The Good Times Are Back for Some Manufacturers

Midsize makers of industrial components are selling in Asia and face less competition

On his frequent trips to Shanghai, Timken Chief Executive Officer James W. Griffith sees cars on freeways and cranes at construction sites powered in part 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 says. “In China, even in a bad year, the economy will grow 6 percent to 8 percent.”

Factory production at many U.S. manufacturers is slowing, but not at Canton (Ohio)-based Timken or at Parker Hannifin, a Cleveland hydraulics concern, or at Kennametal, a Latrobe (Pa.) maker of cutting tools and machinery components. These midsized, Midwest companies have figured out how to thrive in an economic environment that has been a lot less kind to many other companies that make things. They posted three of the top four profit increases among 32 U.S. industrial companies in the two years ended June 30, beating out Deere, Caterpillar, and Navistar, which ranked sixth, seventh, and 16th, according to data compiled by Bloomberg.

Timken, Kennametal, Parker Hannifin, and others like them are benefiting from their focus on high-end niche products, which are difficult for competitors to duplicate or to undercut on price. On top of that, the industrial components they make, used in transportation, energy, and construction equipment, are in high demand in fast-track economies such as China, India, and other emerging markets. And their profit gains have exceeded those of larger and better-known manufacturers, partly because they’ve aggressively shed low-margin products and costs during the recession.

The downside of their success is that it hasn’t translated into many U.S. jobs. During the recession, Parker Hannifin cut its U.S. workforce to 24,000 from 30,000 employees. 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 has shed 2.3 million jobs from the end of 2007 to December 2009 and has only regained 289,000 since then, says Daniel J. Meckstroth, chief economist of the Manufacturers Alliance/MAPI. He expects manufacturers will add some U.S. jobs in the coming months but 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. It’s the guys who are flexible who’ll win the race,” says Bala Balachandran, a manufacturing expert and dean of the Great Lakes Institute of Management in Chennai, India. In 2009, Timken had a loss 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.

At Kennametal, CEO Carlos Cardoso maintained a robust budget for the 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 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 says.

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. One customer: Commercial Aircraft Corp. of China, whose contract with Parker for fuel systems and hydraulic equipment is contributing to a projected tripling of sales in China, to $1.2 billion by 2014. “Some people say, ‘You’re sending all our jobs overseas,’ ” says 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 compared with $188,493 the prior year, an 8 percent gain. “Instead of playing defense, we went on the offense,” he says.

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 says, “we’ve figured out how to move at China speed.” Last year, Timken, whose main customers used to be U.S. automakers in Detroit, derived 12 percent of its $4 billion of revenues from markets around Asia.

The company’s Chennai factory is undergoing an $8 million expansion to boost its 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.

Still, it hasn’t entirely abandoned its Rust Belt roots. Since 2006, Timken has invested nearly $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.

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