Business in Nevada is reflective of the nation as a whole—rampant uncertainty. A decrease in consumer spending impacts both manufacturing and the distribution of goods and a slow economy creates a cash flow problem across the board. “Not only do you have to be concerned about the financial health of your own company,” said Greg Sanders, vice president and general manager of Schneider Logistics, a transportation and logistics company, “But you also have to be concerned about the financial health of your customers.” Nevada businesses are suffering concurrent with the rest of the country, however, we are starting to see a resurgence of exported goods, increases in regional approaches to the distribution of goods and a more global perspective for Nevada’s manufacturing and distribution industries.
There is no denying we are in a recession. UNLV economist Keith Schwer predicts continued declines in the months ahead. Economic indicators for Southern Nevada show that visitor volume, conventions held, McCarran Airport passengers and commercial building permits are down by double digits. “The index offers no sign of relief ahead,” said Schwer.
Nevada’s overall unemployment rate (7.2 percent in Nov. 2008) is above the national percentage. It rose by 2.3 percent in Las Vegas and 2.2 in Reno, respectively, since the same period in 2007. Frozen credit markets, empty housing units and declining wealth are factors that do not point to a speedy resolution to current conditions.
The number of manufacturing jobs has declined. Ray Bacon, executive director of the Nevada Manufacturers Association, reported several plant closures. For example, the Masco Builder Cabinet Group, manufacturer of Merillat and Quality Cabinets closed its Las Vegas production facility in April and moved its operations to New Mexico citing “operational limitations.” According to Bacon, “They built in Las Vegas 25 years ago when land was cheap, but now high property taxes forced them to look out of state.” Another plant, Mitchell & Craig, manufacturers of Sweetheart cups, merged with Solo Plastic and closed down their plant last April for a loss of more than 130 jobs. In Minden, Polyphaser Corp., maker of lightning strike protection cell phone towers, plans to move to Idaho over the next year.
Historically, the manufacturing sector in Nevada has benefited from the state’s proximity to California. Many of this neighbor state’s businesses seek and take advantage of Nevada’s business-friendly environment that also allows them to remain close to major western markets. Relocation to Nevada is still attractive due to lower taxes and a favorable regulatory climate. Presently, financing is difficult, so even if a company wants to relocate to Nevada, the timing is unfavorable. With transportation, real estate and fuel costs fluctuating, there are just too many variables present for companies to consider large scale movements. “Generally, companies are pausing on making a (long-term) decision,” Bacon said. “We are in a malaise.”
There is also increased competitiveness in the transportation industry. Russ Romine, president, Griffin Transportation Services, Inc. said, “Internationally, more foreign providers are entering the industry. Domestically, the struggling balance between capacity, labor and fuel has made the industry much more volatile and dynamic.”
Although opportunities continue to develop within the distribution industry, fuel costs and limited rail access persist as challenges. Distribution centers require large quantities of land, but do not necessarily employ a proportionate number of people. The Michelin warehouse, Bacon explained, is a huge facility, a million square feet, but with a small staff. In addition, Jeff Lynch, president of ITS Logistics, indicated that potential state legislation could lead to new taxation due to budget deficits and reported shortages in education and road infrastructure funding. “It is a real possibility they [the Legislature] will attack the transportation industry which will subsequently have a negative impact on distribution as well,” he said.
Proposed legislation from the new administration such as the Employee Free Choice Act, which is essentially legislation designed to make it easier for unions to target and organize employees of non-union organizations, is an issue expressed by Sanders. “They will target the big companies first, and this has us very concerned at Schneider,” said Sanders.
The economy is forcing companies to look with increasing acuteness at their supply chain strategies. “We are starting to see strategies revert back to more regional distribution centers,” said Lynch. “Reducing the number of miles between a distribution center and end user due to high fuel expenses has become a priority as everybody expects fuel to rise again.”
A slowdown in the economy affects this industry like all others. “Shippers, importers, and exporters will look to cut costs in their supply chain,” said Romine. “As providers we must streamline our operations to be as efficient as possible, while also being proactive with clients by providing solutions to streamline their supply chains and reduce costs.”
A change in attitude will become part of the prevailing conditions for doing business. “As a region, we just need to plain out-hustle our competition,” said Sanders. “Market harder. Sell harder. Execute harder. Strong companies will continue to drive out unnecessary costs in their business and be able to operate effectively in slow economic times.”
The Fuel Factor
In these industries, diesel fuel at $5 a gallon as it was a few months ago, is not sustainable and is believed to be a contributing factor for the economic downturn. Lynch has said, “Fear of substantial fuel price increases persist in the industry. Current bailout money, lowering of key interest rates, the presidential election and plummeting fuel prices will all help bring the economy back, but fuel prices must remain low.”
Infrastructure is another issue for transportation companies, many of which are banding together to lobby for improvements that will lessen congestion and improve highway safety. There is also a national campaign under way to limit the speed for large trucks to 65 mph, which most major trucking companies approve.
Intermodal, or the interconnectivity of containers to switch between trucks and trains, needs to make step level changes to compete as a viable form of freight transportation in the Greater Reno-Tahoe area, according to Sanders. “Most major trucking companies are reducing the size of their fleets and concentrating on a very specific network strategy,” he said. “Additionally, there have been a record number of bankruptcies with the smaller fleets, which has taken a lot of capacity out of the market. When the economy turns, there will be a capacity shortage and it will be important for intermodal to pick up the slack. We are currently in discussions with Union Pacific to better understand their strategy for the Reno-Tahoe area.”
A weak start is predicted for 2009. Consumers make up about 70 percent of total national spending as a percentage of GDP and they are cutting back on large ticket items. On the positive side, the housing market in Southern Nevada is beginning to correct itself. In Northern Nevada, Tina Iftiger, director of business development for the Economic Development Authority of Western Nevada (EDAWN), points out future opportunities to target niche markets to leverage Greater Reno-Tahoe’s location, skilled workforce and key industry players.
EDAWN has an advisory group, specifically focused on the distribution sector, which offered a wish list of improvements to the manufacturing and distribution industry in Nevada. It includes increased rail capacity, improved infrastructure and more attractive incentives for companies. The group projects increased opportunities for distribution as companies regionalize their distribution patterns in response to higher fuel prices.
“Although the current slowdown will likely last through most of 2009, we will still experience growth,” said Lynch. “The Greater Reno-Tahoe market will remain strong over time.”
Romine agrees. “Despite competition from the Inland Empire near Los Angeles, the Reno-Tahoe area remains a very viable alternative for distribution and light manufacturing operations,” said Romine. We have a very good infrastructure. If rail service improves, we will see a real increase in activity. However, we must continue to diversify the state’s economy, as it is likely that gaming and construction will continue to struggle in the near term.”
Nevada as a Global Player
In addition to keeping an eye on what is happening in Nevada, managers must adopt a global perspective. “We have had a strong increase in imports over the past several years,” Sanders said. “The cost advantages of manufacturing in Asia are being mitigated by higher transportation and fuel costs as well as higher labor costs in Asia. This could indicate a shift back to U.S., Europe and Mexico based manufacturing and distribution.”
“We are all interconnected,” said Mike Skaggs, executive director of the Nevada Commission on Economic Development. “There is not a lot of understanding about how important it is to be in the global market. The global economy is very real. It is easier than you think to get your products sold offshore.”
Skaggs is confident that Nevada businesses will expand activities in international markets as well as continue attracting foreign investment to the state. “Goods shipped offshore are up substantially in the third quarter,” he said. Exported products including industrial machinery, aftermarket vehicle parts, plastics and furniture have all increased by a significant margin. “Income from South American countries is $136 million this year, a 76 percent increase over last year,” Skaggs said. “Nevada also ships extensively to Europe, China, and Canada.”
The Bottom Line
Manufacturing and distribution are resilient industries. Regardless of economic circumstances, these two industries find a way to navigate the science of supply and demand. “Goods still need to get to market,” Sanders said. “In good times, our industry moves goods such as flat screen TVs and premium alcohol. In slow economic times, we move George Foreman grills and cheap alcohol.”