Local factories retreat after China's assault Small area manufacturers are not investing to compete with low-cost rivals Chicago, IL, July 03, 2006: http://chicagobusiness.com/cgi-bin/news.pl?post_date=2006-07-03&id=21187 By Bob Tita rtita@crain.com Mid-West Wire Specialties President Chris Sitkiewicz doesn't see the logic in making a heavy investment in his business. "It's just too expensive and there's so much risk," he says. Mid-West Wire Specialties Inc. has an interesting response to its battle with low-cost Chinese manufacturers: Wave the white flag. The Northwest Side company has been bending wire into magazine racks, light-fixture shields and shelving since the 1930s, but sales fell 20% last year as longtime customers went elsewhere, mostly to China, where products are made for a quarter of what Mid-West Wire charges. "China has taken a grip on this business in the last five years. Pricewise, we just can't compete," says President Chris Sitkiewicz, 47. Rather than looking into product lines that are better insulated from Chinese pricing pressure, he is trying to milk as much profit as possible from the business that has supported three generations. "It's provided a living for my grandfather and my mother and my uncle," Mr. Sitkiewicz says. His approach is becoming more common as the decline of U.S. manufacturing enters a new phase. Battered by overseas competition and facing a further reduction in business, many small Chicago factory owners are giving up hope of reviving their fortunes. Thousands of local manufacturers are unwilling or unable to reorient their businesses toward more profitable product lines. As many as 75% of the area's 12,500 manufacturing companies are either struggling to figure out how to change or have no strategy to ensure long-term viability, according to research by the Alliance for Illinois Manufacturing. More than two-thirds of manufacturers use mature or outdated processes — an indication that companies aren't investing or innovating, the advocacy group says. Related Article Topics | Related Industry News "When I talk to some of these folks, they're very concerned about their businesses, but they're doing the same thing they've always done. They're not looking outside the box," says Ralph Keller, president of the Assn. for Manufacturing Excellence, an education group for manufacturing executives, based in Arlington Heights. "In some cases, they don't see the handwriting on the wall and in other cases, they don't care." Chicago-area manufacturing employment was just under 500,000 last year. Since 2000, manufacturing employment has fallen 22%, a reduction of 141,300 jobs, according to the federal government. Manufacturing employees earned an average of $16.30 per hour, a 12% increase from 2001. HANGING IT UP; HEADING SOUTH Many large manufacturers have shut down or scaled back operations in favor of lower-cost locations in the South or overseas. The remaining companies are mostly small, privately owned, decades-old businesses. Half the region's manufacturers are seeing either declining or unchanged sales. Manufacturing remains essential to Chicago's economy. In addition to hundreds of thousands of manufacturing jobs, it provides thousands of additional positions in manufacturing support industries like trucking and warehousing. Chicago generates 4% of the nation's industrial output, making it the third-largest manufacturing region in the country. But with no easy fix, many business owners are simply focusing on managing their businesses to preserve their own incomes. They'll cut overhead expenses, lay off employees and avoid capital spending in order to maintain the lifestyle to which they've grown accustomed. "Whatever assets there were, we've sold off just to keep going," says Jerry Calvacca, who has watched sales at Freedom Tool & Mold Inc. in Chicago drop 70% in the past four years and his workforce go from 18 employees to four. "We've sold our building and sold equipment. I've got to make a living doing something," says Mr. Calvacca, the company's president. The cure for ailing companies is twofold: finding a market niche where more than the price of the product matters and deploying the same strategies used by giant manufacturers to reduce production costs and improve cash flow. Eliminating waste, reducing inventories and training employees to do multiple jobs have become operational mantras at large companies, but smaller manufacturers aren't embracing such approaches. ONE SUCCESS STORY Ace Metal Crafts, a Franklin Park contract metal fabricator, is an exception. Ace changed its ways in 2003. The company quit making the products that were most susceptible to overseas' price pressures and targeted custom-built stainless steel racks and tables that drug and food companies would pay a premium for. Ace overhauled production to eliminate inefficiencies that drove up costs and kept orders from being sent out of the shop. The effort paid off: Ace's sales reached $9.3 million in 2005, compared with $5.5 million in 2001, and payroll rose from 50 to 70 workers, President Dale Ball says. Nearly 100 federal, state and local programs exist to help small manufacturers make transitions like the one Ace underwent. But many small business owners aren't interested, even when faced with financial ruin. Venturing into new markets, retraining workers and revamping operations cost money, they say, with no guarantee that a new business strategy will be any more successful than the one it replaces. "I wouldn't want to try it," says Mid-West Wire's Mr. Sitkiewicz. "We're not Microsoft over here." ©2006 by Crain Communications Inc.