Below are the first 10 and last 10 pages of uncorrected machine-read text (when available) of this chapter, followed by the top 30 algorithmically extracted key phrases from the chapter as a whole.
Intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text on the opening pages of each chapter.
Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.
Do not use for reproduction, copying, pasting, or reading; exclusively for search engines.
OCR for page 7
2 AN INDUSTRY RESTRUCTURED
OVERVIEW OF CHANGES
We're going through a revolution in manufacturing
technology. Formerly, you would have talked about
evolution. EDirector of manufacturing research at
helicopter plant]
The American machine tool manufacturer is not as
competitive as his [foreign! competitors are...not as
prepared to make changeovers into new technology.
[Head of facilities division at aerospace firml
The U.S. machine tool industry is undergoing fun-
damental restructuring. A structurally more complex and
technologically dynamic industry is replacing a mature,
less complex one.
The industry has been characterized by fragmentation,
relatively low levels of capital investment, and con-
servative management.
Strong forces from outside the
domestic machine tool industry, however, have made thi
traditional posture of the industry permanently outmoded.
These forces include technological as well as economic
factors: for example, the increasing use of new tech-
nologies in machine tool construction and applications,
and the increasingly global view of machine tool markets
by foreign suppliers.
The machine tool industry has undergone fundamental
change over the past decade. Although basic metal-cutting
and metal-forming machines are still a critical element
in the manufacturing picture, the machine tool industry
today is becoming part of a new, automated manufacturing
industry that is producing new types of products, such as
computer-driven, integrated production systems, that did
7
OCR for page 8
8
~ -
not exist 10 years ago. It contains new industry
which have entered the market to promote advanced tech-
nologies. It is diversifying into the processing of new
materials. And it is today more than ever part of a
world market, with worldwide sources being used even by
U.S. machine tool firms. In this world market, however,
the U.S. firms are being seriously challenged by foreign
manufacturers instead of dominating markets as they did
10 years ago. It is this new, broader, and worldwide
industry that forms the basis for an assessment of the
machine tool industry's responsiveness to national
security needs.
This chapter traces how these developments are
restructuring the U.S. machine tool industry today, and
is divided into the following sections:
the traditional U.S. machine tool industry
technological trends shaping the industry
segments
economic trends
new entrants and new competitive strategies
response of machine tool builders to these changes
THE TRADITIONAL U. S. MACHINE TOOL INDUSTRY
Any analysis of the machine tool industry in the United
States today must incorporate the fact that technological
and market conditions are altering the definition of the
industry and the players in it. To impart some apprecia-
tion of these changes, this report starts with an
examination of the traditional U.S. machine tool industry.
Definition. According to the National Machine Tool
Suilders' Association (NMTBA), the industry comprises
manufacturers and sellers of machine tools, defined as
"power-driven machines, not hand held, that are used to
cut, form or shape metal.~1 Metal-cutting machines
include lathes, grinding machines, milling machines, and
machining centers. Typical metal-forming machines are
presses, forges, and punching, shearing, and bending
machines. This product classification conforms to the
Standard Industrial Classification Codes 3541 (metal-
cutting) and 3542 (metal-forming).
Size. The machine tool industry, thus defined, is a
relatively small sector of the economy. Production in
the United States totaled $3.6 billion in 1982, or 0.12
percent of GNP.2 Total employment in the industry at
the end of 1982 was estimated at 68,000, or less than
0.10 percent of U.S. employment.3
OCR for page 9
9
Until 1971, when U.S. machine tool production was
outstr ipped by West Germany, the United States had been
the world's leading producer of machine tools since the
end of world War II. The United States regained the lead
in machine tool production in 1979, only to be surpassed
by Japan in 1982.4 The growth of Japanese machine tool
production has been especially swift, averaging a~proxi-
mately 30 percent annually between 1976 and 1981.
Notwithstanding this development, American machine
tool builders have sold, and continue to sell, many
machine tools for export. Exports have averaged 13.8
percent of domestic machine tool production during
1971-1981, and in 1981 itself stood at 13 percent of
domestic production. These exports have also held their
own compared with the combined exports of other countries.
The U.S. share of world machine tool exports has ranged
about 8 to 10 percent since 1970: the rapid rise in
Japanese machine tool export trade, in fact, appears to
have been more at the expense of West German than of U.S.
exports.6
The Committee notes in passing that the Eastern Bloc
countries, once a Large market for U.S.-made machine
tools, have now effectively disappeared as significant
purchasers of U.S. equipment. Machine tool exports to
these countries stood at $92.5 million in 197S, or 16.3
percent of total such exports: the corresponding figures
for 1981 are $22.8 million, amounting to 2.2 percent of
exports. Machine tool exporters, therefore, have had to
find other markets to compensate for this loss. Although
the Committee's mandate did not include pursuing this
issue further, the Eastern Bloc sales situation is viewed
by the Committee as an "unsolved
further U.S. government attention.
Concentration. Most companies
-
question that merits
in the U.S. machine
tool industry have traditionally been small, closely held
firms with narrow product lines. Table 1 shows the
extent to which ~m~1 1 Kohl i ohm ~..^ ~.,1 __ -~_
indust~v.
~ ~~ ~ ~—· t i ~ v ~ ~ ~ U L ~ ~ OU U [ l e
In addition, the industry has not been characterized
by significant firm concentration. According to Commerce
Department figures, the 4 largest metal-cutting machine
tool establishments were responsible for 22 percent of
industry shipments in 1977.
accounted for approximately 70 percent of the machine
tool industry's shipments, as Table 2 shows. This means
that the other 30 percent of shipments came from the
remaining 1,000-plus establishments.
In 1981, 15 companies
OCR for page 10
10
TABLE 1
Size of U.S. Machine Tool Establishments
.
1963 1967 1972 1977
Number of
establishments
Average s ize of
establishment
(employees}
Percent with 20
1,167 1,253 1,277 1,343
71 93 60 62
or more employees 36 40 34 35
Source: NMTBA, 1982-83 Economic Handbook of the Machine
Tool Industry.
Sales Pattern. Machine tool sales have traditionally
been sensitive to changes in the business cycle. The
National Academy of Engineering recently observed that
perhaps the most important trait associated with the
machine tool industry is the extreme cyclicality of its
income, profits and cash flow. n It concluded that n it
would be impossible to understand the American machine
tool industry without appreciating both the depth and
wide-ranging implications of these cycles.~7 Year-to-
year swings in machine tool orders of t75 percent and -SO
percent have occurred (see Figure 1), compared with
maximum sales swings of +39 percent and -34 percent in
steeL.9 This sales pattern has forced upon the industry
a strategy of buffering Business cycle downturns by
accumulating order backlogs from boom times.l° As the
following paragraphs indicate, this pattern has prevented
even large machine tool firms from having the capital
investment, R&D, and overseas sales structure found in
other manufacturing firms (e.g., office equipment) of
. · ~ .
sLml jar size.
Employment Patterns. This cyclicality has had an
effect on employment in the industry. Although the
industry generally pays its employees better than the
average of durable goods manufacturers (see Table 3),
OCR for page 11
11
TABLE 2
Shipments by the 15 Largest U.S. Machine Tool Companies
Company
C inc innati Mi lacron
Bend ix
Cross & Trecker
Gidd ings & Lewis
Ex-Cell-O
F. Joseph Lamb
Textron
Acme Cleveland
Litton
I nger sol ~ M i 11 ing
White Consolidated
Gleason Works
Houdaille
Monar ch
Esterline
Estimated 1981 Shipments of U.S.-
produced Machine Tools (Smillions)
498.0
400.0
310.0
286.9
280.0
27S.O
270.0
240.0
200.0
200.0
180.0
160.0
150.0
140.1
112.3
3,702. 3 = 73% o f
Total Shipments 5,095.6
Sources: American Machinist, August 1982, p. 51:
NMTBA .
whether because of differences in skill levels or
employment conditions, employment fluctuations have been
substantially sharper among machine toot companies than
in the durable goods sector of the nation as a whole.
Commerce Department figures show that average changes in
machine tool production worker employment are more than
one and one half times the percentage changes in durable
goods employment generally.
Industry observers, and the Committee's own surveys,
cite this cyclicality as one of the causes for the
industry's conservative management and the inability of
many machine tool firms to attract and retain the
brightest engineering, managerial, and technical talent.
Profitability. A common assertion has been that
machine tool industry profitability is somewhat higher
than the manufacturing average during upturns in the
OCR for page 12
12
FIGURE 1 Year-to-Year Change in Real Net New Orders of
Machine Tools, 1957-82.
75
50
Lo
~ 25
o
-
>
Lo
5:
z -25
Al
-50
_
_
oil
1-
751 1 1
1~
~1
1
1 ~ 1 1 1
1 958 1 962 1 966 1 970
YEAR
1974 1978 1982
Sources: NMTBA, Economic Handbook of the Machine Tool
Industry, 1982-83: RUMBA, "Industry Estimate of New
Orders, Cancellations, Shipments and Backlog (monthly) n
.
business cycle, but substantially lower on the
downside.ll Table 4 sets forth financial ratios that
contradict this general assertion at least for the years
1975-81. These ratios indicate that The industry has
maintained moderately healthy levels of profits and
earnings relative to sales and to net worth, that these
levels have risen since the middle of the last decade,
and that they compare favorably with corresponding ratios
for durable goods manufacturers. In 1982 and 1983,
however, many U.S. machine tool companies posted
significant lossesl2 and at least one prominent
industry analyst has commented that The machine toot
industry faces difficult profitability through 1984.~13
OCR for page 13
13
TABLE 3
Wage Rates for Metal-Cutting Machine Tool Employees
Relative to Durable Goods Hourly Wages
Year
1960
1965
1970
1975
1976
1977
1978
1979
1980
1981
1982
Source: U.S. Department of Commerce.
Percent
106
110
112
108
108
109
109
109
109
107
108
Research and Development. Conventional machine too 1
industry managers have been cited by outside observers
and by members of the machine tool industry itselfls
for taking a short-term perspective on their market.
Technological pre-eminence and a reputation for excellence
are difficult to maintain without investment in basic
research and development. The willingness and ability to
invest in R&D requires a long-term outlook and an
understanding that state-of-the-art technology and its
potential for developing new products are essential for
survival.
The Committee found that a few leading machine tool
companies have maintained R&I) initiatives. However, the
ind stry as a whole has traditionally drawn on outside
sources for new technology and new product development--
e.~., from the manufacturers of computers and controllers,
manufacturing systems designers, and DOD prime
contractors--rather than from internal R&D efforts. As
thin report points out, this pattern of technology flow
OCR for page 14
14
TABLE 4
Selected Financial Ratios Comparing U.S. Machine Tool
Industry with Durable Goods Manufacturers
Mach One Too l Endue rev
Durable Goods Induscry Comparisons
Ne c Earn inge
Operat ing On Let
Profit on Worth After Profit on Nct Voreh
year Sales Taxes Sales After Taxes ;oluo~n "c" column "a"
c. d.
Let
Operating Earnings on column "a" column "a"
as ~ of as Z of
l9,S 9.1 13.8 j.7 9.9 13S.8 139.3-
l9,s 9.4 11.0 7.9 13.6 118.9 30 8
197~. '.S 12.3 8.2 14.S 92.6 84 S
19,8 7.8 12.8 8.5 IS.9 9l.? 30 S
L9,9 12.2 t6.3 7.6 15.5 L60.5 !OS
1980 13.1 18.1 S.0 11.2 218.3 1$1.6
1981 12.6 t8.0 6. S 12.0 193.8 150.0
L9?S-8I
averages 10.2S 14.51 7.34 13.22 t44.S1 114.S8
S ou rc e: Fede re I Tr ado Cocci ~ ~ i on; N!t~BA
can be ascr ibed in part to conventional defense
procurement practices.
Data on R&D outlays by the U.S. mach ine tool industry
are contradictory. Two independent sources estimate that
R&D investment averaged 1.5 to 1.6 percent of sales over
the past decade.16 Figures supplied by the industry on
a confidential basis to their trade association put the
level at 4.1 percent.17 The NMTBA's data report that
R&D climbed to 4.2 percent of sales in 1981 and 1982,
reflecting either new RED initiatives and/or the
industry's inability to cut R&D below certain minimum
levels during recessionary periods.
Analysis of this issue is complicated by the fact that
the definition of "research and development" in the
machine tool industry is not uniform. Because much of
the industry's work involves the adaptation of basic
machine tools and manufacturing systems to specific
customer requirements, many mach i ne tool companies
include such engineering application expenses with their
R&D accounts. As a result of this accounting practice,
which is not unique to the industry, machine tool
industry R&D ratios may be inflated.
The dollar amounts spent on R&D in the domestic
machine tool industry also shed some light on that
industry's economic situations Table 5 sets forth these
amounts, on both a current and a constant dollar basis.
OCR for page 15
15
TABLE S
Research and Development Outlays
U.S. Machine Tool Industry
Current Constant
Year Dollars (1975\ Dollars
197S S 73,174 $ 73,174
1976 73,231 67,175
1977 83,238 70,541
1978 104,855 79,436
1979 128,216 84,911
1980 171,539 96,91S
1981 188,196 96,018
1982 (est.) 151,38S 75,693
Source: NMTBA.
What the table shows is that R&D outlays have been
heavily affected by economic slowdowns, and in 1982 fell
almost to the level of outlays, in real terms, that
existed in 1975.
3~-
Table 6 compares capital outlays
in the machine tool industry (SIC Codes 3541 and 3542)
with outlays in related industrial sectors. It shows
that U.S. machine tool industry outlays for capital
spending have generally lagged those of other industries.
This is consistent with the conclusion, referred to
above, that machine tool builders have tended to rely on
stretched out order backlog management, rather than
increased capacity, to accommodate cyclical changes in
demand.
Growth and Productivity.
The U.S e machine tool
industryls share in world machine tool production is
significantly below what it was in the late 1960s. In
1968, for example, the U.S. share in world machine tool
output was more than 25 percent. Since 1970, however, it
has failed to climb above 20 percent.l8
Of more significance, because of its implications for
the future, productivity growth in the U.S. machine tool
industry has also been poor. Table 7 compares machine
tool industry output and productivity growth with cor-
OCR for page 16
16
TABLE 6
New Capital Expenditures
as a Percent of the Value of Shipments--
Selected Industries, 1975-1980
Industry
Miscellaneous Machinery (SIC 359)
Office Machinery (SIC 357)
Blast Furnaces/Basic Steel Products (SIC 331)
Construction Machinery (SIC 353)
General Industrial Machinery (SIC 356)
Engines and Turbines (SIC 3S1)
Motor Vehicles and Equipment (SIC 371)
Farm Machinery (SIC 352)
MACHINE TOOLS (SIC 3541 AND 3542)
Special Industrial Machinery (SIC 355)
Refrigeration and Service Machinery (SIC 358)
Percent
5.9
5.5
4.6
4.0
3.5
3.4
3.4
3.1
2.9
2.9
2.5
Sources: Based on data from the Annual Survey of
Manufactures and the 1977 Census of Manufacturers.
responding figures for the U.S. durable goods sector. It
shows that machine tool industry productivity growth has
averaged a negative 0.7 percent annually during 1973-1981,
which is substantially less than the performance of U.S.
durable goods industries during the same period.
Although it is possible that some productivity loss
could have been caused by the retention of skilled workers
during economic downturns, the majority of the Committee
believed that the productivity growth record bears some
relation to the levels of capital investment and R&D within
the industry. While the connection cannot always be
measured directly, it is generally accepted that high
levels of capital investment and R&D spending are essentia:
to maintaining productivity growth in technology-intensive
industries.l9
Marketing. This general picture of a not very robust
domestic industry is also reflected in the marketing
practices of U.S machine tool builders. The industry
itself has recognized that machine tool company management
needs to adopt a long-term outlook and willingness to
OCR for page 17
17
TABLE 7
Growth of Output and Productivity:
Annual Average Percent Change
1959-
-1973
Growth of output
Manufacturing
nl'~=h1 ~ _~_ _ _ ~
4~6
4~8
_~= VJ-V~~ manufacturing 2.3
Machine tool industry 2.3
Growth of oUtDUt Der hall"
Of all emolovees
Manufacturing
Ourable goods manufacturing
Machine tool industry
1973-
-1981
2.5
0.1
0.1
3.0
2.8
1.0
1.7
1.7
-0.7
Source: Bureau of Labor Statistics, U.S. Department of
Labor.
invest In effective mark-- i not ^~ Id- ~ ~ -
; ~ ~ ~ ~~ : ~
pet i ton S have . 2 0 I nterV L ~ "= ~-vL ~= cnac 1 As Japanes
report, however, revealed Gnat marketing strategy for
U.S. machine tool firms is usually reactive and has
tended to concentrate almost exclusively upon the stated
needs of its larger, U.S.-based cush~m~ra to;. ~ 7 ~ ~ ~ -
development of a more varied customer base. Japanese
marketing efforts in the United States, on the other
hand, began with a focus on mass-produced, low-unit-cost
numercial control (NC) machine tools attractive to small
and medium-sized users. A further description of
Japanese machine tool marketing efforts in the rind h-
States is given later in this chapter.
Concluding Comments on the Traditional U.S Machine
.
Tool Industry. The above paragraphs describe an industry
that has lost its position as the world's number one
producer of machine tools, to a nation whose own machine
tool industry has been experiencing dramatic growth which
does not appear to be slowing. This decline in the U.S.
industry's position fits the pattern of other mature,
—~~ LOLL ants
111~ ;> vein little
~ v ~ ~ ~ ~ Cal
OCR for page 41
41
Economic P res sur e s
By and large, the 43 machine tool builders responding to
the survey cons idered the economic trends to carry mar e
ser ious consequences than the technological ones. Con-
cerns about present economic health--and in many cases
survival--appeared to overshadow concerns about the role
o f technolog ical leader sh ip in r emain ing compet i tive .
In view of the evident vigor and resolution with which
Japanese machine tool builders are applying the latest
technology, this attitude while understandable--was
worrisome to Committee members. It suggested that extra-
ordinary ef forts might be required among Amer lean machine
tool builders in order to maintain their reputation for
technological excellence.
Increasing competition, including price competition,
from foreign manufacturers in both foreign and domestic
markets was ranked by all 43 machine tool builders as
being of highest importance to the industry. Two
respondents, however, said that foreign competition had
little impact on their own firms. This seeming anomaly
was explained by the Japanese Targeting of such
products as machining centers, to the exclusion of
others: producers of some specialized machines have found
successful niches.
The high cost of capital over a prolonged period has
been a double-edged problem for the industry . The numbe r
of machine tool orders has dropped, as potential customers
are unable to finance major purchases; and the borrowing
power of the machine tool firms themselves has dropped
recently with decreased sales and profits.
As machine tool orders pick up during the current
recovery, there is cons iderable apprehens ion among U. S .
builders that their position will be further weakened by
the inventory of Japanese tools presently stored in U.S.
warehouses. According to the petition filed by the NMTBA,
Japanese inventor ies of NC lathes and Mach ining centers
in this country stand at the equivalent of l-l/2 years
production for NC lathes and 9 months production for
mach ining centers .35 This description about Japanese
machine tool inventories in the U.S. has been disputed in
a response to the petition. 36
OCR for page 42
42
Cop ing 'ad th Change--Spec i f ic S tep s
The s ite visits and questionnaire responses revealed that
U.S. builders are using a variety of approaches and
strategies to become more competitive. Some of these
actions, however, raise questions about their longer-term
effects on the national security. In two categories,
mergers and joint ventures, the Committee considers the
issues serious enough to warrant further investigation.
The following description of competitive steps being
taken by respondent f irms--while not exhaustive~gives
some indication of the "shakeout" taking Diary in ~ he
U. S. machine tool industry today.
there trill be survivors and those that do not survive.
Those survivors that continue to manufacture and sell
machine tools profitably will necessarily be more forward-
looking firms, committed to seeking algal Or on
mar kets.
Conventional Co~t-cuttinq.
. , ~ ~ ·& ~
As in all shakeouts,
, , ~ _ ~ a. · ~
These steps include
layoffs and furloughs, dividend cancellations, union
contract renegotiation, and liquidation of facilities in
high-cost locations in order to move manufacturing
operations to lower-cost areas in the U.S. or abroad.
The NMTBA, for example, has identified approximately 40
rJ.S. machine tool firms with manufacturing facilities
outside the United States. Most of there facilities have
been used to penetrate foreign markets, especially in
Europe. However, at least one industry analyst cites as
a ~trend. the moire toward U.S. firms ' involvement in
overseas production of machine tools for U.S. consump-
t ions 37 This -subject is covered in further detail
under Joint Ventures, n below.
~-~rie~=~mn of Inept Strategy. At least one
large macalne cool corm nas pledges to "out-Japane~e the
Japanese. ~ It has instituted Japanese methods in inven-
tory management, quality control, marketing strategies,
and customer service, as well as an emphasis on quality
and the adoption of EMS technology for its own production.
Some traditional U.S. machine tool companies are
diversifying into the production.of plastics forming
machines, robots, microcomputer components, software
turnkey services, and materials handling Systems.
Some new f irms have attempted to identify markets
(e.g., certain types of controllers' where both Japanese
and U. S. competition seems weak . In one successful case
of Niche-playing the f irm involved has been able to
maintain relatively even growth, in spite of sales
OCR for page 43
43
fluctuations in the machine tool markets as a whole.
( For more information on niche-playing, see "New Entrants
and New Competitive Strategies, ~ above. )
Efforts to Gain New Technological_ Expertise. These
include budgeting additional R&D sums for discovering new
technology (see, however, ache discussion of R&D spending
in this chapter), pursuing some contracts on a "break-
e~ren" basis in order to gain experience in useful tech-
nolo<;y, and making minority investments in firms that
have expertise in relevant technologies.
Mergers and Acquisitions. These have been coon for
some time as a strategy to remain competitive. Recent
examples include the Cross Company's merger with Kearney
and Trecker, the acquisition of Unimation ta maker of
robots but not of traditional machine tools) by Westing-
house (a maker of industrial controls and a seller of
factory automation services but not a manufacturer of
traditional machine tools), the growth of Newcor and Lamb
Technicon through acquisitions, the acquisition of Snyder
by Giddings and Lewis, and the subsequent acquisition of
G~ddings and Lewis by AMCA International. In the case of
the Cross/Kearney and Trecker merger, the U.S. Department
of Justice diluted the possible competitive benef its by
requiring that the merged company divest itself of certain
product 1 ines .
Mergers and acquisitions hold out the possibility for
economies of scale and the ability ho attract sufficient
funding for necessary capital improvements. If managed
properly, a machine tool f irm involved in a merger or
acquisition could enjoy the benefits of a stronger capital
structure, better access to R&D funds, and possibly an
international sales and administrative structure. All of
these are essential for competing successfully in a
modern, global machine tool market. The Committee has
two concerns regarding such developments, however,
regarding the ability of the merged or acquired machine
tool firm to compete. (1) The joining of a domestic
machine tool firm with a larger non-machine tool entity
could result in severe cost cutting, the use of the
acquired firm's liquidity to finance other initiatives
within the parent corporation, and the imposition of a
large corporate bureaucracy; all these are common ef feats
of mergers and acquisitions today. (2) The joining of a
domestic machine tool firm with a foreign firm that
intended to use its U.S. base chiefly as a sales outle t
could strengthen the domestic firm's short-terra financial
structure at the expense of an ability to design and
manufacture its own products.
OCR for page 44
44
I f these effects became characteristic of mergers and
acquisitions within the machine tool industry generally,
the merger/accTuisition movement--instead of enabling
individual machine tool firms to maintain their com-
petitivenes~--would bring few improvements to the
domestic industry. The Committee believes that this
possibly harmful aspect of mergers and acquisitions on
U.S. machine tool manufacturing canabilitv is an imp
issue worthy of additional study.
Joint ventures. ~ ~
~ ,[ —— ~ e~ ^~~W~ ~11 ~
Many firms are f inding that the mos t
e ff icient route to gaining access Deco additional skills
and product lines is to pursue joint ventures, especially
with foreign partners. Joint ventures are corn among
companies trying to reposition themselves Strategically.
Example. include Bendix-Murata, Acme Cleveland-
Mitsubishi, Westinghoune-Mitsutoki, General Motots-Fanuc,
and Rockwell International-Ikegai Iron Works. Clearly,
many major players are involved.
Most of these joint ventures have offered the potential
for low-cost, reliable overseas manufacturing for the
U.S. pet tner, and an enhanced marketing network in this
country for the foreign one. They represent the trend
toward global sources taking place in the industry. They
raise Rome questions, however, as to the effect that such
action. could have on the long-run competitiveness of
machine tool manufacturing facilities Located in the
United States. When Bendix acquired Warner and Swasey,
for example, one of its first actions was to transfer
nearly all of its machine tool production to the Murata
joint venture in Japan. Subsequently, Acme-Cleveland has
announced that its state-of-the-art NC chucked, jointly
developed with Mitsubishi Heavy Industries, Ltd., will be
produced in Japan, 38 and Or ^~ -~- a,- ~,;
that it is not committed to the production of any
percentage of its machine tools do~nestically.39
Concern was expressed by the Committee that if the
practice of overseas procurement or production by U. S.
cornier of 'machine tools for sale in the United States
were to become widespread, there would be the long-term
danger that U.S companies would end up more as distribu-
tion channels for foreign-built machine tools than as
manufacturers in this country.
~ ~ ~ by_ ~~— i~~— · ~ ~~
OCR for page 45
.
4;
Requests for Federal Ass istanc e
Two recent petit, ons by machine tool builders to the
federal government for relief from the competition of
foreign machine tools represent another kind of response
to the economic trends that have been described. It is
not within the Committee' s Chaucer to pass judgment on
these petitions. However, because they are relevant, we
note them below.
The f irst petition was submitted on May 3, 1982, by
Houda i lle Industr ies , Inc ., to the Of f ice of the U. S. .
Trade Representative, asking for the President to exercise
~ is authority40 tO deny the benef its of investment tax
credits when producers have an unfair pr ice advantage as
the result of a cartel. Attorneys for Houdaille Indus-
tr ies conducted extensive research to document practices
i n Japan that could be construed as contr ibuting to a
machine tool cartel. Some of their evidence is incor-
porated in the Japan section of Appendix B. The petition
was denied in April 1983.
A second petition is pending as of this we itinq . The
National Machine Tool Builders ~ Association has submitted
a petition to the U.S. Department of Co~erce under the
National Security Clause, Section 232 of the Trade
Expansion Act of 1962 (19 U.S.C. Section 1862~. This
petition requests a f ive~year period dur ing which imports
of both metal~cutting and ~netal-forming tools would be
limited to 17.S percent of the value of total domestic
consumption. The argument for this action is that ~ the
national secur ity of the United States in being impaired
by current levels of imports of machine tools because
such imports threaten to debilitate the domestic machine
tool industry, which is critical to the United States'
defense and deterrence posture..41
CONCLUSIONS
This chapter has dear ibed a changing machine tool market
which, in the course of f ive to seven years, has become
significantly more competitive and complex.
· Advances in microelectronics, robotics, systems
engineer ing, computer science, and substitute mater ials
have altered the character of manufactur ins and changed
the nature of the machine tool industry, making machine
tool construction (as defined in this report' one of the
OCR for page 46
46
world's "high tech" industries.
Further advances in the
commercialization and military application of synthetic
materials that substitute for metal will also affect
manufacturing technology and, ultimately, the size of the
market for conventional machine tools.
· International competition, especially from the
Japanese, has brought intense pressures on U.S. firms to
meet new standards of innovation, reliability, pr ice, and
customer service.
New entrants to the market for automated manufac-
turing have brought new (to the traditional machine tool
industry) specialties such as computers and software for
design and integration; electronic controls; machines for
assembling, testing, plating, and heat-treating com-
ponents; robots; and sophisticated engineering services.
These f irms have combined resources that could expand the
financial power of the manufacturing process industry by
several times the present size of the machine tool
industry as traditionally def ined . In addition, con-
~ lomerates such as Allied-Bendix, Litton, Textron , White
Consolidated, and AM CA International have substantial
machine tool subsidiaries. The actions they take to
rationalize their machine tool operations may accelerate
the already rapid change in the industry, providing they
invest in strengthening their machine tool elements. The
financial power of these new firms, and their ~high-tech.
orientation, may require smaller firms to merge in order
to become large enough to make the investments now
required to remain competitive in a technal~aicall v
advanced industry.
· New strategic groups in the industry have
Relegated many traditional machine tool producers to the
flower left. spectrum of an industry map that ranks
strategic group) according to the degree of technological
sophistication and customer support required. The
traditional machine tool firms produce in an environment
in which their products are more like commodities than
products of greater technological sophistication
requiring Extensive computer and other engineering
services. In this traditional market sector, which i S
now actually part of a larger machine tool market, this
strategic group will have to adjust its capabilities to
meet intensif fed competition on the basis of price,
delivery time, and reliability: factors where such U. S .
firms have shown comparative weakness in recent years.
~ The globalization of machine tool manufacture and
markets has forced U.S. machine tool builders themselves
_ _ _, ~ _,
OCR for page 47
47
to take a global view of sources and markets, including
the location of manufactur ing facilities overseas.
These new realities require sk ills and character istic s
substantially at odds with the description of the
traditional machine tool industry on pages 8 to 18 of
this report.
Thus, the signs of a far-reaching "shakeouts in the
machine tool industry are unmistakable. While some
domestic machine tool builders will be unable to respond
to increased competitive pressures from abroad and from
alternative technologies, there are a number of forward-
looking firms--among them traditional machine tool
builders as well as new entrants to the market for
products and services ancillary to the use of machine
tools in automated manufactur ing applications--that have
recognized and reacted to the trends that are fore ring
changes. Those domestic f irms that have had the
fores ight to move toward automated systems development,
processing of non-metals, advanced machining and forming
techniques, and a global view of markets (or, an some
cases. successful nich-e-Playinq) will survive despite a
~ _, ~ . . _,
continuing, substantial challenge from foreign producers .
These f irms will continue to be able to respond to the
needs of the Department of Defense.
For some domestic machine tool builders, however, the
economic trends--high cyclical demand followed by the
especially sharp downturn of the recent recession have
had two consequences that may well be fatal. First, the
effects of economic cycles have distracted some machine
tool builders from the fundamental technological changes
that are proving to have a lasting impact on the types of
products and services demanded, and on their own ~nanu-
f actur ing method.. Failure to respond to those chances
has lef t a number of f irms with product lines which,
because they incorporate less sophisticated technology or
because hey employ traditional manufactur ing methods,
must now compete fiercely on the basis of price, delivery
time, and reliability, which they have proven ill-prepared
to do in the past. Second, new competitors from abroad
have made inroads into the machine tool market that ar e
unprecedented despite the history of cyclical machine
tool demand.
While the evidence of a structurally more dynamic
industry is welcome, two trends raise questions about th e
benef its, from a national security standpoint, of changes
that are taking place:
.
-
OCR for page 48
48
(1) Sound business decision making today may dictate
that a corporation shift its machine tool production to a
foreign venture partner, seek foreign machinery to com-
plement its own peripheral devices such as controllers,
or relocate its own manufacturing facilities overseas.
The danger exists that as business comes closer to
realizing true economies of production on a worldwide
scale, the United States could lose some productive
capacity which is valuable to the national secur ity .
( 2) Among the responses of traditional machine tool
builders to increased competition has been a request for
1 imited, temporary protection from imports . The danger
exists that efforts to provide immediate help for domestic
machine tool builders will, without vigorous and success-
ful efforts by the industry to improve its own produc-
tivity and technological position, actually weaken that
industry' s ability to provide the leading-edge technology
and to compete successfully on a global basis.
To deal with such issues requires an understanding 0 f
how the Department of Defense, pr ime defense contractors,
and the machine tool industry interact. The next chapter
examines these subjects.
NOTE: S
1. National Machine Tool Builders' Association (+TBA),
Economic Handbook, 1982-1983, p. 1.
2. Petition Under the National Security Clause, Section
232 of The Trade Expansion Act of 1962, for
Ad justment of Imports of Machine Tools, Submitted by
National Machine Tool Builders' Association
(.Petition.), p. 20.
3 . O.S. Bureau of Labor Statistics, Employment and
Earnings, July 1983, pp. 78-81.
4. Anderson Ashburn, ea., World Machine-Tool Output
Falls 20%, ~ American Machinist, Feb. 1983, p. 77.
5 . TUBA , Economic Handbook, p . 16 4 .
,
6 . N=BA, Economic Handbook, p . 16 7 .
OCR for page 49
49
7. National Academy of Engineering, Competitive Status
of the U.S. Machine Tool Industry, " 1983, p. 18.
8. U.S. Department of CoIranerce, Census of Manufactures,
1977 .
9 . Amer ican I ron and Steel Institute, Annual
Statistical Repor ts .
10. ~Petition, n page 35.
11. See, for example, ELBA, Economic Handbook, p. 249.
12. It was reported on May 27, 1983, that Cincinnati
Milacron and Acme-Cleveland had reported three
consecutive quarterly losses. Gleason Works had
reported five and Brown & Sharpe had reported six.
Value Line (Machine Tools), May 27, 1983, p. 1344
In 1982 annual reports it was stated that Lodge &
Shipley lost money during 1982, as.did the machine
tool segments of Textron and White Consolidated
Industries.
13. Eli S. Lustgarten, Vice President, Paine Webber
Mitchell Hutchins, quoted in American Metal Market,
June 13, 1983, p. 2A.
14. Otto Hintz, et al., Machine Tool Industry Study
Final Report,. U.S. Army Industrial Basic
Engineering Activity, Rock Island, Illinois,
November 1968, pp. 18-19.
15. National Machine Tool Builders' Association,
Remeeting the Japanese Challenge,. 1981, p. 7
.
.
16. National Academy of Engineering, op. cit. ~ p. 49;
Otto Hintz et al., op. cit., p. 36.
17. ~Petition,. p. 132.
18. N=BA, Economic Handbook, pp. 162-163 .
19. See, e .g., U.S. Congress, Joint Economic Committee,
Special Study on Economic Change, Volume 3 Research
and Innovation: Developing a Dynamic Nation (1980),
possum.
OCR for page 50
so
20. See, Beg. r NMBTA' "Meeting the Japanese Challenge
p ~ 13 e
21. Cincinnati Milacron r Annual Report r 1982 e
22. Testimony of We Paul Cooper r Chairman'
Acme-Cleveland Corporation, before the International
Trade Commission on June 28, 1983, p. 3.
23. NMTBA, "Meeting the Japanese Challenge,. p. 14.
240 See notes 9, 10, 11 of Chapter 3 of this report.
2S. NMTBA, Meeting the Japanese Challenge,. p. 14.
26. Joint Logistics Command, Heavy Press Study, November
23, 1982.
Douglas Aircraft reports that in the next 15
years there will be no major application for
composites in large airframe structures due to
the many existing technological problems.
This position was also supported by
Rocicwell-International. Although they ar e
using composites (up to 700 pounds of parts)
per B-1 aircraf t, they are not among the
~ large bones. of the structure. Boeing feels
that as the technology develops, an increasing
percentage of aircraft will be made up of
composites.... Many of the current
generation of composites (i.e., those
containing graphite) are unacceptable in Naval
surface ship combat environment since debris
from composite damage could affect EMI/EMC.
27. Cincinnati Milacson, Annual Report, 1981
28. SCUBA, Directory 1983, pp. 33-94.
29.
,,
Ibid., p. 21.
Testimony of Eli Lustgarten, Vice President,
Paine Webber, Mitchell Hutchins, before Economic
Stabilization Subcommittee of House Committee on
Banking, Finance and Urban Affairs, July 26,
1983, p. 1.
OCR for page 51
51
31. NMTBA, Economic Handbook, p . 16 7 .
3 2. NMTBA, "fleeting the Japanese Challenge, " p. 27.
33. For a good historical review of the Japanese
"system, ~ see U.S. Congress Office of Technology
Assessment, U.S. Industrial Competitiveness: a
Comoar ison of Steel, Electronics, and
.
Automobiles (Washington, 1981) pp. 190-193 .
34.
35.
Strategic groups are groups of manufacturers
which, for reasons relating to the similarity of
product or market, follow similar business
strategies. The concept of strategic groups
comes from Michael Porter: see, e.g., Porter,
Competi~cive Strategy (New York, The Free Press,
1980) .
"petition, n pp. 153 - 154e
36. Japan Machine Tool Builders' Association
response to NMIBA Petition, ~ Investigation of
Imports of Metal-Cutting and Metal-Forming
Machine Tools under Section 232 of the Trade
Expansion Act of 1962, ~ pp. 136-142.
37. Lustgarten, op. cit., p. 19
38 . Cooper , op. cit., p. 10 .
39. Testimony of Richard T. Lindgren, President and
Chief Executive Officer, Cross & Trecker
Corporation, before the International Trade
Commission, June 28, 1983, at p. 8.
40. Section 103 of the Revenue Act of 1971, 26
U. S.C. Section 48 (a) ( 7) (D) .
41. ~Petition, ~ p. 6 .
Representative terms from entire chapter:
tool industry
