THE WORLD MACHINE TOOL INDUSTRY IN TRANSITION: GROWING ROLE OF JAPANESE PRODUCERS

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A I
The World Machine Tool Industry
in Transition: Growing Role
of Japanese PrOducers
An Intelligence Assessment
Confidential
GI 83-10017
February 1983
Copy
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Gtkt Directorate of
. Intelligence
Confidential
The World Machine Tool Industry
in Transition: Growing Role
of Japanese Producers
An Intelligence Assessment
This assessment was prepared by
Office of Global Issues. Comments and queries are
welcome and may be directed to the Chief,
Industrial Analysis Branch, OG I,
Confidential
GI 83-10017
February 1983
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Key Judgments
Information available
as of 15 November 1982
was used in this report.
The World Machine Tool Industry
in Transition: Growing Role
of Japanese Producers
Advances in microelectronics have led to a new generation of highly
automated, general purpose machine tools. World leadership in the
development and commercial manufacture of this equipment confers
substantial competitive advantages to a number of major industries as a
result of the productivity gains made possible by its use. Leadership has
significant national security implications as well: the ability to produce
advanced weapons systems is often tied to the development of sophisticated
machine tools; an expansion of arms production depends critically on a
concomitant rise in machine tool production.
Japanese producers have a significant lead in the manufacture of these
machine tools and are likely to achieve substantial additional gains in
world machine tool trade over the foreseeable future. World leaders in the
production and export of general purpose, high-technology machine tools
and the computer numerical controls (CNCs) that operate them, Japanese
firms have demonstrated the ability to deliver higher quality equipment
more quickly and at lower cost than their foreign competitors. Japanese
producers have:
? Benefited from a number of government policies. Specifically, industry
cartels were formed that led to the concentration of production of key
machine tools in the hands of a few select firms, giving them the
opportunity to achieve the cost economies and revenue flows associated
with high-volume production. This effort was supported by a number of
other programs that provided research and development support and
rewards for export sales.
? Adopted a highly focused strategy that seeks to dominate key segments
of the general purpose machine tool sector, invested heavily in automated
production of machine tools, and managed to maintain a high rate of
capacity utilization.
? Had ready access, at relatively low cost, to state-of-the-art CNCs. This is
due to the presence of a single firm?Fanuc which produces over half
of the CNCs sold worldwide. Foreign firms typically pay a substantially
higher cost for this same equipment, at least in part as a result of the high
markups charged by Fanuc's foreign distributors.
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G183-10017
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We believe that the shift in demand to high-technology machine tools will
probably lead to increasing concentration of market share in the hands of a
few large firms worldwide. The substantial investments necessary for
product development and requisite plant modernization will force out
smaller firms with limited financial resources. The Japanese are uniquely
positioned to maintain and possibly extend their lead in the production of
computer-controlled machine tools:
? The Japanese machine tool industry is dominated by a group of
financially solid, technologically advanced machine tool producers that
have a strong advantage in price/performance over their competitors in
Europe and in the United States.
? Japanese producers are aggressively moving to increase their world
market share; continued rapid capacity expansion,
will enable the Japanese to supply 70 percent of
the international market for machine tools by 1985.
Although the United States has been a leader in developing the new
technology, US machine tool producers?according to many market
experts?are in a poor position to meet the Japanese challenge. Many US
corporations have been slow to assess developments in Japan, and because
of the recession they lack the financial means to react. Net new orders for
the first nine months of 1982 fell 51 percent from the previous year, and
the backlog of unfilled orders appears headed for the lowest point in a
decade. Industry profitability?needed to finance research and develop-
ment (R&D) as well as new production equipment?is further constrained
by the eroding US position in the world market; imports now account for
more than 25 percent of the domestic market while exports have fallen to
less than 15 percent of production.
West European governments?witnessing a tripling of imports of Japanese
metal-cutting machine tools in 1978-80?have attempted to stimulate the
indigenous development of similar equipment. We believe it unlikely,
however, that West European producers will be able to compete successful-
ly with the Japanese in fast growing product lines. West Germany has long
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been the largest West European producer and exporter of machine tools,
but West German producers have fallen behind in highly automated
systems, a market that we believe has the greatest growth potential. Given
this environment we would expect intense pressure for some form of
industry protection. We believe a reduction in Japanese Government
support to its industry would have little impact on Japan's international
competitiveness in machine tools because of its technological achievements,
efficient production methods, and reputation for quality.
The United States retains an advantage in the most technologically
intensive sectors, especially flexible manufacturing systems (FMS), which
integrate groups of machining centers through the use of computerized
controls. The US industry has gained considerable experience with com-
plex machining systems from building transfer lines for the motor vehicle
industry. In addition, there already are several large users of FMS in the
United States, such as Caterpillar and John Deere, which provide an
opportunity to develop and apply this new technology. The competition in
this field, however, is sure to be intense. Other countries have already
devoted considerable R&D to mastering this technology in their machine
tool industries and have instituted grant and loan programs to make the
technology available to their manufacturing industries.
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EII
Contents
Page
Key Judgments iii
The Machine Tool Industry 1
Market Trends 1
Japanese Dominance in Numerically Controlled Machine Tools 3
Europe Stirs Itself 7
The US Industry 8
Looking Ahead 8
Appendix 11
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1980 Machine Tool Exports, Selected Countries
United
States
Boring machines 20.0
Drilling machines 22.0
Gear cuttingand '4140
finishing machines
Grinding and
polishing machines
Lathes
85.0
81.0
Milling machines 19.0
Other metal-cutting machines 175.0
Punching and 45.0
shearing machines
Presses, including forging
Other metal-forming machines
70.0
West
Germany
Italy
France
?
77.1
63.4
129.6 107.0
82.9 84.5
211.3 67.2 80.6
25.7 27.7 20.1
United
Kingdom (El
31.9
31.2
17.5
106.5
Million US $
Japan
54.2
28.6
13.9
66.5 42.1 50.6
119.1 102.9
62.9 117.1
Source: International Statistics on Machine Tools.
Legend:
= Leading exporter. = Third-leading exporter.
= Second-leading exporter. E = Estimate
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The World Machine Tool Industry
in Transition: Growing Role
of Japanese Producers
The Machine Tool Industry '
The machine tool industry is a critical ingredient in
the industrialization process. Almost every manufac-
tured product is made on machine tools or on ma-
chines that have been built by machine tools. Metal-
working industries automobiles, aircraft,
shipbuilding, aerospace are particularly dependent
on the machine tool sector. Beyond this, advances in
machine tool capabilities play a significant role both
in the manufacture of new products and in the
efficient output of existing products:
? Incorporation of new technologies electronics, op-
tics, and materials into both civilian and defense-
related products often hinges on a commensurate
advance in machine tool development.
? Productivity gains for existing goods such as auto-
mobiles are closely tied to improvements in machine
tool capabilities.
The country that first achieves advances in machine
tool technology tends to strengthen its own economic
base and gain a competitive edge for its user indus-
tries, both civil and defense. Without an indigenous
production capability, the commercialization of new
technologies may be delayed until necessary new
machine tools are available from a foreign source,
increasing the likelihood that commercialization in
the supplier country has already occurred. In addi-
tion, if the advanced machine tools needed to boost
productivity in existing industries come from abroad,
user industries probably will have to take a backseat
to their foreign competitors who would presumably
have first call by virtue of traditional producer-
consumer links?on indigenously produced machine
tools.
Every major industrialized country has a well-devel-
oped machine tool industry (see table). The technical
nature of machine tool production combined with the
1
wide range of product diversity has led to extensive
specialization in these industries; the typical firm
manufactures only one or two types of machine tools.
Largely because of this specialization, most machine
tool firms are small in terms of total employment and
financial resources. The average firm employs 250
persons in West Germany, 150 in France, and less
than 100 in the United States. Large firms are scarce;
only 11 percent of West German firms have more
than 500 employees, compared with 7 percent in the
United States and 5 percent in France. Less than
2 percent of Japanese factories employ more than 300,
and only one-fourth of 1 percent employ more than
1,000.
Trade in machine tools grew rapidly in the 1970s as
producers in Western Europe and Japan aggressively
sought export markets to compensate for the stagna- 25X1
tion or cyclical downturn of domestic demand. Ex-
ports as a share of production with the notable
exception of the United States?have risen across the
board. In 1981 West Germany exported over 60
percent of its machine tool production, while Japanese
and French exports accounted for 35 percent and 50
percent of output. US firms, in contrast, shipped less
than 20 percent of production overseas in 1981.
Import dependence has similarly risen to 58 percent of
consumption in France, 30 percent in West Germany,
and 25 percent in the United States. Significantly,
Japanese import shares have declined as a result of an
across-the-board improvement in domestic production
capabilities. 25X1
Market Trends
Demand for machine tools typically follows the invest-
ment cycle in major industrial countries. As a result,
demand rose sharply during the second half of the
1970s, stimulated in large part by investment activity
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What Are Machine Tools?
Machine tools are described by the National Ma-
chine Tool Builders Association (NMTBA) as power-
driven machines, not supported in the hands of an
operator when in use, that shape or form metal by
cutting, impact, pressure, electrical techniques, or a
combination of these processes. The machine tool
industry is comprised of those establishments whose
primary products are machine tools.
Machine tools include lathes, drill presses, machin-
ing centers, grinding machines, and forging presses.
They are of two types, classified according to the
Standard Industrial Classification (SIC) as Metal
Cutting Machine Tools (SIC 3541) and Metal Form-
ing Machine Tools (SIC 3542)
Machine tools may also be usefullv differentiated
between NC types and standard machines. NC ma-
chines are those equipped with a control system that
operates the machine by means of numerically coded
programs fed into the system in one of several ways,
such as punched tape or by playback of prerecorded
operating programs. In CNCs the control system is
based on a microprocessor. Standard machines are
those that are not NC equipped and are controlled by
an operator.
in the US, Japanese, and West German auto indus-
tries (figures 1 and 2). Between 1976 and 1980 US
demand increased rapidly because of auto retooling.
The US share of machine tool consumption by non-
Communist countries consequently rose from 15 per-
cent in 1976 to 20 percent in 1980. Japanese and
West German consumption also rose sharply during
this period. More than one-third of the growth in
Japanese production during 1976-80, however, result-
ed from increased exports primarily to the United
States and Western Europe.
Beginning in 1981, the recession, combined with a rise
in real interest rates, led to a precipitous fall in world
demand for machine tools. Net new orders have fallen
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Figure 1
Total Consumption of Machine Tools
by Country, 1970-81
Billion I.'S S
6
4
1970 71 72 73 74 75 76 77 78 79 80 81
lilnited States
danan
\Vest (iermany
Italy
United Kingdom
France
5886", 1-83
75 percent since the first quarter of 1980 in the
United States. During 1981 orders from the US auto
industry were down more than 70 percent compared
with the previous year. The Japan Machine Tool
Builders Association forecast a 7-percent decline in
orders for 1982, the first downturn in seven years. In
Italy shipments were off 27 percent during the first
six months of 1982 compared with year-earlier fig-
ures, while in West Germany?where demand peaked
relatively early?shipments fell more than 16 percent
in 1981.
The present cyclical downturn masks a strong under-
lying secular demand for the numerically controlled
(NC) and computer numerically controlled (CNC)
machine tools that have come on the market in recent
years
2
by 1985 NC machines will account for half of
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Figure 2
World Machine Tool Production
Constant Dollars
30
28
26
24
22
20
I 1 [ I II [ I I
18 1964 66 68 70 72 74 76 78 80
588625 1-83
US machine tool sales, compared with about 30
percent in 1980. machine
tool purchases will rise to 25 to 35 percent of total
capital outlays, up from 20 to 25 percent in 1980.
by 1990 most,
if not all, equipment will be fitted with some kind of
numerical control, although use of sophisticated
CNCs will be considerably more limited.
The industry expects a major rebound in demand for
machine tools once economic recovery begins. The
demand will be driven by two main factors:
? Firms?particularly in high-wage countries?can
achieve substantial productivity gains from the ef-
fective use of NC and CNC machine tools. The
results can be particularly dramatic when this
equipment is paired with industrial robots.
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Figure 3
Machine Tools in Use in Six Industrial
Nations by Age of Tool
Percentage of Total
loo
90
80
70
60
50
40
30
20
10
LIS West
Germany
Under 10 years
10-20 years
Over 20 years
588626 1-83
? With over half of the machine tools in use in the
major developed countries more than 10 years old,
the scope for retooling is considerable (figure 3).
This is particularly true in the United States, which
has both the oldest and the most machine tools in
use?nearly 70 percent of US machine tools are
more than 10 years old and 34 percent more than 20
years old.
Japanese Dominance in Numerically Controlled
Machine Tools
Japanese firms are in the best position to benefit from
the shift in demand toward NC and CNC machine
tools. The industry?drawing on its strong national
electronics infrastructure?has concentrated on devel-
oping a decisive advantage in the production of highly
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The Revolution in Machine Tool Technology
Until the 1950s, industrial automation consisted
primarily of special machines constructed to perform
a single operation, albeit with high speed and efficien-
cy. This so-called hard automation is epitomized by
the transfer line, a series of machines linked together
in a production line along which a part, such as an
automobile cylinder block, is completely and auto-
matically processed from the raw casting.
The 1950s saw the arrival of general purpose, nu-
merically controlled (NC) machine tools; machine
tools whose functions could be programed on a
punched paper tape endowing them with the speed
and efficiency approaching that of special purpose
machinery. The harsh environment of the shop floor,
however, caused frequent breakdowns that, along
with high cost, prevented their widespread use.
Over the past decade, the application of microproces-
sors has both reduced the cost and increased the
reliability of machine control systems. An increasing
number of machines are now being operated by
computerized numerical controls (CNC). At the same
time, the application of microelectronics technology
is permitting a vast increase in the versatility of
machines so equipped. A new generation of NC
systems, known as direct numerical control (DNC),
uses a computer to direct the motions and operations
of several, even a hundred, machine tools simulta-
neously.
The NC machining center, with automatic tool
changer, is one of the significant outgrowths of
numerical control. It is a multipurpose machine
programed by numerical control to do several opera-
tions, such as turning, boring, milling, drilling, and
tapping. Without repositioning the part, it automati-
cally performs a series of operations that formerly
required several machines.
In an increasing number of cases, the machining
center is becoming the nucleus of a complex of
machines that constitute a completely integrated
parts manufacturing system known as a flexible
manufacturing system (FMS). These systems em-
brace all kinds of machining operations, assembly
and in-process inspection, and the use of computers to
control and report individual operations. Combined
with automated warehousing, FMS brings a step
closer the ultimate goal of the fully automated,
unmanned factory
automated, general purpose NC machine tools. The
rapid growth in capacity, combined with the concern
of Japanese producers for upgrading their own capital
stock, has resulted in highly efficient production
processes.
In typical Japanese fashion this advantage has been
exploited by rapid penetration of world markets. By
producing NC machines in large numbers as stock
items and shipping them in anticipation of orders, the
Japanese have undercut their competitors' prices and
leadtimes.
the Japanese were able to double their
market share in the 1978-80 boom market in the
United States by delivering competitively priced ma-
chines in four to eight months when US firms'
leadtimes had jumped to 12 to 18 months.
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the Japa-
nese concentration on NC and CNC machine tools
has given them a number of unique advantages.
Specifically, they have been able to:
? Realize scale economies in production by concen-
trating on high-volume types.
? Achieve high growth rates by gaining dominance in
the fastest growing market segments?NC
machines.
? Generate a revenue stream to finance both further
technological development and implementation of
that technology in their own plants to boost produc-
tivity.
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Japanese producers have deliberately forsaken the
market for large, high-powered, and high-precision
NC and CNC machine tools in exchange for the cost
savings attendant to high-volume production of less
sophisticated machines. Japanese firms focus on the
mass production, medium-duty, low-power, general
purpose machines that satisfy a wide range of applica-
tions; the equipment produced typically offers the best
value and quality in its class. Japanese machine tools,
as a result, are often ill suited for those select
customers requiring high precision or using difficult-
to-machine materials. Even Japanese users have criti-
cized Japanese-made machine tools for these short-
comings, according to a recent study by the Japan
Society for the Promotion of the Machine Tool Indus-
try, and they continue to fill their requirements for
high-precision and specialized machine tools with
imports from the United States and Western Europe.
Government Role. Tokyo's main role in support of the
machine tool industry has been in creating a business
environment designed to abet strong firms able to
export. In 1956, under the first of a series of Extraor-
dinary Measures Laws, Tokyo encouraged the forma-
tion of a machine tool cartel, which has concentrated
production of each type of machine tool in the hands
of the most efficient producers by ordaining that firms
with a small market share discontinue production. For
example, just three firms account for 52 percent of the
important NC lathe sector, according to a recently
released MITI (Ministry of International Trade and
Industry) survey. We believe that with the domestic
market essentially divided up, individual Japanese
firms are focusing their attention on export markets
as the principal area of company-to-company compe-
tition.
Japanese machine tool firms have benefited from a
plethora of government programs directed both at
them specifically and at industry in general. Programs
supportive of industry generally have had their great-
est impact on machine tool producers by making it
easier for other firms to buy their products. The most
important of these provisions has probably been To-
kyo's use of an accelerated depreciation program to
promote the purchase of NC machine tools. The
Japanese Government has strongly encouraged ex-
ports with a variety of incentives that had the effect of
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rendering export earnings virtually tax exempt. One
program, in effect from 1964 to 1974, allowed Japa-
nese manufacturers to increase ordinary depreciation
deductions by the percentage of the company's export
income to total income. Japanese machine tool exports
have thrived with this encouragement?growth of
Japanese metal-cutting machine tool exports has aver-
aged more than 30 percent annually for the past 20
years.
Tokyo has also implemented programs specifically to
support the machine tool industry. As provided by the
Extraordinary Measures Laws, the Japanese Govern-
ment has directly and indirectly made funds available
to Japanese machine tool firms at concessionary
terms. The Japan Development Bank, the Small
Business Finance Corporation, the Industrial Bank of
Japan, and the Long-Term Credit Bank have been the
conduits for these funds. The government also has
funded research and development (R&D) projects that
benefit the Japanese machine tool industry; direct
grants have been made by various governmental
entities including the Research Development Corpo-
ration and the Agency for Industrial Science and
Technology.
Production Facilities. A major ingredient in Japan's
recent success has been the extensive use of advanced
production equipment in Japanese machine tool
plants. Use of flexible, highly automated machine tool
systems, for example, has enabled Japanese firms to
upgrade substantially productivity and quality. Plant
automation also gives Japanese firms quick response
time on new orders. Yamazaki Machinery Works, the
second-largest producer of NC lathes in Japan, has
recently opened a new plant to machine parts from
castings for its machine tool products that requires
only 12 workers to operate on three shifts 6-6-0
rather than the roughly 200 employees required in a
traditional plant of similar capacity. (The plant is
presumably manned by maintenance and security
personnel during the third shift.) Moreover, the parts
spend an average of just three days in process instead
of the usual three months required in traditional
plants.
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The Houdaille Petition
Houdaille Industries, Inc., a Florida-based machine
tool builder, has petitioned the President of the
United States to suspend the investment tax credits
now given to US firms that purchase Japanese-made
NC machining centers and NC punching machines
under section 103 of the Revenue Act of 1971. The
petition contends that the Japanese machine tool
industry, with the help of the Japanese Government,
has been operating for over 25 years an international
cartel that has used unfair trade practices to rapidly
take control of the US market for these machines.
Japan's share of the US market for machining centers
grew from 3.7 percent in 1976 to more than 50 percent
in 1981.
Houdaille conducted intensive investigations for
more than a year, interviewing Japanese Government
officials and utilizing a Japanese law firm to gather
information. The petition exhaustively details the
history of Tokyo's support for the machine tool
industry including cabinet orders, ministerial ordi-
nances, and published internal guidelines, which pro-
vided the framework for establishing the cartel. It
also presents evidence of tax concessions, low-interest
loans, research grants, and other subsidies afforded
to the Japanese machine tool industry that have
enhanced the industry's international competitive-
ness.
While the proposed denial of the investment tax
credit to purchasers of Japanese machine tools would
cut profit margins on Japanese sales to the United
States, it is not clear that such action would substan-
tially slow Japanese penetration of US markets.
Houdaille calculates that Japanese firms would have
to reduce prices only 15 percent to offset the denial of
the investment tax credit that is being .sought. Japa-
nese machine tools, however, are already priced well
below comparable US models, and the huge inventory
surplus of Japanese machine tools in the United
States creates a strong incentive for substantial dis-
counting; specific instances of price cuts on Japanese
machine tools of nearly 20 percent have been reported
by US machine tool executives. In addition, Japanese
tools are rapidly developing a following based on
superior design and quality that will tend to mitigate
the impact of price increases.
Role of Fanuc. Another reason for Japan's success, in
our judgment, is the unique contribution of a single
Japanese company, Fanuc. Fanuc is the world leader
in the production of CNCs, accounting for more than
half of the production of non-Communist countries.
Fanuc has vigorously exploited developments in mi-
croelectronics and the capabilities of its parent com-
pany Fujitsu?to increase the reliability and lower
the cost of its numerical controls. The availability at
low cost of these essential machine components is
cited by several Japanese machine tool builders as an
indispensable ingredient to their ability to produce
advanced-technology machine tools at competitive
prices.
Although Fanuc CNCs are available worldwide, for-
eign machine tool builders have not fully benefited
from Fanuc's low manufacturing costs. The compa-
ny's exclusive distributors have marked up prices well
above those charged Japanese firms buying directly
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from Fanuc. West
German users are complaining that Siemens, Fanuc's
European distributor, has used its monopoly position
to double the price of Fanuc controls over that paid by
Japanese firms.
Market Penetration. Japan's emphasis on the produc-
tion of advanced machine tools has understandably
made developed countries the primary markets for its
exports. In 1980 Japan's three largest customers the
United States, West Germany, and the United King-
dom?accounted for 53 percent of Japanese exports
compared with 32 percent just two years earlier. The
Japanese garnered the largest share of market growth
in the United States and Western Europe between
1977 and 1981; Japan's share of machine tools sold in
the United States rose from 4 to 12 percent during
this period.
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Europe Stirs Itself
With relatively small domestic markets, West Euro-
pean machine tool firms traditionally have depended
on sales in foreign markets. Both import and export
levels are typically high relative to production and
consumption. Government support for the machine
tool industries in Europe ranges from substantial in
France, which has an array of programs rivaling
Japan's in scope if not in effectiveness, to almost
nonexistent in Italy. The major emphasis of European
government support policies particularly in West
Germany and the United Kingdom is research and
development.
West Germany's traditional dominant position in ma-
chine tool trade is increasingly at risk in our judg-
ment. The largest producer and exporter of machine
tools in Western Europe, West Germany built its
export success largely by specializing in high-quality,
precision machinery. The West Germans have fallen
behind, however, in highly automated systems where
we believe the greatest future growth in demand lies.
Bonn has recognized this weakness and has supported
R&D programs to advance the state of the art of
Germany's machine tool industry, but this effort has
not yet manifested itself in West German production.
We believe West German producers have not yet
developed a strong market presence in advanced-
technology machine tools in part because a large
portion of their exports-34 percent?go to relatively
unsophisticated LDC and East European users and
because they remain successful with their existing
product lines.
Italy has developed a strong machine tool industry by
relying heavily on exports, which have accounted for
40 to 50 percent of production during the past decade.
Italy is the fourth-largest exporter, after West Ger-
many, Japan, and the United States. The Italian
industry is capable of producing technologically ad-
vanced tools and is the world's leading exporter of NC
radial drilling machines. The industry is composed of
many small and medium-sized firms, which tend to be
highly specialized and often have a suprisingly sophis-
ticated export organization. The small, family-owned
firms are not burdened with the same degree of labor
unrest as most of Italian industry and often enjoy a
labor cost advantage over their West European com-
petitors. According to press reports, however, Italian
7
producers believe they will increasingly have trouble
holding their own against low-cost Japanese produc-
ers, which so far account for only 3 percent of Italian
machine tool imports.
In France, the Mitterrand government has targeted
the machine tool industry as crucial to French indus-
trial competitiveness. To achieve economies of scale in
development, production, and sales, Paris is forming a
holding group, Machine Francaise Lourde, which will
take over several financially troubled private compa-
nies in two groups one for turning machines and one
for milling machines. Government support for the
industry?including orders, R&D funding, and train-
ing programs?is slated to total $335 million over a
three-year period. Although France has run a trade
deficit in machine tools for most of the past decade,
French machine tool builders hold strong positions
vis-a-vis the United States and Japan in the world
market for large milling machines and precision metal
forming presses, which are used in the aerospace
industry. They lead in the technology for very-high-
speed machining. The greatest obstacle confronting
the French is in translating their technology into price
competitive products, an area in which the Japanese
excel.
The United Kingdom's machine tool industry is in
trouble. The British have concentrated on categories
of standard production machines and are the world's
leading exporters of automatic and copying lathes.
According to a spokesman for the Machine Tools
Trade Association, British companies have built their
reputation on small batch production and rapid re-
adjustment to changing requirements. We expect this
market to be increasingly undercut by either more
sophisticated NC machines produced in Japan or the
low cost of standard equipment produced in Third
World countries. Unless the British industry can
quickly translate the results of current government-
supported R&D programs into marketable products,
we believe the United Kingdom is in great danger of
losing both export and domestic markets to foreign
competitors
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The US Industry
The US machine tool industry is in its steepest
recession in recent years. Net new orders for the first
nine months of 1982 fell 51 percent from the previous
year, the third straight year of decline. The backlog of
unfilled orders appears headed for the lowest point in
a decade. Shipments have also begun to decline since
1981, reflecting the working off of the huge order
backlog built up during the boom of the late 1970s.
This order backlog has shielded the US industry from
the full force of the recession until now, unlike the
West European industries where production declined
rapidly beginning in 1981.
In machine tool trade, the US situation is even worse.
Imports, which accounted for less than 5 percent of
the domestic market 20 years ago, now absorb 25
percent, with Japan accounting for 12 percent. US
firms are also losing their position in export markets.
In 1964, the US share of world machine tool exports
topped 25 percent, but by 1981 that figure had
dropped to 10 percent.
US firms are
caught in a vicious cycle of declining international
competitiveness; increased competition first forced
them out of overseas markets and is now causing them
to lose ground at home. Low profitability
limits US ability to upgrade production equip-
ment necessary to stem the productivity declines
relative to foreign competition and to engage aggres-
sively in new product development. It also precludes
building for inventory. US industry consequently is
being forced to lay off a portion of the highly skilled
work force on which it depends. These workers are
often permanently lost and, with four to five years of
training required, will be difficult to replace.
Looking Ahead
The anticipated shift in machine tool demand in favor
of high-technology equipment is likely to lead to
increasing concentration of market share in the hands
of a few large firms. The investments necessary to
develop these new products and to modernize produc-
tion will probably force out weak firms with limited
financial resources. The Japanese machine tool indus-
try has already undergone a shakeout of this type?
during the 1974-75 economic slump. Successful firms
will also need to cultivate export markets both to
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avoid the consequences of depending on a single
cyclical market and to benefit from the economies of
scale made possible by advanced automation equip-
ment.
We expect Japanese firms to dominate world markets
for advanced-technology machine tools and believe it
is unlikely that modification of Tokyo's more overt
support measures for the Japanese machine tool in-
dustry will have any substantial impact on Japanese
export performance:
? The lead they have already gained in modernizing
their production equipment will be difficult for
other firms to overcome, and the Japanese strength
in providing cost-effective solutions to industry's
automation needs will be difficult to match.
? Users' sensitivity to prices confers a second consid-
erable advantage. Not only are the Japanese low-
cost producers of machine tools, but they are likely
to engage in discounting over the short run in an
effort to reduce their large unsold inventories
? The reputation for high-quality, reliable machine
tools that the Japanese have built up in recent years
will further guarantee them continued access to the
markets where they have already established a
presence.
For their part, Japanese machine tool manufactur-
ers- -appear
determined to capture an overwhelming share of the
market for advanced-technology machine tools. We
expect the Japanese to branch out into more kinds of
machine tools as the result of pressure to utilize fully
their capacity.
at the current rate of capacity expansion the
apanese by 1985 will be able to supply 70 percent of
machine tool demand of non-Communist countries.
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The Japanese clearly remain sensitive to the possibili-
ty of import controls; we believe they would respond
to such a threat with increased direct investment in
target markets. Makino Machine Company has al-
ready acquired LeBlond, a US maker of lathes, and
Yamazaki has equipped its US subsidiary, Mazak,
with what may be the most advanced manufacturing
facility in the United States at its Florence. Kentucky,
plant.
We anticipate increasing levels of competitive pres-
sure as the recession continues to shrink markets and
as technological advances shift the composition of
demand. Specifically, US producers can expect to
face increased competition from West European pro-
ducers in high-precision and specialized machine tool
markets. We believe they will target US markets for
machine types in which they have traditionally been
strong as they lose ground to Japanese exports of NC
lathes and machining centers in their home markets.
For example, the Italian Machine Tool Builders Asso-
ciation has recently opened a US office whose pur-
pose, according to press reports, is to foster US sales
of Italian machine tools.
the United States has the
best prospects for market leadership in the most
technologically intensive sectors, especially flexible
manufacturing systems. The US industry has gained
considerable experience with complex machining sys-
tems from building transfer lines for the motor vehicle
industry. Further, there are already several large
users of FMS in the United States, such as Caterpil-
lar and John Deere, which provide an opportunity to
develop and apply this new technology. The competi-
tion in this field, however, is sure to be intense. Other
countries have already recognized the importance of
mastering this technology to manufacturing produc-
tivity in general; they have implemented research and
development programs aimed at providing this tech-
nology to their machine tool industries and have
instituted grant and loan programs to make the
technology available to their manufacturing indus-
tries.
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Appendix
Figure Al
The Japanese Machine Tool Industry, 1970-81 The French Machine Tool Industry, 1970-81
Figure A2
Billion t S S Billion US S
4
19-0 71 7' '3 74 75 76 77 78 79 80 81
1.2
1 otal
Prod Li C) (0
I sport,
I otal
Con LI iii phon
linport.
1970 71 72 73 74 75 76 77 78 79 80 81
588628 1-83
lrotal
Production
IL ports
Total
Con sun1ption
Imports
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Figure A3
The West German Machine Tool
Industry, 1970-81
illi o t.S
Figure A4
The British Machine Tool Industry, 1970-81
Billion US $
1.4
1.2
I 0011
Poduct on
1.0
iiiiULiIiII 1ot1111111 1
1970 71 72 73 74 75 76 77 78 79 80
81
Total
,Prod u et ion
--Exports
Total
- Consumption
- Imports
1970 71 72 73 74 75 76 77 78 79 80 81
85:, 83 588630 1-83
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Figure A5 Figure A6
The Italian Machine Tool Industry, 1970-81 The US Machine Tool Industry, 1970-81
1.5
0
0
t SS
1970 71 72 73 74 75 76 77 78 79 80 81
1-83
'iota]
Production
Exports
total
Consumption
'Ill ports
4
II 11111
1970 71 7' 73 74 75 76 7' 7 8 79 80 51
83
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