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Machine Tool Manufacturing Industry Insight | Fall 2018

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This document focuses on a number of topics that relate to or affect the machine tool/manufacturing industry as a whole, including U.S. manufacturing statistics and trends, the use of predictive analytics to reduce factory downtime and increase business competitiveness, the need for further automation in the industry, and the rise in machine tool orders. It also includes a brief commentary on the outlook for the manufacturing industry.

Hot Topics
U.S. Manufacturing Statistics and Trends: U.S. manufacturing is the transformation of raw materials into new products. It produces 18.2% of all goods and is the largest manufacturer in the world. That exceeds the entire economic output of Canada, Korea, or Mexico. Nonetheless, America’s leadership position is threatened by high operating costs and that gives a competitive edge to other countries. First among these is China, whose low-cost factories manufacture 17.6% of the world’s products.

Importance of Manufacturing in the U.S. Economy
Manufacturing is an essential component of the gross domestic product (GDP) as manufactured goods comprise half of all U.S. exports. It adds a lot of value to the power of the U.S. economy. Every dollar spent in manufacturing adds $1.89 in business growth in other supporting sectors, including retail, transportation, and business services. The manufacturing industry also employs 8.5% of the workforce in jobs that pay 12% more than all others. Yet, more than 600,000 jobs are still awaiting workers with the right skills.

Trends
Manufacturing used to be a larger component of the U.S. economy. In 1970, it comprised 24.3% of GDP, a much larger percentage than it is today. America’s edge as the world’s leading manufacturer has also slipped. In 1985, it produced 28% of the world’s goods. That’s because the industry has grown only 1.1% a year since then, compared to the 2.3% average growth rate of the economy as a whole. It’s also slower than the growth of our major trading partners. China grew 9.8%; India, 5.1%; Germany, 3.6%; the United Kingdom, 2.8%; Canada, 2.7%; and Japan, 1.9%.

Reasons for Decline
The biggest reason for the slippage in America’s standing as the world’s leading manufacturer is the shift to a service-based economy. Banking and other financial services began growing after 1999, when Congress repealed the Glass-Steagall Act. Additionally, the health care sector has grown from 5% of the economy in 1960 to 18% percent in 2015. In 1965, the government began subsidizing hospital costs when it created Medicare and Medicaid. Health care services also responded to the aging baby boomer generation. While other developed countries also switched to service-based economies for the same reasons, less developed countries such as China increased their manufacturing capabilities. Another contributor is the high U.S. standard of living compared to other countries. That makes labor costs much greater than in other nations. Other factors include federal policies that hinder U.S. competitiveness, an historically higher tax rate than other countries, and the fact that other countries have been better at negotiating bilateral free trade agreements.

Improving Manufacturing with Predictive Analytics: Research conducted by IndustryWeek shows that equipment failure is the cause of 42% of all unplanned downtime. This raises questions about why more manufacturers aren’t using predictive analytics as a means to reducing factory downtime and increasing business competitiveness. A report from Statistics MRC estimates that the global predictive analytics market will grow from $3.89 billion in 2016, to $14.95 billion in 2023 as manufacturers come to better understand the benefits predictive analytics can offer.

Traditionally, maintenance in manufacturing facilities has been performed on a fixed cycle, often referred to as scheduled maintenance. Plant managers schedule time to conduct checks on machinery and plan downtime for more in-depth maintenance. However, this can mean that parts are replaced too late, or even too early, increasing the risk of failure. As an alternative, predictive analytics empowers plant managers to detect potential defects before they materialize — and avoid unnecessary maintenance for parts that do not need repair. It also prevents unnecessary downtime by allowing potential problems to be fixed without the need to stop the machinery. These analytics help plant managers spot potential hardware or system problems by comparing historical machine data with current performance. Using analytics, plant managers no longer have to accept a sales person’s guarantee that their offering is the best option. Analytics can predict how the process will react as a result of a change in specific parameters, giving manufacturers an accurate view of whether the investment has been beneficial. To support this, predictive analytics software can statistically evaluate production quality. The related software technology, when implemented to function at its fullest capability, can monitor historical processes to predict potential production variances at a very early stage. Supporting quality assurance from the start of a process reduces wasted time, materials and money. Predictive maintenance is incredibly useful, and it will help manufacturers reduce the risk of unplanned downtime.

Radical Automation–A Must Mindset for Many Machining Facilities: A real possibility is that there may never be enough talent in many local labor pools to meet the still-growing demand for skilled manufacturing employees. The real challenge may lie in changing companies’ expectations about how much skilled labor they really need. Peter Zelinski, Editor-in-Chief of Modern Machine Shop, believes “radical automation” are the two key words that represent the mind-set many shops will need to adopt to meet their needs five to eight years from now. During that period of time, one of those needs is almost certain to be delivering more output using the same or fewer skilled employees.

The machining industry has been talking about the “shortage” of skilled employees with the same urgency for almost ten years now and efforts to address this concern have been met with some success. For example, computer numerical control (CNC) programs in community colleges are now far more popular than they once were. CNC is the automated control of machining tools (drills, boring tools, lathes) by means of a computer, in which a CNC machine operates on a piece of material (metal, plastic, wood, ceramic, or composite) to transform it to precise specifications. Despite greater use of this technology, the progress that has been made is not enough to keep up as older employees retire and manufacturing activity continues to expand. Manufacturers may have to accept that they will never have enough skilled manufacturing employees in the labor pool to keep pace with the demands for greater output. As such, they must continue to work on changing their processes and the related ratio of people to production. This will likely require a radically greater commitment to automation and a radically expanded sense of what automation might include. All this will take time. Much of the work required to make the necessary changes will proceed slowly and will seem unproductive because it will consist of gathering important facts, challenging limited thinking and formulating a strategy to realize a new vision for production that is sufficiently big enough to meet the scope of opportunity faced by manufacturers.

First-Half Machine Tool Orders Up 22%: According to AMT – the Association for Manufacturing Technology, the overall demand for new machine tools and related capital equipment (“manufacturing technology”) slipped 13.8% in June, but was up 4.6% from the same month last year. During the first half of 2018, orders for new equipment rose to $2.55 billion, representing a 22.4% increase from the first six months of 2017. “While many manufacturers are expressing concerns about trade wars, it doesn’t seem that it has slowed their need for additional capacity, and orders for new capital equipment remain strong,” stated AMT president Doug Woods.

In addition to orders for new equipment nationwide, the U.S. Manufacturing Technology Orders report recently issued by AMT offers insights into manufacturing technology demand in six regional markets. As shown in the table below, only the Northeast region posted any May-to-June increase in demand. On a comparative year-to-date basis, the greatest improvement in percentage growth occurred in the South-Central Region.

Manufacturing Industry Outlook
Manufacturing is forecast to increase faster than the general economy. According to the MAPI Foundation, production will grow 2.8% from 2018 to 2021. It will be boosted by President Trump’s tax plan and a declining dollar. However, portions of the manufacturing sector could suffer from Trump’s efforts to renegotiate trade agreements. The extent of any growth also depends on the strength of the U.S. dollar. If it weakens, that’s good for exporters. But the Federal Reserve is raising interest rates and that is making the dollar stronger. Underlying these short-term developments are five new forces that are driving manufacturing’s growth: (1) increased productivity, (2) growing domestic production of domestic natural gas and shale oil, (3) rising wages in emerging markets, (4) companies are realizing the need to protect homegrown intellectual property, and (5) awareness among consumers that “Made in America” means jobs for Americans. According to a survey taken by AlixPartners, 37% of manufacturers would prefer to locate in the U.S. because it’s easier to reach the huge North American market. In 2011, only 19% percent chose the U.S. Unfortunately, growth won’t translate into an increase in U.S. manufacturing jobs. That’s because of productivity improvements, including the increased use of computers, robotics, and other efficient processes. The new jobs will require sophisticated computer-related skills to manage the robots.

President Trump has promised to bring jobs back to manufacturing. He delivered on his promised tax cut for U.S. manufacturers and higher tariffs for those who build overseas. He must also make these incentives offset the additional cost of U.S. manufacturing. Otherwise, his efforts won’t be enough to bring back jobs. Trump’s job creation plan aims to create 25 million jobs in the next ten years. The National Association of Manufacturers applauds Trump’s plan to reduce taxes and regulations. It also supports his strategy to upgrade the quality of the U.S. infrastructure. However, it would prefer he create more free trade agreements. The Association also recommends the improvement of the science, technology, engineering, and math skills of America’s labor force.