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Tthe economic recovery has yet to reach the machine tool industry

ROCKVILLE, MD. -- Machine tool sales have declined for the past four ears. In 1998 sales reached more than $5.5 billion, but in 2001 they were nearly half that amount. For the first half of 2002, sales were down an additional 31 percent from the same period in 2001.

May machine tool consumption figures in the United States remained down nearly 30 percent over May 2001. Total sales for the month were $185.7 million according to the United States Machine Tool Consumption Report, a joint publication of the Assn. for Manufacturing Technology and the American Machine Tool Distributors' Assn.

There is a slight promise of recovery reflected in the increase of 22 percent over the $152 million low in November 2001.

Hardest hit is the Northeast, where consumption was down more than 43 percent for the year. The Midwest and Central regions followed with 34 and 32 percent drops, respectively.

Despite the bleak numbers, AMT president Donald Carison said signs of life are creeping back into the economy and that machine tools have shown a slow upward trend since February. What's more, he said the recovery of the manufacturing sector is critical to the American economy, a sentiment being echoed by others in the industry as the tough times continue.

"If America's manufacturing base is not regularly recharged, and is allowed to fall to a dangerously low level, it will almost certainly die out," said Carlson. "None of us can afford to let that happen."

An economic environment that supports manufacturing growth is essential in maintaining our standard of living and has tremendous impact on quality of life, he said. Manufacturing employs 18 million people in the United States and accounts for nearly 30 percent of the gross domestic product.

While the manufacturing sector has taken the brunt of the recession, the recent corporate failures and accounting scandals, along with companies relocating offshore, have only served to further affect the stability of the economy, said Frank Kirbus, vice president of Bloomfield, Conn.based Haas Factory Outlet. There have been numerous failures of small job shops throughout the country during the recent economic downturn.

"The government needs to do more to support the industry," added Quay Smith, president of Advanced Deburring & Finishing in York, Pa. "So many people don't seem to understand the connection between a healthy manufacturing industry and a healthy economy."

Manufacturing industry capacity utilization as reported by the U.S. Federal Reserve hovered just below 74 percent for the period of March through May. Capacity utilization is a major indicator of machine tool sales. Industry experts expect substantial growth in the machine tool industry when utilization is higher than 80 percent.

"There is serious over-capacity in this industry," said Kirbus. "We are at the end of the food chain and will need to wait 18 months until there is a major recovery in the machine tool industry."

One of the reasons for the over-capacity is the number of companies that have moved manufacturing operations overseas, said Smith. However, the industry is making machines that are of better quality and more productive than ever.

"Newer machines are more accurate and dependable, have a higher rate of productivity, and last longer," said Smith. "One machine can do what formerly required multiple machines."

Many companies are in a survival mode and are not looking to invest in their business, but there are certain signs of recovery, said president Clark Smith of Salt Lake City, Utah-based Smith Machinery Co., Inc. There have been more requests for quotes and an increase in orders.

"Customers are not looking to expand their business. Rather, they are looking for technology solutions," he said. "Most of the new orders are job shops looking to lower the cost of doing business and increase their response time and productivity."

Distributors must respond quicker and lower the costs for their customers, said Clark Smith. Of course, many distributors have had to cut costs and head counts just to survive.

"Everyone has trimmed staff," said Ralph Hegman, president of Maple Grove, Minn.-based Hegman Machine Tools. "We have one-third fewer staff than two years ago."

But there is a bright spot if the cost cutting is made intelligently. Hegman said his company is in better shape than ever, despite lower sales volume.

There are also some sectors that have increased activity. Most of the increased activity is still in the form of RFQs and service or repair parts, but that is an indicator of future activity and sales.

"We already hit bottom and are starting toward recovery," said AMTDA president Ralph Nappi. "The next few months will be challenging. Distributors still face tough times and there will be some closures."

Machine tool distribution is less capital intensive than many other industries, said Nappi. Therefore, most will scale back and survive, but the cost of recovery and future growth may be high.

Even in these difficult times, distributors should be looking to prepare for the future, said president Richard Shanoski of St. Clair Shores, Mich.-based Quality Systems Co. One means of preparation is AMTDA's Certified Machine Tool Sales Engineer program.

"Despite financial constraints there remains continued interest in the CMTSE training," said Shanoski. "Due to the slowdown and the many layoffs in the manufacturing sector, it's a good time to find and train employees."

To prepare for the recovery, AMTDA plans to offer a more comprehensive program in cooperation with various educational institutions to develop trained sales engineers. Shanoski says the program will start from ground level and give trainees the technical and business skills necessary to become skilled sales engineers.

U.S. machine tool consumption history
(thousand of dollars)

SOURCE: USMTC - a joint statistical program of AMT and AMTDA

COPYRIGHT 2002 Reed Business Information in association with The Gale Group and LookSmart.