By Lloyd Graff

One of the major challenges for people in business is to define and understand what they are selling and what their clients believe they are buying.

For employees the challenge is similar. What are you being paid for? How are you adding value? What could you do that would enhance that value either for your present employer or a future employer?

On the face of it, these questions may seem simple and obvious. For a machining company the answer might seem as straightforward as “I sell brass fittings that meet the price and quality standards of my customers.” That probably was the answer that has fueled the company for 50 years and dictated the newspaper want ads for machinists who produced the parts on screw machines from bar stock.

What haunts me is that what appears obvious, and has been good enough for a hundred years, is no longer today’s best answer. It’s not useless, because 90% of the people in the industry still think it works, but what if the obvious isn’t the right answer any more.

At one fittings maker somebody asked a new question several years ago. Why do we have to make these fittings out of bar stock? If we reduced the chips and reduced our consumption of brass per thousand fittings by 25% we could reduce the price and still make more money.

By changing the question from, “how can we run our screw machines faster” to “how can we make cheaper fittings by using less brass, and producing fewer chips,” they changed the game. The financiers were intrigued because the new process was capital intensive, but showed a potentially lucrative return on capital. When automation was added to the process, the robotic arms replaced the skilled screw machine operators with a person monitoring a screen.

This stuff came together for me recently listening to Bill Gates talking to Charlie Rose on big picture changes he sees happening now and over the next 50-100 years.

Big picture, Bill Gates is sure that robots will take over much of the factory and warehouse work over the next 10-15 years. His friend from Seattle, Jeff Bezos of Amazon has been building large warehouses all over America, employing thousands of people to pull stock from bins, but those warehouses, I’m sure, are built to switch to robotic parts-picking as the state of the art advances.

From a political standpoint we should not be surprised when poorly educated voters line up to vote for a demagogue like Donald Trump to vent their fear and anger, or for a simplistic hair brain like Bernie Sanders, who panders to the fear of young people about their future and blames everything on “Wall Street.”

I’m writing this piece in my kitchen, watching a spectacular blizzard in Chicago as I recover from my 14^th surgery in 14 years. I’m certainly somebody who has seen the virtues of technology in my life. But I’m also worried about my children and grandchildren, who will have to figure out how to find meaningful work as robots get more agile and smarter over the next 30 years. They will be smarter than us one day. Did you see the movie, Her, a couple years ago? Think 2029.

The challenge today, February 2016, is to understand that technology is changing fast, even in our old-fashioned metalworking industry. Our customers always say they want “better and cheaper,” but what they don’t verbalize, but they convey under the purchase order, is that they also want reliability. Price doesn’t help if the parts don’t come when they need them. They also want somebody they can complain to and receive an answer from. They want somebody who can take a risk when their bosses will not allow them to take it. They want creativity, because they don’t hire for creativity. They have to find it on the outside.

They want people who have connections, because their bosses don’t want them to have connections. They might be dangerous to the business, because connected people talk too much.

So when I think about how to add value in a robotic world that’s going to be so great and so awful in the coming years, I think about the questions we should be asking right now in our business and in our jobs.

What do I do next when the process changes and they no longer need what I make?

What funny looking kid at a small booth at IMTS 2016 has the next big idea that the Kearney & Treckers and Warner Swaseys of today’s world are laughing at?

What do I tell my kids or grandkids when they ask me what skills they will need for the next 70 years that they will be working?

How do I find both the courage to quit and the guts to start when I feel stuck in the convenience of the present?

I hope you are asking good questions and getting some interesting and useful wrong answers to try out.

Question: What’s scaring you most today?

By Lloyd Graff

My critics have often said my Swarf (British for scrap) was rubbish. I doubt that, but your swarf, those chips that are conveyed out of the machines you run, spun clean of oil and dumped in a bin awaiting the scrap recycler, may have reached the price point of nil. Steel chips today are worth almost nothing, and if the trend continues you will soon be paying the scrap company to take them away.

Very soon it may get even worse.

I was talking to the guru of metal minutiae, Miles Free of the PMPA (Precision Machined Products Association), and he informed me that a decision is coming down imminently in Europe about prohibiting lead in new products other than autos, which have their own lead codes.

I know you probably do not sell much to Brussels or Bruges, but one of those bone screws or bullets you make might migrate there one day, and the authorities might reject it because of 3% lead content.

So not only are your steel chips virtually worthless today because the Chinese have told the scrap freighters to turn back to where they came from because they are making half the steel they used to, but you are probably going to have to separate 12L14 from your 1215 if you want the scrappies to pick the chips up without charging you.

If we just step back and look at the astonishing deflation of the last year in oil, metals and iPads, it is a little wonderful and scary. In the last 18 months oil is down from $90 per barrel to $30. Gasoline in Chicago was $4 a gallon. Today it is $1.79. 316 stainless scrap is down 35% from one year ago. Molybdenum is off 40%.

I have a friend in the scrap business who is a pretty big player. He bought a piece of the first aircraft carrier, The Forrestal, which is a gazillion tons of steel. They are scrapping it out now. For his sake I hope they find some gold in the hull.

Interest rates, which everybody predicted a few months ago would rise inexorably with Fed tightening, have dropped like “lead.” The 10 year US Treasury is paying 1.74%, but in Germany and Switzerland we see negative interest rates in which you pay those governments to hold on to your money because of the expectation for further deflation and even steeper negative rates.

It is now cheaper to make plastic bottles from virgin materials than to recycle your discards. I know this is devastating for all the children who have been raised in the religion of composting and recycling, but the planet will somehow survive.

Water is another interesting commodity to watch. Carlsbad, California is building a desalination plant for a billion dollars, give or take. It is a rich community, like Santa Barbara which did the same thing 24 years ago. Santa Barbara mothballed theirs a year after it was built and Carlsbad may do the same because the drought in California may have broken with this year’s El Nino and big snowfalls in the Sierra Nevadas.

Commodities are awfully hard to predict. When you throw in the vagaries of government regulation it is even tougher.

I find it a bit sad and ironic when I hear Bernie Sanders rail so fervently about raising the minimum wage to $15 per hour and invoking the mantra of climate change that always get s a big round of applause from the kids in the front row.

Then I think about the value of a ton of steel chips that used to be worth $300 and today is worth zero.

Unfortunately, the McDonald’s that has 14 employees on a shift will only need 12 in a $15 per hour world. Economics can be cruel.

Question: Can Trump win the Presidency? If so, what could he change?

By Lloyd Graff

I am writing this blog from home on Tuesday. My brain surgery to remove a benign tumor on my pituitary gland, which had grown from the size of a pea to that of a tangerine, was successful. The threat of blindness from its encroachment on my optic nerve has been removed. I am enormously grateful to the neurosurgery team at the University of Chicago, especially Dr. Issam Awad, who removed the ominous growth by channeling through my nose to get to the extremely enlarged gland.

It seems incredible to me that brain surgery to remove a “tangerine sized” tumor can be done without cracking the skull open, but creative surgeons and product manufacturers have made amazing innovations in recent years. It is quite possible that this pituitary tumor would have blinded me had it occurred a few years ago. Today it is correctable by minimally invasive surgery. They used belly fat to patch the holes. I knew my extra fat would be good for something.

Thanks to all who wrote such caring comments. It really made me feel that this column connects with its readers. I am truly grateful for your feedback.

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The Doosan saga seems to get messier by the day.

Doosan Infracore’s rush rush deal to sell the Doosan machine tool brand to Standard Chartered Bank fell apart at the end of January. The company is hemorrhaging cash from its other businesses, especially construction equipment (Bobcat, etc.). Its only viable asset it can convert to cash quickly is the successful machine tools division.

Standard Chartered Bank had offered $1.08 billion, subject to due diligence. Evidently after thinking about the deal it opted out. The next bidder was MBK Partners, an Asian buyout firm that just did a big deal with Tesco, the British grocery chain for its Asian assets. MBK Partners is a big player but does not seem to do much in the machinery area. Its offer is $850 million, so it is obvious that Doosan Infracore is playing a weak hand now. It is pushing for a March closing because the company is seemingly desperate for cash to keep the ship afloat.

The Doosan story is a little sad. Doosan Infracore built a wonderful machine tool company since taking over Daewoo. Perhaps it got a little heavy in oil and gas, but basically the machine tool division is solid. The company made a colossal blunder in buying Bobcat at the absolute worst time, paying for it with borrowed money. Last year Doosan Infracore laid off 1500 people and lost a fortune in the last quarter. It looks like somebody is going to get a “steal” on the machine tools business now.  IF THEY KNOW HOW TO RUN IT.

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Brian Beaulieu, my favorite forecaster of business for the machining crowd, recently did a webinar for the Precision Machined Parts Association. His outlook remains positive despite the commodities crash and the stock market’s recent haircut.

Beaulieu says that the oil, mining and agriculture downdrafts will make 2016 basically a flat year versus 2015, but not a bad one. Consumers are buying stuff with their extra gasoline money. Cars and light trucks are hot. Utility costs are lower with a mild winter. Employment is rising, banks are lending, retail sales are solid, deficit spending continues, and both residential and non-residential construction are improving.

Beaulieu sees a strong job market with 20% more demand for skilled labor than supply. Wages will go up almost 4% this year in our manufacturing world. This does not include increased costs from ObamaCare. He sees wage expenses going up 4% per year for the next four years, so the number of employees will be a critical judgment to keep in mind for all owners.

He sees the dollar weakening vis-à-vis the euro. This may have started already. He is positive about the next three years with military spending up in 2017 and 2018. He has consistently predicted a recession in 2019, and he still stands solidly on that view.

He seems unruffled by the vagaries of politics. I think the Obama experience of the last seven years justifies his view that a President does not really affect the economy that much.

Clinton, Trump, Sanders, Kasich—none of them will move the needle that much on the economy according to Brian Beaulieu. And he usually has been right for the past 15 years.

Question: Does the President affect the economy?