NEW YORK (Reuters) - Kim Beck once considered owning his factory’s big production machines a big part of being a manufacturer. Not anymore.
The chief executive of Automatic Feed Co., an 80-worker Ohio company that makes machines for auto plants, now leases most of his factory and its heavy equipment to another company that welds and cuts metal for him on the spot. That has freed up cash for him to hire engineers and programmers to design a new line of laser-driven products. “This is a much better way to do business,” he says.
Beck’s change of heart about heavy metal is part of a larger and lasting shift in how U.S. corporations invest.
Instead of spending on buildings and big machines, companies are investing more in software and hi-tech equipment that is often lighter and less expensive than the “monuments” of the past. Many firms, for instance, are shifting to cloud services for back-office operations that once required them to buy and maintain their own systems.
This shift is happening so rapidly that the official investment figures simply do not capture the full scope of what companies are doing to expand and upgrade their capacity.
Federal Reserve Chair Janet Yellen and other officials have been noting only a modest recovery in investment spending while they continue to debate whether to lift rates from the floor, but it might be less of a concern than the headline data would suggest.
The Department of Commerce tracks spending on software, research and development and “artistic originals” such as books, movies, music and even greeting cards. But it does not include, for example, the cost of training workers to use new machines or hiring better paid specialists to maintain them. Investment figures also are faulted for failing to capture the full impact of falling prices.
For decades, economists assumed that jobs grew in step with investment. Now, despite high profits and healthy balance sheets companies are not increasing spending as rapidly as in past recoveries, even as they keep hiring.
Tim Quinlin, an economist at Wells Fargo Securities, notes that equipment spending today is only 15 percent above its pre-recession peak. In the three previous cycles that lasted long enough to compare them, equipment spending increased on average by nearly two thirds above previous peaks.
The shift has caught the attention of Washington. Jason Furman, chairman of the White House’s Council of Economic Advisers, said in a speech last month that since 2010, most of the slowdown in investment that troubles many policymakers and economists can be attributed to slower growth in equipment spending. However, investments in intellectual property and other non-physical assets have been accelerating.
And unlike spending on machinery, investment in new technology and know-how tends to yield results that also benefit other businesses, Furman told Reuters. "We know it has positive spillovers." (Graphic: link.reuters.com/cyz75w)
Not everyone is a winner, though.
Nicholas Bloom, a Stanford economist who studies trends in business investment, said spending in areas such as research and development and software tends to favour higher-skilled workers. “It does help productivity,” he said, “but it could also make low-skilled workers easier to replace.”
Many old-style equipment makers also have had to either upgrade their products, shift production overseas or make up for weaker demand at home by exporting more to developing markets, Bloom says.
Buehler Aeroglide, a maker of industrial dryers used in dog food and cereal factories, is an example of a company that has shed some weight. “Customers definitely want smaller machines,” says Andrew Sharpe, chief executive of the U.S. subsidiary of Switzerland’s Buehler Group. The company has shrunk the size of some devices by a fifth by making air run through them faster.
Interviews with manufacturers representing a broad range of industries and regions show that many have no plans to go back to their old ways. They may invest more when growth perks up, they say, but they will keep spending more on so-called intangibles such as patents and new product development.
Madison Industries, a Chicago-based manufacturer with about $5 billion in sales that makes filtration and medical equipment, among other things, is one example. Its chief executive Larry Gies says his customers increasingly demand smaller runs of specialised products—not masses of identical goods. “When you need flexibility like that, you often need more labour rather than a machine pumping out the same thing over and over.”
Falling prices also play a role. “The unit cost of everything I buy—software, robots, machines, you name it—has gone down,” says Gies. “So I can get the same result, but at half the cost.”
Mark Bissell, chief executive of vacuum maker Bissell Homecare Inc figures he is spending 10 to 15 percent less on equipment now than he was just three years ago. The reason? Basic technology for making vacuums —plastic molding, for instance — has not changed much, so there is no need to splurge on new machines.
“Our investment has actually gone up, but the composition has shifted,” he says, noting that he is spending more than ever on patents and engineering work as his industry races to integrate new electronic features and wireless technology.
Some business leaders say the depth of the last recession is what changed the way they invest.
Buildings and machines last for years and can quickly become an albatross in a downturn. Beck, the CEO of Automatic Feed, said he was forced to lay off 70 employees - most of his staff - in a single day in 2010 after the auto industry his company supplies had gone into a free fall.
Even before the recession, Beck had looked into upgrading his equipment and realized the money would be better spent developing a machine that uses lasers, rather than steel knives, to cut metal. “We really don’t have a budget for capital equipment anymore,” he says, “and I like it that way.”
Reporting by Timothy Aeppel; Editing by Tomasz Janowski