China Bound

REVIEW SUMMARY
Company. Shaw Development
Industry. Manufacturing
Key. Investing in marketing and new products during a downturn are essential ingredients for corporate survival and recovery.

Shaw Development had just moved into a new building in 2008 the size of a football field when the world seemed to stop all at once.

“In December 2008, all the orders stopped,” says Hawkesworth, Shaw's president and CEO. He wondered if there would be anything worth celebrating at the company's ribbon-cutting ceremony scheduled for January 2009.

The collapse in orders for the fuel systems Shaw Development makes confirmed what Hawkesworth forecast in early 2008: “We knew the recession would be deep.”

But Hawkesworth had a plan and he was confident that orders would come back. In exchange for salary rollbacks and elimination of the 401(k) match, Shaw promised employees no layoffs and no cuts in medical benefits. (Hawkesworth is the son-in-law of James Shaw, the founder and chairman of the family-owned company.)

At the same time that the company cut expenses, Shaw boosted spending in two areas: marketing and engineering. Marketing kept the company visible while competitors went dark and engineering made sure new products would be available for the recovery.

Shaw also got a little help from China and other developing countries. That's because Shaw's fuel systems can be found in trucks and earth-moving equipment that these countries need to build roads, dig for commodities, and move materials.

Back home in the U.S., increased regulations on emissions from truck and other heavy equipment made Shaw's technology necessary. These regulations went into effect earlier this year.

All of this added up to a better year in 2010. Hawkesworth says he expects revenues this year to jump more than 30% from 2009 to between $22 million and $25 million.

Marketing and engineering

Despite the fact that sales in December 2008 dropped to 15% of normal levels, Hawkesworth says Shaw's marketing kept it in front of customers even when they weren't spending.

To do that, Shaw quadrupled its travel budget and representatives reminded customers they were ready to supply them. Meanwhile, competitors did the opposite and slashed marketing budgets. “We were the only ones on the road,” Hawkesworth says.

Shaw also increased its spending research and development, hiring new engineers to solve customer problems. “We invested in getting out of the problem,” Hawkesworth says. “We knew it had to be new products.”

While Hawkesworth boosted spending on marketing and engineering, he asked employees to absorb cuts to salary and 401(k) contributions. In return, Hawkesworth boldly promised no layoffs.

But he also asked employees to get creative about how to cut expenses. Suggestions ranged from the obvious (turning off the lights when rooms were not in use and better controls of air conditioning) to the not-so-obvious (shifting payroll to once a month and car pooling).

Hawkesworth posted Shaw's financial performance on boards inside the company's building so employees could track revenues and expenses. He also held regular meetings to update employees about the company's financial progress.

Many of the women who work at Shaw are now the sole providers and they were especially motivated to see the company succeed. “A lot of employees had spouses in construction,” Hawkesworth says.

The effort paid off. Shaw eked out a small profit in 2009 and by January of this year the employees who agreed to take pay cuts all got bonuses to recover the money they would have earned.

Developing business

New products to control harmful emissions and growth in developing countries have been so strong that revenues are growing at a 30% annual clip and Hawkesworth anticipates another 20% growth in 2011. In fact, 25% of its sales are from parts created since January 2009.

This year, for example, its business with Caterpillar, the giant manufacturer of earth-moving equipment, rose 100%. At the beginning of the year, Hawkesworth had estimated Shaw's business with Caterpillar would grow 20%. “We had to add suppliers,” Hawkesworth says.

In addition, Shaw has had to hire people to keep up with demand. In December 2009, the company employed 81 people in Bonita Springs. Today, the company employs 110 people and plans to hire more to meet rising demand.

While the unemployment rate remains high in Lee and Collier counties, Hawkesworth says it's still hard to find good employees. Employment ads in the local daily newspaper generate hundreds of unqualified people, but Hawkesworth says social networking sites such as LinkedIn are more effective. “We're looking for entrepreneurial people,” he says. “We look for fit and attitude.”

To compete with lower-cost Asian manufacturers, Shaw has positioned itself as a specialty manufacturer that designs parts for production in relatively small quantities. Its products such as fuel caps are custom-made for vehicles ranging from fire trucks to bulldozers and battle tanks. “We sell capability more than product,” Hawkesworth says. “We retain a lot of intellectual capacity in the U.S.”

Shaw sold its aerospace-components business to industrial giant Parker Hannifin Corp. in late 2007 for an undisclosed sum, allowing the company to move its operations from Naples to Bonita Springs and invest in its large-vehicle business. (Excessively high taxes on new construction in Collier County at the time made expansion in Naples unaffordable.)

The sale also gave the company the financial cushion it needed to get through 2009 and invest in creating new products. The debt-free company can grow without having to borrow significantly, Hawkesworth says. “We're not willing to leverage the place up,” he says. “We want to be free in our decision-making.”

It was only nine years ago that Shaw's aerospace business had to file for Chapter 11 reorganization after the terrorists attacks of Sept. 11, 2001, wrecked the aerospace industry. The company's financials fell outside the ratios that its lenders required. The reorganization lasted a short four months, but it explains Shaw's reluctance to grow with borrowed money.

Hawkesworth says the company foresaw growth potential in new U.S. laws passed in 2004 governing harmful emissions from large diesel-powered vehicles. Starting in 2010, new large vehicles such as school buses, large pickup trucks and tractor-trailers must be equipped with systems that control these emissions and Shaw is now a leader in that field. In 2014, the same regulations will apply to large off-road vehicles, Hawkesworth says.

Despite the growth in developing markets and clean-diesel technology, Hawkesworth says many companies are cautious. “Even though there is liquidity, people are slow to spend,” he says.

In fact, it's impossible to accurately forecast demand beyond 30 days, Hawkesworth says. That's because the recession was so abrupt that many companies are reluctant to build more than a month's worth of inventory.

To make longer-term decisions, Hawkesworth looks at forecasts of gross-domestic product in various countries where its products end up. In addition, Hawkesworth says he uses data from the Federal Reserve Bank of Chicago and the Institute for Supply Management.

“GDP growth is a big predictor,” he says. “Our outlook will show the growth.”