High-tech manufacturers here have seen sales decline in 2009, causing them to cut jobs, seek new markets, and mine current accounts for new opportunities.

Meanwhile, the sales outlook for the rest of the year is hard to read, but looks like more of the same, they say.

At one such company, MacKay Manufacturing Inc., a Spokane Valley contract manufacturer that specializes in the electronics and medical fields, sales through the end of May were down about 6 percent, compared with the year-earlier period, says President Mike MacKay.

"I anticipated a really tough year," but it hasn't been as bad as expected, MacKay says. He adds, "Six percent speaks for itself."

The falloff comes after MacKay Manufacturing increased its sales 33 percent in 2008, he says.

"We were coming off a record year," MacKay says. The way he sees it, the company has had a great run in sales, and it has merely tailed off some. "I'll take that," he says.

Lee Tate, president of Tate Technology Inc., a Spokane contract manufacturer of components for electronics, says he expects sales in June and July to be down 30 percent. Starting in August, he anticipates a recovery, and he expects major improvement in the fourth quarter, he says.

"Our industry seems to be down about 30 percent to 40 percent, with a lot of layoffs and job losses," he says.

Harold Alexander, president and CEO of Spokane Valley-based Logan Industries Inc., says the first six months has been flat or down depending on the segment of its business. The company primarily assembles cable harnesses used in electronics devices.

Its telecommunications business has been flat, while the company's sales to customers in the medical industry and others have been down thus far in 2009. He declines to provide percentage comparisons from last year to this year.

Meanwhile, Key Tronic Corp., the Spokane Valley-based contract manufacturer, has seen its sales fall about 6 percent for the nine months ended in March, compared with the year-earlier period, says Ron Klawitter, chief financial officer. For the first three months of this year, the company was down about 15 percent, Klawitter says.

"Customer demand is off," he says.

That appears due to the economic slowdown, with demand off for products across the board, Klawitter says. The products Key Tronic manufactures range from specialty printers and multi-media touch panels to gaming and medical devices.

To battle the slowdown, MacKay Manufacturing has made a point of diversifying its customer base, MacKay says.

Its customers are not in the sectors of the economy that have been hit hardest in the recession, he says. For example, medical instrument manufacturing makes up about 50 percent to 60 percent of its production.

Some of MacKay Manufacturing's customers in the medical industry are looking for a good year, while others are expecting a flattening out, due partly to a decline in elective medical procedures, he says.

In the meantime, he says, MacKay Manufacturing will continue to focus on running a lean, efficient, and responsive operation by embracing the "lean manufacturing" principles made popular by the Japanese car manufacturer Toyota Motor Corp.

MacKay Manufacturing has cut about five positions here in the last several months, now has about 105 employees, and plans to maintain the staff it has, MacKay says.

"You've got to keep the good people you've got," he says. "If numbers hold where they are at, we don't see anything further" in the way of staff cutbacks.

Tate says that prior to the slowdown, Tate Technology invested in expanding its customer base, and that has helped keep the company's sales from dropping further.

Those efforts and expenses, with the company increasing its marketing outlays by 50 percent in each of the last two years, will continue to pay off in 2010 and 2011, he says. Its marketing expenses increased so dramatically partly because it had spent a relatively low amount on marketing in the past, he says.

The company has expanded its customer recruitment areas by sending representatives to the Denver, Boise, and Salt Lake City areas to seek out orders.

"In order to grow our business, we've had to go outside our region," Tate says. "When times get tough, we put more emphasis on expanding our market share."

Tate says the company benefits by not being tied to any one industry, whether it's serving medical, consumer electronics, or automotive customers.

Alexander says Logan Industries is also "trying to find additional customers in other markets. We're also going back to our existing customers to see if there is something else we can do for them."

Sales were slow in the first three months of 2009, with customers canceling orders and pushing out delivery times, Alexander says. The second quarter looks slightly better, with fewer canceled and postponed orders.

"We hope it bottomed out in the first quarter," he says. "It feels like things are going to be getting better."

Klawitter, too, says matters would be worse if Key Tronic had not picked up some new customers, which it did through a marketing effort and word-of-mouth, he says.

For April, May, and June, Klawitter predicts the company's revenues will be about $40 million to $43 million, similar to what they were in January, February, and March. Revenues in the second quarter of 2008 were about $57 million; thus, they fell nearly 25 percent in the second quarter this year, he says.

"If you look at some of our competitors, their revenue drop is higher than that," he says.

Key Tronic has had to do some cost cutting to stay profitable, he says.

"The biggest thing was reduce the work force to save costs," Klawitter says.

The company has reduced its manufacturing employee numbers about 30 percent at its plants in Mexico, where about 80 percent of Key Tronic's manufacturing takes place. It has made a similar reduction in China, where about 15 percent of its manufacturing takes place. Less than 5 percent of the company's manufacturing takes place here, he says.

Tate says changes in the high-tech manufacturing industry have become more visible in the economic downturn.

Ten years ago, Tate says, customers focused on who could get the job done best. Now everyone does work of about the same quality, and a determining factor is who can get the job done fastest.

"Now the emphasis is on speed and flexibility—who can be more nimble," he says. That's where a business needs to shine to stay prosperous, he adds.

"The speed of satisfying the need is what wins customers," Tate says.

Some of the potential customers he has talked with that use contract manufacturers in China say they don't like doing that, he says. One complaint he hears regularly pertains to the lack of flexibility of Chinese manufacturers, who he says respond slowly to design changes. The other common complaint about dealing with overseas manufacturers is volatility in fuel prices that make freight costs hard to predict, he says. Because of such problems, he says he sees more manufacturing returning to the U.S.

Plus, labor costs have doubled in China in the last five years. If they double again in the next five years, that could speed the process of manufacturing migrating back to the U.S., he says.

Outlook for rest of 2009

Alexander, of Logan Industries, says revenues should be higher in the second quarter of 2009, but sales over the rest of this year are hard to predict.

Credit has been an obstacle for Logan Industries in the last few months, he says.

"I don't think it's thawed out much," Alexander says. "It's still very difficult to go out and get financing for business right now."

The challenge of getting financing from banks to manufacture products has been difficult, even if demand for the products has been demonstrated in the past.

"These are risky times right now," Alexander says. "When there is a recovery, hopefully there will be support from the banks that will allow manufacturers to benefit from that recovery."

Key Tronic's forecast for the rest of 2009 will be determined by its customers' forecasts, Klawitter says. He says one thing he's noticed in the industry is that electronics manufacturers have been cutting back greatly on the amount of finished products being kept on hand. Unlike the last recession in the early 2000s, when there was a lot of excess inventory to unload, inventory levels now are a lot lower, and companies are running a lot leaner.

"As a consequence, we should see a faster response" when the economy improves, because to meet demand contract manufacturers will have to ramp up production more quickly than they have after past recessions, he says.

Tate says he anticipates seeing continued high unemployment in the economy, with inflation likely, which will lead to a long recovery, but expects high-technology manufacturing to come back faster than the rest of the economy.

"It is leading-edge products that people want" when the economy is improving, and to provide them, companies have to tap into high-tech manufacturing's capabilities, he says.

MacKay says he expects to see little change in the second half of the year.

"It's hard to tell right now," he says. "We can see about three months out," based on the number of orders placed and the size of the company's backlog of orders, but he knows MacKay Manufacturing's revenues this year will be softer than last year.

He says he's put a banner up on the production floor reminding employees that every past recession has ended.

"We get so caught up in the doom and gloom that we forget that," MacKay says.