Iowa manufacturing ‘best house in a tough neighborhood’ amid pandemic
Some subsectors will face a longer road to recovery than others
By Joe Gardyasz
Meet the panelists:
Kanlaya Barr, senior economist,
Deere & Co.
Eric Lohmeier, president, NCP Inc.
Kellan Longenecker, general manager, General Mills, Carlisle plant
Kirk Tyler, chairman and CEO,Atlantic Bottling Co.
Mike Ralston, president, Iowa Association of Business and Industry
While some Iowa manufacturers will face a long road back to normalcy, other pieces of the state’s largest industry sector are experiencing a growth surge as consumer preferences shift amid the coronavirus pandemic.
The new opportunities include some big pivots in how manufacturers think about their supply chains, their workforce and their facilities. The changes, as with many industries, are making 2020 a major inflection point for manufacturers in Iowa, whether their products are distributed on grocery shelves across the United States or ride on flatbed trailers, rail and freighters to job sites on the other side of the globe.
It’s all in a day’s work for manufacturing companies of all sizes and types in Iowa, as a seemingly endless 2020 continues to toss unpredictable curveballs to test their mettle.
In late August, the Business Record invited five experts with varied vantage points of Iowa’s manufacturing to convene virtually for a panel discussion about the state of the industry as the COVID-19 pandemic continues to unfold.
Among the topics covered, the panel discussed some of the sectors of the industry that have fared well during the pandemic as well as others that are experiencing hard times.
Lohmeier, an investment banker in Des Moines who works with manufacturers across the state in developing merger and acquisition deals, summed up Iowa’s manufacturing sector during the current economic and social turmoil as “the best house in a tough neighborhood right now.”
We also asked the panel for their assessment of talent and recruiting trends during this unprecedented period of social distancing and other public safety precautions.
Overall, maintaining good human resource management practices has been a strong point for the manufacturing industry in Iowa, Longenecker said. Her company has a culture of listening to and working with employees that has served it well.
“We’ve gotten really good at being flexible with employees to work with their partners and change hours [to accommodate child care needs], or maybe they’re only working a four-hour schedule instead of an eight-hour schedule,” she said. “I have three kids and I’m very thankful that General Mills has from the very beginning offered paid leave [for family care/child care needs].”
The influence of the pandemic on strategic partnerships, capital investments, mergers and acquisitions, and supply chains were also considered.
Over the next several years, expect to see a continued shift toward reshoring and near-shoring of suppliers and a move away from just-in-time delivery models, the panelists said.
Additionally, the heavy construction industries that support road and other public infrastructure projects and the companies that supply them may see the longest roads to recovery, as state and local tax revenue sources dip by double-digit percentages.
Here are excerpts of the panelists’ responses to some of the questions from the Aug. 27 videoconference. You can rewatch the entire event on-demand: Click to watch on-demand
What sectors of manufacturing are struggling and which are faring well? What strategies should companies that aren’t performing well be considering?
Longenecker: General Mills, as a food company, is doing well at this time. We’re really seeing broad increases across the board, specifically in meals and baking. Getting consumers back into the kitchen as the heart of the home has really benefited General Mills. Consumers are tending to turn to brands that they know and trust, and also to some of that comfort where there’s just a sense of normalcy.
But also even within the food company we’re seeing a corresponding decrease in the away-from-home food demand. So in the Avon plant here outside of Carlisle, a lot of our flour is used to support those away-from-home convenience and food-service channels like hotels and restaurants. So with those declines in foot traffic, [travel and lodging] have really stumbled from the recent closures.
We’ve had to pivot and navigate and figure out how to be agile in this environment to continue to utilize the available capacity that we do have. So we’re manufacturing to be able to donate, for example, to Feeding America with cereal and whole-grain waffles and granola bars and things that weren’t trending as positively, and find new ways to repurpose [those products] and contribute to the community that’s really desperately in need of food.
Lohmeier: I think there are sectors of the agriculture manufacturing industry that are going to have probably a long road back, if you will. You’ve got significant producer subsidies, so what we’re seeing on the agriculture manufacturing side — and in the near term the trucking and transportation side — is a lot of deferral in purchasing new equipment. You’re seeing a lot of a switch to working on used equipment.
One of my biggest fears for industrial manufacturers of large equipment is in what I would call road construction aggregate, because state and local budgets are going to be off in the order of 10 to 25% for funding of new roads or maintenance. And looking at commercial construction and retail real estate and office — I think the outlooks for those industries are pretty dire. Companies may be working through their backlogs, but I see some real struggle and difficulty there.
Barr: I would echo that. With the state being hit by a slower economy, you have less revenue and then you also have unemployment benefits that you’re paying, so you get it on the expense side as well. So therefore at the state level it is becoming very challenging for construction.
And if you look from a manufacturing standpoint … is supply globalization where we want to be? The efficiency is there, but is resiliency something that we need? So over the long term or even the medium term, I think we will start seeing some changes in the supply chain as well, and also in automation. Before this [pandemic], skilled labor was really hard to find — it’s really hard to find a skilled welder within the area that we operate [heavy machinery]. So now going forward with the absenteeism and the difficulty with the labor force, there’s going to be a lot of automation happening.
Ralston: There are always opportunities for a major global manufacturer of tractors; there might be some issues for a while. There’s a smaller-sized company in north Iowa, HyCapacity, that mainly remanufactures parts for tractors, and they’re doing great. … Kreg Tool is a company right here in Polk County that manufactures things for the individual woodworking market, and they’re doing great. Standard Golf, a company in Cedar Falls that manufactures equipment used in golf — cups, flags, pins, those sorts of things — they’re doing great. So the size of the company doesn’t necessarily matter [as much as] the products that you manufacture and the industry that you’re in.
Tyler: And if you take that question and look at it in a different way, there may be struggling sectors that are either failing or shut down, but there are a lot of companies that are doing so well that they’re struggling to make enough products. You can look at the paper industry — you go down the shelves at the grocery store and see them completely empty, so there are a lot of industries that are really struggling just to try to make enough.
With the higher unemployment rate, is that providing opportunities for manufacturers to fill positions they couldn’t fill before, or are these not necessarily the folks you’re wanting to tap into?
Ralston: Folks were really searching for people; what we hear from our members is that [the pandemic] is taking the pressure off. They’re still interested in finding people, but because of the pandemic, maybe business isn’t quite as strong and it’s taking the pressure off of finding people. But I believe that finding and keeping workers is still the No. 1 issue for Iowa manufacturers.
Lohmeier: I think a lot of the issues is where the people are [isn’t] necessarily where the growing companies are, so you’re going to have a real difficult time transitioning somebody from the southwest or center part of the state to the north-central part of the state where there may be a lot of demand for those jobs, so there’s some difficulty there.
The other thing that I’m seeing very live and in color with a lot of companies we work with, even some of the ones that are challenged, they are forced because of workforce absenteeism and spacing to find efficiencies and they are putting a lot of time and, frankly, investment when they can into automation. … I don’t think we’re going to have less jobs because of automation, just different kinds of jobs. There’s just going to be some time and some friction to get people to the locations and to the types of skills that they need, and that’s going to be a real challenge and an opportunity.
Longenecker: For General Mills, we are hiring actively and we had been before the pandemic, as well as continuing to do that. So all of our plants across the nation and North America for General Mills are continuing to run — in fact, we’re running at full capacity across most of our platforms to service this high demand, so staffing continues to be a challenge that we are looking to overcome.
We’ve had to be a little bit more creative on the recruiting side, and also rely a little bit differently on technology. We’re doing virtual tours of our facility and getting people acquainted with what life in manufacturing would be like if they haven’t been in that industry before, or even virtual interviews or having online assessments before they get to the plant. Even our onboarding [has changed], like upgrading our technology so that we can keep social distance while we’re training a brand-new person on the floor. So those are some trends that manufacturers have had to pivot and get creative with to make sure that we do have adequate staffing to serve our business.
We had a question from an audience member asking whether any of you have seen an increase in strategic partnerships to help counter the supply chain challenges. And is this perhaps most prevalent maybe in small to midsize manufacturers?
Ralston: I can say here at the ABI office we’ve heard from members who are interested in things like purchasing collaboratives or being a part of groups that can help direct and advise on capital expenditures. By the way, I’d note that we do a quarterly survey. In the survey that we did right before the pandemic hit, we were stunned to see that about two-thirds of Iowa manufacturers — in our survey, anyway — were going to make capital expenditures during the year. After the pandemic hit, in the first quarterly survey we did, we expected that to be wiped out. But still, about half of them said they were [planning capital expenditures], so that confirms what the panel has been saying today. But yeah, we’ve seen greater interest in collaborations all across the board.
Tyler: One thing that we came across was we had a customer that was making hand sanitizer. So they could make it; they just didn’t have a way to distribute it. So we visited with them and partnered with them. So we were the distribution arm of their hand sanitizer; we could get it out fairly quickly to a lot of customers. … Shortly after that everybody started making hand sanitizer and was selling it, and so it slowed down after that. But we got it out in an initial response, and it worked really well.
How has M&A activity been faring?
Lohmeier: Deals that were carried over from last year, almost to the deal, every one of those has been transacted. We were kind of fortunate to have the “have” industries. The “have not” industries are frankly iced right now. Fortunately there was the [Paycheck Protection Program] for those small to medium-sized businesses that received those funds; it was extremely effective as a stimulus, kind of like the $600 weekly unemployment checks. But we think there’s going to be a real delay with that kind of stimulus happening again, probably in early 2021.
Again, if you’re in the “have” industries, there is a ton of liquidity out there now because of various Fed and Treasury programs. … There’s certainly liquidity to get those deals done. The challenge for us is that you can do financial due diligence over Zoom, but the personal touch between the owners and trying to think about integrating companies is just delaying everything, so everything is taking longer.
There have been many allotments of federal funds by the governor’s office, particularly through the CARES Act. This week alone, $100 million was announced for the agriculture industry. Will this significantly help manufacturers in Iowa, or would more allocations of federal aid help?
Barr: From a funding perspective, the amount that came through from the [CARES Act] which can help the rural crop producers and also is going to help some of the livestock producers, those are going to be really important for our producers. And again, if you look at the amount of payments, the policy is written so the payout is actually a little over half of what [has normally been invested]. So having some sort of restriction removal would really help our producers here. The other part is that the ethanol industry has been hit as we saw gasoline demand off by 50% back in April. … Definitely there has been help coming into the farm economy, but continuing support will be needed to help offset this price environment.
Besides COVID-19, will the derecho damage, along with recent hurricanes and drought, perhaps create a silver lining for producers in higher crop and energy prices?
Barr: Because of COVID-19 we’re probably going to lose about 600 million to 700 million bushels of corn that used to go to ethanol. From the agricultural standpoint, we still have abundant supply globally, so if the price starts to bounce back in the U.S., guess what? In a couple of months South America is going to plant more corn.
A good audience question from Jeff Pigott; Kirk had mentioned the challenges from just-in-time delivery on supply chain, and he’s asking: Should manufacturers look forward to a potential positive bump down the road as customers look at building up their respective component inventories to try to make sure they’ve got the supply on hand?
Tyler: Definitely. We’ve had a little bit of a can shortage in our business because there’s plenty of aluminum out there but the can manufacturers have been decreasing their capacity because that’s the way it’s been trending over the past few years, and they’re trying to follow consumer trends. Beginning March 16 the consumer trends just changed dramatically, and so we’ve had to really bump up our inventories to cover these things. There will be plenty of Fresca out there at some point in time, so keep looking for it.
Longenecker: At General Mills, the future has been pretty difficult to predict. So availability is really the key. We’ve been pretty fortunate to have some good relationships with vendors that we use a lot across the state of Iowa. We have an exceptional amount of vendors that are local that are supporting a lot of our businesses, so having that open and transparent communication with them about our plans has really helped. But I think guidance for manufacturers would be: Have a Plan B and a Plan C, because we are running into bottlenecks further upstream and then we have to go to another contingency plan. Sometimes that even means partnering with your customers to make the most of what they need at that time. One of the ways General Mills has tried to do that is to create some efficiencies by prioritizing around some of the SKUs [stock-keeping units]. Having that dialogue with them has helped us leverage the available capacity that we have.
The second part to his question is about the actual storage and whether or not manufacturers [or their suppliers] will have the space on hand to store those materials and those components.
Lohmeier: That’s a great space to be in; if you’re in real estate I hope you own warehouses or that you could build warehouses because they’re going to get filled due to everything you just mentioned. Just-in-time delivery — we probably went way too far in the pendulum on that. [Larger inventories are] definitely going to be a trend that sticks, whether it’s Amazon or just general industry and inventory replenishment. Having those supplies on hand — that is a trend that is going to kind of stay with us for I think a generation.
Ralston: I can second that. ABI has several contractors that are members of the organization, and many of them have talked about the warehouses that they’re building or the expanded company facilities that they’re building, so I think that confirms what Eric is saying.
One last question on supply chain. If you’re looking out into the future, what are some areas where you see some challenges?
Tyler: For us, we’ll take a look at all of our raw materials and figure out what we can do better, no doubt about it.
Longenecker: The same for us, whether it’s a global raw material or something that’s manufactured in North America that we need as an ingredient, or maybe it’s film or corrugated cardboard. We’re looking at every possible incoming ingredient to predict what potential issues might come up.
Lohmeier: As far as industry trends, I think it’s going to be really hard to make a strong case for a near- to medium-term pop back on anything related to the aerospace side and air transportation. There is going to be some real pain, I think, for a longer time as those companies kind of reorient to the brave new world and whatever that means for business travel. So I think there are certain industries that are just going to have some real restructuring to do, probably over a number of years.
How would you assess the overall strength position of the manufacturing industry in Iowa right now? A net negative or a net positive?
Lohmeier: I believe that when you look at it across the board, manufacturing in general is a slightly net positive, and I think that will be the case going forward. We’re pretty positive on the industry, but it’s not going to be a smooth road by any stretch.
Barr: The government has put $2.4 trillion in subsidies paid directly to consumers, and that has helped to prop up some of the strong sales we’re seeing in some sectors. As we go into the next six to 12 months, if this funding relief is significantly reduced, I’m curious as to how the recovery will look because right now that gap is being filled by this money. If the recovery pace in other sectors doesn’t live up to what we expect, are we seeing more downside risk going forward?
Ralston: I think manufacturers in general are doing well, and I’m only repeating what I hear from manufacturers. Iowa manufacturers for the most part aren’t carrying a lot of debt. They were in a pretty good cash position, and they didn’t have a lot of inventory, which now is sort of a double-edged sword. But they’re in a position to pick up pretty well, and boy, most of the manufacturers that I talk to feel like the future is pretty bright.
Lohmeier: I agree with you that we will see an initial recovery, a pretty good snap-back. But consumption is 70% of our economy, so beyond the essentials as you get further into discretionary items I think you’re going to have a much slower recovery. That’s why I say it’s going to be a long road back for a lot of industries.