Bullish on U.S. Machining
An investment fund seeks returns by buying shops and equipping them to succeed.
John Reinke is an investment manager with a refreshing perspective on U.S. manufacturing. Refreshing, because it matches what many of us within manufacturing have believed for a long time.
In the early 2000s, Mr. Reinke oversaw an investment fund with holdings related to steel production and foundry work. At that time, he did what other business leaders were doing: He sought manufacturing in China. The experience both taught him a lesson and showed him an opportunity.
The lesson was that outsourcing to Asia is no silver bullet. Plenty of work does not make sense to send there, including large parts, low-volume parts and parts with exacting quality requirements. He turned his attention back to North America.
The opportunity was this: Other manufacturing buyers would soon reach the same conclusion, he realized. U.S. manufacturing—particularly U.S. machining—was the business to be in.
Today, Mr. Reinke directs the Generation Growth Capital Fund. Since its founding in 2007, this fund (managed out of Milwaukee and Chicago) has sought out machining businesses in the midwestern U.S. whose capabilities promise yet-untapped capacity to meet the production needs of major manufacturers. The fund has so far purchased three shops and made improvements to all three: Clinkenbeard & Associates (which we’ve covered in MMS), as well as Tri Aerospace and a shop rescued from near-failure that was renamed M2M Machining. More shops will almost certainly be added.
Not any machining business will do, he says. Service to strong end markets is important—aerospace, diesel engine, medical and mining are all examples. Even more important is what he calls customer intimacy. The shops that thrive, he says, will be the ones so strongly connected to the customer that the shop can play a key role in the customer’s own product development.
He says his fund’s goal when buying a machining business is “First, don’t screw it up.” Independent teams continue to run each shop.
Yet the fund does many things at the corporate level to give these shops an advantage. Bookkeeping and back office functions have been consolidated, saving cost for all the shops and removing these distractions. Also, examining the unmet needs of each shop’s customers has opened up opportunities for sister shops.
Perhaps the most valuable benefit the fund provides to each shop is the chance to start fresh. Family-owned manufacturing businesses can have a hard time seeing how much their performance could improve with better organization and a more scientific approach to production. By contrast, Generation Growth does see this—and has the will to make changes. Those changes might include implementing ERP, rationalizing the shop layout, cross training employees and leading the transition to lean.
To Mr. Reinke, the value of such changes is clear. “When we go in, we assume that steps like these are just part of the investment we’re going to make to realize the shop’s full potential.”