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4 PROBLEM SYKES IS AND RECOMMENDATIONS
PROBLEM SCATHES IS
What is Happening to Me UPS. Machine roof Industry?
The U.S. machine tool industry, once the most productive
and technologically advanced in the world, has lost a
substantial proportion of its domestic market to foreign
impor ts . U. S. . machine tool builder s are under consider-
able pressure from Japanese machine tool products, which
some consider to have incorporated superior technology.
At a time when a severe recession has eroded and sometimes
erased prof it margins, rapidly changing manufactur ing
technology has created new urgency for plant moderniza-
tion and investment in R&~ in the machine tool industry
itself. In addition, many customers of U.S. and foreign
machine tool builders believe that the Japanese have
invested more than the United States has in developing an
effective world marketing and servicing network.
Compounding the situation faced by the traditional
U.S. machine tool industry is this Committee' ~ ob~erva-
t ion that the very business of selling stand-alone tools
that cut, form, and shape mater ial in product ion processe s
has changed radically. An discussed in Chapter 2,
manufactur ing process improvement needs today are being
met by a group of suppliers of computer and systems
technologies in addition to the builders of the machine
tools themselves.
Because the technology is changing so rapidly and
customer needs are increasingly difficult to meet, the
problems faced by traditional U.S. machine tool builders
are exacerbated. For instance, order-backlog management
will not substitute for strengthening efforts to identify
and meet customer needs.
84
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85
Even the more traditional economic forces in this
industry are unlikely to reverse the situation. His-
torically machine tool orders lag the business cycle, but
because market penetration by foreign competition seems
to be here to stay, the competitive climate faced by U.S.
machine tool builders is unlikely to improve even if the
current business recovery should prove to be a sustained
one.
How Did the Industry Get This Way?
In every advanced industrial country, there are now
intense pressure. to take a global view of sources of
materials, production facilities, and particularly
markets, in order to compete successfully. This global-
~zation of business has already taken place in such teas to
industries as computers, telecommunications, steel, and
-immure ial aircraft.
..~..~._~ The machine tool industry also
appears to be subject to these same forces, which are fed
by the more rapid diffusion of technology, changing
economies of scale induced by new automated production
techniques, lowering of transport and communications
costs, and a narrowing of income differences between the
United States and other industrialized competitors.
The U.S. machine tool industry is being forced to
adjust to these far-reaching developments because its
traditional practices are ill-suited to the present day.
Unlike their Japanese competitors, most U.S. machine tool
builders have managed business cycle swings by accumu-
lating backlogs rather than expanding capacity and
marketing. Although the machine tool industry'.
prof Stability had been healthy from 1974-1981, its
capital investment for modernization has been relatively
low. It is lowing market share to an industry in a
country, Japan, that has lower wage and compensation
levels, lower interest races, and a form of government-
industry cooperation that is geared to an ~export~or-
per ish" economy.
The users of machine tools have also influenced the
status of the U.S. machine tool industry today. In some
machine tool categories, penetration of the U.S. market
by foreign firms has been possible because foreign
machine tool builders gained important experience with
very sophisticated domestic users. With the possible
exception of some manufacturers in the U.S. aerospace,
farm equipment, and off-road-vehicle industries; there
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86
are no U.S. manufacturers with installed processes of the
technolog ical soph istication that can be found in West
Germany and Japan. The largest U.S. market for machine
tools, U. S. automobile manufacturers, has not until
recently been a strong articulator of demand for high
levels of manufacturing technology.
Although the above paragraphs describe traditional
U.S. machine tool builders in general, leaders within
that industry have acted and are acting to meet new
market realities. This report has shown that the response
to new competitive conditions has been widespread and
varied. Cos~-cutting ( including relocation of manufac-
turing facilities overseas), mergers, joint ventures,
diversification into new technologies, more R&D spending,
and even a basic reorientation of business strategy have
been documented. In addition, as this report describes
in Chapter 2, the structure of the machine tool industry
is changing signif icantly. The industry is being
augmented by an increasing number of. U.S. manufacturers
offer ing products that are becoming an integral par t of
new manufacturing process technologies.
What are O0D' s Interests
Regarding the O.S. Machine Tool Industry?
This report has identified three levels of DOD interest
and concern with regard to the machine tool industry:
1. Access to State~of-the-Art Technology. 'the O01) is
answerable both to its mission of national security, and
to interested parties such as the U. S. Congress, for
maximizing the reliability, effectiveness, and economy of
i ts equipment and mater tel. This requires machine tools
and systems of the broadest, latest, and highest
capability.
2. Cost-Effective, Expandable Production. The same
considerations also require that costed festive
production be readily expandable and sustainable during
per iods of potential ~upply-line disruption.
3 . Health of the Economy . Because inures tment in mor e
ef f icient production--including defense production--is
more likely to take place dur ing per iods of high levels
of economic activity, the DOD is concerned about the
health of the economy and of the manufactur ing sector .
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87
The Committee found that these D00 concerns and
interests will be best satisf fed when three conditions
are being met:
1. The most appropr late, up-to-date production
technology is being widely used in the domestic
industr ial base, in both pr ime and second-tier
contractor s;
2. The use of new technology extends beyond the
defense sector, at least to those parts of the civilian
sector that might be expected to be diverted to
supporting military production during wartime: and
3. The strategic industr ies that face rapid
technological change are also keeping up with the state
of the art and maintaining a sound f inancial position.
while several prime defense contractors are working
with leading edge manufacturing technologies, the
Committee is concerned that advanced manufactur ing
technology is not as widely applied in this country as in
Japan and Western Europe. While some of the world' s best
production technology can be purchased in thin country,
and while delivery time. of U. S . machine tools have
become more competitive recently, many domestic machine
tool users believe that Amer ican machine tool f irms are
not satisfying demands with regard to pr ice and
reliability as well as some Japanese suppliers.
What are DOD's Policy Options, Levers, and Constraints?
Although DOD cannot alone galvanize the machine tool
industry, the Committee is impressed with the influence
that ache DOD can have in advancing the development and
application of state-of-the-art production technology.
Although the s ize of the direct DOD demand for machine
tools is small in volume relative to machine tool sales
nationwide, the DOD-induced demand for machine tools in
large, and the range of DOI, equipment and materiel needs
is so wide as to require virtually every form of manufac-
ture in use in the country. Therefore, DOD can, through
procurement specifications, affect the standards of
product ion that are used .
In short, COIN is at least partially in a position to
ensure that its own interests and concerns vis-~-vin the
machine tool industry can be satisf ied. It is perhaps
the only federal agency so well positioned. .
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88
The Committee believes that technological leadership,
involving not only the ability to perform state-of-the-art
scientific research but also the ability to apply and
i ncorporate it economically into co~unercial products and
processes, will determine the competitive success of the
domestic machine tool industry in the global marketplace
and will, therefore, be cr itical to its continuing health .
As noted above, this leadership is a function of both the
builders and users of machine tools. DOD can do much to
stimulate and encourage U.S. builders toward decisive
technological Leadership in key aspects of manufacturing
sciences.
The policy tools available to government range from
grants and subsidies, to regulations directly affecting
an industry, to other policies designed to provide the
conditions that encourage certain desired activities In
the case of the Department of Defense, the most direct
influence that can be brought to bear upon the machine
tool industry is through procurement. Additionally, DOD
can subs tantially inf luence the lonq-term health of th e
industry by supporting industry-wide ef forts to f ill two
of its pr ime needs: better research in manufactur ing
technology, and a knowledgeable customer for the
resulting process technology.
In considering the range of possible actions, the
Committee emphasizes that the current situation in not
sub ject to a "quick fix. ~ On the contrary, the only
valid solution is one that prepares an already diverse
industry for a climate of cs:,ntinuing rapid technological
advance and strong foreign competition in domestic and
world markets well into the future. Additionally, the
f inancial condition of Many machine tool builders
militates in favor of a mix of measures having immediate
as well as long-term i~npac~c. Anything short of a
comprehensive package, the Committee believes, could
prevent the U.S. machine tool industry from continuing
its adjustment to new competitive conditions and
strengthen the case for emergency measures in the future.
REC=MENDAT IONS
The following recommendations numbered in order of
priority fall into categories of action open to the three
key participants: DOD; parties outside DOI)'s direct
jurisdiction but within its power to influence , such
prime contractors and other government agencies; and
machine tool builders.
as
U.S .
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89
Recommendations for DOD
1 . Modernize the Defense Industr ial Base
There is considerable evidence that contracts for
advanced weapons systems are often undertaken today using
manufacturing technology that is 20 to 30 years old. As
a result ~ not only do these weapons systems have costs
that Could be avoided' but the country loses opportunities
to pioneer in new Production technoloov having ;` 1 Arm"
potential impact on the economy.
To a disturbing extent, the Committee believes, the
technology lag in defense contracting reflects short-
comings in the contracting process itself. As explained
in Chapter 3, there are too few incentives built into the
process to encourage widespread modernization in defense-
r elated product ion .
One hopeful sign is that DOD has in place programs
that could, if given suff icient pr for ity within the
Depar tment, make substantial progr ens . The new
Industrial Modernization Incentives Program ( hMIP), and
000 ' s ManTech and TechMod ( including the Army ' s IPI)
programs have the potential of speeding the implemen-
tation of new manufactur ing technology.
Action: DOD should display a greater commitment to
the aims of its manufacturing productivity incentives
programs. The IMIP (as the successor to the TechMod and
IPI programs) and ManTech programs should receive
increased and stable funding.
_ ,~ , _ . ., ~ ~ ~
2. Stress Productivity Improvement Incentives
The OOD recognizes the value of plant-wide technology
improvement through its TechMod Program. Applications of
TechMod funds, however, are both extremely limited and
conf ined generally to pr ime defense contractors, linked
as they are to specif to weapons programs. The expansion
of the TechMod concept, and the inclusion of the machine
tool builders themselves as potential recipients for
program funds, would be an efficient way of supporting
the viability of the domestic industry through R&D.
Action: DOD should create productivity improvement
incentives within the machine tool industry in the form
of a TechMod program for machine tool builders that well
to the defense industry and to the DOD i tseLf .
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so
3. Simplify Contracting Procedures
.
There have been numerous instances
where f irms,
including machine tool f irms, have deliberately avoided
opportunities to bid on government contracts or apply for
~~ _.-_ ~~~ai~~_= -~_~U== AL Bile complexities of con-
tracting procedures. Such a situation deprives the
taxpayer both of greater competition in government
contracting and of the savings from r-rl',-~ A..,.__-;
r equi remeets .
A reasonable goal in dealings with pr ivate f irms should
be to take no more time in the contracting process for
particular items than the average time taken in regular
non-government business. With regard to making contract
specif ications more realistic, and improving disclosure,
the procedures used for the recent Watervliet Arsenal Ems
and—r non ~ ~ ~ = rat ~ e me_ ~ ,. _ ~ ~ =
~ _ ~~ c ~ lie_ L a
procurement might serve as a model.
Action: DOD should consult with the National Machine
Tool Builders' Association to establish a program encour-
aging individual machine tool f irms to bid directly for
government contracts. Such a program might concentrate
on contract specifications (e.g., substituting performance
or capacity criteria for design specification criteria),
disclosure (e.g., making contract review procedures more
open), compliance (e.g., supplying consulting services,
through the NMT8A, on EEO, set-asides , etc. ), and timing
( e. g ., stipulating deadlines for reviews and automatic
approval if no negative f inding is forthcoming by a
specif ic date) .
4. Improve InEc~rma~i~n F1 Hem
If well informed about available R&D funds, machine
tool companies with the necessary resources and deter-
mination will welcome the chance to improve their
technological capabilities. If better informed about
manufacturing technologies of interest to WO, contrac-
tots as well as suppliers can respond with more
aggressive efforts at plant modernization.
These information flows are especially important given
the U.S. machine Cool industry' s present relatively
fragmented structure. As a rule, only the largest
machine tool firms have been able to maintain the close
relations with university engineering departments, and
separate R&D divisions, which are needed to maintain a
technological edge.
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91
Action: Establish, in conjunction with the U.
machine tool industry, one or more joint, industry-wide
research center s.
Equip DOD research centers to make a more aggressive
effort to make manufactur ing technology information
available directly to potential adopters. Involve
potential adopters in the R&D contract award process.
To increase awareness of ManTech and TechMod activities
among process and equipment suppliers, hold regular
briefings for suppliers of equipment to acquaint them
wi th the wor ~ ings of ManTech and TechMod .
Hold process technology forecasting sess ions with key
individual interest groups (EMS suppliers, near net shape
suppliers, etc. ) to share with them DOD expert=' assess-
ments of related developments tak ing place in pr imes that
ar e sponsored by contract R&O money.
5. Require Long-term Production Equipment Maintenance
Guarantees
~-
In many cases, one cannot think of ~fixing~ a machine
in the old sense of the word; ~repair. has today, in many
cases, become the installation of a highly complex circuit
board or an electric component made solely by a manufac-
turer under highly controlled circumstances. Such con-
ditions obviously present enormous challenges even for
domestic manufacturers in peacetime, but for overseas
resources under wartime conditions, such challenger may
be beyond the meeting.
Action: In defense contracts, require that con-
tractors be able to maintain the production equipment for
five years even if supply line. are disrupted. Continued
production could be guaranteed either by having suff icient
par to inventory in the continental Uni ted States or by
having the ability to replicate the equipment.
6. Study Effects of Consolidation, Acquisitions, and
Joint Ventures
The Committee's interest in consolidations,
acquisitions, and joint ventures is twofold. First,
several countries have adopted policies permitting joint
activity that, if engaged in by U. S . companies, would
appear contrary to the intent of the U.S. antitrust
law=. Such policies place American machine tool manu-
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..
92
facturers at a competitive disadvantage. The nation and
its lawmakers may have to relax their fears of -treater
-- and coordination
size and concentration of,
domestic companies in recognition that many
; - _1 19~ ~ [ ~ ~ _ . ~
among'
U.S. products'
I 1ndCnine COONS ~ now compete in a world market.
Second, the restructuring of the machine tool industry
has, in some instances, involved the purchase of firms by
holding companies or conglomerates. Such developments
could adversely affect investment in U.S. machine tool
production facilities and their ability to respond to
Defense Department requirements .
Action: OOD should commission a study of recent
consolidations, acquisitions, and joint ventures within
the machine tool industry, with the aim of determining
whether (1) such actions strengthen or weaken machine
tool production in this country, and (2) foreign firms
are taking advantage of the relative freedom afforded by
their laws to gain a competitive edge. Where concerns
are warranted, DOD should present the information to
relevant Executive and Legislative branch agencies.
Each of the above recommendations varies considerably
in magnitude of effort and resources. The Committee's
deliberations , however , were based on the assumption that
the opportunities for manufacturing productivity benefits
occur each time the DOD procures weapons, equipment,
munitions , or spare parts. The WD' s procurement budget
for fiscal year 1982 was S64.1 billion. In addition, DOD
and the three services administer revolving and management
funds , some of which (e.g ., DOD stock funds) carry a
large procurement quotient. In f iscal year 1984, outlays
from these combined funds will exceed S100 billion.
Savings brought about by increases in manufacturing
efficiency can have a compound effect, both from the
accumulation of productivity gains and the compound
savings on interest costs. A one percen'c productivity
gain in the DOD's procurement in f iscal year 1984 alone
could, i f i t became the base for a new level of
productivity, save the Department S2 billion in 1990,
with cumulative savings over the seven years 1984-1990 0 f
more than S14 billion.
While these gross totals depend upon assumptions about
interest rates and increases in procurement spending
which may or may not come about, it nevertheless gives a
rough estimate of the large savings that can result from
productivity gains, and gives some measure of the
resources that can justifiably be devoted to this effort.
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Beyond this general level of effort, the Committee
felt that attempting to develop useful measures of costs
and benefits related to each recommendation was a task
welt beyond their ability and resources because of the
huge var iety of technologies and applications involved.
Meaningful estimates with acceptable levels of confidence
would require large volumes of experience data specific
to each application. Even then the benefits of applying
improvements in manufacturing technology are often
difficult to quantify at early stages of the technology'
development.
Another important failing of cost-benefit analysis in
this context deserves special mention. The Committee
believes that where long-term considerations are
paramount, reliance on cost-benefit analysis can be
self-defeating. For example, the dollar costs and
benefits of becoming internationally competitive in
machine tool production are difficult to quantify with
any degree of certainty; yet such competitiveness is
central to many of the concerns of this report. Indeed,
the Committee believes that preoccupation with short-term
cost-benefit analysis, to the exclusion of important
strategic considerations such as the setting of long
r ange goals concerning output and market share, has
brought many U.S. firms to the point where they have lost
substantial ground to foreign competitors. The question
to ask is the cost of not staying internationally
compet i five.
Recommendations for Agencies with Which DOD
Has Frequent Contact
s
The analysis in the body of this report indicates that
the U.S. machine tool industry has been harmed as much by
domestic economic policies as by the actions of foreign
competitors. Changes in the business cycle have had a
marked effect on levels of capital investment, R&D,
sales, and prof itability possibly more so than in othe
industry sectors. Machine tool orders are a ~lagging"
economic indicator; and this means that the industry
needs a sustained economic recovery in order to regain a
solid equilibrium. The Committee believes that a healthy
macro-economy that provides continuous growth oared
several years could be the most significant single
contr ibutor to a healthy domestic machine tool industry.
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94
1. Raise the Profile in the Administration and the
Congress of DOD Programs That Promote Advanced
.. . ~
Manufacturing Technologies
The evident concern in Congress with manufacturing
productivity generally does not appear to be matched by
efforts to generate appropriations for programs, such as
ManTech and TechMod, which would promote manufactur ing
technology from a departmental level. The Congress needs
to focus attention on programs such as these, which hold
some promise for solving in a practical way the problems
of manufacturing technology lags in U.S. factories.
Action: Congress should appropriate additional funds
for ManTech, TechMod, and similar programs as separate
line items in the defense appropriations budget.
2. Build a Program to Promote Machine Tool Exports
The Committee believes that participation by the U.S.
machine tool builders in world markets is essential both
for the economic return and to ensure full awareness of
foreign technological developments, productivity, and
costs. In other words the global machine tool market is
a reality in which U.S. firms must participate in order
to ensure competitive effectiveness in domestic markets
as well as to expand their sales potentials.
In addition, U. S. policy makers must recognize the
mobility of technology. Restrictions on U.S. exports for
some machine tool technology in an effort to prevent i ts
use by Eastern Bloc countr ies is apparently not com-
pletely effective because of foreign availability.
Action: The Department of Commerce should cooperate
w i ch the U. S. machine tool industry to mount a machine
tool expor t promotion program utiliz ing the resources o f
the U. S. foreign-based Consular Corps to identify market
opportunities and help U.S. manufacturers gain access to
those opportunities. This effort would include estab-
lishing market controls, providing assistance in proposal
preparation, and, where appropriate, facilitating
Overseas Private Entreatment Corporation (OPIC) financing.
In addition, the government should reduce barriers to
the export of machine tools to Eastern Bloc countries in
cases where those counts ies have access to the same tech-
nology f rom other sources . U. S . machine tool builder ~
s hould be able to expor t the same types of equ ipment to
the Eastern Bloc that other Western counts ies are
expor ting to them.
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as
3. Bring Machine Tool Industry Considerations Into Other
Departmental Programs
Several federal agencies already have task forces
looking at the problems of the U.S. machine toot industry.
There is no evidence, however, that existing federal
programs for technology development have focused on the
economics of the machine tool business itself.
Action: The Administration should inventory the arra`y
of federal programs that are aimed at the problems of
manufacturing productivity, with the goal of gaining
better coordination among programs and simplifying the
process of obtaining federal assistance.
Recommendations for Machine Tool Industry
The Committee recommends that the conventional machine
tool industry look beyond government trade policy for
solutions to its fundamental problems. To be competitive
in today's marketplace, now global in nature, machine
tool companies will have to modernize their production
facilities an well as stay abreast of advanced tech-
nologies in their product designs. They should also
recognize that American purchasers of machine tools today
have begun to consider foreign suppliers very seriously
for more reasons than their lower cost. The American
machine tool industry should combat the reputation some
companies have built for having a reluctance to be
responsive to user preference in machine design and
systems, a slow delivery record, and insufficient service.
The changing technology will place increasing value on
~ full product support orientation as the basis for
competition. This support would include customer educa-
tion: needs analysis, applications engineering, and
simulation; greater efforts at competing on the basis of
quality; and more aggressive service support. The
industry should realize that many of the problems that
beset it are the same as several other U.S. industr ies
face. As the industry itself has recognized, many
solutions must come largely from the machine tool
industry itself; some must be implemented on an
individual f irm basis.
1. More aggressive application of advanced equipment
and processes in machine tool production. These steps
are needed to improve product reliability, to reduce
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96
costs, and perhaps just as important, to gain first-hand
familiarity with modern production methods.
2. A more active search for new technology. This
would include taking advantage of access to information
available from DOD, and making aggressive efforts to work
with prime contractors in areas of new technology that
they have identified as important as well as keeping up
with offshore technological advances.
3. A -treater willingness to invest in lonq-term
competitive strategies rather than responding only to
short-term economic considerations. The Japanese firms
-
that are successful in this country have made their mark
by responding imaginatively to customer needs with largely
standard products. The new competitive realities demand
that U.S. firms must do no less.
4. A new acceptance of joint R&D efforts. This would
assist in developing a domestic research capability for
nurturing advanced production technology in the mid-1980s
and beyond a
5. A more extensive information program. The NMTBA
should mount a major program to inform machine tool
members of the availability of funds and DOD interest in
upgrading the machine tool base in the United States.
It is particularly appropriate that the U.S. machine
tool builders maximize the value of the current period of
cooperation within the industry for more acting upon real
operational issues (e.g., labor relations, investment,
R&D), which lend themselves to joint efforts. The
industry should take this opportunity to set for itself
challenging objectives whose attainment will achieve the
worldwide competitiveness that is necessary. The
challenge facing the industry is to persist with such an
agenda until its objectives are realized.
CONCLUSION
The U.S. machine tool industry displays the character-
istics of a mature industry facing pressures to undergo
fundamental change. The proper response of government to
such change is twofold:
1. The government should continue to aid technological
progress and the pos itive restructur ing in the industry .
This may mean that from time to time the government will
have to look into means to overcome the comparative
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97
advantages of foreign producers where attr ibutable to
hidden subsidies such as antitrust concessions and low
interest rates give the foreign competitor an advantage.
2. The government should seek to work more directly
with machine tool builders to clar if y its policy of
promoting rationalization and its intention to assist
f irms that are willing to adapt to the realities of the
marketplace.
The realities of the international marketplace, seen
from government standpoint, suggest that the U.S. govern-
ment cannot wash its hands of the industry's concerns.
Indeed, several government agencies, including the
Department of Defense, the Department of Commerce, the
International Trade Commission, and the Export-Import
Bank, have planned initiatives aimed at developing more
effective policies for the U.S. machine tool industry.
Free market economics, however, assumes that most
problems are not amenable to government-imposed solutions
Sometimes resolution of the problem depends upon changing
the attitude. and practices within industries suddenly
faced with rapid change. The surveys conducted for this
report turned up such a pattern among both machine tool
builders and users. The challenge facing policy-makers
today is to identify those measures which demand govern-
ment action, and those which are best left to the
industry.
In terms of this report, the most relevant reason for
action is simply one of our own national de tense . 8u t
such an effort will also help improve our whole national
productivity and cannot be neglected either. The
Committee believes that that argument will come to be of
far greater importance.to this country than any defense
argument.
.
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Representative terms from entire chapter:
tool industry
