Michael Penner, chief executive of Montreal-based Richelieu Group, is sitting at a table in the Roosevelt Room at the White House.
He’s a political junkie, so it’s an awesome experience. He can’t help but look around. But this isn’t a stop on a White House tour. This is serious. Mr. Penner is one of about a dozen executives summoned to meet with President Barack Obama, who wants to talk about what it would take to encourage more investment in the United States.
Someone from Ford Motor Co. is present. There are representatives from Sweden’s Ericsson AB and Deutsche Lufthansa AG of Germany. Sitting next to Mr. Penner is Sanjay Jha, chief executive of Globalfoundries Inc., a chip maker based in Silicon Valley that employs 13,000 people on three continents. These are big dogs. Mr. Penner sells socks and employs about 100 people. He doesn’t normally shrink from the spotlight, but on this day, he’s reciting a quiet prayer that the President of the United States will leave the talking to others.
Please don’t ask me. Please don’t ask me. Please don’t ask me.
“We only have one person left to speak,” Mr. Obama says. “I’d like Michael Penner to talk to you about his story.”
OMG! “Thank you Mr. President.”
What follows is a retelling of Michael Penner’s story, based on several interviews over the weeks that followed Mr. Penner’s audience with the most powerful person in the world.
Mr. Obama’s Commerce Department had its eye on Mr. Penner. His story is one of industrial death and rebirth. Factories that were abandoned when North American production fled to Asia at the start of the millennium now are being refurbished and put back to work. Many said the most manual forms of assembly would never return to rich countries. Richelieu plans to invest $16-million (U.S.) in western North Carolina to begin production of 100-per-cent-Made-in-America socks for Wal-Mart shoppers. “All my future is riding on this,” Mr. Penner says.
Globalization is a funny thing. It’s forever shifting. The cost of labour in China is rising, while salaries in the U.S. have been depressed by the recession. The shale energy boom has significantly lowered the price of powering factories in North America. Business strategy also has changed over the past decade. Managers now want to cut delivery times by locating factories closer to their consumers.
After years of steady decline, the U.S. has added factory jobs every year since 2010. The Labour Department on Thursday estimated that there were 12.1 million Americans employed in manufacturing in June, a 5.6-per-cent increase from the end of 2009. That falls short of a glorious rebirth, but it is growth all the same. Boston Consulting Group in April released a study of the world’s 25 biggest exporters that determined the U.S. and Mexico had closed the gap with China as the most competitive place to make things.
One of the first things Mr. Penner did after securing his beachhead in Burke County, N.C., a few years ago was to erect a Canadian flag. His office is adorned with Canadiana, including a poster depicting all the planes Air Canada has flown over its 78-year history.
But patriotism is no match for economic reality. The manufacturing renaissance that has gripped the imagination of Mr. Obama and other U.S. leaders is barely discussed in Canada. The country’s economy has turned sluggish, in part because relatively high-paying factory work is stagnant. According to Statistics Canada, there were 1,485,976 manufacturing jobs in Canada in 2013, compared with 1,497,657 in 2012 and 1,487,265 in 2009. Boston Consulting’s analysis showed Canada was “losing ground” in global competitiveness because of slightly higher labour costs and, more importantly, weak productivity.
Tough times in textiles
They don’t teach you how to do mass layoffs at law school.
Michael Penner, 45, grew up around the textile business. His father, Harvey, worked for the Simard family of Montreal, which created Richelieu in the 1930s. Harvey Penner purchased the textile business in the 1990s, but Michael didn’t immediately aspire to join the family business. He attended McGill University for his undergrad – playing some football for the Redmen along the way – and then went to Hofstra University in New York to get a law degree. He worked on Wall Street for a while, but realized he’d prefer to be the guy hiring lawyers rather than the guy getting hired. Mr. Penner returned to Canada to join the family business in 2000. He took control of Richelieu in 2006.
Mr. Penner picked a bad time to join the textile business. China’s entry into the World Trade Organization at the end of 2001, the Canadian government’s decision at about the same time to grant preferential access to imports from extremely poor countries such as Bangladesh, and the Canadian dollar’s steady rise from its trough of about 63 cents (U.S.) erased any advantage Canada had over low-cost producers. Richelieu moved all of its production overseas in 2003, shuttering factories in Quebec (Plessisville and Pintendre) and one in eastern Ontario (Cornwall). Other Canadian textile companies, including Montreal-based Gildan Activewear Inc., the T-shirt maker, were either doing the same or going bankrupt. Mr. Penner hates the memory of those days.
“I would rather kill myself than have to do that again,” Mr. Penner says of the experience of closing Richelieu’s factories. “We had no choice but extinction or change the business model. We at least wanted to keep the lights on.”
Mr. Penner sacrificed 117 production jobs to save 29 at head office. He vowed to those who remained that he would rebuild the company. Just give him time.
The Great Recession nearly destroyed that promise.
Richelieu had acquired the Canadian distribution rights for the popular Peds brand of women’s socks owned by a North Carolina company called International Legwear Group (ILG). The licence was an important source of income for Richelieu; without it, the company would be in trouble.
In 2011, Mr. Penner took his pregnant wife and four children on a trip to Greece. Before he left, he wanted to secure the renewal of his Peds agreement with ILG. No one in North Carolina was answering the phone. He boarded the plane without an answer. He abandoned proper channels and started calling ILG’s chief executive directly. Mr. Penner was at the top of the Acropolis with his children when he finally got through. ILG executives had been avoiding him because their company had been taken over by the bank and they were barred from making any future commitments.
“I finally said, `I’m coming over there,’ ” Mr. Penner says. “I just left my holiday. I flew from Greece to North Carolina.”
ILG was owned by a private equity firm that issued debt to buy a family-owned sock maker called Neuville Industries. The private equity guys never managed to generate enough cash to keep up with their debt payments. By the time Mr. Penner was looking to renew his agreement with ILG, the owners had effectively cut and run.
Mr. Penner acted quickly. He convinced the liquidator to sell him the entire company rather than sell it off piecemeal. He rushed overseas to reassure suppliers. He rehired many of the employees who had been handed pink slips by ILG. It was an entrepreneur’s version of triage. “We had to stop the bleeding and stabilize the patient.”
Rather than a mere license holder of the Peds brand, Richelieu now was in a position to become its owner. That left one more thing to do: Secure a sale. Mr. Penner called Wal-Mart. He was so nervous he was shaking. He needed a big order to keep his newly acquired business from sliding back toward the abyss. “They had nothing left,” Mr. Penner says of ILG’s order book. “They had one little program at Wal-Mart and if we lost that, we wouldn’t have been able to keep the business going.
In 2007, Mr. Penner had paid a visit to Wal-Mart’s Canadian headquarters in Mississauga. The place is so big Tim Hortons Inc. runs the coffee concession. While standing in line, Mr. Penner struck up a conversation with a man who turned out to be Duncan MacNaughton, one of the highest-ranking executives at Wal-Mart’s Canadian unit.
They had a pleasant chat. Mr. Penner saw Mr. MacNaughton again the next year when Wal-Mart Canada named Richelieu it’s Vendor of the Year. They wouldn’t talk again until the day Mr. Penner needed a big assist from the world’s largest retailer. To Mr. Penner’s surprise, Mr. MacNaughton had received a promotion – he now was in charge of stocking the shelves of Wal-Mart’s U.S. stores. “I called him and I said, ’Please, just tell me what I have to do,’ ” Mr. Penner recalls.
A strategy for revival
Hickory, N.C., is where you stay when you visit Richelieu’s U.S. location, about 20 minutes west in Hildebran, a community so small that it’s marked on only the most detailed state maps. There’s a Porsche dealership in Hickory, suggesting there is some wealth in the area. (Charlotte, home of Bank of America Corp., is about an hour away; Corning Optical Communications LLC has a factory in Hickory; and Apple Inc. has a data centre in nearby Maiden.) But there also are vacated mini-malls and shuttered restaurants.
The Neuville family built a factory and started making socks in Hildebran in the 1970s. At its peak, the company employed 1,700 people and had sales of $180-million. There was an on-site daycare for employees that at one point minded 99 children. On bad days, Mary Lowman, who now is 65 and still employed in the office at Richelieu, would relax by calling on the children. “They would come to you like puppies,” Ms. Lowman remembers.
The daycare closed in 2006. Like Richelieu and most of the rest of the North American textile industry, the owners of ILG moved production overseas. But the move failed to make the company profitable. At the end, annual sales were $25-million, a sliver of what the owners had inherited when they bought Neuville.
North Carolina was at the heart of the U.S. textile industry. As late as 2000, the unemployment rate in Burke County, which includes Hildebran and parts of Hickory, was 3.8 per cent. The jobless rate now is around 7 per cent. Employment in the textile industry plunged 43.1 per cent to 1,263 between 2000 and 2013.
One day, a worker in Hildebran approached Mr. Penner. “Michael, you got iTunes up there in Canada?” Mr. Penner assured him that Canada had iTunes. The worker asked Mr. Penner to download a song: Death to My Hometown, by Bruce Springsteen. Mr. Penner did so.
I awoke on a quiet night, I never heard a sound/The marauders raided in the dark/And brought death to my hometown/They brought death to my hometown “I’m listening to this song,” Mr. Penner recalls. “I’m like, `Wow, this is what has happened here.’ I started fantasizing about ways to bring manufacturing back. It’s still in our DNA. The pride of being a manufacturer is very hard to be separated from.”
Sewing machines have changed since Richelieu and other North American sock makers gave up trying to produce at home. Older ones could knit the tube, but the toe had to be stitched separately. That meant more fingers and larger payrolls. Mr. Penner found an Italian machine that does both. It was expensive, $35,000, but it could do the work of about six people. With enough of them running around-the-clock, Mr. Penner reckoned he might be able to compete.
But to get the financing to buy enough machines, he would need a buyer.
Re-enter Wal-Mart. In January 2013, the company pledged to buy $250-billion of domestically produced goods over the next decade. Mr. Penner jumped at the opportunity. Still, it took Mr. Penner about a year of “unadulterated persistence, almost stalking” to convince the world’s largest retailer that Richelieu could make socks in the U.S. that Wal-Mart shoppers could afford. Wal-Mart has been accused of crushing smaller businesses. In the case of Richelieu, it turned a little Montreal enterprise into a multinational company.
The persuasive Mr. Penner got his contract.
“That’s the piece of paper we are using to build this factory.”
Southern financial incentives
North Carolina Governor Patrick McCrory takes a break from his pancakes and eggs and leans over the table toward the man across from him.
“My corporate tax rate is lower than Nikki’s now.”
Nikki is Nikki Haley, the Governor of South Carolina. The other man at the table is Mr. Penner, who is enjoying some southern hospitality as Mr. McCrory’s guest for Sunday brunch at the exclusive Myers Park Country Club in Charlotte, the city Mr. McCrory led for 14 years as mayor.
Mr. Penner is a day away from receiving a substantial promise from Mr. McCrory’s government. If Mr. Penner comes through on his promise to create 200 jobs in struggling Burke County by 2018, Richelieu will receive annual grants worth as much as $2.9-million over 12 years.
The competition among states – especially the southern states – is legendary. Ms. Haley’s name has come up at the brunch table because Mr. Penner had mentioned her prowess as a saleswoman. She had pitched Mr. Penner on the merits of South Carolina during a trade mission to Montreal. It’s clear he gave the idea of making socks in the Palmetto State some serious thought.
Canada’s provinces don’t exhibit the same level of hustle. “It could be happening and I don’t know about it, but I don’t see it,” says Mr. Penner, who called the competitive courting of state governments “mind-boggling.”
Southern governors are famous for their hospitality. Mr. Penner already has committed to North Carolina, but the Governor wanted to flatter his latest catch by inviting him to a personal meeting anyway. (Mr. McCrory had intended for the meeting to take place at the even swankier Pinehurst Resort on the final day of the U.S. Open golf championship, but he decided to return to Charlotte so he could get a bum knee looked at Monday morning.)
Governors are also famous for their use of grants and tax breaks to secure business. Mr. McCrory this year has committed to pay grants worth $23.1-million. The return on that investment: pledges to create 2,544 jobs, or about $9,000 a job. Canadian provinces play that game too, of course, but the payoff isn’t always clear. Ontario this year has pledged more than $151-million (Canadian) to generate promises of 2,724 new positions, or $55,594.94 per job.
Still it’s unclear how crucial incentives are in attracting business.
Steve Mai, the chief executive of Cambridge, Ont.-based Eclipse Automation Inc., a custom maker of factory equipment, announced this spring that he plans to open a facility in Charlotte. The choice of location disqualified Eclipse from consideration for a grant because North Carolina only subsidizes companies that invest in poorer regions. Mr. Mai didn’t care. He said it was more important to him to be close to a skilled work force and a good airport.
Making specialized manufacturing equipment is a different business than stitching mass-market hosiery. Mr. Penner says grants and other subsidies only are sweeteners. The reason he’s building a plant in North Carolina is that he ran the numbers and was confident he could make a profit with or without help from state and local governments.
Still, the promise of hundreds of thousands of dollars from the government makes the bankers happy, a point Mr. Penner makes to Mr. McCrory, who argues that North Carolina’s strongest selling points are its low tax rates, a skilled work force, thriving cities and the only airport in the southeast other than Atlanta that offers direct flights overseas.
“I knew I had to get as much cushion as possible with the subsidies, that would help us, but it does not move the needle,” Mr. Penner tells the Governor.
“I would be wary of a company that was solely making a decision on that,” Mr. McCrory says. “The company must be insecure in its economics.”
“Subsidies should be second or third,” Mr. Penner says.
“It’s usually the fourth or fifth option,” Mr. McCrory says.
A Made-in-the-USA attitude
Mr. Penner insists Canada is as good a place to do business as the United States. So does Eclipse Automation’s Mr. Mai, who also is adding workers in Cambridge, as well as in North Carolina and at a new sales office in Silicon Valley.
If there’s really very little difference between making something in Canada and making it in the U.S., then why is the North American manufacturing rebound largely skipping Ontario, Quebec and other provinces? One reason is that the U.S. is at the heart of the action. Mr. Mai said 70 per cent of his customers are in the U.S. and he wanted to get closer to them.
Another reason could be that Americans just want these jobs more.
Manufacturing figures prominently in Mr. Obama’s economic policy and each state has sophisticated economic development operations. “We’re learning in the United States and in North Carolina that you can’t leave it to services alone,” Mr. McCrory said. “Not everyone can work for the county government, or for the hospital, or for a large box chain. We have to continue to build things, make things, innovate things, produce things and grow things. If we stop doing that, the economic model will not be sustainable.”
It’s not just the politicians. Mr. Penner was able to convince lenders and the state of North Carolina to back his bid to make socks in Burke County because Wal-Mart decided to set a pile of money aside to buy American-made goods. There’s a public relations element to what Wal-Mart is doing, to be sure, but the mega-retailer doesn’t intend to lose money on the project. It knows American consumers want to buy stuff that’s Made in the USA. There is no similar source of demand for domestically sourced goods in Canada.
“My dream is to have a factory back here again one day,” Mr. Penner says on the phone from Montreal. “I think it’s realistic. One of the things that would be helpful is if there was a little bit more support for Made-in-Canada initiatives.”
A factory reopens
At about 10:30 a.m. on June 16, Mr. Penner strode onto the empty factory floor of his facility in Hildebran, where a few dozen employees had assembled. A few minutes earlier, Mr. Penner had received a call from the state capital Raleigh: His grant application had been officially approved. He breathed a sigh of relief, removed moose-head cufflinks from his yellow dress shirt, rolled up the sleeves, and got up to make the announcement to his workers.
“We’re bringing manufacturing back to the United States!”
There is applause and maybe even some tears. He explained his plan: At first, 90 of the best knitting machines money can buy, and eventually 400, filling the space where they all are standing now. Some textile companies sell “Made-in-the-USA” socks that are knitted in the U.S. and then sent to Mexico or Central America, where cheaper labour sews the toe, applies the dye, presses them and packages them. Richelieu intends to do everything involved in making its higher-end Peds and Medipeds brands in North Carolina. The socks are made from high-quality yarn and have a higher needle count than other brands on the market.
“We’re going to be one of the best sock companies in the world!”
If Mr. Penner’s gambit works, some of his profits will flow back to Richelieu’s headquarters in Montreal. But for now, Burke County will get the benefits of his ambition. Richelieu plans to hire 200 people over the next few years. Mr. Penner’s office manager, Elena Azzarita, already had received dozens of applications before the announcement. Word got out that the new owner of Neuville Industries was planning something big.
“People had lost a lot of morale,” Rita Pope, 54, an employee in the distribution warehouse who has worked for Neuville, ILG and now Richelieu, said after the assembly. Most of her family and friends worked in textiles, but she is one of the few who still has a job in the industry. “What Richelieu is doing will bring the community back together again.”Report Typo/Error