"The Economic Crisis & Turn-Key Solutions for CA Manufacturers"


Check your regular mail in mid-December for information about a new partnership between Manex, Pragmatic Business Solutions, and select private equity firms to address the liquidity crisis for middle-market manufacturers.


In the past few months, we have been fielding calls from our clients and the community about what the future holds for California's manufacturing sector. Manufacturers, distributors, and suppliers are all feeling the harsh impact of a combination of several factors - the liquidity crisis hampering the commercial and business markets, the consumer credit crunch, and the associated, dramatic declines in both consumer and business demand. Adding to these issues are the rising costs of raw materials that have not eased despite the decline in oil prices, and continued margin pressures from customers.

Manex has been in the news frequently, sharing our expertise about the state of the U.S. and California economy and its impact on manufacturers. This Special Edition ViewPoint is a collection of the most Frequently Asked Questions (FAQs) we have received, followed by answers and solutions from our experts.

Please scroll down below for the FAQs and click the FAQ that may be of interest or help to you; you'll be linked directly to the answer in the body of this email.

If you have questions we have not covered in this Special Edition or if you would like guidance on a specific business issue, please email us at economy@manexconsulting.com.

The Economic Crisis: What It Means to California Manufacturers


The Economic Crisis: California and Northern California Background


The Economic Crisis: General Background


What the Economic Crisis Means to California Manufacturers
Our company has capital issues and we are worried about keeping our business going. What do we do?
Access to credit is vital for a business to survive in any economy. Banks currently have little "appetite for risk" and are closely monitoring performance against covenants for their current customers and are being extraordinarily conservative with new business underwriting.

If your current banker has decreased or closed your line of credit, it is critical to reach out to other banks; if you are having difficulty securing funding from other banks or if your current bank tells you your debt load is unacceptably high, you should consider private equity and alternative lenders.

Manex has longstanding relationships with numerous banks in California and relationships with a variety of private equity firms, alternative finance organizations, and turnaround and rescue firms. These organizations oftentimes provide creative solutions where banks are unable to meet our client's needs. These organizations are looking for opportunities to invest in fundamentally sound businesses - even if current performance isn't ideal - and can quickly provide solutions, such as cash infusions, purchase order financing, accounts receivable financing, inventory lines of credit, bridge loans, bank workouts, and equipment financing, to name just a few.

Keep an eye on your mail for an exciting private equity partnership we'll be announcing in December.

If you would like more information on any of these resources, please email us at economy@manexconsulting.com to request to speak to our expert in this area.

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Can Manex help me obtain financing?
Manex regularly makes introductions for our clients to our vast network of banks and funding organizations where we have longstanding relationships. Our goal is to connect our clients to the providers of funds so that we can do our part in ensuring the manufacturing industry in California weathers the crisis and that our clients continue to thrive and prosper.

While we cannot guarantee you will obtain funding - as these decisions are driven by underwriting guidelines set by these organizations - we do provide personal introductions to key individuals at organizations where our experience indicates your company and their lending/investing criteria are a good match. As a result of these relationships and Manex's proven success with improving our clients' business performance, you are assured a personal review of your specific situation and consideration is often given to the fact that you have engaged us to further improve your business performance.

Recently, one of our clients was faced with an urgent need for capital. We introduced them to our network of funding sources, and because these lenders have worked with Manex for years and know that our clients seek Manex for operational efficiency and performance improvement, they won instant credibility with the lenders. This client was able to obtain the funds needed and prevent a potential catastrophic shutdown of its operations.

Keep an eye on your mail for an exciting private equity partnership we'll be announcing in December.

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What are other sources of funds besides borrowing money?
The R&D tax credit is a hidden and immediate source of cash for many companies, especially for small and mid-sized manufacturers who are more likely to overlook these benefits given the level of expertise that is required to identify and manage their R&D tax credit strategy. Recent changes to the IRS regulations now provide even greater opportunities for small and mid-sized companies to obtain credits.

In addition, there are a variety of State and Federal programs designed exclusively for manufacturers, distributors and their supply chains. For example, Manex manages a $1.5 million workforce development and training fund made available to it through the California Employment Training Panel (ETP). We use the funds to offset professional fees to develop and implement tailored workforce training solutions focused on sales and revenue generation, lean manufacturing, productivity and quality.

Manex also has partnerships with a variety of regional and local Economic Development Corporations (EDCs), advising companies on Economic Development Zones and low-interest Industrial Development Bonds. For more information on these programs, please contact us at 925-807-5100 or economy@manexconsulting.com.

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How is the economic downturn affecting manufacturers in California?
The manufacturing sector is receiving a significant blow in this downturn. Manufacturers were already struggling with the rising costs of raw materials from suppliers, and margin pressure from their business customers. Industrial production dropped 2.8% in September, the steepest decline since 1974. In addition, new orders for manufacturing goods and production itself saw a serious decline according to the Institute for Supply Management. The credit market woes, weak consumer spending and the fall in global demand for exports are all factors in these severe conditions for manufacturers.

Job cuts are also spreading through the manufacturing sector, as more and more companies tighten their expenses as a result of the wavering economy. Small and mid-sized manufacturers are feeling the pain even more and are on the front lines of the credit crisis. Because small and mid-sized businesses represent over half of U.S. economic output, there are specific State and Federal programs designed to assist you. For more information, contact us at 925-807-5100 or economy@manexconsulting.com.

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Have you seen companies succeed or do well in this crisis?
Yes, our findings show that companies taking action to tackle the crisis are doing well and are poised to take market share from competitors that have chosen to "batten down the hatches". Conversely, companies choosing to do nothing significantly increase their likelihood of failure.

While there are many potential strategies and tactics a manufacturer can develop and implement to improve their performance in the current economic environment, doing nothing is not among them. Manex is working with companies throughout California to implement rapid solutions, whether focused on cost-reduction and process improvement or focused on growth opportunities. If you would like more information on survival strategies or have questions about critical issues you have, please contact us at 925-807-5100 or economy@manexconsulting.com.

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What are some quick and inexpensive solutions for my company?

The actions you should take depend on your specific business, competitive landscape and the challenges and opportunities you face. Doing nothing is not a solution. Most companies should look for top-line and bottom-line performance improvements that are immediate and sustainable, strategically sound, and that do not impede growth. While this list is not all inclusive, the following are examples of solutions Manex has developed and implemented for manufacturers in California in recent months:

  • Improved productivity and operations, reducing costs by 18% in 6 days, 41% in 30 days
  • Identified and seized growth opportunities, increasing revenues by 64% in 60 days
  • Restructured a company's debt in less than 70 days
  • Developed a 5-year business plan for a growth company to help obtain funds by private investors in less than 45 days
  • Developed business exit/sell strategy in less than 10 days
  • Assisted manufacturers in leveraging Federal and State programs to help offset the costs of improvement initiatives, such as implementing lean manufacturing techniques and quality programs, by more than 75%


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I don't have a plan in place, is it too late?
No. While it's important to assess the state of your business and identify immediate and long-term performance improvement opportunities on an ongoing basis, you should not allow yourself to be paralyzed (although you may now be overwhelmed) by not having done so.

An excellent "kick start" tool is the Manex Benchmark Assessment, which helps you identify and prioritize near-term performance improvement opportunities. The Benchmark Assessment frequently finds cash "hidden" in excess raw materials and finished goods inventory, and often highlights excess rework/waste and equipment downtime compared to your industry peers. If you would like more information on Manex's Benchmark Assessment report or other cost-effective turn-key solutions that can quickly help turn your business around, contact us at 925-807-5100 or economy@manexconsulting.com.

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Should I defer investment in advisory/assistance?
If your company is experiencing difficulty and is in need of advice, you should NOT defer hiring experts. The reality is that the majority of companies who defer engaging expert assistance due to a "bad quarter" experience yet another "bad quarter" immediately thereafter. Barring a significant improvement in the general marketplace, performance usually deteriorates one quarter after the next. Deteriorating performance impacts a company's ability to borrow money, whether to finance operations or to invest in growth. Cost reductions, whether through reductions in force or otherwise, may not be well planned, and may leave the company incapable of increased production when the market does turn.

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I'm running at 50% capacity, should I reduce headcount?
While reductions in force are unpleasant and often are avoided or deferred because they connote "failure," they may be necessary for the long-term viability of an enterprise. To be successful (to the extent a reduction in force can be characterized as such) they must follow best practices. The "best practice" is to cut once and cut deep. If you're running below capacity and need to reduce labor costs as a result, an across-the-board haircut is preferable to reducing headcount by just a few people in the hope that demand may soon pick up. You will avoid lost productivity and low morale that comes with a long drawn-out process with smaller layoffs that are distracting to your company.

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Are there opportunities right now?
Especially in a down market, there are opportunities for growth. In a down market, the company that is proactive, innovative, and well prepared for growth will take market share from weaker competitors. Companies that go against the grain and chart their growth and take market share from the competitors that have decided to "batten down the hatches," will be the ones on top when the economy is flourishing again. For example, a company went "against their gut instinct" by developing an aggressive growth plan. Manex helped them identify new customers and develop a marketing strategy that can give them rapid sales to boost revenues. In a sector pegged to suffer the most - the construction industry - this company's revenues increased by over 60% in one quarter.

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Are any industry segments doing well?
Food, solar, and biotech/pharmaceuticals continue to do well in the current environment, notwithstanding the increased difficulty in the capital markets. Defense-related industries also are doing reasonably well. Aerospace and high technology have softened significantly and will continue to do so. Metals and machining, and construction/homebuilding-related manufacturers are suffering significantly due to the housing downturn, mortgage meltdown, and consumer credit crunch, three separate but interrelated events. Adding "salt to the wounds" is reduced demand from commercial and business customers.

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How do I stay on top of the latest resources available to manufacturers?
Be on the lookout for our next edition of ViewPoint. We will continue to share information with you as changes occur to the economy and how it impacts the manufacturing sector in California. Manex is also hosting its next Manufacturing Summit on February 19, 2009 in Santa Rosa, where experts from various fields will discuss resources that are available to manufacturers during the economic crisis. This event is free to manufacturers and space is limited; you can obtain more information and register in the Events area of our website.

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The Economic Crisis: California and Northern California Background

Is it true that California is the hardest hit in the country?
The nation watches California's economy because it is a good indicator of "things to come" for the rest of the country. Economists believe if California goes into a recession, the rest of the country will follow. Given the budget challenges the state recently faced, this really put California in the spotlight. The California economy is suffering from a significant downturn which was initially caused by the weakness in the housing market that began in the first half of the year, but now is affecting a wider range of sectors. An even weaker California economy is forecasted as a result of the fiscal crisis, slumping retail sales, losses in jobs and the continued weakness in housing and financial sectors. According to the influential UCLA Anderson Forecast, the California economy and job market look weaker than previous predictions with the slump not expected to bottom out until spring or mid-2009. A robust rebound seems unlikely before 2010. If you would like a free in-depth report on California's economy, please contact economy@manexconsulting.com.

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What is the state of Northern California's economy and outlook?
Although Northern California is feeling the same economic pains the rest of California is experiencing, these declines are less severe with regional pockets of strength minimizing the downward spiral. While San Francisco and San Jose could be less impacted, there is concern for the East Bay. This is due to East Bay's recent growth concentrated in the real estate sector, making the economic downturn more severe in this region. Conversely, San Jose and San Francisco are more diversified which should minimize the effects of the downturn. If you would like a free in-depth report on California's economy, please contact economy@manexconsulting.com.

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What do you forecast for the East Bay?
With continued decline in home prices in the East Bay, the economy in this area may suffer significantly and could take a few years to see some recovery or growth. Adding to the woes in home price decline, Alameda and Contra Costa counties have also had severe job losses, mainly in the financial and construction industries. East Bay's unemployment rate could reach 7%-8% before the region sees an economic recovery. As with the broader California economy, the declines in the financial and construction sectors will continue to put downward pressure on other sectors, including retail and manufacturing. If you would like a free in-depth report on California's economy, please contact economy@manexconsulting.com.

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Is there any good news for Northern California and the East Bay?
Absolutely. In fact, there are pockets of great opportunities in the East Bay, even though this area is pegged to take the biggest hit. Manex is currently working with manufacturers in all sectors to help identify opportunities and pockets of growth in this region. The East Bay, for example, has a sophisticated infrastructure in airport and seaport, a skilled labor workforce, and the East Bay is the "Green" corridor backed by venture capitalists infusing funds into "Green" initiatives. Manex is also working with companies throughout Northern California to address the local economic challenges they face and help develop turn-key solutions so they can take action quickly for rapid results. If you would like more information on Manex's turn-key solutions, please contact us at 925-807-5100 or economy@manexconsulting.com.

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The Economic Crisis: General Background

What started the economic crisis?
Although the economic downturn was caused by a number of factors, the most devastating was the cascading effect of the troubled credit markets wreaking havoc on the interconnected, global financial system. During the credit boom, money flowed freely from banks that lent enormous amounts of money for home purchases. Borrowers aggressively purchased homes and took on payments above their means, and risky loans were underwritten by lenders and Wall Street firms looking to capitalize on the "good times" and bank on rising asset values. Signs began to show that the credit boom was shifting toward a credit bust, with mortgage defaults at increasingly alarming rates, followed by lenders and Wall Street firms announcing write-offs of bad debt.

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How long will this credit freeze last and what is the impact?
It is hard to say exactly when liquidity will be restored at a healthy level as ramifications from the fall of Lehman and takeover of toxic debt on risky lenders, such as Wachovia, are still being analyzed. We are still in the process of "deleveraging," this is when leverage is taken out of the financial system, allowing healthy banks and other key players with abundant capital to wait and assess the true health of a company's balance sheet before diving in to lend. With the bailouts and continued involvement by the government to restore the financial markets, however, we are already seeing some signs of loosening in credit in the immediate term. Long term, a fluid credit market is critical, one with sounder risk management policies to restore confidence in the financial system and prevent future meltdowns. Without this, otherwise healthy companies - big and small - could continue job cuts or fail altogether if they do not obtain the credit needed to manage day-to-day operations. In short, continued credit difficulties for consumers and businesses would suppress demand, and lack of credit for businesses would further eliminate opportunities for those otherwise qualified to obtain working capital for growth.

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Will the multi-billion-dollar bailout help?
Yes, in the medium to long-term, the Fed's bailout will take effect in addition to other swift action being taken by the government. The Fed has shown commitment to injecting the needed liquidity into the market in a timely manner as it assesses conditions day to day. The Fed has taken timely action to restore the credit markets in the past few weeks. In addition to the $700 billion bailout to help prop up the fragile credit markets, the Fed recently committed to lend up to $540 billion to the money market industry, another unintended casualty of Lehman, who issued commercial paper (short-term debt) held by many mutual funds. With the Lehman fallout, unexpected losses ensued from the Reserve Primary Fund, a money market mutual fund, and massive withdrawals by investors has put the money market industry in turmoil. Measures being taken now by the Fed will keep the financial markets on their way to recovery but it will take time. The most critical issue which still remains for manufacturers is the dramatic decline in consumer demand.

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Are we in a recession?
The short answer is "yes." While economists vary on the official definition, according to the National Bureau of Economic Research (the official arbiter of when recessions begin and end), a recession occurs when a "significant decline in economic activity is spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."

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