How ‘Titanium Economy’ Companies Can Continue To Outperform

They thought they were just mid-market suppliers to larger makers. But it turns out that thousands of mostly business-to-business manufacturers in smaller cities across the country are actually the ribs of what a new book is calling the “titanium economy” and are responsible not only for outsized prosperity in the present but also for the hope they can shatter the myth that U.S. manufacturing is collapsing.

That’s the view of Asutosh Padhi, a McKinsey partner, and others at the blue-chip consulting firm who are just coming out with a new book, The Titanium Economy: How Industrial Technology Can Create a Better, Faster, Stronger America. Also, other mid-market manufacturers can learn from what Padhi told Chief Executive about how these players have succeeded in creating this economy he has newly described.

“We call them the ‘titanium economy’ because these companies are durable; they’ve been around a long time,” Padhi said. “The reason you don’t see them is these aren’t the companies that get profiled on popular TV channels, but they’re real and important and underappreciated. They aren’t the companies that run Super Bowl ads, but in many cases they are the real backbone of the U.S. economy. So how can we recommit to them and change the narrative and focus on them?”

Specifically, the book examines, amplifies and praises about 700 publicly traded U.S. companies that compete in the emerging “titanium economy” as well as about 3,500 more companies in the private sector. About 80% of them are small to mid-cap, with sales ranging from $1 billion to $10 billion, each employing about 2,000 to about 20,000 people. The top 380 private industrial companies among them posted a compound annual revenue growth rate of 4.2% from 2013 to 2018, outpacing revenue growth of S&P 500 companies, which came in at an average of 2.9%, the authors found.

By “industrial technology,” Padhi et al. mean manufacturing, robotics and hardware production that are “highly specialized and focused” in about 90 of what they call “microverticals.”

“What differentiates this core of companies,” Padhi explained, “is that innovation is the core of what they do. They have a playbook around developing deep expertise, serving customers extraordinarily well, both B2B and B2C. They serve customers in an economical manner with high levels of service and quality, and reliability better than anyone else.”

The companies include NYSE-listed Heico, a supplier of industrial and defense components in Hollywood, Florida, where it employs 6,000 people, and privately held Dot Foods, America’s largest food redistributor, headquartered in Mt. Sterling, Illinois, with 12 U.S. distribution centers. The smaller cities built up by titanium-economy participant, Padhi said, include Blacksburg, Virginia, with a cluster of industrial-tech companies that are supported by state and local governments and think tanks to create enterprise zones, hiring incentives and infrastructure investments; and  booming Simpsonville, South Carolina, where aerospace firm Collins and automaker BMW have joined Michelin’s long-operating tire factory to support the town of 25,000 people.

In general, Padhi said, these companies are ignored by reigning narratives among investors and the financial media that are “heavily dominated by what’s happening on the west coast. That’s not meant to be a slam on tech innovation but it actually misses the fact that innovation in the United States has another significant component that is missed.”

These companies also suffer in that they participate in an area of economic endeavor, manufacturing, that still is discounted by new talent and young jobseekers who associate factories with something out of Modern Times. “Their operations look nothing similar to this perception,” said Padhi, who came from an engineering and management background, unlike most McKinsey consultants. “They use precision and technologically advanced manufacturing processes and different types of intelligence in their automation.”

In or still out of the public eye, titanium-economy companies — and those which would aspire to their level of performance — can improve their performance by stressing three areas, Padhi said:

• Driving core transformation. Leverage technology and data to achieve margin expansion and growth in an accelerated fashion. “While there is a playbook for this, there are very different degrees of effectiveness at companies in applying the playbook,” Padhi said. “Variability tends to be even higher when you get to whether companies stick to their knitting. For example, when it comes to things like the use of digital [technology], many companies are still in very early chapters.

Many mid-market manufacturers “have operated on somewhat of a made-to-stock basis,” for instance, he said. “Can you shift that model. Most companies are not thinking of that. They need to shift to predictive analytics to anticipate which customers will require what types of parts consumption with what frequency over what time frames. That way you can in some way come back and have a different customer proposition around your service levels.”

• Enhancing their business models. This is aimed at improving performance and delivering margin expansion that, in relevant cases, will attract investors and talent.

“Most of these companies have actually shied away from investors,” Padhi said. “CEOs often have said, ‘I get technology, I have customers, operations, and positive cash flow, but investors aren’t interested in me.’ There’s also a lack of VC funding. What investors care about is a company that actually meets all of the standards for high performance and does the right thing from an ESG standpoint. Understanding the titanium economy starts to shift this narrative.”

• Leveraging M&A around a “segment of one.” “The classic M&A thesis is around cost reduction,” Padhi said. “But [titanium-economy companies] use a slightly different playbook. It’s more around integrating technologies: How do you use M&A to harness technology and unlock more innovation, and preserve talent and integrate cultures?”