Midsized Manufacturers Beat Slump by Embracing China, India

On his frequent trips to Shanghai, Timken Co. (TKR) Chief Executive Officer James W. Griffith sees cars on freeways and cranes at construction sites powered partly by the steel bearings his company has made for 111 years.

“Tepid economic growth and unemployment dominate the headlines in the U.S., but there are opportunities for our products in developing countries,” he said. “In China, even in a bad year, the economy will grow 6 percent to 8 percent.”

At a time when factory production at many manufacturers is slowing, Timken, hydraulics supplier Parker Hannifin Corp. (PH) and machinery component maker Kennametal Inc. (KMT) posted three of the top four profit increases among 32 U.S. industrial companies in the two years ended June 30, Bloomberg Businessweek reports in its Aug. 29 issue. That beats Deere & Co. (DE), Caterpillar Inc. (CAT) and Navistar International Corp. (NAV), which ranked sixth, seventh, and 16th, according to data compiled by Bloomberg.

Timken, Kennametal and Parker Hannifin are benefiting from their focus on high-end niche products, which are difficult for competitors to duplicate or to undercut on price. In addition, the companies’ industrial components for transportation, energy and construction equipment are in high demand in fast-track economies including China and India.

Profit gains at these midsized, Midwest companies also have exceeded those of larger manufacturers, after aggressively shedding low-margin products and costs during the recession.

Jobs Move Overseas

The downside of their success is that it hasn’t translated into many U.S. jobs. During the recession, Cleveland-based Parker Hannifin cut its U.S. workforce to 24,000 employees from 30,000. Its U.S. payroll has been partially restored to 27,500 employees, while the headcount in China, now totaling 3,600, tops the pre-recession level.

The U.S. manufacturing sector shed about 2.3 million jobs from the end of 2007 to December 2009, regaining 289,000 since, said Daniel J. Meckstroth, chief economist of the Manufacturers Alliance/MAPI in Arlington, Virginia. While he said manufacturers are likely to add some U.S. jobs in the coming months, they will invest far more aggressively in people and plants in emerging markets.

“The medium-size companies are big enough to be cost- competitive and develop technology but small enough to be in niche markets and be fast,” said Bala Balachandran, dean of the Great Lakes Institute of Management in Chennai, India. “It’s the guys who are flexible who’ll win the race.”

Midsized Outperform

Midsized companies in the S&P MidCap 400 Index, to which Timken and Kennametal belong, have market capitalizations ranging from $40 million to $11.5 billion, with an average of about $2.5 billion. Before today, the index had jumped 23 percent in two years, outperforming the S&P 500 Index (SPX), which gained 13 percent.

Canton, Ohio-based Timken had a loss in 2009 of $134 million and Kennametal $120 million, while Parker Hannifin’s net profit dropped 46 percent to $508 million. In their quarters ended June 30, all posted record earnings, with operating profit gains of 32 percent to 82 percent. They have told investors that orders remain strong despite the slowing economy.

Competing Globally

Kennametal Chief Executive Officer Carlos Cardoso maintained a robust budget for the Latrobe, Pennsylvania-based company’s nine global research and development centers during the recession, even as he cut the workforce in the U.S. and Europe by 20 percent, to 11,000 employees. The company employs about 2,200 in Asia. Now, 40 percent of Kennametal’s sales are derived from products developed in the last five years.

The company said it has strong orders from automotive and aerospace clients for its new “Beyond Blast” cutting tools, which inject coolants into materials as they’re cut and boost users’ productivity.

“This wasn’t a reaction to the recession; it was how you can compete globally,” Cardoso said.

While Parker Hannifin was slashing U.S. employment by 20 percent in 2009, its new hose manufacturing plant in Qingdao, China -- one of 14 it now operates on the mainland -- boosted sales eightfold in its second year. Commercial Aircraft Corp. of China’s contract for fuel systems and hydraulic equipment is contributing to a projected tripling of Parker Hannifin’s sales in China, to $1.2 billion by 2014.

‘Follow Your Consumer’

“Some people say, ‘You’re sending all our jobs overseas,’” said Parker Hannifin’s CEO Donald E. Washkewicz. “That’s a bunch of crap. You’ve got to follow your customer wherever he goes.”

Timken’s Griffith, a 27-year company veteran and former plant manager, has pushed productivity gains through increased use of robotics and other automation improvements. The company generated $204,421 in sales per employee in 2010, an 8 percent gain from $188,493 the prior year.

“Instead of playing defense, we went on the offense,” he said.

While in Shanghai six years ago, Griffith recalls telling a colleague, “I’m not sure we can manufacture fast enough to keep up with the demand here.” Now, he said, “we’ve figured out how to move at China speed.”

Timken, whose main customers used to be U.S. automakers in Detroit, derived 12 percent of its $4 billion of revenue last year from markets in Asia.

The company’s Chennai factory is getting an $8 million expansion to boost production of roller bearings for construction and power transmission equipment. In contrast, Timken last year completed the shutdown of its bearings- manufacturing operation in Canton, which once employed 1,100 workers.

The company hasn’t entirely abandoned its Rust Belt roots. Since 2006, Timken has invested almost $300 million to upgrade and expand two steel mills in Canton, which employ 2,300 workers -- a scrap of good news in an otherwise hard-hit U.S. manufacturing sector.

To contact the reporter on this story: John Helyar in Atlanta at jhelyar@bloomberg.net

To contact the editor responsible for this story: Ellen Pollock at epollock@bloomberg.net

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