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Industry Outlook: Manufacturing

Local manufacturing veterans discuss the headwinds their companies are battling, from a tight labor supply to global competition. But, they say, increasing automation is transforming their workforce and creating new competitive opportunities.

A special thank you to our moderator, Todd Bingham, CEO of the Utah Manufacturers Association.

Participants:

Kimberly Bailey, Sun Products

Josh Brown, Rio Tinto

Grant Foster, Holland & Hart, LLC

Steve Keiffer, Big-D Construction

Erin Laney, EDCUtah

Steve Marler, Fresenius Medical

Becky Marquette, L-3 Communications

Patrick Russell, Orbital ATK

Mark Suchan, Post Consumer Brands

Corey Thayn, BD Medical

Wick Udy, Jones Lang LaSalle

Joe Wixom, Fetzers

What are the challenges you see in manufacturing as we move forward? What are the big issues your companies are dealing with?

RUSSELL: One of the challenges we’ve had is maintaining a safe work environment. When I entered manufacturing coming out of the military over 30 years ago, most of the people who entered the workforce had come out of the military, whereas now the new workers are coming right out of high school or out of the applied technical colleges, and they are not work hardened. Trying to get them to understand the need to work in a safe environment has been a challenge and has required a lot of extra training on our part.

MARLER: Getting utilities into the facility in order to expand has been an issue for us in Ogden. We are working with Rocky Mountain to work through some of those issues. Infrastructure has to keep up with growth in Utah.

UDY: Existing manufacturing space is becoming scarce. Our vacancy is right at 5.5 percent. We had 2.3 million feet of space delivered in 2015 and another 2.8 currently under construction. If you go to the northwest quadrant, it’s a complete facelift that is taking place. The challenge is a lot of the buildings are built more for warehouse distribution. So they don’t have the power. 350,000 square feet has 2,000 amps going into it, so it’s difficult to find a true manufacturing facility unless you are finding land and building your own facility.

MARLER: We are producing about 25 truckloads of product every day, so shipping costs are huge. And being located in Utah is a challenge. The cost of our transportation is enormous. Sixty to 75 percent of our population is along the eastern seaboard. And the other 25 percent is the western side. So we are trying to look at our model. Should we be less over time here in Salt Lake City and more geared toward a Tennessee location? Somewhere around the East?

I’m a local guy, but it becomes a business decision. Does the shipping cost outweigh some of the advantages that Utah has? The more Utah can do to stay competitive—knowing that they are going to lose ground because there’s not much we can do about the cost of diesel. There are other infrastructure systems like rail that we do have a chance to overcome someday that will allow us to stay competitive on the shipping side.

BROWN: Right now we are faced with a very low-cost commodity market, and as a result of that we have had to be more efficient in everything we do. If you look across every industry, they’re doing it more efficient, faster, cheaper, higher quality. That’s become the norm.

MARLER: Labor is a continuing challenge. I can’t recruit a person that’s a great machinist, a great automation person. They don’t exist. They don’t have the skill set.

BROWN: The general consensus is that we have lost a generation, or potentially two. The truck driver as an example, the machinist—those heavy industrial type jobs. We have an entire generation gap between our average worker now and who we’re trying to recruit. I think you had a generation that was really pushing hard for their children to be better than they were. And that included a four-year degree. That mind-set took a generation or two down that path. We need to have a cultural shift around education.

BAILEY: As a parent of a senior in high school, I’m not encouraging him to be a mechanic. I’m encouraging a four-year degree. It’s definitely a mind-set and a shift. Do I want him to go into some form of manufacturing? Yes. But it’s more along the lines of an engineering degree.

MARLER: I started out working at a farm as a kid, being a mechanic, being a construction worker, making as much as I could to get into college. We don’t have that culture anymore. We have to accept that. We have to be mom and dad, as a manufacturer. We’ve got to send those kids to the university and create the culture in kids, because that is the workforce we have to work with. We have to make the paradigm shift of how we handle it. If we don’t, we will continue to sit around this table and sing the same story.

Automation has really changed the nature of manufacturing jobs. I often fears that automation is actually driving jobs away. How is automation affecting your labor force?

MARLER: It goes into the exchange rate in Mexico. If we have products go to Mexico where it’s a lower cost of living, the exchange rate is almost 20 to one, and so a lot of companies are starting to move manufacturing to Mexico. It makes it harder to stay in Utah and be competitive unless you automate. And unless you have a skilled workforce, you can’t build with equipment that’s going to keep the labor rates down.

Our workforce actually accepts automation. They know it is a requirement, a necessity to be able to maintain jobs in the U.S. and in Utah. If you don’t automate, they realize that companies are going to move products to other countries. We are a global company: Mexico, Russia, Turkey, China. We can ship a lot of the products from across the globe. We make those choices all the time. So they recognize it is an important piece to being successful and competitive, to keeping the cost down and the quality of work up.

RUSSELL: Our factories are highly automated and we have actually found a really good cultural fit with the young people coming out of school today and the automation that we have. They are able to run the machines much better than some of our more tenured or older workforce.

THAYN: It raises the minimum wage of our sites. From when I started there, we probably changed over 30 percent of our workforce from the lowest-level assembly to high technology, maintenance, electronics, robotics. I don’t know the exact change in salaries, but it’s been significant. It’s more of a skilled labor rather than an unskilled labor position. Same number of people at the site, but it’s really shifted the wages up.

BINGHAM: We just completed a recent study with Millennials. We asked them what they thought about manufacturing. And the overall response was, “We don’t know anything about manufacturing.” That speaks volumes to recruitment—they don’t know what it is that we do. Certainly there are challenges in getting youth into our operations, whether it be from a defense standpoint and a security standpoint or in some cases a safety standpoint, and making sure that they are trained before they come in.

UDY: What is your employee retention rate?

MARLER: Right at 90 percent, for us. And the average tenure is 15 – 16 years.

THAYN: We’re about in that range, too. A lot of that is driven by the stability of manufacturing compared to other industries. It’s very easy to move a software development site. It’s just desks and computers and office building. Manufacturing is hundreds of millions of dollars of equipment. And you cannot move that. It gives stability.

MARLER: They have to see a clear path for career advancement. If you are always an entry-level employee, and you are still an entry-level employee 16 years later, you are not going to be there.

LANEY: We are seeing that shift. It’s slow, but UAP is a great example of that. You start talking to kids when they are in seventh grade, eighth grade, ninth grade, and you say, “If four years is what you want to do, that’s great. But we understand it’s not for everybody. Let’s show you an alternate path so by the time you graduate you have a certificate, a job, you already have had an apprenticeship and may have already been hired.” I’m hoping we are starting to see the beginnings of that cultural shift, but it is going to take some time given that such heavy emphasis has been placed on the four-year degree for so many years.

THAYN: About 70 percent of the jobs in Utah don’t require a four-year degree. But in manufacturing, they require some skills and certification. And we talk about lost generations—we don’t have a generation of people who have had to rebuild their own car or work on the farm with equipment. And that’s where the gap is. I joke I talked my son into stopping college and becoming a machinist because we are paying $80,000 to machinists, plus overtime. All the overtime they can get. And it’s just because of that scarcity of those skills.

What are the competitive advantages to manufacturing in Utah?

UDY: My focus is on industrial supply chain and site selection. We ecently represented a company out of California that manufactures medical devices, and they had identified Utah as their site because of the quality of the workforce. They could see the state was investing in the students and training them. But these companies out of California are tired of the EPA issues and the quality of workforce and the taxes that continue to rise. So Utah has done a great job of setting ourselves apart from the pack.

RUSSELL: We have a terrific relationship with the local, state and federal governments. We just had the governor out to our facility. We feel like we have the complete support of the local government entities we deal with. And that makes a huge difference.

SUCHAN: Our proximity to the West Coast is a big deal. Being able to deliver products within a day to those markets is really critical for us. We recently went through a merger. We are Malt-o-Meal here and we merged into Post and thought, “How are we going to compare to this more legacy company?” We are top of the heap in nearly every key metric because our workforce is so great. We have such an educated workforce. They come out here and look at our teams and say, “How do you get your teams to do this?” Because they are more educated, they want more responsibility. And that’s always exciting to model for the other locations across the country.

RUSSELL: We have purposefully located facilities and operations here because of the availability of talent. Compared to some of our other sites, we have talent here that is not available there.

RUSSELL: Quality of life is a huge advantage. In the East and Southeast, work weeks are significantly longer than what we see here. Generally speaking, people work 40 hours a week here. They want to take time off and go do things. And the accessibility of recreation is amazing. As someone who moved here from Texas, I absolutely love what’s available, and so do the people that we recruit. They like the outdoors. This is a place where they want to come and they want to stay.

WIXOM: It’s easier for us in this market to achieve a living wage for our manufacturing employees. And it’s also a very labor friendly state, so there’s a balance both for the labor and for the employer. It’s mutually beneficial. The cost of doing business is very friendly to grow and to develop talent and to provide opportunities for those employees. They are not OK being static at a position for 30 years, this new generation.

There’s a lot of safe, affordable neighborhoods where our employees can live that are within a reasonable distance of where our places of employment are. That’s just not happening when you go to the coasts.

MARLER: When doing our due diligence for locating manufacturing sites, the first thing we look at is what is the cost of labor, the cost of utilities, what’s the cost of real estate and the cost of building there? And that’s why you don’t build something in New York City. You build something in Tennessee, right there at the Eastern Seaboard. But you look at all the sites across the nation where you’d want to be, and just based on those things alone, Utah competes very well and sits right there as best of the best.

FOSTER: We see the importance of our quality of life with a lot of our clients. Ottawa Healthcare decided to put an R&D facility in Salt Lake City based in substantial part because of the quality of life and the diverse geographic area. Vista Outdoor, a client we represent, decided to consolidate here in Utah fundamentally because of the mountains and the outdoor industry that lends itself to hunting and outdoor enthusiasts. And Browning and Easton and other clients of our firm want to be here in Utah to manufacture, to bring in people who are passionate about the businesses in which they are involved.

For example, Hoyt has a significantly high number of bow hunters that actually work at the company because they are able to put their passion into their jobs. And that’s a big deal for a company like Hoyt. I’m sure it would be the same with Black Diamond and other companies where the playgrounds are right in their backyard, literally.

What is the impact from the public sector on our industry? How responsive do you find our elected officials?

MARQUETTE: The government has been really helpful in looking at different types of tax credits. Our company really takes advantage of the R&D tax credit it offers, as well as the economic development incentive tax credit. That’s given us a little bit of back-end savings in order to continue to do R&D and innovate in the state.

BAILEY: We are taking advantage of the similar credits. We not only have a local R&D facility, but we have one back East at the corporate office. So we not only recognize the need to innovate back there, but also on-site in the manufacturing facility.

MARLER: We do have some really good advantages. But as far as the state or the U.S. federal government, when it comes to competing with other countries, I don’t think we do that very well. I don’t think we take the big-picture look at it. For example, we source a lot of our equipment out of Germany. They are a heavily technical-driven country, and they export a lot of their machinery. A lot of their revenue comes from people within the U.S. buying their equipment. And the German government heavily incentivizes that.

Germany invests in their technical industries, and the cost is better in Germany to buy equipment. I don’t think we see that opportunity from the macro-economic perspective within the state, or the U.S. federal side. I’m not sure how we can turn that at this point. It’s going to take a lot of lobbying to make folks realize it and see it.

MARQUETTE: Export controls are huge. They are.

BINGHAM: We’ve got some things we need to work on from a tax policy standpoint. We are commonly recognized as the number one state to do business in. It’s hard to get to number one. It’s even more difficult to stay there. So we need to be more aggressive as a state in terms of tax policy that incentivizes expansion, growth, innovation of manufacturing and other businesses. One thing we have talked about for years is the three-year life component of our sales tax on inputs, where we really ought to be not taxing inputs to production, but taxing the outputs.

THAYN: It’s great being number one, but everybody else is trying harder. What do we need to do to stay there, whether it’s through energy costs or talent or tax policies? I look at the level of technology outside the U.S. And we always think that China and Mexico are low-cost labor. But they are catching up, from a technology standpoint. They have high-automation, high-technology manufacturing. They are battling their own inflation issues and trying to take down number one in technology. And they’ve progressed much faster than we have and caught up quite a bit.

BROWN: GOED and EDCU and the governor’s office had a very good incentive program for bringing new business to the state. But once you are here, what opportunities exist to incentivize growth expansion? It’s something they are aware of. They have said they are looking at options to help incentivize staying here.

LANEY: We all know that things could always be better and you should always strive to be better. But the good thing about the incentive program as it is structured right now is if anyone is expanding, they are typically not just looking at one location. So it’s not typically going to be purely organic growth. For that reason, if you work with the locals and EDC Utah and GOED, something can usually be done for your company.

But the program can always be improved and nothing is ever static. And to quote Governor Herbert, you have to move at the speed of business. You can’t expect a program to fit all needs 10 or 20 years after its inception.

RUSSELL: We talked about utilities earlier, and we have a facility in the Southeast that TVA is very aggressive on giving energy credits. They will come in and relamp your facility. So we have been able to drop our energy costs substantially in the Southeast. That’s something we need to see more of locally. Because when we are looking at making those decisions of where do we do new business, energy is a huge part of our total cost.