When the economic pundits gather to reflect on the last decade of the 20th century, their assessment of Northeast Ohio’s economy will reveal 10-plus years of sustained growth, widespread business expansion and rampant entrepreneurism.
At first glance, it’s no different from other large cities whose regional economies benefited from a robust national economy. Odds are, your business enjoyed the ride as well.
But, there’s an eye-opening twist when it comes to Northeast Ohio: The force behind the region’s economic boom is not the emergence of technology companies or Internet-based businesses. Instead, the engine of Northeast Ohio’s success remains the same one that’s driven it for more than 100 years: manufacturing.
Once you remove the reinvigorated downtown, financial services companies such as KeyCorp and National City Corp., the new sports complexes and the Flats, what you’re left with is a menagerie of industries that mirror those which underlined Cleveland’s prominence in the 1890s — electricity, petroleum products, finished metal products and mass-produced steel.
One hundred years ago, companies such as Standard Oil, Sherwin-Williams and Glidden rose to become world leaders. If you peruse a list of the most successful companies over the past decade, it reveals a similar trend: Eaton Corp., Parker Hannifin Corp., TRW, Sherwin-Williams, Naaco Industries Inc., Pioneer Standard Electronics Inc., Geon Co., MA Hanna, Lincoln Electric Co. and The Lubrizol Co stand out from the pack.
“Generally, we remain a leader in manufacturing,” explains Richard A. Shatten, director of the Center for Regional Economic Issues and the Ameritech Professor for the Practice of Regional Economics at Case Western Reserve University. “That is who we still are. You shouldn’t depart from a 120-year legacy of manufacturing.”
That’s not to downplay the effect that service companies, technology-based ventures and other industries have had in Northeast Ohio. During the 1990s, those companies were the largest generators of new jobs, specifically hospitals, personal and business services, nursing, home-health care, financial services and commercial banking. Polymers and plastics also played a part in creating employment, helping stretch the labor pool thin.
But, Shatten warns, “The casual ease of saying we’ve made a move from manufacturing to the service economy is a misplaced statement. It reflects the diminished employment in the manufacturing sector. But in terms of its overall wages, and contribution to the gross national product, manufacturing hasn’t changed much at all. It generates wealth for society.”
Shatten should know. The organization he heads, REI, follows economic drivers. He says all this is measurable.
“For example, if we had the same number of bankers in our population as everybody else, we’d give ourselves a (rating of) 1. If we had twice the number of bankers as everybody else, we’d get a 2,” explains Shatten. “Northeast Ohio has 5s, 4s and 3s in the manufacturing categories.”
The keys to this area’s manufacturing dominance, however, are rooted in the industry currently driving other regions — technology. In Cleveland’s case, technology leads to more efficient manufacturing. Through an ability to adapt to technological changes, regional manufacturers have integrated new equipment and procedures that allow them to do more with smaller work forces.
Explains Shatten, “Typically, in Northeast Ohio, you don’t get the employment benefit. But you get the income benefit of being a manufacturing center.”
All this occurs because of the region’s unique synergy between the primary job creators — the service sector — and the income generators — the manufacturers. One picks up where the other leaves off, filling what could otherwise become an employment gap. The other keeps the region’s economy chugging along.
So how did Northeast Ohio get here, and what does the state and evolution of the regional economy mean for tomorrow’s business owners? Shatten offers a closer look, breaking the confluence of the past, present and future into four pillars on which the regional economy stands.
The first pillar is straightforward: “We will be who we were and who we should be,” says Shatten. “Forget about a shift from manufacturing to services. We are going to be a place that makes things … and makes things exceptionally well.”
Pillar two is an ability to stay attentive to trends in financial services and high-growth service markets. “Those are ways to drive per capita income in the region,” explains Shatten. “You have to understand how to create places that are highly competitive for high-growth markets or else those types of businesses won’t do well.”
That requires a substantial investment in infrastructure, a foundation that Shatten says is solidly in place. What is needed, besides constant reinvestment, is improvement of education – the infrastructure of the future.
“Places that are going to thrive are the ones that produce and keep well-educated people. It’s been proven that regions that have a higher percentage of workers with a college degree make more money than regions that don’t,” Shatten says.
It’s no secret that Northeast Ohio has fallen behind other leading economic regions in education. Nationwide, the most educated regions boast that 33 percent of workers hold degrees. Cleveland and the surrounding region lag behind, but not by much. Recently, it’s improved to around 25 percent.
Part of this growth can be attributed to the recent decline of what had been a trend: Degrees being exported to other regions, where high-tech companies recruit knowledge workers from the national labor pool, including Northeast Ohio.
Another issue that impacts regional performance is the flight of wealth. Experts agree there is certainly no dearth of available investment dollars in the region, but what concerns many high-level bankers, attorneys, financial services advisers, and business owners, themselves, is the relatively small percentage of these dollars being pumped into Northeast Ohio companies.
Much of the available money finds its way west and east, to regions where hot high-tech operations seek loads of venture capital money to fund the next great IPO.
Ultimately, most take an optimistic long-term view of the situation. They agree that a greater integration of technology into Northeast Ohio’s manufacturing base may provide a much-needed solution. As that happens, both trends should change.
“Geographic boundaries are already down because of the Internet and e-commerce,” says Carol Latham, president and CEO of Cleveland-based Thermagon Inc., which manufactures thermal conductive materials for the computer industry. “Cleveland companies realize it’s a global market and are changing the way they do business, the processes used and how they compete. As a region, sure, we’re behind. Can we catch up to become a leader? Absolutely.”
Change, ironically, is the basis for Shatten’s third pillar — the creation of a destination economy.
“Hotels, attractions, conventions and conferences make an economy for themselves,” he says. “Cleveland’s done something unimaginable in the nation, it invented one from scratch with the downtown development and the Cuyahoga Valley National Recreation area.”
This new supplemental economy emerged within the last 20 years, reaching critical mass during the latter part of the 1990s with the Flats, Northcoast Harbor and three new sports complexes — Jacobs Field, Gund Arena and the Cleveland Browns Stadium.
“You can’t really measure this economy because it doesn’t neatly fit into any SIC codes,” explains Shatten. “But you can see it and can count it. The fact that there are new hotels and people living downtown and all those attractions and jobs and people coming downtown to spend money and generate taxes, those are all testimonials for investment in the future of the region.”
Shatten’s last pillar is the notion of the emerging economy — e-commerce and the Internet.
“We all have this notion where there is this magic event and a company springs up to leap to 1 billion in market capitalization overnight. Well, now that the dot-com companies are doing that, these things are suddenly imaginable and you start to wonder what might be that collection of companies that make the leap.”
And, he says, don’t count Northeast Ohio out of that race.
“There is a very rich reservoir to draw from in our emerging economy. What’s happening in the public and private labs, the inventiveness going on, the things being imagined and created, all of that might lead to the formation of companies that might lead to public offerings that might lead to the creation of tremendous market value and job creation.”
But, that’s all hypotheses. Where Cleveland and Northeast Ohio stand today is as an example of what happens when a region’s business leaders take an accomplished industry and invest wisely in efficiency.
“Innovation,” says Shatten, “is the driving force behind our manufacturing success. The clunks and bangs of yesterday have turned into hums. It’s the sound of successful factories. Less time, lower costs, do it better.
“That’s manufacturing in Northeast Ohio today and that’s innovation. They’re linked together.”
How to reach: Regional Economic Institute, (216) 368-2160; Thermagon Inc., (216) 741-7659
Dustin Klein ([email protected]) is editor of SBN.