Secret Champions

Sunday, September 20, 2009
Text by Steffan Heuer (translated)
Photography by William Widmer

Small businesses in the USA? Do they exist? Sure. Thriving and developing – they are the backbone of the economy, even in the US – but the rules of the game are completely different than in Germany. For example: Kalamazoo, Michigan “The weather is to blame for our company”, says Bill Main and wipes the sweat off his forehead. It gets very hot in the green lowlands of Michigan during summer time. Hard to believe that there is so much snow in winter – so much so that horticulture companies have to let employees go and work on clearances instead. “Not much different to the founder of Landscape Forms,” recalls the president of that company. Because you do not need a lot of personnel to clean up snow and sleet, and also not a lot of brains, landscape architect John Chipman had a better idea – designing his own garden furniture. “A wise decision,” responds Main dryly. Twenty five years ago, when he started working at Landscape Forms, the company had 40 employees with an annual turnover of $5 million – today, 230 employees bring in around $70 million. A typical small business – and by no means an exception in the biggest national economy in the world. Even in the US, companies with up to 500 employees are the invisible backbone of the economy – a strong element of millions of small businesses, in the shadow of the Fortune 500 companies, like IBM, Ford, Merck or Boeing – easily forgotten, overlooked and underestimated. Kalamazoo, a small town two and a half hours from Detroit, is a prime example. In the middle of the 19th century, Kalamazoo attracted Dutch immigrants, who first started planting vegetables and later plants and flowers. Landscape Forms, located at the end of a cul-de-sac between nurseries and family houses, is a most lucrative subsidiary and one of the few specialized companies in the furniture market, producing well- designed furniture that at the same time withstands weather and vandalism. 2 Chairs made out of metal, benches and waste baskets made out of hardwood can be found around the world – at the Microsoft campus in Redmond, as well as at Motor City in Dubai, or in Disneyland in Hong Kong. Landscape Forms is also remarkable in a field that one would not expect, given its small size: In 2008, the Wall Street Journal named the company one of best employers in the US. Because Bill Main has opened up his accounting books – every employee can review orders, profits as well as error rates. Main not only offers benefits, that are compatible to European standards, but also pays his employees an annual profit participation. In the US, this generosity is less than common practice. When visiting a dozen small and mid-size businesses in the same town, you will find a dozen different rules regarding training, vacation time, overtime, health insurance and retirement plans, as well as other benefits of the employees. In America, entrepreneurs are the heroes of capitalism; however, in their hunt for success, they are primarily left to their own devices. And because the unions are a disjointed group, and there are only rudimentary federal labor laws, small and medium business owners can hire and fire as they please and make up their own rules, ranging from training to severance pay. And when a company decides to move to a different state – the rules and regulations could suddenly change completely – however, very few do. And therefore communities like Kalamazoo are eager to attract so-called SMBs – (small and medium size businesses) – to stabilize and insure against the uncertainties of the global economy and to ward off Bill Main, President of Landscape Forms, and exterior of Landscape Forms in Kalamazoo, Michigan 3 4 fickle mega companies, which gladly accept subsidies, tax credits and other benefits offered by the local community, before moving on. Kalamazoo can easily relate to this up and down. The city with just under 77,000 inhabitants is the birth place of world-known brands – whose time has long gone. Checker cabs used to be build here, as well as Gibson guitars and Shakespeare fishing rods. All three companies either went bust or were sold to another owner, and then moved to a different location. The pharmaceutical company Upjohn settled in Kalamazoo in 1886 and was a large employer – until 1995, when the company merged with Pharmacia, a Swedish corporation. Headquarters were relocated, a few hundred employees were let go and the merger wheel kept spinning, until 2003, when Pfizer took over from the Swedes. The New York pharmaceutical company cut another 1,200 jobs in Kalamazoo and moved the entire research and development department with its 2,100 jobs out of Michigan. The departure of Big Pharma was not the first painful lesson, Kalamazoo had to learn: large corporations produce lots of tax dollars and jobs, but are also risky business. Already at the end of the 90's, Kalamazoo felt the consequences of the failing auto industry - something that Michigan's economy continues to suffer today. In 1999, General Motors closed a 186,000 square meter (2,002,087.34 square feet) plant in the city and fired 4,000 workers. This was the beginning of the end for a lot of the smaller suppliers in the region. “Two major business collapses can radically change the landscape in any region – if you want it or not,” says Ron Kitchens, Chief Executive Officer of the regional economic development organization Southwest Michigan First. For him, supporting small and mid-size businesses is something close to holiness. And so he has written a book with the catchy title “Community Capitalism” – and tirelessly promotes the city throughout any national business press. Kitchen acts according to his motto: small is good. “I want dozens, or even better, hundreds of companies with 30 employees to set up shop here. That is the magical number any community can handle – in terms of employees and other resources. These kind of companies are from here and they want to stay here – they give the region many small anchors.” To interest and attract youngsters for small and mid-size businesses in Kalamazoo – local patrons in 2005 started a program that has been unheard of in the US: anonymously they raised around $85 million to pay for four years of college for all high school graduates. Within the past 3 years, this initiative titled the Kalamazoo Promise has attracted 900 families with 1,400 children from 33 states and 8 countries to move to the city. This not only raises more taxes, but also produces the next generation of employees for local industries – who otherwise would not be able to compete for talent with stronger industrial cities. 5 Despite all the industrial shrinkage, the Midwest still researches, develops and produces. For 40 years Landscape Forms has not outsourced one bit of their production – aside from purchasing a few hinges from China. “We produce our furniture on demand and in low units – we want to keep design and production under one roof. It does not make economic sense to purchase furniture from the Far East,” explains Main as he takes us on a tour through the plant. To be ahead of everyone else in the field of high-end outdoor furniture – his company works with designers and creatives from around the world – like Frog Design in San Francisco, or BMW Group Designwork in Munich, which designed Landscape Forms’ latest collection. “Theoretically, we can produce anywhere in the US – but our roots are here in this community. The people here were good to us – it's a give and take – why should we pack up and leave – just because of lower production costs?” asks Main. The company trains its own employees. They usually are high school graduates from a local school, starting at US$10 an hour. Freedom without borders – every business owner offers his own benefit package. In the early 80's the company introduced a code of conduct, regarding employees and suppliers as well as the community, as partners in the business. That explains the relatively generous social benefits. Health insurance or pension plans are not mandatory for small businesses; neither are a minimum number of paid vacation days, period of notice or severance pay. Every company can decide whether to negotiate health insurance for all or only some of its employees. The risk pool is therefore small, and monthly costs for the company high – unless the company only offers limited or capped benefits. If a person with a health insurance capped at US$250,000 – became chronically ill – he would not only be at risk to lose his job, but most likely also his home. And whenever one changes jobs, one automatically loses one's health insurance – and has to start all over again – looking for new doctors, that will accept one's new insurance. Landscape Forms though accepts around 80% of all insurances – and covers everything. “We treat people, like we want to be treated ourselves,” says Bill Main. That is a good practice. This wild patchwork of benefits is deeply rooted in history: To keep wages stable and still recruit workers at the height of production during World War II, employers competed with each other, offering better benefits – including health insurance for their future retirees. The consequences are felt not only by the auto industry in Detroit – who have to A Landscape forms custom-designed chair 6 reserve billions of dollars, but also by everyone starting a new business today. For example, Landscape Forms pays around 460 Euro for health insurance for each employee. For smaller businesses with fewer employees, this can easily go up to 700 Euro - of which the full-time employees pay only around a tenth. On the other end of the spectrum are companies that only cover health insurance for their management – and everyone else has to go without – or hope that their spouse or partner has an insurance that will include the rest of their family. Opening a business without any prior knowledge – even if you are not a professional confectioner you can still train someone. Like Mark Smutek, who in 1993 opened his own cafe and coffee roasting business. After studying at the local Western Michigan University, the 40-yearold- entrepreneur worked at an architectural firm in the fading city center, when he spotted a dilapidated gas station next to overgrown railway tracks. In numerous night shifts, he renovated the 1920's brick building and in the autumn of 1993 opened up Kalamazoo's first cafe, offering exotic beverages like latte macchiatos or cappuccinos, as he called them. “We had to do quite a lot of pioneer work – but Starbucks actually helped with it.” Water Street Coffee now has 65 employees, a branch on the outskirts and thanks to a number of wholesale clients, around a ton of coffee beans a week are roasted in an old refurbished and redesigned former cigar factory. Around half the employees are part-time workers. And because of more than 29,000 students there is ample supply. The boss and eleven of his staff members have health insurance for around US$30,000 a year – the rest of the staff has to take care of it themselves. “We do not have to offer these benefits – the employees do not expect it,” says Smutek “Our business model just does not allow for it right now – maybe later.” It took a long time to settle on the current group insurance for his company. “We negotiated for two months. And when we were finally approved by the insurance company, they rejected one of my employees for a preexisting condition. I would much rather use that time to solicit new clients.” Smutek trains his employees himself – after all, he taught himself how to roast coffee. Meanwhile, Smutek has trained two new full-time coffee roasters and hired a new baker. She does not have any working experience in the kitchen – discloses the coffee-lover, but over the course of a year, she will gain enough knowledge to become a confectionery. Mark Smutek, Owner of Water Street Coffee 7 To secure his business and not be dependent on the daily customers, Smutek is busy running around acquiring new wholesale clients. After winning over local supermarkets, restaurant and churches, he now also wants to do business with the different universities. “A contract like that can be worth up to a half million dollars annually – if and when these companies ever cancel their deal with Starbucks. As a graduate of the university, I should be welcomed with open arms – but unfortunately, it's not that simple.” For such a contract, Smutek is willing to give away Espresso machines and servicing deals worth up to US$ 80,000 – to re-coupe his investment with coffee beans. He is aware of the risk he takes guaranteeing his machines. “Right now I can still repair the machines myself – because we only install two types of machines,” says Smutek, “however, that may soon change, if we continue growing.” Whoever sips an iced coffee at Water Street, is served plastic cups that were produced only a few miles away. Since 1950, Fabri-Kal is based in this small town and remains a family business. The thermo-producing company has 3 plants with 800 employees and produces cups and other containers for the food industry. There are plenty of competitors, says John Kittredge, one of the founder's sons. For the past five years, he has been in charge of the company's marketing. “We strive to differ by using innovative materials – mainly bio-degradable plastics, produced from renewable resources.” Therefore the company is planning to invest between US$40 to 50 million and open 10 new production lines. Starting this year, they will produce 1.3 billion decomposable Greenware cups. “Greenware has to become a household name, like Kleenex for paper towels,” dreams Kittredge, who for 10 years was a master brewer crossing the country from Hawaii to Oregon, before returning home to his family business. He does not hold an official certificate – Kittridge observed professionals in Bavaria for 6 months– before studying some more and training at the brewing kettle. “Being a trained and certified professional is good – but not necessary – as long as you have a good idea and want to do something with it. That's what I learned while working in the brewery - and that's what I am using now in the plastic business,” he says while plastic cups continue to be produced behind him. Worker at Fabri-Kal Corporation 8 Statistically, Landscape Forms, Water Street Coffee and Fabri-Kal are typical for small to mid size businesses in the US – starting small and growing organically - without any risk capital or major inventions that changed the world. The American economics resembles an ant hill in the annual statistics of the US Census Bureau. Most of the 26 million companies are one-man – bands. Only around 5.9 million companies employ one or more people – and 50% of those no more than four. Statisticians call these kinds of companies – micro-organizations. Mid size companies weigh most economically- only 17,047 mid-size companies in the US have more than 500 employees – but those 56.4 million employees, make up nearly 50 percent of all employees in the US, apart from public service employees. They also earn around half the gross domestic product and annually create up to 2/3 of all new employment across the country. In other words – every second US citizen is part of the middle class. As a job alternative, many chose to become self-employed – because there are few rules and regulations for starting and running your own business and very little paper work. Since 1997, home office self employment is the fastest growing business branch – and eventually this can grow into a solid small to mid-size business. Professionals tirelessly praise the economic wonder weapon of small and mid size businesses. They are the creative troublemakers of the US economy, argues Derek Leebaret of Georgetown University in Washington. Small business owners are constantly on their feet, questioning traditional standards and practices. Mid-size businesses with potential – smaller companies produce more patents and are open to change. Leebaert argues they have enormous impact on three levels: First of all, mid-size businesses increase the speed at which new technologies enters the market place – because they can react to new innovative technologies and produce much faster compared to larger corporations – for example 13 to 14 times more patents per employee. Secondly, they are an alternative career path for minorities or women – who might have a harder time getting started elsewhere. Thirdly, they are a catalyst and motor for communities or neighborhoods that bigger corporations will overlook, when searching for a new location for administration, research and production facilities. Companies, ranging from the lonely engineer working from home to a 500 employee production plant – build fiscal and political stability for the communities, argues the academic, because they are loyal and buffer the negative implications of mass dismissals and globalization. 9 Year after year, the Kauffman Foundation based in Kansas City, like no other think tank, sponsors a dozen studies on the theme: who, why and when companies are founded and become successful. “Businessmen are highly respected and celebrated members of our society – founders and innovators, they fire up the economy and give the nation a head start in the world” - so the introduction of the foundation's latest research project – trying to distill and detect the essence of a typical small business. And this is what the heroes of capitalism look like. They are 40 years old, 95% of them have a bachelor's degree – are the second or third child of a middle class family. More than half of the 549 interviewed were the first businessman in their family – and three out of four business owners have worked for another company for at least 6 years – half of them for even 10 years, prior to starting their own business. What drives the mid size businessman? Researchers, supervised by business expert Vivek Wadhwa, have found an answer: Money – most businessman (75 percent) want to be rich; two thirds always wanted to run their own company, and 60 percent simply do not want to work for anyone else. Flexibility without borders – in some companies there is no termination notice nor severance pay The way to be rich and famous is a long winding one – what counts are quick responses to quickly changing circumstances. Since 1964 the W. Soule & Company Group at the other side of Kalamazoo works in metal production, first for engineering projects – then as a specialist for the food, pharma, chemical and other industries. The business with pipelines for breakfast cereals all the way to made- to-order laboratories in five different plants is extremely healthy – reports plant manager Gary Cline – the current recession cannot really harm the US$ 70 sales goal. “We have lost 3 to 4 percent of our business – but we are constantly looking for new lucrative market segments, that we can break into. That allows for certain diversification.” Two years ago, the family business, thought to have found one of those market segment: stainless steel tanks for ethanol production plants – that started everywhere around the country between 2006 and 2007. In the Midwest – the agricultural center of the US – these energy plants were heavily subsidized. Welding work at W. Soule & Company in Kalamazoo, Michigan 10 W. Soule expanded rapidly on the grounds of a former GM plant that has since been transformed into an industrial center. For US$ 900,000, Cline started a new production line with cranes to produce 45 meter high ethanol tanks that needed to be welded and assembled. “In 2007 that business made up our main revenue – a year later – zero. Dead,” describes the manager, citing the rise and fall of bio diesel made from corn. W. Soule had to reucture rapidly. The crane is gone – the production line dismantled. Instead of producing vast tanks – 250 workers now weld made-to-order pipelines and systems for energy and pharma industries. As much as possible, these systems are produced in Kalamazoo – and shipped all the way to China, Poland or Germany – and are only installed on site, says Cline, who has been with W. Soule since 1983 – and is one of its shareholders. “Thankfully, we were able to re-use everything. And if needed, we can change our production to something completely different, such as parts for wind turbines or bio-diesel refineries.” Until now, only 20 workers had to be dismissed. W. Soule does not have to worry about its workers. Compared to Landscape Forms, Cline sounds pretty callous as he points towards his metal workers and fitters. “We can dismiss everyone within 2 hours – no problem. They will simply return to their local union office and wait until the next job opens up.” W. Soule works with three different unions, representing press workers, pipe and engine fitter. The unions take care of their members regarding training and social benefits and negotiate contracts region by region. As a consequence each worker in this plant has a different benefit package for health care and pension plans. “On average,” said Cline, “we have to add another US$20 to an hourly wage of US$28 to US$30. And honestly, I do not know what benefits that buys for the individual worker. That's not our problem. But one thing I know – Michigan is expensive and a different location can be one third cheaper. Therefore, we are looking for a new location – when expanding in the future.” The company does not cover paid vacation or sick days – and there is no termination notice or severance pay even though many of the fitters and welders have been working at W. Soule for decades. Likewise, trainees are also not his problem, but are taken care of by the unions. The unions have designed their own training program that runs over a number of years, and use employers like W. Soule simply as a replaceable training facility. Depending on the contracts, Cline simply calls up the union offices when he has to increase or decrease the number of workers he needs any given day. “There are plenty of workers – on average there are around 100 people in each trade looking for a job.” 11 Communities with ideas – when 1,200 researchers lost their jobs, they became entrepreneurs With academics the situation is a little different. When Pfizer dismissed 1,200 of their scientists in Kalamazoo, development manager Ron Kitchens was prepared. His organization made sure that a few hundred of these unemployed researchers could continue working on their ideas providing them with rent-free office and lab space at the Southwest Michigan Innovation Center, a newly opened laboratory. In addition, Kitchens and his team together with local philanthropists started a US$50 million venture fund for new businesses. In the past 6 years, some 60 new companies were founded, more than balancing out the Pfizer dismissals, says Kitchens. And so from the ashes of the corporation, a network of small life-science-companies have emerged, whose founders have known and worked with each other for decades on such themes as the production and analysis of new materials or clinical experiments with animals and humans. One of them is David Zimmermann. In 1980, the 52 year old chemist moved to Kalamazoo, to start working at Upjohn. “At the time I thought that I would make my career there and stay until my retirement. I never thought of myself as a business man or entrepreneur. But really, Pfizer did me the biggest favor in my life, when they ask me to leave.” Thanks to the encouragement of a colleague and support of the lab, Zimmermann started Kalexsyn the summer of 2003. Like many other local scientists, for the first years, the two founders did not pay themselves any wages, but lived on their severance pay and built a bio-tech company with their own money as well as federal loans. Today they have 31 employees. “Every time there are mass dismissals, there is also an opportunity to recruit qualified employees. And when one of my employees moves away to another state or country, that actually increases my network and provides me with new contacts for new business,” says Zimmermann. Although the location cannot yet compete with established life-science centers like San Diego and Boston, Zimmermann is his own distributor, and spends three weeks out of each month traveling the country to acquire new business. However, in Michigan, he profits from low operating costs for a new office building and from a vast pool of high end equipment that Pfizer left behind and that were sold below price. Plus, Zimmermann has Ron Kitchens, Chief Executive Officer of Southwest Michigan First 12 dozens of scientists he can hire as needed at his doorstep. “Many of them are officially retired, but for a few weeks they gladly come aboard.” Because his employees were used to the corporate life style, Kalexsyn offers them the same social benefits as Pfizer – four weeks of paid vacation, twice as many as US standard, as well as a comprehensive health insurance and pension plan, with Kalexsyn contributing 50%. With an average annual salary of US$85,000, these benefits cost him around US$8,000 per employee. “They expect these securities and we are happy to provide.” A few kilometers along the Campus Drive, there are two more Upjohn veterans, who dared to open up their own business. Before moving to Kalamazoo in the 80's to work on protein synthesis for the pharmaceutical industry, Clark Smith (64) and Robert Heinrickson (73) – were chemistry professors in Illinois. At the end of 2003, the two became entrepreneurs. Since then their company Proteos has grown to 17 employees and works for clients around the world – who usually never show up in the state. “For years, we have worked like entrepreneurs within a corporation -without knowing it,” says Heinrickson. “Now we are writing our own script. It's my third career – and the best one.”