Does American Manufacturing Need Foreign Investment?

The old joke goes like this:? “How do you get 99 old ladies in a church basement to yell the F word?”? Answer, “Have one old lady yell Bingo.” In the industrial world, one won’t find many old ladies but prompting 99 factory workers to sprinkle the air with expletives is simple.? Have one guy from Finance step forward and declare, “Give me your 5 year capex [Capital Expenditure] plan.”

Asking plant leaders to submit a 5 year capex plan is asking him/her to gaze into a crystal ball and determine with precision which assets are going to fail and when.? Will that paper machine die in three years or thirty?? How ‘bout the boiler?? You already know, kind reader, how difficult it is to predict the remaining life on your home appliances.? Now imagine making those predictions on equipment that’s a thousand times more expensive and, in many cases, has been running continuously since before you were born.

Making such predictions is not only a shot in the dark, it causes deep divides between the plant and the plant’s corporate office.? From the plants you’ll hear, “Corporate never gives us the capex budget we need.”? From corporate you’ll hear, “We don’t trust the capex list the plants give us.”? The reality: Both sides are right.? Plants do need more investment to keep running but corporate’s been burned too many times to trust that plant leadership has an accurate crystal ball.?

The result?? Five year capex plans that satisfy no one and – here’s the real pain point – inaccurately funnel millions every year into the wrong bets.? For example, one factory in Tennessee recently dropped $5 Million on a new tank only to discover post-autopsy that the old tank could have lasted another twenty years with only minor repairs.? Meanwhile, another factory one state over suffered a catastrophic failure on a much newer tank that shouldn’t have needed any capex investment for another twenty years.? This kind of thing happens all the time, and it means that even small industrial plants sacrifice upwards of $10 Million/year in bad capex investments, downtime, and safety incidents.

Why does this happen?? After visiting hundreds of plants and interviewing some of the world’s leading experts on industrial capex, I’ve learned it boils down to two factors:

1. ? ? Bad Return on Investment (ROI) Modeling

Many industrial plants use outdated formulas to guide where to invest their capex dollars. Specifically, these organizations overvalue variables such as asset age and depreciation curves while undervaluing variables like innovation and global competition.? Think of it as someone who goes to the horse track and makes bets based on how each horse “looks” vs. the moneyballers who stroll in with a supercomputer full of analytics.? In today’s world, the moneyballers win. ? Loads of detail you can read in this book but for now, suffice to say that factories too often replace old stuff when they should have replaced low innovation stuff, and the consequences are dire.

2. ? ? Blind to Asset Condition

Unless your factory’s roster includes Superman himself, no one has x-ray vision to see inside their assets and determine actual condition.? In most cases, workers are forced to guess on the actual health of assets slated for capex.? Are the pump’s seals still in good condition?? Is the pressure vessel forming microscopic cracks?? No one knows, which means plant workers ask the same question you and I ask every time we push the start button on our home’s old washing machine: “Is today the day?”

There is, however, an emerging path out of this mess: new technologies that leverage Artificial Intelligence (AI), robotics, and sensors to bring never before seen clarity to a factory’s crystal ball.? The good news: It works.? The bad news: It’s new.?

Implementing these new tech tools means changing the way industrial plants have built 5 year capex plans for the last century and as we can all attest, change is hard.? Leaping from the old way to the new way takes time and courage.? I don’t have any doubt that American industry has the courage to change, but can we do it fast enough?

One example in the news right now is Japan-owned Nippon Steel’s $14.9 Billion proposed buyout of iconic American brand US Steel.? If you read the articles, you’ll see US Steel’s leading argument in favor of the buyout is, “We need the money to rebuild our plants.”? Translation: They need capex.? I agree.? I’ve worked with several US Steel factories over the years and know they still have equipment running today on the shop floor which, in a twist of irony, was churning out steel 80 years ago for the war against the Japanese.? The plants are old.? They’re historic.? And weaving together the optimal capex plan across this mammoth organization is a massive undertaking.

My fear, however, is that US Steel inks this deal and doesn’t change how it forms its capex plan.

The old way of making capex decisions is wasteful.? It does little to ensure that a company’s most innovative plants stay that way.? It virtually guarantees that equipment that should have been replaced isn’t and vice versa.? In short, traditional capex strategies force factories to play high stakes Bingo with only half a card and half the chips.? Not the best strategy when global competition plays the game with labor and regulatory factors that pale in comparison to Uncle Sam’s.

I wonder..? If American brands like US Steel embrace the best of American innovation, will they still need Japan’s $14.9 Billion?? Or is there enough savings in the reduced downtime, optimized capex, and increased production that American-born innovation makes possible to not only close the gap but to galvanize American steel so that it’s strong for decades to come?? I realize this is a big ask.? I realize it means aggressive culture shifts and IT approvals and stretching comfort zones and millennial engineers working with blue collar baby boomers..? But it also means setting up American industry, the backbone of our nation’s economy, to drive forward with the tools it deserves to win.

My #1 battle cry for American industry:? Accelerate your move toward American innovation.? In only the last few years, our nation has rocketed forward with disruptive tech that flips the script on traditional manufacturing, and there’s an army of robots, AI platforms, and wildly smart, young, energetic engineers eager to join you in the fight.? Your winning Bingo card – the optimal 5 year capex plan – is on the table and ready to take your bets.