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INTERVIEWS WITH: Gov. Rick Snyder • Bill Manns, Mercy Saint Mary’s • Bob Buist, D&M Metal Products • Brett Bowman, BDO • Brian Peters, Michigan Health & Hospital Association • Bruce Goodman, Varnum • Candace Matthews, Amway • Carol Lopucki, MI-STBDC • Carrie Jones, Michigan Venture Capital Association • Chip Hurley, Newmark Grubb Cressy & Everett • Cindy Larsen, Muskegon Lakeshore Chamber of Commerce • Dale Grogan, Michigan Accelerator Fund • David Rosen, Kendall College of Art & Design • David Smith, The Employers Association • Derek Hunderman, Kerkstra • Diana Sieger, Grand Rapids Community Foundation • Doug Parker, Dykema • George Erickcek, Upjohn Institute • Gregory Ioanidis, ITC Michigan • Jane Clark, Michigan West Coast Chamber of Commerce • Joel Rahn, Chemical Bank • John Augustine, Fifth Third Asset Management • John Dunn, Western Michigan University • John Irwin, Huntington Bank • John Kennedy, Autocam • John Porterfield, Comerica Bank • John Wheeler, Orion Construction • Jon Siebers, Smith Haughey Rice & Roegge • Josh SPECIAL YEAR-END ISSUE DECEMBER 23, 2013 VOL. 26 • NO. 5 Szymanski, Triangle Associates • Joy Gaasch, The Chamber of Commerce of Grand Haven, Spring Lake and Ferrysburg • Judy Brown, Perrigo • Kara Beer, Battle Creek Area Chamber of Commerce • Karl Dehn, Battle Creek Unlimited • Kent Riddle, Mary Free Bed • Kevin Hirdes, NuVescor • Kevin O’Brien, Pridgeon & Clay • Kevin Splaine, Spectrum Health Hospitals • La June Montgomery Tabron, W.K. Kellogg Foundation • Larry Hines, Hines Corp. • Mark Lindquist, Rapid-Line • Mark Martis, Grand River Bank • Mark Olesnavage, Hopen Life Science Ventures • Marti Lolli, Priority Health • Mary Ellen Mika, Steelcase • Matt Miller, Blue Water Partners • Melissa Anderson, IRN • Mike Dunlap, Michael A. Dunlap & Associates • Mike Finney, MEDC • Mike Freed, Priority Health • Mike VanGessel, Rockford • Mike Wall, IHS Automotive • Mitch Stapley, Fifth Third Asset Management • Nancy Farnam, Varnum • Pat Lennon, Honigman • Pat Prichard, Blue Cross Blue Shield of Michigan • Paul Brand, Alliance for Health • Paul Isely, GVSU • Phil Harbert, Old National Bank • Randy Rua, Rua & Associates • Randy Thelen, Lakeshore Advantage • Randy Wagner, Mercy Health Saint Mary’s • Rick Baker, Grand Rapids Area Chamber of Commerce • Rick Breon, Spectrum Health • Rick Mellema, ESCO Group • Rick Pappas, Davenport University • Rob Kirkbride, Monday Morning Quarterback • Rob Nesky, Keystone Solutions Group • Ron Kitchens, Southwest Michigan First • Sam Cummings, CWD Real Estate Investment • Sam Hogg, Open Prairie Venture • Scott Piggott, Michigan Farm Bureau • Steve Beurkens, Major Polymers Distribution • Ted Lott, Lott3Metz • Tom Haas, Grand Valley State University • Tom Kyros, Varnum • Tom Welch, Fifth Third Bank • William Small, MMTC-West • Gov. Rick Snyder • Bill Manns, Mercy Saint Mary’s • Bob Buist, D&M Metal Products • Brett Bowman, BDO • Brian Peters, Michigan Health & Hospital Association • Bruce Goodman, Varnum • Candace Matthews, Amway • Carol Lopucki, MI-STBDC • Carrie Jones, Michigan Venture Capital Association • Chip Hurley, Newmark Grubb Cressy & Everett • Cindy Larsen, Muskegon Lakeshore Chamber of Commerce • Dale Grogan, Michigan Accelerator Fund • David Rosen, Kendall College of Art & Design • David Smith, The Employers Association • Derek Hunderman, Kerkstra • Diana Sieger, Grand Rapids Community Foundation • Doug Parker, Dykema • George Erickcek, Upjohn Institute • Gregory Ioanidis, ITC Michigan • Jane Clark, Michigan West Coast Chamber of Commerce • Joel Rahn, Chemical Bank • John Augustine, Fifth Third Asset Management Dunn, Michigan Huntington Kennedy, Autocam nagemeent • Johnn D unnn, Western Mic chigan University niversity • John John Irwin, Huntin Hun ngton Bank • John Kenne • John Porterfield, Rice Roegge • Josh ld, Comerica Com merica Bank Bank • John John Wheeler, Wheeler, Orion Orion Construction Construction • Jon Jon Siebers, Siebers, Smith Smith Haughey Haughey R ice & Ro Szymanski, Triangle Associates Commerce Grand Haven, Spring Ferrysburg • Judy ngle A ssociates • Joy Joy Gaasch, Gaasch, The The Chamber Chamber of of Co C ommerce of of G rand H aven, S pring LLake ake aand nd Ferry Brown, Perrigo • Karaa Beer, Beer, Battle Battle Creek Creek Area Area Chamber Chamber of of Commerce Commerce • Karl Karl Dehn, Dehn, Battle Battle Creek Creek Unlimited Unlimited • Kent Riddle, Mary Free Bed • Kevin Clay Hospitals inn Hirdes, Hirdes, NuVescor NuVescor • Kevin Kevin O’Brien, O’Brien, Pridgeon Pridgeon & C lay • Kevin Kevin Splaine, Splaine, Spectrum Spectrum Health Health H ospita • La June Montgomery Tabron, Hines, Hines Rapid-Line Mark Martis, Grand bron, W.K. W.K K . Kellogg Kellogg FFoundation oundation • LLarry arr y H ines H ines, ines Corp. ines Corp • Mark Mark LLindquist, indquist, R in apid-LLine • M ark M River Bank • Mark Olesnavage, Hopen Life Science Ventures • Marti Lolli, Priority Health • Mary Ellen Mika, Steelcase • Matt Miller, Blue Water Partners • Melissa Anderson, IRN • Mike Dunlap, Michael A. Dunlap & Associates • Mike Finney, MEDC • Mike Freed, Priority Health • Mike VanGessel, Rockford • Mike Wall, IHS Automotive • Mitch Stapley, Fifth Third Asset Management • Nancy Farnam, Varnum • Pat Lennon, Honigman • Pat Prichard, Blue Cross Blue Shield of Michigan • Paul Brand, Alliance for Health • Paul Isely, GVSU • Phil Harbert, Old National Bank • Randy Rua, Rua & Associates • Randy Thelen,

CRYSTAL BALL Insights, economic sentiment and forward-looking strategies from the region’s business leaders.

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DECEMBER 23, 2013 / MiBiz Crystal Ball 2014: Special Year-End Edition

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CRYSTAL BALL

LOOKING AHEAD TO 2014

Published since 1988 MiBiz® is a registered trademark of REVUE Holding Co., Inc. Editor & Publisher Brian Edwards / bedwards@mibiz.com Managing Editor Joe Boomgaard (auto, manufacturing) jboomgaard@mibiz.com

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f you’ve noticed that business owners look a little more rested over the last year, there may be a good explanation.

It seems that the state’s recovering economy may have provided the right Ambien-like dose of reassurance for West Michigan executives to stave off those restless nights worrying about maintaining their businesses as going concerns. They have reason to step back and give a sigh of relief now that Michigan’s recession is clearly in the rearview. Companies in the state will have added about 79,600 jobs by the end of the year — the best yearly performance since 1999 — and nearly a quarter of a million jobs since early 2010, according to economists at the University of Michigan. Drilling down further into the data, the recovery of the Grand Rapids metro area is even more notable. Grand Rapids ranked fifth out the top 100 metro areas for declining unemployment and sixth in the job recovery since the trough of the recession in 2009, according to a Brookings Institution report. The region’s output recovery was also strong, ranking 14th out of the top 100 metros, the report stated. Based on “balanced” growth across most business sectors, the Grand Rapids economy this year actually grew 2.4 percent, double the pace predicted by George Erickcek of the W.E. Upjohn Institute for Employment Research. Manufacturing remains strong, but it’s not alone as hospitality/leisure and business services continue to post solid gains locally, he said. His outlook for 2014: “Not a huge increase, but still strong growth” of around 2.6 percent, Erickcek told us for this issue. For the most part, business owners are echoing those sentiments. They survived the downturn by making tough decisions and focusing on saving their enterprises. Companies tell us they’re perhaps ready to move beyond survival mode. They’ve made it through the turnaround and have started preparing, albeit cautiously, for growth. If businesses were beaten within an inch of their lives during the recession, today they’ve stopped bleeding, gotten up and started walking again. To move from recovery to healthy growth, though, is going to require capital, talent and confidence. The confidence part, actually, is what seems to be saddling most executives these days — and with good reason. Chief among the economic killjoys: Washington, D.C.

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When the politicians aren’t saddling companies with new fees and taxes to pay for health care reform, their hyperpartisan gridlock effectively stifles consumer confidence, causing the recovery to coast along rather than kick into gear. With an election year on the horizon, one wonders how kooky things will get in D.C. and Lansing. With that in mind, local companies aren’t quite ready to be bullish, even if they are slowly but surely moving ahead.

Senior Writer Mark Sanchez (finance, health care) msanchez@mibiz.com Staff Writers Elijah Brumback (real estate, energy) ebrumback@mibiz.com Nick Manes (innovation, food) nmanes@mibiz.com Contributing Reporters Lindsay Patton-Carson, Jane C. Simons Contributing Photographers Katy Batdorff, Adam Bird, Jeff Hage, Erik Holladay, Jena McShane

They tell us it’s hard to forget the pain of the recession — the worst nightmares of their careers, for many — but perhaps they should at least move that bad memory aside so that it’s not paralyzing their ability to grow.

Minion Audrey Sochor

If you ask Gov. Rick Snyder — who faces an election year in 2014, although he’s not officially saying whether he will run for reelection just yet — the state has been focused on its own turnaround. Governmental reforms and the creation of pro-business policies and support programs have helped clear away barriers to growth, he said.

Vice President of Sales Denise Schott / dschott@mibiz.com

While even Snyder acknowledges talent remains a critical concern, he says at least Lansing has stepped away from putting up roadblocks for businesses to grow and thrive in the state. “Our role is not to create the jobs,” he told us in an interview for this special section. “That’s up to our great smallto medium-sized business people who are a core of that job creation. Our goal is to create the most competitive environment, the best playing field possible for that.” Continuing the Governor’s sports analogy, it’s now up to the business community to step up to the plate and swing for the fences. To find out how they plan to do it, turn the page and start reading.

Brian Edwards Editor & Publisher

Joe Boomgaard Managing Editor

Columnists Melissa Anderson, Karl Dehn, Ron Kitchens, Birgit Klohs, Randy Thelen

Senior Advertising Consultant Shelly Keel / skeel@mibiz.com Sales & Marketing Assistants Lauren Allen, Madison Edwards Creative Director Kim Kibby / kkibby@mibiz.com Design Director Kristi Kortman / kkortman@mibiz.com Ad Designer & Traffic Coordinator Kellie Zaplitny / kzaplitny@mibiz.com Web Editor Jayson Bussa / jbussa@mibiz.com Circulation For address corrections or subscriptions, please visit www.mibiz.com/subscribe

MiBiz ISSN 1085-4916 • USPS 017-099 Formerly MiBizWest • Established 1988 MiBiz is published every other week by REVUE Holding Co., Inc., 4927 Stariha Dr., Suite B, Muskegon, MI 49441. Telephone (231) 798-4669. FAX (231) 798-8335. Email: info@mibiz.com. Subscription changes: www.mibiz.com. Periodicals Postage is paid at Muskegon, MI and additional mailing office. POSTMASTER: Send address changes to MiBiz, 4927 Stariha Dr., Suite B, Muskegon, MI 49441. Subscriptions are available without cost to qualified readers. Paid subscriptions are available to those not meeting qualified circulation requirements. Paid subscriptions are $46/year, $68/two years and $84/three years. Single copy and back issues (when available) are $1.50 each, plus first class postage. GRAND RAPIDS 65 Monroe Center, Suite 5 Grand Rapids, MI 49503 616-608-6170 phone • 616-608-6182 fax

For insights from even more West Michigan business leaders, visit mibiz.com for exclusive online content.

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Special Year-End Edition: MiBiz Crystal Ball 2014 / DECEMBER 23, 2013

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CRYSTAL BALL

Q&A:

GOV. RICK SNYDER As Michigan’s turnaround governor, Rick Snyder says the state’s progress depends on it executing on the fundamentals. But he believes the policies from the first three years of his term — including tax reforms and programs to support the state’s second-stage companies — simply set the table for the next phase: growth. As Snyder heads into an election year, he has publicly pointed to Medicaid reform as one of his proudest legislative achievements of 2013, but he acknowledges there’s more to do to position the state on a growth path. He sat down with MiBiz in his executive office to discuss his efforts to “swipe” German business models, the possibility of doing a quarterly conference call on the state’s financials and how Right to Work is actually performing.

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DECEMBER 23, 2013 / MiBiz Crystal Ball 2014: Special Year-End Edition

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Governor, are you running for re-election?

Since taking office, you worked with economic developers to focus on economic gardening, especially over the first 18 months of your term. And then earlier this year, the reports noted that the state was going to switch more into hunting. For 2014, are we going to do more gardening, hunting – or both?

I will let people know after the first of the year.

Why wait? I’m very busy being governor. I mean, that’s the way I view it. I think people know that. I stay focused on the governor role as much as I can. I don’t want people to believe I’m diverted onto the campaign until it becomes relevant.

We’re always going to do more gardening than hunting. What we sort of had done is scaled hunting back to a very small percentage. And you should always be gardening first. We haven’t walked away from that at all. In fact, we’ve enhanced programs. A couple of partnerships that I’ll mention are the Goldman Sachs 10,000 Small Businesses program [that committed $15 million to small business lending through two programs in the Detroit area] and the Huntington Bank microloan program [that aims to make available up to $250 million in microloans statewide]. Those are very consistent with gardening. What I would say is that now we’re in the hunt to hunt.

You’ve spent a good portion of the last three years operating as a turnaround guy, fixing problems and working on customer service. At a certain point, though, you’ve got to stop being a turnaround guy and start being a growth guy. What do you see for the next five years that takes the state on the growth path? Well, I’ve been in growth companies, too. Gateway was a growth run, and I like it. But you’re right, there is a different set of skills and an approach to it. Two or three things. One is I’ve talked about the need to continue on the ‘more and better jobs’ path. And not just using incentives because I want a competitive playing field that’s as good as possible for people.

So it’s a broadening of the focus from just looking to grow companies within the state.

Give us an example. One huge thing that’s working well is Pure Michigan Business Connect. That program has gone better than I think most people have expected and the benchmark is really DTE and Consumers — our two original (companies) signing up for it. [Editor’s note: The two companies in 2011 agreed to procure $500 million in goods and services from in-state companies over five years, but two years in, they increased the commitment to $2 billion.] Roughly for every $200,000 (they spend with companies based here), that’s another job in Michigan. That’s just those two companies. And then you’ve got the Big Three signed up, (and) we’ve got a number of other companies signed up. That’s really cool. That’s not about us spending money. It’s about us really facilitating good neighbor policies. So that’s exciting.

What else? The second part ties into helping people connect to careers. If you go to the business community … (their) greatest long-term concern (is) about having the right talent. Many of these organizations are more sophisticated and require more specialized skills. And those skill sets are retiring or they’re evolving where they need them. So, we’re being very proactive. I want to lead the country in that particular area.

What types of actual programs are you talking about? A great illustration of a program that I’m very excited about is in its pilot this year with about 30 or so students. (It is called) MAT2 – Michigan Advanced Technician Training. (It) goes back to a trade mission. I did this consciously: I went on this trade mission and besides building (business) ties, I went to say, ‘Can’t we swipe the German apprenticeship model?’ A very technical term: swipe. (Laughs.)

Governor, we don’t swipe ideas, we borrow best practices. (Laughs.) Yeah. So we went to two places – Brose and Daimler, in particular. They were actually great about partnering, so we’ve brought that back. It’s at Oakland Community College, Henry Ford Community College, and we’re doing it in mechatronics, which is mechanics and electronics. Those are the people operating sophisticated robots or CNC equipment – very skilled work. You go in the program, (and) you work for the company while you’re in the program. You get an associate degree paid for during the program. If you’re successful at the end, you have a guaranteed job and you have a work commitment for a couple of years. … This is a really cool opportunity to do something that is relatively unique.

You mentioned manufacturing. During the downturn, you talked about diversifying the economy, but it seems most economists believe that our recovery has been based primarily on manufacturing. How do we continue to make those moves to diversify? It’s not so much changing the portfolio as it is growing the pie. Let’s keep on growing the pie and if a good chunk of that is in manufacturing, I’m not going to complain about that. That’s a good thing. If you look at it and you pick some of our bigger industries, it’s not just been a resurgence of autos, which is very strong and we should be happy with that. Pure Michigan is a Visit www.mibiz.com

great illustration. That’s an area that (has) done very well in the last two or three years. They continue to show outstanding results in terms of the tourism and leisure industry. Agriculture is a great case. We had a tough time last year because of some of the weather issues and some of the crops, but if you want to see a happy group and you don’t normally see smiles, go talk to a bunch of farmers. The export opportunities and the valueadded processing that we can continue to do is very strong.

As governor, you’ve championed customer service and transparency. In looking at the state’s dashboard today, we saw a lot of thumbs up, but we also noticed that some of the data was fairly old. You were a VC and a corporate guy at a public company. We’re curious to know: Would you consider doing a quarterly conference call like public companies do where you talk about the state’s financial results and its operational progress? Um, I would consider it. That’s an interesting idea. You’re the first person to bring that up. … I used to do those calls.

Sure, Gateway was a public company. Why don’t governments do quarterly earnings releases and conference calls? They don’t even do dashboards. Typically, politicians don’t want to be measured. When I did my first dashboard in the State of the State, the main feedback that I got was that I was nuts. People would come up and say, ‘Why in the world would you want to be measured?’ It’s like, no: How do you know if you’re succeeding if you aren’t measured?

You’re the CEO and your treasurer is the CFO. It seems like a quarterly call might interest a lot of people. We might even be able to get Seeking Alpha to transcribe it. The one concern and the one issue I have on that – because I do appreciate that (suggestion) – is that you brought up the biggest challenge. In an organization and in a company, you have viable, more real-time results. And the problem on many of these metrics is they lag one to two years in terms of the data points and in terms of what’s presented at the national level or how you can benchmark other places. That’s something I learned by actually starting this process. I’ve got another set of metrics that might be worth sharing, but they’re sort of leading indicators on what will eventually show up in those numbers.

Absolutely, but you have to admit that profit-andloss statements, balance sheets and cash flow statements are generally accepted as viable metrics for measuring progress. Yes. But to be open, most people don’t care about the cash flow and metrics of the state during the middle of our budget year.

(During my first year in office) I did not do national interviews. I didn’t do that for two reasons: One is politicians talk too much. The second piece is, when you’re 50 out of 50, for you to go out and say you’re going to do a whole bunch of stuff, no one will believe you. My view is let’s go do this stuff for a couple of years. Now, we have a track record. When we say something, I hope people look at our record (and) that we will get a high degree of confidence that a chunk of that is going to get done.

It’s been a year since Right to Work passed and about nine months since the law took effect. Have jobs been created in Michigan because of it? I think we’ve seen some jobs. But the bigger benefit is the pipeline is filling up. It’s really a pipeline question. Previously, Michigan was sort of disqualified because there was this screen that people went through to say, ‘Are you going to consider Michigan or not when you look at opportunities?’ We were screened out. … The point is, now we’ve changed those boxes from Xs to check marks. Now we’re seeing our pipeline fill up a lot more. I couldn’t tell you a jobs number today. Secondly, to say it’s solely because of Right to Work — that’s a tough one. But are we getting a lot more consideration, is the pipeline filling up a lot more? The answer is absolutely yes.

Going into 2014, what’s your message to our business readers? We’re going to continue (working) hard on making Michigan the most competitive environment possible. Our role is not to create the jobs. That’s up to our great small- to medium-sized business people who are a core of that job creation. Our goal is to create the most competitive environment, the best playing field possible for that.

Sure. How can you do that? I’ll give you two illustrations that I don’t get to talk about very often. A great one is on workers’ comp. We did reforms. For the last three years, when you look at pure premiums, the base rate … has come down 7 percent a year in each year. So we’re down about 20 percent, where a number of the surrounding states have actually had increases. So that’s really cool. (Secondly,) our unemployment insurance system was a mess in terms of owing billions of dollars to the federal government. And because of reforms and the bond issue and the other things we’ve done and the recovering economy, you’re going to see a lot of businesses in ’14 hopefully have a reduction of … about a percentage point in their unemployment insurance rate. You add those things together, that adds up. That’s not turnaround stuff as much as it’s just this continual ‘how do you create this opportunity for growth?’

Last thing, Governor. The personal property tax repeal is a huge issue for our readers. What are you going to do to make sure the personal property tax reform measure passes? That’s a big deal. Well, we’re going to get out (the vote). In 2012, there were six ballot proposals and we went five for six. … We’ve got a pretty good track record of supporting things we believe in. (Laughs.)

So you’re going to make it happen? We’re from a business publication, so our readers are always interested in things like that.

That’s not on theory. We’ve got a track record now, right?

I know. (Laughs.) I’ll look at that. I think that’s an interesting idea.

Interview conducted and condensed by Joe Boomgaard and Brian Edwards. PHOTOS BY JENA McSHANE

Special Year-End Edition: MiBiz Crystal Ball 2014 / DECEMBER 23, 2013

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CRYSTAL BALL

JOSH SZYMANSKI Vice President of Business Development Triangle Associates Inc. Grand Rapids

Triangle expects the K-12 building market to be a major component of how the firm builds its backlog over the next year. As clients “catch up” on projects that were delayed or scrapped over the last five years, leadership at Triangle is anticipating a steady supply of opportunity in 2014.

“Our ability to maintain a lean overhead structure and competitive wages while providing excellent client service is a key focus. As contractors and subcontractors enjoy an uptick in business, staffing levels continue to reflect the wariness to add full-time permanent staff. The current market continues to demand that we find ways to meet high expectations at very competitive costs. The availability of experienced staff both in management and in skilled trades developed as a factor in 2013 and will continue to require a vigilant approach next year as the backlog improves for most firms. We continue to see improvements across all of the market segments we serve in the building construction industry. On a regional level, multifamily and urban housing availability and industrial lease space availability continue to drive development and produce construction backlog. Our commercial and retail customers remain profitable and are rolling out multi-year growth plans generating additional construction work in 2014 and beyond.” PHOTO: KATY BATDORFF

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DECEMBER 23, 2013 / MiBiz Crystal Ball 2014: Special Year-End Edition

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Special Year-End Edition: MiBiz Crystal Ball 2014 / DECEMBER 23, 2013

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CRYSTAL BALL

JONATHAN SIEBERS Attorney Smith Haughey Rice & Roegge Grand Rapids

PHOTO: KATY BATDORFF

Ahead of the expected “flurry” of activity in the small and lower-middle market as baby boomers look to exit or transition their businesses, Smith Haughey plans to add at least one staff member next year to its M&A practice, Siebers said. While he expects that the wave of transactions could be a few years away, “you never know” whether or not 2014 will be the year that the rush of activity first appears.

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DECEMBER 23, 2013 / MiBiz Crystal Ball 2014: Special Year-End Edition

“My best guess on the economy as a whole is that 2014 will look much like 2013. In other words, we will see growth, but it will be slow. My practice is focused on commercial real estate and small and lower middle market M&A and debt and equity transactions. My real estate clients, which include a mix of owner-occupied businesses, developers, retail, office and industrial tenants, and lenders, have ramped up their activity significantly in the last two quarters of 2013. I expect that to continue well into 2014. Some of the development work I am handling right now will continue into 2015 and beyond. On the M&A and debt and equity side, I believe we will see a steady but not significant amount of activity in the first quarter of 2014, with an increase in activity in the second and third quarters. This would mirror 2013. However, a huge number of businesses owned by baby boomers will need to be transitioned in the coming years, and I believe at some point we will see a huge upturn in M&A activity with respect to small and lower-middle market companies. Whether that dam will burst in 2014, I cannot say, but it has to burst in the next few years as boomers age.”

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Special Year-End Edition: MiBiz Crystal Ball 2014 / DECEMBER 23, 2013

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CRYSTAL BALL

LARRY HINES President Hines Corp. Spring Lake

Hines was instrumental in the launch last February of the Muskegon Angels, an angel investment group with an initial $550,000 fund to support local startup companies. His family-owned Hines Corp., an industrial holding company, employs about 700 people across North America.

“Hines Corporation is planning on modest growth in the economy during 2014. Our best guess would be in the 2 percent to 3 percent growth range for GNP. This assumes no major change in direction or approach on the part of the current administration. As the Affordable Care Act kicks in, this could drive growth to the low end of the projected range. If the Affordable Care Act should be delayed for a year or so, we might see growth move toward the top of the range at 3 percent. If the administration, along with Congress, came up with a budget-balancing solution, which makes good business sense, I think growth could move up to 3 percent to 5 percent. Business leaders are prepared to invest for additional growth if they feel comfortable with the future direction of our country. We need 4-percent-plus growth if we wish to put our citizens back to work.� PHOTO: KATY BATDORFF

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DECEMBER 23, 2013 / MiBiz Crystal Ball 2014: Special Year-End Edition

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Special Year-End Edition: MiBiz Crystal Ball 2014 / DECEMBER 23, 2013

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LA JUNE MONTGOMERY TABRON President and CEO W.K. Kellogg Foundation Battle Creek

COURTESY PHOTO

Having joined the foundation at age 24 and having risen through its executive ranks, Tabron brings plenty of institutional knowledge to the position of CEO, which she will assume on Jan. 1. Her top priority: supporting our nation’s underserved children so they have access to opportunities and the chance at a strong future.

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DECEMBER 23, 2013 / MiBiz Crystal Ball 2014: Special Year-End Edition

“The W.K. Kellogg Foundation is pleased to see continued, albeit slow, economic growth across the country, particularly in our home state of Michigan. … Michigan has been a priority place for WKKF for more than 80 years, with nearly $200 million currently working to improve lives across our home state. If Michigan is to become the comeback state, it demands we leave no one behind. … According to census data, the state’s poverty rate hovers just over 17 percent. Poverty rates for Blacks and Hispanics are more than double that at 39 percent, and the childhood poverty rate in Michigan is 25 percent, affecting roughly one out of every four children. … Despite these difficult economic times, the commitment of Gov. Snyder and the Legislature to expand access to early childhood education, providing Michigan’s four-year-olds with access to quality early education opportunities through the expansion of the Great Start Readiness Program (GSRP), will lead to putting more of our vulnerable children on the pathway to success. We applaud Gov. Snyder’s commitment to expand GSRP further by doubling last year’s investment. This is an important and essential first step in ensuring that all children have a fair chance at success in school and life.”

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Special Year-End Edition: MiBiz Crystal Ball 2014 / DECEMBER 23, 2013

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RICK BREON President & CEO Spectrum Health Grand Rapids

The federal Patient Protection and Affordable Care Act is the main issue for health care providers today. Spectrum Health continues to adapt to the law, which Breon says means “doing more with less.”

“People are going to ask for more access, they are going to ask for how do you manage patients more effectively, how are you more accountable. How are you going to do all that, probably with less reimbursement than we are getting today? … For us, it’s really about several things we’re doing to respond to it, whether we are transferring the model of care or better coordinating chronic disease care — or whatever we are looking at. Being able to work with ambiguity is going to be important for us. … Peoples’ reaction to the Affordable Care Act and the anxiety that it’s causing people (may bring surprise in 2014.) They either have one of two reactions: They either are paralyzed and do nothing, or they are in a hurry to do something, they’re just not sure what it is. I don’t think people think that out and plan solid(ly) enough. I think what you’re going to see are some interesting working relationships being developed that may not have happened without this legislation.”

COURTESY PHOTO

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DECEMBER 23, 2013 / MiBiz Crystal Ball 2014: Special Year-End Edition

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Special Year-End Edition: MiBiz Crystal Ball 2014 / DECEMBER 23, 2013

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JOHN WHEELER Vice President of Business Development Orion Construction Grand Rapids

MIBIZ FILE PHOTO: ELIJAH BRUMBACK

Orion Construction officially launched Orion Real Estate Solution (ORES) earlier this year. The new initiative offers a suite of services aimed at helping clients with property acquisitions, project financing and host of other pre-construction functions. The firm also inked a partnership with Detroit-based Walbridge Construction, a global, privately owned construction firm. For 2014, Orion is planning to hire more talent and grow revenue by 25 percent.

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DECEMBER 23, 2013 / MiBiz Crystal Ball 2014: Special Year-End Edition

“As a contractor/developer, I see great opportunity in the coming year for the built environment. Though some lenders are cautious in our industry, we should see available bank lending, low interest rates and a pent-up demand for quality, market-rate housing. We want to focus some energy in this direction in 2014. I believe our industry will continue to evolve at a rapid rate and that we’ll need to utilize new services, joint ventures and new technology in order to best serve our clients. I foresee opportunities to grow in our hometown and create optimism in the community through some key projects kicking off next year. A lot of what happens to our local economy has to do with how hard we’re willing to work and learn through the evolution in our industries. … I could see Grand Rapids becoming one of the largest attractions for young business professionals in the Midwest due to our city’s initiatives, job opportunities and universities.”

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CRYSTAL BALL

TED LOTT Co-founder and Principal Lott3Metz Architecture LLC Grand Rapids

After its involvement in a handful of high-profile projects including the Kendall Building and the Fulton Street Farmers Market, the Grand Rapids-based architecture firm Lott3Metz is rethinking its marketing strategy, Lott said. Externally, he says he is looking for an honest effort from state government to understand what cities mean to Michigan’s economic vitality.

“I feel very strongly the state needs to take a realistic and adult view of what cities as economic engines mean to the state of Michigan. The idea of revenue sharing is really just a symptom of 50 years of state divestment in cities. So much of that is rooted in battled, personal vendettas from a lot of different people for a lot of very different reasons, some specifically directed at Detroit, which to some extent has caught Grand Rapids in the fallout. I wouldn’t say to (Gov. Snyder), ‘Give us all the revenue back,’ but what the state can do is provide enabling legislation to the cities that would allow us to make the infrastructure improvements that Grand Rapids wants to make that we can’t locally fund right now. Give us the ability to raise those funds ourselves. That’s a core issue. Transit is a perfect example. The only way to do that right now is through property taxes, and that is a very blunt instrument that falls disproportionately on residents in the city when we’re really a regional concern.”

PHOTO: ELIJAH BRUMBACK

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Special Year-End Edition: MiBiz Crystal Ball 2014 / DECEMBER 23, 2013

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PHIL HARBERT Regional President Old National Bank Kalamazoo

PHOTO: ERIK HOLLADAY

Even as the region fares better than a few years ago, Harbert continues to hear lingering concerns about the economy, including the U.S. unemployment rate. As the new year dawns, he says plenty of questions remain about the economy, how it will affect business decisions, and what will happen in Washington, D.C.

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“There remains a high level of uncertainty as to the economy, which may also be a reflection of the issues that remain front and center. Businesses and consumers react better when they know what to expect in the near future. The Affordable Care Act, the debt ceiling debates, tax policies, government regulations and many other issues create concerns for businesses and individuals. Those concerns may limit their borrowing or spending for new business equipment, (and) building and business expansions, all of which may impact future job growth. … Individuals may also tighten up their personal budgets because they are not sure what the future holds for them and their families.”

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Special Year-End Edition: MiBiz Crystal Ball 2014 / DECEMBER 23, 2013

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CRYSTAL BALL

JOHN KENNEDY President and CEO Autocam Corp. Kentwood

MIBIZ FILE PHOTO: JEFF HAGE

With Autocam, Kennedy has helped build one of the few supplier companies that has successfully been able to span both the automotive and the medical device industries. He’s also suing the federal government over objections to the Affordable Care Act and its mandated coverage of birth control.

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“I expect our economy to experience slow growth caused by a relatively high unemployment rate, and an even higher under-employment rate. I am concerned many college graduates are only able to find jobs that don’t require a college degree. Hiring people into part-time and low-wage work is not a sustainable growth model for our economy. Also, I think there’s a lot of uncertainty among consumers because they don’t know what they are going to end up spending for health care, so they are wary to spend money in other areas. Overall, the economy will continue to grow, but it will be slow. On the positive side, demand for environmentally sustainable products has skyrocketed, which makes Autocam well-positioned in the automotive market. We’ve been investing in fuel system technologies that are more efficient and cut down on gasoline consumption. Those investments are paying off as we experience high demand for our product. In addition, there is a lot of pent-up demand for cars because consumers were holding on to cars that they might have gotten rid of sooner if it hadn’t been for the recession. There have been a few years recently where the scrap rate for cars has outpaced the production rate, which could lead to a year of strong car sales. Unfortunately, the continued lack of consumer confidence will limit this growth.”

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Special Year-End Edition: MiBiz Crystal Ball 2014 / DECEMBER 23, 2013

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CRYSTAL BALL

DAVID ROSEN President Kendall College of Art & Design Grand Rapids

This fall, Kendall College of Art & Design merged with the Urban Institute for Contemporary Arts. Rosen helped write the business plan that showed how the UICA could become a self-sustaining enterprise within the next three to five years by focusing on improving its operations and adding programming — rather than on struggling to keep its doors open as a standalone nonprofit organization.

“The economic conditions for 2014 are right for growth that is favorable to West Michigan … [but] I worry that we … will not act with the insight, speed and determination necessary to take advantage of our situation. Most of all, I worry that we will try to meet current need with short-sighted, short-term and superficial solutions. Standing on the cusp of deep change as a region, country, and world, we need to think beyond the ordinary, act beyond the usual, and embrace our moment, even if it is outside our comfort zone. We won’t get another chance. … KCAD, like any educational institution, has a responsibility to help its region achieve its potential. In 2014, we will launch a Master of Architecture, a professional degree program, the first in a region that strives for pre-eminence in its built environment. We also plan initiatives to foster growth in the apparel and media sectors and in the use of design thinking as a tool in education, business and all human enterprise. In addition, we will enter into regional, national and international partnerships that will grow talent here and bring talent to our area. Our job is to create a vibrant, prospering community that will continue to attract and develop talent and business.” COURTESY PHOTO

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Special Year-End Edition: MiBiz Crystal Ball 2014 / DECEMBER 23, 2013

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CRYSTAL BALL

SAM CUMMINGS Managing Partner CWD Real Estate Investment Grand Rapids

For Cummings, 2013 was a year of witnessing work from the past 25 years finally coming to fruition. With a handful of property acquisitions, tenant build-outs and downtown renovation projects, CWD’s partners continue their focus on suburban retail and urban office mixed-use developments. With expectations for growth, the firm plans to hire, increase marketing and offer new services in 2014.

“We are West Michigan ‘environment providers’ and our focus is on retail and urban office and mixed-use, and we are witnessing extraordinary momentum in both of these historically underserved submarkets. We are incredibly enthusiastic about the future of our great city and its urban core. As a community, we have been collectively dedicated to its revitalization for more than 25 years, and we feel as if all of those efforts are beginning to pay off right now. But that is not a reason to take our collective foot off the gas. We are thrilled with new demographic data and hiring trends that support lifestyles and employment closer to population centers and nearer to existing infrastructure. This just makes sense for many reasons, not the least of which is operational efficiency.”

MIBIZ FILE PHOTO: JEFF HAGE

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CANDACE MATTHEWS

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Chief Marketing Officer Amway Ada

COURTESY PHOTO

Each of Amway’s 10 top markets grew in 2012, helping drive global sales of parent company Alticor to $11.3 billion, a growth of almost 3.7 percent. As CMO, Matthews heads up Amway’s marketing strategy and serves as one of the top advisers to leaders Steve Van Andel and Doug DeVos.

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“The global economy continues to present opportunities for entrepreneurs everywhere. The entrepreneurial spirit transcends borders and cultures, as we found recently with our Amway Global Entrepreneurship Report, which explored the appeal of business ownership in 24 countries. More than two-thirds of those surveyed have a positive attitude toward entrepreneurship and nearly half can imagine having a business of their own. People are motivated by a desire to control their time and future, setting their own hours, goals and priorities. This is good news for Amway. Thanks in large part to the hard work of our Amway business owners, our parent company has grown 12 out of the past 13 years. We’re in the midst of a seven-location, $375 million manufacturing expansion to meet growing customer demand for our nutrition, beauty and home products worldwide. This includes a new Nutrilite tablet and capsule manufacturing facility in Ada that will be operational in 2015. Everything Amway does, from developing innovative brands and products to opening business centers around the world, is in support of millions of Amway business owners in their own communities. It’s a ripple effect that starts right here in West Michigan and expands to more than 100 countries and territories around the world.”

Special Year-End Edition: MiBiz Crystal Ball 2014 / DECEMBER 23, 2013

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JUDY BROWN Chief Financial Officer Perrigo Co. Allegan

MIBIZ FILE PHOTO: KATY BATDORFF

Perrigo Co.’s business model works well in an up or down economy, so no matter which direction the U.S. economy heads in 2014, the Alleganbased producer of lower-cost over-the-counter medications is ready for it, according to Brown. It’s a matter executing the company’s strategy, she said.

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“My perspective is that [the economy in] 2014 is going to continue to plod along similarly to how 2013 has developed. There are some signs of weakness still in the economic environment, and I think some of the factors that are going to be influencing the debt markets and with fiscal policy are going to continue to have constraints. While there’s some consumer optimism that you see a little bit on the retail shelves, I think this holiday season is going to be a really big indicator on how 2014 is going to take off, and then you have some ups and downs from some uncertainties in the lending markets. … The one thing that’s wonderful about our business model is that when the economy is growing and people are shopping, and they are investing in their own health and wellness, our business model works well. When the economy is sluggish and even slow, and they are looking for ways to save money, it’s even better for our business model. Either way, with new product launches that we have coming up, the acquisition that we’ve just done with Elan, we look at 2014 very optimistically and feel pretty good, even with the blah outlook for 2014 relative to 2013.”

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Special Year-End Edition: MiBiz Crystal Ball 2014 / DECEMBER 23, 2013

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CRYSTAL BALL

BILL MANNS President Mercy Health Saint Mary’s Grand Rapids

Given all of the upheaval and change occurring in health care today, the best thing hospitals and health systems can do is to get lean, said Manns, who became president of Mercy Health Saint Mary’s last summer. He believes that continuing to adopt lean operating principles long used in the manufacturing sector will help health care providers adapt to the changes that will continue in 2014, and to differentiate themselves in the marketplace.

“The health care industry will continue to experience a rate of change that is unprecedented. Health care organizations that are agile will have a distinct advantage over those that are mired in bureaucracy. I predict that those organizations that are on their lean journey will widen the gap in the areas of quality, safety and cost between themselves and their peers who have not embraced lean as a management philosophy. … We need to ensure that we are delivering services to the customers in a manner that they consider valuable, (and) technology will play a role in allowing us to deliver services in a way that we have not done in the past. … I believe health care professionals are underestimating the disruptive power of the technology that many patients will soon have at their disposal. As patients assume more financial responsibility for their own care, there will be a marked shift in utilization, and this will have a ripple effect on providers. Mercy Health Saint Mary’s is poised to take advantage of many of the impending changes. We are big enough to have the latest technology and attract the best physicians, and we are geographically diverse enough to allow patients and customers to easily access that expertise in their own neighborhoods.” 28

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DECEMBER 23, 2013 / MiBiz Crystal Ball 2014: Special Year-End Edition

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Special Year-End Edition: MiBiz Crystal Ball 2014 / DECEMBER 23, 2013

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THOMAS KYROS

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Executive Partner Varnum LLP Grand Rapids

COURTESY PHOTO

What’s good for the economy and for Michigan’s economic rebirth is also good for business at Grand Rapids-based law firm Varnum LLP, Kyros said. As economic conditions continue to improve, he expects the firm will see more business resulting from the better entrepreneurial climate in the state.

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“A significant part of the new economy is being shaped by entrepreneurs starting their own businesses, and we’ve been lucky to have a front-row seat to this phenomenon through our MiSpringboard program. Many of the clients we have helped through MiSpringboard are software-as-a-service companies, and we know that area will continue to see significant growth in 2014 and beyond. … We’re working with some amazing clients. … The excitement and passion they have for creating a new economy is invigorating. … (Additionally, the firm) plans to grow in size, particularly in the Detroit area, most likely by opening a second office there within the next couple years.”

Special Year-End Edition: MiBiz Crystal Ball 2014 / DECEMBER 23, 2013

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TOM WELCH

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President & CEO Fifth Third Bank, Western Michigan Grand Rapids

COURTESY PHOTO

Welch agrees with economic outlooks for higher U.S. GDP growth in 2014 that will bode well for Michigan’s economy, particularly manufacturing, exports and tourism. There are, however, what he calls some wild cards for the economy next year.

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“Potential negatives are mostly around policy — fiscal, monetary and health care. We just don’t know how much the implementation of the Affordable Care Act will affect the local and national economy. We believe in the resiliency of businesses, but understand the challenges that changes in policy may bring to all of us in the region as the year progresses.”

Special Year-End Edition: MiBiz Crystal Ball 2014 / DECEMBER 23, 2013

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MIKE VANGESSEL CRYSTAL BALL Chairman and CEO Rockford Construction Co. Grand Rapids

COURTESY PHOTO

While Rockford has seen plenty of success in its first 26 years, VanGessel is focused on the next 26 years and isn’t about to let the company rest on its laurels. That has the CEO thinking about how the firm can continue to innovate in the industry and further support its in-house talent.

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“I truly believe we are building for a changing world, and our services and culture need to respond to the challenges and opportunities our clients face. If we are able to stay ahead of those changes, Rockford will be poised for a great 2014. Our greatest challenge will be to re-imagine how buildings are designed, constructed and operated to support a rapidly changing world. People live and work differently than they did just a decade ago. The built environment has to adapt to changing needs and expectations, including technology and sustainability. For Rockford, 2014 will bring strategic partnerships, products and services that will help our clients respond to these challenges. I am optimistic about the economy in 2014. The entrepreneurial spirit of our region, combined with pent-up demand for different kinds of housing, hospitals, schools and businesses will drive growth.”

Special Year-End Edition: MiBiz Crystal Ball 2014 / DECEMBER 23, 2013

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GREGORY IOANIDIS

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President ITC Michigan Novi

COURTESY PHOTO

ITC continues to rebuild its electric transmission lines across the state, pouring approximately $3.2 billion into upgrades in Michigan and other Midwestern states since 2003. For 2014, ITC continues the largest infrastructure project in its history and hopes in 2015 to complete construction of the Thumb Loop, a 140mile transmission line on the east side of the state.

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“While the economic downturn, combined with demand response efforts and energy efficiency programs, have subdued peak load growth, investment is still needed in the Michigan transmission grid to replace aging infrastructure, improve reliability, increase the economic efficiency of the transmission system and connect new generation resources. We estimate that the construction phase of (the Thumb Loop) project alone will have an economic impact to Michigan of $366 million, including but not limited to employment of local contractors, vendors and suppliers. And while ITC continues to focus on investing in the high-voltage electricity transmission grid in Michigan and across our seven-state footprint, we remain in a strong position to add jobs. We applaud Gov. Snyder’s initiative on ‘readying Michigan to make good energy decisions.’ We believe the final reports, based on data gathered from statewide forums and public input on energy issues, will serve as an important database for the development of future energy policies for the state.”

Special Year-End Edition: MiBiz Crystal Ball 2014 / DECEMBER 23, 2013

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DEREK HUNDERMAN President Kerkstra Precast Inc. Grandville

Formerly an executive in commercial real estate, Hunderman made the transition to Kerkstra Precast in September after owner Greg Kerkstra decided to take a more “visionary” role as chief executive officer. With expectations for the construction industry to continue its recovery, Hunderman said Kerkstra Precast is hungry for growth in 2014, even as talent constraints remain a concern.

“We already see a very strong pipeline heading well into 2014, and there’s no indication this trend will change. The growth of our market does certainly create new opportunities to meet the stronger demand and open up existing capacity limits. For us, our primary capacity constraint is talent. We can find and buy equipment, locations and more space and will be looking to do so in the near future, but nothing is ever built or delivered without quality people at all levels. Finding and keeping high-caliber talent will be key in our goal of meeting the stronger demand in the marketplace. Our focus today and going forward will be in large part on talent retention and attraction.”

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MIKE FREED

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CEO Priority Health Grand Rapids

MIBIZ FILE PHOTO: KATY BATDORFF

Priority Health this year became the first health plan in Michigan to offer members access to Healthcare Blue Book, a web-based database that allows consumers to look up the prices for medical procedures and diagnostic tests and the quality of each care provider in the area. The hope is that members will use the site to choose the care provider that provides the best value. Come 2014, Freed would like to see transparency in health care become a larger priority in Lansing for Gov. Rick Snyder.

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“This is something we have kind of championed but we have been a loner in that regard. Meaningful health care transparency, we just think, is really important to engaging people in their health care, and engaging people in their health care is really important if we are going to transform health care in Michigan. That may be something we need a little bit of help with in terms of either encouraging or cajoling — I don’t know about legislating — and have the governor to champion. … We have a state where health insurance is pretty entrenched. Everybody knows the delivery system is pretty entrenched. If we really want Michigan to be different and to be healthier, and to be less costly … how do we prevent, in effect, the status quo from just maintaining itself?”

Special Year-End Edition: MiBiz Crystal Ball 2014 / DECEMBER 23, 2013

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RANDY RUA

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Founder and President Rua Associates LLC Zeeland

PHOTO: KATY BATDORFF

Rua Associates works on both the buy-side and sellside of mergers and acquisitions, primarily with small- to medium-sized manufacturers. His best advice for both buyers and sellers: Plan ahead to reduce the chance of surprises and setbacks in a transition.

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“We see financial statements for a lot of privately held companies in West Michigan and based on their performance for 2013 and the anticipated sales pipeline, we believe they will continue to grow. The current backlog and workload for manufacturing companies is very high, so there is significant opportunity for growth in that space. In regards to mergers and acquisitions, this will mean business owners will be able to sell their companies for more due to better utilization and margin resulting in increasing cash flow and the continuation of a positive revenue trend. Strategic companies have more cash on hand and will continue to pursue the acquisition of other companies aggressively to develop capacity and take market share. Lastly, there is good news for financial buyers as well, as banks are finally starting to use their excess capital and want to lend money for business transitions.�

Special Year-End Edition: MiBiz Crystal Ball 2014 / DECEMBER 23, 2013

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KENT RIDDLE CEO Mary Free Bed Rehabilitation Hospital Grand Rapids

As changes to Michigan’s no-fault auto insurance law remains on the legislative agenda for 2014, the Mary Free Bed Rehabilitation Hospital CEO hopes lawmakers can arrive at a final bill that works for everyone. A proposal considered in Lansing in 2013 would cap medical claims to auto insurance carriers from people injured in auto crashes. “We need evidence-based, balanced discussions about no-fault auto insurance. We can accurately frame the issue when we have all the facts. People don’t realize that general health care insurance often will not cover injuries sustained in motor vehicle accidents. Auto no-fault coverage has made extraordinary differences in many lives. Research shows the sooner vigorous rehabilitation is begun, the better and most sustainable a patient’s functional ability becomes. These improved outcomes reduce the level and cost of subsequent care.”

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DIANA SIEGER

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President Grand Rapids Community Foundation Grand Rapids

MIBIZ FILE PHOTO: ADAM BIRD

Sieger advocates that state government should consider reinstating the charitable tax credit for the Michigan income tax. It was a tool foundations and other nonprofit organizations used for years that “made a difference in the number of donations,” she said. Those funds are particularly important for community foundations, which use them to leverage government resources to serve the most vulnerable populations.

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“Philanthropy is critical to the growth and vitality of Michigan’s recovery. … We are seeing a strong uptick in donor interest, which is a relief from the years the nonprofit sector suffered during the recession. Contrary to the perceptions of many, the sector is strong — and remember that nonprofit organizations are corporations as well. Many practices and processes of nonprofits rival those of for-profit businesses. This is necessary in terms of sustainability and long-term growth to meet the many needs of people in our community.”

Special Year-End Edition: MiBiz Crystal Ball 2014 / DECEMBER 23, 2013

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MANUFACTURING ROUNDTABLE

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Manufacturing executives discussed talent constraints and how they’re operating in an increasingly uncertain business climate at a recent MiBiz roundtable discussion hosted at The Right Place Inc. Participating in the discussion were (clockwise from upper left) Kevin O’Brien of Pridgeon & Clay (white shirt), Rob Nesky of Keystone Solutions Group, D&M Metal Products’ Bob Buist, Bill Small of MMTC-West and The Right Place, Steve Beurkens from Major Polymers Distribution, Tim Mroz of The Right Place, Steelcase’s Mary Ellen Mika, Mark Lindquist from RapidLine, Nick Manes of MiBiz, Rick Mellema from ESCO Group and MiBiz’s Joe Boomgaard. PHOTO: KATY BATDORFF

Facing workforce constraints, manufacturers say they’re being more selective of customers Flexibility, mitigating uncertainty among keys to growth

How are manufacturers handling health care costs and the unknowns associated with the implementation of the Affordable Care Act (ACA)?

By NICK MANES | MiBiz nmanes@mibiz.com

NESKY: We are directly impacted in at least two ways. Aside from obligations to provide health care for our employees, we are coming under increased regulation from the Food and Drug Administration. (Keystone is a developer of medical devices and is a member of the West Michigan Medical Device Consortium). Everyone we interact with is in a state of unknown. … It used to be pretty clear who was paying for things. Nowadays, you don’t know who your customer is. Keystone’s customer base could be the end user, it could be the government, it could be the organization they are consulting for, or all of the above.

espite positive projections for the coming year in terms of overall sales and growth, West Michigan manufacturing executives say they are feeling uncertain. Their concerns range from how the ongoing implementation of the Affordable Care Act (ACA) will affect their businesses to the squeeze for skilled workers and the forecasted capacity constraints in sectors such as the automotive supply chain. The result: When possible, they’re being more selective in deciding which contracts to sign and which customers to work with. MiBiz sat down with executives from a range of manufacturing sectors to find out what they’re watching and what could be keeping them up at night throughout 2014. Participating in the roundtable discussion were: ■ Steve Beurkens, West Michigan account manager, Major Polymers Distribution Inc. ■ Bob Buist, president, D&M Metal Products Co. ■ Mark Lindquist, president, Rapid-Line Inc. ■ Rick Mellema, vice president and CFO, ESCO Group Inc. ■ Mary Ellen Mika, manager, sustainability and energy supply chain management, Steelcase Inc. ■ Rob Nesky, director of sales and business development, Keystone Solutions Group ■ Keith O’Brien, vice president of global operations, Pridgeon & Clay Inc. ■ William Small, regional manager, Michigan Manufacturing Technology Center (MMTC) West Here are some highlights of the discussion.

D

MIKA: (From an employee perspective at Steelcase), we recently received a notice that said the projection was worse than the reality. We thought the costs would be higher than they were and the effect on employees is just a 1-percent increase. MELLEMA: We are right at the 45-employee mark. I’m consciously aware of the fact that (if we add) a few more employees, we are going to have to get into the government reporting and other obligations. But we have a union shop and they have a Taft-Hartley plan with the Michigan Teamsters. I’m not concerned about that because we locked in our rates when we negotiated for the next three years, so those regulations are their problem, not ours. But the other thing I am discussing with our insurance folks is a self-funded route. BUIST: We are right at that (50-employee) mark. Some weeks we are 51 or 52, and other weeks we are 48 or 49. What we have been confronted with is if we don’t stay above 51 employees over the next year (in a 12-month calendar period), our rates will go up 40 percent. … We have to figure out if we hire two people just to effectively have them stand there and then save hundreds of thousands of dollars. It’s ugly.

See MANUFACTURING ROUNDTABLE on page 38

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Special Year-End Edition: MiBiz Crystal Ball 2014 / DECEMBER 23, 2013

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ROUNDTABLE / MANUFACTURING Continued from page 37 LINDQUIST: We have been waiting for our quote for five months from the insurance company. Potentially our insurance costs are nearly doubled. That would be an extra $400,000 bill, if everyone signed up. The sense I have gotten, and I think it’s the crack in the Obamacare program, is that lots of young people are not signing up. I don’t think we will get the $400,000 mark. We will continue to do the self-insured thing, which we have done for a number of years. Hopefully, we will soon get an idea of what is going to happen there. O’BRIEN: At Pridgeon & Clay, we’ve got 850 employees in West Michigan and another 100 in Indiana. We are self-insured so there is less of an impact on us now. We have done surveys in the last 12 months to verify that they are actually married, that their children are actually their children. We found that 76 of our participants had people on the plan that shouldn’t have been on the plan. The big thing for us is that we actually reduced our health care costs on a per-participant basis by 3.68 percent over the last year. We’re really trying to focus on wellness programs and promoting that internally. … More for us though, the thing we are concerned about is whether the hours considered part-time are going to change or not. One thing (the government) is looking at is pushing that 29- or 30-hour mark up. For us, that would be positive. We employ a lot from local colleges, especially in our distribution center. Twentyyear-olds enjoy having an afternoon or weekend job and it’s a challenge for us to keep those hours at 29 hours or less. MELLEMA: (The ACA) isn’t really going to impact our business. It means that a few of us are going to be paying much more attention. We are going to make it work for us and for our employees. It is just one more administrative task we need to have smart people paying attention to.

It’s no secret that you’re all struggling with how to access a qualified workforce, particularly with skilled workers. How are you dealing with that? Everybody that I talked to over the last five or six years, whether it’s manufacturers or service-oriented companies, all say the same thing. Their biggest problem is finding people who want to work and finding people who are capable of working. Across the board, that’s what they will say. Out of 10 people that would apply for positions, only one of them you would even take a chance on hiring. BEURKENS:

SMALL: One company I’ve been working with is looking for 42 people right now, all skilled. We

are working with Michigan Works! and the community colleges and Ferris State University to just try and get the message out there and hold a job fair. In my career, for somebody to be looking for 42 skilled workers is unprecedented. It’s just one company and they are in Ionia, which is not like a Grand Rapids. They don’t have that base of employees. It’s tough out there. O’BRIEN: One out of every 10 resumes will actually turn into a reasonable hire and even then it’s a crapshoot if that person passes the 90-day mark. Plus the … training development process is so expensive and can be so detrimental with the mistakes an employee can make. … We can’t go through the recruiting and onboarding process and then find out that there was a red flag we missed. You cannot be wrong. We are measuring and using corrective action processes — like you would for defective parts going out of your business — for the recruiting process as well. If an employee comes in and doesn’t work out as intended, it is a full corrective action process of what went wrong so that we can learn from it.

In light of the workforce issues, what are your companies doing to train more workers? O’BRIEN: (Pridgeon & Clay) is starting to see an upswing in high schools and technical centers supporting shop classes and other programs to train students, particularly on the lakeshore. Schools are partnering with companies because the schools don’t have the funding for the equipment. (That training) is great because you (can pair up youths with veterans) and they get started at a young age. But you’re dedicating your resources to it … or you have to bring people on (and) that’s what they are specifically focused on. LINDQUIST: The skills have changed and machines are easier to work with. (Workers) are good with their thumbs (on a smartphone) but they’re not real good with a wrench. We have to deal with that new reality. We are trying to make it simpler for a person to walk in off the street and contribute. … Like many, we are training more than ever. We have a program where we send some of our employees to get associate’s degrees. I never envisioned I’d be doing the G.I. Bill at Rapid-Line, but I guess that’s what we are doing. It’s mostly out of self-preservation because you need fresh resources and fresh ideas. We have been continuously recruiting. It’s ongoing. We are also looking and always hoping to find Cinderella and then compromise for something less. The reality is we are just going to keep stealing back and forth from each other. (Laughs).

“One out of every 10 resumes will actually turn into a reasonable hire and even then it’s a crapshoot if that person passes the 90-day mark. … We can’t go through the recruiting and onboarding process and then find out that there was a red flag we missed. You cannot be wrong.”

— KEITH O’BRIEN, PRIDGEON & CLAY

Our challenge in contract manufacturing is that the bulk of the owners are 55 to 65 years old, so many of them are going to have to retire. Unfortunately, smaller is not better, so someone is going to come along and buy the business. They’ll have to consolidate and the business will have to get bigger and more sophisticated.”

— MARK LINDQUIST, RAPID-LINE PHOTO: KATY BATDORFF

How are your companies dealing with forecasting, whether in the short or long term? LINDQUIST: I see the furniture business going to, ‘Here’s an opportunity, do you want it or not?’ The new challenge is being able to react quickly enough to fill those needs. O’BRIEN: The one nice thing about the automotive business is you can anticipate your volume. It can always go (up or down), but you can plan for it within a range. But you’re still bringing on labor and equipment long before it is needed. The labor side of it can be six months. The equipment — based on launching the product and it having to go through validation — you have to onboard a year or a year and a half in advance before it actually gets put into production. MELLEMA: You can plan for the short- to midterm, but it’s your long-term staffing and capital equipment needs that are a challenge.

There is considerably more being asked of the furniture supply chain, from reporting to tracking the chemical composition of components. How are you dealing with those challenges? MIKA: I’m one of the people who asks all kinds of questions all the time of my suppliers. I’m constantly receiving emails from suppliers asking about conflict minerals (because they’re getting the same question from several customers). That is just one small issue. That’s not even talking about quality issues. So just the reporting, the administrative side and the technical challenges that (Steelcase) is requiring are big deals. LINDQUIST: I had never heard of ‘code of conduct’ or ‘conflict minerals’ before this. They’re the new reality.

How are you planning for growth in your industries? LINDQUIST: The challenge (with being a furniture supplier) is we are looking at the three Fs: fast, flexible and furious. A lot of the opportunities aren’t known today, as the OEMs scramble for new and different customers and new work. Who can react the fastest, get the customer satisfied and pull it off at the end? O’BRIEN: (Automakers’) programs have been delayed because there have been delays in product launches. I think there are 132 new product launches that took place this year across the OEs in the U.S. and I don’t think there is one that went off without a hitch. … I

just don’t see, as you’re launching that many new products, that you are able to grow the market. I think we are going to play in the 16.517 million mark. It’s not going to go any further north than that. NESKY: Countries like Korea and Taiwan are hubs for medical device manufacturing. Issues with quality and supply chain efficiencies, however, are making Michigan attractive for companies looking to retool. But that costs around $150,000. … The conundrum (is that domestic companies) own the product but they don’t own the tooling. As motivated as they are to on-shore and manufacture domestically, it always comes down to overcoming the retooling cost. … If somebody could figure out how to work with these companies to re-engineer and retool for a reasonable cost, I think over the next decade, there is an opportunity for Michigan to take on those types of things. Just within our small consortium of companies there are more than a handful of companies that are expanding and are taking a bullish look at the market and (looking) to continue to grow and put the capital in to support that growth.

How do you go about protecting against the downside? NESKY: We benefit by having things in the pipeline. We are a consulting business so we are similar to the construction business. If somebody comes to us and our pipeline is pretty full, we can quote a project fairly high. Then if we get it, sometimes we are happy, sometimes we are not, but we can also turn that pipeline back on fairly quickly. That is the advantage in our particular business. BUIST: We have to have capacity all the time because as close as we are to our customers, we are still seeing two to four weeks out. That’s our lead time. I could get a project dropped in tomorrow that I quoted six or eight months ago that no one was talking about and all of a sudden I’ve got four weeks of work and I’ve got a week to do it. We have to have overcapacity in our equipment. We have a project right now where we made the prototype three weeks ago and I have to ship on Monday. We quoted the project, we made the prototype and we launch. That is just how it goes. You run it for six weeks and you’re done — on to the next (project). If there’s not a next one, well that is why we have overcapacity because we know those things are going to happen. LINDQUIST: We run about 50-70 percent capacity so that you have the ability to surge when you need to. On the downside, we try

See MANUFACTURING ROUNDTABLE on page 40

PHOTO: KATY BATDORFF

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ROUNDTABLE / MANUFACTURING Continued from page 38 to run debt-free and keep the fixed costs at the very minimum. That way if you have to back up, which you unbearably do, you’re in (a position) to do that.

Given the concerns over capacity constraints, how do you control growth? MELLEMA: We can be discreet and pick and choose business. What we are doing is choosing to limit our revenue growth so that our infrastructure can support it. (That) allows us to be a little more selective on our margins and pick the jobs that fit us better before we really let the dogs loose. O’BRIEN: We have a choice on the contracts we can choose or not choose for future business. We are working on 2016 contracts right now, so that is the model year we are into. But most of us are in capital intensive businesses. Having assets sit and not be utilized 24/7 is not an advantageous way to run our businesses. But once you get past break-even, your choices are a little more in your hands for which business you accept or don’t accept. Still, it’s tough to sit and watch a $20 million asset sit and only be used 20 percent of the time. It is a lot of money sitting there depreciating.

What is the potential for M&A activity looking like in 2014? LINDQUIST: Our challenge in contract manufacturing is that the bulk of the owners are 55 to 65 years old, so many of them are going to have to retire. Unfortunately, smaller is not better, so someone is going to come along and buy the business. They’ll have to consolidate and the business will have to get bigger and more sophisticated. We are going to see a real consolidation as owners begin to retire. So you will see businesses that started out as mom-and-pop shops getting bigger, and they will have to decide if they want to grow through acquisition or not. O’BRIEN: Acquisitions are out there and at times, they are very affordable, but the challenge — as we have looked at several over the last 18 months — is deciding whether your organization is ready to take on something more. Many of the acquisitions out there are companies that are not in good financial position. So you can go grab them quickly, but do you have enough resources and depth in your organization to keep them running effectively? The depth you have really becomes the limiting factor to whether the acquisition will happen or not. The good part is that the banks are more than happy to lend right now.

“We have to have capacity all the time because as close as we are to our customers, we are still seeing two to four weeks out. That’s our lead time. I could get a project dropped in tomorrow that I quoted six or eight months ago that no one was talking about and all of a sudden I’ve got four weeks of work and I’ve got a week to do it.”

— BOB BUIST, D&M METAL PRODUCTS PHOTO: KATY BATDORFF

To what extent does the gridlock in Washington, D.C. affect your companies? BUIST: I think it’s just the frustration. After a while, it starts to wear on you. I think everyone is just frustrated. Just set the rules and leave them alone. That’s the biggest frustration I have. Every year there is something else and you have to change your business or find a new way to work within the system. We’re all just trying to make money and provide jobs for our employees and provide to our customers what they want. O’BRIEN: It is largely a non-issue but the uncertainty drives consumer confidence down. Consumer confidence is what we all rally around for our products to move into the market. … As consumer confidence improves, products move.

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HEALTH CARE ROUNDTABLE

CRYSTAL BALL

Health care execs optimistic ACA’s challenges can be met By MARK SANCHEZ | MiBiz msanchez@mibiz.com ssues ranging from managing the implications of the Affordable Care Act to ushering in a sea change in the economic model for health care weigh on the minds of industry executives as they prepare for 2014. One expectation: The traditional fee-for-service model will continue to be replaced by value-based contracting that pays hospitals and doctors based on quality, efficiency and patient outcomes. MiBiz sat down recently with a group of leaders to discuss what’s ahead in the new year. Despite the deep issues facing health care, all of them ended the hour-long discussion at the Alliance for Health offices voicing optimism for the future because they believe that the health care industry, after years of rising costs, is finally moving toward the right solutions. Participating in the MiBiz health care roundtable were: ■ Paul Brand, executive vice president, Alliance for Health ■ Pat Prichard, director of regional sales, Blue Cross Blue Shield of Michigan ■ Brian Peters, executive vice president, Michigan Health & Hospital Association ■ Kevin Splaine, president, Spectrum Health Hospitals ■ Randy Wagner, chief operating officer, Mercy Health Saint Mary’s Here are some highlights from the discussion.

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What are the biggest challenges and opportunities your industry faces in 2014? PETERS: Our member hospitals and health systems are dealing with what we call three mega-trends, and those are: • health care in Michigan becoming more atrisk from a payment perspective; • moving away from the old volume-driven, feefor-service payment model to a fundamentally different approach; and • health care becoming more integrated. We look at the integration of our hospitals here in Michigan and also the integration between hospitals, physicians and the rest of the care continuum eliminating those silos that have existed for so long, and there are many challenges that come along with that. And lastly, health care is becoming more transparent. We know all of the focus on hospital pricing and hospital quality — things that didn’t used to get a lot of attention and didn’t have a readily available mechanism for consumers and payers to compare “provider A” with “provider B,” or “treatment A” with “treatment B.”

Brian Peters of the Michigan Health and Hospital Association, top, and Pat Prichard of Blue Cross Blue Shield of Michigan, below, participated in the MiBiz health care roundtable that delved into the implications the Affordable Care Act will have in the coming year on businesses and health care organizations. PHOTOS: JEFF HAGE

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SPLAINE: The biggest challenge that we see is the brinksmanship that’s taking place at the federal level. As we go forward, what type of rogue waves are we going to see that we haven’t had the opportunity to plan for? A lot of what we are seeing now with respect to the (Affordable Care Act), we’ve had an awful lot of time to be able to plan how it is that we are going to transform our organization. Those rogue waves that come at us from that type of brinksmanship … really present the most challenges. From an opportunity standpoint, the entire health care economy is moving toward value, and we see that as a great opportunity. We see it as a good thing for the industry to have to differentiate itself based on quality and experience and cost.

WAGNER: This whole volume-to-value transition that’s occurring is a major issue for us in a couple of different ways. First of all, it’s requiring us to redesign the care delivery system — the care model — from a physician practice standpoint. How do they begin to look at managing the patient’s health and doing it in a way that avoids unnecessary emergency room visits, unnecessary admissions (and) being more aggressive in reaching out to the patient? (How do you manage) the whole concept of population health management and being more aggressive around a group of patients that represent 30 to 40 percent of the health care costs (through) 10 to 15 percent of the people? Managing those people in a better way and organizing the delivery model in a way that addresses that is critically important.

The thing that’s changing that is the reimbursement structure. Blue Cross has been a leader in encouraging physicians to look at a value-based approach and recognizing that and rewarding them for being more efficient in their practice. That whole transition is occurring and it’s being done in a backdrop that the Affordable Care Act is coming but not really understanding the magnitude that’s going to bring to us. Is it going to bring a 1,000 new people or 20,000 or 30,000 or 40,000 new people? And then understanding the access impact that it creates. Are we gearing up for a huge number of people or are we gearing up for steady growth and the need to have better capacity on the part of the physicians? BRAND: We’re redoing entirely how we finance health care in this country, so how we pay for the problem is a grave concern. … All of that consideration, from our perspective, pales when you consider the illness burden that is already present in our communities. Our people are getting sicker every year. There’s not enough money anywhere to pay for the illness burden

See HEALTH CARE ROUNDTABLE on page 44

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One of the hardest things to sort through today is the politics that surrounds the Affordable Care Act. It’s the law of the land.”

— KEVIN SPLAINE, SPECTRUM HEALTH

ROUNDTABLE / HEALTH CARE Continued from page 43

that we already face. So as difficult as issues like payment reform, system restructuring and transformation are, they pale to the fact that we have a much bigger problem in our population that we are not yet really focused on to really any significant degree.

How quickly do you see this economic shift occurring to a value-based payment model? How quickly does it need to occur? PRICHARD:

PHOTO: JEFF HAGE

I don’t think there’s a rush to it

(value-based contracting). I think that each hospital, physician group and system is different geographically and maybe in some of their needs. But as we move forward, that opportunity is there to collaborate and talk about this type of contracting (between insurers and care providers). I think it will just take its time appropriately. WAGNER: I don’t know if it can be rushed. There’s a lot of infrastructure and understanding in how the finances are going to actually work. What we’re talking about here is reducing the use of clinical services. That’s ED visits, fewer admissions to the hospital, fewer lab tests and radiology exams being done. That has a negative impact on the hospital’s revenue. It’s good for patients because it obviously provides a mechanism for them to be cared for in a much more cohesive and comprehensive way. But in this change in practice model and in reimbursement, how do we assure that all parties benefit from the activity? The hospital needs to have some mechanism for recapturing that lost revenue, either from larger groups of patients that we are caring for or some sharing in that premium dollar. Physicians are kind of in the same boat. Blue Cross has to have some benefit from this also. Everybody’s coming at it from a little bit different need, but understanding that it’s the right way to go. PRICHARD: We’re not totally going away 100 percent from fee-for-service and jumping all-or-nothing into value-based contracting. Fee-for-service isn’t going away anytime soon. There may be a hybrid of some sorts. That may be a way to still pay for services of some sort because it has worked for so long.

If you could make one change in the Affordable Care Act, what is it? BRAND: It should have required health systems be profitable or at least break even on Medicare. We would eliminate the costshift (to private payers to offset the losses on Medicare). We could make huge progress in efficiency because you’d have to mine out all of the potentially avoidable costs to get there, and that could be shared back with patients and health systems and employers who primarily pay the bills and put us on the right footing. SPLAINE: One of the hardest things to sort through today is the politics that surrounds the Affordable Care Act. It’s the law of the land. The present-day politics, I think, are sending messages that it can be reversed or will be reversed or won’t be reversed. The confusion … I don’t think is doing anyone any good with respect to understanding what it is that they’ll need to do as a business, as an individual, (or) as an industry. This is a complicated law that’s going to take an awful lot to implement and will be influenced through many, many ways. But the politics and the reversibility of it, I think, are really not helping anyone, and that is something that is within the control of our federal leaders to start working on behalf of the people which it’s intended to help. WAGNER: The act was ostensibly an insurance and a payment vehicle, and I was disappointed that there were not more aspects of the act that dealt with reducing the cost of health care. Blue Cross and Priority Health have done a good job in that regard. I think we missed a huge opportunity to start bending the health care cost curve. There was almost an absence of looking at ways to reduce the costs of health care in the act. That was a

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Our people are getting sicker every year. There’s not enough money anywhere to pay for the illness burden that we already face.”

— PAUL BRAND, ALLIANCE FOR HEALTH PHOTO: JEFF HAGE

missed opportunity. If we could get past the political stuff, it would make sense (to reopen the law). We’ve changed Medicare since ’65 hundreds of times. The same thing is going to have to happen with this act to improve it over time. As people learn from their experiences, it will have to be changed to improve it and make it more manageable going forward. PETERS: Lost in the conversation is that one element of the ACA is working right now exactly as it was intended, and not in a good way. Our hospitals have been taking very significant Medicare cuts that were part of the ACA. Our hospitals and health systems are being saddled with these potential Medicare cutbacks ostensibly to help pay for the coverage that is part of the Affordable Care Act.

What’s your advice for employers to better control their health care costs? PRICHARD: Regardless of the size, work with a health carrier like you would any other vendor that you do business with that shares your values, your mission — and I would say the same if you use an agent. Put

in a wellness program that makes (employees) more responsible for their health, and then you can play around a little with your deductibles and co-insurance and reward those people that are taking charge of their wellness. SPLAINE: A lot of the wellness programs that employers look at are optional. From an employer standpoint, not only make it not optional but invest in it, and invest in it in a way that really activates and engages people not just on the healthy exercise side of things but also so it engages people with chronic diseases to be more active in their own care. WAGNER: It’s all about creating a plan design that produces the incentives and the motivations, and uses that carrot, ultimately, to be healthy and to reward (employees) to be healthy in those endeavors. BRAND: I believe we need to move beyond wellness and to health-risk management. (Employers) need to apply the same principles of risk management that they use in other aspects of their business to their health care spend because it’s that unmanaged risk that’s really driving their spending.

Even with all of the changes, uncertainty and problems for the industry right now, are you pessimistic or optimistic about the future? BRAND: I’m very optimistic. We have our eye on the job and there’s a lot of talent being applied to it. We will get this job done. It will be ugly, it will be messy, it will be uncomfortable, (and) it’ll be difficult. This is our time, and this is our job to do it. PRICHARD: Optimistic. If you’re pessimistic, you shouldn’t be in this line of work.

We have an opportunity now to change the system and the incentives are moving in the right direction for us to do that, and we will figure this out. We’ll do a great job, the people will be cared for well, and we’ll be better off at the end of this than we are now.”

— RANDY WAGNER, MERCY HEALTH SAINT MARY’S PHOTO: JEFF HAGE

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PETERS: I am very, very optimistic about the future. The table has been set to allow for the right things to be done that in reality should have been done before. The politics, the economics, the dynamics in communities just didn’t exist before, and the stars didn’t align for the right things to happen. They’re starting to align now. I’m under no illusion that it’s going to be easy and there won’t be an awful lot of difficulty along the way, but at the end of the day, we’re moving in the right direction. SPLAINE: We’re looking at things from an optimistic standpoint because the incentives are now in place for us to really transform the care delivery system that we have and move it to a value-based system. WAGNER: The table’s been set for us. We have an opportunity now to change the system and the incentives are moving in the right direction for us to do that, and we will figure this out. We’ll do a great job, the people will be cared for well, and we’ll be better off at the end of this than we are now.

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CRYSTAL BALL

FINANCE ROUNDTABLE

Banking industry executives and advisers (l-r) Mark Martis of Grand River Bank, Huntington Bank’s John Irwin, Brett Bowman of BDO and Joel Rahn of Chemical Bank weighed in on the lending environment and a potential return to normalcy during a recent roundtable discussion. PHOTO: JEFF HAGE

Back to normal? Bankers see signs of improved business environment in 2014 By MARK SANCHEZ | MiBiz msanchez@mibiz.com ankers say they’re seeing greater confidence in the marketplace among business owners and consumers in West Michigan. In particular, manufacturing is hot right now and the housing market is coming back. They say 2014 could bring back the potential for a return of spec housing development. One banker even suggests a return to “normalcy” for an industry that was heavily battered by the Great Recession. Business and consumers, however, could pay higher interest rates for loans in the new year. The participants in the finance roundtable hosted by MiBiz at the offices of DWH LLC in downtown Grand Rapids also expect to see increased M&A activity in 2014 and more family-owned business transitioning from one generation to the next. Participants in the roundtable conversation were: ■ John Irwin, president, West Michigan region, Huntington Bank ■ Joel Rahn, regional president, Chemical Bank ■ Mark Martis, senior vice president and chief lending officer, Grand River Bank ■ Brett Bowman, CPA, an audit manager at BDO USA LLP who works primarily with financial institutions. Here are some highlights of their conversation.

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Give us a feel on what’s going on in the market right now. What do you see ahead for 2014? MARTIS: For most of the companies out there, for the most part, their balance sheets have begun to heal, and they’ve had some consecutive years of profitability. We still see where sales are down slightly in comparison to the peak, but they’ve changed how their business is structured and reduced their overhead, and are even more profitable than in the past, just on a lower overhead structure.

What we’re seeing on loan growth, the automotive industry is still pretty strong and the Big Three are back and the outlooks that are out there on the number of automobiles that are going to be sold look pretty solid. The other thing we’re seeing a lot of is there has been a real demand for housing. We’re seeing builders that are struggling to find suitable sites to build on, and I’m really curious to see where that trend is going to continue in 2014. Are there going to be banks that enter back into the residential plat development market or not? I haven’t seen a lot of that this year yet, but I just kind of wonder if there is going to be some speculation. It’ll be interesting to see which banks are willing to put their toe in the water first and how that’s going to work out. IRWIN: The confidence level of both consumers and corporations is improving, and when you start to get that sort of confidence, then

they start to think about where they want to do business in the future, whether it’s buying a home as a consumer or an expansion (of a business) or buying someone (another business). I’m sure all of the companies that survived during the downturn … have gotten very good at managing expenses. Their balance sheets have become fortified, individual consumers’ balance sheets are better and there’s less debt. You can see that in terms of credit card delinquencies and that sort of data. When that starts happening, there are so many positive factors and you start to get some momentum that people start to do things. Exports are getting better. You have the resurgence in manufacturing. You have housing starts that are improved. So you get this kind of momentum that people say, “Hey, there is time to take advantage of opportunities.” So I think we’re going to see more mergers and acquisitions of companies. They are looking at that as another growth target. They look to add an additional line or look for a company to buy. RAHN: You’re seeing (improvement in) the primary drivers — automotive manufacturing, office furniture, construction. In construction, we’ve seen an uptick in both residential and commercial. We’re fortunate in West Michigan that we’ve had commercial construction activity the last few years when

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ROUNDTABLE / FINANCE

Everyone’s starting to plan for the future again. We started to see a little bit of that in this past year.”

Continued from page 46 a lot of the state — a lot of parts of the country — haven’t. Now we’re seeing more depth in that commercial construction, and it’s in all sectors. And the homes are coming back, which is nice. BOWMAN: We work with a lot of financial institutions, and they’re really retooling. They come from a position where they constantly have been looking at their balance sheets and trying to improve asset quality, and now they’re switching and gearing over toward finding that loan growth. That’s really their next step. They absolutely have to have loan growth, and if that’s through mergers and acquisitions, or if that’s growing organically, that’s really the next step.

I’m not sure exactly how that’s going to play out in the next year. We want there to be loan growth because we need it, but there’s a lot of competition there.

What kind of economic environment do you expect to operate in during 2014? IRWIN: The forecasters are saying we could see real GDP of 2.5 to 3 percent. That seems fairly reasonable. But as we start to see into the future with the easing of monetary policy and the world economy picking up, we’re going to see rates start to rise at some point in time. That’s a natural thing that’s going to happen. So companies are going to have to continue to be prudent. But also, historically, rates are amazingly low. Companies that aren’t taking advantage of restructuring their capital right now — they’re missing an opportunity.

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RAHN: We’re having a lot more discussions with business owners, not only about buying equipment but actually talking about expanding buildings or looking at other companies to buy. Everyone’s starting to plan for the future again. We started to see a little bit of that in this past year. You go back the prior four or five years, everybody was hunkering down in survival mode. So now we’re seeing some sense of, I guess I’d call it, normalcy coming back to the market where people are starting to have confidence to plan for the future. Our expectations of the economy are that it’s stable. It’s not going to be red hot, but it’s going to be good.

What type of loan demand are you seeing? Is business borrowing picking up? IRWIN: You have more discussion with cli-

ents. “I could do another line” or “I could buy a business that’s in a line that I’m not in.” Those are the kind of expansionary things you are starting to see in terms of activity. We’re going to have the mergers and acquisition activity with folks looking to buy a business that’s not exactly in their line but fits nicely. The other things you’re seeing is the transition of ownership. You’re starting to see, “What are we doing with the next generation” or “is the next generation not capable?” There’s a lot more generational transitions going on. BOWMAN: Our mid-sized businesses are family-owned, and it’s a good time for them to start talking about this stuff, especially from a tax-planning point of view. We’ve had

DECEMBER 23, 2013 / MiBiz Crystal Ball 2014: Special Year-End Edition

— JOEL RAHN, CHEMICAL BANK

PHOTO: JEFF HAGE

several discussions with a lot of local companies — they want to get the next generation in there. (They ask) “How do we do that? Is it an ESOP?” A lot of family-owned businesses are bringing in outside professional help with experience to ensure that transition — either to groom the next generation or to stabilize themselves (because) the kids don’t necessarily want to stay here. This isn’t where they want to be. MARTIS: One thing that remains stable … is the professional practices. The medical, the dental — they are all still building buildings and expanding so much. That was (occurring) even when everything was going on and the economy was down. They were still out there doing that. (It will be) interesting to see how the health care aspect impacts that.

Looking back at the period of 2008 to 2010, what were some of the key lessons learned? IRWIN: There is risk in running a business. Risk is real. If you don’t pay attention to it and watch out for it, it can burn you. That’s true for bankers and it’s true for business owners. MARTIS: I don’t think anybody understood how speculative residential plat lending was. I think that is one big, huge takeaway. In the past, (new homes) always sold. And then they didn’t. It was the whole housing bubble and it just (burst). RAHN: And not just (residential) but real estate in general … business owners, (too). They were building an industrial building, “Well, that will be kind of a side investment for me.”

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MARTIS: Most of them looked at it as their retirement (income). Now most people … are looking at real estate differently. When I’m talking to business owners, we do have some different conversations about real estate because we have been reminded that real estate, when the economy really turns down, is an illiquid asset and where do you want to put your capital? Especially if you have growth opportunities, do you really want to tie up capital in a building or would you rather invest that capital and get a greater return in your core company or your core competency? BOWMAN: It’s a huge initiative of a lot of my financial institution clients to get out of that concentration in commercial real estate. They’ll go into the residential real estate, but they are only going to hold on their books the very best credits. The rest they’re going to sell off.

What would surprise you if it happens in 2014? IRWIN: If events in Washington get carried to an extent that it impacts confidence across the country. RAHN: That’s the biggest wildcard that’s out there, and you just don’t know how that comes down. The general tone in Washington has not been real business-friendly, and it’s a drag on the economy. MARTIS: A large spike in rates would surprise me … but I’m not sensing that. RAHN: It’s hard to envision the economy being so robust that the (Federal Reserve) would completely back off. We all know sooner or later, it’s got to back off. I think the scenario where the economy actually outperforms peoples’ expectations and the Fed does get to the spot where they’re more comfortable and start to back off is a greater

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probability than the economy going the other way and slipping back down. We have a better chance of the economy outperforming than underperforming.

What’s the biggest opportunity for the industry in 2014?

IT’S NOT THE THUNDER, IT’S THE LIGHTNING.

BOWMAN: It comes back to the mergers and acquisitions (involving banks). When you think about what’s happened after the credit crisis, everybody cleaned up and shrank their balance sheets, for the most part. Now they have this overhead and they’re already lean with their operating costs. Compliance costs will increase and net interest margins are decreasing. So I think we’ve all said that loan growth is there but it’s not exceptional, so how are you going to get into new markets? MARTIS: Another piece that’s good for the industry is if everybody maintains the discipline that we’ve learned over the years with pricing. There’s a role for banks to fill, there’s a role for mezzanine lenders to fill, there’s a role for venture capitalists to fill. Everybody plays in their spot. That would be good for the industry. IRWIN: From an industry perspective, I think the opportunity will be in M&A for those banks that are in that position. There will be decent loan growth, but I quantify that because on the residential mortgage side, while we’re seeing now an increase in new construction activity, the re-fi wave is pretty well over. So for bank earnings coming from residential mortgage activity, that will be a little bit of a hole that’s got to be made up, hopefully by the economy being stronger and people buying more cars and people buying more houses. In general, loan demand will increase and we view that as an opportunity.

To stop bad things from getting worse.

616.459.1171 | www.lawweathers.com

Special Year-End Edition: MiBiz Crystal Ball 2014 / DECEMBER 23, 2013

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CRYSTAL BALL

HIGHER EDUCATION ROUNDTABLE

University presidents say funding cuts can’t continue By JANE C. SIMONS |MiBiz jsimons@mibiz.com oliticians and economic developers in Michigan want to make sure that the state has an educated workforce, but the leaders of universities in West Michigan said they are not getting the financial support they need to make this a reality. University presidents say the impact of this decrease in state funding is felt most acutely by students seeking advanced degrees to get ahead. Without financial support from the state, these leaders say it will become increasingly difficult for students and their families to pay the cost of a higher education without racking up a huge amount of debt. Participating in the MiBiz higher education roundtable were: ■ John Dunn, president of Western Michigan University ■ Tom Haas, president of Grand Valley State University ■ Rick Pappas, president of Davenport University Here are some highlights from the discussion.

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What does the state funding picture look like for 2014? HAAS: We are a fundamentally tuition-driven institution. … The reality of the disinvestments the state has made in public education (puts) the real impact on the students. … Grand Valley has kept its costs flat with inflation (but) there’s a direct correlation between state funding and tuition. And there’s also a direct correlation with the decrease in state appropriation and the debt load going up for students. I look for status quo from the state in providing resources to its universities.

Last year, 1.7 percent of the budget for public universities went towards performance funding based on metrics … but well over $1.2 billion is allocated for whatever you got in the past with no performance metrics associated with it. Without revising the way appropriations are deployed, even the best ideas are not going to be evident and lead to any change. DUNN: I think one thing we are all somewhat disappointed about is that two years ago, Governor Snyder’s budget for higher education was reduced by 15 percent. He thought we would be able to begin to restore what was lost, but that restoration has been very little

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and very slow. This state has disinvested itself of any financial aid or support of any magnitude for students. We are on our own. It’s really distressing and disappointing trying to be compliant with tuition increases when we still get no support. HAAS: The myth perpetuated in public and by many in Lansing is that our administrative costs are well out of line. Our administrative costs are flat or below inflation. We are at about 11 percent in administrative costs and the rest is going to programming. … Tuition in most cases is up because of the disinvestment policy the state has taken over the last few decades. … There’s no priority in higher education. DUNN: When you compare us to North Carolina, which is a similar size with similar demographics, the amount of money North Carolina puts into higher education by contrast to Michigan is by a factor of two.

Talent has been a headache for employers across the state and a key focus over Gov. Rick Snyder’s first term in office. What’s the role of higher

DECEMBER 23, 2013 / MiBiz Crystal Ball 2014: Special Year-End Edition

John Dunn

Tom Haas

education in helping create the talent to match the needs of employers? PAPPAS: We have a coalition of colleges and universities that are trying to create more talent. One of the things we’re doing at Davenport is understanding where the careers are coming from. We talk about talent, increasing talent to where employers’ needs are, and we are all spending time trying to do this. We are trying to share with all higher ed institutions where the demand is going. We actually meet quarterly and we talk about higher education and talent, connected to where the employers’ needs are. We’re all spending time doing that. We’ve created 10 new degrees at Davenport all related to high-demand (jobs). Our graduation and retention rates are increasing. We are connecting students to the kinds of challenging jobs out there. DUNN: We develop talent in response to industry need. There’s also another part, and that is responding to employees already in the market. We offer courses in graduate programs within departments. … Newell Rubbermaid is locating (a design facility) in our research park and they’re going to attract talent and we’re going to help develop and provide that talent. HAAS: The number of 18-year-olds in the state is decreasing and the continuum and

Rick Pappas

qualifications to come in to college is also a diminishing pool of folks. We need talent and we need to invest. Why aren’t we investing like Virginia, North Carolina or Ohio? Those questions are best asked of our policy makers. The rhetoric is not following through in supporting the public good. Degrees from universities are critically important.

What kinds of capital projects do you have planned for 2014? DUNN: We’ve invested quite a bit in residential living on campus, which has become available during the last two summers. We have two new facilities on campus that were finished through auxiliary funds, not through the state. We also have a desired goal to expand our aviation school in response to a critical need. That expansion would make a huge difference in the preparation of pilots and people who manage and maintain our airports and air traffic controllers. … The aviation expansion is needed to replace an aging population of air traffic controllers. We are funding other projects through auxiliary funds. PAPPAS: We developed a new physical therapy program for a doctorate, and we have an occupational therapy program for a master’s. We also did a new baseball, tennis and football

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complex with none of that funding coming from the state. DUNN: We are opening our medical school next fall and putting $69 million in to renovate a facility downtown. That’s a major gift to the state of Michigan. We’re not asking for or receiving any money from the state. There’s this whole idea of how much we take and how much we give, (but) our investment in higher education speaks for itself. Then we bring other great opportunities to the state through innovation and philanthropy. It’s important that people in the state recognize it. There are times when we get whopped pretty hard. HAAS: This past year has been a watershed year for us. We opened the Pew Library and that was done with philanthropic support, which is a game-changer. The Seidman Center downtown is another very creative way that we got private funding. We did not get any state funding for this project. There was not one increase in tuition dollars to do this. … There’s the reuse of the old library in Allendale, which is becoming a biology lab building for the flow of undergraduates into health professions. I’m turning away literally hundreds and hundreds of qualified people. We want to create that capacity to help the region.

What new programs or curriculum are you planning? PAPPAS: In the last three years, we introduced 10 programs that are all tied to the market. The most recent one we just added was a Master of Informatics and Coding. One of the things we’re trying to do is really focus on the highest-demand careers. We also have the College of Urban Education, and we are working with area schools to pilot this curriculum. HAAS: All of our investments are driven by programmatic needs. What we’re doing is really devoting our planning toward curriculum. Since the 1980s, we’ve invested more than $250 million in Grand Rapids alone. It took 25 to 30 years to get where we are now. When we look at that property on the north side of the expressway (which GVSU acquired for future expansions of its health programs) we’re looking at where market is. When I look at the applications and qualifications of students applying for our health-related programs, they are qualified and we would take them if we had the space. We have about 3,000 students enrolled in some of these health and

UPCOMING ISSUES SALES@MIBIZ.COM EDITOR@MIBIZ.COM 616-608-6170

nursing programs and we could increase that overnight. We are also bringing on board Speech and Language Pathology. We’re going to look to be responsive to the needs of the community, making sure what we do is strategic and needed. DUNN: One of the challenges for us is that we offer the most extensive range of programs available in any public institution in Michigan. We have an affiliation with Cooley Law School because we have to think differently about relationships that will benefit students. … One of the big shifts in higher ed is a much greater focus on the student. While there’s always going to be market-driven competition, we need to keep an eye on the student because it really is all about the students at the end of the day.

What is your message to Michigan’s business leaders? PAPPAS: We are a major contributor to talent and by their sharing what degrees they need and their employment needs, we can fill those needs. Soft skills like critical thinking and global competencies are important. Our goal is to have an electronic portfolio for each student before they graduate that demonstrates their skills. We’re working on cooperating and bringing business leaders with us. DUNN: There’s a benefit and a need for talent development. We’re not difficult to work with. We use the creative talent of our faculty and students to address real problems. You’re going to have to become much stronger in your advocacy for higher education. We need you to be a loud voice in telling Gov. Snyder that we need help and we cannot continue to disinvest in higher education. HAAS: The business community knows Michigan talent is important to their needs. … We need to demonstrate to the public and our state leaders that we have policies and that there is value in that degree. … I think the business community in partnership with higher education can really increase the talent pool. When the business community is stating that you are producing answers to their needs and wants, that goes a long way to credibility. We need to make use of our base dollars and invest where we want to have the greatest impact. There is an analogy I make between the road construction in Michigan and investment in higher education: If you don’t like the roads right now in Michigan and you don’t invest in their improvement, just wait for the potholes.

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CONTINUING EDUCATION & MBA PROGRAMS CONTRACT DEADLINE: DEC. 30

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Special Year-End Edition: MiBiz Crystal Ball 2014 / DECEMBER 23, 2013

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CRYSTAL BALL

REAL ESTATE AND DEVELOPMENT ROUNDTABLE

In a recent MiBiz roundtable discussion on development and construction, Kalamazoo-based executives maintained optimism about the new year, they said firms must be flexible and creative to keep the work pipeline flowing. Participating were, from left, Rick Wordell of Eckert Wordell, Miller-Davis’ Rex Bell and Rick DeKam of Midwest Realty Group. PHOTO: ERIK HOLLADAY

‘Uneven’ recovery, talent shortage, struggle for financing weigh on builders and developers By ELIJAH BRUMBACK | MiBiz ebrumback@mibiz.com he real estate and development industry along with the related construction and design sectors continue to claw their way back to recovery. For a segment of the economy that was one of the hardest hit in the recession, real estate and development companies are now facing concerns over financing, labor and competition for work — all while uncertainty still runs through client ranks. As industry leaders prepare for 2014, many look to capitalize on the growth the regional market is experiencing. To that end, executives say one way to raise all ships is more collaboration. MiBiz sat down recently with a group of leaders to discuss what’s ahead in the new year. Participating in the roundtable conversation on real estate and development were: ■ Rex Bell, president of Miller-Davis Co. ■ Rick DeKam, owner principal at Midwest Realty Group ■ Rick Wordell, co-founder of Eckert Wordell LLC Here are some highlights from the discussion.

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How did 2013 shape up for your firms and what was the narrative of the year as you see it for your industries? BELL: We have not gotten back to true sustainable, meaningful growth at all as far as we’re concerned. It’s still an anemic economy. Now we’ve bounced back pretty quickly because of our backlog of work after 2009. The couple of years after that, we were able to get back to a volume that was pre-2008 and an income that was pre-2008. But then it’s just uneven and really tough to have any kind of consistent revenue. It’s just up and down. I don’t think our recovery was typical. It just had to do with the work that was in pipeline. 2013 was a flat year and not a lot of growth, but we had a couple of positive signs. One, our backlog continued to grow year-over-year, and the other thing is opportunities seemed to be out there and growing. Right now, we have projects that go out for two years, and that helped us because we already had large projects in the pipeline. WORDELL: We don’t have the backlog like construction companies do. Our projects are fairly quick-in, quick-out. … Trying to set the table to get the projects is a focus for us. There is a lot of action and a lot of projects but often the projects just take so long to develop. We do a lot of health care, so you can understand that because a lot of people in that industry are apprehensive about what the future is. They want to do it, and everything is telling them to, but they’re still holding back. DEKAM: It’s unbelievable how long the financing component is taking these days and I’ve got to believe your work in health care is further impacted just because nobody knows what’s going to happen after January 1st. WORDELL: With hospitals and medical offices, there is still a lot there, but they’re all just questioning.

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DECEMBER 23, 2013 / MiBiz Crystal Ball 2014: Special Year-End Edition

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What is the level of competition like in the marketplace given the volatile workflow? WORDELL: It’s interesting. Our firm teamed with TowerPinkster to position ourselves so instead of competing against each other (in the request for proposal) process, we actually got a job together. So that was an interesting twist, and although I think it was good, I’m not sure we want to tell everyone how to do it. (Laughs.) It was just a different way of looking at competition.

I hate that phrase, ‘the new normal.’ It’s just changed. It’s the just the evolution of the business. It just is what it is. You either have to stay in it or get out.”

— REX BELL, MILLER-DAVIS CO. PHOTO: ERIK HOLLADAY

Have your firms shifted focus on either the building markets you target or the types of deals you put together? WORDELL: As a 20-person firm, we’re trying to focus on what we’re

good at and not spread out so we can command that market. We seem to get more projects being specialists than being a generalist. We tried spreading out and really didn’t come up with any significant gains. We’re trying to focus rather than spread out or change emphasis. BELL:

We’re not spreading so much in terms of identifying completely new markets or new types of buildings or new types of construction, but we are spreading out geographically simply to put more projects in the hopper. … It’s just a pretty simple idea and we’re not alone in that. … But in a sense, specializing in the things we’ve done well at and have expertise with — that’s what we are doing. DEKAM: We started a new construction division about three years ago because we were having such a difficult time getting tenant fits out done quickly and reasonably priced. … We don’t anticipate growing any bigger to do full construction. We just want to be able to turn our fits out over efficiently because some of tenants that came to us, especially when the recession ended, needed the space in a week.

BELL: For us, it’s kind of the opposite. We’ve been so competitive and I think that’s just an outcome of the last couple of years. Competition is just off the charts. … I think all the old clichés still apply. Competition makes you stronger and helps you keep your edge and be progressive and do all the good things you need to do to keep your company strong. So we shouldn’t complain about it too much, but it’s pretty cutthroat. BELL: In 2009 and 2010, there were some fees that just seemed so unbelievable. I don’t know how some firms survived. We were in competitive bids for various projects and we found out how much the successful firms were proposing for their fee and they were way under ours — and we were low. We were wondering how we were going to be successful with the project if we got it. DEKAM: We’ve seen the same thing when we do an RFP for a client, and we tagged a few firms out of Grand Rapids and as a matter of practice. We always tag a few guys there because we consistently see the fees on nearly everything to be lower with similar quality. WORDELL: But now, (fees) are starting to get back to normal where

people have enough work that firms don’t have to do that. And people aren’t trying to undercut each other. It just seems healthier. BELL:

As the industry continues to debate the merits of programs like LEED, how is sustainability affecting the marketplace? WORDELL: Where does sustainability land in all this? I think it’s all great, but a few years ago it was just ‘the thing,’ but now it’s just a part of what we do. While it’s kind of always been a part of what we do, it just got advertised. BELL: The benefit from our perspective is that it has raised awareness and elevated the idea of sustainability. We’re doing a lot better job as a construction community. The things we should have been doing all along, it has just made us kind of more conscious about the things we incorporate in our business. Also, a second benefit of this is the commissioning that goes on in these buildings prior to turning them over. WORDELL: Yeah, that’s huge. DEKAM:

One thing we keep hearing is that the financing market continues to be a challenge. How are your firms finding ways around that with clients? DEKAM: In my 30 years of business, I’ve never hired an architect to do preliminary drawings (but now we are). … If we have somebody who even looks like they’re ready to go, we just put the money in because no one else will and it just gives them a foot up. I’ve never lost a deal that way. BELL: I think that’s part of the message — that you have to be creative. There has to be innovation. That’s the name of the game. I hate that phrase, ‘the new normal.’ It’s just changed. It’s the just the evolution of the business. It just is what it is. You either have to stay in it or get out.

What are some other ways firms are getting creative to get projects? WORDELL: One thing kind of like this is the new (People’s Food Co-op in downtown Kalamazoo). Miller Davis was the project design/ builder, but we came in together at the beginning of the project. BELL:

It was collaboration.

How are your firms dealing with the talent shortage, particularly in the construction sector? BELL:

This issue is going to be huge for the construction industry. We’ve already run into it about a year and half ago in the trades when we were working on (Sangren Hall at Western Michigan University). We couldn’t get enough people out there from some of the trades and that’s a year and half ago. Basically, in round numbers in construction, we lost half the workforce in the last few years, and those folks have retired or left for other parts of the country or gotten into other industries. They are just not waiting to come back into this. As things continue to build back up as the economy strengthens, I really believe that it’s going to be a huge issue. The problem is we just don’t have that continuity of work to where you can bring more people on and keep them employed. So how do you sell that to a young person? From the engineering side, there seems to be an adequate supply. WORDELL: In our sector, many of the same people that had to go to other firms or those that went unemployed for a while, we were able to hire them back. We haven’t seen much consolidation in Kalamazoo.

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It’s just fact that those quotes were unsustainable.

That is a really positive thing.

BELL:

The point is that the owner is happier. And when you multiply that on projects that are tens of millions of dollars, that’s just a huge benefit for the owners. Anything you can do to eliminate those fallbacks or grief is just money in the bank for those guys. So I think that is another good thing that has come out of the focus on sustainability. WORDELL: And right now, a lot of owners don’t even understand the commissioning yet. DEKAM: I’d say that a good portion of our industry doesn’t understand that yet. I’d say that of commercial brokers out there, maybe 10 percent of them get it and some of them might not even care.

Looking ahead, what does 2014 hold in opportunities and challenges for your companies? BELL: We believe that the opportunities and growth are going to continue. We don’t see that dying off. That’s going to continue well into 2014, so we think that’s good. We think that some of those challenges like the Affordable Care Act will die down and we’re seeing unemployment continue to go down, so hopefully that continues. And to be honest, I’ve kind of gotten tired of that phrase of ‘cautious optimism.’ It’s a confidence thing and I think that confidence is coming back. I do think that at some point in the not-too-distant future, we will see more headlines about labor and the lack there of. And more to that end, any company that doesn’t have business development as a core competency is not going to make it. WORDELL: We’ve been working on that over the last couple of years and are more mindful of that than anything. DEKAM: We would love to spec some stuff, but the lenders haven’t come that far back to the market yet. I’m not trying to throw the lenders under the bus, but you know they are looking for things that are pretty sure deals. We’ve turned in a couple of projects where we thought we had pretty solid tenants and a property under option or contract, and it’s like the lenders are waiting for you to pull the trigger. They want to see you completely committed. … They’re that conservative right now, and we’re just talking about the lenders that claim to have a pulse that are actually turning the dirt over. At the same time, where loans are available, rates and terms are really attractive.

Special Year-End Edition: MiBiz Crystal Ball 2014 / DECEMBER 23, 2013

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CRYSTAL BALL

CHAMBER OF COMMERCE ROUNDTABLE

Chamber execs say workforce, industrial building inventory top of mind for 2014 he heads of West Michigan’s chambers of commerce are anticipating another year of growth for many of their members in 2014 — albeit with some concerns. Leaders say they’re watching the ongoing implementation of the Affordable Care Act (ACA) and methods being used to ensure the availability of skilled workers in particular, all while being mindful that chambers must work to stay relevant to their membership bases. MiBiz convened a roundtable discussion to talk about the year ahead. Participating were: ■ Rick Baker, president and CEO, Grand Rapids Area Chamber of Commerce ■ Kara Beer, executive director, Battle Creek Area Chamber of Commerce ■ Jane Clark, president, Michigan West Coast Chamber of Commerce ■ Joy Gaasch, president, The Chamber of Commerce of Grand Haven, Spring Lake and Ferrysburg ■ Cindy Larsen, president, Muskegon Lakeshore Chamber of Commerce Here are some highlights of the discussion.

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What kinds of businesses have been joining the chambers lately?

of businesses that have landed in the downtown area and joined the chamber of commerce.

GAASCH: (In the Grand Haven area) we are really seeing a mix of companies. It has been pretty balanced as far as small manufacturers and some larger manufacturers that haven’t been members for a while. A number of service providers are joining and some small startup retailers.

What are the crucial issues for your members going into 2014?

BEER: We are having the ‘cupcake buzz’ in Battle Creek and that is resulting in a number of small, specialty shops opening up that have been new business chamber members. As well, we are seeing a lot more family-owned businesses. (Largely, the businesses) are spread all around Battle Creek, but we do have a number

Oftentimes, I think it’s around public policy. On the top of a lot of people’s minds is health care, particularly the changes at the federal level and what effect they will have on their businesses. That is a common thread across the industry. (In Grand Rapids) we have had a lot of forums and events to try and educate our membership. The participation (in those events) has been broad. Also top of mind for business is workforce and the ability to attract and retain talented people. BAKER:

Baker

Beer

Clark

LARSEN: We are working on (talent recruitment and retention) in the Muskegon area as well. We’re drilling down to the high school level, which is somewhat of an old idea revisited. We’re pushing an intern program for high school kids through the Muskegon Career Technical Center. That also means we need to make (Muskegon) a great place to live because we are recruiting talent from outside the area for those technology (jobs). We are also anticipating continued growth in manufacturing and construction.

What are members saying about the ACA and what impact does the law have on chambers, which now have more competition in offering access to group insurance plans? GAASCH: The model has changed over the past couple of years. The (group health insurance plans) we could offer as a chamber have changed. The rules and regulations regarding those health care products have changed and it’s no longer a viable recruitment tool as it used to be.

Gaasch

Larsen

LARSEN: In Muskegon, we have had at least three (health care reform education) sessions and each time you go to a session, there is new information or misinformation that people didn’t understand the first time because (the implementation) is becoming a reality and we are starting to understand the complications.

What must chambers do to maintain their relevance? LARSEN: Sharing best practices. It’s our job to make sure our members stay informed and that they have the latest information and the best information since there is a lot of misinformation out there. GAASCH: There will always be the need for businesses to network and share best practices. That is the role that chambers have played for well over 100 years and will continue to play. That is a very viable reason that can lead to a business’ success. BEER: We have been engaging not just the top-level executives but also the employees. As much as we talk about recruiting and retaining talent, (the Battle Creek Chamber) has been focusing on creating opportunities for growth with those individuals so that they can understand the benefits and the value and the relevance of chambers of commerce and what we do for a community. That is something we have been focusing on and we are seeing a lot more engaged members from all of our businesses.

What are the biggest challenges and opportunities as you look to 2014 and beyond? CLARK: We know that three quarters of our manufacturers have growth plans in the future, but we don’t have the number of industrial buildings to help their expansion. We have precious little space available, so that is a challenge. BAKER: We do have a tremendous amount of growth opportunities. I think a lot of that is the result of the leadership of Gov. Snyder, who has created a better business environment in Michigan, and we are starting to see the results of that work. However, the inventory of existing (manufacturing) buildings is shrinking, so we are going to have to see some construction take place for new buildings. The growth is exciting and it is a great opportunity for our region, but it is going to put more pressure on our workforce.

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Special Year-End Edition: MiBiz Crystal Ball 2014 / DECEMBER 23, 2013

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CRYSTAL BALL 2014: FURNITURE FORECAST

Q&A Rob Kirkbride

INDUSTRY SHIPMENTS

Senior Editor, Monday Morning Quarterback, Grand Rapids

Here’s a look at the updated quarterly outlook for the office furniture industry for 2013 and 2014, plus annual shipments going back to 2000.

As senior editor for the last six and a half years of the Monday Morning Quarterback trade publication, Rob Kirkbride travels the world covering the business of the office furniture industry. He sat down with MiBiz to discuss the state of change in the industry and what to look for in the coming year.

People can work from anywhere. They don’t need to go to an office anymore, necessarily. For the first time in modern office history, workers have choices. What the industry needs to do is create options that are better than what’s out there. In the past, workers were tied to the office because that’s where the work tools are located. If they don’t create options that are better, people will choose to work where they want. Some companies are addressing those needs. They have really quality products, and they’re giving workers tools they don’t have anywhere else. … It’s a really interesting time for the industry. It’s a time of incredible opportunity and incredible peril. How have the Big Three companies in West Michigan — Steelcase, Herman Miller and Haworth — approached these changes? The Big Three have each gone in a different direction. At Steelcase, it’s been a blending of technology and furniture. Herman Miller has said our furniture can bridge the different areas between work and home, as offices are more homelike and comfortable. Haworth’s approach has been in between the two. Given all the shifts in the office furniture industry and the integration of more technology into their systems, is West Michigan still the center of innovation for the sector? Yes, West Michigan is still the hub of office furniture. Much of what’s interesting in the industry is coming from here. Personally, I could work from anywhere, but I work here by choice because this is where all the action is. The product development cycle is still driven by West Michigan at Steelcase, Herman Miller and Haworth. Everybody else follows them still. Do the West Michigan companies have enough local talent to draw from? There’s definitely enough talent here. The problem is that the companies need to trust in that talent more. There are great designers in West Michigan. Look at Joey Ruiter: He’s a great designer on any level. Companies just need to take a chance. Innovation takes guts, a leap of faith. When Herman Miller started working with Charles and Ray Eames, that was a leap of faith for them, but they said, ‘We’re going to do this anyway.’ I hope that still happens. By definition, innovation is doing something different. But when you look at the bottom line, it can be hard to take that leap of faith. How do you see next year shaping up for the office furniture industry? I think it’s going to be a good year. I’m really bullish on the industry. Unlike the automotive industry, office furniture is still recovering from the recession. Do you think the industry will ever see the peak that it saw around 2000? I don’t think the industry will ever get back to that point unless there is a product that’s really gamechanging. And if there is, I haven’t heard of it.

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As you’ve covered the office furniture industry, what’s the biggest shift you’ve seen that OEMs have had to face?

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There’s an opportunity for the right company to create a line of products that would capitalize on people’s desire to work from home at least a part of the time …” — ROB KIRKBRIDE MONDAY MORNING QUARTERBACK

As the sector continues to recover, what do you think it could be doing a better job of? One of the things I’m worried about is that the industry does a lousy job of promoting itself. They help workers be more comfortable and creative and they help companies get more work out of their workers, but they do a bad job of telling that story sometimes. Where do you see an opportunity for the industry? The huge opportunity for a company willing to do the hard work is to create a package of furniture for the home worker. When I was setting up my home office, I had a hard time finding the right furniture, and I know the industry. There’s an opportunity for the right company to create a line of products that would capitalize on people’s desire to work from home at least a part of the time with products that are not contract grade, but not crap either. It’s just hard to sell to one person compared to (a company buying) 1,000 workstations. It would be difficult, but there’s a big opportunity there. Somehow the mix of office furniture OEMs and their suppliers mostly came out of the recession intact. Do you expect we’ll see any consolidation or M&A in the new year? I say yes, but I’ve been amazed there’s not been more consolidation. Especially through the downturns, I would have expected someone to get gobbled up, but that hasn’t happened. With consolidation, I see it in the dealer network. The way it’s structured has got to change. When you have several dealers in New York City and they’re fighting against each other, that does not make sense. So I do see some changes to the dealer network in coming year. How about for the supply chain? The suppliers, many of them are tied to the furniture and the auto industry, so they’ve been doing well. The major manufacturers are asking them to do more, to come to the table with real ideas. Many of the innovations are coming out of the suppliers. Where before it used to be that Steelcase would say, ‘Make this part,’ now they’re asking, ‘What do you have that’s innovative and bring that to the table.’ They have to step up and increase their innovation.

Interview conducted and condensed by Joe Boomgaard.

DECEMBER 23, 2013 / MiBiz Crystal Ball 2014: Special Year-End Edition

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 PROJECTED SOURCE: BUSINESS AND INSTITUTIONAL FURNITURE MANUFACTURERS ASSOCIATION

Q&A Mike Dunlap Principal, Michael A. Dunlap & Associates, Holland One industry watcher sees business picking up for the office furniture sector looking ahead into 2014, following an easing in orders and shipments in the third quarter of 2013. The principal of Michael A. Dunlap & Associates in Holland, Mike Dunlap expects solid growth for the industry next year. He conducts quarterly surveys of executives and issues an activity index on how the industry is faring. He spoke with MiBiz about what he sees for office furniture makers in 2014. What kind of year do you see the industry having in 2014? We’ll see the best year that we have seen since we began coming out of this recession. I think it’s going to be a very strong year that people will be pleased with. Given the two deep downturns the industry has had since 2001, what’s generally considered solid growth anymore? Good, solid growth is going to be 4 percent to 6 percent, and 2014 really could exceed that number. In the questions I ask in my survey, I am seeing a lot of responses for 8, 9, 10 and even 12 percent and higher projections. When I look back at the questions in January 2013, the industry was very bullish, and anything better than 6 percent, I would say, is very strong growth. Any suspicion of what led to the slowdown in shipments and orders this fall? Certainly there’s caution from the economy, questions regarding the Affordable Care Act, and the general dismay about what was going on in Washington that certainly had an effect. The office furniture industry is a Tier 1 supplier to other businesses, and when other businesses don’t buy furniture, it won’t build and ship furniture. Just the malaise of the economy and of government slowed down purchases for a brief period of time. What does the industry have going for it in 2014? Pent-up demand, number one. Number two, some of the new products that have been introduced over the last several months and were introduced at NeoCon (in June), which received a fair amount of attention and some popularity, will begin shipping in much larger numbers in the first quarter. Thirdly, once business and the health care markets realize that the recession is over and they have confidence, then there’s going to be more purchases and more expansion. What are some of the potential headwinds in 2014? I think it’s things that are probably out of our control. We live in such a smaller world. When something happens elsewhere in the world, it quickly affects the rest of the world. Anything of any quirkiness or instability can trigger very unusual effects in economies. What would surprise you in 2014? I will start with saying the one thing that will not surprise me will be the expansion of mergers and acquisitions in the industry. What will surprise me will be if any of the top 10 or 15 companies in the industry should merge. I think one thing we will definitely see in 2014 will be more merger and acquisition activity. The surprises will be who merges with whom.

Interview conducted and condensed by Mark Sanchez.

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CRYSTAL BALL 2014: AUTOMOTIVE FORECAST

Q&A Mike Wall Analyst, IHS Automotive, Grand Rapids The automotive market has been shaping up mostly as expected for 2013 with sales at around 15.6 million units and production at 16.2 million units, says Mike Wall, an automotive analyst at IHS Automotive in Grand Rapids. That growth is projected to continue into 2014, although Wall is keeping close watch over a handful of wildcard factors that could become headwinds for the industry. He spoke with MiBiz about his outlook for the next year.

How is the auto industry shaping up for 2014 from a sales perspective? Next year for the U.S. light vehicle sales market, we’re at 15.9 (million units). When I look at that number, I think there’s upside to it, with one big monster caveat, and that is Washington, D.C. in January, February and March. Whatever happens … around a shutdown or debt ceiling, that’s going to be a big determining factor. It’s not going to derail the industry or anything like that, but what it can do is pull some of the wind out of the sails in the first quarter. That could limit us from breaching 15.9 into 16 (million units). Absent of that, I think we can have a pretty good year. What else could possibly tamp down growth in the industry? There are some things we’re watching, that we need to keep a close eye on. Subprime credit is back in full force in autos. It’s a different subprime than in mortgages and I don’t want to overplay it, but it is a factor that’s out there. Incentives are coming in pretty strong. I wouldn’t say that they’re returning to what we saw when we went through the downturn,

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but they’re pretty engaged. But I would also say the automakers and suppliers alike are making some pretty good money at these selling rates. There’s some internal incentive there to keep stoking the fire somewhat, within reason. What’s the outlook from a production standpoint? Production-wise, we’ll do about 16.2 million this year and next year we’re looking at just over 16.8 million units in North American production. We’re well beyond pre-crash levels at that point. We’re beyond it this year. The recovery in North American production has been a little more swift than in sales for a few reasons. In addition to the demand recovery, you’ve got automakers bringing on more capacity here for import substitution and the export activity coming out of the North American market. That’s a tailwind for us here. What are some of the wild cards you’re watching for the supply chain? Capacity constraints are still going to be coming into the mix on the supplier side. That’s been something we’ve even had to navigate

this year. … Could we see some spot shortages here and there? Sure, but I get the sense that suppliers are ramping up their investment. Commercial credit for manufacturing is really re-engaged from commercial banks. We’re seeing a much friendlier credit environment even at the manufacturing level. How about the pace of new vehicle launches next year? The vehicle launch activity is just going to be crazy with 36 vehicles launching. Anytime you have that level of vehicle launch activity mixed in with a strong build rate and demand rate, you could definitely run into issues here or there. It’s bound to happen, but we’re going to be able to navigate that. What’s your biggest concern for 2014? The thing I’m watching the most on the downside is to any extent D.C. causes issues for us and causes problems, particularly in the first quarter to first half of next year. Beyond that, I think things are setting up pretty nicely for next year. You’ve got a production environment where most of the vehicle manufacturers will be gainers. Is it fair to say that next year looks a bit more manageable for the suppliers after a run of double-digit increases? Yeah. On a production basis next year, we’re looking at 4-percent growth. So that’s manageable growth on the production side. It will start to ramp up a little further as we head into 2015 and 2016 as some of that other capacity comes on. But that’s been the beauty of this recovery in North America. It’s been pretty robust, but not so robust that it’s derailing any automaker or supplier. It’s been pretty well managed. Interview conducted and condensed by Joe Boomgaard.

MELISSA ANDERSON VICE PRESIDENT, IRN INC., GRAND RAPIDS MIBIZ AUTO FOCUS COLUMNIST he automotive industry is in very good shape as we come to the end of 2013 and look ahead to 2014. Production of light vehicles in North America this past year was a little stronger than we anticipated, with just over 16 million cars, light trucks, and sport utility vehicles assembled as compared to our projection of 15.7 million. Consumer confidence, credit availability, building permits, jobs numbers, gas prices and many other factors are signaling that the strength of the market this year will improve further in 2014. IRN is forecasting North American light vehicle production of 16.8 million units for 2014, up about 4.5 percent. Of the Detroit 3, GM is expected to have the largest percentage increase, up more than 6.5 percent. Among the Japanese Big Three, Nissan’s torrid 10 percent growth will help it gain on rivals Honda and Toyota in vehicle volume as it pursues its plan to increase the percentage of vehicles produced locally to 85 percent of North American sales by 2015. For suppliers of vehicle components, the focus will be on taking advantage of the opportunities ahead. Only 72 percent of suppliers responding to IRN’s pricing survey this fall said that they have sufficient capacity in place to handle increased demand in 2014. That’s a problem. Human capital is a related issue, particularly engineers, technicians and hourly skilled trades, all of whom are needed for successful product launches. The best suppliers will not only excel at the demands of 2014 but also find ways to institutionalize improvements for future success.

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Special Year-End Edition: MiBiz Crystal Ball 2014 / DECEMBER 23, 2013

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CRYSTAL BALL 2014: REAL ESTATE & DEVELOPMENT FORECAST

Q&A

baby boomers are driving the multifamily sector downtown.

Chip Hurley Managing Director, Newmark Grubb Cressy & Everett, Grand Rapids Before joining Newmark Grubb Cressy & Everett, Hurley served as real estate officer at Macatawa Bank. Prior to that, he was a commercial broker at several West Michigan firms. As managing director for Newmark Grubb, Hurley is tasked with carving out a stake in the Grand Rapids regional market and will oversee the office’s expansion. He is the current president of the Michigan chapter of the Society of Industrial and Office Realtors (SIOR). He spoke with MiBiz about the commercial real estate environment looking ahead to next year. Where do you see the economy going in 2014 and how will that influence the real estate industry? I see our local economy continuing to improve from a confidence perspective. That will allow companies to become more comfortable moving forward with strategic actions that might have an element of risk. There is a still a lot of opportunity to help companies and investors develop a strategic approach to real estate investments that minimizes risk. What market segments do you believe will be the strongest performers in region heading into the New Year and why? Industrial is already light on property inventory. I think that particular market is on the cusp of having some spec buildings developed. Multifamily housing in the central business district (CBD) is in

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high demand and likely will remain so as demand outpaces supply. In fact, I have some family members from the east side of the state who have kids in college in West Michigan or want to attend college here when they graduate from high school. The word within that generation is that Grand Rapids is an exciting place to be. We’re seeing those anecdotes backed up by data showing strong demand for more urban living options in the city. I think the CBD is going to continue to be on the minds of many investors for quite a while. What are the drivers for that expected performance? Manufacturing and a good labor force is driving the industrial sector in West Michigan. An influx of millennial college students and graduates and empty-nested

DECEMBER 23, 2013 / MiBiz Crystal Ball 2014: Special Year-End Edition

What will the increased activity mean for prices? As the inventory of existing property is consumed, prices will continue their upward momentum. Can you predict when the historically low interest rates will tick upward? I don’t think so. Just know they will go up. If someone is in a position to take advantage of their purchasing power or ability to refinance, I would recommend doing so. What are the challenges or headwinds you expect to see next year? I think it is a great time to be in Michigan. The growth and positive changes we have seen over the last several years is exciting, and that excitement is contagious. Some of the uncertainty being created in Washington will trickle down to our economy and weigh heavily on some business decisions. But we need to focus on our own economy and what is working for us in spite of Washington’s issues. In other words, we need to focus what we can control. If you can prescribe a theme for 2014 as it relates to the commercial real estate industry, what would it be? Get involved. If you have ever worked hard for something, you know there is a deep satisfaction once you have attained your goal — whatever it is. If something isn’t working, roll up your sleeves and change it up. Interview conducted and condensed by Elijah Brumback.

PATRICK LENNON PARTNER, HONIGMAN MILLER SCHWARTZ AND COHN LLP, KALAMAZOO Lennon’s practice is focused on real estate development, and he currently serves as the chairman for the Western Michigan chapter of the Urban Land Institute. With a busy year coming to a close, Lennon said 2014 should carry the same momentum for closing deals and getting new projects off the ground. “I think we will see more large development projects announced in the coming year. There are numerous projects and properties in the pipeline throughout the state. The conditions are finally right for many of these projects to move forward. We are looking forward to seeing new and transformative projects in a number of communities. The commercial real estate market has been dynamic, is currently growing and should continue to grow. The combination of pent-up demand, low interest rates, two years of tenant and market growth and favorable tax treatment make commercial real estate very attractive. While there has been a rise in the availability of primary and secondary financing and equity investors, we have also noticed curtailment of economic development incentives for project financing. The number of incentives and the respective amounts compare less favorably to prior years. This seems like a natural occurrence as economic development incentives were essentially filling a void when other financing sources were less available. As other (financing) sources become more available and the terms more favorable, economic development incentives are less essential to getting projects off the ground.”

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CRYSTAL BALL 2014: ENERGY FORECAST

Q&A

Bruce Goodman Partner, Varnum LLP, Grand Rapids An active participant in the statewide discussion of energy and the environment, Grand Rapids attorney Bruce Goodman serves as secretary for the Michigan Energy Innovation Business Council and is a founding member of the West Michigan Energy Group. Goodman also serves as the lead organizer for the Ford Energy Lecture series held in Grand Rapids and Ann Arbor. Goodman spoke with MiBiz about the opportunities and challenges in the energy marketplace going into the new year.

What’s your outlook for Michigan’s energy industry? Looking at the electric industry in Michigan, I think the investor-owned utilities will continue to try to keep to the old model in which they control the generation, the purchase, and the distribution of electric energy. Municipal utilities are apt to take advantage of some of the changes in the marketplace, as they have already demonstrated, and move more toward renewables. Customers are going to begin moving into self-generation in a much bigger way as the cost of solar energy continues to become more and more attractive. Government is going to look more toward energy security by encouraging energy efficiency and distributed energy. What kind of statewide energy-focused legislative action, if any, should we expect to see this year? There is likely to be some pressure to pass legislation to make it more difficult for self-generation to gain a larger foothold in the state. We see rumblings in other states about solar energy not paying its fair share. This is similar to the rumblings about electric cars not paying their fair share of gasoline taxes. This may make a certain type of legislation more likely — legislation to increase the RPS in exchange for more barriers to self-generation and reaffirmation of the 10-percent cap on competition. State Rep. Mike Shirkey (R-Clark Lake), the vice chair of the House Energy and Technology Committee, recently introduced legislation to completely remove the 10-percent cap on electric competition in the state. Does it have a chance to pass? It may pass one or both houses, but if it does, watch for the potential of a veto by the Governor. Do you think Michigan’s renewable energy sector will continue to be dominated by wind development or do you think solar and other options will raise their profile? I think biomass will begin to play a much larger role as a share of the renewable energy component. It can provide 24/7 electricity, thus be operated as a baseload plant. We have lots of biomass, including timber that can be grown as an energy “crop.” Solar will also play a much larger role. It has the advantage of involving no moving parts, delivering energy during the time of day when energy is most in demand, and being easily installed across a wide variety of locations and a large variety of sizes. It seems as if more energy efficiency programs and outsourced energy managers sprouted up this year. What’s the potential for this part of the energy market to expand? Energy efficiency is the cheapest source of “new” available energy. Recent statistics show that for every $1 spent, there is a savings of $4. The Michigan marketplace is ripe for huge expansion in energy efficiency with huge benefits to all ratepayers. It would be easiest to implement on new construction, and so changes to the energy code would help realize these benefits in the near term, rather than waiting for retrofits. Michigan should consider aiming to hit the energy efficiency of New York, a state with a similar climate.

In your work with renewable energy companies, what do they tell you are the biggest impediments to launching, growing and sustaining their business? Financing. What should companies in the energy sector be paying attention to at the national level that could or will impact their business? Everything points to the inevitability that aged coal plants will be shut down. This is in part due to national environmental policies. Unless and until there is an energy shortage, there will be little pressure to change those policies. Environmental policies are acting like the carbon tax that appeared to be in the works in 2008, but which never got traction in Congress. What’s one thing you see happening in the energy sector that could surprise everyone in 2014? The investor-owned utilities could change their business model and decide that their future is in leasing 10,000 rooftops and installing distributed energy in the form of solar panels, backed up by gas-fired generation. Whether that is natural gas or Michigan-centric biogas would be another area for a surprise.

Interview conducted and condensed by Elijah Brumback.

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Special Year-End Edition: MiBiz Crystal Ball 2014 / DECEMBER 23, 2013

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CRYSTAL BALL 2014: AGRIBIZ / SMALL BUSINESS / TALENT FORECASTS

Q&A

Scott Piggott Chief Operating Officer, Michigan Farm Bureau, Lansing Even with $91 billion in economic impact, agriculture somewhat flies under the radar as a major industry in Michigan. However, the combination of a diverse array of crops, relatively supportive politicians and the prospect for good weather makes for opportunities for growth in the state’s ag sector – at least according to the Michigan Farm Bureau’s COO Scott Piggott. He spoke with MiBiz about the MFB’s outlook. What should we be looking for from the agriculture sector in 2014? If the agricultural industry had a Christmas wish, we would pray for weather that allows us to have good crops and for the help to be able to harvest it. From our perspective, when we look out to the future, right now our prices are relatively good, we’re a diverse state in agriculture with over 120 different commodities, so as long as we can stay away from the early frosts and get some timely rain, we will continue to grow our impact to the state’s bottom line. When it comes to controllable factors such as having the necessary workforce, what steps are being taken? We have been continually working with Congress for what seems like a very long time to pass some immigration reform to allow for an appropriate guest worker program that allows our fruit and vegetable industry to get those products to market. Working with Congress on immigration is a big issue for us. We are also working in the absence of a federal farm bill. We are working with the agricultural committees in both houses to move a farm bill that provides that safety net for those bad years so that we can consistently provide food to the country and to the world. How about on a state level? We have a couple things we have been working very diligently on. We support the Governor’s efforts to bolster transportation infrastructure in the state. We can’t get our products where they need to be if we don’t have roads. We also would like to see some changes to the Michigan Merit Curriculum … so that we can do some agricultural education inside of the high school curriculum that marries up with the needs for more science and math. Where are the opportunities for increased growth in the ag sector? We would like to continue to export more products. We have a great trading partner with Canada, and we continue to increase the amounts we move north. We also have a Governor who has made two trips to China, along with (Jamie Clover Adams, the director of the Michigan Department of Agriculture and Rural Development). We see an excellent opportunity to export things such as edible soybeans. So expanding our markets, I think, is always a challenge, as well as an opportunity, rolled into one. Urban agriculture is something of a hot topic in the region but faces some regulatory hurdles. What is the Farm Bureau doing to allow for that sector of farming to grow? We support agriculture everywhere. We have a lot of members all over the place and they grow a lot of different things. We are excited about opportunities in an urban setting. … But it does present challenges. We have a very strong Right-to-Farm law in this state, which was designed to protect farmers from being considered a nuisance. If (someone) is farming out in the countryside and someone else moves close by, they should understand that farms have smells that come from them. If you move closer to the nuisance, there should be some protection. The question with urban agriculture is what happens when you bring the nuisance back to the people. That is something we are going to have to work on with our friends who choose to grow things in urban centers. It’s a hard thing. Imagine living in the city and there is someone next door raising five chickens and a rooster. We are going to have to work through some specific challenges, but we are excited. There are tremendous opportunities for learning and it’s a great social atmosphere in an urban setting for people to get their hands inside of the soil. Interview conducted and condensed by Nick Manes.

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DECEMBER 23, 2013 / MiBiz Crystal Ball 2014: Special Year-End Edition

Q&A Carol Lopucki State Director, Michigan Small Business Technology Development Center, Grand Rapids As state director for the Michigan Small Business Technology Development Center (MI-SBTDC) housed at Grand Valley State University, Carol Lopucki works closely with entrepreneurs looking to start a business, enhance their use of technology or find access to capital. Recently, she has seen a major positive shift in attitudes toward entrepreneurs. As a result of this shift and other factors, she thinks now is one of the best times to launch a small business. What are some of the trends you’re seeing as entrepreneurship is on the rise? There are great opportunities to launch a business right now because there is an environmental and attitudinal change going on in the economy. At the national level, entrepreneurship and business change is cool. Now the economy is saying that starting a business and being self-employed and hiring two or three people is significant. We have switched gears and are calling them ‘entrepreneurs.’ Now we have accelerators, and early-stage seed funds and crowdfunding…. There are a number of different service providers and organizations to help entrepreneurs and startups. Where can companies go to get the proper support? We have multiple places one can go to help a company triage its way through that world. It’s very difficult for the entrepreneur with the idea. If it’s a tech company, it can be a little cleaner, like for instance somebody with a phone app. It can be different if it’s a tech company with a lifesustaining solution to a world health problem. This means that the service providers have to stay on top of all these new funds and how to prepare

(companies) for them. What’s exciting from our side of it is that the map is dotted with several service providers and some potential access to capital. You still have to have a good idea, you still have to have a good plan and you still have to have some element of structure. Sometimes entrepreneurs head in too many directions at once and that is an awful lot of what service organizations will help with.

the state’s export program. We have people who may be selling to Mexico or Canada and can make that leap abroad. We are working on a contract with the MEDC related to first customer exporters. There’s a lot of energy about the fact that small businesses can export. There are a lot of great partners we work with such as the Van Andel Global Trade Center and the U.S. Export Assistance Center.

What are some of the new opportunities for entrepreneurs as we look to next year? The path is still the same, but the environment around it is different. If you look at West Michigan, we’ve got the Urban Market and all these exciting opportunities and synergies for businesses now, who maybe didn’t have that 10 years ago here. But you still have to manage financing, manage growth, figure out who the right customer is. … The CEO can’t possibly manage everything in the business. Those are really critical pieces. That is where ‘CEO fatigue’ can set in. And at each level of growth, the fatigue is different.

What about beyond exports? We have also been doing an online venture planning program (that helps) business owners out there that don’t have good strategy written in place. We have put 480 people through (the online class). We’re trying to use innovation for ourselves. We are also doing deep market research through Grand Valley’s Seidman College of Business. We do data for the consultants that are working for the companies to help them identify their market space. A piece of the research that we are doing right now is search engine optimization (SEO) analysis, both domestic and international. For a company that is exporting, this helps ensure that they are sending the right message internationally.

What will the MI-SBTDC focus on in 2014? We have found two wonderful opportunities as we have grown. One is that we have gotten deeply engaged with

DAVID SMITH PRESIDENT & CEO, THE EMPLOYER’S ASSOCIATION, GRAND RAPIDS From the ongoing implementation of the Affordable Care Act to the so-called “skills gap,” employers face numerous issues heading into 2014. MiBiz talked with David Smith, president and CEO of the Grand Rapids-based nonprofit human resources firm The Employer’s Association (TEA), about the challenges and solutions for the New Year. What are some of the methods companies are using to train their employees? A lot of training companies are looking at developing their internal human resources potential. Companies are looking at employee engagement surveys to make sure they are competitive with their outside market. They are looking at finding qualified employees to work for the pay that is available. That doesn’t mean that they are underpaying, because they need to pay a certain amount to remain profitable. But you have a gap between available talent and available needs. Toward the last quarter, we have seen some hesitancy on the part of employers because they’re afraid of the unknown: What’s happening with Affordable Care Act? What’s happening with the taxes (they’re) going to have to pay? Some organizations are shifting to part-time work from full-time. There is a lot of legislative hindrance to growth.

Interview conducted and condensed by Nick Manes.

What are companies doing to ensure that their workers are trained? I know our workforce development cohort is trying to implement some holistic solutions, starting with education. (Companies are) trying to identify employee needs, as opposed to just working with people that are looking for work. (They are) making sure the training that is developed fits the needs that are present. Employers are doing some internal development of programs to see if they can raise and grow their own talent. So there are some homegrown solutions that are coming out of it. Employers that I talk to, though, are a little bit hesitant that if they train people, they are going to be taken by bigger companies that include more than they do. Internal systems are being developed, but with a little bit of tentative hesitancy. There are different schools of thought as to the “skills gap.” Some economists are saying that if employers can’t find workers, they need to raise wages. What are your members saying? I totally disagree that (employers) are underpaying. … Companies are paying what they need to pay to make a profit in the business they are in. And we are in a globally competitive market, not just a regionally competitive market. For the most part, employers are paying what they can afford to pay. You do get some employees who say, ‘I’m not going to take that job at that rate of pay because I’m worth more.’ You have a little bit of negative on the employer side because they want a ready-now employee. But for the most part, the gap is not there, or as wide as it appears to be. Interview conducted and condensed by Nick Manes. Visit www.mibiz.com


CRYSTAL BALL 2014: ECONOMIC DEVELOPMENT FORECAST

Q&A

we have taken that really should have a very positive impact.

Mike Finney President & CEO, MEDC, Lansing As the state’s main marketing and economic development arm, the Michigan Economic Development Corporation (MEDC) works closely with its regional partners on business attraction and retention. The organization is also responsible for promoting tourism as the manager of the Pure Michigan advertising campaign. MiBiz spoke with Mike Finney, president and CEO of the MEDC, about some of the agency’s upcoming projects, as well getting past some of the controversy the organization found itself in this year. What do the growth metrics in the state look like for 2014?

What are some of the policy changes that will make a difference in 2014?

We look at job growth and investment as the two primary metrics. In terms of job growth, I think the forecast is in the range of 60,000 jobs to be added to Michigan’s workforce in 2014. Manufacturing is still very big and very important, and it’s an area where we have to continue to invest a lot of our time and effort because it has such a positive impact overall. But it’s not just the auto sector. This includes the furniture industry, which is still very large in our state, and it includes medical devices. Our agriculture sector is very important to our state, and I think it’s our second largest industry. And then tourism continues to be an extremely bright spot where we continue to show double-digit growth … year over year.

I would start with the idea that the state has balanced its budget three years in a row, and I expect it to be a fourth year based on the fact that we are already into our budgeting process. The second is the switch from the Michigan Business Tax to the simple, fair and efficient corporate income tax (in 2012). That was a huge change that dramatically moved Michigan’s business taxes from being the second worst state to being in the top 10. The changes in the regulatory environment and some of the rules that have been changed that impact the DEQ and other parts of our state infrastructure have been very important. … Right to Work is another one that we expect, over time, will have a very positive impact. It’s not as much policy, but a strategic direction

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Aside from the Pure Michigan campaign, what are some of the initiatives the MEDC is undertaking to grow tourism as a major industry? We have a commitment to partner with the Detroit Riverfront Conservancy (because) we think there are more opportunities to bring tourists in for the variety of activities that are happening there. We also felt our state was not getting its fair share of meetings and conferences, so we partnered with the Detroit Convention and Visitor’s Bureau and set aside – over a three-year period – $3 million that will be used as sponsorship money to help bring in conferences. (That money) is available for any community in the state that is targeting conferences in the 1,000-person range (or larger). We are having good success. Next September, we will be hosting the Intelligent Transportation World Congress, which will bring about 10,000 people to Detroit. These kinds of things are new to our portfolio, but will help drive additional tourism to our state. How will the MEDC balance attracting new business and retaining the state’s existing business? We have made a pretty substantial effort to retain our businesses. In the first year and a half of our efforts, I’d say we put 80-90 percent of our efforts into existing business through our Economic Gardening and Pure Michigan Business Connect program (that helps to facilitate business-to-business activity). What about exporting? We have also put in place an international focus for both business attraction and exporting. The export part is to help Michigan companies,

primarily small and medium-size companies, who have limited experience in exporting. We are bringing a whole capability to do exporting and outbound mission trips. We have already hosted about a half-dozen trips to places like Mexico and China. This year, we helped facilitate about $130 million of export activity. For our international business attraction efforts where we are trying to bring new businesses here, it is really starting to bear some fruit. We have a lot of activity coming from Europe, particularly Germany and Italy. China, in order of magnitude, is probably bigger than everything else we are working on. The export effort has brought an international focus to the MEDC that historically was pretty weak in our organization. The MEDC has seen some controversy in 2013 resulting from external audits that showed inflated job creation and investment figures. Going forward, what kind of systems have been put in place to ensure that the numbers are accurate? I don’t want to come up with a bunch of excuses, but that information was very old and pulled together before I arrived at the MEDC. We now have a very comprehensive auditing effort underway. Also, the programs that were involved no longer exist. We have stopped doing those direct grants to companies the way it was being done. But we are internally auditing all of the programs that we have now. (MEDC leadership) will actually participate in some of the audits we have going on within the organization so that we bring the most senior-level of review to everything that is happening to ensure compliance. Interview conducted and condensed by Nick Manes.

Special Year-End Edition: MiBiz Crystal Ball 2014 / DECEMBER 23, 2013

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CRYSTAL BALL 2014: ECONOMIC FORECASTS

Q&A

Mitch Stapley Chief Investment Officer, Fifth Third Asset Management

John Augustine Chief Market Strategist, Fifth Third Asset Management

Most outlooks predict improved economic performance for both the U.S. and Michigan in 2014. The state’s economy continues to rebound well from the Great Recession, driven largely by the surging U.S. auto industry, and outlooks generally predict higher gross domestic product next year. For some insight into what’s ahead, MiBiz spoke with economists Mitch Stapley, chief investment officer at Fifth Third Asset Management, and John Augustine, Fifth Third’s chief market strategist.

What do you see happening with the U.S. economy in 2014? Mitch Stapley: We’re growing this year at about 1.7 percent (GDP). Next year, we kick it up to more like a 2.3. It’s not explosive and it’s still below trend, but it’s still better. What do you see happening with Michigan’s economy? Will it continue to exceed the national growth? Stapley: I think we could potentially moderate a little bit. We’ve had a real strong last couple of years. We expect auto sales to stay relatively strong. Interest rates are still low, balance sheets are healing up, and people are feeling better and are willing to buy a new car. If gas prices stay down, tourism should stay good, and obviously in agriculture the weather is always a variable. If we can have another long, normal year for weather, and the agriculture sector stays strong, we’ll probably stay a little bit ahead of the national average. For two key industries in West Michigan — auto suppliers and office furniture — how are things aligning? John Augustine: We don’t expect the cycle is going to slow down for the auto suppliers. … We don’t expect that trend to stop because the fleet of cars out there keeps aging. Stapley: For the furniture makers, it’s been OK. We probably want to see it really turn up here in hiring (nationally). To get the industry to the next leg up, we have to get (companies) not just hiring one or two people. We

This state has disinvested itself of any financial aid or support of any magnitude for students. We are on our own. It’s really distressing and disappointing trying to be compliant with tuition increases when we still get no support.”

— MITCH STAPLEY, FIFTH THIRD ASSET MANAGEMENT need to see more of a ramp there where, ‘I’m expanding a department,’ or ‘I’m leasing new floor space,’ or ‘I’m bringing in new people.’ Europe’s steady for them, and maybe they’ll continue to see some decent stuff going on in the Pacific Rim. Here in the U.S., I’m more optimistic about them in 2015 than in 2014. What are the potential storm clouds out there that could put a damper on the economy in 2014? Augustine: If the Fed changes policy before the market expects, another government shutdown, the Affordable Care Act spins out of control and really affects the economy and hampers investment and employment, and central banks lose control of the bond market. Those are the known risks for us right now.

JOHN PORTERFIELD REGIONAL PRESIDENT, COMERICA INC., GRAND RAPIDS Comerica’s economists forecast conditions to further improve in 2014, and Porterfield expects consumers to become a larger force in the economy. The bank predicts national GDP growth starting the

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DECEMBER 23, 2013 / MiBiz Crystal Ball 2014: Special Year-End Edition

One a scale of 1 to 10 — 1 being completely pessimistic and 10 as completely optimistic — what rating would you each give the U.S. and Michigan economies for 2014? Augustine: I would do a 7 for both. I would say from a national perspective, there’s a potential for an increase in capital spending, my exports are still holding, and I have a chance for a better consumer next year. I see the fundamental economy in an up phase, not slowing down. I’m only at a 7 because I still have three potential headwinds out there: fiscal policy debates, change in monetary policy, and implementation of a new health care policy. Stapley: I would probably go 6 for the nation and 7 for the state. We were down so far in the state and we seem to have some of the winds at our back. There is still some real estate hangover on the coasts and some issues. The stuff that really hits us, the auto sector, that’s a good story and really works better for us than the economy as a whole. Do you see West Michigan continuing to do better than the rest of the state? Stapley: Absolutely. We’ve got a tremendously competitive manufacturing base that’s even more diversified than Detroit, and I think we’re able to be more nimble here. We have more opportunities on the tourism side, and we’re just more diversified and with less baggage.

Interview conducted and condensed by Mark Sanchez.

year at 2.1 percent and growing to 2.9 percent by the end of 2014, and auto sales growing to 16.4 million units from 15.3 million in 2013. “Considering the following characteristics: de-leveraged consumers, increasing home prices, and strong equity markets — household wealth across the country has largely recovered. Thus, pentup demand for autos and homes is creating some new jobs and higher incomes for skilled workers. This, in turn, points to the reemergence of the consumer as a positive force in the economy.”

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Q&A

George Erickcek Senior Regional Analyst, W.E. Upjohn Institute for Employment Research, Kalamazoo The Grand Rapids economy experienced broad-based growth across a range of sectors and performed well against peer regions in 2013, said George Erickcek, senior regional analyst for the Kalamazoo-based W.E. Upjohn Institute for Employment Research. The local economic growth led Erickcek to proclaim that Grand Rapids has fully recovered from the Great Recession, a message he shared at the annual Economic Outlook event sponsored by The Right Place Inc. in mid-December. Erickcek spoke with MiBiz after the event about his outlook for the region’s growth. Why did the Grand Rapids region exceed expectations in 2013? 2013 was a much better year that we thought it was going to be. We thought it was going to be a growth year economically, but we did not foresee the growth that happened. We actually grew twice as fast as forecasted. We thought we would grow at 1.2 percent, but it was actually 2.4 percent. The other thing we saw that was very unique is the growth we did see was very broad-based. It wasn’t just in manufacturing. It was in manufacturing, but also in leisure and hospitality, it was in business services and it was in health. And so we saw a change in the fabric of the metropolitan area as it’s trying to become more diversified. So what are the expectations for economic vitality in our region for 2014? As we move forward, we think that 2014 will be better than 2013. We are predicting 2.6 percent growth in 2014. Not a huge increase, but still strong growth and this growth is causing the unemployment rate to drop and it’s dropping for the right reasons. So the big takeaway is that 2014 should be another good year. Is it finally possible for people to stop being “cautiously optimistic” and just be optimistic? I think that cautious optimism faces the fact that nationwide, we’re growing at a slower pace than we have in other recoveries. So when people talk about being cautiously optimistic, they are worried about Washington, D.C. and when agreements will be made. They are cautiously optimistic about the price of gasoline and all these national factors. So it’s really not the local economy. However, it’s important to think of the local economy as a small fishing boat in the sea and what happens in the sea really does hit us in some way. While the Grand Rapids area is a sturdy ship, it’s still just a ship. So people still see some potential threats. Many groups are worried about the implementation of the Affordable Care Act. What kind of impact do you see it having on the regional economy? My feelings are that it will not be much of a factor. It’s a mess and it’s unfortunate it turned out this way, but as for an economic impact, it won’t have much. What other high-level economic challenges raise red flags for you? It seems as if the whole concern about the national debt has rightly taken a back seat and so that’s good news. However, income inequality is one of those issues we should talk

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about but clearly has no easy solutions. It’s unique and we haven’t seen this level of income equality since the 1920s. How does the cost of energy factor in Michigan’s economic equation? What’s happening with the cost of energy is that we still don’t know what it means to have natural gas prices at all-time lows and what does that mean for changing the way we use gasoline. I think that discussion has been surprisingly quiet. I thought there would be a much bigger movement of fleets converting from gasoline to natural gas because it’s clear that natural gas prices are going to stay low a long time. What I think we’re seeing as the prices for natural gas dropped so quickly is that a lot of producers cut back dramatically. But while prices will stay low, is it low enough and with enough abundance that more new infrastructure to support it will be built? Talent continues to be a struggle for West Michigan and nationally. Do you a have a prescription for how businesses and institutions can work on this? I firmly believe that Grand Rapids is doing everything right, but there is a legacy cost we have to get around. I think that Grand Rapids is not thought of by people outside the area as an interesting place or a learning hub. It’s not weird like Austin or Portland and it hasn’t completely sold itself as being unique — and that just takes time. People think of Grand Rapids and they may think of conservative, they think manufacturing, they think office furniture. For many years, Grand Rapids in the data was already very strange. There wasn’t a university presence, and yet it was still doing well. It was the one outlier, and those legacy issues take a long time to get away from, so I think that’s the challenge. Those same legacy costs are apparent in the state’s relationship with automotive manufacturing now, correct? While the automotive industry does give the state breathing room in terms of economic drivers, it also gives us a challenge. The auto industry is so strong in terms of wages and the supply network that when things are well, it’s tempting for us to not take this as a breather to develop other opportunities, but to bathe in the brightness and reinvest in that same structure. That can impact the environment of the area and people may say, “Michigan? That’s autos.” As long they’re saying that, it makes our task more difficult for people to say, “Michigan? It’s a lot more than that.” Interview conducted and condensed by Elijah Brumback.

PAUL ISELY INTERIM ASSOCIATE DEAN, SEIDMAN COLLEGE OF BUSINESS, GVSU, GRAND RAPIDS What will the shift from automotive growth to growth coming from more diverse sectors mean? We are seeing a lot of things supporting the manufacturing side [such as I.T. support, back-office management support and others]. What’s happening is that people who work all across the manufacturing sector are feeling pretty secure about their jobs. We are also starting to see some pent-up demand on durable goods, those goods that have been around for awhile. We saw a lot of deferred buying when we weren’t sure about our jobs. The people that have jobs right now are feeling much more secure. Those that didn’t get their jobs back at the end of the recession and haven’t found another one, there is still a good pile of those. … West Michigan has an unemployment rate of 6.2 percent, which is below the national average and second lowest in the state only to Ann Arbor. What do you expect to see as we hit the halfway point of 2014 and employers begin to get a better picture of how the Affordable Care Act will be affecting them? We do have a lot of data that a lot of employers have chosen to defer hiring and defer investment because of the ACA. We know that is particularly those mid-range companies. If they are big, they know how ACA is affecting them. If they’re small, they know ACA is not affecting them. That uncertainty is leading them to not even know how they will be providing health care. So there is a high percentage saying they’re not even sure if they will have health insurance a year from now. I think as we reach mid-year, a lot of the components of the ACA will have started to kick in and they’ll begin to see how it’s affecting their business. Some will have been deferred until next year, which keeps that uncertainty going. We need that uncertainty removed. For most business, having uncertainty is worse than having bad news because bad news you can take action on. How will the skills gap play out next year? Certainly we have businesses claiming they can’t hire the skill sets they need. That is certainly a constraint in manufacturing where you don’t have people with five years welding experience. If everybody has already hired someone with five years welding experience, you probably aren’t going to find one of those unless you hire someone and give them five years. So those types aren’t there. It’s not a big enough gap for firms to increase wages. If that constraint was affecting their current business plan, they would find a way to hire that person. To do that means they would have to increase their wage to draw someone from somewhere else. We’re not seeing that. You’ve mentioned before that West Michigan has been doing very well with venture capital. What is your outlook on the availability of capital in 2014? Our entire business is really focused on selling West Michigan to the rest of the country. And we are starting to see innovations. People are starting to come up with ideas. If there is a good idea, it doesn’t matter where it is. If you let people know about it, you’re going to draw in capital. Sometimes, the reason you have no capital is you have no good ideas. What we have seen across West Michigan is incubators and support structures in place to help people with good ideas start to develop them so they can draw in capital. Which is a good thing. I like capital.

Interview conducted and condensed by Nick Manes.

Special Year-End Edition: MiBiz Crystal Ball 2014 / DECEMBER 23, 2013

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CRYSTAL BALL 2014: CAPITAL AND M&A OUTLOOK

EXITS AHEAD? Fund managers expect more VC-backed companies to mature in 2014 By MARK SANCHEZ | MiBiz msanchez@mibiz.com he steady gains Michigan’s venture capital industry has made over the years are expected to continue into 2014, perhaps even bringing more of what experts in the field have long said is needed to accelerate growth: successful exits. In recent years, VC firms in the state have collectively recorded just two or three exits annually. Dale Grogan, co-managing director of Grand Rapids-based Michigan Accelerator Fund I, believes that could double in 2014, as startup companies backed by venture capital begin maturing. “I think 2014 is going to be a really interesting year,” Grogan said. “We’ve seen some pretty good seeding in the past three or four years, so companies have progressed and some of them are finishing their life cycle and headed for an exit.” MAF-I may even record exits next year at two of its seven portfolio companies, he said. As the two “start to mature (and) head toward their benchmarks,” they “have been approached or we expect they’ll be approached” in 2014, Grogan said. “There are inflection points that are being hit, and that means there are suitors,” he said. Among the exits recorded in 2013 was the $70 million initial public offering for Ann Arbor-based Esperion Therapeutics Inc., a maker of a new drug to treat low-density cholesterol. Although he doesn’t necessarily view 2014 as a “watershed” year for exits that generate a “huge” increase, Mark Olesnavage of Hopen Life Science Ventures in Grand Rapids does expect exits to pick up in the next year or two. The uptick in exits will occur as the state’s VC industry continues on a steady growth path, he said. “I’m fairly bullish for what 2014 can be going forward,” said Olesnavage, the managing director of Hopen, which manages $65 million in capital through two funds with seven portfolio companies. “It’s not that we won’t have some bumps in the road, but there’s a lot teed up here and we need to keep pushing forward,” he said. “People have made investments and the opportunity is there for the success everybody wants. “The good thing is that you don’t see too many crash and burn.” Hopen Life Science Ventures completed fundraising for its second fund in mid-2013, netting nearly $41 million. “We’re working to put that capital to work, but it’s got to be the right opportunity,” Olesnavage said. In recent years, as the VC industry in Michigan grew steadily in the number of VC firms operating or based here and in capital under management, the state has attracted more interest from venture firms based elsewhere. That has led to greater

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opportunity to network and syndicate deals when portfolio companies begin to mature and require much larger capital investments in later rounds than what Michigan-based firms can handle, Olesnavage said. One of Hopen’s portfolio companies now has the attention of a large West Coast fund for a potential investment, Olesnavage said. As VC firms based and operating in Michigan begin recording more exits in 2014, the state will continue to see the formation of new funds and greater attention from out-of-state funds, said Carrie Jones, executive director of the Michigan Venture Capital Association. “It’s that growth that ultimately attracts capital and helps Michigan stand out from other places where investors could do deals,” Jones said. “The momentum from those successes will carry forward to the coming year. We’ve got a strong support system for our entrepreneurial economy here in Michigan that’s a solid foundation on which businesses can continue to grow.” Jones expects continued growth in 2014 in venture capital in Michigan, “both in terms of investments here as well as capital under management.” She also sees additional growth in angel investing. She notes the formation earlier this year of Muskegon Angels. A new angel group is also coming together in Kalamazoo. “These organizations are helping to raise awareness of the opportunities that angel investing presents, and it is an area we expect to see grow in the coming year,” Jones said. Through three quarters of 2013, Michigan-based companies received $49 million in venture capital investments through 37 deals, according to the quarterly MoneyTree report by the National Venture Capital Association and PricewaterhouseCoopers. That compares with 34 deals for $189 million through the same period on 2012, which included a few large investments in Detroit-area companies that inflated the dollar value. As of the end of 2012, Michigan was home to 20 venture capital funds, versus 15 as recently as 2008. The amount of capital available for new investments grew to $456 million at the end of 2012 from $367 million a year earlier, according to the Michigan Venture Capital Association. Capital available from Michigan-based venture firms surged to $305 million from $209 million. The MVCA Board of Directors has set a goal of Michigan becoming a top 15 state in venture capital nationally by 2015. Given the industry’s momentum, “I think we can get there,” said Sam Hogg, a partner at Open Prairie Ventures that manages the Southwest Michigan First Life Sciences Venture Fund in Kalamazoo. Hogg credits the growth of VC in Michigan to the state “supporting technology development” as well as talent and capital,

DECEMBER 23, 2013 / MiBiz Crystal Ball 2014: Special Year-End Edition

It’s not that we won’t have some bumps in the road, but there’s a lot teed up here and we need to keep pushing forward. People have made investments and the opportunity is there for the success everybody wants. The good thing is that you don’t see too many crash and burn.”

— MARK OLESNAVAGE, HOPEN LIFE SCIENCE VENTURES which “have been extremely strong the past decade. “It is crucial to keep that momentum going,” Hogg said. “It really takes at least a decade for a state to build an innovation industry. It would be foolish to skimp now that we have the machine reasonably assembled. If anything, now is the time to fuel it.” Michigan Accelerator Fund I has made seven follow-on investments totaling more than $1.6 million in its seven existing portfolio companies during 2013, Grogan said. He expects the venture fund to make two or three new investments in 2014. Michigan Accelerator Fund I invests in startup companies involved in advanced manufacturing, life sciences technology, homeland security, alternative energy technology, information technology, and agriculture. In addition to the funds based here, another nine VC firms from other states had an office in Michigan to scout for investment deals at the start of 2013. That grew with the recent opening of a Michigan office by Chicago-based Baird Capital. The growth in the number of firms based and operating in Michigan generates greater diversity in the investments made in the state beyond life sciences, a key sector for the industry, Grogan said. More VC firms looking for deals in Michigan now target startups involved, for example, in information technology and mobile applications, which have a much shorter product development cycle than pharmaceuticals and generate quicker exits for venture investors, Grogan said. “The velocity (of exits) is going to change based on the types of deals that have been done,” he said. One VC firm, Detroit Venture Partners, “has been investing steadily over the past two or three years and some of these things are growing up and should be heading out the door and creating exits for the venture investors,” Grogan said.

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CRYSTAL BALL 2014: ECONOMIC DEVELOPMENT OUTLOOK

M&A expected to pick up in 2014 By MARK SANCHEZ | MiBiz msanchez@mibiz.com he coming year is shaping up to bring moderately higher M&A activity, generating more opportunity for sellers to exit their businesses and perhaps get a better price than they could a year or two ago. Survey data indicate M&A activity will continue on the upswing in 2014 nationally. Locally, Kevin Hirdes of the M&A firm NuVescor Group LLC in Grand Rapids expects deal volume to accelerate and post a “nice uptick” in 2014 “as long as the economy holds.” “We are on the road to increased activity, no doubt,” he said. “How long we climb up that road has yet to be seen.” Deal flow has been steadier throughout 2013, although volumes are not necessarily up from the prior year and activity is not back to the “robust” pre-recession M&A levels of 2006 and 2007, Hirdes said. “It seems like there are signs of recovery, rather than a full-blown recovery,” said Hirdes, the managing partner at NuVescor. Hirdes cites agriculture — growers, food processors and equipment manufacturers — as a hot area right now for M&A activity, along with automotive. At BlueWater Partners LLC in Grand Rapids, Managing Director Matt Miller expects moderate growth in 2014 in M&A deal volume following a “good year” in 2013. Among the primary drivers: the retiring baby-boomer generation. Selling a business to retire represents “the primary reason for pursuing a transaction” for sellers, said Miller, who expects retiring boomers to drive M&A activity for some time. “The demographics set up well and will for years to come,” Miller said. One change in M&A in the last year has been that more owners are now selling because they want to exit their businesses. “More people are desiring to sell their businesses, not having to sell their businesses,” Hirdes said. At Blue Water Partners, “nearly all of our clients are pursuing an alternative because they want to,” Miller said. Two years ago, “almost all were selling because they had to,” he said. And they are apparently getting more for their businesses. Hirdes estimates that buyers today are paying 10 percent to 30 percent more than they would have paid two years ago and are generally attracting more bidders. He attributes that to the improved economy and a better credit environment that’s driving greater competition for good deals. Miller cites national research from S&P Capital IQ that shows deal values increased nearly 42 percent from the third quarter of 2012 to the third quarter of 2013, while volume nationally picked up about 5 percent. “Deal multiples have returned to pre-recession levels,” Miller said. “There’s probably an imbalance of buyers and sellers and a lot of companies looking for too few deals.”

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Survey points to more deal-making Expectations for greater activity in 2014 also comes from Chicago-based law firm Dykema’s annual M&A survey. Among survey respondents, 68.1 percent expected a stronger M&A market in 2014. That compares to 37 percent of respondents a year ago who expected a stronger market heading toward 2013. Another 28.1 percent of respondents anticipated “no significant change” in the market during the next 12 months, and 3.6 percent expected a weaker M&A market.

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“The expression, ‘There is nowhere to go but up,’ could apply to today’s mergers and acquisitions market. Yes, a government shutdown and possible default dominated the U.S. in recent weeks. Yes, the economy isn’t where it was six years ago. But those who live and breathe the M&A market see glimmers of hope,” states a report on results from the fall 2013 Dykema survey that provides some view of what’s ahead for transactions. Forty-four percent of the survey’s 110 respondents, most of whom were from the Midwest, expected a “strong” M&A market in 2014 and just 2 percent foresaw “weak” activity in the next 12 months, which is easily the best showing since the 2006 Dykema survey. The remaining 54 percent held a “neutral” view on the strength of the market. “We’re going in the right direction,” said Doug Parker, an M&A attorney at Dykema’s Bloomfield Hills office. “People are relatively optimistic. There’s optimism there will be an uptick (in M&A activity) or a continued uptick.” Fifty-seven percent of executives said strategic buyers would increase M&A activity next year. That optimism is seen in survey results on the economy. Half of respondents held a positive view on the U.S. economy for the next 12 months, the most since 2005, and 41 percent were neutral. Just 8 percent held a negative view. Fifty-four percent expected the U.S. economy to improve and 38.5 percent saw no change in the year ahead. The remaining 7.3 percent expected it to weaken. Nearly four out of 10 respondents said general U.S. economic conditions are fueling an increase in M&A activity, followed by the availability of capital, at 33.3 percent. Yet even with the optimism, the Dykema survey found some lingering effects of the recession. When asked what’s been the single biggest obstacle to deals in the last 12 months, 43 percent of respondents cited uncertainty about the U.S. economy. Parker said respondents understandably still have the recession and the tough economic times on their minds, especially in Michigan. The survey was conducted in mid-September, just prior to the federal government shutdown. “Think about where we’ve been in the last several years here in Michigan,” he said. “They’re still a little spooked out about what might happen.”

Regulatory pressures could drive bank M&A M&A activity is expected to pick up especially in the banking sector. In a fall survey by advisory firm KPMG, 65 percent of community bank CEOs who responded said they expect their bank to become involved in a merger or acquisition in the next year. Forty percent said they expect to become a seller and 25 percent anticipated buying. “Community bank executives believe that mergers and acquisitions are a viable option in the current environment if the right fit can be found,” states the annual KPMG Community Bank Outlook. “They cite the main drivers to complete a deal as regulatory reform, geographic expansion and access to new markets. Meanwhile, the existing balance sheet issues of a target bank are viewed as the greatest impediment to deal completion.” In Michigan, two pending deals that should close in 2014 involve Grand Rapids-based Mercantile Bank Corp.’s merger with Firstbank in Alma, and the Troy-based Talmer Bancorp Inc.’s planned acquisition of banks now owned by the bankrupt Capitol Bancorp, including Michigan Commerce Bank.

Economic developers anticipate growth for 2014, with some new challenges By NICK MANES | MiBiz nmanes@mibiz.com

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n outlook for continued economic growth across West Michigan comes with its share of challenges for the region’s economic development organizations. From Holland to Kalamazoo to Battle Creek, the paths to growth for area businesses are largely similar. In particular, manufacturing, food processing and health-related industries are all poised for solid performance across West Michigan, said the heads of local economic development agencies. However, the individual areas across the region have their own unique sets of challenges that economic developers say they hope to tackle in the new year. The Kalamazoo area, for example, has somewhat of a geography-related concern as bordering states get aggressive in competing with the region for companies. “We have a unique problem in Southwest Michigan in that we are adjacent to the Indiana border,” said Ron Kitchens, CEO of Kalamazoo-based economic development agency Southwest Michigan First. “Indiana is very aggressive with their incentives, and particularly with incentivizing companies to move across the border.” A recent example of this includes Exo-s Inc., an injection molding company that in October moved its operations about 20 miles across the border into Indiana from Three Rivers after the Hoosier State offered incentives in excess of $6 million. Michigan eliminated business tax credits when it moved to the Corporate Income Tax in 2012, choosing instead to offer performance-based grants to companies via the Business Development Program, as well as loans. While the Michigan Economic Development Corp. markets the state’s improved tax structure – including the repeal of the personal property tax on industrial equipment, which must be approved by voters in 2014 – and its grants and loans, but other states aggressively target companies with more lucrative offers, Kitchens said. “Michigan corrected the incentives structure three years ago. That Kitchens works pretty well I guess if you’re in central Michigan, but it doesn’t work at all if you’re on the borders,” Kitchens said. “It’s an issue we are going to have to address for those of us who represent border communities.” While states like Indiana continued to hunt for prospects over the last few years, the MEDC prioritized an economic gardening strategy focused on growing small businesses and second-stage companies. Earlier this year, the MEDC stated that it planned to get more into “hunting” now that the state’s business climate has improved and it had a compelling story to offer site selectors. The leaders of the local agencies acknowledge that a balanced approach to economic development is important, but they said that West Michigan has more to be gained from paying attention to its Dehn existing companies than with the potential of luring new companies to locate within the region. “We spend 70 to 75 percent of our time and resources working with our existing employer base to make sure they are successful and growing here,” said Karl Dehn, president and CEO Battle Creek Unlimited. That is not to say that an agency such as Battle Creek Unlimited won’t jump at the possibility of bringing in new companies, he added. “As part of a comprehensive development approach, we also aggressively pursue new business attraction opportunities for Battle Creek to add to the job base, bring new technologies and knowlThelen edge into our economy, and widen and diversify our already great employer base,” Dehn told MiBiz. Of course, some issues are universal. Like most area companies, economic developers say they also wrestle with talent constraints as they look to help grow businesses in the region. With many workers in skilled trades approaching retirement age, business owners and economic developers alike are working to ensure that there are trained employees to step in and fill the gaps. This also means having the kind of communities younger workers want to live in. “Now that this area has largely recovered from the downturn, talent attraction, talent recruitment and talent development are the top priority for area companies,” said Randy Thelen, president of Zeeland-based Lakeshore Advantage. With talent at a premium, some lakeshore companies have found a way around that constraint by increasing their use of automation, he said. “That drives other job growth,” Thelen said. “It might decrease job growth at the company buying the automation, but it increases job growth at the one making it. It’s an interesting dynamic we are facing.” A number of external factors are also weighing on the minds of businesses and economic developers alike. At the top of that list, of course, is the ongoing implementation of the federal Affordable Care Act. As more statutes are put into place over the next year, companies should expect to get an idea of what the full impact of the federal legislation will be on their businesses, sources said. Currently, employers are feeling a significant amount of uncertainty, leading to hesitation over investing in hiring or added infrastructure, economic developers told MiBiz. Despite the challenges, regional economic developers say they are optimistic heading into 2014. The automotive supply chain in West Michigan has rebounded beyond many expectations and appears poised to be busy for the next few years, according to forecasters and analysts. Sectors such as food processing and medical devices are growing areas as well, they say. “Michigan as a whole has done a good job of resetting its competitive position,” Lakeshore Advantage’s Thelen said. “When you look at how we have restructured the regulatory environment, Michigan’s overall competitiveness from a business standpoint has considerably improved. We are on a much more level playing field than we have been in quite some time.”

Special Year-End Edition: MiBiz Crystal Ball 2014 / DECEMBER 23, 2013

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CRYSTAL BALL 2014: AFFORDABLE CARE ACT OUTLOOK

More guidance on ACA expected in 2014 By MARK SANCHEZ | MiBiz msanchez@mibiz.com 2013 ushered in new mandates from the Affordable Care Act, many of which take effect for health policies renewing Jan. 1 or afterward. Next up in 2014 are more guidance and rules from federal agencies that will determine how the health care reform law gets implemented. Employee benefits attorney Nancy Farnam, a partner at the law firm Varnum LLP, sees 2014 as the year that employers learn to live with the ACA’s benefit mandates and its added fees and taxes. Much of what occurs next year amid the 2014 Congressional midterm elections will go to how the federal government decides to implement, execute and enforce the ACA, Farnam said. “2014 is going to be a year of a lot of guidance being issued and the final regulations on how to implement these Farnam employer mandates,” she said. “We’re going to continue to have a lot of questions and confusion because we have so many employee groups and issues that have not been addressed and answered at this time.” Among the rules and Lolli guidance still to come, according to Farnam: how employers with 50 or more full-time workers will count employee hours in accordance with a provision that requires them to offer health coverage to people who work more than 30 hours per week; and how employers will report data to the federal government about the coverage they offer. Federal agencies also still have to issue guidance on seasonal and short-term workers, such as people who work in agriculture or tourism where employers typically have not provided health benefits. Rules for the seasonal employers “are not entirely clear,” Farnam said. The current guidance appears to provide them exclusion from an ACA mandate for companies with 50 or more workers to offer employee coverage. “If we get more guidance, hopefully we’ll be able to move on excluding short-term employees altogether,” she said. “But this year, it’s going to be kind of a year of learning and continued turmoil.” As the new year progresses, employers that make use of contract labor to handle a project — an engineering or an information technology firm, for example — or staff from temporary employment agencies may find themselves under increased scrutiny, Farnam said. In deciding whether an employer must offer contract or temp workers health benefits, the federal government will look at contract labor from the perspective of where those individuals do their daily work, Farnam said. “In those types of situations, it’s where the employee is working. It’s not the temporary employment agency,” Farnam said. “There’s just going to be an emphasis and

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DECEMBER 23, 2013 / MiBiz Crystal Ball 2014: Special Year-End Edition

scrutiny on who is actually employing these different groups of employees. The question is going to be who actually is the employer? Who’s responsible to provide the coverage and who’s responsible for the penalty if they don’t provide coverage?” Farnam advises clients to offer coverage to contract workers if they come to the office every day. If “you’re telling them when to come there, when to leave and what to do when they are there, then you are responsible for offering the coverage,” Farnam said. The ACA requires employers with 50 or more employees (minus the first 30 employees) who work an average of 30 hours or more per week over a year to offer them health coverage or pay a penalty. The employer mandate was to take effect Jan. 1, 2014, but was delayed a year by the Obama administration. Marti Lolli, director of health care reform at Priority Health, said the employer mandate poses problems especially for businesses in low-wage industries such as retail and restaurants that tend not to offer health coverage to employees or have a low percentage of employees pick it up because they cannot afford it. When those businesses start offering health coverage as required, fashioning a benefits package that meets the ACA’s affordability requirements will prove to be challenging, Lolli said. Under the ACA, employers must offer at least one benefit package with a premium that costs employees no more than 9.5 percent of their income. In low-wage industries, that means employers will have to fashion a benefit package with high deductibles to keep premiums down — deductibles that low-wage employees may not even have the ability to afford. “Those employers will have the biggest challenge. They don’t offer benefits today and when they do, they’re going to have a challenge with affordability,” Lolli said. The delay in the employer mandate could cause further confusion for low-income people who buy coverage on their own through a public health exchange, Farnam said. Since employers don’t have to report for another year which of their employees have group coverage and which do not, the federal government may have a hard time figuring out which people enrolling through a public health exchange qualify for subsidies to buy individual coverage, she said. An individual mandate in the ACA that requires everyone to have health coverage, either by taking it from their employer or buying it on their own, still takes effect Jan. 1, 2014. If someone lacks coverage after Jan. 1, they have to pay an annual penalty that starts at $95 for 2014, increases to $325 in 2015 and then to $695 in 2016. 2014 will also bring non-discrimination guidance for health policies. The ACA requires employers to provide the same benefit package to all employees, from senior management and all the way down, Lolli said. If all of that’s not enough for 2014, there’s a case the U.S. Supreme Court recently agreed to hear that will consider whether the law can force private employers with a religious objection to offer contraceptive coverage. The Supreme Court should hear the case in the spring or early summer, Farnam said.

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Special Year-End Edition: MiBiz Crystal Ball 2014 / DECEMBER 23, 2013

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DECEMBER 23, 2013 / MiBiz Crystal Ball 2014: Special Year-End Edition

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Profile for MiBiz

MiBiz Crystal Ball 2014  

Insights, economic sentiment and forward-looking strategies from the region's business readers.

MiBiz Crystal Ball 2014  

Insights, economic sentiment and forward-looking strategies from the region's business readers.

Profile for mibiz