Courtesy of www.benzinga.com

One of the things that has always fascinated me about the used machinery business is the daily assessment of risk and reward in the deals we go into.

Every deal for my company Graff-Pinkert is inherently a gamble on the future value of a discarded machine tool. It also is a judgment call on the risk assessment of our competitors who may or may not know about a machine we have interest in.

My son Noah calls it a daily treasure hunt. It sounds better than “going to the gambling tables.”

I think I understand the risks after being around the game for my entire business career. But I often wonder about my customers who make big bets on automotive or military contracts, knowing that some of the risks may not be apparent when they bid. I have heard of so many projects which demanded hundreds of thousands or millions of dollars of capital investment, only to be canceled out after a month or a year of operation.

In the high production turned parts arena there is a fascinating opportunity popping up with the enormous recall of Takata airbags taking place by Honda, Toyota and a host of other auto companies.

The car companies, at the behest of the U.S. government, are recalling 34 million airbags because about 100 of them have prematurely fired over the last 13 years. The occurrences are associated with heat and humidity causing a degradation of the propellant mechanism, which potentially results in shooting metal shards at a driver and passengers.

For the companies that have the money, expertise and guts to bid on the Takata work the rewards could be enormous. This kind of volume is rare today, even for automotive vendors. But with airbag work, the players know that there have been many washouts of audacious turned parts firms who dared to venture into the Takata briar patch, along with some big winners.

For those companies who want to capture airbag contracts this time around there are additional roadblocks. Lenders who normally might have jumped at juicy capital equipment loans for solid machining firms are scared of airbag replacement work because of the sheer magnitude of the recall. This is a “Tylenol sized” event. Takata of Japan, along with Autoliv, and TRW produce most of the airbags, Takata with its closest ties to Honda and Toyota. Takata invented the airbag 25 years ago and has ridden it to riches, but this colossal recall could devastate the company.

Some people think the recall could put Takata into bankruptcy, but the people who are gambling on making the parts believe the company is too important to the car companies to allow it to fold. It is the Toyota, Honda, GM, BMW, etc. name on the recall, not Takata, which means it is highly unlikely the airbags will not be provided. Who pays for them is a question mark, but the smart money is on somebody paying for the hardware and installation. The buyers of parts might be slow in paying as they work out who is financially responsible.

Another unknown is how much business will end up with Autoliv and TRW, the other big airbag players. But Takata desperately needs parts now and they are inclined to place work with experienced suppliers. For them it should be a bonanza. Unless the unforeseen happens—which as Takata certainly knows—can occur.

Question: Is the safety rating the first thing you consider when you buy a car?

Lloyd Graff is a Writer and the Owner of Today’s Machining World, and also runs Graff-Pinkert, a used machinery firm in Oak Forest, IL.

Joe Maddon, Manager of the Chicago Cubs

How do you change a loser into a winner? This is a question that has intrigued me for decades as a sports fan and a business owner. I think the question can be refined today to, “how do you change a non-winner into a winner?” or, “how do you transform mediocrity into superior performance?” Winning doesn’t mean a championship, and success in business can be defined as longevity and happiness with performance, even if the owners do not get mega rich.

But there is a mindset in sports or business or academia that consistently moves the needle toward success vis a vis one’s peers. This attitude was exemplified and articulated quite brilliantly by Joe Maddon, considered by many to be the best manager in Major League Baseball by his stewardship of the Tampa Bay Rays and now the Chicago Cubs.

A few days ago, a Cubs pitcher named Tsuyoshi Wada was starting a game and the team took a 6-0 lead in the first inning. Maddon watched each pitch intently as he always does and noticed Wada was not sharp. Wada gave up a home run and his pitch count for three innings elevated significantly. With the Cubs leading 6-3 Maddon told Wada in the dugout that he was finished after just three innings, thus he could not get credit for the win because he did not pitch the necessary five innings.

The Cubs bullpen pitched the final six innings and the team won the game, but not Wada in the score books.

Joe Maddon was asked about his decision to lift the starter the next day and relished the opportunity to state his reasoning.

He stated forcefully that he wanted to illustrate clearly to a young team that had been the epitome of failure and non-success for 100 years that mediocrity was no longer the norm. Wada was not on his game and his previous record did not indicate that he would be able to reverse course. He was not trying to get Wada a win, he was determined to get the Cubs a win, and he would do everything possible to insure that. One more win could be the difference between making the playoffs or not.

Maddon’s actions were a message to all of the players that the team was no longer in rebuilding mode. They were supposed to go all out every day, every play, if they wanted to be winners.

As an owner and manager of two businesses I find this attitude inspiring and scary, because I know Maddon is right on and I know that I often take a different approach. I do not always challenge myself or my people to go all out, all the time. Honestly, at 70, I don’t feel like I can be “all in” every day. Therefore, I tend to give my employees a pass at times to clock watch and sometimes go through the motions without always calling them on it. I personally am satisfied to make a good living and pay my taxes at the end of the year, even if I do not always top myself.

I suppose if I was a ballplayer for Joe Maddon, he would be looking to trade me for a more aggressive, type A winner.

Business is not Major League Baseball. I get that, but Maddon makes $5 million a year because he can turn non-winners into winners. The best manager, according to baseball analytics, is worth five to seven games a year. Doesn’t sound like a lot in a 162 game season, but it’s the difference between making the playoffs or finishing fourth for a lot of teams.

For me, the attention to detail, the periodic reminder to do something, the compliment or the thoughtful reprimand, the to-do list that actually gets done, are things that really do move the needle in a small business. Sometimes you have to fire somebody who is adequate at what they do for the firm, but they are a bad fit.

I am slow doing the hard things in my business, so I admire a manager like Joe Maddon who seems to relish doing the “right thing” even when it’s hard.

Question: Do you do your best every day?

The machining world is a conservative one, where change comes slowly. In the screw machine arena change often takes a decade to filter through the industry. Today we are seeing a shift that is catching on in conservation of metal, particularly brass. Hot forges produce near net shapes, which are then machined by multiple station rotary transfer machines. This is a method that has come into vogue for fittings manufacturers. The volumes must be high to justify the initial capital investments, but the paybacks are significant from the reduction in scrap turnings from the traditional way of doing things. With aggressive competition from China, this approach reduces total costs on high volume parts enabling manufacturers to bring the work back to the U.S. Much of the capital equipment comes from Italy, which has pioneered this approach to machining.

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The American economy continues to bump along, refusing to yield to conventional expectations of its behavior. Recently, the stock market has dropped, giving up all of its gains for the year. The perverse explanation is that the unemployment rate continues to drop, wages are bouncing up a little, and the conventional wisdom says that this will allow the Federal Reserve to raise interest rates a bit after seven years at an extremely low level. The theory is that slightly higher rates will dampen growth.

This theory has always perplexed me because it argues that bad is good, and good is bad. High unemployment and low wages are good for growth in the economy? That feels like a flawed idea.

The Fed is looking for a little inflation but under 2% per year. The only place I am seeing inflation is in food prices, which seems dictated more by the California drought than accelerated demand.

Car sales are solid, home sales are weak for new homes with housing prices very erratic. In some places like Denver prices are shooting up, but over most of the country mortgage lending strictness is keeping demand tepid. The big overhang of school loan debt and slow family formation are also a damper on real estate.

One interesting development is the spate of “home flipping” schemes being advertised on the radio. The fact that these charlatans are coming out of the woodwork again means that people think houses are getting hot again. Frankly, I do not think it will be a self fulfilling myth.

In the machine tool world, the scuttlebutt I get from auctioneers is that pricing is off 25% from a year ago on mainstream CNC equipment. The builders from Asia and Europe generally deny they are reducing prices, but with yen down 25% in value versus the dollar, it would be easy for Japanese firms to offer discounts to make a deal. The Swiss have a problem with their ever rising currency, but the Germans have a faltering euro to give them cover if they care to discount.

Not all auction sales have been weak. The recent Jeyco auction in Toronto done by Hilco, featuring 12 Hydromats and 20 Davenport screw machines had prices surpassing expectations of dealers who attended by 20%.

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Major League Baseball season is one quarter finished and there are a lot of good stories. Former weaklings Houston, Minnesota and the New York Mets are leading their divisions, and look like legit contenders. Three of the best young players in the game grew up playing against each other as kids in Las Vegas. Kris Bryant of the Cubs, Bryce Harper of the Nationals, and Joey Gallo of Texas could all be superstars together. They played Little League in Vegas at the same time.

But the story I like best is that Pat Venditte, the ambidextrous pitcher finally made it to the Majors with Oakland at the old baseball age of 30. I’ve been following Venditte since his days at Creighton University in Omaha, hoping he would make it to the Big Leagues. He’s a slender kid and his pitches are in the mid to high 80s from both sides. They passed a special rule for him, that he must declare a pitching arm when a switch hitter comes to the plate so you don’t have a dance going on at the mound with both pitcher and batter switching sides during an at bat.

Venditte has not had an easy journey to the Bigs. The Yankees drafted him in the 20^th round in 2008 and he has bounced from team to team in the Minor Leagues until getting his shot a few days ago with the Oakland call up. He has a special six finger mitt which he can wear on either hand which Mizuno made for him after his Dad sent a design and tracing to the Japanese glove maker when Pat was 8 years old. He is still using the original glove.

Question: Are things changing at your company? Or is it the same–old same–old?

“Playa de la Concha” in San Sebastián

In May I had the wonderful opportunity to go on vacation in a small paradise in northern Spain called San Sebastián (Dononstia in Basque).

When I asked folks from San Sebastián how they felt about their home city they simply beamed. They boasted that the city is the gastronomic capital of the world, it has the most beautiful scenery in the world, has a solid economy, and that its Basque language has no other languages it can trace itself back to, making it the oldest language in all Europe.

I’m happy to say the bragging of the San Sebastiáns didn’t come across to me as snobby, which it very well could have. Instead their pride felt authentic and uplifting, and it was hard to disagree with their sentiments.

San Sebastián is located in Basque Country on the southern coast of the Bay of Biscay, 12 miles from the French border. Despite its small size of 23.51 square miles, and modest population (186,409 in 2011), it is considered a food mecca, filled with bars serving traditional yet creative small snacks often comprised of seafood called pintxos and succulent rare beef ribs (chuletas). San Sebastián’s area also boasts the second highest per capita of Michelin star restaurants in the world, second only to Kyoto Japan. The city’s views of the coast were so breathtaking that I took hundreds of scenery photos, many of which are similar and repetitive, but I was so struck by the beauty that I just had to keep taking one after another.

One thing that strikes me when I travel to Spain is the pride Spanish people have in their heritage. But the pride they exude generally isn’t pride in being Spanish, it is pride for the region or specific city they come from. Contrary to what one might first think, Spain as we know it is actually a young country with its first constitution in 1812. The country is comprised of 17 autonomous communities, two autonomous cities and has six recognized regional languages. The divisions among regions remain clear today. For example, children in the Basque region have to study the Basque language in school, while those in Catalonian cities such as Barcelona learn Catalan. Both the Basques and Catalonians have had significant separatist movements for decades, sometimes even resorting to terrorism.

Noah Graff eating Beef Ribs (chuletas) with a British friend in San Sebastián

In San Sebastián, street and building signs are all written in Basque alongside Spanish. The best soccer players growing up in San Sebastián only want to play for their home city’s team, forgoing the vast salaries and fame they might find playing for a large market Spanish team like Real Madrid or playing in other countries. In fact, I was told by my hotel’s desk clerk that if a player from San Sebastián went to play for another Spanish city people might spit at him walking down the street. I asked him if a city in another part of Spain was attacked by a foreign country if he would he feel as though he had been attacked personally, and he said no. I’m sure not everyone in San Sebastián would feel that way but it was powerful to hear him say it.

A friend I made in San Sebastián told me that he admired how at every sporting event in the United States we sing our national anthem. The ritual had never really struck me as a custom distinct to the United States before then. As much as I loved visiting San Sebastián and as much as I admire the passion its people have for their home city, the disunity I felt in Spain gives me an extra appreciation for the United States. I feel fortunate to live in a nation where I can travel everywhere and not feel like a foreigner, be it to New York, Indiana or Mississippi.

God bless America, where states haven’t tried to secede for over 150 years, where I can go to a Chicago Cubs game and sit next to a Cardinal fan peacefully, and where Lebron James can leave his hometown to follow money, prestige and weather, and then return as a hero.

Question: Do you always want to live where you’re living now?

Question 2: Would you like to be a settler on Mars?