Published in Manufacturing

RoMan Manufacturing CEO: Capital equipment market to contract given place in business cycle

BY Sunday, December 22, 2019 06:15pm

The U.S. manufacturing Purchasing Managers’ Index from the Institute for Supply Management hit new lows in the past few months — a leading indicator that manufacturers must change their tactics in the coming year, said Bob Roth of RoMan Manufacturing Inc. Roth represents the second generation of leadership at RoMan and serves as a member of the board of directors and vice president of the American Welding Society.

What is your 2020 outlook for West Michigan and for the manufacturing industry?

I’m still pro-West Michigan and still very much pro-manufacturing. I think the general outlook for our larger community and for the manufacturing sector is good. 

Bob Roth of RoMan Manufacturing Inc. COURTESY PHOTO

Going into 2020, economists are predicting slowing yet continued growth in manufacturing. What are you expecting?

Specifically for RoMan Manufacturing, our sector of manufacturing is industrial capital equipment and for that sector, I think it’s actually going to see a contraction. The reasoning behind that is nothing squirrely like 2008 or 2009. It is the natural kind of capex cycle, which always has higher highs and lower lows than the general manufacturing cycle. 

Why is that? 

Companies spend money on capital equipment, they put that equipment into service, they’re producing whatever products it is that they produce and capital equipment lasts a long time. Six-, 10-, 15-year lifespans on capital equipment are not out of the ordinary. It’s not something you’re replacing every year and that’s what kind of gives that amplitude to the cycle that is different than the general manufacturing cycle. 

How will you approach your own capex in the next year?

We’ve spent pretty heavily over the last six years, including a pretty substantial addition that we put on one of the buildings. So, we’re also kind of contracting. We’ve got a couple of things that are must-haves and we’ve got a couple of things lined up that have short payback periods, but it’s going to be over the next year or two. It’s going to be a pretty tight budget for our own capex spending.

What indicators are you watching to predict capex spending?

It’s really interesting and I’ve been tracking it for about 20 years. As our leading indicator for this kind of capex cycle, we take the Purchasing Managers Index (PMI) monthly data, convert it to a rate of change, and it leads our business by about six to 12 months. We already saw that rate of change of the PMI go into contraction way back in November of last year, so we’ve known this day is coming. Then, we start to alter our tactics. We don’t change our overall longer-term strategy, but we definitely change our tactics. 

How does this part of the cycle affect your tactics for next year? 

We see ourselves in the backside of that business cycle. Now, we’re going to focus more on talent development and retention, less on talent relative to talent attraction. During this period, we’re going to focus on making sure that our inventories are tight and that we’re watching our credit practices — in the credit that we give to our customers — and not allowing that to get out of hand. It’s about managing working capital. It’s about investing in people but not necessarily having to go out and figure out how to get more people during this part of the business cycle.

What are some mission-critical steps that you’re taking that you think are going to prepare your company for 2020?

We’re really focused on market share gain. We have a couple of markets where we’re the incumbent dominant competitor in that particular space. In those places, it’s like guard your flank and don’t let somebody take market share away from you. Then, of course, we have a couple other segments that we serve where we don’t have that incumbent kind of position, where we’re the newer kid on the block. So now it’s about where we see the weaknesses of our competitors and we’re going to go after market share. 

We are building our business plan to be flat for the year. In those markets where we’re more dominant, what that really means is as the tide goes out, our boat is going to sink a little bit — but we’re not going to let anybody take market share away from us. In those places where we think that we can get market share, we’re going to be very aggressive. That gives us a flat business plan year over year. Of course, as the cycle moves to the next growth phase, then that market share gain will give us a double kick because we’ve got a bigger chunk. 

Are most of your industrial customers still automotive suppliers?

If you would have asked me that question 10 or 15 years ago, I would’ve said ‘absolutely,’ but not anymore. It’s still a very important segment, but we’ve focused on new growth areas that are not as automotive centric. Once upon a time, basically 90 percent of our business was resistance welding and 70 percent of that was direct automotive. We haven’t shrunk one iota in resistance welding, but now it’s only 55 percent of our total business, not 90 percent. The growth for our company over the last decade has been in these new application areas for us, which gives us a couple more springs in the mattress, so to speak. We’re not relying on just one spring anymore. Then, this spring might be bouncing up and that one might be bouncing down, but they don’t necessarily all bounce at the same time.

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