December 1999 State Legislatures magazine: Small manufacturers are good for the economy

State Legislatures Magazine: December 1999

Editor's Note: This article appeared in the December 1999 issue of NCSL's magazine, State Legislatures. To order copies or to subscribe, contact the marketing department at (303) 364-7700.

Small Manufacturers-Good for the Economy

States Can Boost Development
Manufacturing Extension Partnerships
Success Stories
Export Assistance
Financing and Tax Incentives

Small Manufacturers-Good for the Economy

State legislatures are working to improve conditions for small manufacturers, who employ nearly 12 million Americans.

By Monica Kearns
The word "manufacturing" conjures images of giant assembly lines operated by scores of workers. But more than 98 percent of U.S. manufacturers are small plants with fewer than 500 employees, according to the National Institute of Standards and Technology.

The 385,000 small- to medium-sized manufacturers nationwide employ nearly 12 million Americans, about double the number working at large plants. And while jobs at large manufacturers have declined over the past three decades, small manufacturers added 1.7 million jobs between 1967 and 1992. Those jobs were high-skill and high-wage, with workers making on average nearly twice what those in the retail sector earn.

Overall, manufacturing remains a solid source of economic output, despite the fact that the economy is gravitating toward service industries. The $3.7 trillion manufacturing sector has held steady at about 17 percent of U.S. gross domestic product throughout the 1990s, according to the U.S. Department of Commerce. The sheer numbers and job growth associated with small plants means that their success has tremendous bearing on the future of the manufacturing sector.

STATES CAN BOOST DEVELOPMENT
Because of the important role small manufacturers play in the economy, state legislatures are working to help them. Productivity is the top concern, according to Carol Lessure of the Modernization Forum, an association for those involved in technical assistance for small manufacturing businesses. More specifically, small firms lack the information and financing needed for investing in new technologies, updating business practices, developing workforces and obtaining outside expertise.

Productivity, measured in output per work hour, is rising at large plants because they can afford to buy new technology. They also are sending assembly processes and research and development to smaller firms. The small manufacturers must in turn solve their own modernization problems-a battle they are losing currently as evidenced by falling productivity rates.

Ohio Senator Charles Horn is trying to get states to think collaboratively about helping small firms with modernization. "Industries cross state boundaries, so we need to share resources and work together on developing technology processes," he said. He is leading an effort to encourage Midwestern federal laboratories, research universities and private labs to share their knowledge with regional businesses.

One example of this is the Wright Technology Network in Ohio, established in 1989 by the state and Air Force Materials Research Laboratories. "With these networks, small manufacturers can improve not only the quality of products, but their competitiveness," Senator Horn said.

State efforts to help small manufacturers often materialize as funding for innovative programs designed to meet their needs. Dan Berglund of the State Science & Technology Institute, a nonprofit organization that works to improve government/industry technology efforts, says most technology-based economic development programs fall into five categories:

Industrial problem-solving, which includes technical assistance and extension services.
Technology development, including university and industry centers that focus on commercializing technology research.
Start-ups, which include technology-focused incubators or business support centers.
Financing, including loans and direct investment or venture funds.
Networking, such as funding for new manufacturing associations.

Berglund's group conducted a study of state funding for technology-based economic development programs associated with state executive agencies in FY 1995. The results showed that Alaska spent the most per capita-$8.65-from an endowment established by oil revenues. Connecticut, Delaware and North Carolina were next in line. The average amount per capita that states spent on these programs was $1.56.

Berglund said that workforce development and training is not usually considered part of technology-based economic development programs. However, the increasing nationwide need for highly trained manufacturing workers is causing the two realms to become more tightly linked.

In North Carolina, a top-ranking state in terms of manufacturing output, a state-sponsored consortium of technical colleges studied the needs of employers and made recommendations for changes in their curricula. "There has to be a willingness of states to work with business and invest in training for workers," says North Carolina Representative Daniel Blue Jr. "The manufacturers will benefit from a joint effort to train and retrain people."

MANUFACTURING EXTENSION PARTNERSHIPS
Perhaps the most dynamic economic development program geared toward small plants is the Manufacturing Extension Partnership. This nation-wide network of manufacturing extension centers provides business and technical assistance in all 50 states and Puerto Rico. The partnership is managed by the National Institute of Standards and Technology, an agency of the U.S. Commerce Department's Technology Administration.

Delaware Senator Myrna Bair calls the partnership "one of the best federal programs ever to come out of Washington.

"There are a lot of creative things we can do to help small manufacturers, and the Manufacturing Extension Partnership gives states a great deal of flexibility in the services they can offer. It wasn't until this program came along that we really had a focused yet comprehensive effort for small manufacturers."

The partnership began with federal funds, but has fulfilled its original intent to become a public-private collaboration. More than 400 centers and field offices across the country are funded by federal, state, local and private interests. Although many states still don't consider these centers part of their economic development plans, state funding of the centers overall is growing.

The centers offer a flexible, local way to meet the needs of small manufacturers within a state. They can be designed to offer direct services, such as those in Ohio that conduct plant assessments and seminars on modernization. Most centers have led statewide Y2K compliance initiatives for small businesses, since large computer consultants have been occupied with a few large clients.

Manufacturing Extension Partnership staff can also serve more as advisers or brokers, providing referrals for training, lending and other services. Minnesota, Oklahoma and Delaware are among the states with this type of program. The partnership centers can be designed to serve regional areas, as in Ohio and Pennsylvania, or they can be highly centralized. Nebraska's center is actually part of the state's economic development agency, for example.

SUCCESS STORIES
Whatever the structure, these centers help small firms learn about and set up a wide variety of technologies and business practices that can lead to greater productivity, increased profits and better global competitiveness. A number of studies have shown solid evidence of benefits for small manufacturers from the partnership's assistance.

Carol Latham of Cleveland, Ohio, is one success story. In 1992, she launched a company called Thermagon with little more than her own expertise as a chemist and a good idea for a new product. She developed T-flex, which removes the heat that builds up in electronic components. After several years of increasing sales, Latham encountered a problem common to successful businesses: the increased demand for T-flex was creating production and delivery problems.

Latham turned to the Great Lakes Manufacturing Technology Center, an affiliate of the Manufacturing Extension Partnership in Cleveland, for help in developing a faster way of producing T-flex. As a result, quality has improved, product yield has increased by 15 percent, and production time has been cut in half. Today, the company's customers include some of the largest and most well known electronics firms in the world, such as IBM, Hewlett Packard and Dell. Revenues zoomed from $2.5 million in 1996 to $8 million in 1998.

Mark Gaalswyk of Trimont, Minn., is another success story. Gaalswyk founded Easy Systems, a company that produces software used to help hog farmers precisely control the mix of corn, soybean meal, barley and other ingredients in livestock feed. "If it wasn't for MTI [Minnesota Technology Inc., an affiliate of the Manufacturing Extension Partnership], we'd still be just a hobby," Gaalswyk said.

Since starting the company in 1986 as a one-person operation, he has turned to Minnesota Technology for help in getting a patent, setting up a manufacturing facility, raising capital, managing his business and obtaining other assistance. "MTI has helped us grow the business," Gaalswyk said. "Most importantly, they've helped us understand how to manage the growing process." The company now has 70 employees and sales approaching $10 million.

Gaalswyk is most proud that the success of his company has strengthened the economic base of the entire rural town of Trimont, population 800. Younger members of the community, who often leave for better jobs, are returning or staying, increasing housing demand and property values. Many townspeople work for Easy Systems, but others are starting their own small companies. Gaalswyk says this growing economy is "giving the local people the opportunity to achieve things that would have otherwise been unimaginable."

Building on the success of firms like Easy Systems, Minnesota Representative Bob Gunther is promoting rural Minnesota as an attractive option for manufacturers. He is working with the state Department of Trade and Economic Development to encourage manufacturers from the Minneapolis-St. Paul area to consider expanding their operations in rural Minnesota. "The metro areas are concerned about too much growth while the rural areas are losing population," he said. "We're creating more industrial jobs, and we're trying to produce an environment to lure people."

EXPORT ASSISTANCE
Export assistance programs offer another way for states to help small manufacturers. As international trade skyrockets, competitors are as likely to come from the other side of the globe as the other side of the street, bringing the uncertainties of international markets, currency fluctuations and international organizational policies into play. Electronic commerce has contributed to the rising export tide, and small manufacturers increasingly must understand how to conduct business on the Internet.

In a 1999 survey of small manufacturers by the National Association of Manufacturers, about three-quarters of respondents said they export their products, and more than half use the Internet for their businesses.

To support and encourage exports, states offer services such as trade finance, trade missions, market research, assistance with regulations and documentation, and networking with buyers and partners. Pennsylvania recently streamlined its export assistance services by forming the Team Pennsylvania Export Network, an alliance of the state Office of International Business Development, the Regional Export Assistance Network and 10 state overseas contract offices. Each of the alliance's members has a clearly defined role. And the inclusion of a regional network ensures that the expertise of local trade experts is part of it.

FINANCING AND TAX INCENTIVES
Finally, states can assist small manufacturers by creating specialized versions of other economic development tools, such as grants, loans, bonds and tax incentives. There are countless variations on these programs, which can range from tax credits for investments in research and development or equipment to industrial revenue bonds to grants for worker training.

With entrepreneurial spirit, sheer determination and, yes, state support, small manufacturers continue to be indispensable engines of economic growth.

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