Industry Outlook 2017: Manufacturing
Manufacturing is a thriving component of Utah’s economy. Here, local manufacturers discuss the challenges and opportunities that come with doing business in Utah and how their businesses are evolving into the future.
Josh Brown, Rio Tinto
Mark Coy, SetPoint Systems
Brett Foster, Holland & Hart, LLP
Dave Frick, Varex Imaging
Dan Garceau, Autoliv
Mark Jenkins, Petersen, Inc.
Mitch Lord, Orbit
Mark Suchan, Post
Wick Udy, Jones Lang LaSalle
Joe Wixom, Fetzers
A special thank you to Todd Bingham, president and CEO of the Utah Manufacturers Association, for moderating the discussion.
What’s your biggest opportunity moving forward as a company, or for manufacturing as a whole?
LORD: Orbit manufactures watering and irrigation products, and we are a company in transition. We have launched our first smart technology product, a Wi-Fi connected smart sprinkler timer that is doing great in the market.
I think the huge opportunity is innovation and differentiation. That, ultimately, is what drives the opportunity to be successful from a manufacturing point of view. In our business, we are in a home improvement category—relatively historically low level of innovation. And the opportunities relating to manufacturing in a low-innovation environment are not particularly exciting or compelling. But when we go into a highly innovative, highly differentiated space, it opens the doors for manufacturing opportunities beyond that.
COY: SetPoint Systems builds custom automation and factory automation. And business is strong this year. We have a lot of people looking for automation because the economy is picking up and there’s a shortage of employees. But the opportunity we are seeing right now is in fulfillment automation. We worked with a company in Salt Lake to create a new machine for packaging or boxing. We create a box in 12 seconds. Any size box you want. So a company like Amazon that doesn’t want to ship an iPhone in a large box can get an iPhone box to the right size. There’s a huge demand for that in the marketplace. And now our people are working with Amazon on higher-density storage systems and picking systems for their fulfillment opportunities. So we see a lot of activity in the fulfillment and packaging world to support where the retail marketplace is going.
BROWN: The Kennecott mine has existed for 114 years. There is roughly half the ore remaining. So over those hundred-plus years, we have taken out half the ore body present, which means we have a substantial amount of ore left. The question becomes economies of scale as it gets deeper and harder to get, and you have to make pit walls larger. And efficiency technology is the key. We have to look at new technologies continually to find new ways to extract that ore from the earth.
How do technology, efficiency and advanced manufacturing help us do more manufacturing in the U.S. and decrease our logistic challenges? Is automation having an impact on that?
GARCEAU: We are all over the world, but what automation has allowed us to do is stay in northern Utah with our growth. We are in Tremonton, Promontory. Not huge towns, right? We have been double, triple in Tremonton in our size. And we have been able to do it with actually fewer people, higher-skilled people because of the automation we have been bringing in. From an employment standpoint, it’s a much more exciting environment than having humans pick. We are using automation and the automation is making sure the quality is perfect. And we are letting our associates use their brains more and solve problems and make us more efficient.
SUCHAN: Automation is creating a demand for a more technical workforce, and we have to be more creative in how we develop the workforce.
WIXOM: We found a few benefits to automation. First of all, it’s a safer environment for employees to work in. And it’s allowing us to attract a younger generation that is interested in technology. If their work becomes more like a video game, then they are a lot more excited and we are seeing that starting to build in the high schools in the area.
LORD: We have extensive supply chain and manufacturing throughout Southeast Asia, but have the North America campus here. And there have been several product lines over the past three to five years that we have brought back to Utah, largely as a result of technology and automation. So automation is absolutely helping us reshore manufacturing. If you were to go through the facility today versus five years ago, it’s a completely different environment. The mix of employees and the skill set, as a result the compensation level, is different. I’m not sure that in all industries we would be net positive in terms of head count growth, but the value proposition is different, the GDP component would be much higher.
COY: Automation raises the standard of living. So when you provide automation for a product, it allows manufacturers to provide that product cheaper. Now people that used to not be able to afford the product can afford it because it’s automated. For us, as an automation supplier, we deeply would appreciate more kids entering the automation workforce, which means more money for them.
JENKINS: At Petersen, Inc., we are not building 20 million widgets a year like Dan is. So we have always been challenged with automation because we are a one-off shop. We are building two or three or hopefully 40 truck beds. For us that is high volume. And so our challenge through automation is unique because we still need the craftsman, we still need the guy that has some flexibility. And the product is a heavier, bigger, not as dialed in, I guess is maybe the right term, as some of the repetitive products. It is one-off probing, touching. So our automation is much more unique than what Mark’s building and what Dan is using. It presents a challenge that cannot stand alone. We still have to have a guy standing by who has the skill set to tweak it.
Is it fair to say that what you’re really after in a workforce is a critical thinker and problem solver? Whether they are running a piece of automation, highly technically trained, or whether they are someone who you need to resolve issues without automation?
JENKINS: We need more than button pushers. We need people that can think through and be creative and dynamic when problems come up.
GARCEAU: We have been able to work with local universities and colleges to get automation programs established in their curriculum. And that’s been important for us. We don’t see the people come into our sites right now with the technical skills, especially the new hires. So we have to train that ourselves. And actually, what we are finding is automation is creating another career path. So we are getting kids out of high school that are taking eight hours of technical. How do I change or fix a sensor? How do I troubleshoot a machine before maintenance shows up? And we are getting about a 10 percent hit rate of these people moving into true technical jobs. We provide that support so they can go into a maintenance technician role, or some of these guys become engineers down the road. So it’s a mix. It’s working with the community, but also we have had to do quite a bit ourselves.
BROWN: We have been approached by the legislature a few times, sitting us down and saying, “What do we need? How do we help you guys?” And we need to be better with our answer.
BINGHAM: We invest a lot of money in promoting Utah. For instance, we invest millions of dollars every year on tourism to get people to come from out of the state to Utah. What if we took some money and invested that in promotion of industries that produced jobs right here for kids that grow up here and don’t want to leave? At the beginning of last fall we looked at the number of students enrolled in manufacturing pathways in Utah. And it was just shy of 700 students. And there are 3,600 manufacturing companies in Utah. It doesn’t take a genius to realize that you’re all competing for a very small piece of the pie.
We did a three-month social media campaign in the last couple of months and reached 250,000 19- to 27-year-old students. And over that three-month push, we were able to recruit another almost 500 students into manufacturing pathways.
COY: There’s also an aptitude required for this area. So if you take a cross-section of 100 kids and say, “You’re all going to go into this high-tech world of manufacturing, and there’s some neat stuff we are working on,” I would venture to guess maybe 15 would make it. So what you want to do is capture the 15 who love Legos, that this is a world they love and they don’t realize, “I can make money doing that?” I think the STEM program has the basis and the foundation to get to the kids. And we need the teachers to help them understand if you like working with Legos, there really is a way to make great money doing that. We need to make sure we keep supporting the STEM program and keeping kids engaged on what is out there.
Why do you keep your operations in Utah? What are the advantages of being in Utah over other states?
SUCHAN: For Utah, it’s location, location, location. Our access to the West Coast from here is perfect for our business, and it gives us all kinds of synergies. We are consolidating a distribution center out of California here.
JENKINS: Good news/bad news: the 700 people that are available are good people. The students coming out of the universities are top-notch. There’s not enough of them, but they are good. And our quality of life is key. We recently recruited a manager from Oklahoma. They had spent time on a project in Utah years ago. And they fell in love with Utah. It was really refreshing for us to get a guy with global experience who wants to come back to Utah because of the quality of life that they had here. That’s an advantage.
UDY: We see that on the real estate side. We work with national companies, global companies that evaluate their site selection. And they take into consideration freight, labor, inventory, and then their real estate is just a small portion of that. But if you look at the quality of life and quality of employees here in Utah, and also being known as the Crossroads of the West, there’s a great reason why a lot of these companies are looking to relocate or expand here in Utah.
BROWN: We have a mine. Clearly that’s why we are here. But there’s regional offices throughout Rio Tinto’s portfolio. One in Quebec and one in Salt Lake City. And people want to come to Kennecott. When we have a lot of our ex-pats coming to town, they will show up and find operas, professional sports teams, activities that are 20, 30 minutes from their doorstep and they can do it after work. People come here and don’t want to leave. And Salt Lake City is a lot cheaper in real estate and in cost of doing business. So Utah is very attractive to our large organization as a cheap, effective way to get very good talent, and they tend to retain very good talent when they come here.
What are the challenges that come with doing business in Utah?
WIXOM: One of the challenges that we run into as a small business is there’s a heightened sensitivity to the environment in the state of Utah, and I believe everyone lumps all of manufacturing into the negative end of the spectrum. And it is creating for us, as a company, a substantial overhead cost to manage and report on something that is so minimal on the grand spectrum of what is affecting the environment in Utah. It’s hard when you see states that are out there offering a lower tax structure in the incentives because they want to diversify their economy. They want to be the next Utah. So they are offering these attractive opportunities in an environment that is, I don’t want to say is less sensitive to the environment per se, but—
BINGHAM: But may not have the geologic challenges that we have.
WIXOM: Yeah. And we are not trying to hide anything behind the curtain. We are open and show what we are. But the staff and effort that we have to do to stay in good graces with the state of Utah and the general public is a challenge. And it’s a cost that drives the cost of the product that we offer to a point where sometimes it’s not palatable to the customer.
BINGHAM: We know all the companies are doing everything they can to reduce their footprint. Many of our facilities are zero waste facilities. And right now a lot of our companies are sending recycled material to certain facilities that are along the Wasatch Front. One of those facilities is about to close down. And I know personally of eight or 10 very large manufacturing facilities that are zero waste facilities that will no longer have a place to send any of that paper, plastic. And that will go to the landfill.
SUCHAN: We are one of those zero waste facilities.
BINGHAM: Post is one of those facilities. Treehouse is another one. I think P&G is another one. That’s a big deal, to now basically say a manufacturer who is doing the environmental thing now doesn’t have that opportunity to do that. So it will be interesting to see how we, as an industry, are able to deal with that issue and not pump all that to the landfill.
What other things are companies doing on the environmental side to reduce their footprint?
JENKINS: Probably a year and a half ago, we used a lot of energy and power in our shop. And so we went through an initiative and installed sensor LED lights through our entire company. Now throughout our plant, unless there’s motion there, within five minutes all the lights go off. We also did that in our warehouse. We have about 800,000 square feet of out-of-production tooling for Boeing. And of course, everyone knows Boeing is green in every aspect. And we have done that in our warehouses. We are looking at possible solar applications to try and minimize the footprint and lower our costs in the long term.
FRICK: The environmental impact of our facility was the main focus when we expanded a couple of years ago. We took a building that was originally constructed in the ’30s and we added 140,000 square feet, so we have half a million square feet under roof now. And it is 100 percent LEED Gold certified. We went to a lot of effort with LED lighting, with limiting the amount of power that we have in each cubicle, getting rid of the little space heaters that people have under their desks and individual coffee pots. All of those efforts have helped us elevate our green footprint here. And quite honestly, from a recruiting perspective, that’s a necessity these days.
LORD: We have a variety of footprint activities, but one of the things that’s been exciting for us and is inspiring and motivating our workforce is we are orienting our product and the benefit of the product to more of an environmental sustainability view. We launched a smart irrigation controller that will save water. And it’s not just a little bit of water. If I ask how much water do you use when you put your sprinklers on, people say a 100 gallons. It’s 2,500 every time you do it. We have products that leverage technology and allow us to actually become a water conservation company. So it’s not just about what we are doing internally, it’s also what we are doing externally with products we’re bringing to the market that can actually make the world a better place. And that’s not only a fun thing to do, but it’s exciting for our team in total, to go from widgets to somebody who is making great stuff, making the world a better place along the way.
COY: Our engineers have been asked to design machines for energy savings. One specific activity is we use a lot of servo actuators where we are using a servo motor to drive an actuation out to a distant position and then we stop that servo immediately. When you stop it, you have a lot of wasted energy. So now our engineers have come up with a way to capture that energy and regenerate it—actually store it momentarily and then put it back into the system to pull the motor back. It’s a regeneration system really, with a bank of capacitors that allows us to pull the motor back and save some energy on the machine. It’s something our engineers like to think about, and we say go ahead, make it happen. Keep the energy low.
With the new administration in Washington, I think manufacturers are cautiously optimistic. One area that has us a little concerned is some of the trade discussion. What are your thoughts on the national state of things?
GARCEAU: We are one of the biggest importers from Mexico in the state of Utah. But we are also the biggest exporter to Mexico. This is how the automotive industry runs, so we are not alone in this. If the customers are in Mexico, we need to support them in Mexico. If they are here in the U.S., or if they are in Canada. So NAFTA has been a really good thing for the automotive industry. We are supportive of President Trump’s idea to lower the corporate tax rate in the United States. We feel it’s too high. But we don’t feel the border adjustment tax is the vehicle to create the money to allow us to lower that.
FRICK: We have the same concerns. Although the majority of our products get exported outside the U.S., they get repatriated once they are incorporated into larger pieces of iron. And the availability to bring those back into the country and the price pressures are going to be elevated. So it’s going to be a challenge for us.
Let’s talk about manufacturing’s impact on the economy in Utah. I don’t think the public realizes that the manufacturing payroll is the largest in the state, by far. It dwarfs all others.
COY: There’s an enormous multiplier effect, because Dan sells air bags and his engineers buy automation. They come to SetPoint to buy automation, and then I go to Petersen to buy our stuff. So there’s a lot of flow-down in terms of supply chain that comes out of manufacturing. We can have our revenue base, but then we generate an enormous amount of revenue throughout the industry. And we try to keep that local. I think Autoliv likes working with local suppliers. And we like working with local suppliers. And then Mark, in turn, sends it to another local supplier. It tends to propagate itself and it generates revenue after revenue after revenue, and keeps the state strong.
BINGHAM: We had 3.2 percent growth in the state last year, and a big portion of that is manufacturing. Manufacturing across the country last year was flat. But in Utah it was between 4 and 5 percent growth, which is really good. I think manufacturing is $20 billion in Utah. That’s significant. About 16 percent of the state’s economy is in manufacturing. The only higher wage in an industry is in mining. Manufacturing is second in wages, about 30 percent higher than the average wage in Utah.
COY: Back to automation, the discussion from the administration is to stay home unless you want to be a legal citizen of the United States. So our workforce is dropping. But then he is also telling manufacturers to come home. And what does that mean? It means the employment rate is going to drop and more automation and more high tech. So from our standpoint, it is actually a very positive arena.
UDY: A lot of manufacturers are focused on efficiency. For a manufacturer to relocate or move, it is extremely expensive. So they’ll lease or buy a building across the street. Just this year we have seen a handful of manufacturers that are looking to become more efficient and get under one roof. And I think that is going to be a trend that we are going to be seeing over the next couple of years. Because as far as industrial warehouses go, industrial is the new retail. A lot of e-commerce companies are relocating. That was the big trend last year. And now we are seeing these manufacturing companies that are becoming a lot more efficient.
If you could tell the business community one thing about manufacturing, what would it be?
JENKINS: The diversity of opportunity. You go into any one of our shops and look at the skill set, whether it be technical or craftsman. We bring students through our shop and say, “This guy started sweeping the floor. He is now on a CAD machine helping design products.” So the diversification of professional opportunities in all of our factories. I think when people say “manufacturing,” they are thinking of hard labor. And really, there’s some pretty cool professions. There’s some pretty cool stuff in all of our shops.
GARCEAU: The pace of the technology. You know, the technology, the software, and applying the statistics, the mathematics, the information we are getting off the machines through automation now—we are able to be so proactive and fast paced. That’s something that people need to know. Manufacturing is kind of sexy now. Come save more lives, come build buildings, come mine at Rio Tinto. It’s an exciting fast-paced environment now.
LORD: What’s the changing face of retail and how does the end customer interact with a retailer or manufacturer? We are right in the middle of that. Our business is Home Depot, Lowes, WalMart, every big retailer. But we are also active in e-commerce as well. That changes the role of manufacturing. At some point along the way, it flips and becomes cool to be the manufacturer, because then you control it from concept to transaction, and then in the future as well.
FRICK: For someone that is not in manufacturing, they see that dark, old warehouse with the light bulbs hanging from strings, a lot of dust and dirt. And in reality, we are manufacturing, we are marketing, we are sales, engineering. All of those functions exist inside of every one of our manufacturing facilities. And when people look at companies, they have to look beyond that stigma of manufacturing and look at the holistic view.
How do we change or enhance the image of manufacturing? High school kids don’t have a negative image of manufacturing. They have no image of manufacturing, which means there’s an opportunity for us to educate them. We don’t have to convert them from haters of manufacturing to lovers. We just have to help them understand what it is. How do we do that?
JENKINS: You have to play their game. You have to go social. We have chosen to go down the social media route, to share some things. As leaders of these manufacturing companies we have to be vocal. We have to get out there and talk about the cool opportunities. And put that information in places where they are going. We need to take the lead role in that with our companies, and put all the cool stuff that we are talking about out there so they can see it.
FRICK: Getting out to the educational institutions and speaking with them about developing curriculum that could support manufacturing. Going to some of their social events and talking about manufacturing. We have started doing that. We have had to, just from a recruiting perspective. And it’s starting to pay dividends with social media. We had a job fair we only advertised on social media, and we were turning people away because we had more than 300 respondents in two days. We started a social media campaign two days before the event. Over 300 people showed up.
COY: Some of the people that do well in manufacturing are spatial type people. They do well when they hold something and put it together and fit it. The STEM fair is a good example. We hold STEM fairs with the schools, and we go down to the high schools and put hardware on the table. We lay hardware out on the table and let the kids play with it and put something together and let them feel what it is about. When they feel it and touch it and think, “This is cool. This is neat stuff. This is what I have always liked to do. I liked playing with Legos as a kid, and I can get paid for that?”
I would advocate beefing up the emphasis on the STEM fairs where we can actually connect face-to-face with kids, with stuff in the middle of us, and let them feel it and touch it and play with it and have an explanation that this is neat stuff.