March 31, 2009    Volume 16, No. 5

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U.S. Machine Tool Industry Is On The Brink:
How Does An Industry Survive Without Any Orders?

By Richard A. McCormack

The U.S. machine tool industry is on the verge of oblivion. What was once considered to be one of America’s most important strategic industries — described by President Ronald Reagan in a statement on May 26, 1986, as being a “vital component of the U.S. defense base” — the U.S. machine tool sector is in a freefall. Orders for new machine tools have virtually stopped. U.S. machine tool producers — the few that remain after years of unrelenting unfair trade practices — are doing whatever they can to stay alive.

The situation is “desperate,” says Ron Schildge, chairman of the Association for Manufacturing Technology (AMT) and president of Eitel Presses Inc. in Orwigsburg, Penn. “There is some activity in the used machine and rebuilt machinery market, but the new machinery market is virtually dead.”

The total U.S. market for machine tools in January 2009 was $95 million, a decline of 72 percent from the same month in 2008 when sales were at $338 million, according to AMT. The January 2009 figure was down by 60 percent from December 2007. Schildge says that orders are now off by at least 80 percent, and others in the industry say it might even be worse than that.

“The AMT statistics were horrible, but they don’t tell the whole story because a lot of those orders were only from companies that were forced to replace machines that were broken,” says Mike Austin, vice president of Atlas Technologies in Fenton, Mich. “It’s just a horrible situation and unfortunately this economic crisis is hitting small manufacturers harder than anyone because they are the ones who depend on lines of credit to sell receivables.”

With the current credit crisis, even machine tool companies with receivables can’t borrow money against those orders. “Today, we have banks that say I don’t know how I can lend over concern about [companies’] viability,” says Austin. “We do business with Caterpillar, but the banks are questioning Caterpillar’s creditworthiness. When you have someone like Caterpillar being questioned, what do you do? It’s just ridiculous.” The evaporation of orders “is the last straw for many people in this industry,” Austin adds.

Exports proved to be a bright spot until mid 2008, but they have dried up.

In a survey of its members, AMT received an earful about the current economic situation and credit crisis. Members said that time was not on their side. Many are seeking financing and buyers for their businesses. “The phones aren’t ringing and no one is returning calls,” said one executive in Wisconsin. “We are concerned!” Another noted that orders are being placed on hold and that there is a cash crunch coming in the next few months. “A year ago at this time we had five employees. Now we have one,” said one AMT member. Added another: “Work in many industries — automotive, trucking, aerospace and solar panels — has come to a halt with no real evidence it will change any time soon. Since the week before Christmas we have reduced our workforce by 54 percent.” Another executive in Michigan said that capital investment in machine tools and equipment, “especially for automated high technology, high efficiency equipment has completely stopped. Not slowed down, but stopped. Zero orders. Delays. Cancellations.”

The U.S. machine tool industry is already a shadow of its former self. It was ranked seventh in the world in output at $3.8 billion last year, behind Taiwan, which has a GDP of $600 billion, far lower than U.S. GDP of $14.2 trillion. The United States accounted for less than 5 percent of all the machine tools produced in the world last year. China, whose GDP ($3.3 trillion) is one-third the size of the United States’, produced $14 billion worth of machine tools last year, more than three times the U.S. output. Japan’s output ($15.8 billion), and Germany’s output ($15.6 billion) are both four times larger than the U.S. industry’s, according to Gardner Publications

American companies are doing whatever they can to survive. They are rotating layoffs, furloughing workers, deferring payments to suppliers, cutting expenses, reducing management salaries and quoting every job that is available. Schildge says his firm has put half of its employees on rotating four-week layoffs and the office staff is furloughed one day every two weeks.

AMT is losing two to three members per month, due to their going out of business. If business does not turn around soon, Schildge says the trade group could lose 30 percent of its membership this year.

Others in the industry say what’s needed most is the return of credit and consumer confidence. At some point Americans will have to start replacing their aging automobiles. The automobile scrap rate is about 11 million per year, but sales are now projected to be well below 10 million for 2009. “If the government can provide a lending environment that will encourage automobile sales and home sales the market will take care of itself,” says Schildge. “With the right environment, we can come back quickly.”

But presently, there is no sign that the market is turning around. Schildge looks for increasing part sales, which means customers are using their existing machines. But there has not been any uptick in the parts business. Austin has not seen any increase in customer inquiries, and the strengthening of the dollar has put the brakes on overseas sales, not that they were particularly robust given the difficulty of selling systems into Japan, Germany and China. “We’re competing on an unlevel playing field with countries manipulating their currencies and supporting their industries in a way that doesn’t take place” in the United States, says Austin.

In order to have survived the previous industry downturns, the remaining U.S. machine tool companies have had to embrace technology and innovation. But that might not be enough this time around. “There are only a few people able to hang on at this point in time,” says Austin. “Some of them have been helped because they are absolutely essential to certain [national security] parts of our economy, but a large part of the business has been taken over by foreign competitors.”

Don’t write the industry off quite yet, says Schildge. The downturn in 1982 was similar to the current situation and many people in America were talking about the death of manufacturing, but the industry survived. “I think we will come back this time, too,” he says.

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