Swarf: The Money Gravitates West

By Lloyd Graff

Today’s Machining World Archives June 2010 Volume 06 Issue 05

Let’s connect a few dots. The head of the Russian government, Dmitry Medvedev, is coming to visit Silicon Valley because he wants to build a competitive science center in his country. He hopes to learn something about what makes the Bay area so attractive to the Apples, Googles and Genentechs of the world. Toyota is putting a sizeable investment into electric carmaker, Tesla Motors, and is providing the closed Nummi factory in Fremont, Cal., to make Tesla cars. The DMG/Mori Seiki collaboration is probably going to manufacture machine tools in Davis, Cal., near Sacramento.

While the California government may have to pay people with IOUs, the state is still a magnet for investment and young people looking for opportunity. With Wall Street’s reputation muddied up by financial scandal, the best and brightest are turning to the left coast again for opportunity. This is a good thing. In the mid 2000s it seemed like every smart kid wanted to trade derivatives on the Street. A lot of young people actually wanted to be the next Gordon Gekko.

Apple Inc. headquarters in Silicon Valley, Cal.

The pendulum has swung the other way today. Apple, Google and Genentech are hiring tons of people now. Soon Tesla and DMG/Mori Seiki will be in full swing. The momentum is moving west again. The economy is turning toward making things in the highest labor market in the country. Money gravitates to energy and creativity. The magnetism of northern California is strong right now.

After the Memorial Day weekend I posed the question, “Should we be economic patriots”?

When I wrote the car buying stories for the April and May issues, I took heat from readers who felt I was derelict in not coercing my sons to buy American cars rather than Hyundai Sonatas.

It turns out that the Sonatas are made in Montgomery, Alabama, and have more than 50 percent American content. Hyundai spent $1 billion to build a factory, and the workforce is almost entirely Alabaman, but ultimately my sons’ buying decisions were based entirely on the products and price. Economic patriotism had nothing to do with it.

Do you buy a Haas vertical machining center because it is American or because it is the best machine for the money? Do you pass on bananas because they come from Honduras? Do you shun an iPhone because it was made in China at a FoxComm plant that has had 10 suicides among its workers this year? Where does your economic patriotism start or end?

Personally, I am not an economic agnostic. I have never bought a German Mercedes or BMW because of the Nazi atrocities of 70 years ago. But considering most of the taxis in Israel are Mercedes, I know that particular economic discrimination is now ridiculous.

Many of my long time screw machine customers have shops in China now. Are they economic Benedict Arnolds?

I recently talked with Joe Arvin who owns a big aircraft gear company near Chicago. He considers himself an economic patriot because he will not put up a plant in China, even though his clients are pushing him to do it. Do you think our soldiers died for Ford or for the economic and political freedom to buy oil from Saudi Arabia to drive a BMW to the sushi restaurant?

Here’s the good news and bad news. Bad news—75 percent of Americans are overweight. We’re French frying ourselves to death. Good news—it’s going to be great for the precision machining business.

Dr. Uli Sutor, key account manager at DMG, gave an illuminating talk at the first day of DMG/Mori Seiki’s Innovation Days, May 24, at its national headquarters in Hoffman Estates, Illinois. The event was a combination sales and networking event for the collaboration between two of the biggest players in the world machine tool business.

Sutor’s presentation discussed the opportunities in the medical machining business. As he sees it, orthopedics, primarily knee hip and spine, are the biggest growth segment. The passage of Obama’s health care plan in the U.S. will expand the area even faster. According to the literature it takes 40 minutes to do a knee replacement—20 if there’s no insurance.

A person who is at least 30 pounds overweight is three times more likely to need a knee or hip replacement than a trim person. It’s easy to see that the obesity trend is the friend of orthopedic surgeons and hospitals.

Sutor mentioned the number of bone screws and plates produced in the world. His number astounded me—200 million orthopedic screws and plates last year.

Last year 1.1 million knees and hips were replaced in the U.S. The expectation is 4.6 million per year by 2030, partly because a joint replacement lasts 10-12 years, so many people will need redos if the obesity trend continues.

Dr. Sutor gave the presentation from the DMG point of view. He employed a lot of data from the European perspective. One piece of information I found valuable was that “turbo whirling” is now being made by DMG for bone screw threads. The process employs linear technology, which uses no gears or belts and provides a superior surface finish. This is particularly valuable if a doctor will eventually remove the screw from the repaired joint.

The $64 billion dollar question for the economy is, what will happen to employment? What happens to unemployment is related, but the two numbers do not always shift in tandem.

We are seeing a strengthening in manufacturing now and the overtime strategy seems to be waning. Productivity stats are still impressively bullish but they are starting to level off. You can only squeeze so much juice out of the lemon. The Labor Department acknowledges that people are being hired in manufacturing and my anecdotal evidence confirms this.

New construction is still pathetically soft in most markets, but we are seeing a weird anomaly in the most devastated markets of Nevada, Arizona and Florida. Builders are starting to build houses. According to a recent article in the New York Times, the most devastated housing markets are starting to get hot. It appears that some buyers just want a new home and hungry builders with low cost lots are providing value. Buying out of foreclosure or employing a short sale is such a hassle it is pushing buyers to new. According to the article, individual buyers are losing out to out of state buying syndicates who are picking up large collections of foreclosures at cheap prices and
paying cash. Perhaps the dreaded foreclosure overhang will prove to be similar to a mild flu season, which bodes well for employment—but not necessarily unemployment.

Juan Williams, the astute Fox and NPR commentator, recently did an interesting piece on the composition of today’s long term unemployed. The stubborn unemployment is in older, white, blue-collar workers. He compares this demographic slice with black factory workers laid off in the early 1980s downturn. That group was very slow to get new work, saw families dissolve and higher levels of drug abuse and births out of wedlock. According to Williams, we are seeing similar trends now from the bluecollar, white, male demographic.

When I talk to people in the machining world I often hear confirmation of this employment issue. Company owners do not necessarily want to retrace their steps on new hiring. They may be looking for different skills and younger workers who are willing to start at a cheaper wage and be less insistent on health insurance. Immigrant workers with a strong work ethic may look more appealing than a 50-year-old former union guy who has been out of work for nine months.

I think the recovery of 2010 will be a little different than past rebounds. Companies will be hiring, but not necessarily rehiring. Unemployment will be sticky, but millions of people will be finding jobs.

The hot movie at the Cannes Film festival was Wall Street: Money Never Sleeps, the sequel to Oliver Stone’s Wall Street (1987). Michael Douglas plays Gordon Gekko again, who returns to the Street after spending eight years in prison. Art imitates reality. Reality imitates art.

I just finished Michael Lewis’ brilliant new book, The Big Short: Inside the Doomsday Machine, about the appalling fraud among the big shooters on the Street during the subprime fiasco. He could have used the same title he used for his last best seller, The Blind Side: Evolution of a Game, because of the duplicity and stupidity of the bond packagers and the rating agencies who blind-sided the government regulators and most investors.

In my callow youth I thought Wall Street banks were conservative stewards of investor money. The Big Short exposed them as crooked, dumb, cynical casino operators who lacked the scrutiny of Las Vegas.

I think the civil suit against Goldman Sachs was a preliminary probe by the SEC. Goldman’s management probably saw it as a political stunt to help the Obama 2010 Congressional election effort. But Lloyd Blankfein’s poor showing in Washington seems to have emboldened the Feds and New York’s Attorney General, Andrew Cuomo, to keep the pressure on. I’m sure Obama and Cuomo have read Lewis’ book, which lays out the derivative conspiracy with dramatic clarity. The big players—Morgan Stanley, Bank of America (Merrill Lynch), Bear Stearns, UBS, Goldman, AIG—are the names under scrutiny.

I really think we are going to see criminal indictments and “show trials” down the road. Lewis’ number one bestseller lays out the trail like dropped breadcrumbs. There will be a few Gordon Gekko’s headed to the penitentiary this time around, but unless we shut down the taxpayer funded Wall Street casino, it will all happen again in a few years.

Industry Scuttlebutt

  • I understand that some Japanese machine tool builders are running painfully short of inventory in the United States. Sales in Japan are up 260 percent year to year. The American distributors under-ordered last year and the Japanese factories slowed production, while huge Chinese orders flooded in several months ago. Six hundred CNC Swiss lathes were sold by one builder and 285 machining centers went to another for cell phone dies, swamping the companies. Now American demand is perking up, and the cupboards are bare. It will be interesting to see if ¥92 to the dollar will justify higher prices at IMTS.
  • The liquidation of Fadal machines in California has surprised the doubters. The liquidator, Machinery Network Auctions, has sold over 100 machines and has about a dozen left.
  • We hear that companies like Caterpillar, Deere and Case are still starving for inventory. They are pressing their vendors hard and their projections for next year are even more bullish.
  • On June 28 Cy Zvonar of Industrial Machinery Corporation of Milwaukee turned 99 years old. He still comes to work every day wearing a suit and tie like he has since 1939. It’s an incredible coincidence that three generations of Zvonars, Joseph, Cy and Jim, were all born on the same day of the year.
  • The authorities that operate McCormick Place in Chicago, where IMTS will be held Sept. 13-18, have awakened to the threat posed to its convention business by Orlando and Las Vegas. Millions of dollars will soon be flowing into marketing, but unless the total expense of exhibiting and attending is addressed, I can see the day when IMTS leaves the Windy City.

Elena Kagan has impressive credentials to become a Supreme Court Justice, but her nomination brings up some interesting questions about the composition of the Court. If she is confirmed there’ll be three Jews and six Catholics on the High Court—no Protestants, Buddhists, Muslims or evangelical Christians.

Four of nine Justices will be from New York city if Kagan gets in, one from each borough except Staten Island.

With Kagan’s appointment all nine Justices will have gone to either Harvard or Yale Law School. There will then be three women on the High Court, which would be a record number.

Kagan has written about the confirmation process, criticizing the charade of candidates for the bench who dance around their beliefs about crucial cases which the Court will hear. Now that she’s the one in the hot seat we will see if she’s as candid herself.

Ms. Kagan clerked for Abner Mikva who was one of Barack Obama’s early mentors. She was brought to Harvard by Larry Summers, who is head of Obama’s National Economic Council. She also worked in Bill Clinton’s White House with Rahm Emanual. This woman has great connections.

The only drama I anticipate is that a senator will ask her about her sexual orientation. If Ms. Kagan is gay, as has been speculated, it may come up in testimony about cases of special interest to gays. Personally, I hope she addresses the whispers. I would like to see a gay woman on the Court—especially a Court that begs for diversity.

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