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Old machines show why Trump tax breaks may not spark new company spending

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05/19/2017 | 10:49pm CEST
Production equipment at Dan T. Moore Company in Cleveland

(This version of the May 18 story has been refiled to correct weight of Arconic press)

By Timothy Aeppel

Shippoli, a manufacturing engineer at Dan T. Moore Co., a privately-held company which operates nine factories across Ohio and Indiana, won the prize for finding used machines that were a fraction of the cost of buying them new.

He is a fan of President Donald Trump’s policies and even propped a bright red “Make America Great Again” hat on the hyena during the campaign. But Shippoli embodies a mindset that exists across industrial America that will make it hard to boost business investment, even if the corporate tax breaks floated recently by the Trump administration come through.

“I don’t know why anyone would buy new equipment when there’s so much stuff out there that’s perfectly capable of doing the job,” he said.

Many U.S. companies emerged from the last recession extremely wary of spending on buildings and expensive new equipment, unless it was sure the returns would justify it.

Trump Administration officials forecast torrid economic growth on the back of the windfall U.S. companies would get if Trump’s plan to cut corporate tax rates and slash taxes on cash parked overseas became law. U.S. Treasury Secretary Steven Mnuchin and White House economic advisor Gary Cohn met on Wednesday with the full Senate Finance Committee about the administration's framework for tax reform.

CEOs certainly are enthusiastic about the prospect of tax reform. A recent survey by the Business Roundtable - a group representing major U.S. corporations - found more than eight out of ten said they thought tax reform would prompt companies to boost capital spending. Seventy-six percent said it would fuel hiring.

And some companies such as General Electric Co (>> General Electric Company) are making big bets that new digital systems will improve efficiency on factory floors.

But it is unclear how they would use the extra cash if it doesn’t lead to a jump in economic growth. Previous tax holidays aimed at getting companies to repatriate foreign savings have done little to boost investment in the U.S.

“Nobody builds a new factory unless they need the capacity” and tax breaks won’t change that, said Susan Helper, an economist at Case Western Reserve University, who has studied how companies curbed their spending habits in recent years.

She notes that U.S. companies are sitting on plenty of cash - $1.8 trillion, according to Moody’s Investors Service - so it is not that they lack resources, she says. What is missing is the kind of business opportunities that justify the spending.

ARCONIC’S 80 YEAR-OLD MACHINES

It’s not just smaller companies and startups that appreciate age in some industrial machines.

Across town, for instance, at Arconic Inc’s (>> Arconic Inc) sprawling Cleveland Works, workers still use a 1930s metal press confiscated from Germany after World War II to stamp out aluminum parts. Arconic, based in New York, was created last year when Alcoa Inc (>> Alcoa Corp) split in two - creating Alcoa Corp (>> Alcoa Corp) and Arconic, which took the downstream aluminum processing business.

Arconic has plenty of other vintage machines, including an even larger 50,000 ton press in Cleveland built in the 1950s, which it recently spent $100 million completely renovating. The update included fixing metal parts that had begun to crack as well as new controls that made it more precise.

This new style of thrift is visible in the numbers. The average age of industrial equipment in the U.S. has gone up steadily over the last decade and now hovers at levels not seen since the 1940s. The average age of a machine is 10 years, according the Bureau o f Economic Analysis, well above the seven or eight-year range that was common during the 1960s and 1970s.

For a graphic, click http://tmsnrt.rs/2qWxnWz

The trend isn’t limited to factory machines. The average age of information processing equipment used by businesses, which includes computers as well as communications devices, has drifted up steadily since the year 2000 and now stands at five years—the highest level since the dawn of the computer age.

“You have to be frugal to survive,” said Steve Peplin, CEO of privately held Talan Products Inc., which sells about $40 million in building materials each year. When he needed a new press recently, he bought an used machine and sent it to a company that specializes in modernizing such equipment.

“It was literally rebuilt,” he said. “It got new high-efficiency motors and all computer controls.” The reason to go down that road was simple: The whole project cost about $1.5 million versus the $2.5 million he was quoted to buy a new machine.

BUYING USED

The big coup last year for Dan T. Moore’s Shippoli was buying used machines from a factory in California that is allowing him to set up a new production line for $140,000 instead of the $3 million it would have cost new. The line will produce an insulated material the company forms into different shapes and aims to sell to carmakers and other large manufacturers.

Case Western’s Helper said there’s “good thrift and bad thrift.” If companies refuse to invest in new capabilities or processes, that is bad because it holds back productivity gains. Good thrift, by contrast, is the growing recognition that existing industrial machines are often good enough to get the job done, so splurging on new equipment isn’t necessary.

Dan Moore, the CEO of Shippoli’s company, has made the former approach almost a cult at his operations.

One of his favorite sayings is that “steel doesn’t know how old it is,” meaning the basic components of many industrial machines remain useful for decades. The company will typically invest in new computer controls and other components to update the machines it buys. Not only does Moore reward people who find ways to use old machines to meet new needs, he has been known to demote managers who throw away machines that could be salvaged.

One recent day, he led the way through one of his favorite places: HGR Industrial Surplus, a sprawling warehouse that sells old machines on the gritty industrial east side of Cleveland.

“This is one of the secrets of how you can create new businesses in Cleveland,” he said, walking past rows of hydraulic presses, some still smudged with oil from their previous life in a now-defunct factory.

It makes sense to use old machines to get new operations off the ground, because it minimizes the risk if the business doesn’t take off, according to Moore.

For Windsor Ford, the company’s vice-president of acquisitions, the idea of pitching a project to his CEO that involves buying new equipment isn’t unheard of, but it’s “terrifying.”

“All I can say is you better have data to back it up,” he said.

(Editing by Edward Tobin)

Stocks treated in this article : General Electric Company, Alcoa Corp, Arconic Inc
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Sales 2017 11 274 M
EBIT 2017 1 320 M
Net income 2017 424 M
Debt 2017 131 M
Yield 2017 -
P/E ratio 2017 10,50
P/E ratio 2018 14,79
EV / Sales 2017 0,55x
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NORSK HYDRO ASA15.30%11 730
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HINDALCO INDUSTRIES LT..23.35%6 900
ALUMINA LIMITED5.74%4 099
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