III. COMPETITIVE FACTORS: U.S. INDUSTRY AND THE WORLD MARKET

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85-01156R000300380005-9
• Release Decision: RIFPUB
• Original Classification: U
• Document Page Count: 6
• Document Creation Date: December 21, 2016
• Document Release Date: August 28, 2008
• Sequence Number: 5
• Content Type: REPORT

Approved For Release 2008/08/28 : CIA-RDP85-01156R000300380005-9
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III. COMPETITIVE FACTORS: U.S. INDUSTRY AND THE WORLD MARKET
A. Historical Perspective
After significant real growth in machine tool demand resulting
from the investment boom of the 1960's, little further growth
was anticipated in the early 1970's. Therefore, the marketing
strategy in the early 1970's for most foreign and domestic
- machine tool producers was to increase their market shares.
Industrialized countries, in particular, concentrated on
exports. As the U.S. has consistently been the largest world
market, and has had the least restrictions on foreign
competition, it became the market on which all exporters
focused.'
The demand for machine tools increased in the U.S. in the latter
half of the 1970's, largely in response to a major re-tooling of
the transportation sector of the U.S. economy (in turn fueled by
increases in energy prices). The U.S. machine tool industry
responded by increasing production lead-times to 18 to 24 months
or more, depending on the type of machine required. Industry
experts differ on the reasons why the U.S. machine tool industry
pursued this course. However, it can be stated with assurance
that this practice by the industry in the face of increased
demand has historically been associated with increased import
penetration.2 In 1978, import penetration in the domestic
machine tool market was about 30%; by 1982 it was almost 457. of
consumption in terms of units.
B. Current Factors
1. Quality
According to the International Trade Commission (ITC)
study, "Competitive Assessment of the U.S. Metalworking
Machine Tool Industry," the U.S. industry is regarded as
the supplier of choice in high technology machine tools
designed for highly specialized operations. In those
operations which produce machines for components,
military equipment, and long assembly line operations,
U.S. machines are dominant with respect to quality.
However, in the standard-type machine tools, which are
primarily ordered by independent job shops and which
probably have the greatest potential for increased future
machine tool demand, U.S. equipment is perceived to be of
lesser quality by domestic purchasers than that of major
foreign producers.'
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Machine Tool Industry and the Defense Industrial Base,"
notes that offshore firms must export reliable machine
tools in order to eliminate the need for maintaining a
large, after-sales servicing force in a foreign country.
Conversely, in the face of order backlogs, domestic firms
have tended to emphasize higher production rates as
opposed to product reliability.'
2. Delivery
The ITC study noted that the longer lead times associated
with U.S. machine tool orders appeared to be an important
factor to domestic purchasers, particularly for purchases
of the standardized machines. Respondents to an ITC
survey of machine tool purchasers indicated that foreign
producers gained market shares in part because of their
ability to provide more timely delivery.' For example,
according to the NRC report, in the 1970's the domestic
industry required a one and one-half to two year wait for
the delivery of machine tools, while Japanese
manufacturers made deliveries within only one or two
months.' Some foreign producers have also warehoused
the more standard-type machines in the U.S., enhancing
their ability to deliver products in a more timely manner
than their U.S. counterparts.7
3. Service
According to the ITC study, the U.S. producers' after
sales service on specialty machine tools mirrors those
products' reputation for quality: the U.S. producer is
superior to that of foreign competitors. In the lower
end of the market, however, after-sales service for
foreign-made standard machine tools is considered to be
superior to that of U.S. tools. The quality of
after-sales service was described in the ITC study as
including the ability to provide spare parts in a timely
manner, implementing warranties and product servicing,
communicating product changes to the customer, and
customer training. Again, as the foreign-made standard
machine tool is often of superior quality, less servicing
is needed than for U.S.-made machine tools of the same
type.'
4. Price
According to the ITC survey, as a determinant of price,
the cost of raw materials appears to be approximately 38%
of the value of shipments. Although the ITC study notes
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that little information on raw material costs of foreign
producers is available, the study assumes such costs are
relatively equal throughout the world. However, other
costs such as financing, fixed overhead, and particularly
wages are higher for U.S. industries. For example, the
ITC study notes that wages paid to production workers in
France, Italy, Japan and the United Kingdom are, on
average, two-thirds of those paid to production workers
in the U.S. With regard to white collar workers, an
engineer in the U.S. with 1 year of experience earns
approximately twice that of a Japanese engineer and four
times that of Taiwanese and Korean engineers.'
In the NRC report, an attempt was made to assess the
costs of producing domestic and foreign machine tools,
despite the paucity of data alluded to in the ITC study.
The NRC report provides an estimated breakdown of a U.S.
producer's versus a Japanese producer's costs in
manufacturing a conventional computer numerical control
(CNC) lathe as shown in Table III-1. While the study
notes that ". . . the table is intended only as an
indication of general trends . . . ", the 21% price
differential in the example was substantiated as typical
of the experience of machine tool purchasers interviewed
in the course of the NRC study and supports the view that
foreign competitors have a distinct advantage over their
domestic counterparts.10
Thus, with labor approximating 557. to 60% of the cost of
producing machine tools, U.S. producers are at a distinct
price disadvantage compared to their foreign
counterparts. Responses by producers and importers to
the ITC's survey on the question of price indicated that
importers have a significant advantage over U.S.
producers of standard-type machine tools.''
Specifically, the price of machine tools is often the
decisive factor for the small and medium sized purchaser
- a segment of the manufacturing sector expected to
become the predominant market for future machine tool
consumption.12 However, at the higher end of the
market, where the quality of U.S. machines are regarded
as superior, price appears to be less a determinant of
competitiveness. 13
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Comparative Costs of CNC lathe Tools U.S. vs. Japan, 1981
United States
Japan
Amount
Percent
Amount Percent
Manufacturers' Selling Price
$120,000
$92,240
Gross margin J
48,000
36,900
Manufacturing cost
72,000
100
55,360
100
Purchased material J
32,400
65
22,680
41
Labor and burden
39,600
55
32,660
59
Direct labor f/
Dollars
9,900
14
8,165
15
(Hours)
1,081
1,384
Indirect and burden d/
29,700
41
24,495
44
Gross margin of 40 percent is assumed for both U.S. and Japanese
producers.
For the U.S., purchased materials are 45 percent of manufacturing
cost; for Japan, the cost is 30 percent less than the U.S.
material cost.
For the U.S., labor cost is estimated on the basis of a 1 to 3
ratio between direct labor and indirect labor and burden. Unit
hours are derived by dividing direct labor cost by 1981 average
hourly earnings of production workers in metal-cutting machine
industry ($9.16). (U.S. Bureau of Labor Statistics)
For Japan, direct labor hours per unit are derived by
increasing U.S. levels by 28 percent, in accordance with 1980
estimates by the Japan Productivity Center of comparative levels
in the industrial machinery industry. The 1981 Hourly average
for Japan is $5.90.
Indirect and burden are derived as residuals. The higher
proportion for Japan (despite lower fringe benefits) reflects the
higher ratio of non-production workers to all employees in
Japan's metalworking machinery industry (40 percent) compared
with the U.S. industry ratio (30 percent), according to BLS data.
,
and Committee calculations.
National Research Council
Department of Defense
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Differing exchange rates also have negatively impacted
U.S. machine tool sales vis-a-vis price. The increased
strength of the U.S. dollar compared to foreign
currencies favors increased imports and negatively
impacts exports of all commodities. The ITC study
indicates that differences in relative inflation rates
and changes in exchange rates have increased the
competitiveness of foreign producers. The overall price
of all imported goods has increased 8.6% less since 1976
than has the overall price of all U.S. goods.'?
C. Future Market Trends
Unlike the sharp increase in U.S. transportation sector demand
experienced in the late 1970's, it is anticipated that no one sector
of the U.S. economy will exclusively spur such an increase in demand
for machine tools in the future. Rather, it is expected that
increases in domestic demand will result from modernization efforts
employed in all manufacturing sectors, as economic growth and lower
interest rates are gradually sustained in the current economic
recovery period. While prior increases in demand for machine tools
have developed from plant modernization in the larger, more dominant
manufacturing industries, the bulk of the future U.S. demand for
machine tools will come from the small-to-medium-sized corporations
purchasing less technically superior products. This demand shift
could place U.S. manufacturers at a competitive disadvantage, as
foreign machine tool producers have tailored their product lines to
precisely this market.'s
In the near term, the DOC's "U.S. Industrial Outlook 1984" projects
an 8% increase in the combined shipments of the machine tool and
accessories industries over 1983 levels. Employment gains are
expected to be marginal, with the industry operating at a loss at
least through the first half of 1984. Export markets are expected
to remain depressed, increasing at only a 6% rate for metal-cutting
and an 8% rate for metal-forming machine tools. Imports are
expected to continue to gain a greater share of the domestic market,
with metal-cutting machine tool imports increasing 20% and imports
of metal-forming tools increasing 16%.'6
 111-5 NOTES TO CHAPTER III
1. "Machine Tool Industry: Is There Life After Detroit?" Eli S.
Lustgarten, Paine Webber Mitchell Hutchins Inc. Status Report,
December 6, 1982, p.4.
2. Lustgarten, p.4.
3. "Competitive Assessment of the U.S. Metalworking Machine Tool
Industry," Report to the United States International Trade
Commission (ITC) on Investigation No. 332-149 under Section 332
of the Tariff Act of 1930, USITC Publication 1428, Washington,
D.C., September 1983, p.xv.
4. "The U.S. Machine Tool Industry and the Defense Industrial
Base," Committee on the Machine Tool Industry Phase II,
Manufacturing Studies Board, Commission on Engineering and
Technical Systems, National Research Council (NRC), National
Academy Press, Washington, D.C., 1983, pre-publication copy, p.
39.
5. ITC, P.xiv.
6. NRC, p. 42.
7. ITC, P. xiv-xv.
8. ITC, P. xiv.
9. ITC, P. 98-99-
10. NRC, p. 42.
11. ITC, P. xiii-xiv.
12. Lustgarten, pp. 9-10.
13. ITC, p. 105.
14. ITC, p. 155-156.
15. Lustgarten, p. 10.
16. U.S. Industrial outlook 1984, Department of Commerce,
pre-publication copy (available in mid-January 1984),
20-1--20-3.
a x