Monthly Archives: April 2012

It’s a Good Time to be in U.S. Manufacturing

In 2009 the U.S. Department of energy estimated that natural gas accounted for only 25% of the nation's energy, versus petroleum's almost 37%.

The negativists see 8% unemployment, home foreclosures, Spain in free-fall, a Socialist winning in France, an Obama second term, and $4 gasoline. Plenty to moan about, but U.S. machining companies see an economic honey pot. Why?

Autos (not so much pickups) are still selling despite gas prices. This indicates that car purchases are more related to economic optimism than the price of gas.

Why do we have $4 gas? It is not lack of supply that hurts, because we have a glut of oil in North America. It just isn’t in the right place at the moment. The East Coast refineries get oil from Venezuela, the Gulf, the Middle East, and some domestic. They adjust prices according to the Brent crude price, which is $20 higher than the Nymex price. The lack of pipeline capacity from the Canadian Tar Sands and North Dakota’s huge new fields cannot easily go East because we lack pipeline capacity. Supply now overwhelms capacity to transport to Houston’s big refineries. Add the slow move to natural gas as a transportation fuel. It will happen eventually, not now.

Iran is the other wild card. Gasoline demand in the U.S. fell 7% last year, an enormous drop, but prices were bid up because of the fear of an interruption from the Mideast. Ironically, Iranian oil is not that important in itself. It’s the “what if” that pushes the futures market. A wounded or empowered Iran might move on the Saudi fields, which would make a mess.

But business in the U.S. is still humming and the immense new supply of natural gas makes for an interesting cross current. Cheap natural gas is killing coal as power plants switch over. The railroads, which carry so much Montana coal to the East and Midwest, are short of cargo now.

But chemical companies are in expansion mode because cheap natural gas feed stock from America means big profits for a long time. They are already lobbying against the export of gas as LNG (liquid natural gas) to China or elsewhere for fear it would raise the domestic price of natural gas.

I see several opportunities for machining firms from this situation. The conversion to natural gas for transportation will happen over the next five years, especially for trucks – big new market. New chemical plants and natural gas turbines mean a lot of fab and machining here. Stainless steel fittings and valves will be in demand.

We are also in the midst of a big replacement cycle for airplanes, and gas guzzling old cars. Add in China’s loss of advantage because of high energy costs and rising wages, and India’s inability to compete in world manufacturing, and you can see why American industrial firms like GE and Caterpillar are expanding in the United States now.

It’s a good time to be in manufacturing here. It’s about time.

Question: At what price point for gasoline would you change your driving habits or vehicle?

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Scuttlebutt: Facebook’s New Deal

Mark Zuckerberg and Kevin Systrom

There has been a lot of hand wringing in the press about Facebook’s deal to buy the Bay Area startup Instagram for $1 billion, almost what the New York Times Company is valued at. Mark Zuckerberg, founder and still principal owner of Facebook, negotiated the deal with Kevin Systrom of Instagram, which has 13 employees and zero revenue. People are sniping at Zuckerberg because he did the deal over a weekend without informing his Board of Directors. But in the fast moving world of social media he saw a strategic threat to his $100 billion dollar enterprise, because his users wanted to move photos easily on smartphones, and he had a clunky application to do it.

Systrom of Instagram, who owns 45% of his company, knew he had a piece that Zuckerberg coveted, even if he was a speck. The two guys knew each other from Palo Alto networking. The entire deal was negotiated in Zuckerberg’s refurbished old house, very much the way Steve Jobs once did it at his home. Systrom supposedly said that his company was worth 2% of the value of Facebook. He ultimately settled for 1%, or $1 billion for his “revenue-less” company.

I find the story absolutely compelling on several fronts. Zuckerberg understood the potential threat of Systrom selling to rival Google or doing what he had done himself, going it alone. Systrom had strong venture capital partners behind him, so Zuckerberg knew he could not intimidate him. Before Facebook goes public he can still run the company like a private business, even with a billion dollar deal, and he can thumb his nose at the investment bankers and feel secure. Zuckerberg must be both enormously cocky and a little paranoid to pay such a sum to a startup begun in 2010.

This kid Zuckerberg is remarkable to have learned so many lessons about business on the fly. And he knows enough to know what he doesn’t know and pay what it costs to fill the gaps at Facebook.

Question: Would you vote for Romney, even if he has no discernible “core beliefs” other than desperately wanting to be President?

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Education of a Used Machinery Dealer, Part II

My impressions after being in the business for nine months. How do I think I’ve done?

My friend Michi, a machinery dealer in Italy, once told me that it would take at least five years for a person to understand the machinery business. I felt that time frame was similar to my previous gig writing/editing at Today’s Machining World. It wasn’t until the fifth year working at the magazine that I felt like I sort of knew what I was doing, or least knew what I didn’t know. So of course what did I do then …? I decided to switch jobs.

Since I joined Graff-Pinkert everyone has been preaching patience when it comes to learning the technical side of the machines. Ironically, although I’m a third generation machinery dealer, as far as I know, all of the Graff’s have had a mediocre technical aptitude at best. Problems to fix in our house while growing up? At least 90 percent of the time we called the repair guy. And if we didn’t get someone to come there was a higher likelihood my Mom would step in with the wrench than my Dad.

Rex Magagnotti is by far our most technically inclined salesperson at Graff-Pinkert, so he’s been entrusted with getting my “screw machinology” (as my boss likes to say) up to a level where I can follow a conversation about the machines, or at least fake it. He’s of a different gene pool than my Dad, Lloyd, and Uncle Jim, and before he came to Graff-Pinkert he worked for an Acme rebuilder. I like to think of him as a kind of Jedi Master of screw machines. He’s Obi-Wan Kenobe and I aspire to be Luke Skywalker. Wishful thinking, I know. I ask a ton of questions, and I like to think that while he’s teaching me what he’s learned over the last 20 some years, they give him perspective and maybe raises his own game some.

We go on road trips together, mostly throughout the Midwest, looking for treasure, often multi-spindles scrunched together in dank warehouses, covered in grease with wires hanging out everywhere. I’ve learned that often the machines that look pretty on the surface can be fools gold. A common culprit is too much play on the end tool slide of an Acme. Sometimes the ugliest looking machines are the most valuable. Rex has also taught me to keep my ADD mouth shut about various other deals and machines we know about when we are in customers’ plants. He and my other bosses have preached to me the virtue of constantly having my eyes and ears open for other equipment or bits of information that pop up when we go visit customers. They always say that when you go somewhere looking to sell something you end up buying something, and when you go somewhere to buy something you end up selling something. That’s one of my favorite things about the business – the unpredictability – the treasure hunting – finding value in what other people don’t – using creativity to figure out how to make a deal happen.

So how do I feel about my own progress? I’m not going to give myself a letter grade. The business is complicated and I can’t see what benefit would come from that. But I digress … I think most working people in this world want to feel like they’ve accomplished something at the end of the day, or at least by the end of the week. In many jobs that accomplishment is more apparent and easier to quantify than others. A doctor can say at the end of the day that he saved someone’s life or made someone feel better. A janitor can see the room they just cleaned, a hair dresser can make someone look better in a matter of minutes, a writer can produce an article, a mechanic makes a machine that wasn’t working run again. These people know if they’ve done a good job in a few hours, and it’s clear to them that the end result stemmed from their individual efforts or not.

Sometimes I get those feelings as a machinery dealer, but almost all the deals we make at Graff-Pinkert are a collaborative effort, so individual accomplishments are hard to decipher. I sold a 1″ Wickman last week and I felt good about that. But the customer came to us from an Internet ad my Uncle put up. I didn’t find or buy this machine, I’m not going to make this machine look pretty or work perfectly before we send it to the customer. Graff-Pinkert plays a team game. We’re like a baseball team, but one in which you need several good players who can play a few positions at the same time. One person alone can’t do what our company does together.

I’m still a rookie, but if I can help it, Graff-Pinkert will have a better season than the Chicago Cubs.

Question: At your house, who does the handiwork? You, your spouse, or do you call somebody in?

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Knowing What You’re Doing

What is all this stuff worth?

The education of my son Noah in the used machinery business has been progressing for nine months. This is a report from his boss, which is complicated because he is also his father. Next week you’ll hear from Noah about his view of the process.

To an outsider, buying and selling used machinery may seem simple: buy low, sell high. The reality is that it is one of the most demanding intellectual challenges I have ever encountered. Valuing dirty, broken, flawed, obsolete iron and convincing a potential buyer they are getting fair value is so difficult. The iron is generally an illiquid asset. Noah’s job is to liquefy the illiquid, but to do that he has had to learn why people still buy screw machines that most people, even those in the trade, think are weighty anchors.

He has educated himself by talking to people in the field at meetings, one on ones in their factories, watching videos, and especially by listening to Rex Magagnotti, Graff-Pinkert’s go-to guy on screw machinology. Rex has even taught him how to measure the slop on an Acme end tool slide with a dial indicator, a skill that my brother Jim and I never learned. He’s picked up the lingo, if not the context of machining terms. He has the knowing smile even if he’s bluffing a bit, and he’s been very willing to ask the vital dumb question.

There’s no such thing as mastery in this business. The secret is refining your guesses. Noah is constantly probing me, Rex and my brother Jim on values. He asks why a machine is worth X or Y and we say, “because that’s what we think it’s worth.” And then he says “why” again and the concentric circles of guessing provokes yet another annoying “why.” The repetitive “why” imparts rigor into our discussions, but eventually it becomes vexing and then infuriating. When there is no “right” answer, punting often becomes the answer and the indecision becomes a de facto decision. I think that for young people a “no decision” is hard to accept. Often I recommend to defer until more information filters in. Procrastination on a decision, if it is made with intent to eventually decide a tough question rather than just duck, can be positive.

This is the Jerry Reinsdorf approach. Reinsdorf is the principal owner of the Chicago White Sox and Chicago Bulls. He told me that the secret of his success was procrastination, which he defined as waiting long enough to allow proper decisions to become clear.

One lesson I’ve been trying to teach Noah, and relearn myself, is to “know enough to know what you don’t know.” In business we need to avoid the dummies who don’t know what they don’t know – or to take advantage of their hubris.

My brother Jim and I constantly debate the virtues of playing for the long ball or settling for singles. Noah listens to the arguments and tests me on my positions. When I’m not swinging for the fences I tell him the importance of consistent cash flow. When I move towards Jim’s “always make a deal” posture, as I often do, Noah winces. I know how easy it is for deals to fall apart so I often urge him to make the deal when it is within reach.

I find that the sheer quantity of detail, which fills in the texture of a deal can be confusing, even overwhelming for Noah. The business demands a huge cumulative memory for detail to go with an array of relationships to call upon. He cannot manufacture these elements. They come from observations, immersion, and hard work. I want him to achieve mastery in a year when it has taken me 40 to learn so little myself. But Noah made a sale today, of a 1” Wickman screw machine, mostly by himself. It’s coming together. I’m grateful.

Question: How long did it take before you thought you knew what you were doing in your job?

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Swarf: Nielsen’s Bakery

I had a hankering for a croissant and decided to drive over to Nielsen’s Bakery, a local bakery I don’t go to often, but they made nice croissants. All I found was a letter on the window saying they had closed after 21 years. The letter read like a note to a few insider friends and I could not really understand what it said, except that they were closing.

The letter confirmed to me why I had not patronized them for years. I always felt I was an outsider there, a tolerated visitor interrupting a local Kaffeeklatsch (an informal gathering) at the local clubhouse.

Nielson’s was in downtown Homewood, Illinois, next to the commuter train stop. A Starbucks with a drive-through now operates on the other side of the parking lot. The Starbucks does $20,000 a week in business and there are two other Starbucks in the area that do a similar amount of business. My guess is that Nielsen’s was lucky to do $5000 a week. Nielsen’s was a daytime operation while Starbucks is open 5:30 a.m. to 10 p.m.

Another local bakery, Sweet Annie’s, opened three years ago, and in my opinion that was the final blow that killed Nielsen’s. Not only were Annie’s baked goods superior, the ambience of the shop was warm and welcoming.

Another element most likely came into play in the demise of this small business. Homewood, like the rest of the south Chicago suburbs where I live, is becoming a predominantly African American community. Nielsen’s was clearly an old school Homewood institution, patronized mainly by Caucasians—and proud of it. If I felt like an outsider when I walked in, I’m sure a black person would have felt uncomfortable there.

The restaurants and stores in my neighborhood need to feel like they are connected to their customers. Most businesses, even those that do business online or on the phone, need to have a welcoming feel. Airlines with call centers in India lose tons of business because the people who finally answer the phone have no personal touch, are unable to connect with the customer, and are often hard to understand. Cold callers who read from a script rarely get more than a sentence out before I hang upon them.

A machining company owner that thinks he or she is just selling parts with no need for a personal connection with their customers does not understand how business works.

Nielsen’s Bakery didn’t fail because of the recession, though it didn’t help. They failed for many reasons, but the primary one was that they just wanted their little neighborhood bakery to stay the same while the world around them was changing by the day.

Today’s Machining World Archives April 2011 Volume 07 Issue 03

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On the Hill, Not Over the Hill


I didn’t want to write about baseball again today. Enough already with the sports stuff, Lloyd. But Noah sent me an ESPN interview with Jamie Moyer, who will pitch later this week for the Colorado Rockies at the age of 49. How could I resist that story?

Moyer cracked the starting rotation of Colorado because he proved in Spring Training that he can get guys out with his 80-mile-per-hour (heater?) and assorted off-speed pitches. No knucklers like Wakefield and the Niekro brothers. No trick pitches, no splitters, no spitters. Just location, guts and belief.

Jamie came up with the Chicago Cubs in 1986 along with the great Greg Maddux. They probably will both be in The Hall of Fame – Maddux for sheer long-term brilliance and Moyer for persistence. He has won 267 games over 26 years in the Majors and will be the oldest man to win a Major League game when he wins his first this season. Just to add perspective on his age, Moyer’s oldest son Dillon was drafted by the Minnesota Twins in 2010 at the age of 18.

Moyer thought his career might be over in 1992 when he was sent down to Corporal Klinger’s old team, the Toledo Mud Hens.

I’ve heard him interviewed several times and the polite pitcher dutifully answers the questions with a winning authenticity. We want to frame him as a heroic figure, but Jamie just wants to be a ballplayer, because it’s who he is. It’s what he loves. So why wouldn’t he do it for as long as he’s good enough to play at an elite level?

I love to watch him pitch. He’s got nothing and yet the hitters absolutely hate swinging against him because he keeps them off balance. His pathetic fastball actually seems quick to hitters after seeing 65 mile-per-hour curves and changeups. And after he leaves a game and a 23-year-old reliever pounds 98 mile-per-hour heat batters fume.

I connect with Jamie Moyer. He’s coming back after serious arm surgery and arduous rehab. You don’t rehab for a year at 48 or 49 unless you are nutty enough to believe you can still cut it when everybody else your age is selling insurance.

This is the Jamie Moyer story I love. He puts on the stirrup socks that nobody else in the game would dare wear because they’d be laughed out of the dugout and takes the mound because “he gets to do it” not because “he has to do it.” He is a baseball warrior by choice. He also donates a ton of money each year to the 28 bereavement camps for kids that he and his wife Karen support.

I think I get Jamie Moyer. Baseball is his work, but it’s also his love. Long ago he stopped listening to his doubters, because to him baseball is about making pitches and getting outs. Keep it simple. Play the game. One day at a time. The perfect clichés of baseball – and life.

Question:  If you had won 267 games and had earned the money that Moyer has, would you undergo Tommy John surgery to try to pitch again?

An Interview with Colorado Rockies Pitcher Jamie Moyer

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