Category Archives: Business

The China Syndrome

Two decades ago, a cashmere sweater was a soft symbol of wealth and status warn by pipe smoking duffers at the club. Eventually women also wanted to wear the wool from the shaggy goat. The boosted demand beyond the capability of shepherds filled in the production shortfall.

But the sharp folk in Bentonville Arkansas who run Wal-Mart believed that cashmere was not the exclusive wool for the rich, and decided cashmere sweaters should be brought to the masses. It was the perfect Christmas present. They asked the disintermediating question, “Why not sell a $49 cashmere women’s sweater, or a $39 or even a $29 one?”

And the Shepherds in China and Mongolia heard them. A herder with 30 goats living in a tent soon had 300 grazing goats. He did what capitalists everywhere do – expand to meet the demand. And shepherds reaped the reward of Wal-Mart’s audacious bet on the desires of its customers to have buttery sweaters for $30 to $40. And soon the Asian shepherds had small homes and televisions and toilets and life was good.

Except 10 times more goats ate all the green grass, and the bigger herds needed to move to greener pastures. The old land turned to dust and the wind blew. Huge clouds of dirt miles long and wide lifted off the ground, browning the local air and ultimately circling the earth. The shepherds had to leave their newly built homes to search for new grass, and China and the world was a dirtier grittier place. But Wal-Mart got their cheaper wool, and you and I got our comfy cardigans.

The net gain for the Chinese economy was real in this case. New sweater factories were built. Girls got jobs at the sewing machines after fleeing the poverty of rural China. The sewing machine firms sold product and the machine guys sold them components for bobbins and stitches. The shepherds tasted prosperity and the goats found more company. But the gains were diminished by the communal degradation of the air pollution. That is not in the Chinese growth statistics, but the people  on the ground know it’s real. This is the yin and yang of “Wild East” growth. Eventually the Chinese people will not take it anymore.

By the numbers, growth will slow and the markets will no longer fawn over the Chinese stocks. The Olympics will come and go. Wal-Mart will still sell cashmere sweaters. I don’t know if they’ll cost more or less than they do today

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Bad to the Bone

I see the Feds bagged some more bad dudes relating to the machining world. Zimmer, DePuy, Smith & Nephew, and Biomet owe $311 million in fines to the Federal Government to settle criminal and civil penalties stemming from kickbacks paid to surgeons doing orthopedic implant procedures. That’s a lot of bone screws.

Zimmer Holdings alone is taking a $169 million write-off in the coming financial quarter. Stryker of Kalamazoo flipped for the prosecution to seal the deal in this case.

Ex-Attorney General John Ashcroft will get in on the gravy train by being appointed the governance monitor for Zimmer.

I find this case particularly seamy after doing a big cover piece on squeaky clean Warsaw, Indiana, in Today’s Machining World last year. I know that doctors routinely take freebies from drug companies and do cheesy speaking engagements for juicy fees, but it appears that the bone cutters had graft down to a science. We all end up paying inflated insurance fees to cover the insider’s chicanery.

We all know that waste is rampant in hospitals. One little tidbit related to the orthopedic racket is the bone screw packaging. Bone screws come in packages of six, which are opened in the operating room. Once the package is opened, any unused bone screws are discarded. The screws sell for $50 to $500 each. I would guess an enterprising scrap dealer might resell them to Russia or Serbia for a tidy profit. With our cockeyed medical payment system we invite this kind of waste.

But now we can all breathe easier, with Ashcroft nosing around the surgeons’ scrubs.

Hopefully with this messy case out of the way the corporate warriors of Warsaw can get back into buying more Citizens, Stars and Tsugamis and build their brands with product quality, not bribes.

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Gene Haas and Michael Vick — Tragedies of Character

Two young men still at the top of their games copped pleas on August 27, 2007. They will both be going to Federal Prison despite their fabulous wealth and instant name recognition. They gambled their freedom and careers with bizarre acts of recklessness abetted by cronies without the strength to say no to them.

Gene Haas, the unlikely billionaire of American machine tools, and Michael Vick, the quarterback who redefined the position in the NFL, both saw their freedom slip away when their associates flipped to the prosecution. Even the shrewdest legal talent money could buy couldn’t keep them out of jail.

Haas’ hubris led him to tax evasion to cheat the U.S. treasury out of millions of dollars because he thought he was wronged on a patent dispute. Vick electrocuted pit bulls which he had gambled on and buried the bodies on his land.

Haas and Vick were both single men who defied the conventional wisdom of their games. Haas told the world he would build a vertical machining center in L.A., sell it for less than the Japanese builders, cut the price year after year and service it like the Maytag repairman.

Vick said the quarterback was a running back who scored points with his feet. He destroyed defenses built to thwart skilled white boys who played the vertical passing game.

Haas and Vick are iconoclasts in their respective worlds. They broke the defining rules of their peers and they were vilified by the established players. Both guys loved to stick it to the reigning authorities who mocked their unorthodoxies and said they had to fail because they were different and too difficult.

Maybe when you keep showing up everybody else in your field, make huge money, and travel the country in private jets, you think that society’s rules are for the little people. You’re going to do what you’re going to do, and you’re untouchable. It’s so Macbeth.

But in America, Presidents get impeached, and billionaires do go to jail, and quarterbacks plead. The judicial system is still painfully stacked towards the rich and famous, yet on August 27, two of our richest and most famous men conceded their freedom at federal court houses. Haas and Vick — two four letter words synonymous with greatness — and utter stupidity.

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Gene Haas Trial Coming

The Gene Haas tax evasion trial is projected to begin in September. It has been stalled by continuances, but both sides evidently want it to happen now.

Denis Dupuis who was Gene’s top deputy was indicted with him. Dupuis has made a deal with the Feds to testify for the prosecution.

The Haas Automation company has attempted to distance itself from Gene’s travail and appears to be going strong. My dire predictions about the possible impact of the case on the Haas business have proved wrong to his point.

My understanding is that Gene Haas still owns the Haas Automation company. Today’s Machining World will be following the trial closely, because the outcome will affect the machining community. Haas, the man and the company have embodied the resourcefulness and resiliency of American manufacturing as much as any person or company over the past 25 years. The trial certainly demands our interest and scrutiny now.

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The Customer Isn’t Always Right

I hear that Sprint has notified 1,000 of its customers that they are being terminated by the cell phone service provider.

Sprint will get some momentary snickering PR, but frankly, I am sympathetic to the idea of dumping the nags. I believe that not all customers are worth the aggravation. A demanding but intrinsically fair client is a good thing because he or she forces you to raise your game, but some people just “drey your kop” (Yiddish for “play with your head”). Life is too short to diddle with such time wasters. The chronic malcontent customer is always worthy of being pruned. Sprint has the right idea to forgive their balance and direct them to AT&T or Verizon with a gracious kick in the butt.

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The Labor Shortage

The labor shortage of skilled machinists is not a singular phenomenon. Heavy equipment operators who maneuver excavators, dozers, and cranes are also scarce. Power Equipment of Chattanooga, Tennessee, is doing something about it in its area. The company contributed $600,000 worth of Kubota machinery to Chattanooga State University to equip operator courses, according to Larry Moon of the company. He says that the classes have been oversubscribed every time they have been offered. This is a smart move for Power Equipment, which has several branches in the state.

On the machine tool front, Haas Automation has been the most aggressive in donating equipment to colleges and universities. This has had the double barreled effect of developing brand awareness for machinists and engineers while enriching the pool of operators in the field.

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Can Old-school Steel create a New School dream?

Several issues ago in Today’s Machining World, Robert Strauss wrote an in-depth story about Conserve School and its unusual relationship with steel distributing agent, Central Steel and Wire, of Chicago.

James Lowenstine, son of the founder of the company, left this centi-million dollar estate to build an environmentalist’s dream of a prep school in rural Northern Wisconsin.

The Trust which funded the school was endowed with Lowenstine’s stock in Central Steel, a beautifully run company doing $750 million a year in sales. Several board members of Central Steel also sat on the Conserve School’s Trust board.

A clause in the Lowenstine will stated that if Conserve School failed to meet the educational goals Lowenstine had envisioned, the Trust should move the assets to Culver Military Academy, Mr. Lowenstine’s alma mater.

The possibility of attaching itself to a billion dollar corporation was overwhelming and Culver decided to sue Conserve School and its trusties late in 2005.

Both sides were well along in the pretrial discovery process this spring when Culver decided to drop its lawsuit. The judge dismissed the case on May 25th, 2007.

I found this case fascinating for many reasons. Central Steel is the epitome of an old school company in the best sense. The people wear white shirts and don suits and ties. Most of the salesmen come out of Chicago Catholic high schools.

Its reputation for excellent service is impeccable. Some might call the company dull and gray, but it’s brilliant at chopping up steel, delivering on time, and making money. We should all be so boring.

What James Lowenstine did so cleverly is try to preserve the company he loved and build a groundbreaking educational institution on the North Woods ground he adored.

The vast wealth of the trust was such a sweet carrot that it almost became the undoing of the will’s grand plan.

It will be awfully interesting to see how a bunch of steel guys out of Irish Catholic Chicago high schools can steward a tree hugger school in the boonies of Wisconsin with almost unlimited assets behind them. It is a strange brew.

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Rube Goldberg is Alive and Well

“Rube Goldberg” is alive and well in Harry Potter’s neighborhood. Three blokes in their mid-twenties, graduates of elite Cambridge University, have developed fantastic mechanical chains of devices, like sliding chess pieces, dropping hammers, and perfectly aimed darts that keep the crazy sequence going on video. They reckon four to five million people have watched their clever automation process on screen.

Their contraption videos are a brilliant effort to promote the young company of these clever mechanical engineers who specialize in manufacturing and design creativity. I urge every reader to go to their website, to see their hard work.

I talked to Tom Baynham, one of the creative engineers, about the group’s business plan, and how the popular videos fit into it. He says they are in the manufacturing and design creativity business. They are currently working on a project for a firm providing portable machine tools for the oil industry. They have spent time at the Mazak plant in Japan and see a future for their innovative approaches to making things.

He says that their videos have brought them notoriety and networking opportunities in manufacturing circles, but my sense is that they have not grasped the potential of the films.

They have a superb opportunity to turn their site into a huge social networking venue for people interested in mechanical things. This could lead to opportunities in toys, construction, even apparel – judging by the young guys from Threadless. They also could try the citizen contest method, which could culminate in an interesting show approach.

What these fellows have done is discover the latent interest in intricate mechanical contraptions. This implies big opportunities for machining companies to popularize and humanize their websites with similar creative efforts.

If I was looking for a company to make something, and found a group with the creative acumen of a Rube Goldberg master, I would definitely give them a shot at my work.

It is not a big leap to connect the dots from wacky contraption to perfect machined parts.

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A Perfect Day

Sometimes I have a day when everything comes together and I have to say, “Thank you, God, for allowing me to experience it.”

I had one on May 7th. Noah and I had an interview scheduled with Eitan Wertheimer, Chairman of the Board of Iscar, the huge Israeli cutting tool firm that he and his father Stef built. They just sold 80 percent of the company to Warren Buffet’s Berkshire Hathaway for $4 billion.

We got to the Standard Club in Chicago a half hour early, stepped into the elevator and Eitan introduced himself to us. He was ready to start the interview at 9:00 instead of 9:30, and we immediately began talking about Iscar, the sale to Buffet, his business career, love of cars, interest in education, the ups and downs of family business and a satchel full of other subjects.

Great chemistry. He wanted my take on business in North America, particularly the car industry and the woes of GM, Ford and the Tier Ones. I wanted to get his view of Israeli politics. He said that in business you can develop good people and work with them for a long time, but in politics you have no choice but deal with a bunch of difficult personalities.

He had advice for Noah about family business. The two of them seemed to hit it off immediately. Eitan’s oldest son is Noah’s age and is trying his hand at being an internet entrepreneur.

The interview lasted 75 minutes, and I felt like we could have talked for hours, but I knew that other people were waiting for a piece of his day in Chicago.

So we left the elegant, old Standard Club to prepare for our later interviews that day. Noah was preparing to talk to the twenty-something owners of Threadless, a custom tee-shirt company that is rewriting the business script of retail, and I was going to see the young entrepreneurs at Microlution, a machine tool startup on the Northwest Side of Chicago.

Microlution is making a CNC milling machine, smaller than a desktop computer. The next version of the tool will be adding a tool changer with the same kind of tiny footprint or, to be more precise, handprint. These young engineers worked on this stuff when they were students at the University of Illinois and are now translating it into what they hope will be a viable business. They are working on a big development contract from the Navy, they hope to sell four machines by the end of 2007 and 20 next year.

I think that they are doing something very cool. The current machine is potentially a design engineer’s best friend because the engineer could make prototypes literally at his desk by himself, skipping layers of bureaucracy and enormous tooling expense in a traditional big company setting. The engineer could make ten iterations of a component in a fraction of the time it would take to job it out or send it to a big company’s toolroom for prototyping.

I was impressed with their product, and I liked the way they think. I had a 5:00 p.m. reception for the American Israeli Chamber of Commerce back downtown, and I needed a ride. In a moment of inspiration I asked Andy Phillip, one of the brains at Microlution, if he would like to meet Eitan Wertheimer of Iscar. After a long moment of pondering his schedule, he said yes.

We stopped by his apartment in the city (he lives two blocks from Noah), so he could change into a suit and tie for the old school meet-and-greet for big shots at the Conrad Hilton on Michigan Avenue.

We walked into the reception (for the American/Israeli Chamber of Commerce) and saw Eitan Wertheimer surrounded by a gaggle of people. He immediately greeted me buoyantly and asked me if Noah was coming. I told him no, but I had another young guy named Andy Phillip that he had to meet. I briefly described the Microlution product, and then the two men started to talk shop. After 10 minutes they exchanged cards and promised to email. Then Eitan introduced Andy to several men from Pratt and Whitney, with whom he has a big joint venture making jet engine blades in Israel. One of the aircraft engine guys we met has 450 design engineers working under him.

I got a huge kick out of it. Will anything great come of the interviews and the matchmaking? It already has for me.

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How little Spira Shoe Company stole the show from Nike

What do you do if you are an unknown pipsqueak company with a killer idea, going up against a giant with an almost unlimited marketing budget?

On April 16th at the biggest running event of the year, the Boston Marathon, tiny Spira Shoe Company of El Paso, Texas, stole the show from Nike.

For two thirds of the race, two unknown Kenyan runners led, wearing brilliant yellow Spira shoes. Spira shoes have a superior design to their competition aside from just their color. Tiny springs are put into the heel of the shoes. This idea is getting traction in the footwear community but has not been deemed kosher by the running mavens. The Spira guys did not expect to win the Marathon. They just wanted to be noticed. And for one hour 32 minutes of the two hour, 10 minute race, they were front and center.

Nike can buy every track star on the planet (the winner did wear the swoosh), but the talk of the race was these two wannabee Kenyans with the incredibly yellow shoes.

Spira had promised the Kenyan rabbits $150,000 if either won the race. If the runners had won the race they would have had to forfeit the marathon’s official prize because of the spring shoes, but Spira was pretty secure these unknown runners weren’t going to finish first.

Unknowns do not win the Boston Marathon, but this year one did – Spira

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