Successful, Long-Term Growth at Prime Technological Services
Prime Technological Services has been featured on Inc. 5000 for four years in a row—quite a feat for a North American EMS company based out of Suwanee, Georgia. Publisher Barry Matties sat down with the CEO of Prime, Greg Chesnutt, at IPC APEX EXPO, to glean how they continue to find success and have been able to maintain such an impressive growth rate over the last four years.
Barry Matties: Greg, please start by telling us a bit about Prime Technological Services.
Greg Chesnutt: We’re a contract manufacturer who’s been around for about 27 years. We began principally with NPI work and prototyping, and we've evolved over our 27-year history to provide a full suite of services, excluding original design services. We're not doing original design work, but we do a fair amount of DFM and design for test, reliability testing and failure mode analysis work. We're a PCBA manufacturer and all of our work is turnkey. We also do a fair amount of box build or complete product manufacture for our clients. We also selectively provide 3PL services, depending on our customers need.
Matties: You’ve been in this particular business for 27 years; were you in the industry prior to that?
Chesnutt: I was not, actually. I came to the industry in 2007. My partners and I bought this business from the entrepreneur who founded it. We have an investment firm as well that invests principally in niche manufacturing businesses. We found this opportunity through an intermediary. Really didn't know a lot about the industry but looked into it, liked it, thought the company in particular had some interesting growth prospects. I'd say we’re nine to 10 years in now, and we're pretty excited about it. We think we've had a good run with it in terms of our ability to build value.
Matties: You came through some difficult times. You bought it when the market was down and you probably got a pretty good price on that.
Chesnutt: We’re in the lower middle market, so we’re sort of dealing in companies that are $50 million and under, for the ones that we acquire. Valuations over the years have begun to creep up a little bit, but certainly ‘08 and ‘09 were interesting years to be in any business, but particularly interesting to be in the lower middle market.
The company was a lot smaller when we bought it. It was, what I like to think of as, a lifestyle company, entrepreneurial founded. The gentleman had done a great job building it over time. We just felt like, and still feel like, it represents a very attractive growth platform. We’re happy we have it.
Matties: How many employees do you have?
Chesnutt: We have about 110. We’re a single facility, with 50,000 square feet in Suwanee, Georgia, which is in the northern suburbs of Atlanta.
Matties: In all those years, what’s the thing that surprised you the most coming into this industry?
Chesnutt: The thing that has probably surprised us the most is the momentum we’ve enjoyed in growing the business. When we bought the company, it had been a solidly profitable business, very well run, with an excellent market reputation, however, we wanted to redefine the culture of the company as a growth business. That's challenging proposition when you're in an industry where growth rates are in line with overall GDP growth or slightly higher. I looked at a forecast yesterday of maybe 4 percent growth targeted this year for this industry, and as you move a little further out, there's some debate as to whether even that number is sustainable.
We’ve been on the Inc. 5000 for four consecutive years now. So really, the most pleasant surprise for us has been our ability to take the company as a platform, invest in it very aggressively in the four pillars of investment in our business—capital equipment, the information architecture, the people and some sales and marketing—and have it exceed our expectations for growth. That's not always the case in every industry. Sometimes you can do all of those things right, and growth can be difficult to come by.
It’s not easy in any business, but the circumstances during the time that we've owned it—some of the technologies that we've focused on, the verticals that we've focused on—have been pretty accommodating to that. So, we've been pretty pleased with it.
Matties: Growth comes from great leadership, but also from great strategy. What strategies did you employ to create that growth?
Chesnutt: A couple. First, it had to do with completely retooling the factory—it was the first thing that we needed to do.
Matties: Looking for efficiencies, or just capability?
Chesnutt: Capability and efficiency. Our motto in our business is if you're going to build technology, you have to have currency and redundancy in your technology. So, I'd say probably the first component of the strategy was to really build the platform in terms of capital equipment. Then, to run any business effectively today, you need an excellent information architecture. We didn't have one in the business, so we made substantial investments in that area. Culturally, sometimes when you're running a business, if you want something to become a reality in the business, the first important step is to believe in it, and the second most important step is to talk about it a lot.
So, we engaged our workforce. We engaged our market. We engaged the influencers in the business, which are probably no different for us than for any other Tier 3 North American EMS company, the distribution and design community. We told them we wanted to grow. More importantly, we backed up the desire with deliberate investment that was demonstrative of our intent to go try to make it happen. I know there's not a lot of secret sauce in that, but that's just what we did.
Matties: But those are fundamentals that oftentimes people miss.
Chesnutt: They are, particularly in a business like this where there are great companies in this industry. I kind of think of it as a bit of an open architecture business, certainly on the EMS side. Not a lot that's proprietary. Everyone has access to the same asset base. Certainly, labor pools are different if you get in different parts of the country and different parts of the world, but a lot of times it just comes down to having a vision and being kind of relentless in terms of how to stay on target and executing.
Matties: What sort of culture did you bring to your organization?
Chesnutt: We took the organization through a fairly extensive planning exercise when we first came on board, and we started with our core values. Number one on our core values was to be as customer-centric a company as we would want to engage with if we were on the other side of the commercial equation.
So, we really spent a lot of time with all of our associates and all of our teams talking about the importance of the customer. That's kind of manifested itself in some things that have become phrases or quotes in our business. But in any mature business or really in any competitive free-market economy, the only source of enduring success is getting and keeping happy customers. If you don't make that idea the centerpiece of what you're trying to do, then you can be successful for a while, but it’s very, very difficult to sustain it over time.
The customer centricity, as embedded in the four core values of our business, was really the starting point for the messaging that was critical in building the culture we sought.
Matties: If you can’t produce, words are just words.
Chesnutt: People figure out pretty quickly if it's just talk, and so you have to try to live it every day and we can always be better, but I really feel like we make a sustainable and concerted effort to do that.
Matties: When you went in and you started looking at capabilities, did that modify the markets that you went after, or did you stay in the core markets that they were already focused on?
Chesnutt: We were fortunate in that the business was fairly diverse in terms of vertical markets, but also in terms of what I think of as our mix. I sort of think of our customer mix as three tranches. We do a lot of work on the NPI side. We have also grown from the NPI business into what I call our middle tranche, which I refer to as category killers. These are companies that have significant depth of expertise in a technology or a specific vertical. And then the third are our Tier 1 OEMs.
We were fortunate in that we had a diversified business across verticals, but we also had a diversified business within that customer portfolio within those verticals. We just sought to continue to build on that. We picked a couple of markets we felt like were regionally important or that could be very important. Energy and energy management systems are very important to us in the Southeast. There's a concentration of companies in everything from grid automation to smart metering technology that's a thriving ecosystem in the Southeast. Lighting and lighting controls is also business that's very important to us. About 65 percent of the North American lighting market, at least in the commercial investment side, is headquartered within a three-hour drive of our facility.
Matties: Proximity really makes a difference, doesn't it?
Chesnutt: It really does.
Matties: And it makes a difference to customer service too. It's a lot easier for both parties.
Chesnutt: Time and space can become friction points for prospective customers, particularly in early stage enterprises and particularly in NPI work, where speed is paramount. Rapid exchange of information and speed of execution are very important. Sometimes that work can be best done on a one-to-one basis when you’re kind of going eyeball to eyeball. So, I like to think at our facility, obviously with the exception of some access controls and some security protocols that we have, that we really try to treat our facility like an extension of our customer’s facility. Our customers are in the facility a lot working with us and working with our engineers, because we're trying to help them accelerate the commercialization of their products.
Matties: Do you see an on-shoring or re-shoring trend coming?
Chesnutt: It's interesting. There was a lot of conversation about it two to three years ago, and we saw some. Clearly, as the developing economies mature, and we're never going to get towage parity in our lifetime, but the gap is beginning to narrow in terms of not just wages, but total delivered cost for our product from some of the developing economies—particularly when you lay on top of that ongoing trends in manufacturing automation. Quite frankly, a statistic I saw yesterday is that direct labor accounts for about 7 percent of the cost structure of a product in this industry. So, you're working with a fairly thin slice of the overall cost structure.
We've seen a little bit of it; who knows what's driving it. I think market movement and the need for speed is what's driving it more than anything. Most of our customers are talking to me today about shortening the supply chain. They don't want it elongated. They want it shorter. It's easier to manage. There's less complexity, and in any products business today, inventory is kind of dirty word. You want it when you need it, but when you don't want it, you don't want a lot of it hanging around because asset velocity is very important to everyone in business.
That's driven a little bit of it as well. As to what the next card that's going to be dealt off that deck is going to be with everything going on today, who knows, but we have benefited from it. One thing we're seeing right now with some of that uncertainty, particularly for North American OEMs who have a substantial portion of their strategic sources down in Mexico, is we are starting to hear conversations about supply chain diversification and maybe hedging some bets.
Matties: Trump is certainly a big factor in some re-shoring. Have you seen an impact at all yet?
Chesnutt: Just conversationally. I can't say it's shown up in terms of opportunities.
Matties: Attitudes have certainly shifted to a more positive outlook, I think, as well.
Chesnutt: Agreed. I was talking to someone about it earlier. Any time, and this is an apolitical comment, because we have to prosper in our business regardless of what's going on in Washington, but any time you have a change of leadership, a shift in the governing party, there's just sort of a natural excitement that comes along with that.
Matties: I think there's a natural excitement, but I see this more as a redefinition of American values, and ultimately that influences global values.
Chesnutt: Yes. We talked about some of them yesterday in the EMS Management Council meeting, but clearly there are some ideas being discussed around restoring the global competitiveness of our manufacturing economy. Nobody likes paying taxes, but the US tax code, has put us at a competitive disadvantage globally with other OECD nations. If you have less capital to work with that's internally generated by your company, it's going to eventually affect your investment posture.
Matties: Especially if you can't write off a piece of equipment the same year you bought it. Now if that comes to pass, do you see your company jumping on and investing heavier in equipment?
Chesnutt: We will. Our investment won't be solely tax driven. It'll obviously be about opportunistic need in our business, but tax policy can definitely create a very attractive environment to do it. I guess the answer to your question is yes. You might accelerate some things, perhaps a bit earlier in your investment cycle than you would have. So yes, it definitely can have an impact.
Matties: The point being is when we see Intel, Foxconn and all these other companies coming in, if it comes to fruition I see a huge increase in the manufacturing sector, particularly in areas like yours.
Chesnutt: Absolutely. We've got a pretty robust manufacturing ecosystem down in the Southeast. We’ve benefited greatly, and the automotive industry has been a big driver of that over the last 10 years. But really across industries, our region of the country and within the overall context of what's going on in Washington, has tried to be very accommodating to attracting and building the manufacturing base. It's just nice to see that trend emerging as a broader priority for the entire country. It's important to be good at building things. You know, it really is.
Matties: I think there’s a swell of patriotism and pride in manufacturing that’s coming across the American population. You won’t realize that by watching the news, but when you go and talk to the people that are actually living the lives of manufacturing, I see it.
Chesnutt: We see it as well. I gave the example in an earlier conversation, some of the county governments and the state governments are really doing a good job through the technical college infrastructure in the Southeast of engaging young people when they're in school, and talking to them about alternative career paths. We've had this idea that education is a wonderful thing and we all want more of it at every level, but not every young person who’s going to graduate from high school this year wants, needs or certainly should feel compelled to go get a four-year college degree in order to earn a quality living in this country. There ought to be alternative paths for building a career. Certainly, we see very encouraging engagement and that conversation emerging in our part of the country.
Again, that feeds into that support ecosystem for manufacturing. Its cliché I know but you can't build a great company without great people. One of the things that is a consistent topic, not only in this industry but other industries that we're involved in, is workforce development. It's a vitally important topic when building a growing company.
Matties: We just ran a survey of the industry looking at hiring, and indeed there’s a hiring increase going on, and that's like on the average of two to three people over the first half of the year. Then we asked what the greatest challenge is, and the greatest challenge is finding qualified people. The skilled labor force is a big issue.
Chesnutt: Absolutely, and while we’re in this middle ground where, for lack of a better term, our educational system catches up and begins to provide a little bit more of that need or more than it’s been able to provide up to this point, a lot of companies are taking the challenge on internally. You're hiring for characteristics. You're hiring for interest. You're hiring for energy level. You're hiring for work ethic. You’re hiring for adaptability and trainability, and then you’re taking on the responsibility to bring that talent into your organization and develop it according to your specific needs and requirements. That's what we've been trying to do.
Matties: I think that's the only way you can do it these days.
Chesnutt: We are forced to do it, I guess, but it's also a pretty good business strategy.
Matties: What are the primary demands that your customers put on you these days?
Chesnutt: I hate to keep coming back to it, but really it’s an ability to be very nimble and fast. Markets just move so quickly today, literally in everything, and if you have an innovation or you have an idea, or you have a product or even with sustaining engineering of an existing product base, if you don't move quickly, and are first or second to market and grab the end user's mind share of that innovation or that product, it's real hard to win over time. That's probably the number one thing, and what we try to do in our business is build a highly adaptable organization, a nimble organization if you will, that can respond to that need. Then a lot of times it just comes down to being willing to say yes, as long as it fits within the parameters of good business practices.
Matties: You have to stay within your frame, because it's easy to chase business and lose money.
Chesnutt: Yes, which is no fun. There are two things in business today, particularly in products businesses and certainly in EMS: competitiveness and quality are almost a given.
Matties: That’s the ante.
Chesnutt: Nobody says I want just the inexpensive stuff, or worse, the expensive stuff that doesn't work. So, we almost take the need for quality and competitiveness as a given. That's really the jumping off point in terms of trying to build differentiated value to a customer, and that really does then get into things like being able to work quickly, being able to say yes, and being able to position your company as a true accelerant in the commercialization process for a customer. Believe me, they know it when you are, and if you can't do that and you give them enough of a reason to look elsewhere, eventually they will look elsewhere. The incentive systems inside our customers’ businesses, whether it’s Tier 1 OEM or an early-stage company, drive their people are to respond to that market reality and they're expecting it and quite frankly they're demanding it from their supply base.
Matties: What sort of growth do you expect in the coming year?
Chesnutt: We've been on the Inc. 5000 for four years in a row now, so our compound annual growth rate over the last four years has been north of about 20 percent. We're looking for that to slow a little bit, and a little bit of that is deliberate on our part. We've had a wonderful run in our business. However, we are today principally a regional business. Our business is largely in the Southeastern and mid-Atlantic states in the U.S. so we're going to try to break outside of that core geography and we anticipate that that's probably going to slow our growth rate down a little bit. We're not going to say no to market opportunity where we are, but we are actively looking to expand our business.
Matties: How do you expand? What's your strategy for getting out beyond your borders?
Chesnutt: Basically, it's trying to find, within those three tranches of customers I identified, companies that we feel like are targets that can benefit from what we have to offer. We'll fish where the fish are in terms of what geographic markets offer us, but we'll probably go out and try to replicate some things and some verticals that we've been very successful with in the Southeast, and we expect that those market opportunities are available as we expand.
Matties: What advice would you give a buyer of EM or box build services?
Chesnutt: Probably the advice is to make sure that holistically, your partner is a good fit for what your need is. We went through a cycle in this country for a very long time; we touched on it earlier, where once you got outside of engineering in many operations of a business and you got into supply chain, landed unit cost was the metric that everyone lived and died by. It's an important measurement, but whether you're evaluating cost of quality, total cost of ownership, speed to market or your supplier’s ability on the EMS side to support your particular needs throughout the life cycle of a product or range of products, I would just encourage people, and I do encourage on a daily basis when we're engaging with prospects, to look holistically at that relationship. Because as I tell our employees, every one we do business with is strategically outsourcing their revenue stream to us. That's a really, really important decision.
Matties: And their reputation, which may be more important.
Chesnutt: Absolutely. So, I just think fit is very important in that regard.
Matties: Are there any thoughts that we haven’t talked about that you think we should discuss?
Chesnutt: No, I don’t think so. I appreciate you taking time to sit down and visit with me, and learn a little bit more about Prime. We're grateful for the opportunity and appreciate everything that you do.
Matties: It’s been a pleasure talking with you, Greg. Thank you.