Lest We Forget History's Lessons.

I've written in CEO Journal many times and from a number of different viewpoints about the widespread changeover in casting purchasing personnel that has taken place over the past 2-3 years. One reality I have not written about (till now) is the similar changeover in foundry industry personnel that has occurred over the same time period.

While this "generational change" has been mainly a positive one for our industry, there is at least one major potential down side--overconfidence. These new people have never seen an industry downturn; they've never seen competing foundries engage in a self-destructive price war; and they've never seen a capacity shakeout. This could lead to overconfidence about what is possible and what prudently can and should be done in a given situation.

So, to provide some context for current business conditions and help prepare these people for what they might see in the near future, I think it would be useful to take them through a look back into the not too distant (at least for us "old timers") past.

Feast or Famine

The year 1980 was a watershed for the North American foundry industry. Casting demand and production were strong, and to meet that demand, roughly 5000 foundries operated in the U.S. and Canada.

1980 also is noteworthy in that it witnessed an unparalleled foundry-building and domestic capacity-expansion boom. Several huge foundries were opened at that time, and scores of smaller facilities were built as well. Further, many existing foundries were modernized and expanded at that time in hopes of cashing in on the economic boom. Sound familiar yet?

As remarkable as 1980 was, 1982 was even more so, but in an alarmingly different way. Seemingly overnight, near depression levels of economic recession forced casting users to cut demand more than twice as fast as it rose during the late 1970s. As a result, the North American foundry industry was jolted right out of its boom and into the single most precipitous decline in demand ever. Metal casting shipments fell by about one-third just 2 years later.

In response to this drop off in demand, foundries closed at a breakneck pace. If in 1980 there were 5000 foundries in North America, there were fewer than 4000 just a few years later. And this was just the beginning of the capacity shakeout.

As the industry slid farther and farther into this huge trough in the business cycle, it became characterized by massive excess capacity and self-destructive price competition. Foundry margins shrank, downsizing accelerated, and the shakeout continued at warp speed. We laugh now, but at the time the practice of pricing to "lose money on the part but make it up in volume" was widespread, and industry observers wrote frequently about the industry being its own worst enemy when it came to pricing and shooting itself in the foot regarding profitability. Things were so bad that it was heretical to suggest that foundries were in business to make money, not castings.

Will History Repeat Itself?

While it's true that a substantial portion of the demand lost in the 1982-87 time frame was never recovered, it's also true that the foundry industry--a smaller foundry industry--did regain its health over time. As the 1990s began, approximately 3000 of the strongest foundries were left in North America. By the end of 1998, casting demand had reached a near term peak and began again to rival the heady levels achieved in the 1970s. Further, while the occasional foundry closing is reported, we are today much more likely to read about a new facility being put in place.

So, could the industry's recent demand boom and surge in capacity building be a replay of the run-up that occurred prior to 1982? Will the next decade bring a repeat of the capacity shakeout and self-destructive pricing behavior many of us went through in the 1980s? I doubt it, but that scenario does remain a distinct possibility.

More likely, we will see isolated rather than widespread instances of excess foundry capacity as specific end-use industries experience demand slowdowns. This is happening right now in the agricultural equipment business and among the foundries that serve that market. And, as a cynic like me would expect, evidence strongly suggests that some of the foundries that have been impacted by the slowdown have indeed reverted back to their self-destructive "fill-open-capacity-at-any-price" behavior. Have we not learned history's lessons well enough?

Older and Wiser

CEOs must guard against this behavior by insisting in every possible way that their foundries are in business to make money, not castings. They must make sure younger employees understand the basics of industry and business cycle economics, that micro decisions should take macro factors into consideration, and that every job must stand on its own profit-wise.

Most importantly, CEOs--especially those who lived the history recounted here--must resist the basic urge to react in those same old ways. My advice is to remain true to your customers and your margins. Demand fluctuations come and go, but your foundry business must make money and keep customers happy through it all.