The keys to manufacturing recovery

The following is an interview with Carlos Cardoso, chairman, president and CEO of Kennametal Inc., Latrobe, Pa. The interview, conducted by CTE Editorial Director Alan Rooks, took place at IMTS 2010 in Chicago.

Carlos Cardoso

Rooks: The metalworking industry appears to be recovering from the recession more rapidly than some had expected. What are the factors behind the recovery?

Cardoso: This is clearly an industrial-led recovery. One reason is that the recent recession was different than most. It was much deeper and many companies not only took out their finished inventory, they went deeper and took out work-in-process inventory because they were trying to protect their balance sheets. Companies went from managing profit and loss to managing cash. The inventory levels got extremely low and what’s happening now is not necessarily inventory building, but rather inventory replenishment. Also, the global economy is stronger than in past business cycles. Every time we go through a recession, the global economy becomes stronger, and the current recovery is being led by developing countries. So developing countries are having more of an impact on the recovery than they would have 10 years ago. Also, a low U.S. dollar is helping U.S. exports.

Rooks: How has the U.S. auto industry factored into the recovery?

Cardoso: Automotive was obviously very hard hit during the recession, but it has so far been the highest growth industry for us coming out of the recession. In North America, for example, we scrap about 12 million cars a year and for 2 years now the U.S. has been producing below that level, so there is some pent-up demand. I’m sure some people are holding onto their cars a little longer so the 12 million per year scrap rate may actually be somewhat lower, but, even so, production has not kept up with the scrap rate.

Rooks: Why did Kennametal develop separate brand identities for Kennametal and Widia products?

Cardoso: When I joined Kennametal in 2003 we had 60 brands, and reducing that brand complexity was something I focused on immediately. Three years later we were down to about 30 brands, which was a major shift, but there were still too many brands. We’ve reduced that number still further and consolidated under two brand names. The Kennametal legacy is that our products are primarily sold directly. At one time we owned the J&L tool distribution business, and it was difficult in that we were looking to sell directly to some of their customers, so we decided to sell J&L. Widia has always been primarily an indirect brand sold through distributors. We felt this was a unique opportunity to have two strong channels with different value propositions, so we took what I thought was a negative of having multiple brands and turned it into a positive.

Rooks: Are the products sold under the Kennametal and Widia brand identities different?

Cardoso: The products are different. Some of our competitors have the same products in both direct and distribution channels. We have very specific Widia products that we don’t have in Kennametal and vice versa. We have different kinds of customers for Kennametal and Widia. Some of them overlap but, for the most part, Widia products are sold through distributors to smaller shops and Kennametal products go directly to OEMs and other high-volume producers.

Rooks: Looking 2 years out to the next IMTS, where do you think the metalworking industry will be?

Cardoso: U.S. manufacturing has been challenged and we are experiencing an unusual recovery. After prior recessions, the economy has come back very strong with high growth rates, but that is not happening now. We really need to turn the page and look at manufacturing as something we want to do. One of the major challenges to the middle class is that we’ve lost too many manufacturing jobs and the only way to have the middle class flourish in this country again is by protecting and growing our manufacturing outlets. Manufacturing jobs pay, on average, 35 percent more than other jobs in the U.S. But the number of people employed in manufacturing has dropped from about 18 percent of the workforce in 1990 to about 9 percent in 2009. Most manufacturing plants today are clean and great environments in which to work. I don’t see that much of a difference between a grocery store job and a manufacturing job in terms of a having a nice work environment, but manufacturing jobs pay significantly more. Companies like Kennametal also offer training and continuing education, something service industries tend not to do. We need to wake up and think about creating jobs and getting away from the politics of that situation. Manufacturers generate jobs and are good corporate citizens but for some reason we have developed the idea in the U.S. that manufacturers are bad. If we don’t want manufacturing companies around, where are we going to get new jobs? We need to change that perception.

—Alan Rooks, Editorial Director