Moving On Up

The metalworking industry showed surprising resilience in 2010, thanks in large part to a resurgent U.S. auto industry. Will 2011 continue the trend?

After a wrenching 2009, when parts manufacturers saw precipitous sales declines and orders and sales of machine tools and cutting tools also dropped sharply, the U.S. metalworking industry experienced a relatively strong recovery in 2010. Demand for manufactured products in developing markets, a rebound in the domestic auto market and inventory rebuilding by companies that had been holding off on orders helped fuel the recovery.

However, with the residential and commercial real estate markets still bogged down and consumer spending restrained, some observers are concerned about the pace of the recovery, particularly because growth rates have slowed. Indeed, U.S. industrial production declined by 0.2 percent in September, according to market research firm IHS Global Insight, Lexington, Mass. Within that segment, manufacturing also declined by 0.2 percent in September from August. While auto production rose by 0.5 percent in September from August, this was more than offset by declines in machinery, computers and aerospace. For the third quarter as a whole, U.S. manufacturing rose 3.6 percent, but growth was down from 9.1 percent in the second quarter. 

However, October saw manufacturing trending upward again, demonstrating the unsettled state of the U.S. economy. “The nation’s manufacturing industries increased production activity considerably in October as new orders jumped to record the highest level of forward momentum since May,” said Brian Bethune, chief U.S. financial economist for IHS Global Insight. “The good news on orders is that both domestic and export orders picked up momentum.”

Outlook for 2011 

The U.S. economic recovery will slow more than previously estimated earlier in the year, to 2.5 percent GDP growth in 2011, according to a recent survey of 59 economists by Bloomberg News. The group sees elevated unemployment depressing consumer spending, with U.S. companies also scaling back investment plans. The economists surveyed expect the U.S. unemployment rate to remain above 9 percent in 2011. The U.S. Federal Reserve is more optimistic, predicting “a moderate strengthening of the expansion in 2011.” The Fed estimates that 2011 U.S. GDP growth will range from 3.5 to 4.2 percent, after a 3 to 3.5 percent growth rate in 2010.

While sales of machine tools and related equipment remains well below totals reached prior to the Great Recession, the recent trend has been positive. In September, U.S. manufacturing technology consumption totaled $400 million, according to AMTDA, the American Machine Tool Distributors’ Association and AMT - The Association For Manufacturing Technology. This total, reported by companies participating in the USMTC program, was up 66.1 percent from August and up 156.8 percent compared to the total of $155.69 million for September 2009. With a year-to-date total of $2.09 billion, 2010 is up 74.1 percent compared to 2009.

“September 2010 was a watershed in the recovery from the recession of 2008-09,” said Peter Borden, AMTDA President. “The 1,992 [machine tools] sold this month is the highest number since September 2008 and demonstrates the resilience and staying power of the U.S. manufacturing base. More remarkably, this was done while many factories are running below the capacity levels that require capital goods purchases, despite the tight credit market, and in spite of questions about government debt and potential tax increases. The catalysts of the successful IMTS, the weaker dollar and the passage of bonus depreciation paid surprising and long awaited dividends.” 

Shipments of cutting tools also reflected the growing strength of U.S. manufacturing in 2010. While 2010 tool shipments started poorly, with shipments down 1.2 percent compared to the already depressed levels from the same period a year earlier, they began to rally, according to the U.S. Cutting Tool Institute, Cleveland, which tracks shipments of its member-companies. In the second quarter, cutting tool shipments soared 32.2 percent and in the third quarter the growth rate jumped 38.8 percent, compared to the same periods in 2009. 

U-Turn in Autos

Ironically, one of the factors fueling the growth of the metalworking industry is the U.S. auto industry, which was the cause of much pain during the recession. It has clearly rebounded from the depths of the recession. “What we’re seeing is the OEMs (auto manufacturers) are running lean and plant utilization rates are at all-time highs,” said Paul Lacy, manager of technical research, Americas, for market research firm IHS Automotive, Northville, Mich. “Because they closed so many plants, the ones still operating are running at good rates. As a result, OEMs are in a better position to control the elements that help Tier 1, Tier 2 and Tier 3 suppliers conduct their business more consistently. Vehicle inventories are in check, which means the supply base can produce without having to wonder if they’ll be bottlenecked at some point and have to take a week off because the OEMs don’t need parts.”

Also, a large number of new vehicles are being introduced and new fuel-efficiency demands by the federal government are driving innovation. New engine, transmission, hybrid technology and other technology programs are creating the need for new part designs and tooling. 

Overall, North American light vehicle (cars and trucks) production is climbing off the lows experienced during the recession. In 2009, total vehicle production was 8.56 million units; in 2010, the total should range from 11.3 million to 11.5 million, and in 2011 the total should be about 12.3 million, according to Lacy.

The main trend driving development of new parts and tooling are engine and transmission programs targeting higher power density—improved power and fuel efficiency from smaller-displacement engines. “The 2011 Ford Mustang, for example, features a 3.7-liter, V-6 engine with 305 hp as its base engine,” Lacy said. “Compare that to Ford’s V-8 engine last year, a 4.6-liter, with just over 290 hp.”

Higher power density is achieved through new cylinder block design and better cam phasing systems that regulate how much fuel and air go in and out of the cylinders. 

Designing parts that can be produced more efficiently is also a major focus for automakers. For example, use of P/M parts is growing because the process can produce a near-net-shape part closer to a finished product than ever before, according to Lacy. “These parts require a lot less grinding, deburring and finishing than other processes, such as plain stamping or forging, which brings down cost and waste.”

The use of alternative materials may also grow as auto manufacturers continue to pursue lightweighting. “For example, magnesium is expensive, but Ford recently used a magnesium subframe for vehicle tailgates to improve fuel efficiency by reducing weight,” Lacy said.

Regarding auto parts suppliers, Lacy does not expect another wave of attrition like the one experienced during the Great Recession. “If you’ve made it this far, you can probably make it through just about anything,” he said. “What we’re seeing is consolidation.” Acquisitions will continue as large companies seek smaller companies with core competencies in a specific area, according to Lacy. “It is less expensive for a large company to purchase the equipment, facilities and subject matter expertise of, say, a hydroforming operation than it is for them to build it from scratch,” he said. “On the flip side, small companies with a narrow focus may have difficulty bidding against larger companies, so acquisitions can be a win-win.”

Aerospace Levels Off

Despite the recession, U.S. aerospace sales in 2009 and 2010 were relatively steady. Total U.S. aerospace sales reached $215.2 billion in 2009, up more than 4 percent from 2008, and in 2010, sales are projected to be relatively flat compared to 2009, according to the Aerospace Industries Association.

Despite the extremely difficult economic environment, the U.S. civil aerospace sector registered moderate growth in 2009, with sales improving by nearly $2.4 billion to $83.0 billion. In 2010, civil sector sales are expected to drop slightly compared to 2009, according to the AIA. 

U.S. sales of military aircraft were also higher in 2009, at $61.9 billion, a year-over-year increase of nearly 9 percent. In 2010, there may be a small increase in military sector sales compared to 2009. 

According to Bill Chadwick, director of research for AIA, the reason U.S. military aircraft manufacturing is expected to have a slightly better year in 2010 than civil is that military budgets are planned well in advance. “What is bought and paid for by the military several years ago will definitely be reflected in the appropriate year,” he said. “Civilian aircraft, however, can reflect the current economy a lot faster than military.” 

According to market research firm Deloitte & Touche, Chadwick’s projection for U.S. aerospace sales in 2010 should track closely with worldwide sales (civil and military). Deloitte expects sales revenue in the global aerospace industry, including commercial and defense, to drop only slightly, by 1.01 percent.

One of the trends in civil aviation is toward small regional jets. “Airlines are trying to balance the market with the number of customers to save fuel and operate more efficiently,” said Chadwick. Indeed, Embraer, a Brazilian manufacturer of regional jets, forecasts the world fleet of 30- to 120-seat jets will increase from 4,285 aircraft in 2009 to 7,780 in 2029. During this period, 51 percent of the new deliveries will support growth in regional jet usage and 49 percent will be needed to replace aging equipment.

Overall, the U.S. aerospace market has weathered the recession surprisingly well, according to Chadwick. “Both civil and military have turned out better than we expected,” he said. “We’ve revised forecasts made just a few months ago because things are going much better than our model indicated. The decline has been shallower than we expected. We expect that the military side will flatten out rather than fall off a cliff in coming years. We still expect dips in some sectors, but hopefully it will pick back up and in 2 or 3 years be back to solid growth.”

Medical Powers On

Even with the raging debate about the need for health care legislation, the medical device market continues to show impressive strength. It was expected to grow about 7 percent in 2010, reaching sales of about $101.7 billion in 2010, according to market research firm Frost & Sullivan, San Antonio, which predicts about the same rate of increase in 2011. Frost & Sullivan defines the market as therapeutic devices, ranging from surgical scissors to surgical robots. 

Within that category, the market for implantable medical devices—of key concern for part manufacturers—is also expected to experience strong growth. U.S. demand for implantable medical devices will increase 8.3 percent annually from 2010 to 2014, reaching $49 billion in 2014, according to “Implantable Medical Devices to 2014,” a report by The Freedonia Group Inc., Cleveland. 

“The development of next generation devices based on new technologies and improved materials will underlie growth,” the report stated. “Shortcomings in existing drug therapies will promote the increasing use of implantable devices in the treatment and management of cardiovascular, orthopedic, neurological, ophthalmic and various other chronic disorders.”

The study noted that demand for orthopedic implants will increase 8.8 percent annually to nearly $26 billion in 2014. The market for reconstructive joint replacements, forecast to reach $10.5 billion in 2014, will benefit from improved products, such as rotating-platform knee replacements. Advances in implant products and related surgical technologies, coupled with an increase in chronic back conditions, will create strong growth opportunities for spinal implants. Demand for these products will rise 11 percent annually to $7.5 billion in 2014. Fixation devices and artificial discs for spinal fusion represent the best growth opportunities.

The report also noted that an increase in fracture injuries attributable to demographic and lifestyle trends will boost demand for trauma-fixation implants by 7.5 percent annually to $3.6 billion in 2014. The best growth prospects will emerge in anatomically shaped plating systems for complex fractures near joints and intramedullary nails for long bone fractures. 

The news is also good for stent makers. The introduction of newly designed drug-eluting stents with a reduced risk of complications will boost the market for cardiac stents and stent-related implants 9.4 percent annually to $7.1 billion in 2014. Other stents and stent-related implants projected to fare well in the marketplace include endovascular stent-grafts, carotid stents and femoral and related stents, the report noted.

—Alan Rooks, Editorial Director