Back from the brink

The metalworking industry sustained a body blow in 2009, but it’s getting back on its feet as 2010 nears.

In review and outlook features from recent years, Cutting Tool Engineering has referred to the metalworking industry decelerating or downshifting from rapid growth to more moderate growth. In 2009, the industry was dropped instantly into reverse by the financial meltdown of October 2008. Orders virtually disappeared as U.S. manufacturing went into a sharp decline and many companies—shops and suppliers both—struggled to survive. Some didn’t make it.

While it’s too soon to hail a strong recovery, it appears that metalworking is starting to grow again, and a moderate recovery in 2010 may bring some relief to parts manufacturers and their suppliers.

Economic Tsunami

While the metalworking industry has turned in strong performances since the 2001 recession, there was little it could do to escape the tidal wave of bad economic news that hit manufacturing in 2009. Overall, manufacturing output was off 7.7 percent from September 2008 to September 2009, according to the Federal Reserve Board.

Two primary metalworking industry inputs—machine tools and cutting tools—fared much worse. According to the U.S. Cutting Tool Institute, total billings for cutting tools produced by its member-companies were $255.8 million for the January to September 2009 period, down 39 percent from the same period in 2008, as parts manufacturers cut production and reduced inventory of cutting tools. Meanwhile, production of manufacturing technology—which consists of machine tools and the nondisposable equipment that supports it—was $1.2 billion for the January to September 2009 period, off an astounding 67.8 percent from the same period a year earlier, as manufacturers axed expansion plans and delayed replacing aging equipment.

But there is reason for optimism, said Doug Woods, president of AMT—The Association for Manufacturing Technology. “Year-over-year figures were down anywhere from 57 percent to 70 percent for much of the year, but we’ve actually seen some month-to-month increases recently,” he said. “Obviously, 2008 was a good year, and 2009 was about as bad as you can get, so it does make the percentages seem more overwhelming than they would be ordinarily. However, we are seeing some steady improvement. From all of our metrics, we are pretty sure we are at the bottom of the cycle, and we have started to build an upward direction with some consistency.”

Indeed, early projections for manufacturing technology in 2010 show increases ranging from 5 to 30 percent compared to 2009, according to Patrick McGibbon, vice president, strategic information and research for AMT.

There are also signs of modest improvement in the sale of cutting tools. Billings of USCTI member-companies have risen steadily since July, when they reached $80.8 million, to September, when they topped $91.3 million.

However, Woods cautioned that, for capital goods producers, large increases in order backlogs are not expected until the second and third quarters of 2010 at the earliest. The sudden onset of the financial crisis in 2008 clearly deepened the falloff in manufacturing technology. Producers were operating at full speed almost to the end of 2008 to support what had been extremely high demand, and those producers have spent most of 2009 reducing inventory to a more appropriate level, according to Woods. Parts manufacturers, for their part, will be slow to buy even as the economy recovers.

“In the auto industry, for example, companies had invested in a broad range of equipment and tooling to support the annual production of up to 16 million vehicles, so even if auto manufacturers recover to make 11 or 12 million vehicles, there will be overcapacity at some suppliers,” Woods said. “They may be able to use existing capacity for quite some time.”

While the manufacturing technology supplier base has been hit hard, it could have been worse. AMT observed a much lower number of its member-companies going out of business than expected, considering the severity of the recession. “Many companies have found ways to rapidly adjust and survive,” Woods said. “They have set their businesses up to be much more efficient, and they can achieve profitability at lower capacity levels. Companies are so lean at this point that the slightest increase in business, be it in automotive, aerospace or medical, they should see a big improvement in profits.”

One part of the equation that has yet to be resolved is capital markets—specifically bank credit. Many companies have stretched their finances to the limit to survive the recession and need new financing for work in process. Banks have been slow to lend, and many companies need better and more affordable access to capital, Woods said.

Kim Korth, owner and president of management consultancy IRN Inc., Grand Rapids, Mich., agreed that 2010—and the years that follow—will continue to be challenging. “We’re going back to the ’70s, when the economy was more volatile and less predictable than it has been for the past 20 years,” she said. “We’re likely to see a lot of ups and downs over the next 3 to 5 years, largely because the easy access to credit has disappeared. We don’t expect the economy to go back into a severe recession, but we will likely see cycles of positive news followed by some not-so-positive news.”

Still, 2010 will probably be better than most people expect, particularly if inflation remains in check in the second half. “We’re at the point in this economic cycle when we’re starting to get positive year-over-year comparisons, which will give people more confidence that things are getting better,” Korth said.

Out of the Wreckage

The fortunes of the metalworking industry rise and fall with the industries they serve, and none was harder hit in 2009 than the U.S. auto industry. What does the future hold? It can be summed up by the refrain from a classic Graham Parker song: “Crawling from the wreckage, into a brand new car.” With bankruptcies at General Motors and Chrysler and financial distress at other large automakers, 2009 will long be remembered as a multivehicle smashup. But as the industry—and the federal government—cleans up the mess, the outlook may not be so bleak after all, with the accelerated development of brand new models and the release of new, more fuel-efficient cars.

Total U.S. vehicle production is expected to rebound to about 10.2 million in 2010, compared to about 8.6 million in 2009, according to Paul Lacy, manager of technical research, Americas, for market research firm IHS Global Insight (USA) Inc., Lexington, Mass. And while vehicle production in 2010 will be low by traditional standards, retooling is ramping up as more fuel-efficient models are developed to help meet 2012 federal mileage requirements, increasing demand for tooling and parts for these new lines.

The years beyond 2010 will be even better, according to R.L. Polk & Co., Southfield, Mich., an automotive research firm. It predicts a return to 15 million units in 2013, according to its most recent U.S. light-vehicle forecast. Polk expects the market share for Japanese brands to stabilize, reaching 40.1 percent in 2013, similar to their current market share. “We also expect a more even split between passenger cars and lights trucks, with passenger car volume reaching 8.3 million units,” said Dave Goebel, North American forecast consultant for Polk.

A major shift is underway from large vehicles to smaller vehicles, and from small vehicles to even smaller vehicles, according to IHS Global Insight’s Lacy. “The traditional body-on-frame midsize sport utility segment is all but disappearing and is being replaced by smaller crossover unibody vehicles. And efforts to downsize power trains are happening like crazy right now.”

Traditional body-on-frame vehicles typically use rear-wheel-drive or 4-wheel-drive power trains, while unibody construction, in which the frame and body are one piece, typically uses smaller, more fuel-efficient front-wheel drivetrains.

“There is a clear trend over the next 5 to 6 years toward smaller displacement engines that have more power than comparable engines today,” Lacy said. “The second part of that trend is we’re starting to see V-8 engines used only on large trucks, with V-8s being replaced on smaller vehicles by more powerful V-6s. And many current V-6 applications will be replaced with more powerful 4-cylinder applications.”

There is a similar shift underway in transmissions. Standard 4-speed automatic transmissions will disappear by 2012, replaced by 6-speed automatic transmissions that produce better fuel economy and higher performance, according to Lacy.

The move to produce more hybrid-electric vehicles, such as the Chevy Volt, will also drive retooling, though at a lower level than traditional gasoline-only cars. Hybridization—including conventional hybrids, plug-in hybrids and full-electric vehicles, such as the Nissan Leaf and the all-electric Ford Focus—is ongoing at every major automaker.

The automaker crisis obviously had a major effect on the supplier base, with many bankruptcies and outright closures. However, one major beneficial change in the supplier base brought about by the recession is a lower breakeven point for profitability, noted Korth of IRN. While breakeven used to be annual vehicle production of about 13.5 million, a recent survey found that, after the massive 2009 restructuring, 70 percent of suppliers can make money with annual production at nine million units.

“It is amazing that we have not had more supplier bankruptcies when there was a 47 percent decline in auto production from the first quarter of 2008 to the first quarter of 2009, but a lot of companies were able to wring costs out of their structure without having to close their doors,” she said. “There will still be some liquidation among Tier 2 and Tier 3 suppliers, ironically not because of the absence of orders but because they can’t get access to capital. But the huge consolidation that some people were projecting didn’t happen.”

Still, suppliers will need to be more tightly focused. Korth predicts further attrition at the Tier 1 level, which will have declined from about 5,000 direct suppliers in 1999 to about 2,000 in 2010. “That doesn’t mean all those suppliers are going away, but they will no longer supply the OEMs directly and will move down a tier. There will be a lot more competition at what has traditionally been the Tier 2 level, and those suppliers must be able say they’re as good as or better than the best company in their region.”

To succeed, suppliers will need to be the leader in their geographic region for a particular module, technology or component. There will still be a few large generalists that will be Tier 1s, but they will have a narrower focus. The idea of very large Tier 1 companies being systems integrators by supplying a vast range of products is completely dead, according to Korth.

Small to medium-sized machine shops that sell to the automotive supplier tiers will also need to change the way they do business as well. “They’ll need to get out of the habit of chasing any RFQ that comes through the door,” said Korth. “They need to understand what’s driving those RFQs, look for patterns in why they get and don’t get certain jobs and determine how they can get more business from similar customers.”

Aerospace: Still Flying High?

While automakers struggled, the nation’s aerospace companies fared much better. The U.S. aerospace industry in recent years has enjoyed strong growth in both the commercial and military segments, and while this rate of growth is likely to decline, the downside may not be severe. Indeed, the industry is projected to be up in 2009. U.S. aerospace sales, based on preliminary figures, reached $205.1 billion in 2008, up from $200.3 billion in 2007, according to the Aerospace Industries Association. Despite the economic downturn, 2009 aerospace sales are projected to reach $211.0 billion, a 2.7 percent increase over the previous year, as companies deliver products ordered years earlier. The 2008 total includes civil aircraft ($80.5 billion); military aircraft ($55.1 billion); missiles ($13.2 billion); space ($33.4 billion) and related products and services ($22.8 billion). However, in a signal that this good news may not last, the U.S. Department of Commerce reported that aerospace orders plunged 33.5 percent from the fourth quarter of 2008 to the first quarter of 2009.

The thinking of some aerospace analysts is that the downturn might not be a bad as in previous cycles, but it might last a little bit longer, according to Bill Chadwick, director of research for AIA. Still, there are some challenges ahead. “The change in administrations is going to have an effect on the military side and in civil aviation, the real moneymaker for airlines—business travel—is not doing very well,” he said. “You don’t have a lot of people buying the first-class or business-class seats from New York to London, and if the airlines are not making money, the next step is that they don’t buy new airplanes.” Also, Chadwick noted there are large numbers of planes idled as airlines have cut flight schedules, and many of these airplanes will be put back into service before new planes are ordered.

Still, Boeing and Airbus have yet to see a wave of order cancellations. Many orders are being deferred but even when orders are released outright, other customers are stepping up to take over those production slots, at least for the time being.

“The best case is that production will plateau for awhile and will take off again, but most people agree that the very high annual growth that we’ve been happy to see for the past couple of years is pretty much over for now,” Chadwick said.

Medical Motors On

Like aerospace, the medical device market continued to grow in 2009 and prospects look good for 2010 as well. The U.S. medical device market, defined as therapeutic devices ranging from surgical scissors to surgical robots, was expected to reach sales of about $95 billion in 2009, up 7 percent over the previous year, according to Venkat Rajan, industry manager, medical devices for market research firm Frost & Sullivan, San Antonio. While that growth rate is down from previous years, it is a strong performance in a recessionary environment. Rajan expects the market to grow at about the same rate in 2010.

The lower growth rate in 2009 was caused by several factors. Hospital spending on new infrastructure and capital equipment was impacted by the credit crisis, rising unemployment led to greater numbers of uninsured patients treated in emergency rooms and elective and cosmetic surgeries declined. But overall, recession-resistant medical markets are still healthy, said Rajan.

He pointed out that one section of the American Recovery and Reinvestment Act of 2009 is funding comparative effectiveness studies that may increase acceptance of funding for certain therapeutic treatments. The Health and Human Services Administration has authorized $1.5 billion for the National Institutes of Health to evaluate the effectiveness of and long-term patient survival rates for certain technologies. For example, titanium orthopedic implants are more expensive than other implants but may have the lowest risk of complications. Some of the studies may show that even though the titanium implant is more expensive, it reduces the risk of complications and the number of revision surgeries.

Medical devices for minimally invasive surgeries continue to show strong growth. For example, a new technology due to be introduced to U.S. markets in 2010, the transcatheter heart valve, may become a blockbuster product, according to Rajan. These minimally invasive heart valve implants, which can be installed with a catheter that snakes through the femoral artery, will begin replacing standard heart valve implants, which require open heart surgery. The new transcatheter valve implants are much less costly to install, and unlike standard heart valve implants are easy to replace when they wear out. Medical devices manufacturers Medtronic Inc., Westchester, Ill., and Edwards Lifesciences LLC, Irvine, Calif., are already selling these devices in Europe and the FDA is expected to approve them for use in the U.S. in 2010. The devices are similar to stents and some are made from shape-memory alloys, which allow them to be compressed into a small profile.

While it may be cold comfort to parts manufacturers and suppliers burned by the severe economic downturn, it does appear that the worst is over for U.S. manufacturing—at least for now. Manufacturing production expanded 0.9 percent in September from the previous month, following an upwardly revised gain of 1.2 percent in August, according to the Federal Reserve. And while the factory operating rate remained 12.2 percentage points below its 1972-2008 average in September, it did climb to 67.5 percent. At this point, manufacturing must be grateful for small favors such as these. CTE

About the Author: Alan Rooks is editorial director for Cutting Tool Engineering and MICROmanufacturing magazines. Contact him by phone at (847) 714-0174 or by e-mail: arooks@jwr.com.

Contributors

Aerospace Industries Association 
(703) 358-1000
www.aia-aerospace.org

AMT—The Association for Manufacturing Technology
(800) 524-0475
www.amtonline.org

Frost & Sullivan
(877) 463-7678
www.frost.com

IHS Global Insight (USA) Inc.
(781) 301-9100
www.ihsglobalinsight.com

IRN Inc.
(616) 785-5175
www.think-irn.com

R.L. Polk & Co.
(800) 464-7655
www.polk.com

U.S. Cutting Tool Institute
(216) 241-7333
www.uscti.com