While the pundits debate how to restore U.S. industrial competitiveness, thousands of small, flexible, market-driven manufacturers are already doing it
While the pundits debate how to restore U.S. industrial competitiveness, thousands of small, flexible, market-driven manufacturers are already doing it
WILFORD D. GODBOLD JR.'S FATHER didn't raise his son to be a metal bender. Since their arrival on South Carolina shores in the 1640s, the Godbolds have produced distinguished attorneys, judges, and legislators, but hardly a man of trade. It was much the same on Wilford's mother's side of the family, where the Ehlerts in this century claim three generations of physicians.
So, in 1982, when Wilford "Woody" Godbold announced his intention to leave his partner's chair at the top-drawer Los Angeles law firm of Gibson, Dunn & Crutcher in order to take a job as executive vice-president of a metal-fabrication company, the reaction among family and friends ranged from disappointment to bewilderment. Those who did not think him crazy thought perhaps it was merely a stage Godbold was passing through. "Caution: Keep Out Midlife Crisis" read the sign that hung, only partly in jest, over his law office door.
Now, nearly six years after leaving his comfortable place in the booming service economy, Godbold's decision seems anything but insane. Godbold has since become president and chief executive officer of Zero Corp., his former law client, and under his direction it has increased its sales 73% to $138 million. During the same period, earnings have doubled to an estimated $13 million. With factories now in southern California, Florida, Massachusetts, Minnesota, and the United Kingdom, the company has established itself as a leader in metallic packaging for industries as diverse as aerospace, electronics, medical instrumentation, and photography.
Zero is typical of a new breed of industrial growth companies in the United States. In sharp contrast to the mass-production-oriented giants of the last industrial era, the new stars of manufacturing are small, highly focused companies whose fortes are flexibility, customization, and market sensitivity. They rely neither on one product nor one customer, prefer short production runs over long, and aim for high margins rather than high volume. Productivity is invariably high. And while others decry the effects of foreign competition, these firms seem to thrive on it -- as competitors and even as suppliers to companies around the world.
Yet even as these companies distinguish themselves from the old industrial giants, so too do they distinguish themselves from the sleepy small manufacturers of an earlier generation, which seemed content to get by by relying on one product or one major customer. Zero Corp., for instance, currently boasts more than 17,000 different customers, with no one account representing more than 3% of sales. At Zero's Burbank, Calif., factory, teams of workers craft everything from cooling equipment for supercomputers to frames for disk drives to housings for the Stiner missile systems. Company-wide, 40% of Zero's sale comes from specially customized products.
"Big production runs are an anathema around here," Godbold explains. "We don't even bother bidding on the IBM PC jobs, fighting over a tenth of a cent or running the machinery to go a tenth of a second faster. The revenues are great, but the profit isn't. We feel better solving a customer's problem -- adding our value -- and getting a 9% or 10% return instead of the 3% most metal fabricators get."
Those are margins old Henry Ford would have admired. And he probably wouldn't have turned his nose up at the take-home pay, either. Woody Godbold points out that his 1987 compensation nearly equals the six-figure income he would have earned as a partner at Gibson, Dunn & Crutcher. And what's more, he's having a ball.
"I was tired of the advisory role. I wanted to build something. That is more important to me than the money."
The emergence of such small, high-growth manufacturing companies as Zero represents a dramatic break with the traditional notion of industrial America. For years, pundits and politicians have bemoaned the decline of the giants of American manufacturing, and constructed around it a general theory of deindustrialization. Yet even as these behemoths have fallen, as much from the onslaught of foreign competition, new companies -- most of them far smaller even than Zero Corp. -- have quietly been picking up much of the slack.
Indeed, rather than dying, America's industrial base has actually been restructuring itself -- painfully, at times unevenly, but ever so surely. Since the mid-1950s, the actual number of manufacturing jobs and the roles of manufacturing companies have increased even as manufacturing's share of the gross national product has gradually declined. But within the manufacturing sector, even greater changes are taking place. Between 1974 and 1984, large companies shed themselves of some 1.4 million manufacturing jobs, but during the same period 41,000 new manufacturing companies created enough new jobs to offset virtually all of those losses. As a result, companies with fewer than 250 employees now account for 46% of the manufacturing work force, up from 42% a decade ago. If the trend continues, small-scale manufacturing should pass the 50% mark by the 1990s.
This profound shift to smaller manufacturing firms has been widely ignored in political, academic, and financial circles. Harvard University's John Kenneth Galbraith spoke for a generation of big-is-the-way-to-go economists when he wrote back in 1967 that the small business was a "diminishing figure" in the industrial system because of its inefficiencies of scale and dearth of management and marketing talent. Despite recent evidence to the contrary, Galbraith still maintains that large companies are the centerpiece of the manufacturing economy.
So, too, does his Cambridge colleague Robert B. Reich, the oftquoted guru of industrial policy. When Reich thinks about small manufacturers, he thinks only of "lonely geniuses and backyard inventors," whom he dismisses as having no significant role in building an industrial base. Reich would have the United States seek industrial salvation through a greater degree of economic planning conducted by big government, big industry, and big labor -- which are the very forces that brought us to the current crisis, and that seem to have learned so little from it.
This narrow view of the economy infects the more popular discussions of industrial policy outside the academy. When prominent policy analysts address the issue, invariably they talk in terms of protecting jobs at General Motors or providing tax incentives for modernization at Bethlehem Steel -- as if the problems with these companies go no deeper than highly paid workers and outmoded equipment. Further, the choice appears to be between writing off manufacturing in favor of a high-technology and service economy, or propping up the old industrial giants with tariffs, import quotas, and subsidies. A third option, based on the vibrancy and growth of small manufacturers, is never seriously considered.
And yet the evidence of manufacturing's entrepreneurial revival is everywhere. Among the basic industries, perhaps the most outstanding example has been the minimill sector of the steel industry. While United States Steel Corp. was busy buying up oil companies and changing its letterhead, these smaller operations were investing heavily in the latest steelmaking technologies, such as continuous casters and electric arc furnaces. Now numbering 50, the minimills increased their share of the U.S. steel market from virtually nothing in the early 1970s to close to 20% by 1986. Nucor Corp., based in North Carolina, is perhaps the most successful of the minimill companies. From its new plant in Utah, it has now started penetrating deeply into West Coast markets that, until recently, had been dominated by Japanese and Korean steelmakers. And last year Nucor began construction of an Indiana facility to produce flat-rolled steel, supposedly the last bastion of the giant integrated mills.
It is one thing to dismiss the role of small companies in such basic industries as steel, automobile, and rubber as simply peripheral or "boutique," as is the fashion. More curious, however, has been the insistence by the industrial policy thinkers to dismiss them in the areas of high tech and consumer electronics. Author Walter Russell Mead, for instance, insists that the rising costs of new plant and equipment now place technological industries outside the reach of entrepeneurs, who can play on the role of scavenging "hyena" feeding on the leftovers of the corporate "pride of lions." Mead derides niche markets as being inconsequential in the larger scheme of things. It has not yet dawned on him that the industrial sector, like every other sector of the American economy, has been transformed into a collection of niches ill-suited to the old industrial-model analysis.
Nowhere has this proven truer than high tech. It was, after all, such "backyard geniuses" as Stephen Wozniak, Steven Jobs, William Gates, and Adam Osborne who developed and popularized the personal computer, and created a $35-billion worldwide industry still dominated by the United States. And even with IBM's forceful entrance into the market and repeated sallies by the Japanese, young growth companies such as Apple Computer, Compaq Computer, and AST Research continue to maintain strong market share. Similar patterns have emerged in nearly all the key high-tech fields, from biotechnology to supercomputers to semiconductors.
"People have developed a mythology about size," notes venture capitalist L. J. Sevin, an original investor in Compaq and in Cypress Semiconductor. "Nobody thought a company like Compaq could survive against IBM and the Japanese, but it did . . . . The Same is true of semiconductors. I once heard Bob Noyce tell a bunch of guys when he was still at Fairchild that in the end there'd be just Texas Instruments, Motorola, and Fairchild -- there wouldn't be room for other semiconductor companies. They would end up like the car companies. It proved to be an irrelevant comment." Irrelevant, indeed, Noyce himself went on to found Intel, now a billion-dollar semiconductor manufacturer, while Fairchild itself has been swallowed up by another upstart, National Semiconductor.
"The shift to small business is happening in virtually every manufacturing sector," says Michael J. Piore, MIT's noted economist and expert on industrial organization. As large companies continue to spin off many of their manufacturing units and increasingly turn to subcontractors for production, Piore predicts that a greater share of the nation's manufacturing will fall upon the shoulders of smaller, more efficient, and more highly focused industrial firms. "It is a total reversal of the trends from the 1960s and '70s," says Piore.
The new industrial paradigm has altered the geography of manufacturing in the United States. Over the past decade, many of the Rust Belt cities of the Northeast and Midwest have lost their exclusive franchise on the industrial sector as such cities as Dallas, Phoenix, and Miami attracted plants and spawned their own manufacturing companies.
Surely if there is a mecca for the new generation of American manufacturing, it is southern California. The Los Angeles area experienced an 11% increase in manufacturing jobs between 1974 and 1984, a decade in which Pittsburgh watched its blue-collar employment drop 41%, Detroit 37%, and Chicago 30%. Today, Los Angeles, long derided as Tinsel Town, is home to more manufacturing establishments, employs more factory workers, and creates more industrial wealth than any metropolitan area in the country.
Central to Los Angeles's manufacturing ascendancy has been an industrial structure dominated by thousands of small, niche-oriented growth companies. While southern California is home to only half as many Fortune 500 industrial corporations as Chicago, for instance, it boasts more manufacturers from the INC. 100 and 500 lists of fast-growth companies than Chicago, Pittsburgh, and Detroit combined. Nor is this merely a question of a few high fliers. According to a study done for INC. by Cognetics Inc., in Cambridge, Mass., nearly 2,500 of the nation's fastest-growing small and midsize manufacturing firms are located in Los Angeles, more than any other city in the country.
Perhaps the most remarkable aspect of Los Angeles's small-company industrial economy is its staggering diversity. It would surprise no one to know that there are many companies clustered around the aerospace industry. Less well known and appreciated, however, is the fact that Los Angeles also leads the nation in the number of production jobs in electronics and high tech, easily edging out northern California and its Silicon Valley and more than double the size of Boston's much-ballyhooed technology economy.
Typical of the southern California high-tech economy are companies such as Point 4 Data Corp., a manufacturer of computer systems. Founded in 1969 by three Orange County engineers as a supplier of computer systems to educational institutions, Point 4 ambled along. Then, in 1979, the company began manufacturing its first major processor, and it began to take off. Now, it enjoys total annual sales of nearly $22 million, most of it from sales of its own hardware.
Like Woody Godbold's Zero Corp., Point 4's modest success stems from its careful avoidance of large-scale production. The company sells it multiprocessor systems -- most of them in the $50,000 to $100,00 range -- to a cadre of high-tech middlemen who add peripheral equipment and software applications and resell the packages to such specialized vertical markets as hospitals, hotels, and dental offices.
As a manufacturer, Point 4 also avoids competition with lower-cost producers by eschewing economies of scale and long production runs. Most of Point 4's computers are built to the specifications of individual customers, necessitating a degree of communication and cooperation that an Asian company would find difficult, if not impossible, to offer. "We are a low-volume, high-value kind of company," explains president Bill Rigby, a former Honeywell Information Systems executive. "As a high-volume, low-value-added company, we would be setting ourselves up for the Koreans or whomever -- and not getting the margins, either."
Alongside the boom in high tech, the Los Angeles area has also produced a boom in such low-tech industries as textiles, furniture, and metalworking. In some instances, these increases merely reflect the fact that Los Angeles, with its population growing 20% during the past decade, provided a growing local market for expensive-to-ship products. But in others, they can be better explained by an entrepreneurial business climate and the presence of an enthusiastic blue-collar work force.
Take the garment industry as an example, which in Los Angeles has become a mosaic of small companies. Indeed, some 2,800 companies, each with fewer than 100 employees, now account for 95% of all establishments. Between 1974 and 1984, Los Angeles garment makers increased employment by more than 17% -- at a time when foreign competition helped to cut industry jobs 14% nationwide.
For the most part, these small-scale garment manufacturers enjoy an advantage over large American competitors who live in fear of foreign competition and who have transferred much of their own production offshore. By keeping design capacity in-house and their production close by, small American companies can respond far more quickly to the sort of fashion changes that drive much of the industry.
At CWII of California Inc., for instance, president Warren Handler says he can move into production much faster than competitors with overseas suppliers when his specialty and department store customers report that a particular item has suddenly become hot. In his case, all he needs to do is walk across the hall of his airy factory in downtown Los Angeles, sketch out a few ideas with his in-house designer, Lucy Freitas, and production chief Carlos Retana, and let them go to work on it. Within four or five weeks, the garment can be designed, manufactured, cut, sewn by local subcontractors, and shipped to retailers. A similar process with a Hong Kong or Taiwan company can take as long as three months.
"The key in fashion is to remain flexible," says Handler, who got into manufacturing after years as garment salesman. "You have to be ready to recalculate, redesign, reorder on a moment's notice."
This interplay between design and production is an important characteristic of the New American Manufacturer, and a barrier against competition from cheap imitations. Designer Freitas's unique stylings take months for overseas competitors to copy. And Handler often makes knockoffs still more difficult to produce by ordering custom-manufactured fabrics from local mills that produce them only for CWII's use.
"What puts us in a comfortable situation is that we have an exclusive product," explains Handler. For CWII, comfortable means $7 million in sales last year, with pretax profits of between 10% to 15%.
Clever design and marketing are the trademarks of the New American Manufacturer, but they alone do not a successful company make. An industrial firm also requires a trained or trainable blue-collar work force willing to work at competitive wages. At CWII, and indeed throughout Los Angeles, that labor is provided by an enormous pool of immigrant labor, much of it recently arrived from Asia and Latin America.
No one is more aware of this immigrant edge than Carlos Retana, who cofounded CWII and owns half its assets. A native of Costa Rica, Retana emigrated to Los Angeles in 1962, and started out sweeping floors of downtown garment factories for $35 a week. Before long, Retana talked his employers into letting him stay on after his usual hours in order to learn how to cut fabric. Eventually, he was able to set up his own custom-cutting service that by 1978 employed 20 people and was billing $750,000 a year.
Retana's is not a unique story. In southern California, which is home to one out of eight foreign-born Americans, most of the labor-intensive sewing work of the garment industry is performed by "ethnic" contractors who hire workers from their native countries. Tucked away in an old brick industrial district east of downtown L.A., and dispersed among the lowslung industrial buildings of the suburban San Gabriel and San Fernando Valleys, are Filipino shops, Chinese shops, Salvadoran shops. "The truth is that you don't get many Americans who have the patience to develop skills as cutters," says Retana. "And it is from the cutters that you find your managers and even owners."
Los Angeles is not the first American city to build its industrial base on the back of immigrant labor and the ambitions of first-generation entrepreneurs. Around the turn of the century, when the United States was just emerging as the world's preeminent industrial power, immigrants, most of them from Europe, accounted for 70% of all coal miners, two-thirds of all garment workers, and half of the men employed in steel mills. Today, the high-tech industry around Los Angeles depends heavily on recent Asian immigrants, notably Vietnamese refugees, for the meticulous hand labor crucial for electronics manufacturing. And across all manufacturing industries in and around the city, it is Hispanic workers who are filling roughly half of all production-line jobs.
At companies such as Fireplace Manufacturers Inc. (FMI), as many as 90% of the company's 150 employees are Hispanic. With Hispanics willing to take starting wages of $3.75 an hour, FMI has a certain advantage over its unionized competitors. But more important than the lower cost is the higher quality of the work. "They simply work harder than white Caucasians," says John Hornsby, FMI's vice-president for operations. "They come from harder backgrounds. They've had to struggle all their lives. If you give them a good system -- free English classes, help with immigration -- they appreciate the fact that you're doing something for them."
FMI has also found its immigrant work force eager to adapt to modernization. Back in 1984, FMI president Bill Harris was so concerned about high inventory costs, flat productivity, and wastage of production materials that he and Hornsby engaged Japanese manufacturing expert Kiyoshi Suzaki to redesign their factory. It took Suzaki three years to totally revamp the production process and institute a "Just-in-Time" production system. Several old-line supervisors, brought up in more traditional manufacturing environments, quit rather than adapt to the new system. In contrast, FMI's Hispanic workers, relatively new to their trade, were eager to embrace the changes, and it was from their ranks that new supervisors were selected.
"The immigrant worker is very much like the Japanese worker after the war. He has a real survival instinct," notes Suzaki. "The older worker is married to the old ways. The immigrant hasn't gotten settled yet and is willing to try something new."
In the case of FMI, "something new" yielded impressive results. Scrap left over from the manufacturing process fell nearly 60%, inventory turn is three times faster, and overall productivity jumped by more than 30%. These efficiencies have allowed FMI to cut prices over the past two years, from an average of $325 per system to $225. And by increasing its production force by only 50%, FMI managed to increase sales by 300%, to $18 million.
The new breed of industrial companies found all around Los Angeles didn't just spring up from nowhere. They required, first, a new breed of industrialists to spot opportunities and reconceive what manufacturing was really all about. Rather than the hard-bitten veterans of the factory floor, many of these new industrialists came from the service industry. From their old jobs they brought a focus on markets, on management, and on making the numbers work. And to their new ones they brought fresh-eyed optimism unclouded by any of the biases of the old industrial order.
Randy Pauly, for one, certainly never saw himself as a manufacturer. A self-styled hippie of the early 1970s, Pauly majored in history at UCLA and dreamed of owning his own boat and plying the Pacific for swordfish. But after a year of confronting the harsh realities of life on the not-so-high seas, Pauly tossed aside his maritime career to join up with his father, then a successful sales rep for a number of office furniture manufacturers.
In 1976 the Paulys got the bad news that one of the largest manufacturers they repped for, accounting for more than a quarter of their business, was up for sale. "We suddenly realized that as soon as someone else bought it, we'd probably be fired," the younger Pauly recalls. "The life of an independent rep is always precarious. You're the scapegoat for the problems of the manufacturer. We realized the only way we would be secure would be to make our own product. We were tired of being the yo-yo at the end of the string."
Althought they knew little about manufacturing, the Paulys went out and raised $250,000 in Small Business Administration-backed loans to found Pauly Inc. They managed to recruit a few executives with manufacturing experience, then scrounged around some of their old retail contacts for some start-up orders.
Alan Blum, now the company's manager of operations and an old manufacturing hand, thinks the Paulys' lack of manufacturing experience may all have been a blessing. Unaware of what to do, they were willing to try the latest techniques. "They did everything by instinct rather than by prior knowledge," says Blum, who joined the company in 1986. "At least they were not repeating the stupid mistakes of the past 20 years."
Most important was the marketing orientation that the former reps brought to the manufacturing process. In contrast to the classic small manufacturer, who often sees everything from the point of view of his own cost and ease of production, the sales-driven Paulys naturally empathized with the needs of their customers. As a rep, Randy Pauly had himself been subjected to the humiliation of a customer calling to complain about shoddy merchandise or late delivery. So rather than strive for a traditional volume-manufacturing strategy, Pauly set up his company to run in a "service-intensive way," spending as much as 3-1/2% of sale on customer service activities -- significantly more than his competitors.
"A lot of our competitors with a manufacturing background take an adversarial approach to customers, but because of our sales orientation, we bend over backward, even if it costs a little profit," says Pauly, whose 1987 sales don't seem to have been hurt by the philosophy: $28 million, up 22% from the previous year. "You can't have obsessions about doing things only a certain way. If we promise something to a customer in New York and we can't get a full truckload together, we absorb the penalty in shipping costs -- we do that without hesitation. Our goal is to keep that customer happy. Otherwise, you end up being susceptible to competition. You grow by keeping your customers."
In a similar way, Z. Paul Akian is using skills developed as a financial planner to build his own little industrial empire. Before taking over Western Filter Corp. in 1978, Akian had spent his career almost entirely on the financial side of business, including stints with Technicolor Corp. and GTE Corp. He had also worked as a financial consultant helping to turn around several small companies in trouble.
But all the while Akian was determined to be an industrialist, and he saw his chance with Western Filter. Run by its founder, an engineer, the company in 1978 was a classic small manufacturing enterprise with barely $1 million in sales. Its line of small filtration systems was limited to a few conventional items, which in turn circumscribed both its customer base and its ability to raise new capital for expansion.
Yet in what was decidedly a low-growth company, Akian saw growth potential in the aerospace, industrial, and military markets. He was able to hire the marketing and engineering help the company needed to develop new products. And he used some of his old contacts at Wells Fargo Bank to arrange several million dollars in loans to finance his ambitious expansion.
But it was not simply in raising money that Akian's background proved crucial. At Western Filter, he subjected every capital expenditure, even every new hire. By placing emphasis on the most remunerative lines and investing in up-to-date machinery, Western Filter's sales have jumped from $1.2 million to almost $10 million, even while the number of employees has increased from 40 to only 120. Yet despite this rapid growth, Akian's grip on the company's operations remains tight -- even to the point of reading over every piece of correspondence that goes in and out of the company.
"I don't go out and bother people in line positions, but if anything seems amiss in the correspondence, I take action," Akian says as he puffs on a cigar. "My executives might think I'm wasting time, they may not like it, but it keeps everyone on their toes."
As hard as he drives his people and his systems, Akian drives his people and his systems, Akian drives no one harder than himself. Arriving at work at 7 a.m. for a 12-hour day, he often spends his nights inspecting his other fledgling manufacturing enterprises, including a security alarm company and a bakery specializing in lavash bread, the traditional Armenian staple. Akian sees his future as building an industrial organization made up of several such tightly focused manufacturing businesses.
"I want to develop these assets and create real wealth, not by manipulating paper, but by creating viable industrial companies," says Akian.
Like the other new industrialists -- Godbold, Rigby, Handler, Retana, Harris, and Pauly -- Akian shares a basic belief not only in the importance but the long-term profitability of manufacturing in the United States. Once before during this century, that faith helped transform America into the dominant industrial power in the world. Now, it is that same faith that finds a renaissance in thousands of small and growing manufacturing enterprises in Los Angeles and across the country.
Ten Commandments for the New Manufacturing
1) Keep production units small
2) Keep corporate overhead low
3) Keep productivity high
4) Keep production flexible
5) Remain market driven
6) Customize products
7) Strive for margins, not volume
8) Stress customer service
9) Recruit from the "New America"
(10) Recruit a CEO with