’s 51.1. New orders were up for the fifth consecutive month. Export orders were up in October, and the month saw the fastest increase in employment numbers since May. THE ECONOMIST magazine, in its latest weekly report on world economies highlights changes in Gross Domestic Product (GDP), Consumer Prices and Unemployment Rates for what it considers

the world’s major economies, mostly applicable to at latest the past two months, and show definite trends in the world economy. The figures are qualified as being the latest available, and with reference to a given quarter or month. The figures for GDP represent the % change on the previous quarter, annual rate. The consumer price increases represent year-over-year changes. The unemployment figures, %, are for the month as noted.

Manufacturing Outlook / November 2019

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CREDIT MANAGER’S OUTLOOK

CREDIT MANAGERS’ OUTLOOK

by DR. CHRISTOPHER KUEHL MANAGING DIRECTOR OF ARMADA CORPORATE INTELLIGENCE THIS REPORT REPRINTED COURTESY OF THE NATIONAL ASSOCIATION OF CREDIT MANAGERS (NACM.ORG) WHERE MORE IN-DEPTH INFORMATION CAN BE FOUND.

Combined Sectors It was fun while it lasted! “Last month featured a nice little rebound in the Credit Managers’ Index (CMI)—especially on the manufacturing side,” said Chris Kuehl, NACM Economist. “That gain was short-lived as this month there was a bit of a decline. The data is still pretty firmly in the expansion zone (above 50) but not as robustly as was the case earlier.” His take is that the indicators for the economy in general have been following that same pattern—some good indicators coinciding with some not so good. Industrial production numbers were far better than they were in the previous month and there was an improvement in the industrial capacity numbers as well. On the other hand, the Purchasing Managers’ Index sank into contraction territory for the first time in years with a reading of 49.1.

The problems with the CMI were in the favorable categories, but the drop was not calamitous.

The combined index score fell from 55.2 to 54.1, but still higher than the numbers seen in July (53.4). Readings in the mid-50s, however, certainly beat the high 40s that are showing up in the Purchasing Managers’ Index. The combined score for the favorable factors fell from 61.8 to 59.1, but again, this is better than the 58.6 notched in July. “There is certainly no reason to panic about numbers in the high 50s, but there is concern that a downward trend might extend,” Kuehl said. The combined score for the nonfavorable factors stayed almost the same as last month— going from 50.9 to 50.7. “This category has been teetering on the edge of contraction for months

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Manufacturing Outlook / November 2019

and even years, but has been able to keep out of the contraction zone thus far.”

The biggest drop in the favorable categories was in sales, which could be a potential problem. Last month the sales data was at a high point—64.4.

This was close to the level reached in May. The reading this month fell to 58.7, about where it was in July. “A reading in the upper 50s is certainly no cause for alarm,” Kuehl said, “but the trend is not good and signals there may be more caution in the economy—an observation that has been made by many looking at other data points.” The other readings in this category were not as concerning.

The new credit applications data slipped from 60.9 to 59.7, a pretty minor reduction. The dollar collections numbers went from 60 to 58.5. He suggests this is a bit more worrisome as it shows some creditors may be struggling a little. The amount of credit extended also fell out of the 60s with a reading of 59.7 as compared to last month’s 61.7. In sum, “the numbers are not as good as they were in August, but they have hardly fallen off the map.”

The data from the nonfavorable factors didn’t vary much from the month before, but this is somewhat cold comfort as the readings are not all that high. The rejections of credit applications slipped a bit from 52.1 to 51.4. Kuehl explains that this category is tied to the applications for credit—if there are fewer applications and there are more rejections, it essentially means there

CREDIT MANAGERS’ OUTLOOK are fewer good applicants. There was very little change in terms of accounts out for collection.

The reading this month was 48.4; it was 48.6 the month before. The more salient point is this category remains in contraction territory.

The disputes numbers actually improved with a reading of 50 after an August reading of 49.4. It is always good to see a reading break out of contraction—even if only by a little. The reading for dollar amount beyond terms fell quite a bit, but has still managed to stay out of contraction (down from 53.6 to 50.2). He notes that this is worrying in that slow pays are the first sign of future problems. The dollar amount of customer deductions improved a little, which was somewhat unexpected. It has gone from 50 to 52.1. There was also an improvement in filings for bankruptcies from 51.6 to 52.1. According to Kuehl, “The bankruptcy numbers had been a bright spot for years, but had been slipping over the last few months, so it was reassuring to see an upward trend.”

Manufacturing Sector As for the manufacturing sector, Kuehl said that it has been experiencing the greatest levels of volatility thus far this year. The start was pretty impressive, but there were developing concerns as the trade and tariff war began to take shape. By mid-year, the slowing global economy was taking a toll on the U.S. industrial sector. Much of what the U.S. exports is machinery and other higher tech goods, and the market has been suffering a little. These issues are expected to worsen.

The combined score for manufacturing is at 54.3—less impressive than the month before (55.7). It is still higher than it was in July, however.

The favorable numbers fell from the 60s, but

remained firmly in expansion territory with a reading of 58.8. The nonfavorable factors came in very close to what they had been—51.2 as compared to 51.7. The sales data took a significant hit as it went from 65.3 to 57.9, a development that was not unexpected given all the challenges that have been facing the manufacturing sector of late. Kuehl attributes this to the global slowdown, as most of the major trading partners for the U.S. have been struggling. “Of the top15 U.S. trade partners, all but three now have Purchasing Managers’ Index readings below 50 and the three that are still in expansion territory are only at 51 or 52.” The new credit application numbers slipped from 60.1 to 59.5. The dollar collections numbers also declined, but not by that much as they went from 59.6 to 58.7, certainly still respectable. The amount of credit extended numbers fell out of the 60s, going from 61.4 to 59.2. He notes that the favorable numbers are clearly still favorable as readings in the 50s are solid. The worry is that sales data tends to drive everything else.

There was less volatility in the nonfavorable categories, but the readings have been weak for several months and in some cases years. The rejections of credit applications data slipped, but stayed out of contraction territory with a reading of 51.9 compared to 53 last month. The accounts placed for collection did slip back into contraction with a reading of 49.7 from 50.6 the month prior.

This takes the reading back to levels seen in July (46.7) and far lower than the June reading of 53.5.

The disputes numbers remained almost as they were the month before with a reading of 50.6 after being at 50.3 in August. The dollar amount beyond terms slipped quite a bit from 55.9 to 52.1, but the good news is that the data is still in expansion territory. “The slow pay is often the first sign of trouble and thus far there are few major alarms sounding,” Kuehl said. The dollar amount of customer deductions improved as the reading rose from 49.3 to expansion territory at 51.1. The filings for bankruptcy reading recovered a little bit of ground as it went from 51.4 to 52.

As far as manufacturing is concerned, there are conflicting assessments according to Kuehl. There have been more than a few positive signs and there have been negative indicators as well. The sense is that trends will be more negative as the trade war grinds on and more tariffs come into play.

Manufacturing Outlook / November 2019

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NORTH AMERICAN OUTLOOK

NOVEMBER 2019

NORTH AMERICAN OUTLOOK

by ROYCE LOWE

The Institute of Supply Management PMI figure recovered slightly from 47.8 percent in September to 48.3 percent in October. New orders, production and employment are contracting; supplier deliveries are moving faster from slower and backlogs are contracting. Raw material inventories are contracting, customers inventories are too low. Exports are growing, imports contracting.

Of the 18 manufacturing industries, five reported growth in October: Furniture & Related Products; Printing & Related Support Activities; Food, Beverage & Tobacco Products; Wood Products; and Computer & Electronic Products. The 12 industries reporting contraction in October — in the following order — are: Primary Metals;

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Manufacturing Outlook / November 2019

Apparel, Leather & Allied Products; Textile Mills; Transportation Equipment; Plastics & Rubber Products; Machinery; Chemical Products; Petroleum & Coal Products; Electrical Equipment, Appliances & Components; Fabricated Metal Products; Miscellaneous Manufacturing; and Paper Products.

Comments from the industry continue to be less than optimistic. Customer demand is generally down, and there are some reports of high labor costs culminating in higher product costs. A Chemical Products quote describes the industry as depressed. Trade, tariffs and general global uncertainty are cited as prime culprits. A Fabricated Metals quote, however, says business is still very good.

NORTH AMERICAN OUTLOOK Commodities Up in Price Corn; Ethylene; Nickel; Polypropylene Resin; Propylene; Steel; and Steel — Stainless.

Commodities Down in Price Aluminum (7); Caustic Soda; Copper; Freight; Nylon (2); Solvents; Steel (4); Steel — Carbon; Steel — Hot Rolled (3); Steel — Scrap; Steel Products (10); and Sulfuric Acid.

Commodities in Short Supply Electrical Components; Electronic Components (3); and Helium (4).

CANADIAN manufacturing showed the sharpest increase in production since February, together with a modest increase in new orders. October saw a marginal increase in employment. Their PMI in October rose to 51.2 from September’s (adjusted) 51.0. There was overall business optimism for the next twelve months.

Light vehicle sales in Canada in October were off but slightly - for the twentieth consecutive month.

Sales were 160,969 units, down 0.9 percent from 162,456 units. Sedans were down 16 percent, light trucks up 5 percent. Light trucks represented 76.1 percent of new vehicle sales in October.

MEXICO saw marginal growth in new orders and some increase in employment in October, but also the fifth consecutive monthly decline in production. Business confidence increased along with predictions for sales growth. Their PMI for October, 50.4 was up from September’s 49.1.

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Manufacturing Outlook / November 2019

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METALS OUTLOOK

NOVEMBER 2019

METALS OUTLOOK

by ROYCE LOWE

STEEL PRODUCTION ACTUALLY DECREASED IN THE MONTH OF SEPTEMBER for the 64 reporting countries – which represent 99 percent of world crude steel production – but only by 0.3 percent, at 151,499 MT. U.S. crude steel production for September 2019 was 7.072 MT, down 2.5 percent year-over-year.

Mexico produced 1.465 MT of crude steel in September, down 10.6 percent year-over-year.

Canada produced 1.040 MT of crude steel in September, off 11.0 percent year-over-year.

The World Steel Association forecasts global steel demand will increase by 3.9 percent in 2019 to 1,775 MT and by a further 1.7 percent in 2020 to 1,805 MT. Primary Global Aluminum Production in September 2019 was reported at 5.163 million tons, with production in China, at 2.878 million tons, representing 56 percent of world total. Production was 456,000 tons in GCC; 363,000 tons in the rest of Asia; 276,000 tons in Western Europe; 310,000

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Manufacturing Outlook / November 2019

tons in North America and 344,000 tons in Eastern and Central Europe.

Domestic H.R. steel coil was at around $500 per ton in early November, down around $20 per ton from early October. C.R. coil was around $680 per ton in early November, down from around $ 720 in early October.

The steel situation is still somewhat depressed in Europe.

Copper was at $2.67 per lb in early November from $2.57 in early October, but down from $2.85 a year ago; Aluminum was at $0.82 per lb early November, from $0.78 early October, but down from $0.95 a year ago; Nickel was down, at $7.4 in early November, from $8.1 in early October, but up from $5.80 a year ago; Zinc was at $1.16 early November, from $1.05 in early October.

Crude steel production in Germany in September was at 3.352 MT, down 4.0 percent year-over-year; in Italy 2.208 MT, up1.1 percent year-over-year; in

METALS OUTLOOK

France 1.205 MT, down 10.2 percent year-over-year and in Spain 1.175 MT, down 1.0 percent year-overyear.

Russia’s crude steel production for September was at 5.575 MT, down 4.1 percent year-over-year; Ukraine’s was 1.745 MT, down 2.3 percent yearover-year.

Brazil’s crude steel production for the month of September was 2.403 MT, a decrease year-overyear of 22.0 percent.

The UK produced 0.599 MT of crude steel in September, down 5.9 percent year-over-year.

CHINA produced 82.773 MT of crude steel in September, up 2.2 percent year-over-year; Japan 8.045 MT, down 4.5 percent year-over-year; India 8.961 MT, up 1.6 percent year-over-year and South Korea 5.691 MT, down 2.7 percent year-over-year.

Taiwan produced 1.830 MT in September, down 2.0 percent.

The Story of Stelco Once upon a time, back in 1910, a steel company was founded in Hamilton, Ontario. It was called the Steel Company of Canada, but would forever be known as Stelco, and would be for some time Canada’s flagship steel company. At its peak, in 1981, it employed 26,000 people. Then it fell prey to the North American eighties phenomenon called China, and things would never be the same again. It got to the point where the company went into creditor protection in 2004, a private equity firm got U.S. Steel corp. involved, and the Pittsburgh company picked up Stelco for U.S.$1.2 billion in equity, another $785 million in debt.

Manufacturing Outlook / November 2019

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METALS OUTLOOK The entry of U.S. Steel on Canadian territory was to bring about dark days for Stelco and its workers. It was charged by a union president that the American company saw the Canadian workforce as secondclass citizens and imposed on them a “militaristic” management style, where feedback was neither encouraged nor welcomed.

U.S.Steel repeatedly locked out workers during 2008 contract negotiations, again in 2009, and again in 2013.

The Canadian government had to get involved at some point to make U.S. Steel meet its obligations: there was a settlement that was never made public.

In 2013, U.S. Steel shut down operations and in 2014 placed Stelco into creditor protection, claiming cumulative losses of $1.5 billion. What they left behind, having treated the steel-producing facilities as badly as it did the workers, was a real rusting mess. Things didn’t look at all rosy for Hamilton’s once proud steel facilities and their workforce. But the company spent almost three years under the Companies’ Creditors Arrangement Act (CCAA) which wiped away $3 billion in debt and a further $1.4 billion in pension and other obligations.

Enter a man named Alan Kestenbaum, who had been having metals for breakfast since he was a kid, from his great uncle and his father, later from his father-in-law. He shipped aluminum products from South America, Romania and Russia, opened offices in Asia and built early relationships in China. He later got involved in silicon metal, as near as Bécancour in Quebec, and had experience in handling labor disputes. He supposedly knew nothing about steel. He met, and got along with, Randy Graham, the local union leader. Through a company called Bedrock Industries Group LLC, he bought Stelco for $350 million in June

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Manufacturing Outlook / November 2019

2017, including payments to U.S. Steel and other creditors. Today, Bedrock owns 46 percent of the still-operating steel company.

Kestenbaum took the company public and today it’s Stelco Holdings Inc. Over $400 million was invested in equipment updates, extending to a blast furnace reline. People have been hired, old employees have been rejuvenated, and the product mix has been updated. Aggressive marketing is winning back old customers from the automotive and appliance industries. Research and development is again an item, having been reduced to next to nothing by U.S. Steel. There’s a new CEO, CFO and COO, the latter an experienced steel man from Arcelor Mittal in Quebec. Since that time, the company has made a profit in all but two quarters.

The steel industry is not in its best place at the moment. Demand is down, hence so are prices.

Stelco has its work cut out ahead of it, but it now seems to have the guts and the gall to get the job done.

AEROSPACE OUTLOOK

AEROSPACE OUTLOOK

Colonizing the Cosmos

by Royce Lowe

Elon Musk’s SpaceX’s Starship Mk1was unveiled in late September. It’s some 50 meters tall (164 feet) and is made from stainless steel, since both carbon fiber and aluminum alloys suffer from cost and service temperature disadvantages. This is not an interstellar spacecraft, but a prototype of an interplanetary one. Mr. Musk hopes one day to use its successors to ferry passengers to the Moon or to Mars; perhaps even all the way to Saturn.

SpaceX was founded 17 years ago, since which time its cheap, reusable machines have revolutionized the rocket business. Its ultra-low prices allowed it to accede to a dominant share of the commercial satellite-launching market, and along with Boeing, SpaceX is responsible for ferrying supplies to the International Space Station. All this is merely a necessary first step in Mr. Musk’s bigger plan, which is to make humanity into a “multiplanetary species” by establishing colonies elsewhere in the solar system.

Enter the Starship. The prototype, which is presently on display in Texas, is but one half of an enormous rocket stack designed with planetary colonization in mind. Pairing with a Falcon Super Heavy booster, also under development, will allow

lifting around 165 tons into orbit, making it the most powerful rocket ever built, just ahead of the Saturn V that propelled astronauts to the moon in the 1960s and 1970s. Unlike the Saturn V, whose three stages were abandoned to the sea or to space as their fuel was used up, the Starship and its booster will be reusable, keeping costs down.

Mr. Musk has said that a Starship prototype might be ready for a test flight all the way to orbit (without its booster stage) within six months.

This would be in line with its rapid development schedule. The prototype was put together in a matter of months, and was built out in the open rather than in a factory environment.

In contrast, Space Launch System (SLS), another very heavy rocket designed to ferry astronauts to the Moon and Mars, authorized in 2011, is being built by NASA. It has, to date, taken some $14 billion of taxpayers’ money, and is due to make its first flight in 2020, though NASA has stated that date may be pass by. Mr. Musk, who states that less than 5 percent of SpaceX’s resources support Starship, may yet beat NASA into orbit. Others in the space race are Richard Branson’s Virgin Galactic and Jeff Bezos’s Blue Origin. We’ll follow their adventures.

Manufacturing Outlook / November 2019

19

AUTOMOTIVE OUTLOOK

NOVEMBER 2019

AUTOMOTIVE OUTLOOK

by ROYCE LOWE

Who would have thought it? Who would have imagined Porsche and Boeing actually collaborating? But they are: they’re going to explore the market for flying vehicles, with an eye on urban centers.

The plan is for a high-end machine capable of vertical takeoff and landing. An initial pact was recently signed, whereby the two companies will create a team to explore the market potential for premium flying vehicles, involving engineers from the Boeing unit Aurora Flight Sciences. Porsche meanwhile is looking to expand its scope - as a sports car manufacturer - by becoming a leading brand for “premium mobility.”

Transport and technology companies across the globe are stepping up development of drones and associated machinery to give more flexibility for people and goods in increasingly congested city centers. In this vein, a German startup, Volocopter GmbH, backed by Daimler AG and its biggest shareholder, Ziejiang Geely Holding Group, recently completed a test flight in Stuttgart with a prototype resembling a helicopter - drone mix.

This is Boeing’s latest venture into futuristic vehicles that may one day crowd the space over cities. Boeing bought drone maker Aurora Flight Services in 2017 and is funding a laboratory at Stanford University devoted to new flying machines.

Boeing CEO Dennis Muilenburg says that commercial flying taxis could take off within the next five years. Deployment of drones will require

20

Manufacturing Outlook / November 2019

an air traffic management system capable of staying on top of a very busy city environment.

Porsche’s consultants expect action in this market post 2025. They look to move passengers more quickly and more efficiently than by current means of ground transport. Imagine what the skies over New York, Atlanta, Miami, Chicago, Dallas, Houston, Los Angeles, San Francisco, or Seattle might look like!

On the automotive production front, at time of writing, both GM and Ford have settled their contracts. Only FCA is left. The GM strike cost the company $2.9 billion on a full-year basis, a 3 percent raise and $11,000 ratification bonus for tenured workers. It will reduce the amount of time entry-level workers need to get to top pay. There will also be limits on the number of temporary workers who can be hired.

Passenger cars sales at 355,266 were down 16.4% year-over-year and light trucks at 988,576 were up 6.4% year-over-year.

ISSUES OUTLOOK

NOVEMBER 2019

ISSUES OUTLOOK

by ROYCE LOWE

Canada’s aviation industry is looking a labor shortage in the eye. By 2025, this sector foresees a deficit of 3,000 pilots and 55,000 aircraft workers, such as engineers and technicians. There’s a new center, a new training facility that is coming on stream in the Toronto area, that is designed to help students navigate their way through a new career.

This is the brand new Center for Aerospace and Aviation, a 138,000 square foot campus that was opened in January 2019 at Downsview Park, north of the city of Toronto. The campus has two hangars, an upgraded aircraft fleet, and lots of learning space.

It combines modern facilities with the redeveloped, historic de Havilland Canada Building, where de Havilland manufactured aircraft from the late 1920s to the 1980s, prior to the building becoming a museum. Downsview Aerospace Innovation and Research (DAIR) is the consortium behind the project.

The center has aroused interest from aircraft company executives, and has brought in new hardware such as a commuter jet and a CRJ-200 donated by Bombardier. Teaching aids and large expenditures on tools have been added to the facility.

Enrolment in this (Centennial College) Aerospace and Aviation program will expand from 300 to 900 students: at capacity the campus will house 1,000 students; 600 in aviation maintenance and engineering, 300 in engineering technology and 100 in airframe assembly programs.

The Center is located near leading aerospace companies such as Bombardier and FlightSafety, Defense Research and Development Canada, and Canada Lands Company, all of which are associated with the project. But this center is just phase one of the larger vision to create a renaissance in the Canadian aerospace sector. DAIR includes local colleges and universities together with large aeronautics and space companies, such as Bombardier, Pratt and Whitney, and Collins Aerospace. It will eventually connect to other Canadian innovation centers, such as the Montreal Aerospace Institutes (MAI), including six Quebec universities. MAI, in fact, serves as inspiration for the Downsview project. The goal is the creation of a world-class aerospace hub in Downsview within the next five years, helped along with combined federal and provincial government donations totaling over $40 million. This will involve students, researchers and corporations working closely together. International researchers and Canadian expat companies have already shown interest in the project.

The project has partnered with France’s Safran Landing Systems to develop an electrified landing gear, as opposed to current hydraulic systems.

Further research involves aircraft interiors, space systems, and wing development. Ultimately, the center will address the coming labor shortage in the aerospace sector, and will encourage kids to think about being involved in aerospace; kids who will become the future’s pilots, technicians and maybe astronauts.

Manufacturing Outlook / November 2019

21

ENERGY OUTLOOK

NOVEMBER 2019

ENERGY OUTLOOK

by ROYCE LOWE

Carbon Engineering, a Canadian company, is in the business of taking CO2 from the air in order to reverse climate change without resorting to expensive techniques, convoluted tax schemes or depriving billions of people of the energy they need for a good life. A bonus would be making gasoline, diesel or jet fuel from the CO2. That’s what Carbon Engineering is up to.

Carbon Engineering’s Direct Air Capture (DAC) system directly removes CO2 from the atmosphere, purifies it, and produces a compressed carbon dioxide, using only energy and water, ready for a pipeline. This CO2 can be combined with nonfossil fuel-generated hydrogen to produce ultralow carbon intensity hydrocarbon fuels such as gasoline, diesel and Jet Fuel-A. This pipeline CO2 can also be used for industrial purposes including production of steel and concrete, coatings and carbon fibres, or enhanced oil recovery.

Carbon Engineering has a pilot plant in Squamish, British Columbia, where it has successfully developed and demonstrated its technologies and has been removing CO2 from the atmosphere since 2015, and making fuels from it since 2017. The technology is supported by Bill Gates, Canadian Natural Resources Ltd. founder Murray Edwards, Occidental Petroleum, and Chevron, among others.

Carbon Engineering’s DAC system can remove a ton of CO2 from the air for around $100. Individual

22

Manufacturing Outlook / November 2019

systems would be set to capture about a million tons per year, requiring tens of thousands of systems to keep up with global emissions and reduce atmospheric CO2 to normal levels by 2040.

The next step in Carbon Engineering’s technology produces synthetic, liquid transportation fuels gasoline, diesel and Jet-A (for gas turbine engines.)

The process combines CO2 captured by DAC with hydrogen, to produce hydrocarbon fuels. If the hydrogen is produced from water using nuclear or renewable energy, then the fuel is carbon-neutral and the fuels may be used in today’s transportation infrastructure, engines and aircraft.

The cost of these fuels - which will continue to come down - is less than $4 per gallon, hence more expensive than fossil fuels but similar to biofuels.

Carbon Engineering fuel doesn’t take much land space or water and is independent of weather and geographic location, nor does it contain contaminants that fossil fuels contain, such as sulphur, nitrogen and particulates.

The U.S. military is interested. It wants to deploy small nuclear reactors that could run Carbon Engineering’s technology, producing water and fuel for troops in remote sites. This would obviate the need to risk lives while delivering such supplies in combat zones.

Carbon Engineering’s pilot plant has been running for four years. The technology is proven. The next step may not be a long way away – stay tuned.

GLOBAL PMI

GLOBAL PMI OUTLOOK

by NORBERT ORE, DIRECTOR, HEAD OF INDUSTRIAL SURVEYS, STRATEGAS RESEARCH PARTNERS In October, we saw a continuation of recent trends in manufacturing which define the current state of the global economy. Half of the eighteen indexes we watch closely were above the 50 mark and half were below.

Nine indexes are growing (but growing very modestly) and the other nine are contracting (but contracting very modestly). And that is good news! While we would like to see global economic growth reaccelerate, we accept the current landscape in which manufacturing is bottoming.

There is one exception. While the U.S. PMI® struggles to regain momentum, the ISM Non- Manufacturing NMI® with significant help from New Orders and Business Activity has established itself as the leader with 13 of 18 industries growing.

Political and financial challenges continue to add to existing supply chain concerns. The scatterplot below illustrates global weakness as nine of eighteen indexes are under 50.

Eurozone: The Eurozone PMI (45.9,+0.2) was contractionary for the ninth consecutive month.

Germany (42.1, +0.4) led the decline as it failed to post a PMI reading higher than 45 for the eighth consecutive month. Italy (47.7, -0.1), Spain (46.8, -0.9), and Austria (45.5, +0.4) were below the neutral mark too. Amidst the decline, growth was found in Greece (53.5, -0.1), Ireland (50.7, +2.0), France (50.7, +0.6), and Netherlands (50.3, -1.3).

United Kingdom: The UK/CIPS PMI (49.6, +1.3) rose to a six-month high in October. A reading below 50 is consistent with the seemingly endless political and economic uncertainty taking a toll on operations and employment through reduced hiring and deferral of replacements.

China: China’s Official Report, the CFLP PMI (49.3, -0.5),

Manufacturing Outlook / November 2019

23

GLOBAL PMI OUTLOOK remained below the mid-point. The Caixin Manufacturing PMI (51.7, +0.3) gathered momentum and posted a second month of growth – the highest reading since February 2017. Even more encouraging, New Orders expanded at the fastest rate since January 2013. While a PMI of 51.7 is seen as marginal growth, this is the most encouraging report from China in months.

India: India’s PMI (50.6, -0.8) was expansionary for the 27th consecutive month. India’s Manufacturing PMI has averaged 52.3 YTD. South Korea: The PMI (48.4, +0.4) remained in contractionary territory in October. The PMI posted a reading below 50 for the sixth consecutive month.

North America: Canada’s PMI (51.2, +0.2) has averaged 50.6 YTD. Mexico’s PMI (50.4, +1.3) has averaged 50.1 YTD. Both indexes indicated little change in the overall manufacturing sector for North American trading partners. USMCA ratification will result in greater movement of goods across North America’s borders.

In October, the U.S. manufacturing ISM PMI® (48.3, +0.5) was contractionary for the third month since August 2016. It was only a year ago the PMI reached an impressive rate of growth at 60.8. The peak was followed by a slow deceleration, averaging one point per month prior to falling below 50 in August. The past relationship between the PMI® and the overall economy indicates that the PMI® for October (48.3) corresponds to a 1.6 percent increase in Real GDP on an annualized basis, according to the press release.

24

Manufacturing Outlook / November 2019

ASIA OUTLOOK

GLOBAL OUTLOOK

ASIA OUTLOOK

by ROYCE LOWE

CHINA saw its strongest improvement in operating conditions since February 2017 with production and new orders expanding at steeper rates, together with a renewed increase in export business. The PMI for October rose to 51.7 from September’s 51.4. Business confidence regarding the next 12 months’ outlook improved to its highest level since April.

Total new orders rose solidly in October, with the rate of expansion the quickest recorded for 81 months. There was job shedding and attendant capacity pressures. China’s sales of passenger cars and commercial vehicles were down in total by 5.2 percent in September, at 2.271 million units.

JAPAN saw weaker demand in October and production down for the tenth consecutive month.

Firms reduced selling prices in efforts to stimulate sales. New orders dropped at the fastest pace since May 2016. Business confidence picked up slightly, and employment growth picked up to a six-month high. Their PMI for October retreated

from September’s 48.9 to 48.4. Typhoon activity in Japan was a temporary interruption in October, but there are reported unfavourable underlying conditions in both the domestic and export markets.

INDIA saw new orders and production up at the weakest rates in two years, and job creation down to a six-month low. Business confidence dropped to its lowest in two-and-a-half years. India’s domestic market was its weak point in October.

Their PMI fell from September’s 51.4 reading to 50.6 in October.

Manufacturing Outlook / November 2019

25

EUROZONE OUTLOOK

GLOBAL OUTLOOK

EUROZONE

by ROYCE LOWE

IHS Markit’s Eurozone Manufacturing Composite Purchasing Managers’ Index (PMI) continued in contraction, with October’s PMI at 45.9, very slightly up from September’s 45.7. Production, new orders and purchasing all showed continuing weakness in October. Jobs were cut at their highest rate since early 2013. There was an ongoing lack of demand, both domestic and export, leading to a continuing burn off of backlogs.

The move away from diesel-powered cars in Europe continues. New car registrations for October were mixed, with Germany up 12.2 percent yearover-year and the UK down 6.7 percent. Over half the cars registered in Norway in October were electrified.

IHS Markit’s PMI for the UK rose from 48.3 in September to 49.6 in October, a six-month high, but there were reductions in production, new orders and employment, with stock-building activity gathering pace.

Brexit and the political situation in general were causes for concern in the UK in October, along with job losses for the seventh consecutive month and their rate of decline among the steepest over the past decade.

There was some build-up of “safety stocks” along with a mild improvement in business confidence in October.

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Manufacturing Outlook / November 2019

SOUTH AMERICAN OUTLOOK

GLOBAL OUTLOOK

SOUTH AMERICA

by ROYCE LOWE

BRAZIL saw production increase for the third straight month in October, with continuing growth in new orders and high business optimism.

October’s PMI, at 52.2, from September’s 53.4, continued to show an improvement in overall business conditions, with growth sustained in consumer, intermediate and investment goods categories - consumer goods being the strongest sub-sector. Export sales were down for the second month.

The JP MORGAN GLOBAL MANUFACTURING PMI – a composite index produced by JPMorgan and IHS Markit in association with ISM and IFPSM (International Federation of Purchasing and Supply Management) – improved very slightly, for the third month running, from September’s 49.7 to 49.8 in October. Global manufacturing spent its sixth month in contraction in October, and that can accurately be called a ‘manufacturing recession’ and their GDP may follow suit.

The intermediate goods sector saw its PMI at a three-month low of 48.8; the PMIs for consumer and investment goods were in expansion, with both seeing growth of production and new orders.

National PMI readings showed expansion in 13 of the 32 countries for which October data were

available, including China, the U.S., Brazil and France. European countries fared somewhat less well.

In October, global manufacturing production edged higher for the second successive month, with new orders stabilizing following five months of contraction. Global trade continued to slide, with new export business declining for the 14th consecutive month.

Global manufacturing employment fell for the sixth consecutive month. Business optimism rose slightly from the series-record lows registered in both August and September.

Manufacturing Outlook / November 2019

27

WHAT LEADERS SAY, IS NOT ALWAYS WHAT THEY DO

WHAT LEADERS SAY, IS NOT ALWAYS WHAT THEY DO

BY ANDREA BELK OLSON

28

Manufacturing Outlook / November 2019

WHAT LEADERS SAY, IS NOT ALWAYS WHAT THEY DO We’ve all been in an organization that’s been on the cusp of implementing change. There were some internal rumblings about addressing some challenges which were hanging around for a long time. Leadership conducted a few discussions on the issues. A study, review, or evaluation was conducted. Fantastic! We have momentum! These challenges will FINALLY get addressed!

However, in the coming weeks, things seem to slow down. There’s some disagreement amongst leadership on how “urgent” or “critical” the issues are. There are discussions about the costs of implementing changes. Leadership has concerns about the ROI and the rollout timeline. The initiative list starts to narrow, and now those things that “really needed changing” boil down to a fraction of projects that are easy to implement and assuage the team’s frustrations. All is well, right?

Leaders are reluctant to make changes in their organizations. Research has found that, while employers recognize challenges within their businesses, few felt they were able to take action through investing in new ideas, instead choosing cost-cutting, risk-averse approaches. Furthermore, many leaders felt too overwhelmed by day-to-day challenges to prioritize long-term change.

Company leaders are telling employees two conflicting messages. They’re being told to go out there and innovate, but they’re also being told that they should do so without taking any risks – that’s when you see the energy start to plateau.

This sets the expectation that nothing really changes. It becomes a pattern of all talk and no action. Veteran employees start to accept that “this is the way things work around here” and new employees start getting frustrated and head towards the door. Recruitment and retention challenges start to surface. Competitors start to rollout new innovations and initiatives, while your organization remains in “safe mode”. Even though things aren’t crashing and burning, revenue starts to diminish in modest percentages year over year.

The organization is on auto-pilot.

Why does this happen? It comes down to leadership mindset. If your leadership is riskaverse, the talk of change will never manifest into

reality without a catastrophic or massive change, often happening from the outside. (think of industries who have been recently disrupted) This risk aversion is not uncommon - everyone wants to make decisions that lead to success. Individuals want to minimize perceived mistakes, so they can ensure job security. But inaction can actually create worse outcomes, albeit much slower. The cycle of creating hope for progress followed by a lack of true follow-through also undermines organizational culture.

A CEO we worked with was leading a massive overhaul of his company while he personally struggled deeply with indecisiveness. Historically, the organization’s culture had been slow and unresponsive because decision making resided largely at the top. He redesigned the organization to create a culture where decision rights were more appropriately distributed to those lower in the organization who were better equipped to solve problems and direct resources. That left the most-strategic decisions with him and his team. Yet he struggled to get closure on critical decisions with his team, decisions the rest of the organization depended on to execute the subsequent decisions they were now empowered to make. The CEO was perpetuating the very problem he sought to fix.

In short, leaders need to not simply empower others, or delegate down, but have the courage to be decisive and take risks, whether right or wrong.

People in your organization want to be led. They forgive mistakes, especially if they are recognized and corrected early. Your actions need to align with your words. Otherwise, you’re simply full of hot air.

About the Author: This introspective essay was previously published on LinkedIn.com by Andrea Olson. In addition to writing and consulting, Andrea Olson speaks to leaders and industry organizations around the world on how to craft effective customer-centric organizations. More information is available on pragmadik.com or thecustomermission.com.

Manufacturing Outlook / November 2019

29

ISM REPORT OUTLOOK

THE INSTITUTE FOR SUPPLY MANAGEMENT’S MANUFACTURING REPORT ON ® BUSINESS

BREAKING NEWS

ISM PMI at 48.3% for October Report Released November 1st

ISM PMI for the past 5 years

30

Manufacturing Outlook / November 2019

ISM REPORT OUTLOOK

ISM® REPORT ON BUSINESS®

MANUFACTURING E

conomic activity in the manufacturing sector contracted in October, and the overall economy grew for the 126th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM® Report On Business®.

The October PMI® registered 48.3 percent, an increase of 0.5 percentage point from the September reading of 47.8 percent.

The New Orders Index registered 49.1 percent, an increase of 1.8 percentage points from the September reading of 47.3 percent. The Production Index registered 46.2 percent, down 1.1 percentage points compared to the September reading of 47.3 percent. The Backlog of Orders Index registered 44.1 percent. The Employment Index registered 47.7 percent, a 1.4-percentage point increase from

OCTOBER 2019 Analysis by Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management® Manufacturing Business Survey Committee

the September reading of 46.3 percent. The Supplier Deliveries Index registered 49.5 percent. The Inventories Index registered 48.9 percent. The Prices Index registered 45.5 percent, a 4.2-percentage point decrease from the September reading of 49.7 percent. The New Export Orders Index registered 50.4 percent, a 9.4-percentage point increase from the September reading of 41 percent. The Imports Index registered 45.3 percent, a 2.8-percentage point decrease from the September reading of 48.1 percent. Of the 18 manufacturing industries, five reported growth in October: Furniture & Related Products; Printing & Related Support Activities; Food, Beverage & Tobacco Products; Wood Products; and Computer & Electronic Products.

PMI @ 48.3% ®

‡Miscellaneous Manufacturing (products such as medical equipment and supplies, jewelry, sporting goods, toys and office supplies).

MANUFACTURING AT A GLANCE Oct Index 48.3 49.1 46.2 47.7 49.5 48.9 47.8 45.5 44.1 50.4 45.3

Sep Index 47.8 47.3 47.3 46.3 51.1 46.9 45.5 49.7 45.1 41.0 48.1

% Point Change +0.5 +1.8 -1.1 +1.4 -1.6 +2.0 +2.3 -4.2 -1.0 +9.4 -2.8

Faster

Trend* (months) 3 3 3 3 1 5 37 5 6 1 4

OVERALL ECONOMY

Growing

Faster

126

Manufacturing Sector

Contracting

Slower

Index PMI New Orders Production Employment Supplier Deliveries Inventories Customers’ Inventories Prices Backlog of Orders New Export Orders Imports ®

Rate of Change Slower Slower Faster Slower From Slowing Slower Slower Faster Faster From Contracting

Direction Contracting Contracting Contracting Contracting Faster Contracting Too Low Decreasing Contracting Growing Contracting

3

*Number of months moving in current direction. Manufacturing ISM Report On Business data is seasonally adjusted for the New Orders, Production, Employment and Supplier Deliveries Indexes. ®

®

PMI 2017

50% = Manufacturing Economy Breakeven Line 42.9% = Overall Economy Breakeven Line

2018

PMI®

2019

48.3%

Manufacturing contracted in October, as the PMI® registered 48.3 percent, an increase of 0.5 percentage point from the September reading of 47.8 percent.

The PMI® contracted for the third straight month, but at slower levels compared to September. This marks seven straight months of softening or contraction in manufacturing. The past relationship between the PMI® and the overall economy indicates that the PMI® for October (48.3 percent) corresponds to a 1.6-percent increase in real gross domestic product (GDP) on an annualized basis.

COMMODITIES REPORTED Commodities Up in Price: Corn; Ethylene; Nickel; Polypropylene Resin; Propylene; Steel; and Steel — Stainless.

Commodities Down in Price: Aluminum (7); Caustic Soda; Copper; Freight; Nylon (2); Solvents; Steel (4); Steel — Carbon; Steel — Hot Rolled (3); Steel — Scrap; Steel Products (10); and Sulfuric Acid.

Commodities in Short Supply: Electrical Components; Electronic Components (3); and Helium (4).

Note: The number of consecutive months the commodity is listed is indicated after each item. *Reported as both up and down in price.

Manufacturing Outlook / November 2019

31

ISM REPORT OUTLOOK

ISM Report On Business ®

®

manufacturing

October 2019 Analysis by Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management ® Manufacturing Business Survey Committee

New Orders (Manufacturing) 2017

2018

52.5% = Census Bureau Mfg. Breakeven Line

2019

49.1%

New Orders ISM’s New Orders Index registered 49.1 percent in October, an increase of 1.8 percentage points when compared to the 47.3 percent reported for September. Of 18 manufacturing industries, five reported growth in new orders in October: Wood Products; Furniture & Related Products; Food, Beverage & Tobacco Products; Computer & Electronic Products; and Fabricated Metal Products.

Production (Manufacturing) 2017

2018

2019

46.2%

51.7% = Federal Reserve Board Industrial Production Breakeven Line

Production ISM’s Production Index registered 46.2 percent in October, which is 1.1 percentage points lower when compared to the 47.3 percent reported for September, indicating the third consecutive month of contraction. The six industries reporting growth in production during the month of October — listed in order — are: Printing & Related Support Activities; Furniture & Related Products; Paper Products; Food, Beverage & Tobacco Products; Electrical Equipment, Appliances & Components; and Fabricated Metal Products.

Employment (Manufacturing) 2017

2018

50.8% = B.L.S. Mfg. Employment Breakeven Line

2019

47.7%

Supplier Deliveries (Manufacturing) 53.1% 2017

2018

2019

49.5%

Employment ISM’s Employment Index registered 47.7 percent in October, an increase of 1.4 percentage points when compared to the September reading of 46.3 percent. The five industries reporting an increase in employment in October are: Printing & Related Support Activities; Textile Mills; Furniture & Related Products; Nonmetallic Mineral Products; and Food, Beverage & Tobacco Products.

Supplier Deliveries The delivery performance of suppliers to manufacturing organizations was faster in October, as the Supplier Deliveries Index registered 49.5 percent. The six industries reporting slower supplier deliveries in October — listed in order — are: Apparel, Leather & Allied Products; Textile Mills; Food, Beverage & Tobacco Products; Primary Metals; Miscellaneous Manufacturing‡; and Computer & Electronic Products.

Inventories (Manufacturing) 2017

2018

44.3% = B.E.A. Overall Mfg. Inventories Breakeven Line

‡Miscellaneous

2019

48.9%

Manufacturing (products such as medical equipment and

supplies, jewelry, sporting goods, toys and office supplies).

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Manufacturing Outlook / November 2019

Inventories The Inventories Index registered 48.9 percent in October. The seven industries reporting higher inventories in October, in the following order, are: Nonmetallic Mineral Products; Wood Products; Furniture & Related Products; Petroleum & Coal Products; Plastics & Rubber Products; Food, Beverage & Tobacco Products; and Transportation Equipment.

ISM REPORT OUTLOOK

ISM Report On Business ®

®

manufacturing

October 2019 Analysis by Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management ® Manufacturing Business Survey Committee

Customer Inventories (Manufacturing) 2017

2018

2019

Customers’ Inventories ISM’s Customers’ Inventories Index registered 47.8 percent in October. The five industries reporting customers’ inventories as too high during the month of October are: Nonmetallic Mineral Products; Apparel, Leather & Allied Products; Primary Metals; Furniture & Related Products; and Miscellaneous Manufacturing‡.

47.8%

Prices (Manufacturing) 2017

2018

Prices

2019

The ISM Prices Index registered 45.5 percent in October. Four of the 18 industries reported paying increased prices for raw materials in October: Food, Beverage & Tobacco Products; Petroleum & Coal Products; Miscellaneous Manufacturing‡; and Computer & Electronic Products.

45.5% 52.5% = B.L.S. Producer Prices Index for Intermediate Materials Breakeven Line

Backlog of Orders (Manufacturing) 2017

2018

Backlog of Orders

2019

44.1%

ISM’s Backlog of Orders Index registered 44.1 percent in October, which is 1 percentage point lower than the 45.1 percent reported in September. Five of the 18 industries reported growth in order backlogs in October: Printing & Related Support Activities; Wood Products; Furniture & Related Products; Paper Products; and Food, Beverage & Tobacco Products.

New Export Orders (Manufacturing) 2017

2018

New Export Orders

2019

50.4%

ISM’s New Export Orders Index registered 50.4 percent in October. The five industries reporting growth in new export orders in October are: Petroleum & Coal Products; Wood Products; Miscellaneous Manufacturing‡; Electrical Equipment, Appliances & Components; and Food, Beverage & Tobacco Products.

Imports (Manufacturing) 2017

2018

2019

Imports The Imports Index registered 45.3 percent in October. None of the 18 industries reported growth in October.

45.3% ‡Miscellaneous

Manufacturing (products such as medical equipment and

supplies, jewelry, sporting goods, toys and office supplies).

Manufacturing Outlook / November 2019

33

2020: MORE SMALL MANUFACTURING ACQUISITIONS PREDICTED

2020: MORE SMALL

MANUFACTURING ACQUISITIONS PREDICTED

BY FRANCES BRUNELLE

The uncertainty on the political front, trade wars, and a pandemic prognosis for recession globally, simply does not translate to the U.S. market. Easy financing conditions along with earlier tax cuts and shifting small manufacturing demographics are driving deal activity for the next decade through 2030. Mergers and acquisitions (M&A) multi-year run of unprecedented activity shows no signs of slowing. The drivers include the continued strength of the equity markets and the private equity class.

Private equity (PE) has been a meaningful participant in recent acquisition activity,

34

Manufacturing Outlook / November 2019

benefiting from a continued low interest rate environment. Since the 2008 financial crisis, the volume and number of PE transactions have grown at a compound annual growth rate (CAGR) of 20%, reaching $741 billion in total deal value, according to financial data provider PitchBook.

The popularity of PE as an asset class has also continued to grow among investors.

The 2020 Story: Small manufacturing <$20M The 2020 acquisitions are probably not the big IPOs. These are the $2M - $20M manufacturers, who after decades of building a worthwhile operation, are ready to sell. The buyers often

2020: MORE SMALL MANUFACTURING ACQUISITIONS PREDICTED have little manufacturing experience. Instead they are business savvy people looking to bring marketing expertise and grow companies exponentially. Alternatively, a long-standing employee, who helped build the company, wants to acquire the company from the original owner/ founder. Regardless of the prospective acquirer, funding for these acquisitions can come from a variety of sources.

Guaranteed loan programs There are various types of SBA lenders; each comes with specific requirements. In general, the lender approves the loan for underwriting and then submits it to the SBA. If approved, the SBA

Acquiring a manufacturing business is a significant endeavor

repays up to 85 percent of losses in the event of default, depending on the loan amount and the type of loan.

A critical step in this process is securing the funding to buy the manufacturer. Entrepreneurs often seek financing from angel investors or venture capitalists, which rarely works out. The investors may have requirements which cannot be met or are simply unacceptable.

SBA-Guaranteed loans The U.S. Small Business Administration — SBA — is a governmental organization that helps U.S. businesses start and expand. SBA guarantees business loans that are extended by certain banks and other SBA lenders against default. If an entrepreneur defaults on an SBA loan, the SBA covers the losses up to a predetermined amount — not the lending institution. This arrangement enables SBA lenders to offer higher loans with better terms than without the SBA guarantee.

2020 manufacturing acquisitions best managed by a business broker Working with a business broker to secure funding and complete the needed objective due diligence avoids pitfalls, poor advice, and helps secure a preferred lender whose internal criteria are a good match for a specific acquisition.

For strategic acquisitions, cultural fit and the ability to successfully integrate are even more important than just price when defining a successful acquisition. Stay tuned. Next month will look at why more women are going to acquire manufacturing operations in 2020.

Author Profile:

Frances Brunelle is the founder of Accelerated Manufacturing Brokers, Inc., which specializes in the sale of lower middle market manufacturing companies nationally.

Fran and her team help to ensure the continuity of U.S. Manufacturing by transitioning ownership to the next generation of entrepreneur. Fran writes on topics that help manufacturing business owners prepare their companies for sale and navigate the sale process to ensure a positive financial result in support of their retirement.

Manufacturing Outlook / November 2019

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