Manufacturing is primed for growth, but the state has work to do to keep companies here

By Bill DeRosa

By now, it's common knowledge that over the last several decades, U.S. manufacturing companies and the jobs they provided have disappeared in large numbers. Connecticut, for example, lost nearly 60,000 manufacturing jobs between 2002 and 2012. So it's easy to jump to the conclusion that manufacturing here and throughout the U.S. is headed for oblivion.

A closer look, however, suggests something quite different. Beyond the well-publicized declines in companies and jobs, a less visible but significant change has been occurring. High-value-added manufacturing, driven by cutting-edge technology, constant innovation, lean processes, and highly skilled teams of workers has, for the most part, replaced the assembly-line production of cheap goods by low-skill workers.

In a July 2012 article, CNN Money, citing data published by the Conference Board, reported that the number of job openings for skilled manufacturing workers increased 38% since 2005 and 152% in the last three years.

"Manufacturing and manufacturing jobs have become much more complex," says John Rathgeber, CBIA's president and CEO. "They demand critical thinking skills, analytical skills, and communication skills as people increasingly work in teams to solve problems, create new products, and lean their processes."

University of Connecticut Provost and former dean of UConn's school of engineering Mun Choi agrees.

"Manufacturing has gone through significant transformation in this country," he says, noting that while there has been a decline in manufacturing jobs, "the value of manufacturing [output] per worker has increased during the past 10 or 15 years."

Indeed, between 1990 and 2007, Connecticut manufacturing output increased by more than half, despite a 35% decrease in manufacturing workers: that according to UConn economist Steven P. Lanza, writing in the Winter 2013 edition of The Connecticut Economy.

All this is good news for Connecticut, a state whose manufacturing base: from the largest corporations to the smallest supply-chain manufacturers: is on the cutting edge of advanced technologies, such as additive manufacturing, and well-positioned to capitalize on the shift to high-tech, knowledge-based industrial processes.

"Right now there's nothing more exciting than additive manufacturing," says Choi, "especially additive manufacturing using powder metal bed technology. These are 3-D printers, but not using typical ink-jet types of technology, which uses softer materials, such as plastics. Instead, they use metal powder beds and fuse materials and metal powders in place using high-powered lasers and electron beams. [See cover photo.] With that technology, there are now capabilities to manufacture parts: not just prototypes: on demand for industries from aerospace to biomedical implants.

"Pratt & Whitney has been very much on the frontier of this technology. But there are other companies using electron beam melting to create biomedical implants. So it really spans many different industries, and we see it as becoming one of our major focuses at the university."

An Economic Force in Connecticut

The economic power of manufacturing in Connecticut is undeniable, says Rick Wheeler, president of Capewell Components Company LLC in South Windsor, a CBIA board member, and the head of CBIA's Manufacturers Advisory Council.

"Manufacturing is vital," he says. "The best example is that whenever we get a new project or put out a new product, we're looking to other Connecticut companies to be our suppliers. So the one new job that might create new revenue or new employment for us has that multiplier effect because it creates new revenue and hopefully new employment for the supply base in Connecticut. Being able to stay inside of Connecticut for our supply base makes manufacturing even more vital to the state's economic recovery."

The numbers support Wheeler's argument about manufacturing's significant multiplier effects. In Connecticut, nearly 4,500 manufacturing establishments employ more than 166,000 people. For each new manufacturing job, between 1.5 and 4 additional jobs are created in other parts of the state's economy.

In addition, Connecticut manufacturers:

  • Spent $1.27 billion in capital expenditures in 2011
  • Add $25 billion to Connecticut's GSP
  • Generate $1.35 in additional economic activity for every $1 they spend
  • Bring in $12.3 billion in defense contracts

Manufacturing is also the source of high wages, pumping more money into Connecticut's economy. The average manufacturing compensation in Connecticut is $89,316. In addition, a national study released by the U.S. Department of Commerce in August found that:

  • New hires in manufacturing had 38% greater monthly earnings than new hires in other sectors at the end of 2011 (the latest data available).
  • For the workforce as a whole, including new hires and incumbents, earnings were 25% higher in manufacturing than in other industries.
  • Since the recession began, real average earnings for new hires in manufacturing grew 3.5%, while real earnings for hires in other industries were flat.

Success Overseas

Manufacturing's contribution to Connecticut's economy has been boosted by companies' ability to capture business overseas: a good thing, given that 95% of consumers reside outside the U.S.

The CBIA/BlumShapiro 2013 Survey of Connecticut Businesses, released last month, found that while one-third of companies surveyed are engaged in international trade, among manufacturers the number of exporters is significantly higher: nearly 80%: an increase of six percentage points over last year. Overall, Connecticut manufacturers export nearly $15 billion in products annually.

"At the end of the day, when you look at the manufacturing companies that have really grown since the end of the recession, it's hard to look at those companies and say that exports weren't a huge factor," says Chad Moutray, chief economist at the National Association of Manufacturers (NAM).

Moutray cites the NAM's surveys, which show that companies exporting have a more positive outlook in terms of higher sales expectations and other measures.

"One of the keys for U.S. manufacturers is to continue to stay engaged globally," he says, arguing that more free trade agreements will help significantly by lowering the costs of exporting, creating more opportunities, and generating more economic growth.

"The one thing to keep in mind is that we have a trade surplus with those countries we have a free trade agreement with. We want more of that. We want to be able open up opportunities for our manufacturers."

Other States Want What We Have

For Connecticut's manufacturing sector to realize its full economic potential, policymakers will first have to figure out how to keep manufacturers in the state.

According to the CBIA/BlumShapiro survey, 88% of the 141 manufacturers responding have a very negative or somewhat negative opinion of Connecticut as a place to do business.

To make matters worse, other states seem to share that view, a perception fueled in part by Connecticut's poor showing in various national rankings of business friendliness. That perception has inspired a host of (mostly southern) states to aggressively recruit our companies.

Our survey found that 35% of Connecticut manufacturers have been approached within the last year by other states about relocating or expanding to their area. North Carolina, South Carolina, Virginia, and Florida were the states most often cited by respondents. When asked whether they are considering moving to another state in the next five years, 27% of respondents said yes.

"Other states just know that the general tone of the business climate in Connecticut isn't the best," says Don Droppo, Jr., president and CEO of Curtis Packaging Corp. in Sandy Hook and chair of CBIA's board of directors.

"Often, depending on what report you're looking at, we rank in the bottom quartile on a lot of measures, and sometimes even dead last."

Droppo gets approached regularly by other states to relocate. Some of the most aggressive states, he says, are South Carolina, Kentucky, Alabama, North Carolina, and Mississippi. Their sales pitches focus on the weaknesses in Connecticut's business climate.

"I probably get called at least once a month," he says. "And sometimes the same state will call me five times in one year. They talk about how the cost of living is going to be so much better down there and that energy and taxes would be much less expensive.

"So they're saying that to keep all things the same: suppose you have a $30 or $40 million business: just by making this move, you'd be able to pick up at least a couple million dollars additional to the bottom line."

Realizing that moving a manufacturing operation to a different state is no easy task, other states are sweetening their offers with special incentives, says Droppo.

"I have not really entertained a lot of those calls, but in one case several years ago, I talked to one of the guys who told me, "We'll move your company down, we'll build you a brand new facility, there will be various tax incentives that would span three to five years or more, and we'll help you train new employees'. They're throwing all but the kitchen sink at business owners to entice us to move our companies down South."

Keeping other states from luring our manufacturers away from Connecticut will be challenging unless policymakers make the tough decisions necessary to restore business leaders' confidence in Connecticut as a place to invest and grow.

"Realistically, Connecticut will never be among the lowest-cost states for business," says CBIA President and CEO John Rathgeber. "Being economically competitive doesn't mean that we have to be the lowest-cost state for business, but we must strive to be the best state for business. Our high quality of life, well-educated workforce, world-class colleges and universities, and close proximity to major markets like New York and Boston are all things that Connecticut business leaders cite as competitive advantages and can partially make up for the cost factor. But, while business costs here may never be as low as they are in Mississippi, Kentucky, or North Carolina, we need policymakers to take actions to at least narrow the gap."

"The Fiscal Issue Is a Big One'

Droppo agrees, citing the state's fiscal problems, regulatory environment, and energy costs as areas where policymakers can make significant improvements to the state's business climate.

"I think it's just understanding that businesses in Connecticut have a big challenge and have an uphill battle versus other parts of the United States," says Droppo.

"We're so heavily regulated here. You always have to make sure you get prepared for the next regulation coming down the pike. Energy is very expensive here as well. I'm a big proponent of renewable energy, but when I know some of my competitors in West Virginia are running on coal, I can only imagine what their energy bill looks like compared to mine."

Droppo also cites the state's financial troubles as a major contributor to a poor business climate. "The fiscal issue is a big one: there's no doubt about it. Policymakers have to look internally and make cuts. They have to right-size government the way you right-size a business."

Why is getting the state's fiscal house in order so important? More than any other state issue, it affects companies' willingness to make the investments necessary to grow their businesses and create jobs, says Rathgeber.

"If the General Assembly and the executive branch can work together on fixing our short-term and long-term fiscal problems, it would be the best job creation program in the state," he told the audience at a recent forum hosted by the Connecticut Policy Institute in Trumbull.

"Business leaders consistently tell me that our continuing budget deficit cycles and the threat of unfunded liabilities down the road are the biggest drags on business leaders' willingness to make investments in the state."

Having the confidence to make those investments is not only critical for Connecticut's economic future but a real-life necessity for business owners who have to constantly reinvest in their companies to compete.

"We reinvest in three areas: research and development, capital equipment, and facilities," says Wheeler, explaining that his company recently added a dedicated R&D position, purchased new CNC machines, and improved their facilities for lean manufacturing, energy savings, and cost effectiveness.

"The reason we do that is that we operate in a competitive global environment," he says. "In order for us to be competitive, we have to reinvest in the business."

Michele Caulfield, vice president and CFO of metal components manufacturer Stevens Company Inc. in Thomaston, also believes reinvesting is essential.

"It's incredibly important," she says. "It's harder and harder in this economy to stay competitive, and we always need that little extra measure of relevance to our customers. Often, that will take investments in either quality equipment or different machinery or different processes that we have to develop in order to be competitive or even be able to continue the type of work that we do."

Workforce Challenges: "Glimmers of Hope'

A highly skilled, well-educated workforce has always been a critical factor in the success of advanced manufacturing in Connecticut. Today however, having enough skilled young people to replace an aging workforce in a field that's becoming ever more technical and demanding has become a major concern.

"One of the issues we'll be facing in the future is an aging workforce," says Droppo. "There's no doubt that baby boomers are starting to retire and will be retiring in the next three to five years. We are doing a lot of training and trying to recruit the next generation into manufacturing. But that tends to be a bit challenging in the state."

Indeed it is. When asked if they are having trouble finding qualified workers, 64% of manufacturers responding to the CBIA/BlumShapiro survey said yes.

"We require highly skilled eyelet and progressive toolmakers," says Caulfield, "and slowly but surely, those people are harder and harder to find."

Because of recent state actions, however, Caulfield is cautiously optimistic that Connecticut's workforce can remain among the best in the country.

"There are definitely glimmers of hope with the measures being taken at the state's community colleges: the advanced manufacturing programs and the greater emphasis on manufacturing," she says1. "One of the big things in that effort is that schools are reaching out to manufacturers to determine what skills are going to be needed for these individuals in the workforce so they're not getting taught irrelevant skills but learning things that are really going to help them as they move on."

The state is also taking aggressive action at the university level. The Next Generation Connecticut initiative at UConn, signed into law by Gov. Malloy in June, is an ambitious program to boost the university's standing as a research institution and increase the number of faculty and graduates in science, technology, engineering, and math (STEM) fields. The initiative includes a $1.5 billion capital component to fund the renovation and construction of research labs, classrooms, and student housing. The state is also investing $137 million in operating funds to hire new faculty and staff.

"We are a state that imports many engineers from the bachelors level all the way to Ph.D. level from other states and other countries," says Mun Choi. "So one of the goals of "Next Gen': and this was very important to the governor, the legislature, and [UConn] president Susan Herbst: was to make sure that the number of engineers and scientists who are trained as part of Next Gen will increase significantly."

Choi says that the plan is to grow UConn's School of Engineering by approximately 70%, adding that because of the excitement surrounding the Next Gen initiative, the freshman enrollment in engineering increased by 45% compared to last year.

"We typically graduate about 500 bachelor's degree students in engineering," says Choi. "In a few years, we'll be graduating 700 to 800. And that's not even counting the number of Ph.D. students and master's degree students that will be graduating because of the capabilities of new faculty as well as the investments in new facilities."

Next Gen can't get under way soon enough, as interest in STEM careers seems to be waning across the country. A new study by Junior Achievement USA and ING U.S. Foundation, which surveyed more than 1,000 teens nationwide, found that although almost half (46%) of teens showed interest in pursuing either a STEM or medical-related job, that represents a 15% decline from 2012. At the same time interest is declining, the U.S. Department of Labor predicts employment opportunities in STEM careers will increase by 17% through 2018.

"You Have to Be Bullish About Manufacturing'

According to the CBIA/BlumShapiro survey, there is some cause for optimism about the future of manufacturing in Connecticut, at least in the short term. Although nearly half of manufacturers (46%) describe conditions for their companies today as below average, only 30% believe conditions will be below average by the end of 2014. And while only 28% see conditions as above average today, 36% expect above average conditions for their businesses by the end of next year.

Despite concerns about skills shortages, hiring expectations for 2014 are positive, with 56% of manufacturers expecting to hire additional full-time employees by the end of next year, compared with 48% who either have hired additional employees or expect to this year.

Chad Moutray believes that nationally, the prospects for a resurgent manufacturing sector are good.

"I think that we've certainly seen an increase in competitiveness in the U.S. in terms of the manufacturing sector," he says. "I mean, you can just look at the number of investments that have been announced in the last couple of years as the result of increased global competition, quality, and productivity, as well as rising costs elsewhere. And I think you certainly see an enormous amount of potential over the next few years."

Moutray's optimism stems, in part, from the fact that increases in domestic oil and shale gas production: the latter from sources such as the Marcellus Shale in the Northeast: are bringing down energy costs for manufacturers, which, he points out, account for 30% of domestic energy consumption.

"So anything you can do to lower those costs is going to put U.S. manufacturers at a great advantage," he says. "I think you are seeing [investments] especially in areas that utilize natural gas, because of shale, but you're even seeing investments that go beyond those sectors. So I think you have to be bullish about manufacturing over the course of the next decade or so."

Whether Connecticut manufacturers will see lower energy costs remains to be seen, but the governor's broad energy agenda passed by the legislature this year: which includes increased use of natural gas and large-scale hydroelectric power: provides opportunities to control our costs going forward, says Rathgeber.

"Greater access to natural gas and large-scale hydroelectric power will help over time," he says, "but we also have to preserve the diversity of energy sources available to us and continue to promote energy efficiency. And we must make the necessary infrastructure investments to take advantage of the energy revolution that is occurring in America. If we can do that, we'll eliminate one of Connecticut's biggest economic disadvantages and greatly improve manufacturing's potential to drive Connecticut's economic recovery."

Bill DeRosa is editor of CBIA News. He can be reached at bill.derosa@cbia.com.