Credit Markets Key To Machine Tools Recovery
Hit hard by the recession, the machine tools industry is starting to recover, but needs credit markets to improve for growth to accelerate.
John Bell (June/July 10)

The nation's machine tool industry is recovering from the recession, but still has challenges to meet before reaching full recovery. Machine tool distributors and manufacturers agree that the industry has weathered 2009 - what they call the worst single year in its history - and is slowly rebounding.

However, the sector remains burdened by tight credit, which hampers business and financing of customer sales. The drop in capacity utilization among manufacturers, or the amount of production of a plant operating at peak hours, presents another obstacle. But business is positive for 2010. Machine tool consumption rose 49.5 percent to $258 million in March 2010, compared to more than $172 million in March 2009, according to the American Machine Tool Distributors' Association (AMTDA) and the Association For Manufacturing Technology (AMT). And with a year-to-date total of more than $548 million in March, this year was already up by 33.7 percent from the same period in 2009.

"The March increase in manufacturing technology orders is further proof that the recovery is accelerating," says Peter Borden, AMTDA president and CEO. "The number is encouraging, considering that bank lending is still anemic and that Congress has done little to help manufacturing, such as re-passing the bonus depreciation tax bill or R&D credits. We still expect some ebb and flow for the rest of the year because of uncertainties in the world economy."

Depression, Not Recession
Last year was "a depression, not a recession" for the industry, Borden says. Customer orders were down 70 percent compared to 2008. Financing for new capital projects and production orders dried up. Capacity utilization among manufacturers shrank from upwards of 80 percent to between 50 percent and 60 percent.

"The credit crunch prevented toolmakers from getting the loans that they needed, not only for projects but for individual credit as well," Borden says.

However, Pat McGibbon, AMT vice president of strategic information and research, placed customer order declines at 63 percent last year compared to 2008. "Customers stopped buying as consumer spending went into the tank," he says. "Manufacturers began to basically stop production and work their inventories."

In the auto industry, capacity utilization dropped precipitously to less than 37 percent in 2009 from 70 percent as demand for new vehicles nosedived.

Borden and McGibbon both say that the machine tool industry is on a slow road to recovery. The market began to stabilize during the fourth quarter of 2009, Borden says, as accelerated depreciation contributed to a slight comeback.

"Almost all the manufacturing industries are in recovery now based on industrial production, capacity utilization, shipments and orders, and the Purchasing Managers Index [PMI]," McGibbon says. And an April 2010 Manufacturing ISM Report on Business reported that manufacturing grew for the ninth consecutive month.

The rate of industry growth as indicated by the PMI grew by its fastest rate since June 2004, when the index reached 60.5 percent. New orders continue to grow, and the New Orders Index has averaged 61.6 percent for the past 10 months. Overall, the sector's recovery remains strong, and the report relayed optimism for continued growth.

Vigorous results from big manufacturers such as Caterpillar and Whirlpool show that demand is spreading across consumer and industrial suppliers, according to an April Wall Street Journal article. These results highlight growing optimism among manufacturers, who report that inventory reductions are declining and customer orders are rallying.

The Federal Reserve reported in April that manufacturing output surged in March as factories continued to lead the economic recovery, according to the Journal. Factory output rose by 0.9 percent in March, which reinforced expectations that the manufacturing sector would boost the economy as firms call employees back to work to boost output and restock store shelves.

Despite the good news, manufacturers still can't celebrate the recovery because many are stalled on credit renewal, McGibbon says. And domestic manufacturers' shift to low cost, foreign labor markets continues to hurt the industry. But high tech applications may alleviate those woes, as advanced machine tools provide increased productivity and better engineering and automation. "The result is production of higher quality parts for less money than foreign manufacturers can produce," Borden says.

But manufacturers may be in for painful surprises if their overseas production moves don't net larger returns, and may even cost more. "Workers here are more productive and our superior technology tends to provide higher quality products at lower cost," McGibbon says.

A Slow Recovery
The manufacturing industry will see a slow recovery for the remainder of 2010 into 2011. "It can't stay down forever," Borden says. Inventories are being replenished, the auto industry is reviving, aerospace is improving, and manufacturing's capacity utilization stands at upwards of 70 percent. Borden anticipates up to a 10 percent increase in customer orders for 2010, and continuing slow increases in 2011. "People are starting up machines again, and that's going to help us," he says.

Meanwhile, McGibbon expects up to a 7 percent increase in customer orders in 2010, and a 20 percent or higher increase in 2011. Inventory replenishment is growing more guardedly. "Manufacturers remain cautious and costs of raw materials make building inventories more expensive than in the past," McGibbon says.

But the recession's effects still linger for some machine toolers. Alan Lockery, president of machine tool manufacturer Able Machine Tool Sales in Agawam, Massachusetts, says people in his high tech Eastern markets are "just scared."

"The last thing they want to do is sign up for a long-term commitment on machine tools," Lockery says. "What manufacturers are doing is putting on second shifts to double capacity versus buying new machinery." Lockery's April and May orders were down by about 15 percent, but he expects improvement later in the year.

Jim Addy, president of machine tool distributor Addy Machinery Company in Clinton Township and Grand Rapids, Michigan, says his markets are not out of the woods yet. He looks for gradual improvement in 2010, but says the market will be flat compared to 2007 and 2008. "I don't see us selling our way out of this recession anytime soon," Addy says. "Our industry won't thrive until the credit markets clean up their act."

Roger Goff, general manager of machine tool manufacturer Milltronics in Waconia, Minnesota, takes an optimistic view. "Demand is picking up now for the first time in 18 months as our manufacturer customers rebuild their inventories," he says. "The other aspect is that our suppliers need more lead time to fill their orders to us and are doing it with reduced staffs, which puts more pressure on them." Goff expects the market to stabilize and continue to grow in 2011, "but whether that gets us back to previous norms is a question," he says.

Future Growth
Different segments of the machine tool industry are expected to grow in the coming years. Multi-process machines and "smart" machines that operated unattended by sensor controls will gain popularity, according to Borden. "There's some unbelievable technology going on out there now," he says.

High accuracy machines in the nanotech sector, fiber-based lasers, multi-tasking machines, five-axis milling and waterjet cutting units comprise McGibbon's predictions for growth. Flexible solutions for machine tools will be a key trend. "Customers are looking for flexible, innovative and integrated technologies," McGibbon says. "They want turnkey solutions rather than piecing their production floors together themselves."

Despite the rosy outlook, the financial front presents a bleak scenario for many machine toolers. AMT reports that a third of its members have lost lines of credit as lenders pull back. "For the most part, this has been a result of general tightening in lending standards," McGibbon says. "It has been a problem for all borrowers, even those with the best of credit."

While banks have become more conservative with the objective of keeping their reserves, Borden sees some light at the end of the tunnel. "Credit's still tight, but there's been some loosening," he says. "It's starting to ease up."

To fully spur recovery into 2011, the industry needs those credit lines to open.

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