president of Chicago-based consulting company, ITA.
America's largest manufacturing show, IMTS2010, opened with a positive flourish recently in Chicago. At the time of writing with two days left to run, total visitor registrations had already topped 80,000 and the mood on the show floor seemed to signal a revival of fortunes for manufacturing globally with huge visitor numbers and 1,100 exhibitors giving a good indication of the favourable view in which many hold the current economic conditions.
Many of the people I spoke to at the show had a very positive business outlook, with recent modest sales increases in the 30-40% percent range being a typical response.
The fortunes of Japan's machine tool industry are of course inextricably linked to this global demand. Traditionally, Japan has been at the heart of this business, and for many years, its machine tool industry has been regarded somewhat as the world's industrial delicatessen – renowned as a leading source of a wide variety of high end, sophisticated machine tools which have underpinned high quality precision production processes for decades.
However, the recession has hit this market hard. According to JMTBA (Japan Machine Tool Builders Association), Japanese machine builders have seen sales plummet in the recent global economic downturn. 2009 saw almost a 60% decrease in domestic sales and close to 65% decrease in overseas activity. In contrast, the first half of 2010 was up 107% for domestic and over 360% for overseas sales increase – positive news indeed for many of manufacturers but not enough to make up for the previous declines. In addition to which, the seismic changes in global business have bought with them new challenges, which Japan's manufacturers will need to respond to if the present recovery is to continue.
In Japan, the automotive industry and precision machinery sectors were the quickest to rebound from the downturn, but this was only because their respective dips were so severe the year before and despite positive signs of recovery, they are still far from achieving 2008 sales levels.
Also, the Japanese Yen has ramped about 40% in value, meaning profits have been swallowed up in foreign currency exchange losses. Additionally, ancillary costs have fluctuated wildly; for example, the costs of fuel/logistics by 15-20% and raw materials by 20-30%. Certain steel prices hiked close to 50% at one point, and many other costs are exhibiting a similar degree of instability.
With supply and demand being such a moving target and with raw materials costs fluctuating, it has been very difficult for mid-sized and smaller manufacturers to manage production and sustain profitability. In the past, decreases in sales simply meant decreases in demand or loss of sales, but today however, the root causes can be far more complex, such as scarcity of parts or materials further up the supply chain. Coming up with strategies to cope with these new uncertainties is providing significant challenges for the management of Japanese companies today.
Grade ‘B' manufacturing
While most actual manufacturing activity connected with automotive and precision production has been passed onto manufacturers located in the emerging countries, the machine tool builders have thus far retained a position of strength. However the game is changing. Electric vehicles are expected to take a steadily larger share of the market from conventional automobiles and as there will be a diminishing need to manufacture engines requiring large amounts of machining, this will inevitably result in substantially fewer tiers of suppliers and less parts required.
Less sophisticated manufacturing means that the quality of machine tools can be downgraded to serve a more commoditised manufacturing model. These are major new trends/issues to which Japanese manufacturers must respond. Certain markets now only require downgraded versions of machine tools and/or components and less sophisticated, but lower priced tooling will be better suited to serving the requirement for simple parts manufacturing. Developing these ‘Grade B' machines, as they are referred to in Japan, is now a priority as companies see a clear need to provide simpler machine tool product offerings with competitive pricing to meet the evolving needs of manufacturing globally.
With so much manufacturing now relocated outside of Japan in overseas, low labour cost countries, the global diversification of manufacturing is also prompting machine builders and their suppliers into making some difficult choices. Should they follow their customers and move their R&D, design and manufacture of the core components of their machines overseas? And what about assembly and service?
As manufacturing has become globally transient to take advantage of the relative cost strengths realised through manufacturing in different countries, these are becoming increasingly difficult questions to answer. For machine tool manufacturers, the production tooling and heavy components required does not make the prospect of a highly mobile or highly diversified manufacturing base a realistic prospect. However there is a case for modularisation, and the evolution of Grade B products may just give Japanese manufacturers a route to achieve that profitably, while retaining their main skill base in Japan.
Success paths and innovation
The successful manufacturers still lead by the same criteria – quality, speed and price – and these factors have not changed. The pressure towards achieving lower costs through offshore sourcing and commoditisation is relentless, driven ultimately by the same consumer demand that has seen electronic component prices pared to the minimum.
Today, most of the mid to low end range machine tools from Japanese companies are produced by foreign contractors. But while this is enabling these companies to stay competitive at one level, a great deal of effort is also being expended in Japan towards the development and manufacture of the next generation of high end machines, providing the ultimate in automation, advancing more 5-axis technologies, application software, technical support services, superb quality vision systems and sophisticated artificial intelligence features.
Intense manufacturing advancement
In the long term, such strategies may lead to yet another reversal of fortunes for global manufacturing. One leading Japanese manufacturer, for example, has automated its production to such a high level of sophistication that there now is virtually no people working in its factory. As a result, its machine production costs are now actually cheaper than Chinese made alternatives. Importantly, its core know-how and IP is kept securely in-house. The highly automated processes mean that core component products can also be sold to other manufacturers as OEMs, with mass production making the price even more competitive. Its unrivalled expertise in this kind of automation may well prove to be the salvation for many Japanese machine tool manufacturers.
The road ahead
It's clear that the upheaval wrought by the global economic crisis has left the global business landscape permanently changed. However with its fabled ingenuity and resourcefulness, Japan is far from disadvantaged when it comes to creating new opportunities.
Japan will continue to innovate, not just new technologies, but also new industries and markets – both domestically and overseas. While traditional markets like automotive are declining, new ones are emerging with companies in Europe and the US developing key markets for green technologies, high end medical devices and other high tech products.
In response, Japan is nurturing the next generation of industrial expertise in order to sustain and retain its leading position in fine precision machining and automation. Although, machine tool sales are heavily monitored and restricted by the Japanese government in certain overseas markets, the industry's repertoire of applications is steadily expanding with new opportunities, and it's clear that machinery manufacturers will have a big role to play in innovating and developing the applications that will define tomorrow's industry.
JIMTOF 2010 show will be held in Tokyo from October 28th through to November 2nd and based on the experience of the IMTS 2010 show in Chicago, we are all very anxious to see how the show will turn out.
ITA is a Chicago-based company providing a broad range of corporate marketing, international trade, technology support and business consulting services to European, American and Japanese companies. Having worked closely with manufacturing industries in both hemispheres for over two decades, ITA is well positioned to observe the changes in international manufacturing and the factors underpinning them.