The biggest fabricators get even bigger, but contract fabrication remains distinctly regional
June 4, 2013
This year’s Fab 40 list shows an industry in growth mode, though the amount of growth depends on the region and industries contract fabricators serve. Company leaders gave their outlook for the rest of 2013, and there’s more optimism than pessimism.
In this year’s FAB 40, size stands out. Some big fabricators got bigger. Mayville Engineering Co. (MEC), the Wisconsin fabricator that was struggling as recently as 2005, now has almost 2,000 employees in 16 locations. Thanks to its December acquisition of Michigan-based Center Manufacturing, the company ended the year with $311 million in sales. That’s nearly triple its 2010 revenue.
This year’s FAB 40 also includes O’Neal Manufacturing Services (OMS), a division of O’Neal Industries. For years O’Neal has offered plenty of value-added services, and after much planning the company formally separated those services into its own business unit, OMS, in 2011. With the purchase of Cedar Falls, Iowa-based Iowa Laser in 2012, OMS now employs more than 1,400 people at 10 locations across the country.
According to company sources, OMS operates separately from the distribution side, and for good reason. When it comes to standardizing business processes, the two don’t mix: Distribution hinges on quick transactions and delivery; OMS, on the other hand, manages more contractual manufacturing needs of major OEMs. Providing second- and third-step processing on subassemblies and weldments requires more involved planning, engineering, and process controls.
OMS does, however, share back-office and purchasing functions with its larger parent company. According to Gerald Brockman, OMS’s vice president of sales and marketing, the division’s 2012 revenue of $278 million represented about 10 percent of the entire organization’s revenue. To this day the company remains a privately held family business, albeit a very big one.
During an April manufacturing conference organized by The Washington Post, James Manyika, San Francisco-based director of the McKinsey Global Institute, pointed out the “non-monolithic” nature of manufacturing. A broad brushstroke doesn’t do this business justice. He explained that although manufacturing has helped pull the economy out of the Great Recession, not all sectors of manufacturing have pulled with the same force.
Transportation and machinery manufacturing have been the much publicized heroes of the recovery, and it’s well-deserved. The two sectors have added several hundred thousand jobs since 2010—158,000 for transportation and motor vehicles; 147,000 for machinery. But the unsung heroes of the recovery may be what Manyika identified as “regional processors,” and this includes fabricated metal products, which in total has hired back 179,000 jobs since 2010.
In fact, of all the manufacturing sectors Manyika analyzed—motor vehicles and transportation, rubber and plastics, food and beverage, primary metals, energy products, wood manufacturing, mineral products, furniture manufacturing, printing, and electronics—fabricated metal products had the most pronounced jobs bounce-back of all since 2010. He said that it makes sense that regional processors, fabricated metal products companies included, have led the manufacturing recovery, especially considering the reshoring trend as OEMs choose suppliers closer to the final assembly plant and, ultimately, the end customer.
Still, cumulatively, all businesses in the FAB 40 this year employ fewer than 10,000. IBM alone employs well over 400,000 globally; General Electric, more than 300,000. Compared to previous years, the 2013 FAB 40 has seen a marked increase in head counts, though a fair number of firms reported higher revenues this year than in 2012, while employing fewer people.
But in aggregate, an army of relatively small metal fabricators have been hiring, and this year’s FAB 40—a progressive slice of the contract metal fabrication marketplace—shows this. If companies were charted out by revenue, the “long tail” would be immediately evident. A few big players keep getting bigger, but that long tail of small businesses remains. And since 2010 many have been hiring, chipping away at this country’s unemployment rate bit by little bit.
Of course, from a broad perspective, fabricators are chipping away at the unemployment rate with a puny pickaxe. Even if every shop had highly qualified people lining up ready to work (which they don’t), the industry is too small to make any real dent in overall unemployment.
Proclaiming fabricators as a premier jobs engine of manufacturing is a bit like Disney World bragging that Big Thunder Mountain is the tallest bit of land on the overdeveloped sandbar of Florida. As Manyika emphasized, manufacturing overall accounts for just 9 percent of this country’s employment, though it drives 61 percent of all exports and close to 69 percent of all private R&D efforts. Most significant, he said, is that 30 percent of the increase in productivity among all economic sectors has come from manufacturing alone.
Still, the hiring trends are evident. General Sheet Metal Works in South Bend, Ind., reported 187 employees last year, 218 this year. Cupples J&J Co. Inc. in Jackson, Tenn., reported 215 employees last year, 245 this year. MEC is projecting growth this year, as is Minnesota-based BTD, another behemoth. The projections remain positive. Of all submissions this year, only two companies expect revenues to be down in 2013.
Company managers are expressing considerable optimism, though there’s uncertainty on the horizon, considering global events, the sequestration, and the general mess inside the Beltway. Changes in defense spending have affected the industry, as has the recent slowdown in automotive since peaking in November 2012.
All this is made evident by the mix of positive and mildly negative outlooks among FAB 40 submissions this year. For instance, Robinson Metal, a $60 million shop in De Pere, Wis., projected “modest growth of 5 percent.” Other firms expressed concern over slowdowns in specific sectors, transportation and mining among them.
Ace Metal Crafts Co. just moved into a new building in Bensonville, Ill., doubling its plant size, and expects to make $3 million more this year than it did last year. Meanwhile, Richards Sheet Metal Works in Ogden, Utah, said it “expects slower sales through the rest of the year.”
Rich Demeules, CEO of Standard Iron & Wire Works, Monticello, Minn., put some perspective on its business activity. How’s business? In truth, he said, it’s difficult to give an accurate, all-encompassing answer. “People talk about, say, construction equipment as a category, but there are dozens of subsegments, and then you have agriculture and mining, then equipment for landscaping. All this sometimes gets thrown into ‘construction equipment.’ But in reality, each one of those subsegments has its own demand patterns. There are certain segments that aren’t doing as well, but overall things are looking promising.”
Corchran Inc., of Waseca, Minn., expects significant revenue growth this year, in the double digits. So how are the fabricator’s customers feeling about what lies ahead? As Senior Vice President of Operations Tom Westphal explained, it depends. “One customer who’s related to thde natural gas industry is really picking up. The food processing industry is going to be picking up. But some in the industrial maintenance area are pulling back. Another customer of ours is shifting its focus to R&D and having someone else build their products. So it really runs the gamut.” Balancing out the entire customer mix, though, he said the fabricator can safely predict strong growth next year.
Troy Berg, president of Dane Manufacturing, a fabricator in Dane, Wis., said he’s expecting an economic downturn going into next year—not the crisis like in 2008 and 2009, but certainly a dip in the business cycle. “But by 2015 and 2016, there may be a huge upturn,” he said, adding that he plans to purchase more of the land that surrounds his shop, to be used for a building expansion. When the economy does improve again, he said that Dane will be ready to meet the increased demand.
Revenue figures at the top of the FAB 40 keep soaring. Some of it came from organic growth, some from acquisition, and some others from new entries in the market, like O’Neal Manufacturing Services. As managers explained, the company already had a network of facilities across the country offering value-added services beyond the traditional service center offerings. Considering that the infrastructure was in place, it made sense to take the next step and formally launch a contract fabrication business. As Brockman put it, “We thought our ability to come out of the blocks with a national footprint would be a strategic advantage with the large OEMs.”
Today stamping and metal fabrication processes may be found in upper tiers of the automotive supply chain as well as, to some degree, the service center arena—and both of these markets have companies with large, sometimes continental operations, with plants spanning from Mexico to Canada. This begs the question: Is the high-mix, low-volume contract metal fabrication industry destined for consolidation?
The stage seems set, especially as baby-boomer shop owners reach retirement age. OEMs like Rockwell Automation and John Deere have pruned their supply base in recent years, concentrating just on the high-performance contract fabricators; efficiency as well as risk mitigation are central to their strategy. A fabricator with redundancies, such as having similar equipment at two regional plants, now looks attractive, especially considering how natural disasters have affected global supply chains in recent years. Several well-known contract fabricators have sold to larger firms recently.
Taking all this together, is there a consolidation trend? Not necessarily, according to Anthony Schneider, senior vice president of BKD Corporate Finance in Indianapolis. While the model can work for some larger players to serve certain OEMs, the demand for low-volume, high-variety manufacturing is just too great.
“The job shop is fluid, nimble,” Schneider said. “This has made smaller, independent fabricators successful, if they have the right culture and outstanding customer service … In consumer markets like grocery stores, there are real synergies there, and you just don’t find that in the fabrication market.”
What may be a trend, he said, is a march toward a more diverse metal fabrication community, especially as more strategic buyers from outside the industry look to invest in the field. A recent FABRICATOR reader survey supports this assumption. Almost a third of respondents said they got into this business after making a career change, while only 13 percent said they joined the family business.
It’s still about location, location, location. Even the largest FAB 40 fabricators operate multiple plants that serve local customers. You can send information instantaneously from one side of the world to the other, but there’s still no way of getting around trucking a batch of fabricated parts to the assembly plant, which ideally is nearby.
The current size distribution of contract fabrication companies may provide a good market balance. The industry may see growth in larger players, which help meet capacity and risk-reduction demands as OEMs pare down their supply base. But the small, nimble shop—that is, the long tail—probably will dominate the market for some time to come.