When you hit rock bottom, there's nowhere to go but up. That's where the machine tools market was in 2009, but the past year has seen sales increase at a healthy pace, leaving at least one analyst feeling bullish on where the industry is headed in 2011.
Pat McGibbon of the Association of Manufacturing Technology says it's not difficult to improve when sales drop to nearly zero, which he adds is what happened in 2009 in the midst of the worst recession in the United States since the Great Depression.
"When you get near zero, it's easy to see improvement, but even given where we were, the numbers we've seen over the past 12 months have been outstanding," McGibbon says. "Right now, it's not too strong a point to say we're on a roll."
The numbers bear out McGibbon's assertion. The U.S. Manufacturing Technology Consumption reports that orders for machine tools in 2010 skyrocketed 85% over the 2009 numbers, with the last two months of the year in particular finishing strong. Spending in December reached $446.8 million, a 40.9% jump over November and a 104.8% jump over December 2009.
The report, compiled by AMT and the American Machine Tools Distributors' Association, provides regional and national U.S. consumption data for domestic and imported machine tools and related equipment. Analysis of manufacturing technology provides a reliable leading economic indicator as manufacturing industries invest in capital metalworking equipment to increase capacity and improve productivity.
2011 to Remain Strong
According to Douglas Woods, president of AMT, the report showed four consecutive months of increased spending for the first time in the history of the USMTC report. He says he believes 2011 will also remain strong.
The January report lends credence to Woods' belief. The January numbers reached $371.4 million. While the number was down 16.3% from the spectacular December numbers, it's a 188.3% increase over January 2010. But the reality on the ground is a bit more nuanced than the numbers might indicate.
Dennis Bray, president and CEO of Contour Precision Group LLC, which manufactures machine tools for industrial gas turbine and aerospace production, says 2010's performance was a tale in two acts. The first half of the year was weaker than expected, but the second half of the year was stronger.
"That's in part the cyclical nature of our business," Bray says. "People put off purchasing until as late in the year as possible so they can get a full year's depreciation on it the following year."
Contour's business breaks down into OEM and repair, and Bray says that while the OEM side is strong, the repair side is a little softer than he'd like to see it.
Bray also believes the disaster in Japan could affect his company's ability to deliver products later in the year. Some of the components of his machine tools are manufactured in the hardest hit parts of Japan, and he is currently working off his internal inventory.
"Once those inventories run out, we may have some problems getting components," Bray says. "But that wouldn't happen until the second half of the year."
AMT's McGibbon, however, remains optimistic.
"We don't do forecasting ourselves, but the people we listen to are telling us that the market in 2011 will increase somewhere between 20% and 30%," McGibbon says. "I personally believe it's going to be closer to 30%."
McGibbon says the robust market has a lot to do with the aging of equipment. Between 1992 and 1998, U.S. manufacturing replaced most of the outdated equipment that had been purchased 20 years before. Then from 1998 to 2004, there was a lull in machine tool purchases. After 2004, the market started to come back before the 2008-2009 recession cut it off at the knees.
"It's time to replace some of the equipment that was purchased in the 1990s, and that's what we're seeing now," McGibbon says. "That's why we're so bullish on what we think we'll see in 2011 -- there's still a lot of equipment out there to be replaced.
"What the surge also means is that we're getting a lot more productive equipment into the field," he adds. "That's going to improve our overall manufacturing efficiency and productivity."
The Global Market
The improvement in the domestic market is mirrored globally, at least according to one report. A Global Industry Analysts' report titled "Machine Tools: A Global Strategic Business Report," predicts the world machine tools market will hit $80.7 billion in just four years.
The report examines the machine tool market's recent weakness through the recession.
"Changes in production, capacity utilization, capacity expansions and the level of business confidence strongly influence demand in the marketplace," the research states." "Therefore, the machine tools industry confronted its toughest challenge ever thrown up by the financial-crisis-induced world economic recession.
With the recession receding, there is the same resurgence in growth fundamentals that is fueling the growth in the domestic U.S. market.
"The sheer diversity of application areas for machine tools, ranging from aerospace, automobiles, process industries (wind-power generation to mining) and oil exploration industries, will ensure a quick recovery," the reports says.