After a strong 2016, most West Michigan manufacturers are looking ahead to this year with optimism that they will continue to grow as the economy expands.
Overall, the majority of manufacturing executives interviewed by MiBiz over the last month have expressed bullishness that the industry will continue to expand, particularly if the incoming Trump administration follows through on some of its campaign promises for pro-business policies and deregulation.
But despite the bullishness, manufacturers are also approaching the year with a level of uncertainty. Although some of the policies proposed by President-elect Trump could help drive business, plans to significantly alter foreign trade policies could pose major challenges for some manufacturers.
“Some of the stuff that was said on the campaign trail bluntly scares the crap out of me,” said Bob Roth, president of RoMan Manufacturing Inc., a manufacturer of welding and automation equipment based in Wyoming, Mich. “When anyone talks about ripping up NAFTA, which is basically thumbing your nose at your two most important allies, that’s not the kind of stuff that makes me feel good. That is the core of our market.”
Still RoMan, which primarily serves the automotive industry and the oil and gas market, maintains a positive outlook for 2017.
“In the automotive tooling cycle, we’ve now had now four strong years and our backlog is such that we’re going to start the year in that segment strong, but I don’t think that pace is going to hold,” Roth said. “I think the tooling cycle is going to slow down.”
Tooling for the automotive industry is often produced several years ahead of new vehicle launches. North American light vehicle production is expected to reach 17.6 million units in 2017, slightly less than the anticipated 17.8 million units produced last year, said Mike Wall, director of automotive analysis at IHS Automotive.
IHS Automotive expects North American light vehicle production to peak at 18.7 million units in 2020, as a result of new facilities coming online in Mexico.
Although Roth believes his segment of the automotive industry will slow in the latter part of the year, he’s bullish that activity from the oil and gas industry will help offset any of those headwinds.
Since prices for crude oil rose to around $50 a barrel in December, investment among oil and gas producers has ratcheted up, something that both Roth and Muskegon-based Eagle Alloy Inc. hope will drive their businesses.
For Eagle Alloy, which manufactures large metal castings, the oil and gas industry once comprised 40 percent of its business in 2014, but fell to 6 percent as oil prices tanked in 2016, said CEO Mark Fazakerley.
“It was just a horrendous drop,” he said. “Oil and gas, mining and agriculture are the three segments that we live and die by.”
Now, the manufacturer is seeing signs of life among oil and gas companies as higher prices make it more feasible to restart domestic production. Moreover, many in the industry believe the price of oil will hover around $50 a barrel given OPEC’s decision to slash production coupled with the incoming presidential administration’s promises of deregulation in the industry.
“This slowdown has lasted a lot longer than anticipated, but we haven’t slowed down as many did in our industry,” said John Workman, president of Eagle Alloy. “We expect a good year next year but not back to the 2013 or 2014 levels.”
MANAGING TALENT CONSTRAINTS
Growth in the manufacturing sector will be broader than just companies in the automotive and oil and gas sectors, according to Jim Robey, director of regional economic planning services at the W.E. Upjohn Institute for Employment Research in Kalamazoo.
Overall production of goods in the Grand Rapids metropolitan area is expected to increase 2.2 percent this year, according to data presented by Robey at the annual Economic Outlook for West Michigan event hosted by The Right Place Inc.
At the same time, employment is only expected to grow by a half percent over the same period, indicating to Robey that a constrained labor market will force more manufacturers to invest in capital equipment in the coming year to meet demand.
“One thing we’ve been watching is Moody’s Analytics, and they’ve started to look at less employment and more output, suggesting that we are in the age of a smart machines,” Robey said. “We’ve started to see the same trend for West Michigan. Grand Rapids is at 3.2 percent unemployment. At the current wage rate, you’ve probably induced as many people into the market that you’re going to get.”
That reality is nothing new for manufacturers, the majority of which have struggled for the last several years to attract qualified talent. However, now retaining employees has begun to prove more difficult, prompting increased training costs that have executives looking for new strategies to keep the workers they already have on their payrolls.
“We’re experiencing upwards of 2 percent turnover a month — that’s 24 percent a year,” Jeff Dolbee, CFO of Grand Rapids-based ADAC Automotive, said in a roundtable discussion hosted by MiBiz in December. “The cost of continuous training is pretty high.”
Manufacturers have adopted a number of different strategies to mitigate those training costs, including moving to a direct-hire model and offering their workers ancillary services such as wellness and personal finance training.
Beyond the uncertainty over talent and the global political environment, RoMan’s Roth is most concerned about the trends he cannot control.
“What keeps me up at night is hoping that our monetary policy hasn’t created a whole bunch of bubbles that are going to explode,” Roth said. “Those are the types of things that no matter what we try to do at RoMan to do a good job, when those massive things happen, I just don’t know how to plan for them.”