Keeping Doors Open

Industrial construction has been in the doldrums for almost two years now, and those engineering firms with a strong presence in the industrial market have come up with a number of strategies to keep their staff busy and their doors open. Some have shifted engineers into other specialties, others have focused on the few industrial sectors that have remained active, and a few are taking advantage of this downtime to look at their own processes and procedures.

Though some industry observers are seeing signs of recovery, with more manufacturers considering the equipment upgrades that often presage plant construction, most aren't expecting a large resurgence anytime soon.

"Overall, in manufacturing, the capacity utilization levels are pretty low," says Yorgos Papatheodoru, Ph.D., chief economist and manager of strategic development at Spartanburg, S.C.-based Lockwood Greene. "The latest numbers are approximately 75.5%. The long-term average is just under 82%. There's a lot of overcapacity out there."

The impact has been worse for those manufacturers who supply original-equipment manufacturers than for the OEMs themselves, Papatheodoru adds.

"The American consumer has stopped this recovery from being deeper," he says. "Generally, what we've found is that the closer the manufacturer is to the final consumer, the better it is."

This assessment is echoed by a recent survey of industrial purchasers. In Thomas Register's December Industrial Purchasing Barometer, some 66% of respondents stated they were only buying what their companies absolutely needed right now.

Manufacturing facilities aren't the only industrial-construction projects facing the budget ax these days. Soaring power prices and dire supply predictions just a few years ago created a strong market for electric-generating plants. That situation has changed, as new plants have come online, demand has moderated and the power-marketing business collapsed in the wake of financial-misconduct scandals.

"The power industry had a significant boom between 1991 and 2001," Papatheodoru says. "There was something like 100,000 megawatts of new power put in place. Since last winter, it really hit a brick wall."

Location and industry specialties are playing a role in how firms are faring during this downturn. Automotive manufacturers have continued with facility upgrades related to regular model-year changeovers, helping some Midwestern firms. In addition, overseas manufacturers hoping to grab larger U.S. market shares continue to transplant operations to states such as Georgia, Tennessee and Mississippi. And where the manufacturers go, suppliers follow.

"Transplant companies aren't waiting," says Fareed Rifat, P.E., a principal in the Automotive & Industrial practice of Detroit-based HarleyEllis. "Whether they're Asian or European companies, their business in the U.S. is doing better than their business at home. This is a new market to them and they want to add to it. This is also the case for their suppliers as well."

Generous tax incentives have played a big part in these relocation decisions. States in the region often end up in bidding wars against each other, in a battle over the jobs the new facilities can bring.

"We saw a whole lot of transplants come into the Southeast [recently]," says John Enkemann, Jr., AIA, vice president and director of operations for Detroit-based Albert Kahn's Automotive & Industrial Group. "But I think that was primarily generated by tax incentives. The incentives are driven by state economics—there are border wars to gain favor."

Engineers for the auto industry also benefit from regular model-year changes. New tooling can mean new design work as facilities managers consider impacts on related systems.

"All plants, if you want to maintain them, you have to renovate them," says Rifat. "If you put a new process in a building, the electrical and other systems all need to be adapted."

The Northeast has benefited from a boom in healthcare, which has helped cushion some of the economic fallout caused by the bursting tech bubble. Healthcare now accounts for nearly 10% of all employment in the Northeast corridor, according to a recent New York Times article. Major pharmaceutical manufacturers wanting to be close to decision makers in the area have been expanding their plants or building new ones.

"Our pharmaceutical business is doing well," Papatheodoru says. "The industry's been growing at a rate of 10% to 12% a year in revenues. They spend a lot of money because of the technical and regulatory issues involved."

And build-to-suit warehouse construction has remained strong on the West Coast. That activity is being spurred by Asian manufacturers seeking a stronger foothold in U.S. markets through the busy Los Angeles ports.

With new-construction projects harder to come by, many firms are looking at ways to help their clients get more out of existing facilities. Incremental upgrades can help manufacturers increase profit margins to help make up for stagnant or falling sales volumes.

"One of the things we see happening, typically, when the faucet on capital investment starts to shut, is that more attention starts to be spent on strategic planning," says Craig Rutherford, another principal in HarleyEllis' Automotive & Industrial group.

Opportunities for participating in these planning efforts are available in even the most downtrodden industries. One example: Semiconductor managers, who could barely spare time for a cup of coffee three years ago, are now interested in looking at current facilities and considering possible process improvements.

"These guys aren't building like they did a few years ago," says Jim Gekas, senior vice president and head of the Industrial Facilities Group at Boston-based Vanderweil Engineers. "But they are retooling. We are seeing a lot of deficiency work going on."

Some firms are taking their own strategic approach to clients who might be more interested in talking than building right now. Understanding that down times don't last forever, these engineers are hoping to build opportunities for larger contracts tomorrow by investigating less-expensive incremental improvements today.

Lockwood Greene has a small group of industrial engineers and system specialists dedicated to looking at incremental upgrades and manufacturing-process improvements. The firm will also conduct workshops for current and potential clients to help foster the planning process.

"Manufacturers have been trying to increase their profits through productivity increases," says Lockwood Greene's Papatheodoru. "A lot of the work has been involved with special points of the process that create a bottleneck."

As Brian Mershon, manager of public relations, notes, "The initial idea is that, if we can get into the front of the process, we can leverage those relations later on."

Energy-efficiency upgrades are often a part of these renovation efforts. In some areas, like the Northeast, utility rebates can play a financial role in these improvements. Where power is more available—and less expensive—as in the Midwest, such moves must provide their own cost justification.

Some of these upgrades, such as cogeneration-plant installations, can be substantial. Experts see a market in such projects as manufacturers take advantage of downtime to extend their facilities' working lives. Emissions concerns in the face of growing regulatory pressure also play a role.

"There are many industrial boilers out there that are very old," Papatheodoru says. "The replacement of these boilers has been postponed for a while. But with the power situation being so uncertain, it's worth it for companies to look at how they produce their process heat."

The downsizing of many facility-management staffs, even during the recent boom years, made this kind of plant-wide evaluation difficult when operations were running three shifts a day.

"They're really doing a lot more with less," says Vanderweil's Gekas, of the workload facing current facility managers. For one of Vanderweil's clients, this downtime has provided the opportunity to do a facility-wide hydraulic analysis, including the chilled-water cooling system. As it turns out, the plant may actually have excess chilled-water capacity, which could mean being able to shut down some existing air-cooled chillers at a substantial savings.

Some observers are beginning to see signs of possible improvement in the industrial market. One leading real-estate investment research firm, Reis, New York, recently noted improvements in industrial facility vacancy rates and predicted these rates would remain stable through 2003. Another research group, Torto Wheaten Research, noted that net absorption of industrial space was positive in the third quarter of 2002. However, warehouse space remains the industrial subcategory in highest demand.

Anecdotally, engineering firms say they are seeing some increased interest from industrial-side clients.

"As soon as 9/11 happened—it really set the industrial side into a tailspin," says Albert Kahn's Enkemann. "Now we're seeing some fish out there. All of a sudden we're seeing that all of the markets are showing something.

Vanderweil's Gekas says he also is seeing some master plans getting dusted off after being shelved for the last two years. But, he says, the projects actually going out for bid are smaller, and they are attracting much more competitive attention from construction-management firms that might not have considered them a couple years ago.

"Construction costs are very competitive," Gekas says. "These bids are 15%, 20%, 30% lower than what the facility planners are expecting to see.

And, he notes, since A/E fees are based on a percentage of construction costs, architects and engineers are seeing less money, as well.

So, for the time being, engineers involved in the industrial market will have to keep concentrating on the retrofits, retoolings and periodic relocations that have helped them keep their feet in their respective clients' doors. And more firms may be shifting staff into market sectors that have maintained some strength, such as retail and healthcare, until industrial construction recovers. Such projects may not hold as much interest for the true industrial enthusiast, but they can make an important bottom-line impact during difficult times.

"We're not so specialized that we can't share skills," Enkemann says. "After all, you still have to keep the rain out."