What’s the Matter with Manufacturing?


CFO Studio Magazine, 1st Quarter 2012
By Gerald Najarian, Principal

INDEED— WHAT IS THE MATTER with manufacturing in our country? Well, the answer might be nothing. At least nothing out of the ordinary in the capitalist system.

But wait. Doesn’t everyone say that all our manufactured goods are made outside the United States? Aren’t manufacturing jobs being outsourced to China, India and other countries in Asia and the subcontinent? The answer to all these questions is, yes! But…

What really happened to U.S. manufacturing is fourfold: globalization, comparative advantage, automation and policy neglect at the national government level – all pretty natural in the American capitalist system. The first three of these are unavoidable, but the last, policy, can be addressed. More about policy neglect later in the essay. Let’s look at the unavoidable after a little statistical background.


Numbers and Trends

Since World War II, manufacturing has grown steadily. There have been some down years, but the slope of the line over the years has been upward. While ubiquitous — with factories emitting smoke into the atmosphere and employees queued up for the shift change — at its peak, manufacturing employment never exceeded 32% of the total non-farm labor U.S. labor force and was never more than 27% of GDP.

Between 1950 and 1970, manufacturing GDP grew at 3%; between 1970 and 1990, it grew at 4%. Since 1990, manufacturing GDP has grown at less than 2%. While growth between World War II and 1990 was good, and since then has been slow, there was always growth.

Employment is a different story. In the years since the war, manufacturing employment grew 18% until 1990 then declined by 33%! So as output grew, employment gradually declined, suggesting that productivity, abetted by automation, has grown.

We are, in fact, a much more productive manufacturing nation. Increased productivity is good news. All we need now is to put that productivity to use making things. And therein lies the problem – we need to make and sell more goods. With all the positive productivity gains, the use of our bounty languishes in its sight. Manufacturing capacity utilization stands at 75%, its lowest in more than 20 years. Most economists think that capacity utilization has to be in excess of 80% for the industry to be healthy and investing. Manufacturing output isn’t declining, it’s just anemic.

The Unavoidable and the Inevitable

Now let’s look at the unavoidable international phenomena and their effect on our ability to sell more. If India and China weren’t growing their manufacturing base, the United States would be producing more goods. We can’t stop globalization nor its close relative, comparative advantage, which is the labor cost differential enjoyed by developing countries. In a world that is experiencing rising expectations for the economic well-being of its citizens, industrialization is a rational policy for developing nations. We can see this industrialization/globalization as a threat or as an opportunity — and embrace it intelligently.

Comparative advantage will eventually take care of itself. Overtime, wages in industrializing countries grow (just as they did in Japan), and the advantage disappears, often going to another

less developed country until it, too, experiences wage growth. So it goes.

To try to compete with low-labor-cost countries amounts to a “race to the bottom.” The net effect of comparative advantage is that we are unlikely to see high labor content products, sneakers for example, manufactured in the United States any time soon. These two international factors won’t cease because we wish them to. We can, however, take advantage of them through policy.

Here in the United States, automation, which is inevitable, reduces aggregate demand among our citizens by requiring fewer workers and wage payments. The dramatic productivity growth since 1970, occasioned by automation and a better educated work force, has not been accompanied by comparable wage growth in manufacturing (or in other industries for that matter). Manufacturing wages grew in the post-war years up until 1980 and then began to level out. There were various reasons for this growth in wages and for the subsequent leveling, chief among them the influence of unions on the upside and their decline in the recent leveling period. Changing wage patterns is a complicated topic not in the scope of this essay. However, manufacturing employment and production (and the consequent purchasing power it can provide) can be influenced by promoting the quantity of output. In manufacturing operations terms, we need to manage demand to get factories operating three shifts.

What’s to be Done?

Manufacturing’s share of GDP is now at 12%, about $1.8 trillion in output. Its share of total non-farm employment is 9%, with about 12 million workers. Goals for growth, GDP share and quantity must be set — and policy directed toward meeting them. Employment goals are not necessary, as growth and output quantity will force the employment numbers up.

In 1990, the share of GDP represented by manufacturing was 17%. Perhaps this would be a good, though aggressive, goal to achieve over the next 10 years. Assuming very modest annual GDP growth, a 17% share of GDP in 10 years would yield 4 million to 5 million new manufacturing jobs. More importantly, increased manufacturing output radiates demand into the tangential industries that service the manufacturing industry and creates additional jobs at the rate of five to one.

Of course, having goals is not enough. Now is the time to make the policy, investment and focus changes that facilitate achieving the goals. Some of these changes can be traditional while some will be very untraditional. But they must be serious, and they must be substantial. First and foremost, some attitudes have to change. The animosity between manufacturers and national government has to give way to a mutually beneficial partnership. Naturally, both have to recognize their responsibilities to the public as well as their own constituencies. If the mutual suspicion can be overcome, some untraditional approaches can be tried.

The policy and investment initiatives needed to grow the U.S. manufacturing base will best be facilitated by focus; and focus comes from people and organization. To get that focus, the most dramatic change would be to establish a cabinet level Department of Manufacturing. We have departments of energy, transportation, agriculture, health, housing and education, all seeking to advance the state of the nation’s capability in their respective “industries.” If we believe that manufacturing is an important industry, why not a Department of Manufacturing? Such a department would certainly bring focus and coordination to manufacturing policy, but its real value would be to abandon the “hope as strategy” approach that now is the de-facto policy for manufacturing.

The needs for successful manufacturing growth are not unknown. Manufacturing needs quality logistics and location infrastructure. It needs trained and well-paid workers. And, the industry certainly needs sustained demand for its output from a weak dollar, aggressive export policy and serious economic stimulus. Most of all, manufacturing needs an industrial policy that promotes promising industries and protects them and others, where needed, to keep them strong and growing.

The last of these needs – industrial policy – is the most controversial because it goes against the grain of American capitalism. The manufacturing capitalism to which we are accustomed is a form of “incentivized laissez-faire,” in which 19th century norms of minimum government are combined with 20th century tax code encouragement. It is time to abandon this policy and recognize that national government can, with industry’s help, identify, invest in and protect the foundation industries of the future.

Such a policy doesn’t mean that government will be seeking to pick businesses in popular culture that are best left to marketplace selection. High-tech, environmental and basic industries would be candidates for an industrial policy. Structured along the financial models of venture capital/private equity, and with careful tariff protection, our industrial policy would be a uniquely American industrial model that can revitalize manufacturing. Finally, a policy like this one can’t be timid; substantial funding and strong political support are critical to success.

If we are serious about getting manufacturing growing at the rate it grew between 1970 and 1990, the American capital system will have to undergo some wrenching cultural changes. To maintain the current paradigm is to abandon the competitive edge to our manufacturing rivals.

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The Future is Now


CFO Studio Magazine, Fall 2011

New lease accounting standards promise to change the way CFOs report leases in financial statements

WHEN IT COMES to the way the U.S. Financial Accounting standards Board (FASB) works, there’s nothing as permanent as change. Indeed, the set of standards that guide accounting principles in this country are always evolving.

Currently up for discussion are new lease accounting standards being developed in a joint project between the FASB and the International Accounting Standards Board (IASB). Suggested changes that seek to more closely align U.S. reporting guidelines with the ones used outside this country were recently “re-exposed” to the financial community here, giving interested parties an almost unprecedented second opportunity to comment. These proposed changes, as written, completely overhaul the way leases are reported in financial statements. The new standard would effectively eliminate all “operating leases” and require them to be capitalized on a company’s balance sheet. It would also replace rent payment expense reporting with interest and depreciation expense reporting. Lessees (and possibly lessors) would have to change fundamentally the way they account for real estate and equipment leasing transactions, providing more extensive financial statement disclosures than ever before. For lessees, the new standards would also replace rent payment expense reporting with interest and amortization expense reporting.

Peter Bible, partner at EisnerAmper, LLP, says that the main thing CFOs must consider is how these changes will impact on lease vs. buy decisions going forward. “Historically, the lease vs. buy decision contained an element known as off-balance sheet financing, which operating lease treatment provided,” Bible explains. “Under the Proposed standard, this option would be removed as virtually all leases would be on balance sheet. Accordingly, CFOs need to focus on the economics of the alternatives.”

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Q & A: Master of Many


CFO Studio Magazine, Fall 2011

Jonathan Alpert reflects on CFOs in a private equity world

Interview by Andrew Zezas
JONATHAN ALPERT is the former CFO of Beefeaters, Inc. (dba Petrapport), world Gourmet Marketing LLC (dba sensible Portions), and Apple & eve LLC, as well as, his having led JA & Associates. He is a member of the board of directors of the New Jersey chapter of Financial Executives International (FEI) and is involved in other finance executive and business organizations. Alpert recently appeared in a CFO studio interview hosted by Andrew Zezas.

What’s going on with private equity?

Jonathan Alpert: there’s an enormous amount of activity that started late last year and has

continued on to this year. After 2008-2009, when these companies raised billions of dollars and then couldn’t and wouldn’t invest them, activities picked up enormously. They’re buying companies, selling companies, and competing against strategic buyers; and the market has picked up enormously.


Are there any sectors that are particularly hotter than others?

The obvious sector is technology and the internet; we all read every day about Facebook, Myspace, Xanga, and the little technology companies—everyone is playing there. But in consumer products, there has always been activity. There was activity in 2008-2009. It was a bit more difficult, but there was activity there; that has picked up, and there are lots of transactions. There is a lot of selling, a lot of buying. Private equity firms have kept their portfolios on the sidelines. They are now selling and going after new companies; there’s a great deal of activity.

That’s exciting because we always hear about tech bubbles doing this, but you’ve said that consistently, even through the down economy, consumer products are being bought and sold.



Let’s stay in that vein and focus on mid-cap companies, publicly-held, privately-held, entrepreneurial-owned companies, and private equity-owned companies. Operationally and strategically, how are they different today on a company level?

On a company level, entrepreneurial and mid-cap, privately-owned companies all operate with small teams, and are cross-functional, trying to drive growth. The publicly-owned company has a broader time horizon—they can afford to wait next year. A private equity company is on a short lease. They have a three-to-five-year time horizon. They have narrowly focused finance objectives. They’ve got potential debt, covenants, and restrictions. They’re racing down the road, but it’s a lot narrower for private companies. A public company has financial objectives and the outside world looking at them. That’s a whole unique spotlight, and it takes the focus off different things and keeps the company driving, but it’s driving toward the bottom line.


But at the end of the tunnel, at the end of the road, the final objective may not necessarily be as well defined as for a private equity company.


Let’s talk about the role of the CFO. You’ve got three companies that run differently. I’ve got to believe the skills required and the expertise and role of CFO in each of those verticals is vastly different.

Absolutely. Let’s take the role of the CFO in public companies—that’s not the easiest job, but it’s the easiest to describe. A public company finance team has got reporting requirements, SEC requirements, heavy budget requirements, and accounting functions. Therefore, the CFO is much more focused on the financial function than the whole body, the whole enterprise. In a mid-cap company or a private entrepreneurial company, the CFO has to be a jack-of-all-trades, a master of many.


A master of many?

The CFO has to rely on his own network to supplement his own team and the company team because he’s operating in a small environment, and it’s very much a close team environment. The finance guy has got to work with sales, marketing, operations, logistics, and human resources. He’s working with a team, building a team, and working on bringing a company to the next level. There’s a financial component to all the sales decisions and marketing decisions, and the finance guy has to be proactive there, not only saying, “This is what we can afford to do” or “No, you can’t do that.” He’s working with his team on ways to do whatever it is within the company’s financial constraints. He has to have his fingers in every piece of the pie.


It sounds like in the privately-held and the private equity held companies, the finance executive is so diverse that he or she is probably like a COO rather than a publicly held CFO. The focus is much narrower and probably not as exciting.



You’ve always demonstrated the belief that finance and marketing should be aligned. Help me understand how that all works.

At the end of the day, revenue is the growth driver. The finance guy is responsible for making sure it’s profitable revenue, but at the end of the day it’s revenue. And how do you gain revenue? The guys on the frontline are your sales team and your marketing team. The finance guy has got to support that team. He’s got to be a player in there; he’s got to understand it. I was fortunate in my career to move from

finance to marketing. And I went out on the road with my sales guys and presented marketing and sales plans to liquor salesmen at 8 o’clock in the morning in a little room in a warehouse in Memphis, Tennessee. Once you’ve done that, you know what your guys are doing on the frontline, and that makes you sensitive to helping them seize opportunities: “say ‘yes,’ and say ‘yes’ this way.” Also, you need to keep them within the focus and the guidelines of the company, but make them look like the heroes they need to be in order to drive the bottom line and grow the company.


I’ve heard you use an analogy about skeet shooting and sales and finance.

In an environment, a CFO is, in a lot of ways, like the armor of the company. In skeet shooting, you’ve got your sales, marketing, and CEO out there with the shotguns and the rifles, taking aim at the targets. You’ve got someone there loading the weapons, selecting the proper ammunition. You’ve got another team player shooting the disc, and that group has got to function as a coordinated team so when the disc goes up, everybody’s tracking that disc and the rifle is going to discharge, and you’re going to hit the target. Then you move on, and you’re ready for the next opportunity. It’s a key role, but the CFO has got to know how to shoot the gun. He’s got to know what his team is thinking. He’s got to feed them the information and ammunition needed to hit that target.


So the salesman and the CEO are the shooters. And the CFO is what you called the armor, or the person who is loading the gun with the right tools and the right ammunition.



What should a CFO be thinking about and doing on behalf of his or her company, so the company can achieve success?

The core financial function or the core reporting is information. Information is power. Information is only power if you get it in the hands of the user. If the finance guy is a full member of all the other aspects of the enterprise and is a respected member, that means he’s earned his way up on those teams. He’s feeding them information, and he’s seizing opportunities.


He’s an active participant.

The CFO is helping to drive sales and making sure those sales are profitable. He’s putting the ammunition on the frontline. He’s in the trenches with his troops ensuring the informational flow; and in between the investors and the operational team—that’s how the CFO is going to be successful. The CFO has to be a full member of the team and drive the growth and the profitability that the team needs. He has to be a team player.

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