Manufacturing is the underpinning of the economy, in many ways. Each manufacturing job supports three other jobs in the overall economy, according to the Economic Policy Institute, a nonprofit, nonpartisan think tank, and there is a broader supply chain impact as well. Researchers at the Arizona Commerce Authority report manufacturing jobs tend to be high-wage, which contributes to a stronger economy. They also note that, as a base industry, it is not as significantly affected by economic fluctuations as sectors such as retail, service and construction.
And while manufacturing stands by itself as an industry, it’s also “embedded in everything else,” says Rosalyn Boxer, VP of Workforce Development at the ACA, noting, “It’s not just making a machine part. It’s pervasive in every industry.” Or, as Dante Fierros, president of Tempe-based Nichols Precision and a member of the National Association of Manufacturers Board of Directors, likes to put it, “Everything not made by God is manufactured by someone.”
The Bureau of Economic Analysis reports that U.S. manufacturing supported 12 percent of our GDP in 2012, producing more than $1.86 trillion of value each year. This is the highest level for manufacturing in recorded history. Focusing closer to home, how is it woven into our state and our local economies?
Manufacturing’s Economic Reach
There is a tremendous variety of types of manufacturing businesses in the Greater Phoenix area. Some fit the strict definition of manufacturing as the converting of raw materials into a product to sell. Others include assembly that uses components which were, themselves, manufactured by another manufacturing business.
Honeywell spans both, with core and non-core manufactured goods. For core items, Mike Owens, VP of Integrated Supply Chain for Honeywell’s aerospace division, says, “We invest and protect and keep close where we differentiate in the marketplace.” Gear technology is a core differentiator, so “we cut gear teeth ourselves,” he says. “For non-core, we use what’s available in the marketplace at various levels of performance — meaning, cost and competitiveness.”
Honeywell contracts with about 3,200 suppliers globally, with Arizona accounting for nearly half — 1,300-1,400 companies, Owens says. “We spend about $750 million locally with extended companies in the Arizona region.”
Sandra Watson, CEO of the Arizona Commerce Authority, notes the importance the ACA places on such an extended network, observing, “Supporting the small and medium-sized companies creates a rich supply chain, supporting larger manufacturers, creating jobs and generating revenue — strengthening our economic base.”
And from the point of view of the large manufacturer, access to a smaller manufacturer in the same market cuts costs and improves efficiency. Says Owens, “The desire in any supply chain industry is to lower the cycle time from the order to delivery of the product.” Having a local supply base provides a better business return by enabling a lower inventory and a faster return on money, “with less freight and all the cost.”
Sharing an example of one of the tightest supply chain relationships, Arnold Maltz, Ph.D., associate professor of Supply Chain Management at ASU’s W. P. Carey School of Business, points to States Logistics in Tolleson, which works with the Gatorade plant across the street. “Bottles come over on a conveyor belt [from the plant] and they custom-assemble pallets for delivery.” Although States Logistics does not work with raw materials, “it uses the same scheduling and labor issues as manufacturing.”
A large amount of the manufacturing industry here is an offshoot of the defense industry, notes Steve Macias, president and CEO of Pivot Manufacturing. He points to the optics cluster in Tucson — “a result of doing work for Raytheon,” he says — that is responsible for about 5,000 jobs. “It’s big enough that they have their own industry group.”
Capabilities developed in one area have the potential to transfer to other areas. Notes Dr. Maltz, “Component suppliers are here because of aerospace and defense and electronic chips. But Medtronics and other healthcare companies also have electronics components.” Macias sees the extended opportunities in his own business, which provides machining and mechanical assembly operations. Pivot used to be almost all defense-related, but now works with businesses in semiconductors, oil and gas or alternative energy, and commercial aerospace. A company in oil and gas in Texas that Pivot works with, for instance, requires extreme precision because “they are sending pipes thousands of feet beneath the earth or into the ocean. You certainly don’t want those things to fail.”
Dean Heckler, whose Phoenix-based company Heckler Design produces desks and counter-top items used in retail commerce, specifically credits the advantage he has found in Phoenix in having access to precision manufacturing that results in high-value, high-quality goods. “The same companies that are making armament for tanks are making our desks,” he says. “It’s the same level of precision, quality and durability. I don’t think you’d find that in manufacturing in China.” In fact, he says he designs his company’s products so that they do not include anything that can’t be made in Arizona — 99 percent of it in the Phoenix metropolitan area. The steel fabrication is done in Tempe, as is the powder coating; plastic parts are tooled and ejected in the Scottsdale Airpark; parts are assembled in the company’s Phoenix warehouse; and the packaging is custom-made in Tempe. Referring to what he sees as a “huge manufacturing community,” he says companies “have capabilities I’m dying to take advantage of.”
Eric Miller built his company, Phoenix Analysis and Design Technologies, around advanced manufacturing technology that, he says, “supports almost every industry.” PADT is especially known for its 3-D printing, and works with a lot of electronics and consumer products companies. “Locally, mostly for people making a product, we help them make the enclosures,” Miller says. For Dial, for instance, PADT makes the soap bottles; for The Hillman Group, whose hardware lines include door keys, PADT helps with the manufacturing involved in the self-service key-making kiosks.
Nuts, Bolts and Other Looks of Manufacturing
“Aerospace and defense is a critical, advanced industry focus area for Arizona and the ACA,” says the ACA’s Watson. “This industry is growing faster than the overall economy and contributes significantly to the state’s economy, both in terms of employment and gross state product.” Indeed, the numbers as of third quarter last year are impressive. Arizona is home to more than 1,200 companies that comprise the aerospace and defense supply chain, which include such major A&D industry players as Boeing, Bombardier Aerospace, General Dynamics, Honeywell Aerospace, Lockheed Martin, Northrop Grumman, Orbital Sciences and Raytheon Missile Systems as well as the hundreds of small and mid-sized suppliers they support. These companies, all together, represent more than 150,000 jobs to the economy, almost $15 billion in annual revenue, exports that top $2.8 billion, and 5.91 percent of the state’s gross domestic product. Nationwide, Arizona ranks 4th in aerospace industry payroll and revenue ($14.9 billion) and 5th in aerospace total employment (153,484).
And yet that 1,200 companies is only about one-fourth of the total number of manufacturing establishments — 4,623 as of Q3, 2013, up from the 4,267 reported in the 2011 Census’s County Business Patterns.
Arizona’s top five sub-industries in manufacturing, determined by their contribution to the state’s GDP, are computer and electronic product manufacturing ($6.94 billion), transportation equipment manufacturing ($3.56 billion), food and beverage and tobacco product manufacturing ($1.57 billion), miscellaneous manufacturing ($1.3 billion) and chemical manufacturing ($1.2 billion). The term “manufacturing” comprises tremendous variety.
Refresh Glass entrepreneur Ray DelMuro applied his background as a manufacturing engineer in aerospace to what started as a hobby repurposing empty wine bottles to new functional use as glasses and candle holders, and created efficient systems to organize production “so it makes sense in terms of value to retailers such as Whole Foods, wholesalers, hospitality and [direct to] consumers.” Building his business model on sustainability — his raw material is wine bottles that would otherwise go into landfills — DelMuro collects about 15,000 wine bottles per month from 17 Valley hotels and restaurants such as Postino and House of Tricks. In his 6,000-square-feet of shop space at Tempe incubator MAC6, each shift produces 700-1,000 units transformed from wine bottle to finished product. The most traditional glass-working equipment are “really large ovens to stress-reduce the glass so it’s durable,” he says. “The rest I custom-designed.”
PADT sidesteps lengthy traditional manufacturing to use the advanced technology of 3-D printing. “We can take anybody’s computer model and directly create a part for them,” Miller says. Among the varied types of business PADT works with are a toy manufacturer in Ahwatukee and another that makes rockets. Another project was making hydrogen fuel-cell blowers for hydrogen cars. “Nissan came to us and asked us to manufacture this for them,” Miller says, calling it a “unique product from Arizona.”
Another automotive claim to fame for Phoenix is Vantage Mobility International, which manufactures vans to be disabled-accessible. VMI is the second-largest van conversion company in the industry, according to company president Doug Eaton.
Manufacturing and its related supply chain cover a broad variety of products and businesses. These range from a small steel fabricator that brings in large pieces of rod and cuts to order to a company that stencils T-shirts for special events and sports organizations to food processing — which includes a lot of packing of fresh produce at the border. “Avnet does a lot of finishing here, loading software, customizing boxes — assembling to order. Many retailers, such as Marshall’s, put things together [at distribution sites] for their own stores,” Dr. Maltz says, noting these, too, are value-added services that require processing.
Global economic changes are resulting in manufacturing trending back to the United States. Wages overseas are rising more rapidly than in the U.S., and the convergence is cutting into the cost difference. “Wages overseas are now 30-40 percent of what they are in the U.S., compared to 10-15 percent five years ago,” explains Dr. Maltz, although cautioning that reshoring may not generate a lot of employment as most manufacturing is likely to be highly automated.
Long-time industry leader Fierros points out that cost involves more than working with the materials. He has found that companies rarely factor in total lifecycle cost, of which transportation, lack of local control and concern over patent infringement and copyright are part. For one project he was involved with, “When we first went to China, the cost promise was alluring. But once we were in production, the products started to be not so perfect. That led to low yield in terms of quality,” he relates. It’s critical to have control over quality in areas such as aerospace and defense and commercial industries, and since quality outside the U.S. is questionable, “It has to be U.S.-made.”
Another aspect of location to consider is where the engineers are who designed the item being manufactured. Rick Smith, founder and CEO of TASER International, shares that Scottsdale-based company, for instance, has opened an office in Seattle to be closer to pools for software talent. Explains Honeywell’s Owens, “If you have a highly technology-engineered product, the best way to support its manufacture is to have local support where it was designed and developed.” The U.S. is known for its technological advantage, but, says Owens, “if the technologist is in Shanghai, and it’s for Chinese aircraft, it makes sense to have manufacturing there.”
As Owens’ example indicates, decisions as to where to locate manufacturing are also impacted by where the customer is. Dr. Maltz notes that the reshoring of manufacturing from China to the U.S. will bring back only some of it as suppliers may stay there. “When the lead manufacturer went to China, the suppliers went with him. But China is also absorbing manufacturing for its domestic use, and even if companies relocate some capacity here, suppliers will want to serve the Chinese market because that’s growing more quickly than here.”
In the ACA’s work with attracting business to our state, it has found that Arizona attracts not only local and national businesses, but international. Some of the benefits cited for locating their manufacturing operations in Arizona are world-class original equipment manufacturers (OEMs) for partners and customers; proximity to California, Mexico and robust industrial and consumer U.S. domestic markets, which are three of the top 15 largest economies in the world; and world-class research universities for talent and emerging technology pipelines.
Arizona is a favorable location for retail distribution, which is big here to serve the western region between New Mexico and California. DelMuro cites a low cost of operations, noting “how affordable it is to run a business.” For him, transportation is not an issue, although he says, “The people on the East Coast would probably prefer that we were located in the Mid-West.” VMI’s COO Steve Crandell says shipping is fine to the West Coast, but “we are at a disadvantage with respect to competition on the East Coast.” But TASER’s Smith says, “The main reason to be in Phoenix is, it’s a great place to live.” And he believes the “fantastic lifestyle and good business climate” are helpful in recruiting employees.
Arizona’s Got Talent –or Does It?
Hiring talent is not a problem for Honeywell, according to Owens. The labor coming out of high schools and community colleges have good foundational skills, he says, and the company provides extensive on-the-job training to develop advanced skills.
A talent pool is an issue, however, for companies like Pivot Manufacturing and Nichols Precision, two companies that contribute to the supply chain for giants like Honeywell.
So where is the work force? The crisis the industry is trying to deal with is too few qualified people in the employment pool. While Smith, at TASER, relates he has “good luck recruiting mechanical engineering and manufacturing folk here in the Valley,” and Crandell says VMI finds there is a good pool for non-specific jobs, the skills gap is enough of a widespread issue that organizations concerned with economic development have initiated a specific response: the Arizona Manufacturing Partnership. Fierros, who co-chairs the AMP, describes it as a statewide, industry-led initiative that aligns industry needs with education articulation to create and sustain a qualified work force for manufacturing. Its three main goals are to promote a world-class image of manufacturing to schools, parents, teachers and elected officials; see that the curriculum being taught is actually what industry needs; and act as a liaison between education and industry.
“Industry is taking a more aggressive approach to what they want in terms of an educated work force,” says the ACA’s Boxer. She notes that the focus has been on higher education, but “there are many pathways to be successful and we have ignored ones that led to direct hire rather than a four-year engineering degree.”
Educating a Work Force
According to Fierros, what is sorely needed is certification-level training that teaches to national standards. “Every discipline has its own society, and from these organizations stem the minimum requirements” for certification of the specific expertise, he says, noting certification helps employers in hiring. “Most of us in the machining world understand and appreciate credentials from the National Institute for Metalworking Skills, so if a student graduates from any school with a NIMS certification, he can go anywhere and any business would know what that certification means.” Fierros sees AMP’s role as making clear what end result industry is seeking, and “we’ll let education coordinate among themselves to come up with roads to get us to the certification.”
AMP is focusing first on community colleges, then grades K-12, and lastly on universities. Community colleges, Fierros reports, “are open to the concept and the conversation. The issue is to translate that willingness to action.”
Randy Kimmens, associate vice chancellor of workforce development for the Maricopa Community College District, says the community colleges back the effort and try to ensure industry is represented on the board “to make sure we meet their needs.” But he points out the issue is not just curriculum; it’s getting people interested. “We’re working with AMP to market this to younger students and those going through a transition in the job market,” he says. Part of that effort is a multi-level approach to get as many students involved as possible. “We’re doing a good job of connecting to EVIT and West-MEC [East Valley Institute of Technology and Western Maricopa Education Center], which represent most of the high schools in Maricopa County, to articulate their students with us as they move forward to a career pathway to get an education in manufacturing.”
West-MEC has begun a program to train students to levels 1 and 2 of the NIMS certification, and Ron Kalmbach, program specialist at the school, says the new facility at the Central campus equipped with new mills and other tooling machines has generated favorable interest. He says West-MEC also plans to be part of the Arizona Precision Manufacturing Apprenticeship Program, a collaborative effort begun just a few years ago among the ACA, Arizona Tooling and Machine Association, Maricopa Workforce Connections, Phoenix Workforce Connection, several Maricopa community colleges and individual manufacturers to help build a much-needed pipeline of qualified employees.
Owens cites a generational shift in career choices, observing there is little interest in machining and flash manufacturing. But businesses are partly to blame as well. “Businesses moved manufacturing to lower-cost labor regions, and, therefore, were not attracting skilled workers. So there’s a void in labor for work coming back here,” he says.
Helping fill that void, Honeywell supports industry programs that focus on an engineering skill set. It is one of the main sponsors of the Arizona Science and Engineering Fair. And there’s the Honeywell Fiesta Bowl Aerospace Challenge, which encourages students in the fifth through eighth grades to enhance their knowledge of space technology. Such events, Owens says, “develop the interest in technical thinking, which can lead to an engineering degree or they can go into manufacturing — manufacturing engineer, industrial engineer or even a skilled machinist.”
Other businesses have also taken their own proactive measures to address the labor deficiencies. Avnet developed its Avnet Tech Games in 2006 after the Maricopa Community Colleges District Office approached the company for help in improving the employable skills of its graduates. The games — created each year with input also from Avnet’s vendors — not only challenge the college student participants in real-world skills, they enable the faculty at the colleges to gain a greater understanding of what the industry is looking for. And PADT contributes to STEM education in schools throughout the state, from elementary through university. Says Miller, “We supply them with 3-D printers and help develop curricula around the printers so they understand the technology.” PADT also offers active internships. “We try to use the technology to get students excited about manufacturing.”
Where Are We Now?
The total manufacturing output in Arizona was $21.9 billion in 2012, the most recent year for which there are figures, according to the ACA. This represents the highest manufacturing output ever recorded for the state’s GDP. Manufactured exports increased by 25 percent from 2009 to 2013, when it reached $15.5 billion and accounted for more than 80 percent of Arizona’s total exports and an estimated 84,000 manufacturing jobs.
“Manufacturing plays a critical role in our economy and our future, and it’s important for Arizona-based manufacturers, and for those who expand here, to know that they have a strong foundation of support,” says Watson, noting the ACA offers grant and incentive programs to encourage research and development to spur innovation. Among them is RevAZ, a partnership with the U.S. Department of Commerce National Institute of Standards and Technology that Watson describes as “an ACA program with a single focus — to strengthen our state’s small and medium-sized manufacturers.”
And there continues to be opportunity. “We have every intention to keep our operation going strong here,” says Honeywell’s Owens. Noting there is a record backlog in the aerospace industry, he says filling the need “will require we all grow, including the local supply chain.”