Quality Engineering Career News by UQSI

Changes in economy, military spending force Arizona firms to get creative to survive downturn

by Andrew Johnson – Apr. 24, 2009 12:00 AM
The Arizona Republic

Potential cuts to U.S. defense programs, a slowdown in aviation spending and the general economic malaise are forcing small machine shops across the Valley to sharpen their pencils to stay competitive.

These small Arizona companies depend on the business of large manufacturers such as Honeywell International Inc. and Boeing Co. But as the economy slows and the federal government prepares to cut or shift federal defense spending, Arizona’s large manufacturers have responded by tightening their belts.

The cuts have trickled down to smaller Arizona companies that have been forced to lay off workers or reduce shifts to manage the lean times. Some have even sought to gain international credentials that will allow them to sell parts to manufacturers abroad.

Tyler and Karen Crouse of Phoenix-based Pro Precision LLC can attest to the challenges of running a machine shop in the recession. Their company makes valves, shafts, brackets and other parts that wind up in engines, vehicles and other products made by the likes of Honeywell, Boeing and General Dynamics Corp.

Business was steady until last fall, when orders began tailing off following Wall Street’s implosion.

“I’ve seen the downturns happen before,” said Tyler Crouse, who has worked in machining for 28 years. “This one is probably every bit as bad, and probably worse, than the one back in the ’80s, which was pretty severe.”

The small machine shops that sell parts to Arizona’s defense contractors and aerospace manufacturers have been especially vulnerable to the slumping economy and potential shifts in defense spending.

U.S. Defense Secretary Robert Gates outlined budget proposals to Congress this month that would scale back or terminate certain weapons, vehicle and aircraft programs while increasing funds for others.

The changes could cause Arizona defense contractors such as Raytheon Missile Systems, Honeywell Aerospace, BAE Systems and others to lose work, which would likely mean a loss of work for some of their suppliers.

Honeywell, which says it spends more than $500 million annually with more than 1,000 Arizona suppliers, has seen its supplier base shrink in recent years as it outsources to Mexico.

Its Phoenix-based aerospace division, which makes aviation electronics and engines for business, military and general aircraft, experienced a 1.1 percent decline in sales during the fourth quarter.

Tooling and machine shops, in particular, often have little control over orders because they provide parts to other suppliers that have direct relationships with the large manufacturers. That makes forecasting business tough and negotiating costs difficult.

Economic impact

No group has official numbers on how many tooling and machine shops are in Arizona, but experts say they are an important part of the local economy.

The National Tooling and Machining Association, a trade group that represents such companies, has about 115 member companies in Arizona.

The Fort Washington, Md.-based group estimates it represents about 25 percent of the local industry, according to James Grosmann, marketing director. The association estimates its Arizona member companies provide about 3,000 jobs, with each position supporting an additional four or five service jobs.

Experts say the number has shrunk over the years along with declines in overall manufacturing. Between January 1990 and January 2009, the number of manufacturing jobs in Arizona declined 5.3 percent to 167,900, according to the U.S. Bureau of Labor Statistics.

As a percentage of the state’s non-farm employment, manufacturing jobs made up 6.7 percent of the workforce in January. In 1990, that figure was 12.1 percent.

The Arizona Aerospace and Defense Commission, a group the state established in 2008 to look at improving the industries, estimates the two sectors employ more than 57,000 workers in the state.

One area the commission is focusing on is strengthening ties between the state’s small parts suppliers and machine shops and larger manufacturers, said Vicki Panhuise, chairwoman of the commission and a vice president at Honeywell Aerospace.

A slowdown in aviation has caused steep declines in spending on aerospace parts.

“What’s happening is a lot of the non-defense-related projects are slowly drying up,” said Mark Osborn, a lobbyist with R&R Partners in Phoenix who represents the Arizona Chamber of Commerce and Industry.

The boom in defense spending this decade has helped some companies, but proposed cuts to certain military weapons, vehicle and aircraft programs call into question whether that will continue.

Some smaller shops may look to non-government work to tide them over. But for many businesses built around aerospace and defense customers, such commercial work may not be cost effective because profit margins are lower.

Staying competitive

The Crouses responded to the slump by seeking to appeal to manufacturers abroad. They pursued and received certification under international quality standards for their company, Pro Precision.

Such certification allows them to bid on a wider array of contracts with a bigger pool of prospective customers.

To qualify, the Crouses had to revamp operations at their west Phoenix tooling shop, which cost them about $25,000.

The company had $650,000 in sales last year, so the task was a significant investment.

“It’s an expensive process, it’s not a cheap thing to undertake,” said Tyler Crouse, who started the business eight years ago in the garage of the couple’s Avondale home.

Many tooling and machining shops are trying to avoid layoffs by reducing hours. And winning work has become more competitive because the pool of business is down.

Pivot Manufacturing Inc. in Phoenix does machining for defense manufacturers, semiconductor makers and medical- device companies.

Defense-related work, which makes up about 80 percent of Pivot’s sales, has remained steady, President Steve Macias said.

The other 20 percent has dropped off, especially in the semiconductor industry, he said.

“You have roughly the same amount of companies chasing less business,” Macias said.