Factories Revel in New Industrial Revolution : Manufacturing: Spending on high-tech equipment is driving a breathless expansion. But what’s growing is productivity, not jobs.
The factory floor is clean--and surprisingly quiet. Only a handful of men tinker with huge machines destined for other plants that will turn metal into automobiles, appliances and construction equipment.
Owned by Giddings & Lewis, America’s biggest producer of machine tools, the factory is a window on a revolution in U.S. manufacturing--and the peculiar nature of the nation’s robust economy.
Heavy industry is pouring money into advanced equipment such as Giddings’ automated machine tools. Capital spending on equipment increased 16.2% in 1993, driving the kind of breathless economic growth not seen in nearly a decade--growth that has policy makers and the financial markets worried that the economy is overheating.
Simply put, American manufacturers, who just 10 years ago evoked images of inefficiency and obsolescence, are enjoying a revival. But, unlike in past expansions, they are not meeting demand by putting up new factories or opening shuttered ones. Nor are they hiring many more workers.
Instead, they are reconfiguring plants, adopting lean manufacturing techniques and buying automated, versatile equipment.
“Our customers are looking to do more with less,” said Stephen Peterson, Giddings vice president of sales.
As recently as three years ago, the Giddings plant here, in a blue-collar suburb northeast of Detroit, employed 1,200 people. Today, there are fewer than half that many, but the smaller work force is shipping almost as many automated machine tools out the door.
“Real growth . . . is coming from productivity driven by capital spending,” said David Littman, chief economist of Comerica, a Detroit-based bank holding company.
Littman’s conservative estimate is that capital spending will rise 13% this year. The Commerce Department reported Thursday that companies are increasing investment in plants and equipment to the highest level in five years.
One reason: The average age of metalworking machinery in U.S. plants is 10 years, older than at any time since 1941. To remain competitive, factories simply must replace aging equipment.
Not everyone is thriving, of course. Aerospace and other defense industries are reeling from cuts in the Pentagon budget. California and the Northeast, with manufacturing bases much more reliant on military contracts, have not felt the expansion as much as the Midwest and the South.
“It’s a complete flip-flop from a decade ago,” said Diane Swonk, economist for First Chicago National Bank.
Another difference from 10 years ago: This expansion has been a feeble producer of jobs, particularly in manufacturing. Overall, employment decreased in 1991 and 1992 and grew only 1.6% last year. The Commerce Department estimates that half of the 120 manufacturing industries expected to show growth in sales this year will also cut employment.
“I know of no similar period when there has been such a reluctance to add employment to meet demand,” Littman said.
Layoffs by major employers continue; an estimated 186,000 jobs were cut by big companies in the first nine weeks of the year. The firings are concentrated among companies that are still restructuring, embracing new technology or facing stiff price competition, as in the computer industry.
But the remaking of manufacturing may be laying the groundwork for more jobs and a stronger economy in the future.
Painful as the process is, productivity already has drastically improved. The Labor Department reported this month that the productivity of U.S. workers--output per hour worked--was improving at the fastest rate in seven years.
Such gains have been made possible by the so-called re-engineering of U.S. factories. Many plants have cut costs and work force. They have adopted lean production principles that emphasize quality, shorten manufacturing time and reduce inventory. They have learned how computers and other high-tech communications can make them more efficient.
“It’s a technology revolution in manufacturing,” Swonk said.
Manufacturers have been aided by several other factors: a resurgence of consumer confidence that is creating demand, low interest rates that have reduced the cost of capital (though rates now are going up) and a weak dollar and lower trade barriers that make exporting easier.
The auto industry is leading the improvement in the manufacturing sector--and adding jobs for the first time in years.
Nearly 14 million vehicles were sold in the United States last year, up 8% from 1992. Growth has continued at a brisk pace through the first three months of this year, with sales of 15 million cars and trucks projected for 1994. For the first time in 14 years, the United States is likely to produce more vehicles than Japan.
Even with sales and production strong, however, the auto makers are not opening new plants. Instead, they are increasing output by eliminating production bottlenecks, redesigning assembly lines to make them more efficient and adding third shifts.
Chrysler, for instance, recently announced it will spend $1.8 billion over three years to increase assembly plant output 17%. The company will also upgrade engine facilities, including a $120-million investment for new equipment to build 100,000 minivan engines at its Trenton, Mich., factory.
The No. 3 auto maker is doing all this without building any new plants, although it is keeping a St. Louis plant open that was previously slated for closing.
“One thing we don’t want is to get stuck with too much capacity,” said Dennis Pawley, executive vice president of manufacturing.
The new investments could result in 6,000 new jobs, as Chrysler adds new equipment and third shifts at existing plants.
Another company hiring is Caterpillar, the Peoria, Ill.-based maker of construction equipment. Strong demand for its earth-moving equipment has been spurred by highway repair projects and other major construction undertakings.
In three announcements since November, Caterpillar has declared its intentions to hire 1,000 factory workers. Some new hires will replace workers who retired, but most are needed to meet higher than expected demand.
“In 1991, Caterpillar had 10% too many workers,” Swonk said. “Now it is calling back workers in record numbers.”
Cummins Engines of Columbia, Ind., is also operating on all cylinders. The producer of heavy-duty diesel engines for trucks has enjoyed strong profits for the past two years, after a difficult restructuring in the ‘80s. Industry-wide, the backlogged demand for tractor-trailer engines is a record 120,000 units.
The rising demand for autos, trucks, appliances and construction equipment has boosted the machine tool business as well--the critical industry that builds the machines that make all other machines.
Today machine tools are the nation’s fastest-growing manufacturing sector, according to the Commerce Department--a remarkable turnaround for a business devastated by foreign competition in the 1980s. More than 900 of 1,400 U.S. machine toolmakers have disappeared since 1982.
The survivors, leaner and wiser, enjoyed a 32% increase in machine tool orders and a 13% rise in shipments in 1993. Last year, the United States surpassed Germany as the world’s largest consumer of machine tools, a trend expected to continue through 1995.
One thriving machine toolmaker is Newcor Inc. of Bloomfield Hills, Mich. The company, which makes specialty machines and precision parts for the auto and appliance industries, has enjoyed three years of record revenue and earnings.
At its Wilson Automation plant in nearby Warren, Newcor recently completed a $40-million automated assembly system for installation at Ford Motor Co.’s engine plant in Cleveland. The computerized system is being used to make Ford’s new V-6 engine.
Newcor’s high-tech bent is evident in the makeup of its 250-member work force in Warren: 170 of the employees are engineers who spend most of their time working on computers.
Newcor works closely with customers, typically forming teams early in a project to help design, engineer and build a system. The emphasis is on flexibility--having a machine perform more than one function with little retooling--and eliminating downtime.
“Ten years ago, a machine would be up 65% of the time,” said Richard Parkes, manager of new product sales at Wilson Automation. “Today that is 85% to 90% of the time. And we are striving for 100%.”
Just three miles north, the effort to build better machine tools is under way at a Giddings & Lewis plant. The company, based in Fond du Lac, Wis., exemplifies the renaissance of the U.S. machine tool industry more than any other manufacturer.
In 1987, Giddings was losing money as a unit of Amca International of Canada. William Fife, a turnaround specialist brought in to revive the unit, implemented a strategy aimed at broadening Giddings’ base beyond its traditional Big Three auto customers.
Fife took the company public in 1989. In 1991, he made his boldest move--acquiring Cross & Trecker, a company twice Giddings’ size, for $107 million. The purchase allowed Giddings, a specialist in high-end automated systems, to expand into less costly machines and gain entry into Europe.
Giddings aggressively cut costs, cut Cross’ staff and developed new products by merging the expertise of the two companies. Productivity almost doubled. The result: steadily higher sales and hefty profits. Last year, the company earned $43 million on sales of $517 million.
In Fraser, a team of Giddings engineers is working with Chrysler to design manufacturing solutions to reduce production time for a 1998 replacement for the car maker’s LH-model sedans.
“We have targets here to shrink the manufacturing time,” said plant manager Ed Schenk, who has spent 25 years in the manufacturing trenches. “It’s a competitive advantage to be faster.”
