June 13, 2017

Updated: From steam power to electric powered digitisation: The problem with making the mid-west rust belt shiny again

You never know which line of thought President Donald Trump is following when it comes to his expression of opinion.

On the one hand, he recently invited the likes of Amazon, Google and IBM to a meeting at The White House to launch a new tech group whose objective will be to advise ways that the US government can ‘transform and modernise’. On the other hand, it was reported soon after that announcement that Trump had expressed his disgust with the catapult system known as Electro-Magnetic Aircraft Launch System, nicknamed EMALS, aboard the USS Gerald R. Ford. The president described in that interview that he wanted to scrap EMALS, a key technological upgrade at the centre of the multibillion-dollar carrier project, and return to steam.

It is reported that US Navy officials were “blindsided” by President Donald Trump’s suggestion that he has convinced the Navy to abandon an advanced digital launching system in favour of an obsolete steam driven mechanism on its newest aircraft carrier. His quote, according to a report filed by Adrienne Lafrance in May 11, 2017 in The Atlantic was:

“It sounded bad to me (Trump). Digital. They have digital. What is digital? And it’s very complicated, you have to be Albert Einstein to figure it out. Then I said: You’re going to use goddamned steam, the digital costs hundreds of millions of dollars more money and it’s no good.”

EMALS isn’t just a computer-based electronic solution, it uses a linear induction motor to activate a magnetic core which in turn, propels a carriage down a track upon which an aircraft can be attached. The electronic technology replaces a steam piston that was previously used to pull the aircraft as a foundation for its launch pad. Trump seems to have seized on the apparent failings of the aircraft carrier development project overall rather than EMALS specifically when he made his observations reported here. In doing so he gave the impression that he simply didn’t appreciate, or understand the complexities of moving from steam to digital.

The steam-powered catapult systems that are being replaced it was reported, have been used to launch airplanes from U.S. carriers for some six decades now. The fact is though that not only are steam systems harder to maintain than electrical ones; they have a lower upper-limit during combat. This means that electrical systems can launch more aircraft in a shorter amount of time.

Electrical systems are also much better positioned to handle smaller aircraft and drones compared with steam. This in turn increases launch time and at the same time reduces the threat of attack – making their application a top priority.

 The obvious ambiguity in Trump’s proclamations creates significant uncertainty in the minds of those whom he is either asking to invest in the US or to retain their existing investment in the country. For those with a manufacturing capacity already located at home, especially, the pressure is immense.

As an example, most of us would never have heard of the Midwestern US bearings and parts manufacturer Rexnord Industries (Rexnord) had President Trump not been on a crusade to ‘make America great again’. In naming Rexnord specifically, the President placed immense pressure on that company to reverse its decision to move its manufacturing facility to Mexico.

Despite Trump’s continued naming and tweeting, Rexnord chose to ignore him. Needless to say, Trump was not impressed, he openly condemned the decision through a blaze of tweets.

"Rexnord of Indiana made a deal during the Obama Administration to move to Mexico," Trump tweeted on May 7. "Fired their employees. Tax product big that's sold in U.S.”

 The fact is that the intent of President Trumps protestations is not new. Manufacturers from mature economies around the globe have been ignoring this same message in one way or another for years.

The reasons for and against such a move are many and deep. The reality, however, is that the idea of simply ‘keep on keeping on’ with high labour costs and outdated manufacturing facilities just won’t help regional rust belt industries in any country one iota. At least those that are similar in nature to Rexnord, which against the odds has survived the key characteristics of a domestic base – ie, a high cost, premium price environment – far longer than many, many others.

Rexnord has been following the same strategy for years. It is one that is focused on the realisation of inorganic growth through acquisition and organic growth through the selection of product categories that promise high market share for a (primarily commodity oriented) product range. Underneath these positioning strategies, Rexnord is able to maintain a premium price in its markets courtesy of its solid brand recognition. Such recognition, however, is in turn maintained by a strong and consistent record of quality, reliability and service and a promise of more price reductions as opposed to unexpected price increases.

It’s a text book business strategy and has been a winning one but time has now run out.

In a world where quality, reliability and service are a given, thousands of organisations of Rexnord’s ilk can only survive into the future if they offer a favourable price in addition to the promise of quality. These businesses simply can’t afford to listen to those who protest their plans to relocate manufacturing plants offshore, not for a minute longer. If they can’t compete on cost there is no buyer and with no buyers there is no business. Off to Mexico we go!

One company that did listen to Trump was Ford which cancelled plans to transfer a US based manufacturing plant to Mexico soon after his inauguration. A failure to stand up to the president backfired badly on CEO Mark Fields, however. Rather than saving jobs, Fields announced in May 2017 that the company would be cutting 1,400 jobs in order to reduce cost. At the same time, rather than earning plaudits from the board he increased their ire by further depressing the company’s sagging share price. The disappointment was so great that the board recently announced that Fields would lose his job.

It is not widely recognised but a decision to shutter one manufacturing plant and replace it in another location is never an easy one. There is a major physical challenge associated with a one-off move that may damage machinery and certainly will disrupt culture and harmony in the workplace. There is also the issue of having to employ less experienced operators at the new plant, not to mention the difficulty that is experienced in managing remote operations.

All of these issues and more can result in a real threat to a firm’s reputation in home markets. Never mind, that’s what competitors do and that’s what Rexnord had to do to reduce costs and to remain competitive.

There is also a bigger downside from the move that Rexnord would be well aware of. That is one that echoes President Trump’s primary concern -  the damaging impact that plant closures always have on local economies. In many cases for global minded corporations a relocation is generally registered as a negative for domestic economies but a positive for less well developed nations. Each of these outcomes, though, is ultimately the responsibility of governments. Enter President Trump and the promise he made to bring back the jobs of those who have been laid off from numerous factories across the USA.

Had President Trump, or any of his predecessors for that matter, taken the time to look, they would have seen that there is little opportunity for manufacturers of commodity products such as those produced by Rexnord to survive, or better still thrive in the emerging, high tech environment of the future; at least in their current forms. As a grass roots manufacturer, Rexnord relies heavily on the use of unskilled labour for its production capabilities. As a commodity provider using similarly commodity based suppliers for their survival, however, its future has always been at the mercy of market forces (in this case, a good example of price – and only price) as opposed to a capacity to compete through a service offering or core competence in an area that no one else can copy.

As a commodity provider, Rexnord was only ever going to be in a position to realise a comparative, as opposed to a competitive advantage. Not only are its products relatively easy to copy, they are also readily made in many parts of the world, even those that have cheaper labour rates than Mexico.

So this is the dilemma for President Trump and many other governments located in more mature economies in the world.

For those businesses willing to address the need to change, the extent and size is overwhelming. Moreover, the enormity of change increases every day as new technologies emerge and new forms of developments are announced. The longer a program of transformation and renewal is ignored, the harder the challenge becomes.

In the specific case of Rexnord, there are some apparent areas of opportunity and signs that it is embracing advanced and innovative production technology. For those choosing to appreciate how Rexnord operates, they will observe it possesses a strong presence in a number of diverse, high-potential industries that include aerospace and other advanced manufacturing environments. It has also acknowledged the emergence of digitisation as it is dabbling in the area of the ‘Internet of Things’ as well as the development of some service based solutions. This is no doubt designed to help it to survive the disruptive years that will soon befall all of us, now that the effects of the Fourth Industrial revolution are starting to be felt.

Is it enough? The extent and nature of change that is required by Rexnord and its unseen equivalents in the US and other countries is both diverse and massive, but everyone needs to start somewhere. The extent and variety of change will be different for each business and each situation that each business finds itself in.

In reality, manufacturing is returning to America and other similar countries that include the United Kingdom, Europe and Australia. It is, though, reappearing in a different form and format to the more familiar constructs of an industry that tradition has favoured so well. Just as digital has replaced steam in an aircraft carriers’ launching system, so too will digital be the driving force of many advanced manufacturing capabilities.

Ironically, these new forms of manufacturing will not bring back jobs and will in many situations replace them. There is nothing that Trump or any other government can do to change that fact, except find ways to contribute to the ease of transformation. Put simply, all these governments can do is look for new ways to foster growth and to retrain and redeploy the myriad of workers who will be replaced by the likes of robots, artificial intelligence, additive manufacturing and – in summary – digital automation.

Rexnord has started on the path towards this new utopia in manufacturing, but it has a long way to go. In view of that fact, it may well have been more beneficial for it to attract the president’s attention in a more positive way. Rather than ignoring him, it may have been more opportune to explain why it is doing what it is doing and encourage him to get on board with the inevitability of change and all that implies. Only through understanding, learning and cooperation can Rexnord, and more importantly President Trump, hope to “make the American rust belt shiny again.”

Footnote: Soon after writing this paper CNN reported that “The Carrier manufacturing plant that President Trump helped save will be shipping about 380 jobs to Mexico just before Christmas”. CEO of parent company United Technologies, Greg Hayes, further announced that automation will ultimately replace some of the 800 jobs that were claimed as savings by President Trump soon after his inauguration. There is no denying the facts. Retraining and a strategy of transformation and renewal is the only solution. A return to ‘what was’ simply won’t cut it.