Made in Indiana: manufacturing has a bigger economic impact than many realize.

WE'VE ALL HEARD THE refrain: manufacturing is in turmoil, therefore a manufacturing-heavy state like Indiana needs to explore other ways to drive the economy.

To be sure, economic diversification is a good thing. But manufacturing in Indiana is by no means on the ropes, a new study suggests. Indeed, according to the analysis, titled "What Indiana Makes, Makes Indiana," manufacturing directly or indirectly supports more than half of all Hoosier jobs.

"There has been an ongoing conventional wisdom that we're too manufacturing-dependent, it's going away, we need to diversify, to be something else," observes Pat Kiely, president of the Indiana Manufacturers Association. The problem, he says, is that those perceptions were postulated without a thorough understanding of the state's manufacturing sector: "where we are and what role manufacturing plays in the Indiana economy." The IMA and the Central Indiana Corporate Partnership set out to get a better picture of that role, hiring Greenfield-based consultant Thomas P. Miller and Associates to conduct the study

"The numbers surprised us," Kiely admits. The analysis works from the notion that any kind of economic activity yields both direct and indirect effects. Every manufacturing job creates additional work for companies providing goods and services to the manufacturer, everything from suppliers to utilities to transportation firms to companies offering financial or business services. On top of that is the so-called "induced effect" or "second-order effect," which takes into account the impact created when these manufacturing and supporting employees spend their earnings in the local economy Analysts have determined multipliers to estimate the exact impact of these ripple effects.

The bottom line, according to the study: Indiana's 573,039 manufacturing jobs stimulate an estimated 593,669 indirect, supporting jobs. These earnings, in turn, support another 601,118 more jobs through the "induced effect." Add it all up and the employment associated with manufacturing totals nearly 1.8 million jobs, or about 60 percent of total Indiana employment, a much greater share than many might realize.

How can that be? "The manufacturing enterprise has changed dramatically in the last 20 years," Kiely observes. "I grew up in Anderson, and practically everyone worked for General Motors." That workforce included employees on assembly lines, as well as the people who mowed the automaker's grass and painted its buildings, he says. But all were listed as employees of that giant manufacturer, GM.

Today, he says, there obviously are still people who mow lawns and paint buildings for manufacturing operations, but because of changes in labor-force measurement along with increased outsourcing the link between those supporting jobs and the direct manufacturer is no longer as obvious. He points to the AK Steel facility in southwest Indiana as an example, noting that it supports at least a thousand jobs, but only 600 on the direct payroll. Everything from security personnel to computer technicians would not have jobs without the presence of AK Steel, but those people are not directly employed by the steelmaker.

To the northeast, the economic impact of Steel Dynamics Inc. is substantial. Keith Busse, president and CEO of the Fort Wayne-based steelmaker, says SDI's non-executive employees last year took home an average of $84,000 plus another $18,000 in profit sharing. The company has about 1,700 on the payroll--most in northeast Indiana, with roughly 300 in central Indiana and a hundred in Florida. "They're not low-end jobs," he says.

Another example is Toyota Motor Manufacturing Indiana. The Gibson County assembly plant last fall conducted an economic-impact study of its own, with the help of researchers at the University of Evansville and the University of Southern Indiana. According to Norm Bafunno, the plant's vice president of production and quality planning, Toyota employs about 4,600 people directly, but the plant supports a total of nearly 13,000 jobs in the Evansville metropolitan area and more than 31,000 statewide.

"You have to look at the whole value chain," Kiely says. "Is manufacturing just 20 percent of employment in the state, or something else?"

The answer, the statistics seem to confirm, is "something else," something much greater than many people acknowledge. And the difference is crucial, says Kiely. "It changes your entire view of the policy debate."

Just what should that policy debate revolve around? In short, helping manufacturing prosper and grow, and assisting companies as they deal with an increasingly global marketplace.

High cost of doing business. "The basic challenge facing most industries right now is growing costs, not only wage rates but the cost of insurance, the cost of benefits, the costs to run plants in the United States," says Edward Mackey, vice president for U.S. operations at DePuy Orthopedics in Warsaw. "The cost of doing business in the United States is higher than in most places. When we do stack up our overall costs and compare to different areas of the world where we can manufacture, it's a tough decision."

Indeed, says Kiely, a host of costs are troubling manufacturers these days. Natural-gas prices are up, and electricity is likely to follow, he says. Fuel prices also add to logistics costs and may cause a bump in material or component prices.

"The price of steel is driving up pricing, and some of our manufacturers are stuck in the middle," adds Dave Schmitt, Manufacturing & Distribution Group leader at BKD in Indianapolis.

Perhaps the biggest cost-related concern of all is health insurance, and that's an issue where Indiana tends to suffer even more than some other places. "We're a high-cost health-care state," Kiely says, adding that it's a subject that needs to move front-and-center in the public-policy debate. "That's key to all businesses in Indiana, but when's the last time you heard a discussion in the Statehouse about health care?"

Regulatory and tax burdens.

Certainly, the government can't offer all of the answers to manufacturers' challenges, but those in the sector have a few requests that they say will help Indiana manufacturers be more competitive. First of all, take it easy when it comes to regulation. Kiely refers to the regulatory lag, the time it takes to obtain permits and approvals relating to environmental and other matters. The state has made gains in this regard, he says, but there's always room for improvement.

Busse says the regulatory system could use an attitude adjustment. "We all are at a disadvantage related to environmental compliance. There's not a good working partnership between businesses and the environmental people at the state and federal level," he says.

"I'm not saying that we should not comply, because we should. We have the same goals," Busse says. But he says the often adversarial relationship between regulators and the industries they regulate should give way to a more cooperative environment.

At the same time, he believes some regulations are becoming so restrictive that they're keeping businesses from thriving, and may be driving them elsewhere. "We're making rules that are onerous to industry," he believes. For example, new goals relating to mercury in the Great Lakes region will be difficult to achieve, he says.

The truth, adds Busse, is that industry is much cleaner now than it has been in the past. Though many have traditionally viewed steelmaking as a dirty business, "emission controls today are well beyond anything enjoyed 50 years ago."

Then there's the issue of taxation. "We're a little disadvantaged because of taxation," Busse says.

"There's only so much you can do, but most of our competitive states don't tax personal property," Kiely adds. Among other things, he believes property used in production ought to be exempt from taxation.

Besides cutting or eliminating troublesome taxes, governments must be in regular contact with existing companies to ascertain their needs and, on occasion, offer tax incentives to help them grow. "It's always beneficial to work with companies regarding tax incentives to grow employment," Mackey says.

"It doesn't mean that you just hand out incentives forever to existing businesses, but you have to at least engage in a dialog regarding their needs and figure out how government and companies can work in partnership," says Busse.

"There needs to be close communication between manufacturers, state business and state government," Bafunno agrees. That communication can be about matters specific to the company as well as public-policy issues that affect manufacturing as a whole. "We have to make sure legislation we write creates jobs and allows companies to expand here in Indiana."

Workforce and education. To help manufacturing succeed, investing in the workforce is critical, proponents believe. "We would never have grown if we had not had an outstanding workforce to draw from," Bafunno says. "We don't think it's tapped out."

At the same time, governmental and educational leaders need to pay close attention to the workforce and training needs of industry, those in manufacturing believe, because manufacturing processes are becoming more advanced all the time. "They're changing their processes and they're changing the types of people they hire," Kiely says. "It's a whole different enterprise.

Manufacturing is high-tech, and it needs a whole different set of workers. It's a K-12 issue and beyond-12th-grade issue."

"We try to hire people with experience so we can limit training," Mackey says of DePuy, but that's not always possible. The company could use a bigger source of applicants conversant in the technologies used in modern manufacturing.

Indiana's educational system needs to do a better job of promoting manufacturing as a promising occupation, says Schmitt of BKD. "We've got to get a source of people interested in going into manufacturing as a career," he says. "Manufacturing is a well-paying industry that people ought to consider. We've got to encourage people to go into manufacturing."

The manufacturing future. Even though processes are becoming more innovative and advanced, Kiely says the "What Indiana Makes, Makes Indiana" report makes it clear that much of the future continues to be tied to making things that are traditional, long-time Indiana products--steel, vehicles and auto parts, food products, medical devices and the like.

"Most growth in our sector is really going to be in traditional manufacturing," he says. "A lot of people in Indiana have never been in a factory and think that traditional manufacturing is a failed enterprise, or it's going to be taken over by China in two weeks. The mantra has always been 'we need more advanced manufacturing.'" In reality, advanced manufacturing is what we already have, regardless of what comes off the end of the assembly line.

Busse agrees that Indiana needs to focus attention on the manufacturing it knows and does best, because it offers plenty of opportunity. "I don't think you can remake yourself overnight," he says. "I still think that this is the heartland and this is where most of the industrial business in the country is located. We need to stay focused on industrial opportunities. I think they're out there."

RELATED ARTICLE: Manufacturing report.

Indiana's strengths, opportunities and challenges.

* The outlook for Indiana manufacturing is both troubling--due to job losses, restructuring and mounting competition--and exciting--due to technological advancement, continued high wages and foreign market opportunities.

* Most of the growth in innovative manufacturing over the next decade will occur in the traditional industries in Indiana.

* Strong productivity improvement is a "cure" and a "curse"--resulting in more interesting, better paid jobs, but fewer of them.

* While some may have lost faith in manufacturing as an engine of growth, it is one of the very few "games in town" for the foreseeable future.

* Indiana manufacturing has sustained a standard of living, with more middle class workers than the U.S. average. That standard is threatened by loss of well-paid, low- to medium-skill jobs.

* Other states are making a run for manufacturing growth and have been gradually competing away Indiana's lead in productivity and high-paying jobs.

* The dollar has been weakening, which provides expanded export opportunities, and the otherwise troubling U.S. current account deficit may help states pursue foreign direct investment. These opportunities far outweigh the threat of job loss from jobs moving offshore.

* Indiana manufacturing managers must become even more flexible and agile.

* Manufacturing is a high-skill, high-tech, high-pay industry. The days of high-pay, low-skill jobs are coming to an end quickly. Students need a more rigorous K-12 education, both in academics and career technical preparation.

* Growth opportunities include advanced energy technologies and services, advanced environmental technologies and services, advanced materials, coatings technologies, producer software and nanotechnology.

* The key to unleashing the growth potential of Indiana manufacturing is to provide a conducive business climate that encourages innovation, entrepreneurship and investment. Picking winning industries is a risky business.

* Heightened public-private collaboration and interfirm alliances will be necessary to fully capitalize on opportunities.

Source: "What Indiana Makes, Makes Indiana: Analysis of the Indiana Manufacturing Sector," December 2004, prepared by Thomas P. Miller and Associates for the Indiana Manufacturers Association and the Central Indiana Corporate Partnership.