Manufacturing Grows Rapidly – Small Businesses in a Good Position

By Tom
Updated on

US manufacturing sees first sustained rise since 1998.

That is the news I’ve been waiting for – it comes slinking like a thief at night – the past two years. Not the blustering of “important” decision makers.

Recovery comes from smaller businesses, not from large corporations. The smaller firms that can plough back profits into capital so they don’t have to waste time at banks. The large companies fight for survival – or whatever you might call vegetating in a respirator – and will suffer from lack of demand to fill their production plants of underutilised capital.

The smaller ones have advantages:

  • They hire people happy just to have a job that can use their skills and prepared to give an honest days work in return for modest wage – where they know: They are out if they don’t get less than they are worth.
  • The companies cut cost 3 years ago – not listening to siren songs about an turn around the corner.
  • The capital equipment is bought at fire sales, they operate from buildings taken over by the banks (as if banks would know what to do with a lathe) – office furniture has been delivered by a truck from the local charity store.
  • The equipment is generally not the most appropriate; but it will do – and the workers using them will be of a higher skill: Knowing how to make things without the proper tools.
  • Investment is from the bank desperate to get rid of industrial equipment they’ve picked up from defaulters: “Yup, We could use that 4½ D numerically controlled gizmo you have standing there; but not at that price and you will have to agree to an instalment plan!” (My perverse fantasies revolve round torturing bankers!).
  • Finance is from taking and extending supplier credit at way above prime rate. It is the best sales tool at the moment.
  • Sales come because somebody asked them to produce.

These companies will not grow big in a hurry.

  • They are operating to close to break even.
  • Their administration won’t be able to tackle aggressive expansion.
  • Demand has to compete with others trying to avoid foreclosure.

As an aside: On of the things that will help such businesses is a functioning National Health Service. The profitmargin of such firms can’t carry the cost of a health- or dental plan – extended maternity leave and what have you. An often overlooked aspect of a flexible workforce – naturally a NHS gets out of hand, they always do; but until then it is a competitive edge.

But they do have the macroeconomics on their side:

  • Even Chinese get tired of showing up for work without getting paid. Except for a relatively (relative in China is always huge) small class they can’t cut wages – if they want to eat.
  • China can’t keep subsidizing their export by undervaluing their currency when they switch to being a net importer – so unfair competition is curbed.
  • Intra-state transport is much less fuzzy than sending ordering in China. And smaller businesses don’t need shiploads of raw materials – trucks do just fine.
  • The Chinese plants need high volume to stay competitive – the original advantage that has centralised so much production in China (and India). Large volume to generate low unit prices. But that will be a liability as markets age – when a 10 year old vacuum cleaner works just fine – sales tend to drop off.
  • If you can make business to business deals so that liquidity is provided for – without involving banks. Then why involve banks? Banks tend to overestimate their role.

Denmark has near world monopoly in church organs. As such a contraption has a service life of several hundred years market never booms. Sct. Mary in Elsinore has the very same organ that Didrik Buxtehude (don’t know him? Well Bach did!) played in the 1660’ies. Works perfectly well every service (has been maintained and has other bellows; but apart from that..) – not great attendance; but that is beside the point:

Some businesses don’t need high volume to thrive.

I believe it was Yamaha that some years back bought one – took it apart – and couldn’t make a copy work. Not because the Japanese are stupid; but because there was something they didn’t know.

Much of economic recovery is not so much things getting better for big corporations as killing them off gently.

Can small businesses grow? Some of them can and will – others just survive and others again die as quickly as they sprung up. The main problem is that investors have difficulty in finding the nuggets.



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