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Survive 85: industry report - machine tools.

SURVIVE 85

Industry report-- Machine tools

This could be my last article. It's not often that you knowingly and willingly bite the hand that feeds you. The machine-tool industry supports this magazine and feeds my family. The machine-tool industry is in big trouble. Therefore, as the messenger of bad tidings, I am now in double jeopardy.

This is an industry that got caught with its pants down in '82-'83, and now after recovering some of its composure, it's standing there with one pant leg missing. Half of its domestic market has been lost to imports, most of it permanently --the best that can be hoped for is knee-length knickers.

Over two thirds of this industry has already merged to survive, and some feel only a dozen or so companies will survive the decade. Without a terrific niche, the little guy is dead. Despite the recent recovery, nearly a fifth of this relatively small industry's people are gone since '82 (9000 people, nearly half white collar). The National Machine Tool Builders' Association's 232 import-protection petition lies stillborn. Once a $5-billion industry, it's now only $3 billion (as a single company, it would match Time Inc, 132nd on the Fortune 500). And now that the nation's capacity utilization rate seems headed back below 80 percent, who needs machine tools?

Why did this happen? A lot of the problem can be blamed on the actions of others: soaring interest rates, the distortion of the dollar, the mistakes of Big Auto and Big Steel, the failure of Big Government to shield them from unfair foreign competition, the outsourcing by domestic manufacturers, and those nasty Japanese and Germans trying to make a living selling their home-tested leading-edge quality machine tools over here.

But a lot must also be blamed on the sins of this industry. They're easy to enumerate, but a little hard to recite: you're too conservative, you're too small, you can't compete in the world market, you can't build a competitive small machine tool, you ignore your backlogs, you don't invest in your own future, you hide behind your hundred-year-old nameplate, you never give me specs or live up to my expectations, you sell me automation without believing in it yourselves, you live off defense-department R&D largess, and you're still trying to sell me iron, not the software I need to survive.

(Phew!! Am I still here, or am I dead by now?)

Now that I have everyone's attention, I would like to quit talking and turn this over to people more qualified to make value judgments. This article was generated by challenging a wide variety of people to help me explain and evaluate all of these wild claims. It includes people who get paid to analyze this industry, sages from academia, the top people from the largest and smallest US machine-tool builders, and most importantly --the people who distribute and ultimately buy machine tools. When they are all through, I'll summarize a prognosis for this industry.

But first a few more zingers, but from real people (not some clown with a hyperactive word processor). The too typical machine-buyer's lament, from the president of a leading maker of cutting tools: "One key reason this industry's in trouble today is the ridiculous prices and deliveries we were being quoted back in '81 and '82 when we were shopping for a five-axis machine: lead times of 18 months to 2 years, and prices clearly noncompetitive for equipment that wasn't even competitive with available foreign machines! These builders were clearly not meeting their customers' needs in value, availability, or capability. It's not rosy out there today for anyone, but this certainly impacted their downturn!'

Next, an engineer with a leading systems supplier: "I don't see the US machine-tool industry ever returning to the size it once was. Some of it is gone forever. Like other industries, we are highly dependent on the skills of our people. When you lay off your engineers, tooling people, and machine builders, they go into other industries or head for the Sun Belt. You won't be able to get them back; they're goine! You can't replace them with robots!'

Nevertheless, whether you're machine builder or buyer, stay with us, there is still hope!

The view from outside

One industry analyst with an in-depth current report is Barry G Haimes of Kidder, Peabody & Co Inc, New York, NY. On the positive side, he sees factory automation increasing its share of capital spending, FMS continuing its market penetration, and the top companies picking up market share as industry consolidation continues. "The systems area offers insulation against Japanese competition, and other industry positives are the resurgence in automotive spending, lower interest rates, and the possibility of deficit reduction this year.'

But there are a few delays, he notes. "Auto orders have slowed with the restructuring at GM. Systems progress, while steady, has been less than spectacular because of outmoded customer systems of financial justification. Profitability continues to be restrained by foreign competition, there's overcapacity in systems as new competitors try to buy into this business, and the Treasury's tax simplification proposal is inhibiting investment decisions.' As a result, he's reducing earnings estimates significantly for '85, but to a lessor extent for '86.

While his favorable long-term views are relatively easy to understand, his short-term trepidations need some explaining. "A significant amount of transfer-line business has been quoted to GM, but held up by its recent massive restructuring.

"System inquiries are at all-time highs and orders are improving, but the key stumbling block is the justification process. Vendors can persuade the shopfloor people, but not the financial people who want to see quantifiable savings beyond direct labor and work-in-process inventory, in such intangibles as product qualify, quicker response time, and design-change response, while demanding two-year paybacks.

"The transfer-line segment is operating at 50-percent capacity, and a year ago, to win a transfer-line contract, a company had to bid at a loss of 10-percent pretax. Today, margins have returned to about 5 percent on new business, but further progress is being held up by GM's backlog.

"Pricing in FMS continues to be extremely competitive. Several potential vendors, who do not yet have enough installations under their belts to be considered bona fide players, will be trying to buy business to enter this market. While some customers will eschew these price cuts in favor of proven vendors such as Cross & Trecker and Giddings & Lewis, others will be tempted by Ex-Cell-O, Ingersoll Milling, GE, Westinghouse, Mazak, and Okuma to bite at these lower prices.'

Second opinion

Christine Chien is machine-tool-industry analyst for Prudential-Bache Securities, New York, NY. I asked her how she rates the leaders these days. "We only follow the three publicly-traded machine-tool companies--Cincinnati Milacron, Cross & Trecker, and Ex-Cell-O, and of these, only Cross is considered a "pure' machine-tool play.

We haven't recommended Cross & Trecker or Milacron this cycle at all, which has been very slow and lackluster, compared to the 1979 cycle which was gargantuan. We continue to recommend the accumulation of Ex-Cell-O, but not because of their machine-tool segment, which is only 15 percent of last year's sales. They have created a reserve at the end of fiscal '84 to restructure their machine-tool segment. They will be farming out jobs that they were doing inhouse before and consolidating plants.'

Who was the leader in '84 machine-tool sales? "Looking at Cross & Trecker sales (including Bendix Automation from April 19 on and excluding 8 percent for Roberts, which is material handling), I estimate their machine-tool sales at $305 million. Milacron's machine-tool segment (and related controls, or 47.3 percent of total sales), I would guess is $312 million, so these two are pretty close.'

Isn't there an awful lot of risk for any company willing to expand in the face of all the overcapacity in machine tools today? "Yes. A classic case was at the peak of the last cycle when Cross & Trecker's backlog went through the roof. So they decided to build additional capacity at Port Huron, but before the plant was ready, the machine-tool cycle died. So that plant was never used!'

Defense tools

An important ingredient in the 232 debate was a report from the Committee on the Machine Tool Industry, Manufacturing Studies Board, Commission on Engineering and Technical Systems, National Research Council. Issued in late '83, the report was title. "The US Machine Tool Industry and the Defense Industrial Base.' While studying the defense readiness and international competitiveness of the machine-tool industry, it also examined relationships between three key players: DoD, prime defense contractors, and machine builders.

It's recommendations for the machine-tool industry included this preface: "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 as well as stay abreast of advanced technologies in their product designs. They should also recognize that American purchasers of machine tools have begun seriously considering foreign suppliers for more reasons than 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 report went on to make these specific recommendations:

1. More aggressive application of advanced equipment and processes in machine-tool production to improve tool reliability and reduce costs.

2. A more active search for new technology, including seeking out DoD and prime contractor technology and keeping up with offshore developments.

3. A greater willingness to invest in long-term competitive strategies rather than responding only to short-term economic considerations.

4. A new acceptance of joint R&D efforts.

5. A more extensive information program, specifically that NMTBA inform its members of the availability of funds and DoD interest in upgrading the US machine-tool base.

It also recognized that this was a mature industry undergoing fundamental change, and that the realities of the international marketplace dictate that the government and its agencies--particularly DoD, DoC, ITC, and the Export/ Import Bank--take greater initiative in forming more effective policies for the US machine-tool industry.

Analyzing the industry

For insight into the report, I interviewed Margaret B W Graham, Associate Professor, School of Management, Boston University, who was vice chairman of the Phase II committee.

"Our study started in 1979, at the initiative of the Defense Department,' she explained, "but later the Army became very involved. DoD's first concern was "The machine-tool industry has serious problems, should that matter to us? We see all these reports on the industry about its fragmented structure, the lag in acceptance of new technology, etc, but they don't tell us anything about what DoD should be doing differently. We need a more accurate overview, and some help in understanding the machine-tool industry.''

The Phase I group was formed to identify basic problems, and Phase II to answer the questions raised and make recommendations. The latter group consisted of defense contractors (Lockheed, Rockwell, TRW, GE, Martin Marietta), machine-tool builders (Bridgeport, White-Sundstrand, Litton, Brown & Sharpe, Rouselle), and industry consultants. Although no DoD people were committee members, their representatives were present for all discussions.

"You must understand how these reports are put together, Graham says. "The sponsor of this study, DoD, had representatives in every meeting who heard exactly who was recommending what. Although it was not exactly clear in the final report who's ox was being gored in each case (if we had had to do that, we would have wound up with pablum), there is no question that this was a basic political problem. A lot of the things that were said about the necessary changes in management of the machine-tool industry, for example, were said only with the great protestations of the machine-tool industry. It took several years and many drafts to get agreement from the group.

"Although this group soon became involved in the same issues being addressed by NMTBA's 232 petition, that was not the original intent. In the Phase I deliberations, the key argument was whether the government should really be concerned about the machine-tool industry. The defense-contractor representatives tended to say that many machine-tool companies would be dying, but, since better technology could be obtained from abroad, we should let them die. You can imagine what the machine-tool people had to say about that!'

The final report ultimately became part of the 232 debate, selectively used by both sides (like taking quotes from the Bigle) to fortify their arguments before the trade commission. As a key participant on the Manufacturing Studies Board, Graham witnessed a lot of conflicts. "There was heavy debate about saying anything in the report about the NMTBA 232 proposal. Because it wasn't our mandate, we ultimately didn't, despite the desire on the machine-tool side to openly support the petition, and another group who wanted to condemn it. My opinion is that the report actually is a strong argument against 232.

"Certainly, there was general agreement that not to have a machine-tool capability in this country would seriously impair our ability to maintain a stake in this technology. It was also generally agreed that it would be ludicrous to allow the advanced technology developed under defense auspices to be funneled directly offshore.

"I'm no protectionist, but I feel strongly that if we invest heavily in advanced technology, it is foolish to give this to joint ventures that would simply funnel it out of this country, which is actually happening today.'

The report also included a recommendation that machines purchased by the defense establishment include a 5-year maintenance guarantee that you sustain that machine during wartime conditions, obviously a requirement only a domestic builder could easily meet. Wasn't that a bit farfetched? "My feeling is that the stuff about wartime conditions is absurd,' Graham reveals. "I don't think the issue for the defense department is wartime machine-tool needs. That part of the report was a political compromise with the machine-tool builders.'

Wrong mindset?

Another issue raised was that not enough machine-tool companies are benefiting from the technology developed within the defense establishment. "If you can't afford to do R&D on your own, as our report says,' Graham says, "you must take advantage of the forces of innovation that are available. One of the report's goals was to raise awareness in the machine-tool industry of what the opportunities were if they wanted to take advantage of them.

"It's not just capital investment. It's mindset! The big problem with the machine-tool industry--and many other mature industries in this country--is that they all talk about lack of capital, but the real problem is lack of imagination! It's parochialism. It's the inability to look any further than your nose, even when the competition is beginning to come up with clearly superior technology.

"The industry is not reacting to the situation in a positive, competitive way. They cry "unfair competition' when it is simply a case of being beaten at their own game. I don't call it unfair. What's unfair about a real marketer asking customers what they really want, and then developing the right product for the job?'

Another interesting part of the study was a survey of defense buyers of Japanese machine tools, Graham reports. "The machine-tool industry was telling us that it was simply a case of unfair competition, the Japanese were undercutting their prices, and that was that. But the story from the buyers was very different. They said the reasons were that reliability was superior, delivery was faster, and support was better. All these factors were more decisive than the cost differential. They were willing to pay a cost differential to get these things!'

The guts to risk failure

Graham feels the burden is also on the buyer of machine tools. "These are new technologies that are not certain; they are under development right now, both here and around the world. That means that you don't have the luxury of waiting for the technology to stabilize before deciding to buy it.

"This is why it is not just the machine-tool builders that we have to blame for our lack of advanced manufacturing processes. It's the users unwilling to venture out, risk failure, learn from their experiences, and keep on going.'

Graham also sees a lack of sophistication in both the buyer and seller of machine tools. "When things go wrong, they blame each other, when it is really a breakdown in communication. When the first wave of computerization hit the business world in the '60s, the same arguments were heard. "Computers are not here to stay, they are lemons, they can't live up to their promises, etc'.

"Today's leading-edge companies-- both buyers and sellers--have learned how much they had to change their management system to accommodate computers within their company. And that's what all advanced manufacturing is going through right now, and will struggle with for another 20 years. Those who adapt will survive, those who don't, won't.'

Defense fallout

Another key criticism of machine builders is that they wait for the defense establishment to hand them new technology. "Defense contractors have fantastic abilities to develop the machine-tool technology they need in-house,' Graham says. "For most machine-tool suppliers, this is quite a different market to supply in terms of their own comparatively limited capabilities, so in many cases, they merely supply equipment designed by these sophisticated users. Eventually, this leading-edge technology trickles down into the standard machine-tool product line.

"There are two alternative scenarios here. First, "We'll wait for this technology to trickle down on its own. From what we've seen, that's too advanced for us--our people will never want it--so we're not interested.'

"Second, as the Swedish companies often do, "We see an opportunity to get our foot in the door here, so yes, we'll gladly take that on and do it at cost if we have to. By working closely with your people we will develop a cadre of people in our own operation who really understand this technology, so the next time somebody comes along with this interest, we will be in position to provide it competitively, or even have it set up in prototype on our own floor.' Cincinnati Milacron is another example of the latter philosophy, but these are two very different approaches!

"But as recently as 1981, it was a different story. Then, a lot of the big companies were so diverted by that huge artificial demand--primarily the conversion in the auto industry--that they needed all their resources and didn't have any extra for advanced technology.'

Strategy evaluation

Despite the overall negative message she has for the machine-tool industry, Graham doesn't want to wear the black hat.

"I'm not comfortable being cast as an industry critic. I feel that some companies have shown real initiative, while others, for whatever reason, have not been able to see the handwriting on the wall. The ones who are farsighted are making some very difficult transitions as they take full advantage of the resources they have for innovation. These are the ones with much more of a chance to survive.

"One of the big problems with today's joint ventures abroad is that they are looking for short-term profits, but in the long run they will lose their business. This happened in the US camera industry. Soon there was no significant domestic content, and that market was gone overseas. The reason the Japanese want those channels is to establish themselves in the marketplace, and they won't need those companies once that's done.

"So, unless the joint venture is well structured (and I haven't seen many that are), that is a very shortsighted approach. The synergism benefits are not instant when a company like Bendix merges a group of machine-tool elements into a systems company. That really takes a long time to do, and I don't think Bendix, for one, realized it. They were talking finance, not thinking operation.

"While I'm not very hopeful about the domestic machine-tool industry compared to its overseas competitors, some are doing a lot better than others--Giddings & Lewis and Cross & Trecker are good examples. I have a lot of respect for Milacron. They have worked hard to position themselves technologically, however, I think they are approaching limits in their resources, and even they may not be big enough to do what must be done.

"The Japanese are very good at mass producing machine tools--they use their own equipment to make machine tools, unlike the machine builders in this country. This does two things for the Japanese --reduces their costs and teaches them a lot about how their products perform.'

VJ Day in the UK?

It's often said that if you want to see the future of the US in 20 years, just look at the UK today. Britain's problems may be a little different, but they tend to look a lot like ours.

Their machine-tool industry is in worse shape than ours, and a recent report suggests that their only salvation lies with surrender to the Japanese. The report, issued in January, is titled "The UK Machine Tool Industry: Recommendations for Industrial Policy' by the Technical Change Centre, London. It relates the decline in UK manufacturing's contribution to GNP from 37 percent to 24 percent in the last 30 years to their machine-tool industry's problems, and after discarding survival strategies of reliance solely on user R&D, monopoly mergers, nationalization, reliance on specialty niches, foreign licensing, European or US mergers, and total withdrawal from machine building, they agreed on the following recommendation.

"The prime objective was to consider viable structures to achieve international competitiveness for the UK machine-tool industry overall. Therefore, while not ruling out any options for individual firms, the authors most strongly favor the model involving Japanese/UK joint ventures with monitored technology transfer agreements. Only this will provide for the UK industry the necessary skills to develop long-term strategies, and product as well as manufacturing process innovation capability, required for international competitiveness.'

Bunko bean counting

Robert Kaplan is a professor at Harvard Business School and formerly Dean of the Carnegie Mellon Graduate School of Industrial Administration. He's now a full professor at both schools, and working on a book on the capital justification process for flexible manufacturing.

For an economist, he notes a disturbing trend about US manufacturing. "I am picking this up from my colleagues at Harvard who have visited both Japanese and US machine-tool companies. There is simply much more innovation in Japanese industry. The US seems to be very slow in adapting productive technology.'

Why is this? "People trying to use traditional methods of capital justification are omitting important benefits as they evaluate flexible machining centers. A lot of this is that people are not applying financial techniques intelligently, thus penalizing flexible-automation projects.

"These projects tend to have longer lives; the equipment is useful well beyond the current product's life cycle. By using discount rates that are too high, companies are not adequately valuing future benefits. They are also not properly valuing increased quality, reduced inventory, faster response time, reduced manufacturing space, etc, that accompany these types of investments.'

Bean-counter revolt?

Can't these accounting shortcomings be overcome? "There's no reason why not. It must be done! This is a major defect in applying capital-budgeting procedures. This is evidenced in the fact that these systems are not selling very well. What is also disappointing is that the people who are buying them are not using them very flexibly--they are operating them as rigid manufacturing systems, and not exploiting the flexibility.

"A much broader issue than capital accounting is that management must understand that this is not just another machine, but a radical new technology requiring major rethinking in marketing, human-resource management, and software development.'

A paper by Kaplan in last summer's Harvard Business Review (July/Aug) talked of the inadequacies of current accounting systems for the new organization in the technology of manufacturing, and a future paper of his will look at how to justify the acquisition.

The big guys

This is not an industry without hope. The following remarks by Richard T Lindgren, president and CEO, Cross & Trecker Corp, at a WESTEC luncheon in March, are full of confidence about the lead of C&T's leading-edge technology.

"The factory automation market is the future in machine tools. There can be no doubt about it. But as the future unfolds, who will have the upper hand? Who will the winners and losers be?

"Our charge at Cross & Trecker is this: We know what we can do and we have done it. It is one thing to say that you are going into FMS. It is another to be able to put it all together at the right cost (which means making money) and on a time schedule that makes sense.

"I believe the Japanese capability in FMS is both generally misunderstood and considerably overrated. It's not hard to understand why. In recent years, it has been difficult to find a story about automation and the factory floor that didn't focus on Japanese achievements. In some cases, it was almost as though the US machine-tool industry didn't exist. And yet, outside of Japan, how many FMSs does the Japanese machine-tool industry have up and running in customer's plants?

"Even in Japan, where considerable automation can be found, most of the Japanese FMSs are installed in the plants of the machine-tool makers, at least until recently. That's changing, of course, with the strong drive for factory automation that exists in Japan. Japanese manufacturers want to automate everything they can, and the machine-tool companies are selling them the equipment for flexible systems, even if they don't have in place all of the software and engineering expertise that they will need to be a major factor in world markets.

"The fact is, Cross & Trecker has a 12-yr jump on all our Japanese competitors. One of our domestic customers probably has more FMSs installed in one plant than any of our competition has sold to date.

"As you know, the heart of manufacturing systems technology is software; it is this capability that is the critical difference between the manufacturing systems we have developed and installed and the manufacturing systems Japanese manufacturers are developing for themselves and would like to sell in world markets.'

Ex-Cell-O

David Reichard is vice president of marketing, machine tool group, Ex-Cell-O Corp, Trov, MI. I started off our interview by asking why the population of machine tools was declining at a rate of one third each decade for the last 20 years? "Machine tools are more productive and more flexible now, with the strong influx of CNC. Fewer machines do more work and cover more functions.

"And those machine tools are doing a remarkable job of helping small shops stay competitive. These people are believers now that NC is here to stay, and we see this in the tremedous decline in demand for more conventional machines.'

What is Ex-Cell-O doing to compete-- can you tell us about your restructuring plans? "We have announced a major restructuring and consolidation program for this year, and have held several million dollars in reserve for that. This is aimed at making us stronger, more competitive, and better able to respond to the market when it does turn up.

"I cannot elaborate--these plans still are being developed--but it does not involve putting up new buildings as much as redeveloping people, equipment, and existing plants. We will be taking a good look at our product mix, and putting our emphasis on the proprietary items and specialty systems where we are the least vulnerable.

"There will be lots of casualties in this industry, but the survivors will be strong, and we plan to be one of those. We're committed to this industry and spending the time and money to stay competitive.'

Foreign wars

How is your company doing in the world market? "As a former director of international marketing, I was very aware of the dollar impact on our declining export business, and the impact it had on the imports to our domestic market. I don't think there is much hope right now for a big change in the dollar.

"But when that does come, it will be directly beneficial to Ex-Cell-O. We have had several export opportunities where the sale had to be diverted to one of our foreign plants because we couldn't be competitive from our US plants. The same product, but the difference was totally due to the difference between the deutschmark and the dollar. A more favorable dollar would not only boost our exports, but also have a beneficial impact on import competition in this country. But we have no control over this, and without waiting around for that to happen, we must strengthen those areas of our domestic market that are the least vulnerable to foreign competition.'

Are there any foreign markets strong for you, even under these adverse conditions today? "There are a number of countries that recognize our know-how and expertise. We are realizing good business in China and other developing countries, due primarily to the degree of technology we can offer. I have been to China eight times in the last three or four years, and we have seen some tremendous business develop there in just the last few months.

"China needs to catch up--they want state-of-the-art equipment--and even though they are getting competitive bids from Japan and Western Europe, they are buying a considerable amount of American goods.'

Does Ex-Cell-O agree with the survival strategy of acquiring foreign partners? "We're not much involved with joint foreign ventures, but we are doing a lot of licensing with foreign partners. The types of products we license overseas are those nearing the end of their life cycle in this country, and also the kind of product it would be difficult for us to sell overseas and be competitive.

"The best way to tap that market is to make the product in that country and get royalties for your know-how, thereby extending the product's life. We're doing this in China, Japan, and India with 10-yr contracts (a sizable amount of money), and we are able to satisfy markets that we couldn't really reach any other way. After those 10 years, that product will be dead anyway. Meanwhile, we pump those monies into the R&D that will develop new products.'

Auto whiplash

Many builders got a bad case of whiplash in the past few years. Will these wicked market swings continue? "God, I hope not? We are constantly looking at market forecasts, and we see swings that we don't want to believe. We are talking to major customers, trying to make them recognize the problem.

"They obviously need machine-tool suppliers, so we're trying to get them to help by evening out their programs--they must distribute their orders better to sustain this industry. Well, the automotive people now say they will be spreading their spending out, but our history of their performance doesn't support that in any way yet. They are still extremely cyclical, and regardless of what numbers show in general terms--Chrysler's steady $2 billion/yr program, for example --when it comes down to orders for specific types of machinery, it just isn't there.

"I disagree with Chrysler's statement in your magazine last month that they couldn't automate any faster because of the limited resources of the machine-tool industry. I can assure you that there are many suppliers, such as ourselves, that have tremendous capacities available.

"The capacity is here! We had a peak of $5 billion just a couple of years ago, and that capacity is still there, for the most part. Yet, we're a long way away from that in present bookings.'

Tirekicker trauma

"The real capacity problem,' Reichard adds,' is handling all the quotations and proposals required by the new emphasis on systems. These take an inordinate amount of engineering time and cost, and because the return is rather poor, you must be very selective where you invest your efforts. So if automotive is telling you they are limited in how fast they can automate, that's probably where the bottleneck is.

"We just booked a $10-million order with Vickers at our plant in Germany. We worked on that quote for over two years before it became an order. A tremendous amount of engineering time went into it. We did receive money for part of our development work, but that is unique and the kind of thing we need to see more of over here if we are going to promote that type of advanced equipment in this country.'

Are you saying that people here should pay for proposals? "Yes! It would certainly help sort out the tirekickers. If they can't even afford to pay for proposal work, they shouldn't be in the game! People are still taking major systems to eight different suppliers for proposals.

"In the Vickers situation I mentioned, they started with 16 different suppliers, but quickly narrowed that down to one and worked with us over two years, shared some of our costs, and spared the rest of those suppliers a lot of duplication of effort. But there is not enough of that being done in this country.'

Where's my specs?

Another criticism we've heard is that domestic builders don't offer enough performance specifications on the machines they sell. "Systems and machining centers are all quoted by repeatability and resolution of the basic machine. But when it comes to cutting chips and the repeatability on a specific cut, that depends largely on the stability of the part and many other factors beyond our control.

"Most companies will not quote actual tolerance performances within the workpiece. They will give guidelines on what can be typically achieved on similar applications. It is difficult to predict the effects of the part's internal structural integrity, temperature variations, etc.

"But that doesn't mean it's not done. Particularly at our plant in Germany, we do sell machining centers as a completely tooled package where we have spent enough time and effort to sell the system package with a quoted accuracy for the workpiece.

"Yet, this is not typically done that way in the US. Here, the customer is essentially buying the integrity of the supplier. And the more complex the system, the more important that integrity is. It is almost impossible for the machine builder to certify a particular component unless he goes to a lot of extra effort to run trials and tests. For the most part, that's not the way machines are sold in this country, right or wrong.

"The worst example of this is the Japanese. They sell you a catalog machine, and you have to take it or leave it. In most cases, they take zero responsibility for your application requirements. They offer less information about their machine than domestic suppliers.'

R&D or Relax & Dally?

It's been said that this industry has a poor commitment to R&D, that too much of their leading-edge technology is just defense-department largess. Is that true? "I agree that there certainly is not enough R&D, but I wouldn't hide behind DoD. That has never been a major source for our new development.

"Although the industry should be doing more R&D, Ex-Cell-O is doing a tremendous amount right now. We are working hard on high-speed machining, lasers, noncontact inspection, system software, etc. We're going all out! Almost 4 percent of '85 sales is budgeted for R&D, and we plan to increase that steadily over the next five years.'

Giddings & Lewis

Harry Hall is president of Giddings & Lewis, Fond du Lac, WI. I asked him about the complaint that not enough R&D is being done. "I think there has been overcriticism of the R&D commitment of the machine-tool industry. G&L has been putting back at least 5 percent of our sales into R&D each year for practically our entire history. With the drop off in sales volume, this year's percentage is even higher because we have not reduced our R&D expenditure.

"Without this R&D, you don't develop new technology, you just apply existing technology, as the Japanese, for example, have been doing with their greater emphasis on applications. But I still fell US R&D leads their technology considerably.'

Just as the auto industry is struggling to prove they can build a small car profitably in this country, your industry is being severely tested by foreign makers of small machine tools. Can the US retake the small-tool market? "I don't think the trend to not build small tools in this country can continue,' Hall replies. "This condition will eventually be rebalanced. The US was a major machine-tool exporter--30 to 35 percent of our product--in the early '50s, because the other countries were not on their feet. Now that they are, they have attacked and targeted the small-machine, high-volume market.'

What about industry criticism that you make tools, but you don't buy or use them? "Well, isn't that more difficult, making tools in low volume profitably? If you can solve the problem of making one piece, then it's easy to make thousands.

"I'm not so sure that Japan's ability to manufacture things in quantity was the real reason for their success. The war left our manufacturing muscle in place, so there was not the need that Japan and Europe had to reestablish a manufacturing base. So we didn't need to create it--it was already here.

"We were very efficient at manufacturing then, and I think we still are. If you look at the builders in Japan, over 70 percent of their components are brought in from outside. They are basically assemblers. And we've never set up a substructure in this country where garage shops running at $2/hr surround our neighborhood and deliver parts to us on a daily basis.

Dollar returns?

Will all that outsourced manufacturing come back if the dollar drops back to more normal levels? "If we are then the low-cost producer, it will. It's not just the dollar; we have to be able to provide a given product at lower cost than suppliers offshore.

"I don't think the dollar-distortion effects will cause permanent displacement of manufacturing overseas. One of the positive aspects of this trade imblance and strong dollar is that these are still our dollars. Take our $70-billion trade differential--those dollars have to come back to the US.

"What good is a dollar if you can't spend it? Eventually those dollars will be used to build plants here, buy stock, buy bonds, etc, and that will strengthen this country. At the same time, if it wasn't for our strong dollar, the rest of the world economies would be in a real mess.

"Interestingly, when you go back to the 1770s when the whole of the Industrial Revolution was in the United Kingdom, they sent a delegation to America to find out how to make rifles with interchangeable parts. So the world's markets will continue to swing back and forth. Today, we're sending Americans to Japan to see what they're doing. Who knows, the world may some day be going to China to see what they're doing!

"Nothing is permanent. If I can buy gearboxes cheaper in Malaysia than I can here, I certainly have to buy them there. Yet, I think manufacturing technology is still strongest in America. We make the breakthroughs, and are leading in practically all areas. Not everyone will agree, of course, and you can't generalize --you must evaluate each specific area. We have some heavy markets here, and our machines have the rigidity, tolerancing, and accuracies that can outperform the Japanese.

"Our gear standards are much different than theirs, and so are our electrical standards. In cells and systems, reliability is going to be the big payoff, and I certainly know where we stand against offshore people in this area, and it looks good to me!'

Coals to Newcastle?

Is there a market in Japan for US machine tools? "We still sell in Japan. Our Winslow drill pointers are well accepted because they can't produce them there. Hell, I've got something like 450 machines over there that they love. They still respect Giddings & Lewis as a world name.

"Yet for 20 years, they've locked all of us out! As Vice President Bush said, if trade is fair, there's no problem. But you can't expect to compete on a global scale with one hand tied behind your back. And I think the Japanese understand that. Most of their profit is made in currency exchange. I was talking to Teri Yamizaki recently, and he said that's where he made his money--buying in yen and selling in dollars.

"Americans have always loved competition. I just wish the rest of the world loved it as much as we do. Your strategy must be to compete, one way or another, if you are going to remain a global entity. Of course, we plan on doing just that.'

Shakeout alert?

Is there a big shakeout ahead for machine-tool companies? "Our industry was typically a group of fragmented family operations. In 1955, G&L first saw that this industry was going the way of the automobile industry--that machine tools would end up with six or eight major suppliers in the following decades, and the family-run operations would fall by the wayside.

"So our objective since has been to identify the markets we want to be in, and be one of those six or eight industry survivors. Now this fragmented industry is going exactly as we had foreseen--consolidating just like the auto industry did--and there will be a shakeout.

"It's happened already with NC controls --we once had some 70 builders. You will also see consolidation in machine vision and robotics. All our hightech industries must go through this cycle.

"When we have our strategic planning sessions, we talk about long term as 10 years out, and we run on a rolling five-year plan, but we actually do things one year at a time. Sometimes, of course, we're way off, but there are other predictions that we hit right on the head. As long as we can stay 1 or 2 percent ahead of the competition, we're in heaven! That's the only percentage of decisions you need be correct above the norm! As long as you're the leader in a given field, you're doing something right.'

Labor pains?

Is labor a problem for this industry? "It has been. The International Association of Machinists is trong, and we've had difficult strikes. I think we have good skilled workers--not only here, but worldwide--and this is one of the foundations of the industry. Japan's great concern is where to get the skilled people they need, even where their shop is going to run untended.

"The apprenticeship programs we have in Wisconsin are very important. You must have a strong educational structure. If you're going to cut metal, you have to know how to hold it, the tooling requirements, etc.

"The problem with labor is, of course, that its cost is so high, but it's also the poor atmosphere--they are always in an aggressive, combative stance, and not cooperative. It's much like our relationship with the government. That's just American, I guess.'

But isn't the situation getting better as everybody realizes they must help this industry become more competitive? "That's been generally beneficial. It's opened up everyone's eyes that labor and management must now cooperate. Things are changing by force, not by reasoning or logic, unfortunately. (IAM President) Winpisinger is still violent; he hasn't changed. Until we can get true co-operation, we will continue to have a struggle.

"Fortunately, I think our workers are highly intelligent, highly skilled, and well educated--they can see beyond all that. When you get down to the individual, we have a strong base. I'm very confident about our workforce in this country.'

The future is high tech

What's the future look like to G&L? "It's certainly an interesting and challenging time,' Hall feels. "You can no longer model anything on historical norms, which is great because it keeps everybody on their toes.

"I look for the market to be strong, for the global market to be very competitive. I think eventually everything will shake itself out, if we can get the politicians working with us around the globe, and when we get the global market well structured, it's going to be an interesting century ahead.

"The need is certainly there for high tech, and we're looking forward to the challenge of supplying it.'

Ingersoll Milling

Lynn Williams is vice president and general manager, heavy machinery group, Ingersoll Milling Machine Co, Rockford, IL. I started our interview by asking if this industry really has all the talent they need. "The critical thing in this business is always brainpower and human energy. Manufacturing as a broad term has not been an attractive career for the brightest of our young people. Yet, much of what is required today is complex. We as an industry have not done well in building the talent we need to do the job.

"However, I think that's changing, and this is one of the good things coming out of the computer age. There's a new day in manufacturing, a new excitement, and a lot of young people are coming into this business. You can see it at meetings --one group that is well over 45, but in the MIS (management-information-systems) group, there's a whole fleet of people age 25 to 30--misguided in some aspects, perhaps, but a lot of energy and a lot of new thoughts. And that's pretty exciting!

"That shiny new computer may give you more miles/employee, but that can cut both ways. When you've got a bright guy running a computer, it greatly extends his abilities. When you get a dummy, the computer tends to give credibility to a lot of dumb stuff on fancy printouts. So the problem is how to discern between one or the other.'

When it's shop-floor trainee versus computer-science major, doesn't it seem that neither can do the whole CIM job? "Right. But from our experience, we find that the computer-science people are actually transcendent--they're the leaders, they put new thought to the task. The manufacturing guy who's been in the trenches too long tends, although not always, to be afraid of change or new things. He will say, "Oh, I've tried that before, and it doesn't work.'

"Meanwhile, some of the computer folks have run way beyond him. The change-resistant guy is taking early retirement, some are just displaced (which is never friendly), and others are changing their minds and saying, "By God, I'll get on this train!'

"There is a net positive move going on here, although there is still some computer craziness going on. I think this has come partly from the very real competition from overseas--threatening competition, not just ennobling competition like a football game between Harvard and Yale.

"This is survival. It's bringing the good people to the front, and although it means some dark days ahead, it is ultimately going to be for the better for our industry. The companies that survive will be much stronger because of this competition.'

Nonmetal neglect?

Is this industry neglecting nonmetals? "Yes. Import competition aside, metalworking machine tools are in decline now and will be in the future. So much of what we use now is made of plastic. There's still a metal mold stamping things out, but that product is no longer pieces of metal.

"Look at the jet-engine industry--they couldn't do what they do now if they had to whittle everything out of metal with machine tools. Because of this trend, the overall need for machine tools is shrinking every day. There will be more assembly-machine builders and metalforming machines and less metal-cutting. Composite materials look awfully attractive.

"I'd believe we're ahead of Milacron in composite machine building, while they have a lead in plastic-injection-molding. But if a process involves fibers --graphite tapes or individual glass threads--we are doing more of that. There are many new names in this industry that you've probably never heard before, like Goldsworthy.'

Import futures

How much more import penetration of domestic industry do you see ahead? "Over the next five years,' replies Williams, "there isn't going to be radical change. Imports will slowly increase their share, subject to change if there is a major economic upheaval, and the dollar becomes cheap again. But, based on current conditions, we expect imports to increase only moderately.'

Who is going to get hurt first? "The big conglomerates are not going to like the return on investment they are getting with their machine-tool companies, so you would have to expect that Houdaille will spin off Burgmaster, for example, and the Japanese will start doing some manufacturing here after buying up some old names. We read in the paper that White Consolidated isn't pleased with their machine-tool group, and one can easily see why.

"A lot of US machine-tool companies will either be sold or closed because they are in the hands of conglomerates who traditionally are pretty cold-hearted concerning their bottom line and their stock prices. This includes White, Litton, Textron, Houdaille, and now Cross & Trecker. What are they going to do with all those companies they bought? I would expect a number will be closed.'

Europe's edge

Williams sees important differences between this country and Europe. "We feel that Europe treats the manufacturing and machine-tool industries as a place where guys can earn a good living, as opposed to this country where the wild real-estate industry and wacky investment banking community tend to siphon off some of our best people. You don't have to be very smart to see that there are better ways of making a ton of money than working in manufacturing!

"But in Europe, thanks to socialism or the tax structure, it's simply not possible to make and keep zillions of bucks unless you play the guitar well. The European looks around and decides that he or she can't make much money doing anything, so they tend to follow their natural proclivities. Engineering is a perfectly good thing for them to pursue, or even school teaching.

"As a result, when you go to the big European tool shows and then come to Chicago and see what the Americans are offering, you've got to think that our technological lead is not what it used to be. It's spotty at best. We're doing some very good things, but there has been a greater rate of change toward higher technology in Europe than here. They started further back, and if they aren't ahead of us now, they are certainly equal. Yet, just 15 years ago, their stuff was considered by many as second rate.'

Star War stars?

How important do you feel the defense establishment is to the machine-tool industry? "Although DoD may some day be forced to go overseas to get the leading technology they need, they are very helpful right now to our industry,' Williams feels. "They do buy American, and the kinds of things they do for the country are pretty good, short of getting us into war, and I certainly don't like bombs or poison gas lying around any more than anyone else does.

"If you look at the big integrated manufacturing systems, you would have to look far to find one that is not either a direct result or closely connected to defense work. That's where this industry's R&D comes from, and the new manufacturing systems our government is making possible are either putting us back in the technological lead or keeping us there.

"I don't think our machines are necessarily better, but certainly the ability to implement and integrate computers, program them, and make them useful is a major strength we have way beyond anything that the Europeans or the Japanese have. That is why I think we will beat back this offshore onslaught through our full integration and implementation of the computer.'

But doesn't that make this industry too user dependent? "The real survival question is less for the machine-tool industry --which is so small and dependent on the fortunes of steel, autos, and all of manufacturing--than the industries it serves. The retrenchment at Caterpillar is just one example where a lot of rethinking is going on. If the resulting business requires machine tools, our industry will serve it. But if these industries continue to shrink, it won't be because machine tools aren't there to serve them, but because the basic need for that industry is no longer there.

"At some point, it may become inefficient or impossible for the large US machine-tool companies to stay alive. In that respect, you would have to say that a company like Cincinnati Milacron is more vulnerable than the 20-man local shop that can make the odd lathe you need when you need it.'

Fallout for the job-shop

Will the little guy buying machine tools, the job shop, for example, see benefits from defense technology? "We're going to see good fallout in software where people have spent hundreds of man-years, largely because of DoD largess, now being rolled up in a package and put in a PC with peripherals. The guy in the 10-man shop will use that thing by day to do his payroll and bookkeeping, then turn a switch and run his machine shop for two shifts at night, untended.

"When it comes down to the little guys, that's the big payoff! And it will happen, whether it's in this country or somewhere else. Maybe we won't manufacture here any more, but that is going to happen wherever manufacturing is being done.

"System costs will come down. You will be able to put together a couple of machining centers, a lathe, a computer, and handling robot for $1.25 million, and a guy in a small shop will be able to raise that kind of money. What's more, we as builders will be able to demonstrate that it really works, so he isn't faced with sinking his life savings into new technology, wondering "Jeez, is it going to work?' and risking going out of business while we're trying to debug his software.

"We will be able to wrap it up in packages, and what's more, when it comes to programming, he can talk with our computer and programmers over the line and get new programs or other software. It's remarkable to think of the kinds of things that are possible and are happening already. It's never fast enough or done quite well enough, but overall, you have to be optimistic about our situation.'

Build-it-yourself?

How about the criticism that this industry sells what they won't buy themselves? "The typical machine we're asked to build is for fairly high-production consumer-type products. We build assembly lines that produce 150 engines /hr, but we don't produce anything ourselves at even 150 pieces/month! Therefore, the machinery we build would hardly be useful, for the most part, in getting the cost out of what we do in our own shops.'

How labor intensive are you? "We figure half our product is labor. Our ratio at Ingersoll is probably higher than most because we build special machinery, although we probably have a more modern shop than most, which tends to push the figure lower. In comparison, automotive is considered bad above 22 percent labor.'

So sue me!

Is this industry guilty of sloppy specs? "Well, Ingersoll isn't. In big general-purpose machines, the accuracy at which the machine will perform is carefully spelled out. Sometimes we must hold temperature tightly for 40 hours of runin, because a big machine can lean back and forth 8 to 10 thousands as the sun comes in the window in the afternoon.

"Yet people do sell machinery who are almost insulting about what they guarantee or don't guarantee. This is a sloppiness that they won't be getting away with much longer. It will drive them out of business.

"We do get into some strange things these days with the liability laws--weird things about consequential damages and what's merchantable and fit for what use. It's one thing to be used because you didn't meet performance guarantees, but it's quite another to miss a performance guarantee for whatever reason, not be told about it, and then a guy says he lost his order with GM because he made inaccurate parts, and that it's your machine that didn't make them right, so he's suing you for loss of business. On these things, both the emotional trauma and the hours taken to defend yourself can be very high.

"As a result of all this lawyering.' Williams admits, "a guy will implicitly strive to offer no more than he has to because he knows that it could eventually be used against him. When a customer reads a proposal--ours or anybody else's--and all the disclaimers of what we will not be responsible for, he really has to close his eyes and hold his breath.

"I don't think there is any intent to deliberately mislead. People just get enthusiastic for the possibilities the computer represents, yet none of us has been quite good enough to bring it all together perfectly, or on a tight schedule.'

Prop wash

Do you agree with the others that proposal costs are too high and some of this cost should be borne by your customers? "They should let us be involved earlier,' Williams believes, "and put us on the payroll, just as they do with their manufacturing engineers. But if they want us to do our own work plus their manufacturing engineering at our own expense --just tell us what they are trying to do, and then go away for six months and expect us to support what we do ourselves--then we're in trouble.

"That's why some people want to charge for proposals on FMSs. It can take seven or eight months and two of your best guys to put it all together, and you wind up spending $40,000 to $50,000 out of pocket. Then, even if the order does come, you've put out a lot of engineering for all the iron that results.

"Yet, it's not all that bad, because every time you do one of these, you get better able to handle the next one and do it more efficiently and quickly--the retained engineering starts to work for you.'

Little guys

Reinheart Zirbel is president of Camtrol Inc, Janesville, WI, and his experiences of late exemplify what the smaller machine builders are going through today. "We survived, but it has not been a pleasant experience, and it continues to be a real problem. The last few years have been a struggle, caused by a number of things, but mainly the onslaught by foreign machine-tool manufacturers, primarily the Japanese, who enjoy certain advantages at the moment.'

Do you think all this outsourcing would reverse if the dollar turned? "If it did, there would be a tremendous amount of business returning to this country. I've talked to a lot of people who have contemplated buying equipment (particularly ours) to make parts. Too many times the order evaporates because --aside from what they could gain from our machine--their production costs would still be too great. If they can buy that same part much more cheaply overseas, why manufacture it here?

"It has come to the point where the cost of not producing it--the overhead --is the only reason left to make it here. But even that negative reason can be overwhelmed by much lower costs overseas; there's still no point in using that idle capacity. I've talked to many people about this. They look at their labor costs, fringes, all their overhead, all the associated costs, etc, and conclude that it's not worth it.

"When you look at this manufacturing dilemma, the machine-tool aspect is only a small part of that problem! We can produce machines that are truly efficient, but they would have to be fantastically efficient to overcome this problem and return manufacturing to this country.'

Economic tests

What will it take to sell machine tools? "Well, the economists some years ago were predicting that the US was moving away from a manufacturing economy, and I think that's what's happening. We see it as a much smaller market for machine tools, and our customers have a much smaller market for their products. It's a two-edged sword--increased competition and a shrinking market.

"I'm a staunch believer in getting rid of inflation, but there is virtually no such sentiment in other countries! This leaves our dollar as the monetary benchmark that everybody looks to for stability. Well, hell, we in manufacturing are the ones who are paying for it!

"It's great to have a stable dollar, but not if you're unemployed. The consumer is the one who has benefited tremendously. Inflation has been almost nonexistent, and no one can raise prices. The days of passing costs along to the consumer are gone.'

Aren't the little guys like yourself in the greatest jeopardy today--unless they have a special niche, aren't a lot of the small guys going to be gone? "I think so. The small guy has two strikes against him already, although he does have the advantage of being able to move faster (if he has capable people) and less expensively than the big guys. We've taken advantage of this to a large extent, but even we have overhead.

"Sometimes it seems like such a futile struggle. There are so many things totally beyond our control, but most small guys like us are fighters. I've been in this business for 25 years, ducking and swinging, twisting and turning, scheming and planning, and putting in 70 hours a week. If your people really exert themselves, you survive. I've been in much larger plants, and while there are a few people really putting themselves out, for the most part, it's business as usual. They're not putting the effort into it that we are.'

Money pains?

Is tight money a big problem for the little guy? "Getting the money you need to build the machines you have on order is no problem. Certainly it hasn't been a problem for me. The problem is making sure that each time we sell a machine, we can make a buck, and that it adds up to something at the end of the year--all our bills are paid and we've kept our house in order. If you can do that, you will find people willing to back you, with either equity or loans.

"Pricing your product is critical. You say to yourself, "If I could just jower my price a little more, I could lock up this sale.' But you reach point where you must say no, and walk away. That's the key to survival. With half a dozen competitors, each walking those extra couple of steps to get the order, the result is nobody makes any money, and over a period of time, everybody is eroded into nothing. You have to draw the line at some minimal profitability.'

Japan is the toughest

Of all his competition, Zirbel respects the Japanese the most. "From what I've seen and read, Japan views this competition as all out warfare. They have had heavy governmental assistance, making it possible for them to acquire the capital to develop machine tools.

"They know that their government is standing behind them. They can do things that were long ago outlawed in this market--loss leaders, for instance. They get into a market by selling machines way below their costs. Then, once they get that market share, they raise prices and get it all back. They are very aggressive, and I don't have a lot of hope that the US machine-tool business will ever be anything like it was five years ago. Our industry will soon be like the television industry in this country.'

Be somebody special Richard Cottrell, vice president, machine-tool group, Newcor Machine Tool Co, Fraser, MI, is another little guy who says his company is surviving by doing things in a special way. "We've always felt we were capable of finding our own special niche, and that's ours--specials. Today, when you start marrying the different available technologies--putting them tegether in a cell or system--you may want to develop your own standards and expertise, but you still have to deal with a marketplace with its own standards and specs.

"The specials business was pretty such created to serve the automotive industry. The auto people have always had their own specs at each division, and many times, different specs within a single division. That's GM's biggest problem right now.

"For us, it's more difficult today, trying to comply with everybody's wishes. The higher the technology, the more expertise required. Let's face it, we're in the midst of another major evolution that's going to take time to train and develop people to handle. And the more complex it is, the longer it takes to adapt to it.

"We have a pair of turning machines on our floor right now that will probably be the first of their kind in the industry. These are four-axis machines, two spindles, automatic load/unload, automatic tool change, automatic probing after tool change, and automatic gaging. We had to comply with certain specifications. We would not design that machine the same way a second time. We had to get five different suppliers in here to start up their own little part of that machine. Just the phasing of all those people in and out of here was headache. And then, we had to get our own people well acquainted with all the software.

"The problem is that each of these five suppliers has the leading-edge technology in their specialty, but nobody has it all. So we have to deal with them all, one at a time. It's much more time concuming than it looks, and if it costs me time, it costs that machine buyer more money.'

R&D = Rotten & Difficult

Who can afford R&D these days? "There's much talk in this industry about the great things we all can do, but some people, at least, are not ready to lay down he money that's required. It's a very compeitive world. How can the little guy stand the R&D costs? Either as machine builder or buyer.

"The big guys are certainly betting on R&D today, but I think that most found that enthusiasm fairly recently. I spent 10 years at the Cross Co, and I know that we weren't putting 5 percent into R&D back then. We were doing an awful lot of development work, but we did it on other people's purchase orders. So you gambled that rather than prototype it and massage it to death for a year before you introduced it; you had to bet you could get it right the first time. That's what specials are all about.'

What about your costs for making proposals these days? "I agree that systems proposals are killing us. I see that GM is starting to share some proposal costs. They may not narrow the competition to a single guy, but they select only certain people for proposal projects and give them a go-ahead. That takes courage on their part--it's a brand new purchasing philosophy.

"But the auto industry's philosophy is changing--quality is now more important to them than cut-throat pricing. But GM's spending all that money at Comau --$250 million--is not helping our shrinking industry. For a total industry that ranks somewhere around soda crackers, that's big money!'

Changing customer base

"We cash have our problems,' Cottrell continues. "We're determined that we're going to be a factor in this business, but we are really just getting started. We started in the '70s, serving the oil-patch people, and when that business died, we died with it. We then purchased Dearborn Tool & Machine, but their number one customer was Caterpillar. That was great timing! That died the same way! We did some great things for them, but now trying to find a market for that kind of big equipment is tough. It's not there today. It will take some cultivating!

"Who's agriculture anymore? Deere. They've spent a lot of money, and they will continue to, but not in the great gobs they were in the '70s, that's for sure. The farmers must start buying tractors once again.'

Job shop report

Bruce Braker is executive vice president of the Tool & Die Institute in Chicago, and constantly in touch with a large group of small precision metalworking companies. Thus, he's an ideal person to comment on what's happening in the job shop today, and how they feel about the machine tools they need to compete and survive in metalworking today.

"Our members are still waiting for the domestic machine-tool industry to deliver the machine tools they want and need,' Braker reports. "Tool & die people, machining companies, stampers, etc, buy what does the job best for them. They have to remain competitive. Although many would like to buy American machines, they are simply not available.

"In many cases, the job-shop type CNC or NC machine they need is not being made domestically. US companies tend to focus on the larger, more complex systems for the larger manufacturers. When the owners of a typical five-man job shop are looking for a new machine tool at a price they can afford, and when they shop around, they find that what they want is not available from a US manufacturer.'

Too little, too late

The scenario here is similar to what the auto manufacturers did, Braker feels. "They didn't respond to the market and start making small cars until small cars started to be bought from foreign manufacturers.

"Similarly, US machine-tool manufacturers didn't see the heavy market coming for smaller, cost-effective CNC machinery until this market was flooded with imports, and the job shops started buying in quantity. Then, the builders either decided that's an area where they couldn't compete, or they got into the market with too little too late.

"Historically, the US was the leader in NC technology, and when their first NC machines came out, job shops were buying US-made machines. But, the improvements and adaptations for the small shop came from Japanese and European manufacturers. These builders had already developed nice markets at home. Their people--both large and small users--were far more receptive. So these importers found a virgin market here in the late '60s--their timing was perfect.

"The biggest proliferation was in the last five years with the leap forward from NC to CNC, where programming complexity improved so greatly that a small shop could buy one, and two weeks later have the machine running and making profitable parts. Before, the jump to NC was a far more complex operation to learn how to program.

"The machining companies making parts are very heavily into CNC, especially if they tend toward aerospace or defense work. Tool & die companies are not as heavily into CNC, although CNC wire EDM is now commonplace. It varies widely, shop to shop. You can go into one shop and there won't be an NC machine in the house, and then visit a maker of big molds and find them almost entirely NC and CNC. Clearly, every shop needs at least one NC machine, it's just that not all have made the capital commitment yet.'

Machine glut

As a service to their members, the Tool & Die Institute advertises machines for sale in their weekly news bulletin. "Over the past couple of years,' Braker notes, "we've seen a tremendous amount of conventional machine tools up for sale. There are two reasons: 1) It's been a severe recession, and 2) there are a lot of machines being replaced as people find they have to take the plunge to stay competitive and then hope that they can keep that new CNC machine busy.

"This machine glut is also destroying the incentive for domestic builders to offer conventional machines. There are too many good used conventional machines available at bargain prices. It's very seldom that a job shop buys a new conventional machine.'

Job-shop shake out?

Like other industries, the Chicago tool & die people are in a state of flux, Braker observes. "We have a diversity of customers here, so we're not tied to any particular industry, and that helps. Even though some large manufacturers are downsizing their operations or moving out of the area, they will typically come back for their precision metalworking support service--tools, dies, and machined parts. If they move south, that capacity is not there yet, and it will take a couple of generations to build that base.

"The smaller shops are still tending to be locally oriented--satellites of one or two major industries or even a single customer--but the larger shops are now trying to develop a national reputation and become more marketing oriented. Before, long backlogs were the name of the game, and the job shops were basically in control. Now, they have to aggressively scrap for business, and that will mean a shake out. Marginal players will disappear, particularly if they have not made a commitment to new machinery, training, marketing, and keeping an inflow of skilled people.

"Maybe three customers provided 80 percent of that small shop's work, and suddenly they lose one, which is not unusual. If they've never gone out and sold before, or dealt with a customer over 10 miles away, they are suddenly at a real disadvantage. They must learn something altogether new. They may be fine technicians, but maybe they never had to be salesmen. Or they have never made the capital commitments to stay current, and they don't have the cash flow now to get the machinery they need. There may be no choice but to go out of business.

"Tool & die prices are still extremely soft, and very competitive. But it takes a certain level of profit to be able to plow that back into an upgrading effort and stay competitive. This industry is still fighting a tough battle, and results are spotty.

"If you call on one mold or die company, you may find that they are going like gangbusters because they are tied to a computer market niche, electronics, or a segment of the automotive business. They are producing quality, delivering on time, and very busy.

"You might then talk to another shop with the wrong customer mix or who hasn't kept up, and they are dying. So it's hard to generalize about this industry. Overall, we're a whole lot better off than we were a couple years ago.'

Advice to builders

What's your advice to domestic builders today? "The machine-tool industry should see what the job shops are buying,' Braker feels, "and determine what they can offer that's comparable or competitive. With the unfortunate dollar situation, the Americans can deliver as good a machine, or even one with better technology, but not at a price that the Japanese can. Several thousand dollars difference in price is a big hurdle to a job shop.

"The builders have been guilty of not listening to job-shop people for years. That will have to change. They need to find out that the job shops are buying. The market's right here. They can go into the shops and ask "What do you need? What improvements do you want?' Just like the auto people are starting to ask customers what kind of car they really want. Actually, all the machine-tool builders have to do is go to the dock in California and watch what's being offloaded from all those Japanese ships.'

Distributor report

Another good source of evaluation of how well the machine-tool industry is doing are the distributors who must make a living from what the builders produce. I talked with distributor Jim Ellison, president, Ellison Machinery, Los Angeles, CA, about what Bruce Braker told me.

"I am inclined to agree that it's hard to find many domestic builders who are truly competitive and aggressive in small CNC equipment,' Ellison admits, "but the reason is not necessarily that they are only interested in systems and high-tech solutions. The cold facts are that they are only competitive in high tech. The more traditional commodity products-- small CNC lathes (up through 30 hp) and horizontal and vertical machining centers--are now built in sufficient volume and with fully modern features from Japan and Europe, at prices that just don't allow the domestic competitor to compete effectively, so he retreats into those areas where he can.

"To the consumer, this may appear as lack of interest by the builder, but I can assure you that it's not. They would love to have part of that business.'

Foreign tactics

How do you view the rift of domestic builders' foreign-partner alliances? "I don't think these arrangements are as much technology driven as commercially driven,' Ellison observes. "When someone like Pratt & Whitney decides to broaden their base by importing, I don't think they approach it from a technology standpoint. I would still defend our domestic major builders, at least, as being on the leading edge of pure technology.'

Will the foreign partners eventually dominate? "The answer to that is visible in what has happened to distribution of machine tools. There, the Japanese started out in desperate need of a delivery system for their products. So they paid premium discounts to distributors and were very generous in sharing inventory and promotional costs.

"Now that they enjoy a rather comfortable, if not dominant position in machining-center and lathe markets, they are beginning to turn the screws on those distribution relationships. They are eliminating them entirely, or at least dominating them to the point where it is not as interesting to the distributor as it once was. So I would guess that those same tactics will eventually be applied to builder relationships.'

Price wars?

But aren't there indications a price war is going on? "Well, there has been a dose of reality in pricing. The domestic builders are more competitive and closer in price. Milacron's new products, announced in Chicago last fall, made no bones about it: these were machines that in price and features would compare favorably with the leading Japanese suppliers.'

What did they do to cut their cost? "They've gone to a Japanese control system, a major revolution. Secondly, they claim to be getting economies of scale by building them in volume with a standard specification, with little or no deviation. If this is really working, God bless them! I certainly hope it does.

"Somewhere there's a marketing textbook that says when you can capture 30 percent of the market, you begin to make the market, control prices, and make money. If you took the four leading Japanese builders of lathes and machining centers (Mori Seiki, Yamazaki, Okuma, and Hitachi Seiki) and lumped them together, they now have something more than 50 percent. So if textbook theory is right, it should be no surprise that whatever is happening in this market is happening at the pleasure and convenience of those leaders.'

Does a distributor care whether he sells a domestic or foreign machine? "On a single transaction, if you audited it completely, you will make more selling a foreign product because they are still paying distributor discounts with higher margins than domestic builders. It has come down from what it was in the beginning, when they were generous almost to a fault.

"But the second consideration, as I mentioned earlier, is when a distributor looks at his market area--for example, Minneapolis--and sees that he had 2500 potential accounts. If you were to sell a product there, endear yourself to that customer, and position yourself for repeat business, that has a value to us that may be even greater than a 1- or 2-percent cost differential between Supplier A and Supplier B. So you must think long term.'

The bottom line

Are people expecting further price erosion in machine tools? "During the past five years, and despite periods of hyperinflation, the trend in the costs of machine tools is down. This has established an expectation in most users' eyes that they should pay less and less. Price is always an issue. They expect more functions for less money than last year.

"Here's another more subtle, but important, point: It used to be that when you invested in capital equipment, you could depreciate it over 10 years and know that the real book value of that equipment after 10 years would be darn near what you paid for it. You could buy a DeVlieg jigmill and sell it at a premium.

"However, as NC machines entered the equation, partly because they cycled more and partly because technology was moving higher, you don't get anything for a used piece of equipment. There's a glut of used equipment that is technologically obsolete and has high maintenance cost. Everybody's scared to death of that.

"So this has undermined this unspoken "comfort zone' for a manager. Once he could say, "I may depreciate that machine in 10 years, but I know that it's really worth much more.'

"This was particularly true for the privately owned shop where the balance sheet of the company is the balance sheet of the owner. Now, there's a whole new set of realities in the investment thinking of many machine consumers.'

Are tax uncertainties holding up machine purchases? "That used to be an often-discussed part of every purchase decision,' Ellison admits, "but it doesn't appear to be a major consideration now.'

Diagnosing the patient

What can we conclude about the machine-tool industry from all of this?

1. Admit it, Japan is Number One in machine tools. But wait a minute--so are we! We're stronger in systems, and they're stronger in bread-and-butter tools. That's why we're splitting the world market. The problem is we're not neck and neck with them because we are trying any harder or running any smarter than we ever did; it's just that we started further in front. The clear danger is that if we don't start hustling now, we'll quickly fall far behind.

2. Foreign alliances will be precarious, unless they are made from a position of strength, not weakness.

3. Both system users and suppliers should expect t share engineering development costs more equitably, proportionate with the actual benefits each will gain from a given job.

4. This industry has a lot more restructuring to do before it stabilizes. The die-hard conservatives in machine tools will die hard.

5. Major builders shouldn't spend millions on R&D unless they're spending at least thousands on talking to their customers about what they really need.

6. This business is manufacturing, not simply tool building. For machine-tool consumers, this means excellent opportunities ahead to get competitive tools at competitive prices.

7. If you're not making much profit, you don't buy a machine tool just to cut your tax bill; you buy it because it's a vital competitive weapon.

8. Europe is right, to compete in the world market, you must hire the best and brightest young people you can. (You'll probably have to bait them with money.) Since it's not lack of capital, but lack of imagination, that's holding this industry back, it must invest in fresh young minds.

9. Although people will pay a premium for a quality machine tool, they won't spend dollars they don't have.

10. And last, but not least, we in the metalworking trade press need to focus less on spectacular technology and more on pragmatic how-to metalworking survival solutions.

Information processing next

Next month, Survive-85 will examine the information-processing industry.

Photo: Heavy machinery? Great technology for making big parts, but not many users are making big parts these days. Photo, Dearborn Manufacturing Systems, Newcor Inc.

Photo: Flexibility factor. The key to success of FMS is flexibility in fixturing, tooling, and software. Photo, Giddings & Lewis.

Photo: Interaction payoff. A highly skilled operator with a highly responsive CNC can produce highly profitable parts. Photo, Tree Machine Tool Inc.

Photo: Young blood. The hope for this industry lies with its young people--a good example, a bright young computer-science major who can show you how a Ms with an MS can make MIS mean M$ (megabucks). Photo, General Electric Co.

Photo: Auto clout. Although the machine-tool industry may not have the clout to get import relief, it's biggest customer--the auto industry--does, and that helps a lot. Photo, Cincinnati Milacron.

Photo: Cookie cutters. As parts get smaller, thinner, and more materials efficient, the fancy footwork of the metalcutting CNC laser will become more useful. Photo, Coherent General.

Photo: Shop-floor sharpies. As scarce production-floor jobs get more and more competitive, that guy on the toolroom floor will be the best and brightest you can find. Photo, Harvey Arbuckle.

Photo: Eternal life. With fancy new vacuum-deposition processes, we now have eternal-life tooling--only the coating is consumed. As a result, the tool will still be around long after the company that made it is gone. Photo, Multi-Arc Vacuum Systems Inc.

Photo: Robot races. The race to program robots to make one-on-one replacements for workers illustrates the narrow thinking of many whose top priority is to replace labor content. Instead, it should be to build quality products productively. Photo, Coherent General.

Photo: Cutting edge. New cutting-tool technology offers big improvements in productivity for those willing to learn how to use these new materials effectively. Photo, GE Carboloy.

Photo: Robot editors? As the machine-tool industry gets more automated and computerized, robots with artificial intelligence will replace editors, as I was shocked to learn from this demo at Cincinnati Milacron. Each reader's specific interests will be programmed into a Cray 1 supercomputer, and the robot will write your personal copy out in longhand.
COPYRIGHT 1985 Nelson Publishing
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Copyright 1985 Gale, Cengage Learning. All rights reserved.

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Author:Sprow, Eugene E.
Publication:Tooling & Production
Date:Jun 1, 1985
Words:14285
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