Highlights from VMA’s 2016 Leadership Forum

FLAT, AND THEN AN UPTICK

In his presentation—Guidance in Uncertain Times—ITR Economics senior analyst Alex Chausovsky said the United States is facing economic headwinds, including a strong dollar, which has had a profound impact on exports. The euro is at its weakest point in many years against the dollar, and since the EU is America’s biggest trading partner, that is a serious problem, especially when American companies are competing with goods manufactured there. Despite this, he sees positive economic growth, driven mostly by the U.S. consumer. “The worst of the dollar strength is behind us and the U.S. economy has lived up to its potential following the recession,” said Chausovsky. “We expect to see that until the end of 2018, but we do still see a small recession in 2018.”

According to the U.S. Industrial Production Index, industrial production is doing worse than GDP growth and Chausovsky expects a flat year for 2016 but an uptick in 2017. “We’re expecting industrial production to go into negative territory in first half of this year.” This is not because manufacturing is declining, though. “There are three components of Industrial Production,” said Chausovsky, “and mining is 16% of that category, which includes not just mining but oil and gas, so that will not be good. The third component is utilities, which is also in recession because of El Nino and warmer-than-average weather. Mining and utilities are pulling this down, and we do expect oil and gas to get worse before it bottoms out.”

Chausovsky said that new orders of nondefense capital goods (which do not include aircraft) are the best representation of what is truly going on in business. “This shows a continuing weakness in business-to-business activity.”

The U.S. Metal Valve Production Index is expected to further decline in growth rate, but is still showing improvement. “We expect to finish 2016 with a 4% decrease, but growth in 2017 up 4% so we will end up back to where we were in 2015,” said Chausovsky.

Also, he said, “Metals are down deeply, which means that pricing has been lower. We feel the worst of it is behind us, and we are expecting some stabilization. But it will be a very gradual recovery. That means that manufacturers will be able to pass along some small price increases, or they can keep prices the same and gain competitive advantage over those who raise prices.”

The other major concern is oil prices. Chausovsky predicted there will be a very gradual upswing in crude oil futures. “There are a billion barrels of oil in inventory but we think that in 2017, much of that global excess will start to be drawn down.” Bottom line: There will not be a lot of upside movement for oil prices over the next 12 months. Chausovsky had no official prediction on oil pricing beyond 2016 but said he does think there is potential for it to get back close to $100/barrel. “I do think prices will go significantly higher than they are now.”

Chausovsky said that Russia and Brazil are both in recession and even Canadian industrial production is down about 1.3%, which is tied to a decline in oil sands production. However, he does not agree that China would pull the U.S. economy down into recession. “A slowdown in China would have a much more profound impact on other countries,” he said.

The employment sector is dominated by millennials now, so businesses must focus on ways to attract them. “You need flexibility and have lots of snacks on hand,” joked Chausovsky. “Seriously, we need to spend a lot of effort on making manufacturing appealing as millennials tend to be more liberal arts.”

Chausovksy recommends the following actions for companies:

• If you’re in heavy industrial, try to find opportunities closer to the consumer.
• Do targeted customer research.
• In preparation for uptick, hire salespeople now so they are trained and ready to go when uptick comes.

WHAT DOES WALL STREET SAY?

From his Wall Street perspective, Michael Halloran of Baird Industrial Research believes the current times are like those in a Dickinsonian novel: “It was a time of confusion and uncertainty.”

Halloran said many of his company’s process company clients are saying their 2016 growth prospects are bleak. “And trends are worse because people didn’t understand how much of the capex process was tied up in oil and gas,” he said. “To think that there will be recovery in the second half of 2016 is a little optimistic. Process controls companies are down almost 15%, and global demand outlooks have deteriorated. The key question is whether there is increased risk to over time as big picture concerns around debt levels, the Chinese economy and yuan peg, and continued commodity price pressures leave little room for upside catalysts until resolved.”

“That said, things aren’t all that bad…At a high level you’re getting some growth, just not what you would expect,” he continued. “We are watching distributor trends very carefully, looking at monthly orders. But OEM stocking is also a very powerful tool and OEMs are shedding inventory as we speak.”

There is some growth in the petrochemical sector because those companies are taking advantage of low gas prices. Halloran is more optimistic about pace of growth for the chemical sector as long as feedstock prices stay low and he expects flat to modest growth in that industry.

Municipal water and wastewater is finally improving, and Halloran expects 3 to 5% growth over the next two years, especially since water quality is becoming a bigger concern.

Halloran offered several suggestions to help companies prepare for a potential global recession including the importance of having niche products in attractive markets, and unique go-to-market strategies. Those who embrace lean manufacturing and get it engrained in the culture with a focus on continuous improvement and overhead cost containment will have a better chance of long-term survival. Having a strong portfolio of critical, value-add products and focusing on capturing high-margin aftermarket (e.g., replacement parts, service kits) is also essential.

Halloran stressed that getting ahead of the curve on costs and learning from past recessions is key to mitigating downside. “An important caveat here is understanding that we are likely to see low commodity prices for some time, which is different from 2009 when a commodity expansion was interrupted briefly. Equally critical is the balance between investing for the future vs. cutting costs to the bone. Increasing automation, investing in top talents, and focus on innovation and R&D dollars are important.”

THE SOCIAL SIDE OF BUSINESS

In the new social reality, business is not just about making and selling a quality product at a competitive price. Marketing, branding and social media are having a terrific impact on everything from recruiting employees to handling customer satisfaction issues, and it is no different for valve manufacturers or the plants or utilities that use their products.

Mark Babbitt pointed out in his presentation that today, companies must adapt to survive. “The most important thing is to have social leadership, be someone who takes the time to talk to the people who work for and with you,” he said. “Some leaders are doing this well, like Arianna Huffington and Richard Branson. But mostly we are still leading like it’s the Stone Age.”

Babbitt introduced the concept of a “blue unicorn”—that top influencer in a company. The number one trait amongst the best is that, good or bad, they actively listen to problems. The best are also very good at sharing their knowledge, and are always mindful and present. “An example is if an executive is walking around the plant floor, but has his nose in email. He is not a blue unicorn.” Top leaders also “get” that relationships and ROI matter. “Social media is fine, but eventually it has to turn into relationships and ROI,” said Babbitt.

“Social is a mindset,” said Babbitt. “How we work, how we collaborate, how we problem solve. Social leaders get stuff done. When you start to bring employees in the room that were never asked to solve problems, they become a brand ambassador. They know you care about them, and they care about you.”

Babbitt had several suggestions for companies to utilize this social world, including blogs. “One of the best ways to drive people to your site is to blog and show you’re the expert. Someone in your company has to be the face of your company online. Next, get your employees involved. If you have a millennial on staff that talks about what a great place it is work, let that person do the talking for you.”

Babbitt pointed out that this engagement is very important to younger people; 70% of millennials will change their brand preference if the CEO answers their questions. “As you make a change from industrial to social leadership, attrition is your ally,” said Babbitt. “The old white guy syndrome will kill any attempt you make toward social leadership. Most important, just get started. Pick a unit and start to make a difference.”

Michael Couch expanded on the theme of corporate culture in his presentation on building a strategy-capable organization.

He pointed out that everything starts with strategy, and if you understand the value you deliver in the markets you are serving, that is the biggest predictor of markets share/revenue growth. Unfortunately, according to a survey conducted by Couch, 66% of respondents felt they are worse at strategy execution than strategy development. “It’s easy to lay out the strategy but not so easy to get people to implement it,” he said. “You have to get the entire workforce to buy in, and often at the lower level.”

Couch stressed that the most important thing is feedback. Both top down and bottom up. It’s a better match of today’s workforce. “There is lot of shoddy research out there,” he pointed out. “You can’t just focus on millennials because half of your workforce is older. It’s not how you did, but how is your team on the project doing and what did you do to contribute to it? People love this.”

Another critical factor is to build competencies. “Focus on the future, not what was successful in the past. Model on high-potential, high performers, not on average performers. Competencies will change if your strategies change. Look at pools of talent. Leaders are not always the executives, they can just as likely be from the factory floor or the front office.”

Couch believes that almost all dollars spent on Leadership Development is a waste. “You go to class. Hit or miss. Walk out of there. And don’t use it. Most training out of context doesn’t have the impact you want. People learn by managing a challenging situation and learning from it, even if they make a mistake. How do you intentionally develop people? You give them challenging things to do.”

SHARING THE TALENT POOL FOR ADVANCED TECHNOLOGIES

Deloitte recently did research to identify the most promising technologies currently under development within the U.S. as well as determine perspectives on what challenges are most critical to U.S. manufacturing competitiveness.

Ben Dollar shared the results in his presentation, and noted it was clear that a strong, innovative and technology-savvy manufacturing base leads to long-term economic prosperity and growth. In a self-feeding system, this industrial base flourishes when a country provides an integrated support structure, thereby attracting more businesses, which, in turn, creates more demand for high paying jobs, thereby attracting more top-tier talent.

The issue is how to meet the workforce needs of these technologies in order to be competitive. “There is not enough talent to go around,” said Dollar. “It’s very difficult to own all of what’s needed. So we must figure out who we need to do this and then figure out who we need to hire. Temps, freelancers? We need to foster companies that can come together.”

At this time, the United States is a global leader in research and development, but the gap is closing…especially with countries like China. Executives interviewed for Deloitte’s study expressed concern that R&D competitiveness is narrowing rapidly, due primarily to the growing competitiveness of emerging nations that are aggressively attracting STEM talent, building domestic R&D capabilities and offering attractive R&D incentives to foreign countries.

Meanwhile slower economic growth, especially in developed countries, has curtailed R&D budgets, and at least in North America, manufacturing still suffers from the perception that it is “dirty, dumb and dangerous.”

The solution may be in companies pooling resources and becoming part of an ecosystem where talent with the needed skills can be shared. “It’s hard to break out of talent paradigm that says keep paying more and they will stay. But millennials see different experiences as part of their career path. All of us need to work together to build regional clusters to meet increasing demand for advanced technologies.”

Dollar pointed out that today, more than one in three workers are freelancers. This is expected to grow 40% by 2020. He called it the “Uberization” of labor – i.e., Don’t hire for life, but hire someone who can take care of this specific problem now.

Dollar recommended that employers recognize this is happening, and get in front of this trend because it is going to happen. “Look for the right freelancers,” he said. And, while there are certainly challenges, most of the executives surveyed for this report are confident that the U.S. has the ability to endure and prosper. Dollar did stress, however, that the U.S. does require a long-term strategy that, when aligned with short-term priorities, can foster the innovation ecosystem and further encourage the flow of required investments, growth in innovation capacity, the development of STEM talent and the creation of high value jobs.

The next Valve Industry Leadership Forum will be held March 23-24, 2017 at the Ritz-Carlton in Philadelphia. This event is open only to VMA and VRC members. For information on membership, please visit VMA.org > About VMA.

Judy Tibbs is editor-in-chief of VALVE Magazine and VMA’s director of education. Kate Kunkel is senior editor for VALVE Magazine and VALVEmagazine.com.