November 4, 2004    Volume 11, No. 20

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Economic Recovery Bypasses U.S. Foundry Industry:
Foundry Industry Is In A State Of Shock



BY RICHARD McCORMACK


The United States foundry and metal castings industry is literally falling apart. Hundreds of foundries have gone out business in recent years due to unrelenting pressure from cheap imports, the departure of large manufacturers and skyrocketing costs of raw materials. "This industry is in deep trouble," says Charles Kurtti, president of the American Foundry Society.

The foundry industry, regarded as being the world's second oldest industry, forms the basic underpinning of an industrial society. Its products are used to make 90 percent of all manufactured goods.

The nation's economic turnaround is not helping much. Companies that remain in business are busier than they have been in previous years, but much of the additional work is coming from stranded customers of foundries that have gone bankrupt.

"The U.S. foundry industry is at a critical juncture," says a legal filing made by the American Foundry Society to the International Trade Commissions' recently initiated "Section 332" investigation. "The industry has been undergoing a massive restructuring and the pace of closures of production facilities has escalated in recent years."

Two of the nation's largest cast parts makers -- Citation Corp. with 17 foundries and 5,100 employees, and Intermec with 17 foundries and 6,000 employees -- have recently filed for bankruptcy protection. Combined, the two firms generate about $1.5 billion a year in revenues.

Six of the top 10 foundries in the United State have filed for bankruptcy protection over the past three years, according to the American Foundry Society.

About 50 foundries are closing in the United States each year. Over the past 20 years more than 1,000 foundries have disappeared, a contraction of 30 percent to just 2,380 foundries. There are an estimated 12,000 foundries in China.

"Who's going to put money into an industry that's dead," says Ray Stevens, chairman and CEO of Impact Forge.

The majority of the foundries that have closed had been in business for decades and many for even more than a century. They made it through every type of economic cycle, but no more. "The dynamics that have put us here haven't changed at all," says Kurtti. "What bothers me is that this is not a temporary loss or setback."

The foundries that are closed are never expected to be reopened and the accumulated loss of skills and knowledge will be difficult to regain. "When these jobs leave this country, we will never see them come back," says Kurtti.

The situation is "alarming," according to dozens of executives in the industry testifying before the International Trade Commission, the United States-China Economic and Security Review Commission and in interviews with Manufacturing & Technology News. These executives are irate about unfair trading practices by China and about the federal government's unwillingness to enforce U.S. trade laws.

"We have existed for 125 years under one set of rules and suddenly we have an entirely different set of rules," Randall Lawton, president of Bay Engineered Castings of De Pere, Wisc., told an Oct. 14 hearing of the International Trade Commission on the competitive conditions of the foundry industry (Investigation No. 332-460). "Little of our accumulated knowledge skills and abilities prepared us for this next era."

Adds Kurtti: "We fear we are on the edge of a tipping point. It is deeply concerning most of us. We can't keep sending our standard of living overseas."

The future for mold making "is pretty bleak in this country because I think the horse is already out of the barn," says David Murphy, director of personnel at Ferriot Inc. in Akron, Ohio. "There's nobody going into the machine trades."

China and its fast-growing economy, is also blamed for the skyrocketing increases in materials prices that have eliminated margins and dried up funding for capital upgrades. Foundries say customers are not willing to pay surcharges for the increased costs of materials.

"Many casting purchasers have a misguided idea that the only real way to cut component cost is to source offshore," says James Mallory, executive director of the Non-Ferrous Founders Society. "They call it cost control. I call it corporate greed."

Foundry industry CEOs are scratching their heads over how China is able to sell products to U.S.-based manufacturing companies at half their price, given that they are not as efficient and have to pay the same amount for raw materials.

"After the Chinese buy the $400-a-ton-scrap, they put it on a boat that costs $50-plus a ton, take it to China, take it off the boat, put it on rail or truck, pay another $10 to $20 a ton to get it to the foundry, melt it into the form of a casting, take it back to the dock, put it in a container at $150 a ton, ship it to Long Beach, get it off the dock, put it on rail, send it through Customs to a warehouse and then deliver the castings to our customers," says Tim Brown, vice president of the Benton Foundry in Pennsylvania.

A customer of Aurora Metals of Montgomery, Ill, mistakenly requested credit on a rejected part made by one of Aurora's competitors in China. "When the amount of credit was requested, we knew exactly the price differential between our price and the Chinese price: 30.1 percent," company president Dave Bumbar told the ITC. "Therefore, we conducted a study to assure ourselves that we truly understood the true cost of producing this impeller. We would need to reduce our price by the entire amount of all our labor, the entire amount of all of our health care costs and the entire amount of our workmen's compensation insurance in order to compete with the price delivered to this country from 7,500 miles away. We are being asked to sacrifice our employees and our futures for the gains of others in the world." Aurora Metals has been in business since 1899.

The industry has been forced out of high volume applications and is now concentrating most of its marketing and sales efforts on small prototype specialty jobs that require more complex molds and castings. But this is not a strategy for success. Having to rely solely on short-run jobs "is tantamount to hopping lily pads," says Murphy, of Ferriot Inc.

Companies that have upgraded their plants to be highly automated don't have enough work to pay off their investment. "So now you have a facility where all of the volume has gone away and you lose contribution margin to absorb your fixed overhead and you're running into all types of problems," says Larry Communale, vice president and general manager of Doncaster Southern Tool. Companies can no longer fund research and development or design improvements.

"We're hoping we're not one of the next guys closing our doors," says Bruce Cain, president of Xcel Mold and Machine of Canton, Ohio. "About six [companies] quit building molds in the Akron area in the last two or three years and you would think that when that happens there's going to be more work. Well, that's not happening. It's going out of the states faster than anything."

The two big companies that recently declared bankruptcy were running at capacity, but "their individual customers refused to pay the materials surcharge," says George Boyd, president and CEO of Goldens' Foundry and Machine of Columbus, Ga. "We went to our customers last year and we told them that we had two choices. We could either close our doors or they could pay the metal surcharge. After a significant struggle, they agreed to pay it because we were being honest. The material issue has elevated our costs by 15 to 20 percent."

The industry wants the International Trade Commission to send its analysts over to China to figure out how Chinese companies can gain such an advantage. The executives say they've all heard stories about how the Chinese government is willing to subsidize foundries by providing them with interest-free loans and free equipment.

"I recently spoke to one of my members who was in China visiting facilities looking at the possibility of establishing a joint venture," says Mallory of the Non-Ferrous Founder's Society. "He went into a state-owned facility and looked around and saw all kinds of brand new equipment and said to the managers of the facility, 'Boy, this is really a very modern and very well-equipped facility.' The Chinese foundry manager said, 'Oh, yes. It's very easy. If we see new equipment we want we tell our government, they give us the money to buy it and we don't even have to pay it back.' Every one of our metal casters would love to have a similar arrangement with the United States government, but we know that's not fair so we won't ask for it."

Such a story is not plausible, retorted William Blackerby, CEO of ASC Industries, a global manufacturer of water pumps whose company has opened two foundries in China. "There are huge capital constraints toward buying capital equipment inside China," he told the ITC hearing. "The local market won't finance it and the government certainly doesn't have the money to buy it for you because they can't even pay you back for your VAT receipts." Most of the foreign-invested companies in China have to borrow money either domestically, in the United States or in international markets. "It's just not readily available," Blackerby said.

Hundreds of executives from foundries and their trade associations have met with U.S. government officials and members of Congress describing unfair trade and business practices and the lack of government enforcement of U.S. trade laws.

"Frustration is the lightest term I would use" to describe meetings held with such officials, said Stevens of Impact Forge of Columbus, Ind., in an interview. "I'm irate. The stupidest thing our government has done is not to recognize the devastating effect that this has had on jobs in the United States and to just sit back and be stonewalled by the Chinese while our balance of trade with China mushrooms. I believe in free trade, but we don't have free trade."

Steven made a presentation to Grant Aldonas, Undersecretary of Commerce for International Trade on July 8, 2003, in Columbus, Ohio, during the Commerce Department's cross-country fact finding trip on how to fix manufacturing. Since that time, conditions have changed "only for the worse," says Stevens, and the federal government has done nothing.

"Why should we let all of our trading partners take advantage of the openness of the American market?" he asks. "We are woefully inadequate at responding to a foreign government's actions against our industries. I have worked internationally and have lived overseas and we're the only nation in the world that doesn't understand that manufacturing is the engine the pulls the rest of the economy."

The America Foundry Society has also provided "huge amounts" of information about the declining health of the industry to political people in Washington. "They all say they are listening and have an understanding of where we are headed, but politically, we don't know what the pressures are for them not to act," says society president Kurtti. "But I do know this, if we are not careful, this is the last generation that is going to have a better standard of living than or folks did. Good luck creating wealth in this country through health care and services."



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