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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

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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

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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

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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),

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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

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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

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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

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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.

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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-

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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

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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

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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

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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

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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.

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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~~ ~ ~~

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. 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

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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 _ _ _, ~ _,

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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: . -

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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 .

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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.

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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.

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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 .