Exports and Manufacturing & Technology and International Business

State exporters poised to benefit from Obama effort

February 13, 2010

Indianapolis-based Peerless Pump has seen its products installed in some of the city’s biggest recent construction projects—the airport terminal, the Conrad Indianapolis, the downtown Marriott.

Company President Andrew Warrington also has his eye on Brazil, which will put up some high-value buildings for the 2016 Olympics. Overseas sales are a major emphasis for Peerless, which makes highly engineered pumps for fire suppression, factories and waterworks.

Martin DeLaRosa welds two pieces of metal next to one of the pumps at Peerless Pump Inc., which is growing its exports. (IBJ Photo/ Perry Reichanadter)

After five years of foreign investment, Warrington said, exports account for about a third of the company’s $120 million in revenue, thus about a third of its local payroll of 300. Despite a drop last year with the recession, he expects continued growth in exports.

“If they only doubled in the next five years, I’d probably be very disappointed,” he said.

President Obama’s administration wants to help rebuild the U.S. economy by putting more companies on Peerless’ trajectory. Obama announced in his State of the Union address the goal of doubling the nation’s exports in five years and creating 2 million jobs in the process.

Although economists call Obama’s goals lofty, or downright unrealistic, many of them welcome the spotlight on exports.

When it comes to creating jobs, pushing exports is a more sustainable effort than the economic-stimulus package, said Tim Slaper, director of economic analysis at the Indiana Business Research Center at Indiana University.

Obama’s target of 2 million jobs “sounds fairly lofty,” he said. At the same time, he asked, “What state is going to have five years of shovel-ready projects?”

Indiana exports began a period of steady increase in 2002 and reached $26.5 billion in 2008. Exports also grew as a share of the state’s economic output in the past decade, hitting 10.8 percent in 2007. Data for 2009 is not yet available, but Hoosier exports were expected to fall.

Transportation equipment, chemicals and industrial machinery drive exports from Indiana. That’s not surprising, considering some of the biggest exporters are diesel-engine maker Cummins Inc. and Eli Lilly and Co.

The nation’s roster of exporting companies is relatively small. In a recent speech unveiling some details of the Obama initiative, Commerce Secretary Gary Locke pointed out that less than 1 percent of 30 million U.S. firms engage in exporting.

Slaper estimated that the portion of Hoosier companies is around 4.5 percent.

Those statistics can be misleading because the bulk of the nation’s economy revolves around service. In other words, dry cleaners and financial advisers are in no position to reduce the trade deficit.

One critic of Obama’s plan, IU economics professor emeritus Larry Davidson, resents the implication that American companies aren’t trying to get in the game.

“Exports and trade are incredibly complicated business decisions, tough business decisions,” he said. “It’s not that our companies aren’t trying. With markets declining in so many places around the world, it’s even tougher to make the sale.”

The Obama export initiative so far has emphasized assistance for small and midsize companies—firms that might feel least prepared to do business internationally.

Olaf Tessarzyk, managing partner and president of Indianapolis-based ZPS America LLC, is undaunted by the challenges.

He started ZPS, which sells machine tools throughout North America and South America, two years ago. The firm now has 15 employees and $5 million in annual revenue. Many of his customers are parts factories in Mexico, and about one-quarter of sales now come from outside the United States.

Tessarzyk has hit obstacles along the way, including tightened security at the U.S.-Mexico border that has caused weeks-long delays in getting shipments to customers. He said he thinks government can help firms like his by removing various bureaucratic obstacles.

But Tessarzyk said the real fuel for export growth is investment.

“The increase will be affected by us adding the staff we need to add,” he said.

To make a splash in exports, Tessarzyk said the United States should follow the example of his native Germany, the world’s No. 2 exporter behind China. He said the country has wisely avoided protectionist policies and emphasized high-value manufacturing.

“First, you’ve got to create the goods. It’s got to be globally competitive,” Tessarzyk said. “If the government will put something into that, we will have exports—because we have good people.”

Slaper said industries that are growing in Indiana—such as life sciences, medical equipment and alternative vehicles—all eventually will add to exports.

“It’s still going to take a good long while for all that stuff to get in the pipeline,” Slaper said. “It’s not something that’s going to be a quick hit.”

The main reason large companies have dominated overseas trade is the expense. Peerless, for example, did not become a serious exporter until it was acquired by a multibillion-dollar Danish company, Grundfos, in 2007, Warrington said.

Then Peerless took advantage of its new parent company’s existing global network.

“We were a relatively small business before, and now we have the capability to do our exports directly,” he said.

Significant growth in exports is most likely to come from large domestic or multinational companies that already have overseas business, said Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics, a pro-free-trade think tank in Washington, D.C., that advised the Obama administration on its export initiative.

That’s why he hopes Obama abandons his second trade-related promise—to tax companies that ship jobs to foreign countries.

“The facts of the matter are that these big, multinational corporations are responsible for one-half to one-third of U.S. exports,” Hufbauer said. “Investing abroad is an assist for exports.”

Such a move might play well politically in states that have seen lots of manufacturing jobs disappear. But Hufbauer said, “Keep it in the campaign oratory.”

Manufacturing accounts for more than 15 percent of Hoosier jobs, but the number has been on the wane for decades. As of December, the sector had 441,300 jobs, down 10.8 percent from the prior year.

Hufbauer thinks that, with the right policy changes, exports could lead a manufacturing recovery.

“We could have a manufacturing boom in this country, which would surprise everybody,” he said.•

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