Metal fabrication ripe for consolidation, or not?

The 2015 edition of the FAB 40, The FABRICATOR's annual list of the top 40 fabricators in the country, will hit the streets next month. When looking at this year’s list, my thoughts went back to a presentation I saw at the 2014 FABTECH® show in Atlanta, where Doug Nix, vice chairman of Corporate Finance Associates in Oakville, Ont., Canada, said that the amount of cash in global business has reached record levels, which in turn may have a dramatic effect on M&A during the coming years. “There’s an incredible amount of liquidity—that is, cash—in the system,” he said.

How will this shape the custom fabrication business in the years to come? It’s hard to say. It’s no secret that some investors are looking to custom metal fabrication as a relatively untapped area of opportunity. Companies like The Mifsud Group have built a solid portfolio of companies, many offering complementary processes and products serving different markets.

The industry is seeing some evidence of vertical integration, too. O’Neal has its contract manufacturing arm, O’Neal Manufacturing Services. Millenia Products Group launched in 2001 as a distributor, and according to President Frank San Roman, the organization now gets about 80 percent of its revenue from stamping, roll forming, custom fabrication, and full-service contract manufacturing.

So is custom fabrication destined for more consolidation? That’s a tough question. On the one hand, small, sometimes fiercely independent businesses make up the core of this industry. On the other hand, this industry also suffers from high revenue concentration. The best fabricators keep getting more work from their core customers. That’s great, but this means they have neither the capacity nor the time to reach out to other sectors. More than half of the respondents in FMA's “2014 Financial Ratios & Operational Benchmarking Survey” said that fewer than eight customers made up 80 percent of shop revenue. Would consolidation help overcome this problem?

Consolidation can give fabricators more locations in different areas of the country. This not only can help serve the needs of large OEMs, it can mitigate risk. What if a snowstorm hits a plant in the Northeast? Another plant in the South can help pick up the slack. What if a tornado hits a plant in Texas? Another plant in California can keep production rolling. An OEM’s preferred suppliers need to be extremely reliable suppliers.

On the other hand, custom fabricators can serve vastly different markets, each requiring a unique approach. Large, project-based fabrication is vastly different from a dozen lasers cutting tens of thousands of piece parts a week. On top of this, you have one-off jobs; blanket orders; inter-company kanban and similar replenishment relationships; and complete contract manufacturing with drop-shipped products, where customers never touch the order. The variety of services is astounding.

Still, some of the largest fabricators have become adept at handling all this complexity. As just one example, Mayville, Wis.-based Mayville Engineering Co. (MEC), has experienced explosive growth. The firm has tripled in size in four years. For a $335 million fabricator, that’s saying something.

Could custom fabrication become like the automotive supply chain, with large suppliers surpassing $1 billion in revenue? The answer probably lies in the customer base. For some, it may make sense to outsource more manufacturing to a large custom fabricator that isn’t tied to a handful of markets. For large OEMs, that arrangement helps mitigate risk.

Still, there’s something extremely American about the small, independent shop. The nature of so much manufacturing work in this country is either extremely low volume or one-off—no blanket orders, no consistent demand. As long as the U.S. has entrepreneurs with an idea, people who want just one of this or a dozen of that, small job shops will continue to dominate metal fabrication.

Some specialize in thin-gauge precision sheet metal fabrication; others specialize in plate; others tackle tube and pipe; still others take on industrial and structural work; and many do some combination, a process-mix “recipe” tailored to suit their customer base. It’s tough to pigeonhole the custom metal fabricator. This perhaps is what helps set a fabricator apart, and it’s probably why the industry hasn’t experienced the kind of consolidation seen in other sectors of the economy.