How fabricators survive the middle-market squeeze

May 10, 2017

The modern economy has put the squeeze on many middle- market companies, and metal fabrication isn’t immune. But because the market is so diverse, it’s allowing progressive shops to bridge the chasm between niche players and market leaders.

“You either grow, or you die.”

More than one manager uttered that statement during The FABRICATOR’s Leadership Summit in March. Part of the Fabricators & Manufacturers Association Annual Meeting in New Orleans, the summit brought together fabrication shop executives, salespeople, and operations managers from across North America. Many had company expansion on their minds. Their concern: How do we grow to the next level?

Enter the Red Ball of Death.

It’s a dramatic moniker, but a memorable one. And it’s no surprise the name came from an ad agency for the retail industry, where the Red Ball of Death is particularly pronounced. It describes the squeeze of middle-market companies.

In a recent “Fabrinomics” e-newsletter from FMA, Chris Kuehl, FMA’s economic analyst and managing director of Armada Corporate Intelligence, Kansas City, Kan., introduced the concept to the metal fabrication audience. He also featured some commentary from his business partner Keith Prather.

Prather describes a straightforward chart. Put “margins” on the Y axis, “market share” on the X axis, and you get a downward- and upward-swooping curve, with healthy profits for those with very low market share (the niche players, or “nichers”), and very high market share (the 800-pound gorillas). As companies grow, their margins decrease and get obliterated altogether as they compete with the 800-pound gorillas that have supreme buying power and large-scale efficiencies. That’s the Red Ball of Death. If they can attain a certain level of market share, they can escape and grow to new heights.

What can companies in the Red Ball of Death do to escape? In the newsletter, Prather described three options:

1. They find a way to grow their way out, but to do so they need overwhelming resources to help take market share, and it’s almost impossible to do it organically and outgrow a market leader.
2. They can try to merge the power of several competitors and use M&A to take a quantum leap across the Red Ball of Death chasm. The key here is that they must utilize the combined purchasing power of the two companies, and they must build synergies and cost savings quickly so that profitability is improved in short order. If they don’t find quick synergies, they “acquire their way” right into the Red Ball of Death.
3. They can divest divisions and shrink into a more profitable shell of themselves, so that they begin to play a nicher role. But they have to do something that allows them to carve out a segment—and own that segment.

What can so-called nichers—those on the left of the chart—do to stay competitive? Prather again gave three options:

1. Stay the course. These companies are profitable, and as long as they don’t get too greedy, they can sit successfully in a niche position for decades.
2. If a group of nichers sees a market leader coming for their competitive space, they can band together to try to create an entity that has the size and scale to compete.
3. They can get dressed up for the dance and hope to get acquired.

Nichers dominate custom metal fabrication. They supply locally and thrive for decades as small companies. Of the few that grow from a nicher into a market leader, how do they make the jump? How do they move from being a strong regional player to a significant manufacturing partner for the largest OEMs, which have themselves reduced their supply base in recent years, giving work to fewer and fewer fabricators? This has made it very difficult for medium-sized firms to make the kind of investment needed to compete with the industry’s largest players. The result: A widening chasm between the niche players and the market leaders.

Still, the situation in metal fabrication is different from the retail sector, where the Red Ball of Death concept was born. Defining “market share” isn’t always straightforward, considering fabricators sell to sectors across the economic spectrum, from industrial vessels to auto parts. For any industry, a company’s market share depends on how you define the market pie—and because fabrication serves so many areas of the economy, those market pies vary substantially.

All the same, two fabricators profiled in this issue may have uncovered other ways to jump the chasm and successfully “grow their way to the right [on the chart],” as Prather put it. One is Laser Precision in Libertyville, Ill., which has automated most of its order processing and scheduling functions. Within a certain market, which includes customers that have the infrastructure for electronic data interchange (EDI), Laser Precision may be poised to keep gaining market share without costs going out of control, thanks to automation and (most significant) sophisticated data management.

Another is Metalworking Solutions in Chattanooga, Tenn. It plays in a different sandbox. It serves large customers, but usually not the largest OEMs in the world, and it offers quick-turn services. Managers hope to avoid growing massively in a single location, but just large enough to secure competitive purchasing agreements. And they hope to one day duplicate this model in other regional markets.

Through small individual locations, Metalworking Solutions would in fact remain a niche player in each regional market it serves. Put another way, the fabricator wants to grow by taking a few bites out of many market pies. It would remain on the left of the Red Ball of Death on not one but many charts.

Custom metal fabrication is a dynamic, complex, difficult-to-pigeonhole business. It lacks highly visible national or worldwide players, mainly because customers are utterly diverse and have complex needs. There is no Amazon of metal fabrication, at least not yet.

Custom fabricators still need to deal with the Red Ball of Death chart, but the markets they play in can change substantially over time. They not only can move to the right on the chart, but jump to a different chart altogether. That makes this business enormously complex, but it also presents enormous opportunity.

 

Source: The FABRICATOR