Tennant Co. executives knew something needed to be done.
Factors beyond their control — including a soaring U.S. dollar and slowing economies in key foreign markets — were affecting the bottom line.
“Currency has been a headwind. It’s more volatile than we have seen in the past,” said Tom Paulson, chief financial officer of the giant floor scrubber manufacturer.
The Golden Valley-based company took action on what it could control. It increased prices, made plans to sell its soft Green Machines business and bypassed the strong dollar by moving two production lines for overseas customers from Minnesota to Europe. Tennant also eliminated huge shipping costs by buying molding machines and making plastic engine covers right in its local plant instead of in Michigan.
But like many large U.S. manufacturers, the flurry of strategic actions was not enough to stave the hit from souring global conditions. Last month, Tennant joined a majority of U.S. manufacturers in lowering profit forecasts for 2015. Economists say the culprits include the strong dollar, battered oil sector, decreases in the Chinese and Canadian markets and ailing ag equipment and mining firms.
The manufacturing sector — which has been a bright spot for years, especially in Minnesota — is slowing, and no one seems immune.
Global behemoths such as 3M, Caterpillar, DuPont, John Deere and Donaldson Co. announced layoffs to wrestle with stalled equipment orders and exports.
Then last week, national and regional economic reports officially sounded the industry alarm. Manufacturers across Minnesota and the Midwest contracted sharply in October.
“Just looking at manufacturing, there has been some impact here that is fairly state specific,” said Steve Hine, director of Minnesota’s Labor Market Information Office. “We have been noting for the last few months a pretty noticeable decrease in the rate of growth here.”
Drop in jobs
In December 2014, manufacturing jobs were up 7,000 over the same month in 2013, Hine said. By September, that year-over-year gain had melted to 146 jobs.
The widely watched Creighton University Mid-America Business Conditions Index showed Minnesota manufacturers’ business conditions index sunk from 53 in September to 42.7 in October, the worst index in three years. Anything under 50 denotes a contraction.
The Institute of Supply Management, which tracks conditions in factories nationwide, also reported that U.S. factory growth slowed to a crawl. Its October index fell to 50.1, the worst since May 2013.
October’s results echoed what many economists feared was coming after September’s disappointing gross domestic product (GDP) report. Year to date through September, nondefense capital goods orders are off 4.2 percent vs. a year ago, said Daniel Meckstroth, chief economist for the Manufacturers Alliance for Productivity and Innovation.
Worse, Friday’s U.S. jobs report confirmed “that America’s manufacturing sector flatlined in October,” he said. “The industry detail shows a weak picture, particularly for orders of long-lived items.”
Chad Moutray, economist for the National Association of Manufacturers, said the GDP report was “a mixed bag” for manufacturers, with some growth on consumer spending but international demand “sapped by the strong dollar and weaknesses abroad.”
The “pullback in inventories alone reduced real GDP by 1.44 percentage points in the third quarter as businesses did not need to replenish their stockpiles as much as desired,” Moutray said.
The sudden global slog is unleashing different tactics.
3M, which saw currency woes slash third-quarter sales by $570 million, is now restructuring, taking a $100 million fourth-quarter charge and laying off 1,500 workers worldwide, including 500 in the United States.
CEO Inge Thulin told analysts last month that the changes 3M makes during this “continued slow-growth environment” will help with “building a stronger, more streamlined and more focused company that can compete and win for years to come.”
But economists believe that the impact of slower oil production in Canada, the United States and Middle East, plus global battles with underpriced steel, reduced iron mining and the overpriced U.S. dollar will hit Minnesota for some time to come.
“Looking ahead six months, economic optimism as captured by the October business confidence index sank,” said Ernie Goss, the director of the Creighton University Institute for Economic Inquiry.
“Falling agricultural and energy commodity prices along with global uncertainty pushed supply managers’ expectations of future economic conditions lower [so suppliers now expect] slow to negative economic growth over the next three to six months for the overall regional economy.”
Softness first hit Minnesota food and beverage firms and other producers reeling from the spring and summer avian bird flu that destroyed millions of eggs, turkeys and chickens in the state, said Hine, the state labor market economist. Soon difficulties expanded to “durable goods” as crop, oil, steel and iron prices fell causing a pullback in orders for hefty equipment.
Also troubling, Hine said, is that firms such as oil-valve maker Pentair, ATV maker Arctic Cat, nut and bolt distributor Fastenal and the tractor and industrial filtration maker Donaldson Co. suffered when Canada slid into a recession this spring and as China’s former rocket-like 14 percent growth sputtered to just 6 percent a year.
Kathleen Motzenbecker, executive director of the Minnesota Trade Office, noted that Minnesota exports to China fell 9 percent last year and saw minimal growth during the first half of this year. Exports to Canada, which is Minnesota’s largest trading partner, plunged 21 percent to $1.13 billion in the second quarter.
Tennant CFO Paulson said he’s not willing to give up on his company’s goal to increase annual sales from $800 million to $1 billion. However, the timeline could change. The company said the growth would happen by 2017. Now, it could be later.
Tennant, he said, will continue its strategic expansions in China and Brazil, sell its weak Green Machines business in Europe and take an $11.5 million charge against the third quarter so it can move forward.
Economists and Wall Street analysts said many manufacturers will take similar steps to wrestle through the new downturn with a mixture of expense cuts, efficiency moves and geography swaps that try to minimize currency impacts while boosting sales.
Tennant is betting on a lot of new products. It launched 33 this year and plans to introduce 50 more in 2016, Paulson said.
“New products are an incredibly important part of our growth strategy,” Paulson said. “It’s a lifeline to organic growth, and it’s a way to mitigate the currency issue.”