EXECUTIVE INSIGHTS: 2010 BUSINESS OUTLOOK

To develop a meaningful profile of the business climate facing our industry during the coming year, Fabricating & Metalworking invited several key executives from various market sectors to share their thoughts on the following questions:
(1) Please identify the critical issues that you see facing the machine tool business during the next year.
(2) Based upon (1) above, how would you characterize the current state of the machine tool business?
(3) How have (1) and (2) above changed or affected the needs and expectations of the machine tool buyer? How do you see these changes shaping the machine tool marketplace over the next year?
(4) Based upon (3) above, how must competitors in the machine tool business position (or reposition) themselves for success during the coming year?
(5) What do you feel are the most competitive challenges facing players in the machine tool business during the next year?
(6) Any additional insights you would like to share?

Their responses (which follow below) not only describe the overall business conditions our industry faces, they thoughtfully explain why doing business in 2010 will be very challenging indeed, with some tips on how to succeed.

The number one issue facing the toolholding business in 2010 is the ability for manufacturers/buyers to start investing in capital equipment such as machining centers. Generally speaking, tool holders are mainly purchased at the time the machining center is bought, so tool holder manufacturers often follow the sales trends of the machine tool builders. The ability of companies to purchase new machining centers is dependent on the availability of funds from banks and the availability of product from the machine tool builders should an increase in demand occur.

Currently, the state of the toolholding business is quite tough for all tool holder manufacturers worldwide. This is truly a global crisis. Since so few companies are purchasing new machining centers, toolholding competition is higher because tool holder manufacturers are all chasing the same business. That being said, those companies that are currently buying new machine tools are typically successful competitors that are interested in increasing their productivity.

All of the new tool holder business from companies who are not purchasing new capital equipment seems to be focused on trying to make their existing equipment run more efficiently. This sort of customer mentality actually works well for us, based on the tool holders, balancing machines and shrink fit machines that we supply. But the lack of new machining center purchases has obviously led to lesser needs from the toolholding buyers in the market.

The fact that all the tool holder companies are in the same boat has ushered in higher expectations from the toolholding buyer than I have seen in the past. Consumers are taking their time to thoroughly investigate all tool holding options before making a decision. Since buyers are typically focused on increasing their productivity, more study and time is needed for them to ensure the tool holders they purchase actually do this. This trend will continue in 2010. The number one reason that buyers will purchase machining equipment in 2010 is to increase their productivity, and a thorough study of tool holding options will be a big part of this process.

To successfully position themselves in the market, tool holder manufacturers must be able to demonstrate the benefits of their equipment. The consumers looking to increase productivity are typically educated users that understand their number one cost is machine time. They want tool holding technologies that are able to reduce this machining time, increase productivity, and ultimately leave a higher margin on their final product. This, in turn, should allow these manufacturers to take on new jobs and ultimately strengthen their business.

Based on a very tough year in 2009 for the toolholding market, a big challenge in 2010 will be the management of inventory in an uncertain market. That being said, due to open capacity most tool holder manufacturers can turn around orders quicker to address any changes or upturns that occur in the market.

In 2009 we all came to realize how much all of the facets of the manufacturing business are interrelated. Tool holder manufacturers now work more closely than ever with machine tool builders and cutting tool manufacturers to do whatever is possible to create an increase in business. Also, the manufacturers/buyers themselves are much more understanding about how this entire financial crisis affects their suppliers ? who, after all, are also manufacturers.

Where buyers in the past sometimes felt tool holder manufacturers simply tried to ?sell them products to get their business,? they now have a deeper understanding of tool holder manufacturers as working to provide solutions that help both sides grow their business and come up with new innovations for the future.

The biggest driving force for our industry is identified by machine tool utilization, which currently is probably in the 62 percentile range. History teaches that until this percentile grows to the high 70s or low 80s, the need to purchase machine tools is limited. However, the desire or need for productivity improvement never goes away, regardless of the level of utilization.

So demand does exist from our industry for productivity improvements, and if machine tool builders can help meet that demand, they can sell their technology. The catch is that these productivity improvements don't just lie with the basic machine tool. Productivity improvements require multiple suppliers working together to provide the ultimate solution.

This is the most challenging period machine tool builders have ever experienced ? at least in my business life ? but at the same time, these conditions bring clarity to what must be done. Stated simply, machine tool builders must organize their companies and their resources to provide solutions. When they really listen to customers, they will come to the realization that they alone cannot be the solution provider. Solutions take suppliers from all areas of manufacturing.

They must assess what has happened to their customers during these difficult times. Customers have experienced a tremendous amount of downsizing, trying to do more with less. Human resource availability is probably the worst limitation they've experienced, but to survive, they must improve their productivity. Quite frankly, they need the help of machine tool builders and their partners. No matter how large or how small the corporation is, the problems they all face today are similar ? only the magnitude differs.

Machine tool builders must reposition their view from the marketplace, along with their distributors and their partners, as a central source and resource: manufacturing knowledge, products, advanced technology, how to apply all of this and improve productivity. They must provide and educate at the same time.

Parts of the industry are doing some repositioning, but there is no way they will achieve higher levels of success until they truly understand their customers' needs and learn not to focus only on the machine tool itself. The machine tool builder is only one part of the manufacturing solution and productivity. Eliminating one bottleneck only to find another is not the solution. Eliminating all bottlenecks is the solution.

Having enough manufacturing/engineering resources to meet the growing demand for cost-effective productivity gains is a competitive challenge. The resources are there, but with the economic climate we're in, they are not currently affordable. The longer those resources remain idle, the greater the likelihood that they may go somewhere else or re-educate themselves to support different industries. Any lapse in time and involvement in this industry is very hard to get back.

One of the major challenges is educating the workforce of the possibilities of information available from the machine tool. If they can do it on their computer, they should be able to do it on the machine tool control. How do we get operators and manufacturing people to begin thinking outside the box and start questioning the possibilities?

The last four months indicate that the business climate is improving. Customers are indicating their desire to find more productive ways to do what they do. The possibilities for them are exciting. But a low cost, basic machine tool is not the answer. Machine tool builders must help advance manufacturing for the long term.

The automation and systems integration industry faces two major issues for the coming year: One is the financial cutbacks that are plaguing many manufacturing companies that need automation. The other is the loss of the engineering talent necessary to direct the implementation of automated systems into current manufacturing systems.

Fortunately, there is still talent at many manufacturing firms that can implement new systems, although they are spread very thin. From the financial side, this talent is being forced to scrutinize every potential project and its associated cost justification to a much tighter tolerance than in the past.

Business opportunities still exist for systems integrators in this new environment, but they must provide their customers with more support and assistance in the justification of any new automation projects. They may also have to provide more support to turnkey the projects, as a manufacturer?s in-house staff may not have the resources to completely manage the systems integration.

With this in mind, systems suppliers need to work on a more streamlined approach to automation and systems integration. They must address some of the tasks that their customers were previously responsible for and determine if they can do that work themselves or design the systems from the outset so those tasks aren?t required at all. Advanced software will probably be the key to this approach. Any area of the project management that can be simplified with special software will have to be addressed.

Systems integrators are also finding that providing customers with the tools to simplify the process of cost justification will be necessary to help them prove the return on investment for the quoted system. There is no question that all manufacturers must look at automation to reduce labor costs and new control systems to improve their processes, but they must accomplish this with less staff and a smaller budget. Systems integrators will have to be very creative to generate a workable solution for these users.

Machine tool manufacturers face one of the most turbulent periods in history as they manage issues ranging from bottom-line economic survival to finding ways to participate in emerging markets. By most accounts 2010 is setting up to be a transitional year, with economic conditions and the slow road to recovery serving as the backdrop for many machine tool companies' "defining moments," as business models are adjusted to find new ways to remain profitable and relevant into the future.

For most, the focus this year will be survivability and adjusting to the "new normal" in terms of economic activity and demand for products and services. The recovery has yet to indicate with any certainty what the timing, magnitude and impact on machine tool orders will be. Many companies making it this far will need to see business and profitability pick up in order to continue. Stability and confidence in the financial markets, and availability of capital to support those willing and needing to make capital investments, will go a long way toward ensuring some of these builders are able to survive the downturn and, just as important, be in the ready position when the inevitable recovery comes to fruition.

Manufacturing is the engine of economic growth, and support of this wealth-creating core of the U.S. economy is especially necessary now. Our industry must address the shortage of skilled labor, which creates thorny choices for recession-battered machine tool builders who want to fund new technology and infrastructure development as well. Awareness of manufacturing as a viable, rewarding career must increase among teens comprising tomorrow's skilled workforce. Recent surveys indicate that more than 50 percent of teens nationwide have little or no interest in a manufacturing career.

For U.S. manufacturing to stay competitive, it will require knowledge of some of the most advanced, sophisticated robotic, laser and computer-controlled equipment. Ensuring a skilled workforce to program, operate and maintain these machines is imperative to the industry's future. However, a delicate balance exists between developing new technology and people for the future and the need to survive in the short term. This is a challenge many machine tool manufacturers will face in 2010 and beyond.

Slow economies force manufacturers to evaluate and restructure current operations for more efficiency and develop new market opportunities. Renewable energies like wind, solar and nuclear, composites, even a "new" automotive industry all provide opportunities for machine tool companies to meet the needs of manufacturers. Increasing demand for wind turbines and solar panels has already driven the development of new manufacturing methods and technologies for composites and large-part machining. Thin film solar material and the trend in vehicle design continues toward lighter, more fuel-efficient cars, creating opportunities for machine tool makers to provide manufacturing solutions and re-tool existing plants.

The trend toward a "five-axis" world will increase. Customers are looking for machines with design enhancements and multifunction capabilities that deliver finished parts in a single-setup. Their obvious goal is reduced labor, floor space and machines, plus the added benefit of higher quality. Modular machine tool design for rapid customization plays an important role in providing these customers new and specialized equipment quickly and at lower cost.

With their in-house staffs further diminished by the recession, customers will increasingly rely on machine tool OEMs and distributors to provide a total solution ? a capable, predictable process ? backed and supported by a stable partner. To be strategically positioned for the coming year, machine tool manufacturers should maintain, and continue to develop, core technical resources. Technological advancements are critical to success in this business, because that's what differentiates your business and solutions from others.

The most promising business segments must be identified, with resources and attention shifted to them. This is also a time to look at "alternative" sources of revenue, as any contribution to the right side of the general ledger can increase a company's chances for survival. After-sales productivity enhancements and service programs are great for not only generating additional revenue, but also building customer relationships and loyalty.

The key in 2010 is to remain financially viable and manage the business carefully, even as things improve. It's important to avoid the temptation to take on excessive risk or pursue business on unfavorable terms just to generate revenue. The current short-term market conditions will require many difficult and correct decisions to navigate safely to the twin objectives of survival and long-term success.

Attracting new business, access to financing, rising health care costs, and skilled labor are likely to be the biggest challenges facing small-to-medium sized metalworkers next year. Current business conditions continue to slide for some, yet most have weathered the deepest part of the recession and are ?surviving.?

Typically, manufacturing lags behind the overall market anywhere between six to eight months. That being said and looking forward, expect to see business slowly start to rebound toward the end of the first quarter of 2010. OEMs have slowly depleted their inventories and will require additional manufacturing for existing products and programs. We will likely see an increase in new product development.

From the buyer side, long standing relationships, company loyalty and ?buddy systems? are becoming more of a thing of the past. Baby Boomers are retiring and the next generations are now establishing ground with a completely different style and mentality. These buyers are doing more research online, fixating on price and speed of delivery. Competitive pricing will take an even more active role in years to come as companies must continue to find efficiencies in the way they operate.

Flexibility and speed of delivery will play a more significant role in the competitiveness of manufacturers in the upcoming year. As the overall economy begins to rebound, there should be intermittent surges in demand; buyers will look to those companies who can deliver a quality product at an expedited rate. Additionally, manufacturers will need to increase their sales efforts and look toward expansion into new markets. It is no longer a ?safe bet? to rely solely on those customers they have always done business with.

As a general rule, a manufacturer should have no more than 50 percent of their business in any one market and no more than 20 percent of their business with any one customer. Obviously there are exceptions to this, especially if a company serves a very niche market and has developed unique processes. However, diversification has been the saving grace that has allowed manufacturers to survive when times are tough.

Metalworking is one of the most significant economic engines in our country, yet it has lost its market appeal over the years as we looked more to evolving technologies and services. As an industry, we need to re-educate the consumers, elected officials, and ourselves as to the value and stability manufacturing brings to our country. It is vitally important the U.S. manufacturers network together to form a united front. Belonging to national trade organizations and ?getting involved? is a key to pushing a manufacturing agenda that supports small-to-medium sized manufacturers.

Most cutting tool companies will have to adjust their business models to make profits on a much smaller sales volume in a fiercely competitive environment. Only the ?fittest? companies will endure. In addition, recognizing the importance of demonstrating the value of advanced tooling and machining methods, cutting tool manufacturers need to reach out to the users of their products, invite them to make their requirements known and collaborate with them on creating solutions and demonstrate the value of new technologies and methods.

There is a lot of uncertainty about the future and what it holds. As a result, cutting tool companies are focusing on the projects at hand and staying close to their customers in order achieve the best results. It is a buyer?s market and the customer is King. When spending his money, he can demand absolute supplier excellence in price, product performance, availability and support. Cutting tool manufacturers must position themselves to deliver better, more affordable products faster, and back it all up with the best customer service and technical support.

U.S. manufacturing companies can compete with anyone in the world. We have gone through enough downsizing over the years and faced enough inferior imported products that the remaining players are among the best in class. Our industry is embracing the latest developments in machining and tooling technology and employing some of the most innovative and productive workers in the world.

The most critical issue in our market is much like the general economy: confidence. We need the working people to have confidence in their personal situations, the businesses to have confidence in the near future, and the bankers/investors to have confidence in the businesses. We like to think that unemployment is the primary indicator for the economy, but the 80+ percent employed that are working are actually having the immediate effect.

Challenges more related to our industry involve convincing our customers and potential customers that productivity investments are still a sound expenditures. It still makes sense to reduce piece part costs even if the process is not at 100 percent capacity. These investments will pay off big time in the future, placing those companies that invest ahead of their competition. Convincing customers to invest is further complicated by the staff reductions that were required by most manufacturers to survive the current recession. This simply makes it harder to get time with an open-minded decision maker.

The tooling/workholding business did not receive the same blow from the meltdown that hammered the machine tool business. I would not say that the toolholding/workholding business is solid, but there is a clear indication that manufacturers are making parts. Our consumable and semi-durable products are showing steady month over month increases in sales in the U.S. and worldwide. Products such as quick change devices that truly increase machine time have experienced only minimal declines in sales throughout the downturn.

Manufacturers are starting to receive steady orders and confidence is building daily, meaning they will have to get more out of the machine resources they currently have in the short-term. This will be good for the tooling and workholding suppliers that focus on productivity products. Our industry is facing 2005 ? or worse ? revenue numbers in the 2010 information age. Customers today go to the web to research products and solutions to problems. The open education base provided by the Internet will play a key role in success over the next five years that will not be comparable to the past.

With a smaller pie, price pressure will get worse before it gets better. Manufacturers must all remain focused on participating and helping our customers in their business requirements and needs.