Stropki: Chinese economic growth means global economic growth

 

John Stropki, chairman, president, and CEO of Lincoln Electric Holding, Inc., discusses the “The State of Manufacturing: Challenges and Opportunities” with the Chautauqua audience. Photo by Megan Tan.

Nick Glunt | Staff Writer

In today’s economic climate, success stories in the business world range from creative geniuses thinking up that perfect invention to investors funding that risky venture.

John Stropki’s story is more traditional than that.

Stropki began work at Lincoln Electric Holdings, Inc., 35 years ago. Over the decades, he’s climbed the ranks literally from bottom to top. Today, he’s president, CEO and chairman of the company — and he has been since 2004.

As the fourth speaker for Week Seven, a week titled “The U.S. Economy: Beyond a Quick Fix,” Stropki presented his PowerPoint lecture at 10:45 a.m. Thursday in the Amphitheater.

Stropki spoke about how Lincoln remains a successful corporation despite global economic turmoil. On a secondary note, he addressed the role China has played in keeping the business afloat — and the role it will play in recovery efforts.

Lincoln is a Cleveland-based welding company with plants in 19 countries around the world.

Founded in 1895, it retained its success using various techniques and market practices, including pay-per-product style of wages and disuse of layoff policies. Business students worldwide study Lincoln in classes, most notably at Harvard Business School.

One of the innovations the company has made is to submit to the Green Movement, at least partially.

It’s reduced waste, from 6 million pounds in 2007 to 2 million pounds in 2010, while recycling almost 3 million pounds. For every 1 lb. of steel welded at one branch, the amount of water used has been reduced from one liter to almost nothing — it’s using evaporation and recycling water now.

“The program that we’re most proud of, at least in terms of recent investments,” Stropki said, “is that we’ve put a wind tower on our property in Euclid, Ohio.”

The wind tower, a $6 million investment, produces about 10 percent of the facility’s electrical power. It will take about 10 years to return on the investment, but it’s “created a tremendous amount of enthusiasm,” Stropki said.

Its second purpose is to show the company’s customers’ support in wind energy generation. As a welding company, it builds steel used in wind towers.

These practices have helped to keep Lincoln afloat during the economic crisis. Stropki explained the ins and outs of the economic crisis before applying it all to the steel and welding industry.

Then the topic switched to China.

China’s global domestic product is about $10 trillion, and it’s increasing almost 10 percent every year — a feat Stropki said would be like the U.S. “finding the Holy Grail.” The U.S. has a $14 trillion GDP, but it’s only growing at 1 percent each year.

“It doesn’t take long for one to overtake the other,” he said. “The predictions from the (International Monetary Fund) are that China’s total GDP will exceed the U.S. in 2016. That’s just around the corner.”

He said this shouldn’t be viewed as a negative progression. China’s growth, he said, along with that of other countries, is fueling the global economic recovery efforts. However, he said foreign growth only helps countries that are still participating in global trade.

Greece’s bankruptcy and the “teetering” economies in Spain, Portugal and Italy don’t look good for global recovery, he added.

“Something that’s kind of close to home for us that I think is a great barometer to show what’s happening in the world economy is steel,” Stropki said. “Steel is a primary building component to so many things in our life — transportation, appliances, bridges, roads. There aren’t many things that don’t use steel.”

Then, to audience laughter, he tagged: “In fact, everything should use steel from my perspective.”

China consumes 45 percent of the world’s steel, while the U.S. consumes just 6 percent. Stropki said to think about how much more use steel is getting in China. Because of such use of welded steel in China, he said Lincoln has the opportunity for market growth.

In 2001, 71 percent of Lincoln’s sales went to North America, while 3 percent in all of Russia, Brazil, India and China. In 2010, 49 percent went to North America, with 19 percent to Russia, Brazil, India and China.

He added further that sales in North America have more than doubled — meaning international sales to Russia, Brazil, India and China have jumped at least 18-fold.

In 2001, Lincoln was a $1 billion company. If things stay on track this year, he said, it should end up a $3 billion company.

Stropki tried to explain why China is suddenly increasing in power; part of it, he said, is the modernization. People are moving from rural areas to urban areas in China, which also is increasing the use of energy.

China and the U.S. use about the same amount of energy, but China’s energy use per person is about one-fourth as great. Car ownership per person is significantly less, as well, but it is increasing.

Stropki, in the end, said international trade is important to global economic health.

“I believe this is the biggest driver for the growth of U.S. manufacturing right now,” Stropki said. “It’s not the strength of the U.S. economy — it’s the growth of the global economy.”


Q: Can you comment on the challenges and opportunities the dramatically increased size of the financial industry poses for real businesses, such as the one you lead?

A: I will tell you I’m not an expert on the financial industries. As I mentioned, we’re not out in the marketplace borrowing a lot of money, so we don’t have very friendly bankers. I think it’s more the perception that people have that there are a lot of things going on there, and some have been proven to be going on there, that distort the economy and then again, take confidence away from the kind of things that we’re trying to do. And it’s the uncertainty that this kind of circumstance presents that just doesn’t allow people to make commitments to the long term to know that the stability and the confidence is going to be there.

Q: How do you manage an aging work force? Have you learned something over the years about what percentage of your profits should go into employee incentive programs? The next is about your foreign investments; is it true that you don’t employ the same system there, and can you talk a little bit about why that’s the case?

A: First, let me explain a little bit more about how the guaranteed employment works. Our U.S. company does not have a union; we’ve never had a union in our company. And that’s not to say that unions are bad, or we’re anti-union; we just think for our base and our philosophy, our system works a lot better. But because of that, we have work rules that are very cooperative. As an example, when we’re very, very busy, we’re going to work our employees a fair amount of overtime. Our normal workweek might be from 45 to 47 hours instead of 40 hours, because we want to have that cushion when things slow down. Our first defense mechanism is to reduce overtime. And then under our agreement with our employees, we can reduce the hours down to 32 hours. So we can go from 47 to 32, which creates a big gap for us. People know that, look, “Maybe I don’t want to work 47 hours in the summertime, but I’m willing to do that because I know I’m going to have a job if things get bad.” Even when they’re working 32 hours, they haven’t lost their job. As I’ve said, our people’s paychecks are going to be a little bit smaller than they were, but they’re coming to work every day, and they know they got a job, and they know when things pick up, they’re going to get that loss of income back. And again in 2009, when our people were working reduced hours, they still got a $14,000-per-employee average in terms of their bonus. In terms of the aging workforce, that’s a challenge for all manufacturers. There’s just not a lot of attention in a lot of mediums to attract people into manufacturing jobs, and we’re working very hard with that. We’re active participants with NAM, National Association of Manufacturers, in a program called “Dream it. Do it,” where we’re going around to the high schools and showing young children about the great opportunities that manufacturing presents today. Manufacturing jobs today are not picks and shovels and hammers and saws. They’re operating electronic equipmen;, they’re using tools that are intellectually stimulating, not just physically demanding, and once people know that, and they see the kind of environment our factories have today versus what their parents or grandparents had, then I think they see the attractiveness of that.

Q: One looks at the fact that you’ve got $400 million of reserved cash and then describes this sort of corporation approach to taxes. That is the idea of the rejection that corporate taxes are way too high. But the connected question is given the massive proportions of debt. Where should we get the money to pay for the needed infrastructure? Those connections, I hope, are obvious to you.

A: Let me first confirm your comment that corporate taxes are too high. In this slide, I think puts it in a very succinct and fair way. The United States has the second-highest statutory corporate tax rate of any country in the world — second only to Japan, and we’re only one-tenth of a percentage point behind Japan. All the red bars underneath that are trading partners collectively and have lowered the corporate tax rate over the past ten years. And as an example of that, just look at two countries: Germany and Canada. Two very established — you could argue Germany is socialist format government, Canada, much more aligned with the U.S. Germany has gone from 52 percent statutory corporate tax rate in 2000 to 30.2. The U.S. is roughly 40. Canada’s gone from 42.5 to 29. Now, if I can make a dollar’s worth of profit, and I can make that in Germany, I lose 30 cents of that profit to taxes. If I make that same dollar in the United States, I lose 40 cents of that dollar to taxes. So, you know, you have your share hold or interest in mind, a lot of people look at that as opportunity. The other terrible thing about the U.S. corporate tax rate is that it’s nonterritorial. So when we make profit in Germany, we pay the German taxes, as we’re supposed to pay, but if we bring that profit back to the U.S., we also have to pay the tax on the profit we made in Germany in the U.S. tax system. So nobody does that. No other country in the world taxes people twice on corporate profits. If a German company makes taxes in the United States, they don’t pay German corporate taxes on that when they bring the profit back home, and that sucks capital out of the U.S. investments that might be invested in building new plants in the United States instead of building them in Germany.

Q: The second half of that question contends that 40 cents could be an investment in the infrastructure of this country.

A: I think that’s true, if it’s properly utilized. I think the problem that most taxpayers have is — not just corporate tax payers; I pay a fair share of personal income taxes — I don’t think my taxes are well used. When I see the waste of our tax dollars, it’s very disappointing. When I see the president of the United States laughing with Jeff Immelt that he wasted more than a trillion dollars of our tax money on non-shovel ready projects, I’m pretty disappointed with that.

Q: Can you talk about the problem of subpar manufactured products of steel, drywall, etcetera, coming out of China?

A: That’s a big challenge, and I’ll tell you the other element of Chinese manufacturing is piracy. We have trade shows in China, and it’s always interesting — our welding machines are red, and the number of red welding machines that you’ll see in China that look exactly like our welding machines is very disappointing. I will say that the Chinese government has gotten much more aggressive. We had a raid of a counterfeit welding manufacturer in China about two weeks ago, and we got 100 percent support from the Chinese government. They went in; they shut down the operation. Their form of justice is very swift; those people are in jail. Their lawyers aren’t postponing the event for six years. But the poor quality is something that is challenging. But I will say again, our business model in China is mainly supporting U.S. global companies — John Deere, Caterpillar, General Motors. When those people move in, they’re producing the same quality products in China that they’re producing in other parts of the world. And then, most important to the Chinese government and, I think, to the Chinese people, they want to be a global player, and they know that to be a global player, they’ve got to elevate the quality of their products; they’ve got to play by the world rules. They’re far from perfect, but I think they’re making pretty important progress.

Q: Identify two measures that might be taken by the federal government to encourage other businesses, other manufacturers, to emulate the successes of the Lincoln Electric company on a long-term basis, not a quick fix.

A: I think some form of investment credit. The U.S. has what’s called the R&D credit. It’s a fairly small credit off our corporate tax rate. It was installed 30 years ago, and the 30-year period is expired 15 times and then reinstituted. We wait every year until December to know whether or not we’re going to get our credit. And then at the 11th hour dash the Congress comes together and they repass the R&D credit. I think if manufacturers knew for sure that they were going to get that credit at the end of the year, rather than hoping they’re going to get it, they might invest more heavily with not knowing that it didn’t present that type of a risk. And then again, I think if they got rid of this ridiculous territorial tax program, we could take the profits that we make overseas and invest some of those back into the U.S. market as real profit without having it taxed at a 40 percent tax rate.

Q: Can you describe what you think the impact is of U.S. debt in general and the progress for a U.S. debt deal specifically for manufacturing?

A: I think the prospects of the U.S. debt situation are terrifying from my perspective. And we’re only seeing a small part of the equation. The debt that we’re talking about is funded debt, money that we owe the Chinese or the Japanese or people who own U.S. bonds. What about the $40 or $50 trillions of unfunded obligations that we have for social security, Medicare, any of the other entitlement programs that nobody is backing that up? It scares the hell out of me, and I think it should scare the hell out of everybody. I’m going to make it through this, but there are a lot of people who are not going to make it through. When I look at my children and my grandchildren, I’m scared to death of it.

Q: Much has been said in the course of this week about the inequality in the pay of management and workers. Would you comment on this in relation to your experience at Lincoln, and what you’re seeing in the U.S. economy in general?

A: I think it’s a big issue, and studies are done, and they compare CEO pay to the average worker pay, and you see unbelievable differences in regards to that. Our program isn’t quite like that. I think my pay ratio to the average worker — and my pay is public, so anybody can go and look it up — is in the 30- to 40-times range. I’ve seen statistics in the thousand-times range. I don’t know the answer to that. I’ll tell you I work very, very hard for the money I earn, and I’m not embarrassed by it. It’s a 24/7 job, and a lot of my pay is predicated on the results of the success of the company. I will tell you I care deeply for the employees at the company. I want them to have good jobs; I want them to have great opportunities. I think that’s more the norm than the exception. The publicity that Enron or Tyco or Apple gets kind of corrupts the whole view of that. But what’s worse about that is when you have an Enron or a Tyco, then the costs are piled onto good companies like Lincoln to collect the problems these other people created, and that hurts our employees; it doesn’t help them. I don’t know what the right answer is for that; I would just say I’m a guy who started working on the shop floor, and I think America and companies like Lincoln can provide opportunities for people to start working on the shop floor and elevate themselves to whatever thing they want to reach.

Q: Referring to corporate governance, there’s been a trend to separate the office of the chairman and that of the CEO. How do you feel about that?

A: I look at it as a person who has both titles, and if somebody was going to take away half of my job responsibility and pay me the same amount of money, they can go ahead and have the chairman’s job. I don’t see the huge advantage. I look at U.K. companies where the model is a non-executive chairman and then a CEO, and I say to myself, “What does this non-executive chairman do?” The chairman CEO title is like every job; it’s got multiple types of responsibilities with it. The more important thing is — the problem that U.S. companies get themselves into, and not just U.S. companies — is when the board’s not engaged in managing the chairman CEO. If you have the right dynamic between an independent board that’s actively engaged, knows the business and is active in setting the strategy and being sure that it’s implemented, it doesn’t matter what the title of the person is; it could be either system. I don’t think it helps corporate governance.

Q: Does our education system adequately prepare workers for manufacturing? What does manufacturing need from our education system?

A: I would say definitely not. It was one of the topics I was going to cover in (my Challenges section), so I’ll answer it now. If you look at the public school system in the United States, it’s broken — badly broken. The dropout rate for students in Cleveland public schools is 54 percent. The national average for dropout in public schools is 33 percent. Then the 67 percent or the 50 percent that are staying aren’t getting the kind of education they need. Cleveland public schools this year have a $72 million deficit. I was in Chicago over the weekend. The headline for the Chicago newspaper, front page of the Chicago Tribune — Chicago public schools have a $720 million deficit. Where does Chicago get $720 million? Schools are not focusing on the right things. People aren’t engaged in the way they are; parents aren’t engaged in the way they need to be. Not everybody can be a doctor or lawyer. Somebody’s got to make things. What we’re trying to do is get active in organizations like NAM, the American Welding Society, and going around developing curriculums at the high school and the junior college level that will give people the skills to allow them to come into organizations like Lincoln or manufacturing jobs in general. I think, again, manufacturing jobs are 25 percent higher wages; that means we get 25 percent more taxes that we can invest, but it’s just not a money game. I live in a suburb of Cleveland. My children went to public schools, not private schools. We chose that suburb because we thought they had good public schools. Cleveland public schools’ cost per student are higher than the community we live in, and the quality of education is no comparison.

– Transcribed by Leah Rankin