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by Mary Ethridge

Diversify. Diversify. Diversify.
In 2009, cheerful economic development types chanted that
mantra to frantic auto suppliers. Reinvent yourself, they said,
as they paraded shiny growth industries before tired eyes.

Think aerospace, they said, or alternative energies, or medical devices.

By diversifying into those areas manufacturers would protect themselves from a collapsing auto sector and its attendant woes, they reasoned. Expertise in precision machining, automation and systems integration along with an established supply chain would fit well into one of these growth industries.

It sure sounds like a good idea. But ideas are free, and diversification usually isn’t. Auto suppliers that followed the big thinkers’ suggestion to explore new routes to revenue found themselves up against the same roadblock time and time again: the closed doors of lenders. The weak auto market, the general decline of the economy and the credit squeeze make it vital for companies to reinvent themselves and, at the same time, more difficult for them to do so. This dearth of capital has been a complicating and sometimes insurmountable problem for automotive suppliers trying to diversify.

“It’s been a major problem for many but especially for anyone serving the automotive market,” said Rob Kiener of the Precision Machined Products Association (PMPA), who recently testified on the issue before Congress. “I think that by trying to prevent another crisis the banks are creating a whole new one.”

The Original Equipment Suppliers Association has estimated that when all the figures are tabulated, about 15-20 percent of the 4,000 U.S. auto suppliers will have gone out of business through 2009. Monthly billings just to the three Detroit automakers from the U.S. suppliers fell from an average of $16 billion to about $7 billion in less than a year.

Bill Shepard, president of Die-Matic Corp., a metal stamper in suburban Cleveland, was one of those who took the diversification message to heart. More than two-thirds of Die-Matic’s business is tied to the auto industry. The remainder is in small appliances, mining and construction, where sales are healthy but not big enough to sustain the company over the long term, let alone grow it. Shepard explored the high-growth medical device market but found that even if he mastered the industry’s complex requirements he would need new equipment. He was set up to stamp big pieces of metal, but the medical industry typically needs small parts, thoroughly cleaned and individually packaged. New equipment, of course, requires money. Even if Shepard had gotten over some of the other hurdles, he says he doubts he could have managed to convince a bank to follow him into new territory. He’s heard the similar horror stories from his peers.

Vacant auto dealership.

“They’re cutting off credit of good, solid companies after relationships of years and years,” said Shepard. “These aren’t flyby- night operations, but the banks want nothing to do with them.” For the time being, Shepard has pared his operations dramatically, laying off talented, skilled people he took years to find and train.

“It’s a shame, and I certainly don’t want it to continue this way,” he said. “I don’t really know what the answer is yet.”

About an hour south of Die-Matic in Akron, Ohio, machining company owner Lee Combs is trying to figure out how to fill a $60,000 order when he needs to spend $24,000 for 4,140 steel rings to do it.

“I would normally use a line of credit to buy what I need, but you can’t do business as normal anymore,” said Combs, who also operates a CNC school to retrain oldschool machinists that was featured on the NBC Nightly News in November. “I can’t finance it. My bank doesn’t want me. They told me that. They want to shed anyone who’s not all about cash flow.”

Combs said he went to a holiday party an Akron bank gave for its business customers in December, but it wasn’t out of the spirit of the season.

“I went so I could get a free drink off a banker and eat their shrimp,” Combs said. “I figured it’s the only thing I’ll get from them.”

Combs said only about 25-30 percent of his business is automotive and that he’s been diversified for years, but that doesn’t seem to matter to the banks.

“They see automotive and they don’t want you in their portfolio,” said Combs.

In mid-December, the Federal Deposit Insurance Corp. reported U.S. bank loans fell by $210.4 billion or 2.8 percent during the third quarter—the biggest drop since the FDIC started keeping records in 1984. Banks booked $2.8 billion in third-quarter profits, reversing a second-quarter loss of $4.3 billion, while loans to businesses fell 6.5 percent. Borrowing from the Fed for nothing and buying 10-year treasuries is a no-risk, can’t miss strategy for banks.

Several surveys of metalworking manufacturing companies estimate that roughly 75 percent of these businesses cannot secure sufficient credit for day-today operations, equipment acquisition and expansion, among other activities, according to PMPA. In some cases, a small to medium-sized manufacturer will see its line of credit significantly reduced or revoked, or a loan called due to the health of its manufacturing customers, not because of the company’s own business decisions. Or, a company will sometimes be denied credit because the lender is having its own troubles.

“Countless members I speak with who still manage to maintain profitability tell me they have held decades-long relationships with their bank but are now being told they must offer their life insurance collateral to help secure a loan,” said Rob Kiener of the PMPA.

Kiener said that even when a manufacturer seeks to renew a loan with its existing bank, it can take three to four months to process because of all the new lending requirements and paperwork, despite taking no more than 30 days in the past. Small manufacturers are required to purchase raw materials on their own, and some aren’t seeing full payments from customers for six months, prompting a cash flow squeeze. The federal government agrees. “We need to see banks making more loans to their business customers,” FDIC Chairman Sheila Bair said in a news conference. “This is especially true for small businesses.”

But the bankers have said they are doing what they can, and the federal government is partly to blame. Their lending is not only limited by a sluggish economy but by hawkeyed federal regulators eager to avoid the kind of shaky loans that led to the banking crisis in the first place. In addition, businesses are reluctant to expand in a poor economy, so loan applications are down.

GreenCleen Surface Preparation. Photo courtesy of Mark One Corp.

Aggravating the situation, according to Kiener, is the decline in value of assets traditionally used as collateral for loans. “You have a piece of equipment that used to be worth $100,000 and it’s now worth $10,000,” he said. Real estate has also lost value, so even owners who put up their own homes as collateral, which happens primarily when banks seek loans through the Small Business Administration, can’t convince lenders to make the loan.

But despite the grim lending picture, some auto suppliers have managed to diversify and expand, using a bit of creativity and daring to avoid banks altogether.

Gary Lawton, president and majority owner of Buell Automatics in Rochester, N.Y., is grateful he didn’t have to depend on a bank to expand his non-automotive business. Buell, which was founded in 1966 and has 44 Davenport screw machines, had a long-time relationship with a client who liked their work. The client told Lawton they had another job they wanted Buell to do, but it required CNC capabilities. Based on the client’s commitment, Buell purchased two Citizen A-32 Swiss CNC machines and got the job. Besides the investment in new CNC equipment, the company also purchased a Durr Ecoclean parts washer in early 2009.

“Fortunately we were in a position to pay cash and didn’t have to rely on the banks,” said Lawton.

Buell’s business has traditionally been about 60 percent automotive, but now has dropped to around 45 percent. This new non-automotive business more than compensates for lost automotive work, Lawton said. “You don’t want to put the cart before the horse and take the risk buying new equipment, but in this case it worked out for us by getting the commitment up front,” said Lawton. “These days you’d better be creating some revenue without the help of a bank if you want to survive.” Lawton said he’s optimistic about marketing his new CNC capabilities to lure new customers this year.

Frank Kestler, president and chief executive officer of the Mark One Corp. in Gaylord Mich., said it was a matter of some luck and a boost from a state organization that allowed him to expand his company into non-automotive territory. For years, the company’s bread and butter was designing and building material handling and surface preparation systems for automotive metal fabrication applications. In 2005, a steel drum manufacturer approached Kestler and asked if Mark One could develop a more efficient and eco-friendly way to clean the rolls of steel used to make the drums. They came up with GreenCleen, which eliminates chemicals by using only hot water and brushes.

Kestler began to think about marketing GreenCleen to other non-automotive industries but found that banks considered it speculative, even though he had already sold one system. Kestler turned to the Michigan Economic Development Corporation’s (MEDC) Auto Suppliers’ Loan Diversification Program. Through the program, the MEDC buys a portion of the loan from the bank and offers a grace period up to 36 months on its portion. The $1.1 million awarded Mark One Corp. protects the bank while giving Kestler the freedom to market GreenCleen to a variety of industries. In November, he shipped a GreenCleen machine to a U.S. company doing business in China. He said it was the biggest sale of the year for the company, which employs 50.

Bridget Beckman, spokeswoman for the MEDC, said the program was started with what the MEDC could “scrounge from its couch cushions”—about $12 million.

“It’s a start, but unfortunately, the need is about $1 billion,” she said.

Successful applicants to the program should have a solid plan already in progress, Beckman said. About $6 million has already been awarded.

“They chose us because we were already well on our way. We just needed a little support,” said Kestler. “You probably aren’t going to get it on just an idea.”

Kiener of the PMPA said programs like the MEDC’s are worthwhile, but what manufacturing really needs is a new attitude from the banks.

“If customers can’t receive the products they need because manufacturers can’t get the credit they need, they’re not going to wait. They’ll source them from overseas,” he said. “These lost jobs, once outsourced, will never come back to the U.S. We have to solve this problem”—and we have to solve it right now.”

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