Description
This document contains: Causes of the U.S. machine tool industry’s decline; JAPANESE TECHNOLOGICAL GROWTH VIS-À-VIS THE US DECLINE; Appreciation of dollar; Questionnaire Survey; Rapid changes in the Product Life Cycle; Determinants of Competitive Advantage In Machine Tools
DECLINE OF U.S MACHINE TOOL INDUSTRY
MICRO ECONOMICS
PROJECT
Group F1
Chaitra Manish M Rohan Ulhas Narvekar Shreyas Srinivasan Tanumoy Sarkar Vignesh Swami
08115 08129 08143 08151 08159 08163
INTRODUCTION “Machine tools are the master tools, the tools that make tools. Virtually every product is built on a machine tool or a machine made by a machine tool” Losman & Liang, 1990 The U.S. machine-tool industry’s decline in the early 1980s is analyzed during the course of this research. The significance of this decline can be emphasized by considering that, the product in this case is not consumer goods like television or automobiles, but one that is used to make thousands of other products: machine-tools. Machine tools are a small but vital sector of manufacturing. Without healthy domestic machinetool makers, U.S. manufacturers will not have access to the latest technology. This results because machine-tool makers worldwide tend to first sell their most current products at home to ensure that any problems are easily fixed. A 1990 machine-tool study at General Motors noted that: “If you buy the very best from Japan, it has already been in Toyota Motors for two years, and if you buy from West Germany, it has been with BMW for a year and a half”. Since machine tools are so central to manufacturing, the decline of the U.S. machine-tool industry was perceived by many as a symbol of the broader decline in U.S. industrial competitiveness. Entering the 1980s, the United States was the largest producer of machine tools with 20 percent of the world market. By the end of the decade, the U.S. machine-tool industry was less than half the size of those of Japan and Germany. More than two-thirds of U.S. machine-tool firms had closed. The United States was reduced to a relatively minor player and forced to adopt protectionist policies to defend its domestic market. The failure to rebound, points to more fundamental set of problems within the industry. The basis of competitive advantage in the industry has now permanently shifted because of two trends: the rapid change in machine-tool technology and the shift to global competition. This shift requires machine-tool makers to develop new capabilities. Lacking these capabilities, U.S. firms continued to lose their share of world markets. In this paper, we further try to emphasize the striking similarities between the Japanese and the German machine-tool makers and notable dissimilarities between the two and the US makers.
OBJECTIVES • • • Identify the causes of the U.S. machine-tool industry’s decline Japanese technological growth vis-à-vis the US decline The new competitive contest and failure of the U.S. industry to rebound
METHODOLOGY • Data Collection/Sources o Data for Declines in Metal Use derived from Department of Commerce inputoutput tables. o Data from field research conducted with Japanese, German and U.S. tool makers, from the end of September 1996 to the end of March 2000. o National survey data from 271 U.S. plants in 20 metalworking industries conducted in 1993 and requesting for information about conditions at the plant and firm in 1992 • Data analysis model o Sunk cost spreading model
ANALYSIS Causes of the U.S. machine tool industry’s decline Over-dependence on a declining domestic market • Over-dependence on domestic market
There was a dramatic increase in worldwide demand for machine tools in the latter half of the 1980s, which U.S. firms failed to capitalize on. Because of the lack of a strong export orientation, U.S. firms have barely penetrated the world's largest machine-tool markets (see Figure).
Fig. Low penetration of U.S. machine-tools in foreign market
•
Declining metal consumption
The sharp drop in the demand for machine tools in the United States has put U.S machine tools makers at a disadvantage relative to their main competitors. Although this change in demand is certainly influenced by normal economic cycles, the period from 1980 to 1995 have seen the U.S consumption of the machine tools fall sharply in real terms and as a share of worldwide demand. One possible explanation for this decline in demand for machinery tools is a shift away from the metal consumption. The decline in the importance of the metal within the U.S economy can be seen in the figure. The drop in metal use has two components. The drop in the metal use has two components. The U.S economy has shifted away from the sectors and industries that use metal, but even among the industries that do use metal, metal use have declined as products have been lightened and other materials, such as Plastic and Ceramics, have been substituted. The first bar shows actual metal use in 1977. The second bar shows how much metal would have been used in the U.S economy in 1987 if the economy was simply scaled up from the 1977 economy- i.e.: assuming that the rate of metal consumption had kept pace with the rate of economic growth for the decade. The third bar shows how much metal was actually used in 1987.
Fig. 2 Declines in Metal Use
Although the largest decline in metal use occurred within the troubled U.S automotive sector, the decline is broadly based. The table shows the decline in metal use by industry. Most metal used in the economy is not machined, and advance in other technologies, such as near net shape casting, may significantly reduce the need for machining. Many of the new materials that have been used to replace metal, such as plastic and advanced ceramics, require new forms of machine tools. For example, one of the oldest and largest U.S. machine tool firms Cincinnati Milacron, now derives a much greater portion of its profits from the production of plastic-processing machines than traditional metal-cutting tools and has been far more successful in defending this market from foreign competition (RAND interviews). The decline in the metal use within the economy certainly had an adverse effect on the traditional machine-tool industry. While much has been made of the increasing importance of services in the economy at the expense of manufacturing, the decline in metal use is distinct phenomenon. What appears to be happening is a heavy investment in computers and information technology and substitution of newer, higher technology material (ceramics, plastics) for traditional metalprocessing machines.
Table.1 Reduction in use of metal by industry
•
The U.S. industry's strategy to historically volatile demand was to accumulate a backlog of orders
The companies in US worked as if it was a closed economy. Due to a stronghold in US markets it accumulated backlog greater than total annual production.
The strategy backfired when demand picked up again and Japanese firms were able to fill orders more quickly.
Fig 3. – U.S. Backlogs as a percentage of total production
•
Appreciation of dollar During the period of 1980 to 1985 the exchange rate of US dollar rose by 60 percent. The table given below gives value of other currencies with respect to 1 US dollar. Hence, buying US goods were expensive to other countries whereas goods of other countries became cheaper in US. This resulted in decline in US machine tool export.
Year
1980 1981 1982 1983 1984 1985
German Japanese British French Canadian Swiss Italian Marks Yen Pounds Francs Dollars Francs Lira
1.8177 2.26 2.4266 2.5533 2.8459 2.944 226.741 220.536 249.077 237.512 237.522 238.536 0.43029 0.49764 0.57245 0.65973 0.75181 0.77925 4.2256 5.4346 6.5721 7.6213 8.7391 8.9852 1.1692 1.1989 1.2337 1.2324 1.2951 1.3655 1.6757 1.9642 2.0303 2.0991 2.3497 2.4571 856.45 1136.7 6 1352.5 1 1518.8 5 1756.9 6 1909.4 4
Australian Dollar
0.87824 0.87021 0.98586 1.11001 1.13952 1.43189
Table.2 - the value of of different currency index
•
Size of U.S. Machine-Tool Firms Compared with Those of Other Major Producers
Competing successfully on a global basis requires major investments in capital goods, technology, training, export marketing, and other areas.
Fig. 4 Distribution of 60 largest machine-tool firms
Large firms are more likely to adopt new technology than small firms (Thirtle and Ruttan, 1987). Having adopted new technology, large firms are more likely to utilize all the features of new technology than small firms (Fichman and Kemerer, 1997). However, the replacement speed of old with newly adopted technology is inversely related to firm size (Mansfield, 1963). Based on his analysis of a national survey data from 271 U.S. plants in 20 metalworking industries, Thomas Asterbo (University of Waterloo) proposed a simple sunk cost-spreading model that explains these results. The greater the sunk cost associated with using the technology, the lower the likelihood that a firm of a given size will both adopt and exploit the features of the innovation once it is adopted. Compared with its major competitors, the U.S. industry lacked both a sufficient quantity of large firms that can build these capabilities in house and strong mechanisms for creating cooperation among smaller firms.
JAPANESE TECHNOLOGICAL GROWTH VIS-À-VIS THE US DECLINE Inter-firm factors Most of the past studies which observed this leapfrogging development (e.g. Finegold et. al. (1994a and 1994b), Fleischer (1997), Kobayashi and Ohdaka (1995) and Mazzoleni (1999)) have emphasized the following “inter-firm factors:” Strategic R&D alliance of Japanese with superlative CNC makers & adoption of CNC The introduction of CNC (Computer Numeric Control) in the 1970s and widespread adoption in the 1980s and 1990s has brought about dramatic shifts in the global market for machine tools. As Japanese companies were the most successful in adapting to this kind of technology innovations while the US machine tool makers have suffered a major decline.
To understand the US machine tool industry relative weak opposite to obtain technology, it is useful to compare it with the situation in Japan and Germany. Both foreign governments have been few more effective at promotion of applied R&D and the transfer of technical part to small and medium sized firms. US have been markedly less successful in adapting to the new CNC. US have been markedly less successful in adapting to the new CNC technology Germany and Japan had. The US not only has much lower rates of investment in the latest flexible technology, but also has tended to take a lower skill approach to introducing CNC tools. That is by adapting to the new technology to compensate for low skilled workers in many functions, machine tool markers and users fail to receive the full economic benefits that these technologies offer their foreign competitors.
Fig.5 – machine tool production in US
Extensive use of outsourcing from excellent precision parts’ suppliers In addition to CNC and servomotors, machine-tools consist of parts such as main spindles and bearings and high-speed motors for them, guideways and ballscrews or linear motors, and cast iron products such as beds, columns, or saddles. The precision of machines and their production lead-time crucially depend on the performance of these parts as well as their prompt and stable distribution. It is definitely true that Japanese machine-tool makers have obtained a considerable advantage by depending on outsourcing from top-rated Japanese precision parts’ makers. Reflecting this situation, most of the machine-tool makers claimed that their payments to these precision parts’ makers took 10 to 20% of their total machine-building costs.
These precision parts’ makers, however, were globalized in the 1990s. For example, for the leading Japanese precision parts’ makers, the ratio of overseas production, overseas sales and foreign workers was 30%, 70% and 40% respectively. Extraordinary development of the auto industry The impact of the auto industry on the machine-tool industry is enormous. Indeed, domestic auto or autoparts’ makers directly create about 30-40% of the induced domestic demand for machinetools. This number adds up to about 60- 70% if the auto industry related demand from the general machinery industry (e.g., die-making industry) and the electrical machinery industry is considered. This point is well reflected by the fact that the Japanese machine-tool industry was the largest producer in the world one year after the Japanese became the world’s largest automakers (1981). As is indicated in Rosenberg (1963), the growth stage of manufacturing industries tends to be properly projected on the growth of capital goods industries like the machine-tool industry. Hence, it was quite probable that the “demanding and knowledgeable” Japanese automakers helped greatly to increase the competitiveness of the Japanese machine-tool makers. A large amount of the demand for Japanese machine-tools came, especially during the late 1970s and the early 1980s, from the US auto and aircraft industries. The export ratio of Japanese machine-tools was just 10% in 1970, but it exceeded 40% in 1978 and oscillated between 30 and 40 % during the 1980s. Eighty percent of machine-tools newly consumed in the US were American in 1975, whereas this number dropped to 50% in 1985. Most of them were replaced by Japanese machine-tools. Intra-firm factors In 1982, the Japanese machine-tool industry produced the largest amount (US dollars) of machine tools in the world and has maintained this leading position for 19 years. However, the above mentioned inter-firm factors do not sufficiently explain the further development of this industry during the 1990s. Hence, attention was paid to the significant roles of “intra-firm factors”: o the simultaneous and cross-functional information sharing system at an early stage of new product development processes; o the positive and early participation of frontline skilled workers in assembly or machining shops; and o the existence of highly skilled assemblymen or machinists.
Simultaneous and cross-functional information sharing system & participation of frontline skilled workers Field Research A field research was conducted from the end of September 1996 to the end of March 2000. Twelve Japanese machine-tool makers, two CNC makers, and one precision parts’ maker were investigated. Three German machine-tool makers were also examined, whereas, regrettably, US producers were not considered. Among Japanese machine-tool makers, seven were large-scale producers with more than 1000 full-time employees and the others had fewer than 500 full-time employees.
Questionnaire Survey In addition to field research, between February and April of 2000 a questionnaire survey was also conducted for the Japanese, German and US machine-tool makers. In the survey, the interviewee was asked to agree or disagree with the following statement: “CNC machines have become so complex that, without close collaboration with assemblymen and/or machinists during the early stages of machine development, D&D engineers can no longer effectively develop and design new machines to the finest detail.” Japanese samples included all establishments (1750) that were included in the of Census of Manufacturers (MITI) list in 1997. The US samples consist of all machine-tool makers (366) that belong to the AMT (Association of Manufacturing Technology) and machine-tool related makers ( 517) that belong to the NTMA (National Tooling and Machining Association). The German samples included all machine-tool makers (273) that belong to VDW (Verein Deutscher Werkzeugmash Cinenfabriken e.V.) or VDMA (Verband Deutscher Maschinen und Anlagenbau e.V.) and are listed in the Red Book CD-ROM issued by these organizations. The questionnaire was to be filled out by supervisory personnel in assembly and/or machining shops. The response rate for each country is as follows: 30% in Japan, 22% in the US, and 12% in Germany. Results of the field research
Fig. 6 Percentage of interviewees in three countries who agreed about close collaboration with assemblymen during early stage of development
Results of the Questionnaire survey
Fig. 7 The in-house department the D&D engineers tend to meet most frequently
This shows that the American Data Review (DR) processes are quite different from those of the Japanese or the Germans. The results showed striking similarities between the Japanese and the German machine-tool makers and notable dissimilarities between the two and the US makers.
Existence of highly skilled labor One reason for the low co-operation among US machine tool manufactures has been a lack of an effective mechanism for setting and implementing technical standards, which in turn inhibited the development of commodity CNC technology. To understand the US machine tool industry’s relatively weak opportunities to obtain technology, it is useful to compare it with the situation in Japan and Germany. Both foreign governments have been far more effective at promoting applied R&D and the transfer of technology, particularly to small and medium sized firms. Each specializes in a technology area based on the interests of the region’s firms and is primarily supported by prefectural and local government. As we have seen, the United States has been markedly less successful in adapting to the new CNC technology than Germany and Japan.
Managers choice of skill strategy is influenced by both the internal and external institutional environment in which they operate. This has led US managers to pursue a lower skill strategy with the new technology than their main rivals do, which in turn discourages the most able young people from entering metal working.
Fig 8. – circle of operations in US & Japan
The new competitive contest and failure of the U.S. industry to rebound • Depreciation of US dollar – didn’t rebound After 1985 the value of dollar depreciated, this should have allowed US machine tool industry to rebound. On the contrary the industry did not show any signs of improvement. This was due to integration of economies of all countries. This induced more competition and forced the manufacturers to innovate. Pre 1985 the industry was selling more or less homogeneous goods.
Year 1986 1987 1988
German Marks 2.1715 1.7974 1.7562
Japanese Yen 168.52 144.638 128.152
British Pounds 0.6822 0.61193 0.56217
French Francs 6.9261 6.0107 5.9569
Canadian Dollars 1.3895 1.326 1.2307
Swiss Francs 1.7989 1.4912 1.4633
Italian Lira 1490.81 1296.07 1301.63
Australian Dollar 1.49597 1.42818 1.27991
1989 1990
1.88 1.6157
137.964 144.792
0.61117 0.56318
6.3801 5.4453
1.184 1.1668
1.6359 1.3892
1372.09 1198.1
1.2646 1.28106
Table 3 – currency index
The New Competitive Context Fundamental changes in the machine- tool industry and its environment have created a new set of requirements for success. Seven characteristics seem most important: • • • • • • Rapid changes in product life cycle The blending of mechanical and electronic technologies An increase in global integration and competition New skill requirements New capital requirements The increased importance of external relationships.
The following paragraphs briefly describe each characteristic: Rapid changes in the Product Life Cycle For more than a century, the basic technology of metal cutting and metal forming remained relatively stable. New products tended to come from the incremental innovations of skilled machinists, rather than the labs of engineers with large research and developments budgets. Firms would not sell the same basic line of tools for 20 years, and the process of designing a new product range took several years. Growing Importance of System Integration With the spread of CNC technology, there has been an accompanying shift in emphasis from stand alone machines to integrated manufacturing systems. These systems can range from a small machining cell, in which two or more CNC machines are joined by an automated transfer mechanism, to an entire computer integrated factory. This has given an edge to those machine tool vendors who can offer the greatest compatibility and reliability in their machines, as well as assistance with system integration.
Increased Global Integration and Competition There has historically been substantial international trade in machine tools. What has altered in the new global environment is the number and type of competitors, who have altered in the new global environment is the number and type of competitors, who have broadened from the United States and Europe to include a major new power,Japan, the newly industrialized countries (NICs) ,such as Taiwan, Spain, Korea, and in the near future , mainland China. New skill requirements To exploit the full potential of CNC, the workers who operate these new machines need a wide array of new skills, while continuing to require an understanding of the mechanical fundamentals and craft of shaping metal. These new skill demands are as pressing on machine tool customers as on the makers themselves; indeed, the new environment is placing greater demands on machine toll firms to offer using a full training package with any machinery they sell. New Capital Requirements Just as the customers of machine tool firms can greatly enhance productivity through investments in new CNC machines, so can machine tool makers. Indeed, there are two reasons why it may be more important for machine tool makers to make this investment in the latest capital requirement. Greater Importance of external Relationships The common thread that unites the different characteristics of the new machine tool competitive environment is the need for new investments and building new capabilities. (e.g. higher level skills, diffusion of the latest technologies, product and process R&D). That institutional system that is able to share the costs and risks associated with this investment will have a distinct advantage in global markets. These Determinants of Competitive Advantage In Machine Tools We will now turn our attention to why the U.S machine tool industry has been less prepared to cope with this new set of competitive demands than its main rivals. This can be analyzed using a modified version of the framework that Michael Porter (1990) developed to analyze the competitive advantage of nations in different business. Industry structure and the relations among the firms are placed at the centre of the diagram, because it is the companies themselves that will ultimately determine the success or failure of the industry.
References: • www.rand.org/pubs/research_briefs
• • •
www.econ.yale.edu/growth_pdf www.rand.org/pubs/monograph_reports/2006 www.rotman.utoronto.ca/bicpapers/pdf/03-08.pdf
doc_766187337.doc
This document contains: Causes of the U.S. machine tool industry’s decline; JAPANESE TECHNOLOGICAL GROWTH VIS-À-VIS THE US DECLINE; Appreciation of dollar; Questionnaire Survey; Rapid changes in the Product Life Cycle; Determinants of Competitive Advantage In Machine Tools
DECLINE OF U.S MACHINE TOOL INDUSTRY
MICRO ECONOMICS
PROJECT
Group F1
Chaitra Manish M Rohan Ulhas Narvekar Shreyas Srinivasan Tanumoy Sarkar Vignesh Swami
08115 08129 08143 08151 08159 08163
INTRODUCTION “Machine tools are the master tools, the tools that make tools. Virtually every product is built on a machine tool or a machine made by a machine tool” Losman & Liang, 1990 The U.S. machine-tool industry’s decline in the early 1980s is analyzed during the course of this research. The significance of this decline can be emphasized by considering that, the product in this case is not consumer goods like television or automobiles, but one that is used to make thousands of other products: machine-tools. Machine tools are a small but vital sector of manufacturing. Without healthy domestic machinetool makers, U.S. manufacturers will not have access to the latest technology. This results because machine-tool makers worldwide tend to first sell their most current products at home to ensure that any problems are easily fixed. A 1990 machine-tool study at General Motors noted that: “If you buy the very best from Japan, it has already been in Toyota Motors for two years, and if you buy from West Germany, it has been with BMW for a year and a half”. Since machine tools are so central to manufacturing, the decline of the U.S. machine-tool industry was perceived by many as a symbol of the broader decline in U.S. industrial competitiveness. Entering the 1980s, the United States was the largest producer of machine tools with 20 percent of the world market. By the end of the decade, the U.S. machine-tool industry was less than half the size of those of Japan and Germany. More than two-thirds of U.S. machine-tool firms had closed. The United States was reduced to a relatively minor player and forced to adopt protectionist policies to defend its domestic market. The failure to rebound, points to more fundamental set of problems within the industry. The basis of competitive advantage in the industry has now permanently shifted because of two trends: the rapid change in machine-tool technology and the shift to global competition. This shift requires machine-tool makers to develop new capabilities. Lacking these capabilities, U.S. firms continued to lose their share of world markets. In this paper, we further try to emphasize the striking similarities between the Japanese and the German machine-tool makers and notable dissimilarities between the two and the US makers.
OBJECTIVES • • • Identify the causes of the U.S. machine-tool industry’s decline Japanese technological growth vis-à-vis the US decline The new competitive contest and failure of the U.S. industry to rebound
METHODOLOGY • Data Collection/Sources o Data for Declines in Metal Use derived from Department of Commerce inputoutput tables. o Data from field research conducted with Japanese, German and U.S. tool makers, from the end of September 1996 to the end of March 2000. o National survey data from 271 U.S. plants in 20 metalworking industries conducted in 1993 and requesting for information about conditions at the plant and firm in 1992 • Data analysis model o Sunk cost spreading model
ANALYSIS Causes of the U.S. machine tool industry’s decline Over-dependence on a declining domestic market • Over-dependence on domestic market
There was a dramatic increase in worldwide demand for machine tools in the latter half of the 1980s, which U.S. firms failed to capitalize on. Because of the lack of a strong export orientation, U.S. firms have barely penetrated the world's largest machine-tool markets (see Figure).
Fig. Low penetration of U.S. machine-tools in foreign market
•
Declining metal consumption
The sharp drop in the demand for machine tools in the United States has put U.S machine tools makers at a disadvantage relative to their main competitors. Although this change in demand is certainly influenced by normal economic cycles, the period from 1980 to 1995 have seen the U.S consumption of the machine tools fall sharply in real terms and as a share of worldwide demand. One possible explanation for this decline in demand for machinery tools is a shift away from the metal consumption. The decline in the importance of the metal within the U.S economy can be seen in the figure. The drop in metal use has two components. The drop in the metal use has two components. The U.S economy has shifted away from the sectors and industries that use metal, but even among the industries that do use metal, metal use have declined as products have been lightened and other materials, such as Plastic and Ceramics, have been substituted. The first bar shows actual metal use in 1977. The second bar shows how much metal would have been used in the U.S economy in 1987 if the economy was simply scaled up from the 1977 economy- i.e.: assuming that the rate of metal consumption had kept pace with the rate of economic growth for the decade. The third bar shows how much metal was actually used in 1987.
Fig. 2 Declines in Metal Use
Although the largest decline in metal use occurred within the troubled U.S automotive sector, the decline is broadly based. The table shows the decline in metal use by industry. Most metal used in the economy is not machined, and advance in other technologies, such as near net shape casting, may significantly reduce the need for machining. Many of the new materials that have been used to replace metal, such as plastic and advanced ceramics, require new forms of machine tools. For example, one of the oldest and largest U.S. machine tool firms Cincinnati Milacron, now derives a much greater portion of its profits from the production of plastic-processing machines than traditional metal-cutting tools and has been far more successful in defending this market from foreign competition (RAND interviews). The decline in the metal use within the economy certainly had an adverse effect on the traditional machine-tool industry. While much has been made of the increasing importance of services in the economy at the expense of manufacturing, the decline in metal use is distinct phenomenon. What appears to be happening is a heavy investment in computers and information technology and substitution of newer, higher technology material (ceramics, plastics) for traditional metalprocessing machines.
Table.1 Reduction in use of metal by industry
•
The U.S. industry's strategy to historically volatile demand was to accumulate a backlog of orders
The companies in US worked as if it was a closed economy. Due to a stronghold in US markets it accumulated backlog greater than total annual production.
The strategy backfired when demand picked up again and Japanese firms were able to fill orders more quickly.
Fig 3. – U.S. Backlogs as a percentage of total production
•
Appreciation of dollar During the period of 1980 to 1985 the exchange rate of US dollar rose by 60 percent. The table given below gives value of other currencies with respect to 1 US dollar. Hence, buying US goods were expensive to other countries whereas goods of other countries became cheaper in US. This resulted in decline in US machine tool export.
Year
1980 1981 1982 1983 1984 1985
German Japanese British French Canadian Swiss Italian Marks Yen Pounds Francs Dollars Francs Lira
1.8177 2.26 2.4266 2.5533 2.8459 2.944 226.741 220.536 249.077 237.512 237.522 238.536 0.43029 0.49764 0.57245 0.65973 0.75181 0.77925 4.2256 5.4346 6.5721 7.6213 8.7391 8.9852 1.1692 1.1989 1.2337 1.2324 1.2951 1.3655 1.6757 1.9642 2.0303 2.0991 2.3497 2.4571 856.45 1136.7 6 1352.5 1 1518.8 5 1756.9 6 1909.4 4
Australian Dollar
0.87824 0.87021 0.98586 1.11001 1.13952 1.43189
Table.2 - the value of of different currency index
•
Size of U.S. Machine-Tool Firms Compared with Those of Other Major Producers
Competing successfully on a global basis requires major investments in capital goods, technology, training, export marketing, and other areas.
Fig. 4 Distribution of 60 largest machine-tool firms
Large firms are more likely to adopt new technology than small firms (Thirtle and Ruttan, 1987). Having adopted new technology, large firms are more likely to utilize all the features of new technology than small firms (Fichman and Kemerer, 1997). However, the replacement speed of old with newly adopted technology is inversely related to firm size (Mansfield, 1963). Based on his analysis of a national survey data from 271 U.S. plants in 20 metalworking industries, Thomas Asterbo (University of Waterloo) proposed a simple sunk cost-spreading model that explains these results. The greater the sunk cost associated with using the technology, the lower the likelihood that a firm of a given size will both adopt and exploit the features of the innovation once it is adopted. Compared with its major competitors, the U.S. industry lacked both a sufficient quantity of large firms that can build these capabilities in house and strong mechanisms for creating cooperation among smaller firms.
JAPANESE TECHNOLOGICAL GROWTH VIS-À-VIS THE US DECLINE Inter-firm factors Most of the past studies which observed this leapfrogging development (e.g. Finegold et. al. (1994a and 1994b), Fleischer (1997), Kobayashi and Ohdaka (1995) and Mazzoleni (1999)) have emphasized the following “inter-firm factors:” Strategic R&D alliance of Japanese with superlative CNC makers & adoption of CNC The introduction of CNC (Computer Numeric Control) in the 1970s and widespread adoption in the 1980s and 1990s has brought about dramatic shifts in the global market for machine tools. As Japanese companies were the most successful in adapting to this kind of technology innovations while the US machine tool makers have suffered a major decline.
To understand the US machine tool industry relative weak opposite to obtain technology, it is useful to compare it with the situation in Japan and Germany. Both foreign governments have been few more effective at promotion of applied R&D and the transfer of technical part to small and medium sized firms. US have been markedly less successful in adapting to the new CNC. US have been markedly less successful in adapting to the new CNC technology Germany and Japan had. The US not only has much lower rates of investment in the latest flexible technology, but also has tended to take a lower skill approach to introducing CNC tools. That is by adapting to the new technology to compensate for low skilled workers in many functions, machine tool markers and users fail to receive the full economic benefits that these technologies offer their foreign competitors.
Fig.5 – machine tool production in US
Extensive use of outsourcing from excellent precision parts’ suppliers In addition to CNC and servomotors, machine-tools consist of parts such as main spindles and bearings and high-speed motors for them, guideways and ballscrews or linear motors, and cast iron products such as beds, columns, or saddles. The precision of machines and their production lead-time crucially depend on the performance of these parts as well as their prompt and stable distribution. It is definitely true that Japanese machine-tool makers have obtained a considerable advantage by depending on outsourcing from top-rated Japanese precision parts’ makers. Reflecting this situation, most of the machine-tool makers claimed that their payments to these precision parts’ makers took 10 to 20% of their total machine-building costs.
These precision parts’ makers, however, were globalized in the 1990s. For example, for the leading Japanese precision parts’ makers, the ratio of overseas production, overseas sales and foreign workers was 30%, 70% and 40% respectively. Extraordinary development of the auto industry The impact of the auto industry on the machine-tool industry is enormous. Indeed, domestic auto or autoparts’ makers directly create about 30-40% of the induced domestic demand for machinetools. This number adds up to about 60- 70% if the auto industry related demand from the general machinery industry (e.g., die-making industry) and the electrical machinery industry is considered. This point is well reflected by the fact that the Japanese machine-tool industry was the largest producer in the world one year after the Japanese became the world’s largest automakers (1981). As is indicated in Rosenberg (1963), the growth stage of manufacturing industries tends to be properly projected on the growth of capital goods industries like the machine-tool industry. Hence, it was quite probable that the “demanding and knowledgeable” Japanese automakers helped greatly to increase the competitiveness of the Japanese machine-tool makers. A large amount of the demand for Japanese machine-tools came, especially during the late 1970s and the early 1980s, from the US auto and aircraft industries. The export ratio of Japanese machine-tools was just 10% in 1970, but it exceeded 40% in 1978 and oscillated between 30 and 40 % during the 1980s. Eighty percent of machine-tools newly consumed in the US were American in 1975, whereas this number dropped to 50% in 1985. Most of them were replaced by Japanese machine-tools. Intra-firm factors In 1982, the Japanese machine-tool industry produced the largest amount (US dollars) of machine tools in the world and has maintained this leading position for 19 years. However, the above mentioned inter-firm factors do not sufficiently explain the further development of this industry during the 1990s. Hence, attention was paid to the significant roles of “intra-firm factors”: o the simultaneous and cross-functional information sharing system at an early stage of new product development processes; o the positive and early participation of frontline skilled workers in assembly or machining shops; and o the existence of highly skilled assemblymen or machinists.
Simultaneous and cross-functional information sharing system & participation of frontline skilled workers Field Research A field research was conducted from the end of September 1996 to the end of March 2000. Twelve Japanese machine-tool makers, two CNC makers, and one precision parts’ maker were investigated. Three German machine-tool makers were also examined, whereas, regrettably, US producers were not considered. Among Japanese machine-tool makers, seven were large-scale producers with more than 1000 full-time employees and the others had fewer than 500 full-time employees.
Questionnaire Survey In addition to field research, between February and April of 2000 a questionnaire survey was also conducted for the Japanese, German and US machine-tool makers. In the survey, the interviewee was asked to agree or disagree with the following statement: “CNC machines have become so complex that, without close collaboration with assemblymen and/or machinists during the early stages of machine development, D&D engineers can no longer effectively develop and design new machines to the finest detail.” Japanese samples included all establishments (1750) that were included in the of Census of Manufacturers (MITI) list in 1997. The US samples consist of all machine-tool makers (366) that belong to the AMT (Association of Manufacturing Technology) and machine-tool related makers ( 517) that belong to the NTMA (National Tooling and Machining Association). The German samples included all machine-tool makers (273) that belong to VDW (Verein Deutscher Werkzeugmash Cinenfabriken e.V.) or VDMA (Verband Deutscher Maschinen und Anlagenbau e.V.) and are listed in the Red Book CD-ROM issued by these organizations. The questionnaire was to be filled out by supervisory personnel in assembly and/or machining shops. The response rate for each country is as follows: 30% in Japan, 22% in the US, and 12% in Germany. Results of the field research
Fig. 6 Percentage of interviewees in three countries who agreed about close collaboration with assemblymen during early stage of development
Results of the Questionnaire survey
Fig. 7 The in-house department the D&D engineers tend to meet most frequently
This shows that the American Data Review (DR) processes are quite different from those of the Japanese or the Germans. The results showed striking similarities between the Japanese and the German machine-tool makers and notable dissimilarities between the two and the US makers.
Existence of highly skilled labor One reason for the low co-operation among US machine tool manufactures has been a lack of an effective mechanism for setting and implementing technical standards, which in turn inhibited the development of commodity CNC technology. To understand the US machine tool industry’s relatively weak opportunities to obtain technology, it is useful to compare it with the situation in Japan and Germany. Both foreign governments have been far more effective at promoting applied R&D and the transfer of technology, particularly to small and medium sized firms. Each specializes in a technology area based on the interests of the region’s firms and is primarily supported by prefectural and local government. As we have seen, the United States has been markedly less successful in adapting to the new CNC technology than Germany and Japan.
Managers choice of skill strategy is influenced by both the internal and external institutional environment in which they operate. This has led US managers to pursue a lower skill strategy with the new technology than their main rivals do, which in turn discourages the most able young people from entering metal working.
Fig 8. – circle of operations in US & Japan
The new competitive contest and failure of the U.S. industry to rebound • Depreciation of US dollar – didn’t rebound After 1985 the value of dollar depreciated, this should have allowed US machine tool industry to rebound. On the contrary the industry did not show any signs of improvement. This was due to integration of economies of all countries. This induced more competition and forced the manufacturers to innovate. Pre 1985 the industry was selling more or less homogeneous goods.
Year 1986 1987 1988
German Marks 2.1715 1.7974 1.7562
Japanese Yen 168.52 144.638 128.152
British Pounds 0.6822 0.61193 0.56217
French Francs 6.9261 6.0107 5.9569
Canadian Dollars 1.3895 1.326 1.2307
Swiss Francs 1.7989 1.4912 1.4633
Italian Lira 1490.81 1296.07 1301.63
Australian Dollar 1.49597 1.42818 1.27991
1989 1990
1.88 1.6157
137.964 144.792
0.61117 0.56318
6.3801 5.4453
1.184 1.1668
1.6359 1.3892
1372.09 1198.1
1.2646 1.28106
Table 3 – currency index
The New Competitive Context Fundamental changes in the machine- tool industry and its environment have created a new set of requirements for success. Seven characteristics seem most important: • • • • • • Rapid changes in product life cycle The blending of mechanical and electronic technologies An increase in global integration and competition New skill requirements New capital requirements The increased importance of external relationships.
The following paragraphs briefly describe each characteristic: Rapid changes in the Product Life Cycle For more than a century, the basic technology of metal cutting and metal forming remained relatively stable. New products tended to come from the incremental innovations of skilled machinists, rather than the labs of engineers with large research and developments budgets. Firms would not sell the same basic line of tools for 20 years, and the process of designing a new product range took several years. Growing Importance of System Integration With the spread of CNC technology, there has been an accompanying shift in emphasis from stand alone machines to integrated manufacturing systems. These systems can range from a small machining cell, in which two or more CNC machines are joined by an automated transfer mechanism, to an entire computer integrated factory. This has given an edge to those machine tool vendors who can offer the greatest compatibility and reliability in their machines, as well as assistance with system integration.
Increased Global Integration and Competition There has historically been substantial international trade in machine tools. What has altered in the new global environment is the number and type of competitors, who have altered in the new global environment is the number and type of competitors, who have broadened from the United States and Europe to include a major new power,Japan, the newly industrialized countries (NICs) ,such as Taiwan, Spain, Korea, and in the near future , mainland China. New skill requirements To exploit the full potential of CNC, the workers who operate these new machines need a wide array of new skills, while continuing to require an understanding of the mechanical fundamentals and craft of shaping metal. These new skill demands are as pressing on machine tool customers as on the makers themselves; indeed, the new environment is placing greater demands on machine toll firms to offer using a full training package with any machinery they sell. New Capital Requirements Just as the customers of machine tool firms can greatly enhance productivity through investments in new CNC machines, so can machine tool makers. Indeed, there are two reasons why it may be more important for machine tool makers to make this investment in the latest capital requirement. Greater Importance of external Relationships The common thread that unites the different characteristics of the new machine tool competitive environment is the need for new investments and building new capabilities. (e.g. higher level skills, diffusion of the latest technologies, product and process R&D). That institutional system that is able to share the costs and risks associated with this investment will have a distinct advantage in global markets. These Determinants of Competitive Advantage In Machine Tools We will now turn our attention to why the U.S machine tool industry has been less prepared to cope with this new set of competitive demands than its main rivals. This can be analyzed using a modified version of the framework that Michael Porter (1990) developed to analyze the competitive advantage of nations in different business. Industry structure and the relations among the firms are placed at the centre of the diagram, because it is the companies themselves that will ultimately determine the success or failure of the industry.
References: • www.rand.org/pubs/research_briefs
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www.econ.yale.edu/growth_pdf www.rand.org/pubs/monograph_reports/2006 www.rotman.utoronto.ca/bicpapers/pdf/03-08.pdf
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