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1 r NTRODUCTION _ STATEMENT OF THE PROBLEM The performance of the U.S. machine tool industry has a major impact on the efficiency, effectiveness, and timely production of defense materiel, despite its relatively small share of the national economy. To provide for the national security, the Department of Defense (DOD) manufactures and procures a wide variety of articles, which depend in turn on a wide variety of manufacturing processes. To carry out this mission effectively, MOD needs not only materials but continuing access to the latest process technology to cut and shape those materials into required components. In addition, the DOD mission needs expandable capacity to manufacture both finished articles and spare parts during mobilization and "x--na" military conflict. Recent trends, : ~ , ~ ~ ..~ =~ ~ ~ including a sharp surge in machine ~o~1 Hillel ~= =~ d Percentage or Domestic consumption' have called into question the ability of the domestic machine tool industry to meet current needs for defense production under both peace and wartime conditions. The Department of Defense requested the formation of this Committee to assess the international competitiveness of the domestic machine tool industry, study its current and expected responsiveness to defense needs, and recommend actions and policies for DOD and others to ensure access to a sufficient machine tool capacity and capability. 1

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2 THE U. S. MACHINE TOOL INI)USTRY: THE PROBLEMS OF MATURITY The U.S. machine tool industry shows many of the character istics of an aging, mature industry. Annual growth of real domestic machine tool output has stood a t approximately 0.1 percent for the last decade; average annual productivity, measured by output per man hour, actually declined during 1973-1981. Contributing to the industry's low productivity is the fact that its own production machinery is relatively old. In 1978, 40 percent of its machines in use were over 20 years old. In Japan, by contrast, the comparable figure has been estimated at 18 percent.2 Like other mature industr ies such as steel, the U.S. machine tool industry has been hit hard by foreign competition. Machine tool imports, which stood at 9.7 percent of domestic consumption in 1973, climbed to 24.2 percent in 1981.3 Adding to the problems of the domestic machine tool industry are some far-reaching technological advances that not only are altering the types of machines being demanded by end users but have also given rise to the entry of new types of firms in the provision of machine tools in the broader market for factory automation products. In various stages of research, development, and implementation are (1) synthetic materials, such as composites, ceramics, and plastics, that will ultimately replace metals in some military and civilian applications; and ( 2) new processes for forming and working both metals and other mater ials, wh Ash will reduce the need for traditional machining. In addition, the growth of computer-integrated manufactur ing has meant that new sets of firms (e.g., manufacturers of computer controls) are entering the broader market. While none of these firms have entered as manufacturers of machine too a per se, they--along with specialized assembly firms and machine tool builders themselves--are likely to become major players in the process of fitting machine tools with computer technology. Accordingly, U.S. machine tool builders will have to adapt to new markets and new products. To r ema in competitive under these conditions will require (1) massive investments by the U.S. machine tool industry in research and development; (2' a substantial broadening in these companies' R&D, engineering, and software capabilities: (3\ a reshaping of their

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3 development strategies: and (4) heavy investment in modern production facilities. It is uncertain, however, how many of the companies in the U. S . machine tool industry other than the industry's leaders have the ability or the percept ion of necess i ty to accompl i sh these tasks, although some individual firms representing a significant part of the industry's production are already engaged in meeting the challenge. This report concludes that in the face of urgen t competitive pressures, some U.S. machine tool builders have already begun responding to the challenges of new competition and technology. As the Phase I study indicated, the machine tool industry as traditionally defined is giving way to a more sophisticated one, which is also engaged in, for example, factory automation and computerized controls. The Committee believes that, given a sustained economic recovery and aggressive steps by both government and industry, an effectively com- petitive domestic machine tool industry can emerge. This industry, however, will be substantially different from the machine tool industry as traditionally defined: many traditional firms who are unable or unwilling to take the appropriate steps to modernize will not survive the rapid changes that are now upon them. Without such a transi- tion, the United States may lose or seriously damage a resource that is valuable to the national economy and the national defense. Indeed, one of the aims of this report is to Describe what the "survivors" of this transitional phase in the machine tool industry will look like and how they will get there. THE DOD r NTE.REST As this report describes, the Department of Defense already manages several programs aimed at improving manufacturing productivity and maintaining a reserve of machine tools. The Committee found that the DOD's interest regarding the U.S. machine tool industry includes having access to state-of-the-art technology; being able to utilize cost-effective, expandable production facilities: and having a macro-economy that permits long-term growth within the domestic machine tool industry. The changes in technology and markets referred to above, however, suggest that DOD's interest is tied to the international competitiveness of a Restructured

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4 machine tool industry substantially more complex than the traditional industry as defined today. This scenario necessarily places more emphasis on measures to modernize the industry, and less emphasis on such traditional measures as stockpiling maintenance. The changing status of the machine tool industry raises difficult questions over how the government should treat mature, basic industries that are beset by rapid change. In many such industries, conventional business economics has seemed to favor the offshore manufacturing facility, whether this facility be owned by a U.S. or a foreign company. This tendency has recently appeared with respect to machine tools. Thus approximately 40 U.S. machine tool firms have overseas facilities. On the other hand, some foreign manufacturers (e.g., Yamazaki, Hitachi-Seiki, Oerlikon-Motch) have established manufacturing or assembly plants in this country. The task facing this Committee, therefore, has been twofold: first, to collect the data necessary to draw valid conclusions as to the health and future of the U.S. machine tool industry; and, second, to assess the implica- t ions for the national security of these conclusions. The Committee believes that certain policy changes are vitally important in support of this transition. Chapter 4 of this report contains recommendations for action by DOD, other government agencies, prime contractors, and machine tool builders themselves. APPROACH TO IRE STUDY As the second of two studies produced for the Department of Defense on the subject of the machine tool industry's international competitiveness (see Preface), the work of this Committee stems from the work of the Phase I committee and its report. During the research phase, the Committee conducted written surveys, site visits, and interviews. Two written surveys were conducted: one of machine tool users that had made recent purchases, to learn what they had bought and why; and one of machine tool builders, to learn their perceptions of recent economic and technological trends. Eleven site visits were conducted at firms chosen to represent a wide spectrum of machine tool firms. The major groups having an interest in this study--DOD, machine tool builders, prime contractors, and major subcontractors--participated in a total of several dozen

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s telephone interviews, in addition to the surveys and site visits. These primary data collection efforts were augmented by a literature review and the collective knowledge of the Committee members. When the data gathering effort was completed, the Committee undertook to synthesize the views presented by the various sources. From the start, the Committee was impressed with the unevenness of the data. Much of the available informa- tion is highly aggregated, thus obscuring the situation of many individual firms, or merely anecdotal, thus making generalizations difficult. Under these circum- stances, the Committee was forced to rely in a number of instances upon its own surveys, as well as the subjective judgments of its members. The Committee broke the issues down into the following questions, to form the underpinnings of its analysis. What is the technological and economic state of the U.S. machine too L ind~trv -~w relet it's ~ ~ I;_ competition? Is the U.S. in danger of losing two important strategic resources: its machine tool manufacturing capability and its position as a leader in manufacturing process technology? What are the causes of the problem of increased in the machine tool industry? ~ ,! ~ ,! ~ _ _ ~ ~ ~ v ~ ~ ~ ~ v ~ ~ ~ y 1 ~ import competition To what extent has DOD action affected the current status of the U.S. machine tool industry? Are there major shortcomings in the machine tool industry structure and performance that are in the national interest to change? What are the national security interests regarding the U.S. machine tool industry? What constructive contributions might be provided by DOD in pursuing these interests? What are the potential contrite -ions of other executive branch government agencies, _.ime contractors, and the U.S. Congress? What policies and actions should be applied by - e machine tool industry? ORGAN I ZATION OF S'rUOY The Committee organized its written analysis according to two broad topics: (1) the present competitive situation

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6 of the U.S. machine tool industry: and (2) the relation- ships among DOD, prime contractors, major subcontractors, and machine tool builders that affect the competitiveness of the U.S. builders. These are described in Chapters 2 and 3, respectively. Chapter 4 presents the Committee's conclusions about the implications of this situation for this country's national security goals, and presents a set of recommended options for DOD and others. Three appendices are also included. NOTES 1. National Machine Tool Builders' Association (NMTBA), Economic Handbook 1982/83, p. 233. 2. Japan Productivity~center. More recent (1981) data suggest that wh i le the total inventory of Japanese machine tools is not as young as it once was, it in still higher than the U.S. for most machine tool categories. Anderson Ashburn, Modernization Pace Slows in Japan,. America Machinist (January, 1983), p. 122. 3. NMTBA, Economic Handbook, 1982/83, p. 126.