Engineering company executives provide U.S. economic advice

Three National Instruments leaders offered U.S. business leaders advice about how to thrive as the country moves out of recession. The engineering-minded executives also suggested ways U.S. policymakers, economists, and financial wizards might avoid future economic disasters, in an Aug. 4 discussion.

Advice from the trio (with combined tenure of 72 years) includes:

1. Make laws, policies, regulations, and decisions that are sustainable, with attention to the next 10 to 100 years, not only the next quarter, 1, 2, or 3 years.

2. Embrace and invest in engineering innovation as if future economic prosperity depends on it, because it does.

3. Use common sense: The economy will cycle. Plan for lean times to accelerate past competitors, looking at the needs of employees, customers, shareholders, and suppliers.

While it may be anecdotal evidence, enthusiasts see wisdom in what National Instruments (NI) is doing with advances in graphical system design software, data acquisition hardware, industrial computers, and industrial wireless technologies. Despite cancellation and postponement of some other industrial technology events, registrants to the 15th annual NIWeek increased 5% over 2008 and 23% over 2007, with 2,975 attendees.

Panelists

John Graff, NI vice president of marketing, moderated the panel of three and audience of journalists. The panelists were:

-Dr. James Truchard, NI president, CEO, cofounder, says the most recent models used on Wall Street were too simplistic. Dr. T., known for dissecting any large issue he addresses, piled, next to his chair, a stack of financial books he has referenced over the past six months. He also cited a recent BusinessWeek article that lamented there’s not enough innovation happening to continue to meet the promise of America. (Examples of innovation from National Instruments (founded in 1976) include telescope motion control using 64 8-core Dell servers running NI LabView software. NI also is involved in 14 of 14 Engineering Grand Challenges.

-Pete Zogas, senior vice president of sales and marketing, has 24 years with NI. Because of NI’s direct sales model, he is in daily interactions with customers. "Companies and individuals need to continue to invest during difficult economic times. The NI community knows that, showing up in just about full force for NIWeek. Our stakeholders continue to make investments," he says. "We’ve worked to create a culture that aligns people to long-term goals, has a high level of transparency, and has open communications. New recruits at NI feel like they can shoot for the stars."

-Alex Davern, chief financial officer and senior vice president for manufacturing and IT operations, 15 years with NI, says National Instruments is deploying people as needed and acquiring talent to propel our business forward. "Instead of looking at how to survive, we’re looking at how to take advantage of this opportunity. Ten years from now, I think we’ll clearly see this as a transitional time in industry leadership."

Plan for inevitable business cycles

Truchard: There are four parts of a business cycle, expansion,slowdown, downturn, and recovery. I’ve worried about the trade deficita long time. The U.S. has created many of its own problems. During the last decade,U.S. home owners borrowed excessively against those loans. In 2006-2007,$700 billion was spent on consumer products, which is not a sustainablemodel. The U.S. Federal Reserve tried lowering interest rates to tryto keep the economy going. Sub-prime loans, given to those whocouldn’t pay them back, compounded the problem.

Davern: My father used to say, "champaign taste on a beer budget." The country has overspent, and now we have to pay it back. We need to adjust our spending to income. The U.S. economy will have to adjust its standard of living. Politicians will have a problem recognizing that need. Trying to compensate in the short term will create more long-term pain. Innovation may accelerate the process of healing, but at present there doesn’t seem enough to drive a faster recovery.

Follow the right models, use common sense

Zogas: Economies like China benefited from manufacturing moving over there. Run up of oil prices have moved a lot of U.S. wealth to the Middle East. Monetary policy here continued to encourage spending, creating a perfect storm of debt. If we can let classic supply demand take its course, the economy would adjust. The stimulus money will upset that balance for quite some time, creating spending in areas that aren’t sustainable when the money’s gone. I don’t know what they’re teaching in economics courses nowadays.

Truchard: Business schools tried to apply the same rules to financial markets as mathematics or physics, but there are many more things going on. Financial models do work, but it’s like a control situation where approximations follow an anticipated course within a linear region, but outside those areas, the process goes out of control widely. Common sense should be part of the calculation. We still need to educate engineers on how to recognize bigger picture. [Earlier in the day, Dr. Truchard said during NIWeek’s keynote technology demonstration, to huge applause, that financial engineers have really screwed things up, and now it’s time for real engineers to clean things up.]

Davern: This country has over-borrowed. People put their money into housing, and that market declined as it never has before. A 0% savings rate signaled a problem; 6-7% savings rate is where we need to be.

Zogas: Design cycles are accelerating, and customers expect to do testing for less. We’ve spent a lot of time looking to see if we’re losing any business. An NI sales manager lost a deal recently because the end-user gave the sale to the legacy supplier, for fear that without business, the traditional supplier would go under and no longer support legacy systems. That’s an odd, nonstandard environment.

See beyond short-term thinking

Truchard: I saw a red flag many years ago when observers suggested we make up for less U.S. manufacturing with services. Guess what "services" turned out to be? Wall Street. But the 90-day mindset encourages CFOs to make decisions that just aren’t good. Employees and bonuses became the only objective on Wall Street without considering risks. Sending IP to China has been a concern. A manufacturer in China made power tools for a U.S. company during the day, and at night made a lower-cost line of power tools in the same plant, creating an alternative supply chain.

Davern: The public gets what the public wants. Management teams have been encouraged to produce quarterly. They need to manage to produce gains 90 days from now, or they will get fired. Generally, managers in charge are not owners of business and do not have a stake, or long-term confidence. In end, we’re all responsible for that kind of behavior. How? If we move money out of one 401k money market account into higher performing short term 401k product every quarter, then we’re part of problem. At NI, the two largest shareholders are the original founders. Would we have sense to resist bad behaviors if owners were not at the helm? People over-aggressively managing stock portfolios is one root cause. They don’t carry a downside burden, only an upside bonus. If people like that lose, the leave and get a job someplace else.

Spend at a sustainable rate, watch trade imbalance

Truchard: On the trade imbalance, if we’re spending more than earning, it creates systemic problems with the trade balance. More energy independence may make the imbalance more solvable. We have to look at ways we can export. In 1923, Henry Ford raised the salaries of his workers to $5 day, saying he needed to give them enough money to buy a Ford. In that respect, Japan needs to give us a raise. Japan has not been reciprocal in way they do business with us.

Davern: Running with a surplus from China is problem. They’ve lost more factory jobs than they’ve taken from us by automating and moving the economy into the 20th Century. The Chinese currency will strengthen dramatically, and businesses there will become incompatible, so they will need to stimulate domestic consumption. The answer to U.S. fuel efficiency is obvious and right in front of us. We need to shift from buying large Escalades to smaller cars. There’s $7/gallon gas in Ireland, and everyone drives small cars. I’m skeptical on alternative energy investments because Saudi Arabia can bankrupt those new businesses anytime they want. Less than 10 years ago, oil was $17 per barrel. If politicians gave gasoline a competitive floor, the remaining taxes could help those in the alternative energy markets. We know it works. When gas was highest, 5-7% fewer miles were driven.Taxation has reduced energy consumption dramatically in the European Union and Japan for decades.

NI’s goal has been to manage the recession by expecting it, planning for it, and deciding ahead of time how to behave. We built-in flexibility, didn’t lay off anyone, and held onto available cash to maintain profits with a 28% drop in revenue. A deeper recession, offers greater opportunity because many competitors were not prepared, showing a need for massive layoffs and disruptions.

Zogas: If we prioritize the needs of customers, employees, shareholders, and suppliers, we can make better decisions in bad times. Doing that will help determine what we need from each group over the long-term, rather than a short-term focus on revenue only. We need to continue to provide platforms that transcend generations of products, helping customers get better and reduce costs.

Anticipate economic cycles, save, and invest

Truchard: Anticipating a recession, we figured out ahead of time how to operate differently, looking at expenses and cutting costs. That might include using the web instead of the airplane in many cases. When I walked in here, I wondered, for instance, if we’d have bowls of nuts on the tables [laughter]. We don’t want to affect fundamentals of who we are, so we prepare ahead of time and tighten our belts. Doing so has allowed us to recruit people that in other times would have been impossible to recruit. We support customers’ needs when competitors aren’t.

When we went public, we were careful to emphasize the long term to our shareholders, looking at things first through a 100 year plan, the 10 years, 5 years, 1 year, and 90 days. Folks need to look at the big picture, not just the next 90 days. There has to be common sense. Another book here looks at generations of U.S. financial trends since the pilgrims arrived and identifies four patterns. One of them happens approximately every 80 years; 2009 minus 80: Guess what that was.

Spend on the right things

Zogas: A more natural and productive way to approach economic stimulus would have been to suspend taxes for 18 months and allow states, businesses, and individuals to do what they needed to do with that money. Then funds would have been distributed more naturally, creating less disruption than there will be when the flow of stimulus money stops. Many are trying to get their fair share of stimulus dollars, and they are going after many grand challenges.

Davern: I agree in principle that governments distort markets. Policymakers don’t really know the long-term affects of what they’re doing. Many times there’s no model in place, and if there were, it’d be wrong anyway. There are a few exceptions. For instance, it doesn’t make sense that the federal government taxes ethanol at 80 cents/gallon but doesn’t tax gasoline more. I think there are more effective ways to distribute stimulus that what we’ve been doing.

Zogas: Some of our alliance members and competitors have different models than we do. As they finished contracts, they were running out of business, laying off people, and hunkering down. Many customers have been stockpiling projects. Everything has to get approve for spending pretty far up in their organizations. The question is: Will spending resume in a short bubble or at a sustainable pace?

Marketplace reset

Davern: We’ve seen some partner disruption, but among our largest competitors, this recession has been a game changer like it was in 2001. Many do not have the capacity to absorb and manage productively through a recession because of their drive to optimize profits for the short term. As the recession ends, it will be pretty clear who took strategy A and who took strategy B. It will be interesting to see how it plays out.

Zogas: The true value of what a company offers shows now, internally and within its customer base. This recession will reset the competitive landscape forever. Analog Devices, for instance, realized it need to compete in the MEMS [microelectric mechanical systems] market at 50 cents per piece for highly complex parts. To do that, it had to completely rethink the cost of testing. The semiconductor marketplace testing costs didn’t fall with manufacturing costs; that’s an opportunity now. Because marketplace incumbents haven’t prepared, they won’t be able to address those needs. NI is in a better position because of our own efforts to innovate and cuts costs.

The worst is behind us, for now

Davern: For moment, the worst is behind us. On the up side, the massive inventory destocking will have to reverse. GDP will stop declining now or very soon. We’ve seen almost 20% reduction in global production with just a 2% reduction in GDP, and that will have to rebalance. Government stimulus will end in 2010, government spending will fall, and taxes will have to increase in 2011 to sustain current levels of government. It’s uncertain if consumers and businesses will have enough time to restructure balance sheets so consumption will accelerate at a needed rate. We could see a modest recovery in the short term, followed by a double dip recession in 2011. We need to plan for that possibility.

Some industries follow a different path

Truchard: The semiconductor industry has followed a different pattern. Cellphones and iPhones continue to be manufactured. Housing will not strengthen again until available inventory decreases. Companies need to look at where their products are going. This is a more severe economic cycle than prior recessions.

Alex: The semiconductor market cannot continue to underproduce. There won’t be a new boom until consumer spending resumes. We’re cautious about linearly projecting current gains through the end of year.

Zogas: Many companies have to do things drastically differently than they have been doing. Our products can drastically reduce costs and increase productivity in many areas, including for semiconductor testing.

– Mark T. Hoske, editor in chief, Control Engineering www.controleng.com

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