Manufacturing Can Lead the Way Again
Can the state do its part to foster a growth environment?
By Bill DeRosa
Perhaps more than any other industry sector, manufacturing has the potential to lead an economic resurgence in Connecticut. That might sound surprising given that the state lost more than 60,000 manufacturing jobs and over 1,000 companies in the last decade: a trend seen nationwide as the trade deficit increased, low-skill jobs were lost to higher productivity and offshoring, and investment in new facilities slowed.
There are signs, however, that things are changing. Throughout much of Connecticut’s history, manufacturing was the driving force behind the state’s economy. Today, the nature of manufacturing and the global economic landscape are evolving in ways that are breathing new life into Connecticut’s longstanding reputation as a center of entrepreneurship, innovation, and productivity. Whether the outcome is merely a brief uptick in manufacturing activity or a sustained period of growth will depend not only on investment and locational decisions by business leaders, but on how the state shapes policy in key areas affecting those decisions: business costs and regulations, the tax code, education, workforce development, and infrastructure.
Connecticut on the Cutting Edge
The nature of manufacturing has changed dramatically since the days when workers with limited skills stood in long factory assembly lines completing simple, repetitive tasks. Those jobs have been disappearing fast. Overall, factory jobs in the United States declined from a peak of 19.4 million in 1979 to 11.7 million in 2011. In roughly the same period, high-skill manufacturing jobs increased by 40%,* reflecting the sector’s growing reliance on technologically advanced processes.
“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. It’s no longer an area where a good work ethic alone is sufficient to have a successful career.”
Home to some of the most prominent high-tech manufacturers in industries such as defense, aerospace, renewable energy, and pharmaceuticals, Connecticut is well-positioned to capitalize on the shift to technology-driven, knowledge-based manufacturing. But the state’s technological edge goes far beyond the big corporations.
“When you’re talking about advanced manufacturing in Connecticut, you’re talking about virtually every manufacturer,” says CBIA Senior Vice President of Public Policy Joe Brennan. “They have to innovate every day if they’re going to be successful in a high-cost state like Connecticut and a highly competitive global economy.”
CBIA Economist Pete Gioia agrees. “Connecticut has a tremendous concentration of highly capable, high-tech manufacturing operations. You find pockets of fairly small companies that have niche products and are the worldwide technological leaders in those products.”
Companies large and small throughout the state are operating on the cutting edge of technology-driven fabrication processes. General Electric and United Technologies, for example, are among the leading adopters of a process called additive manufacturing. Unlike traditional fabrication, which relies on machining to remove material to create a finished piece or on molds and dies, additive manufacturing works by building up a product or prototype layer by layer using powders and liquids made of materials like plastic, titanium, and carbon fiber composites. Sometimes called 3-D printing, the process makes it possible to produce three-dimensional solid objects from a digital file and significantly reduces lead times, helping manufacturers become more agile and competitive.
Metal fabricator Pegasus Manufacturing, with 90 employees in Middletown, uses a 3-D printer to create plastic prototypes of engine and other machine parts.
“We have a 3-D plastic printer that we use for in-house demonstrations, rapid tooling, and rapid picturing,” says company President Chris DiPentima. “The tolerances on the 3-D printers are pretty tight, almost as tight as a blueprint.”
So far, he says, only one customer has accepted a 3-D-printed plastic model of an engine part as a first article, or pre-production sample, rather than an actual metal part, but he continues to promote the new approach. “Basically, what the 3-D printer provides is a deliverable of our engineered processes. You print, and the part comes out,” says DiPentima, adding that the technique can save time and money for customers. “We’ve been approached a lot this year by customers wanting a quote on one piece of everything to mock up an engine, and we tell them, ‘we can do that, but it’s very costly, but how about if we give you a plastic model of every part that’s on the engine?'”
Overseas Advantages Waning
In addition to Connecticut’s ability to capitalize on the high-tech shift in manufacturing, several global economic and other developments have combined to spur growth in the sector and increase the potential for a manufacturing renaissance in the state.
“There are multiple things going on,” says Gioia, lead researcher on a new CBIA report, Connecticut Manufacturing: Building on the Past, Creating Our Future. “The first thing is that some of the cost factors that drove manufacturers to seek activities outside the U.S. are no longer as favorable.”
Gioia cites rising transportation costs, a narrowing wage gap between the U.S. and China, and quality control problems, especially with sophisticated parts, subassemblies, and final assemblies. “All of these factors are intersecting when we’re finding cheaper energy closer to home from sources such as natural gas and oil shale that are allowing some cost benefit vis- -vis producing overseas.”
Because of the changes in competitive factors affecting manufacturing, we’re seeing more and more onshoring of overseas production: U.S. companies moving operations from low-cost labor markets back to the states.
“Just a slight increase in the cost of labor in China makes it a less competitive location,” says Rathgeber, “because the less sophisticated skill sets of those employees (and other factors) create a situation where you either transition to a lower-cost labor market or bring your production back to the U.S., with higher costs but greater productivity. In addition, when you have quality control problems, you have waste, and waste is the enemy of any successful operation.”
Indeed, many Connecticut manufacturers have successfully implemented lean and Six Sigma practices to eliminate waste in their operations and increase productivity. As these companies increase their productivity, they’re able to expand their sales and markets, increase investments in R&D, and create more jobs.
Global competitive shifts have also spurred an upward trend in key U.S. manufacturing indicators. The Institute for Supply Management’s Purchasing Manager’s Index, for example, has shown sustained growth in the manufacturing sector every month from mid-2009 to April 2012.**
As a result, employment in manufacturing has expanded by nearly 500,000 jobs (4%) nationwide since January 2010, according to a U.S. Commerce Department report, The Benefits of Manufacturing Jobs, released in May.
That increase, says the report, represents the strongest cyclical rebound since the wake of the dual recessions in the early 1980s.
Last year, for the first time in decades, Connecticut’s manufacturing sector also saw net job growth: a performance that could have been even stronger had more qualified job candidates been available.
Why Is Manufacturing So Important?
Connecticut is currently home to nearly 5,000 manufacturing firms, which are responsible for 12.7% ($28 billion) of the state’s gross state product (GSP) and roughly 10% of all jobs in the state (166,000).
Manufacturing also accounts for a substantial portion of Connecticut’s tax revenues, generating over $250 million in sales and use taxes and $69 million in corporate taxes. Manufacturing workers account for over $1.2 billion of Connecticut’s personal income tax revenue, earning more than $14.5 billion in wages annually, with an average salary of $87,465: well above the national average for manufacturing ($77,186) and the average for Connecticut’s service sector ($55,493).
Equally impressive is manufacturing’s economic multiplier effect. “In most cases,” says Gioia, “manufacturing generates a broader swath of economic activity than nonmanufacturing sectors. Manufacturing begets services, not the other way around.*** And a vibrant manufacturing sector leads to significant indirect job creation.”
Each manufacturing job creates from 1.5 to 4 additional jobs in other parts of the state’s economy, and each dollar’s worth of manufactured goods creates another $1.35 of activity in other economic sectors: twice the multiplier effect of most of the services sector.
“In addition, a critical thing about Connecticut manufacturing is that its sales are largely outside the state, including overseas,” says Gioia.**** “That brings wealth into the state, and that wealth can have a significant effect by generating opportunities and jobs in other sectors.”
Connecticut has many characteristics that make it a good home for advanced manufacturing.
First, the state has one of the most skilled, productive manufacturing workforces in the country. Although manufacturers here are finding it difficult to hire enough skilled workers, outside perceptions of the state’s workforce quality remain strong, and manufacturers continue to consider Connecticut workers a major asset.
When it comes to productivity, the state’s manufacturing workforce is rated sixth-highest in the country, with each Connecticut manufacturing worker creating, on average, added value of $278,654, significantly higher than the national average of $261,261.
The state’s ability to support R&D is another key component of it’s positive manufacturing profile. Connecticut ranked ninth among the states in the Milken Science and Technology Index, a ranking based on public investments in R&D; a well-educated, skilled workforce; and the risk capital available to help convert R&D into viable technology products and services.
Also among the state’s strengths are an advantageous location between Boston and New York, an excellent quality of life, and an impressive diversity in the range of products manufactured here. Connecticut received an “A” grade for diversification from the 2011 Ball State University Manufacturing and Logistics Report, one of only five states to receive top honors.
A Rich Manufacturing Ecosystem
One of the state’s most important attributes is its manufacturing ecosystem, a vibrant network of small and large manufacturers; entrepreneurs; service providers; government leaders increasingly committed to promoting the manufacturing sector; and universities and other research centers that provide R&D, technology transfer, and talented engineers and technicians.
“We have a long history of cooperation among manufacturers, suppliers, subcontractors, universities, and research centers,” says Gioia. “So Connecticut has all the parts of the system.” Plus, he notes, Connecticut is a small state, which means, “Everyone can get to see everyone face-to-face within a couple of hours. That’s still something that makes a difference.”
Michele Caulfield, vice president of administration at Stevens Company in Thomaston knows firsthand the value of that kind of networking capability. Her firm, a custom metal components manufacturer with 47 employees, is part of Connecticut Metal Components Inc., an alliance of small manufacturers that collaborate in mutually beneficial ways.
“Over the years, we found that we formed almost a kind of roundtable, where we’re able to share common concerns, bounce ideas and problems off one another, and share,” says Caulfield. “Because our capabilities are not identical, if one of my customers comes in looking for a part that we can’t do, we refer that business to one of our partners in the consortium.”
The partners also collaborate on marketing: including creating a new website and exhibiting at trade shows: and supply one another with products and services.
“One of the companies does plating and will plate parts for the other companies,” says Caulfield. “We just finished selling a new component to one of our consortium members that they were not ready to do themselves.”
Frank Wolak, vice president of government business at FuelCell Energy in Danbury, says that the connections his company has developed with academia have proven invaluable. “We have a strong working relationship with the University of Connecticut as a place to find engineering talent,” he says. “Our vice president of engineering is a UConn grad, and we’re full of UConn people at the engineering level. So we’ve got that connection into higher engineering and sciences in terms of a workforce supply line and network; we don’t operate in isolation.” FuelCell Energy employs more than 500 people at its headquarters in Danbury and manufacturing facility in Torrington.
Room for Improvement
Despite the state’s considerable upside as a location for advanced manufacturing, several factors negatively impacting manufacturers must be addressed by policymakers if Connecticut is to maximize the sector’s growth potential.
“The main areas the state needs to focus on to promote manufacturing growth are cost, preparation of the future workforce, and an infrastructure that allows companies to reach their customers,” says Rathgeber.
It’s no secret that Connecticut has some work to do to become a more business-friendly state, especially when it comes to costs: one of the main barriers to economic growth and job creation. Manufacturing costs in the U.S. are on average about 20% higher than those of our global competitors, and many business costs in Connecticut are higher than their national average.
Among the chief cost drivers are wages, benefits, healthcare, certain taxes, and energy. Energy costs and reliability, in particular, are critical issues for manufacturers because of the great resource demands inherent in their processes. Moreover, a recent MIT study, funded by the National Science Foundation, showed that newer manufacturing techniques tend to use more energy than some of the older methods. Connecticut’s commercial and industrial electricity costs are the tenth-highest in the U.S.
“Energy costs are usually among the top two or three concerns Connecticut manufacturers have about doing business here,” says Rathgeber, noting that we have an opportunity to take advantage of natural gas from new resources like the Marcellus Shale in New York and Pennsylvania, provided that the state supports building an infrastructure to facilitate interstate transmission and intrastate distribution. “These increased resources within our region can be a game-changer for the Northeast.”
The Looming Workforce Crisis
Although Connecticut manufacturers rate the state’s highly educated workforce as one of its primary assets, nearly half of those polled in a 2011 CBIA/BlumShapiro survey are having trouble finding qualified workers. In fact, the state Department of Economic and Community Development (DECD) reports that manufacturing firms in Connecticut have approximately 1,000 job openings for which they cannot find suitable candidates.
One source of the problem is the rising rate of baby-boomer retirements, what DiPentima calls the “silver tsunami.” (Two of his workers were scheduled to retire the day after CBIA News interviewed him for this article.)
The other contributing factor is what many manufacturers say is a state education system not geared to meet the manufacturing jobs challenge. In many cases schools are failing to impart basic computational and communications skills, let alone the ability to problem-solve in a fast-paced, high-tech work environment.
“Our public education system has to improve overall academic performance, close the achievement gap, and improve graduation rates,” says Rathgeber, noting that the passage of significant education reform legislation this year was a positive step toward reaching those goals.
“We also have to recognize that not everyone’s best future is going to be in higher education,” he says. “But everyone needs to have a baseline of skills so that they are positioned to take continuing education and training in order to qualify for jobs in advanced manufacturing.”
When it comes to keeping manufacturers in the state and attracting new investment, the workforce issue is critical, perhaps even more so than business costs, says Rick Wheeler, president of Capewell Components Company in South Windsor. Wheeler, whose company employs 200 workers, believes quality is manufacturers’ top priority.
“If you have something that’s low-cost but also low-quality, it serves you poorly,” he says. “So rather than focus on cost or having manufacturing done in a low-cost country, for example, if we can get a well-trained workforce: employees who can work independently, who can operate successfully in a lean, Six Sigma type of environment: then cost will naturally be driven down, and we will be able to compete, because we will always have the beauty of knowing that when a product leaves the facility, it’s not coming back, it’s good. You can’t always say that about a product coming from a low-cost labor market.”
For Wheeler, the key to solving the problem is training at the technical high school and community college levels. “If we want to have a trained manufacturing workforce: people who are [proficient] on the computer-based equipment that we use today, it has to come through either vocational school training or community college training.”
For that approach to succeed, the state must do a better job of aligning curricula at all levels of education to meet the specific needs of our economy so that students can lead successful lives, says Rathgeber.
“We need to make our job training programs more nimble and designed to better meet the skills that employers are actually looking for. And it’s not just about kids who graduate. We also have large numbers of unemployed workers in the state who have the capacity to be retrained to qualify for high-skill positions.”
Rathgeber also points out that more responsive, nimble training programs would attract more manufacturing to Connecticut. He says employers need to know that the state will partner with them to help ensure that they have a strong workforce, because higher business costs demand a higher-skilled workforce.
A positive sign is that the state has taken steps to ensure better alignment among training programs at all academic levels and alignment of those programs with industry requirements. In January, the state Board of Regents for Higher Education (BOR) announced the selection of three community colleges for the creation of manufacturing centers to meet the state’s manufacturing workforce needs.
Housatonic Community College in Bridgeport, Naugatuck Valley Community College in Waterbury, and Quinebaug Community College in Danielson were selected by the BOR based on their ability to establish or expand manufacturing technology programs and their commitment to precision manufacturing. The idea for the centers was inspired by Asnuntuck Community College’s successful Manufacturing Technology Center in Enfield.
The three community colleges will be responsible for providing measurable outcomes, which include students graduating from the program and final job placement in the state’s manufacturing sector. Programs must meet the needs of the region’s manufacturers and offer a standard core curriculum and industry-recognized credentials.
In the Spotlight
Considering the impact manufacturing already has on Connecticut’s economy, it’s no surprise that the sector has been attracting increased attention from policymakers, business leaders, and economists.
“Aside from just wanting to see retention of manufacturing jobs, there’s a broader recognition that the manufacturing sector in Connecticut has spinout attributes that trickle up and trickle down throughout the economy,” says Wolak. He adds that policymakers and other stakeholders also recognize that Connecticut’s manufacturing base is a sound platform for growth and job creation.
“It’s taken a long time for people to recognize that you can reverse trends,” he says. “I think people are feeling that we can take what we’ve got, stop worrying about declines in manufacturing, and ask ‘How do we keep advancing it? How do we simply do more of it?'”
The answers depend heavily on whether the state can provide a public policy environment and infrastructure that allows Connecticut manufacturers to compete, grow, and create jobs as well as make the state a more attractive location for manufacturing startups and companies seeking to expand or relocate.
The NGA Initiative
One indication that the state is ready to do just that is its successful bid in September 2011 to participate in the National Governors Association’s Best Practices Policy Academy, “Making” Our Future: Encouraging Growth Opportunities in Manufacturing Through Innovation, Entrepreneurship, and Investment. Connecticut was one of only seven states selected by the NGA for the program, partly because of efforts already underway to develop the state’s industry clusters and promote advanced manufacturing.
“Although Connecticut is well-positioned to capitalize on growth opportunities, we face many challenges in the competitive global economic environment,” says DECD Commissioner Catherine Smith, selected by Gov. Malloy to head up the state’s NGA Policy Academy core team. “Growth in advanced manufacturing will spur growth in many other sectors, which is why we want to focus on this particular sector.”
In addition to the governor and commissioner, core team members include representatives from a variety of government and quasi-public entities as well as a representative from the manufacturing community, Pegasus Manufacturing President Chris DiPentima.
The initiative also involved designating a Connecticut home team, comprising 21 of the state’s most relevant stakeholders from the economic development community, including CBIA.
“The main goal is to develop a set of policy initiatives that can help Connecticut be more competitive from an advanced manufacturing standpoint,” says Joe Brennan, who is representing CBIA on the Policy Academy home team.
One outgrowth of the Policy Academy has been the creation of a Manufacturing Caucus in the General Assembly. Announcing the group’s formation on May 2 on behalf of a bipartisan group of state legislators, Sen. Gary LeBeau (D-East Hartford) said the caucus will “provide resources so that the legislature can learn about the challenges and opportunities facing Connecticut’s various manufacturing sectors”_[and] examine every bill that we see through the lens of its impact on manufacturing.”
Caucus co-chairs are Rep. Jeffrey Berger (D-Waterbury), Rep. Vincent Candelora (R-North Branford), Sen. Tony Guglielmo (R-Stafford Springs), Rep. Selim Noujaim (R-Waterbury), and Rep. Zeke Zalaski (D-Southington). The caucus held its first meeting on June 12.
Early in the NGA project, the core team identified four key areas of focus: workforce development, networking, cost reduction, and R&D: and designated four subgroups to work on each area.
DiPentima, the lone business owner on the core team, is responsible for leading the effort to get the dozens of manufacturing and business associations in the state to do more networking beyond their own memberships, what DiPentima refers to as horizontal networking.
“A lot of innovation and best practices come out of idea sharing when people outside of their own networks come together and collaborate,” he says. “Imagine, for example, the Aerospace Components Manufacturers (ACM) sharing some of what they’ve seen in the past 12 or 18 months in terms of their members’ best practices and process improvements with groups like the New Haven Manufacturers Association (NHMA). Even though many members of the New Haven group may not be in the aerospace industry, they are manufacturers, and a process is a process.”
DiPentima credits his own company’s horizontal networking with many important improvements. “It’s huge; it’s been the foundation of a lot of our change here at Pegasus,” he says. “We’re not hesitant to go see another facility, and we’re not hesitant to let people see our place.”
Many of the manufacturers DiPentima has visited are not metal fabricators. “They may make electronic ID cards, but what they do from a visual management standpoint are things that we’ve taken and are now doing here.”
The NGA Policy Academy team is also examining ways to improve information sharing when it comes to R&D, says Brennan. “In terms of technology transfer, there’s a lot of R&D that goes on in academic institutions: for example, at UConn’s School of Engineering: where new technologies are developed. One of our goals is to make sure that we have a system in place that allows for advancements in technology to be shared as much as possible, particularly with smaller companies that don’t have the resources to do heavy R&D internally.
“We have a really strong, diverse base of manufacturers making world-class products using world-class technologies developed right here in the state,” adds Brennan. “We need to leverage the strong base that we already have to help Connecticut manufacturers expand and to attract more companies to the state and make sure we get a good portion of the production that’s being brought back to U.S. shores.”
* See Manufacturing’s Wake-Up Call, a study by the University of Michigan and consulting firm Booz & Co.
** The index is based on measures of new orders, production, employment, supplier deliveries, and inventories.
*** Each year, manufacturers purchase more than $21 billion in goods and services from other state businesses. Every $1 million in additional output from manufacturers means more than $2 million in sales: and potential tax revenue: in other industries.
**** In 2011, Connecticut companies exported nearly $16.2 billion in goods, more than double the 2000 total of just over $8 billion. Manufacturing accounts for 87% of Connecticut’s total exports.Bill DeRosa is editor of CBIA News. He can be reached at firstname.lastname@example.org.
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