They thought they were just mid-size suppliers to larger manufacturers. But it turns out that thousands of mostly business-to-business manufacturers in smaller cities across the country are actually the ribs of what a new book is calling the “Titanium Economy,” and not just for the outsized prosperity of the present are responsible, but also for the hope that they can bust the myth that US production is collapsing.
That’s the view of Asutosh Padhi, a McKinsey partner, and others at the blue-chip consultancy, who are publishing a new book. The Titanium Economy: How Industrial Technology Can Create a Better, Faster, and Stronger America. Other medium-sized manufacturers can also learn from Padhi’s explanations Managing Director about how these actors managed to create this economy that he has re-described.
“We call them the ‘titanium economy’ because these companies are long-lived; they’ve been around for a long time,” Padhi said. “The reason you don’t see them is because these aren’t the companies that are featured on popular TV channels, but they are real and important and underappreciated. They’re not the companies running Super Bowl ads, but in many cases they’re the true backbone of the US economy. So how can we recommit to them and change the narrative and focus on them?”
Specifically, the book examines, expands on, and commends some 700 publicly traded US companies competing in the burgeoning “titanium economy,” as well as some 3,500 other private sector companies. About 80% of them are small to medium-sized companies with sales between $1 billion and $10 billion, each employing about 2,000 to about 20,000 people. The 380 largest private industrial companies among them experienced a compound annual revenue growth rate of 4.2% from 2013 to 2018, outpacing the revenue growth of S&P 500 companies, which averaged 2.9%, the authors found.
Through “Industrial Technology”, Padhi et al. means manufacturing, robotics and hardware production, which are “highly specialized and focused” in about 90 of the so-called “micro-verticals”.
“What separates this core of companies,” explained Padhi, “is that innovation is at the core of what they do. They have a playbook for developing in-depth expertise and providing exceptional service to clients, both B2B and B2C. They serve customers in an economical manner with a high level of service and quality, and a reliability that is better than any other.”
The companies include NYSE-listed Heico, an industrial and defense components supplier based in Hollywood, Florida, where it employs 6,000 people, and privately held Dot Foods, America’s largest food distributor headquartered in Mt. Sterling, Illinois, and 12 US distribution centers. Among the smaller cities being built by the Titan Economy participant, Padhi said, is Blacksburg, Virginia, with a cluster of industrial and technology companies backed by state and local governments and think tanks to provide business zones, hiring incentives and infrastructure investment create; and booming Simpsonville, South Carolina, where aerospace company Collins and automaker BMW have joined Michelin’s longtime tire company to support the city of 25,000.
In general, Padhi said, these companies are ignored by the dominant narratives among investors and the financial media, which are “heavily dominated by what’s happening on the West Coast. This isn’t meant to be a slap in the face of technical innovation, but it actually ignores the fact that innovation in the United States has another important component that’s being overlooked.”
These companies also suffer from being involved in an area of economic enterprise, manufacturing, that still goes unnoticed by new talent and young job seekers who associate factories with something extraordinary Modern times. “Your operations don’t resemble that perception,” said Padhi, who, unlike most McKinsey consultants, had an engineering and management background. “They use precise and technologically advanced manufacturing processes and different types of intelligence in their automation.”
Whether in the public eye or still out of the public eye, Titan Economy companies — and those that aspire to their level of performance — can improve their performance by emphasizing three areas, Padhi said:
• Drive core transformation. Leverage technology and data to achieve margin expansion and growth at an accelerated pace. “While there’s a playbook for that, companies have very different levels of effectiveness in applying the playbook,” Padhi said. “The variance tends to be even greater when it comes to whether companies are sticking to their guns. For example when it comes to things like using digital [technology]many companies are still in the very early stages.
For example, many mid-market manufacturers “were working on a sort of made-to-stock basis,” he said. “Can you change this model? Most companies don’t think about that. They need to move to predictive analytics to anticipate which customers will need what type of parts consumption, with what frequency, and over what timeframes. That way, in a way, you can come back and have a different customer proposition in terms of your service levels.”
• Improving their business models. This aims to improve performance and achieve margin expansion, attracting investors and talent in relevant cases.
“Most of these companies have actually shied away from investors,” Padhi said. “CEOs have often said, ‘I get technology, I have customers, I have operations and I have positive cash flow, but investors don’t care about me.’ There is also a lack of VC financing. What investors care about is a company that actually meets all the standards for high performance and is doing the right thing from an ESG perspective. Understanding the titanium economy is beginning to change that narrative.”
• Leveraging mergers and acquisitions around a “Segment of One”. “The classic M&A thesis is about cutting costs,” Padhi said. “But [titanium-economy companies] Use a slightly different playbook. It’s more about the integration of technology: how do you use mergers and acquisitions to harness technology and unlock more innovation, retain talent and integrate cultures?”