Main content Integrative Case 2.3 The Machine Tool Industry: International Trade and US CompetitivenessFootnote United States Department of Defense In the Department of Defenses 2020 annual report to Congress on US industrial capabilities, the machine tool industry is highlighted as an area of concern. In this industry, China and the United States are the top two consumers (China #1, the US #2) and both have the highest trade deficit (the US #1, China #2). What are the major risks and issues stemming from a lack of US competitiveness in this industry?

A machine tool is a power-driven machine that shapes or forms parts made of metal or other materials (e.g., plastics, composites) through processes including: turning, grinding, milling, stamping, drilling, forming, extrusion, injection molding, composite deposition, and additive manufacturing techniques. Modern machine tools leverage sophisticated industrial control systems, process parameter monitoring systems, and networked sensors. They incorporate advanced materials and precision components, as well as advanced lubricants, bearings, sensors, and coatings.

Machine tools provide the factory floor the foundation for leveraging advances in robotics, high precision automation, specialty materials, precision components, and additive, subtractive, and hybrid machining. Because machine tools support both prototyping and production operations for virtually all manufactured products, every commercial and defense manufacturer is a stakeholder in this industry.

The global machine tool industry is mature, but involves continuous innovation of new capabilities and features that drive competition. As Exhibits 1 and 2 show, in FY2019, China was the largest producer and consumer of machine tools. China designs, builds, and sells large volumes of relatively low-cost machine tools for consumption in the global market, and imports high-end machines from more advanced regions (notably Japan, Europe, and the United States).

Thus at the heart of the industrial health of any nation is its machine tool industry. It is no coincidence that the erosionthus of the machine tool industry parallels the decline of domestic manufacturing.

Footnote Exhibit 1 FY2019 Top 20 Machine Tool Consumers (Billimanufacturing domestic on $) A horizontal bar graph depicts Top 20 Machine Tool Consumers in Billions of dollars for financial year 2019. The horizontal axis ranges from 0 to 25 in increments of 5. The vertical axis lists 19 countries. The data from the graph are as follows. Austria: 0.9; Turkey: 0.9; Poland: 0.9; Thailand: 1.2; Switzerland: 1.2; Vietnam: 1.2; Canada: 1.4; France: 1.5; Taiwan: 1.7; Russia: 1.8; Brazil: 2; Mexico: 2.5; India: 2.6; South Korea: 3.2; Italy: 4.4; Japan: 6; Germany: 7.9; U S A: 9.7; China: 22.3. Exhibit 2 FY2019 Top 20 Machine Tool Producers (Billion $) A horizontal bar graph depicts Top 20 Machine Tool Producers in Billions of dollars for financial year 2019. The horizontal axis ranges from 0 to 25 in increments of 5. The vertical axis lists 20 countries. The data from the graph are as follows. Singapore: 0.54; Thailand: 0.57; Czech Republic: 0.64; Russia: 0.64; Turkey: 0.66; Canada: 0.67; U K: 69; France: 96; India: 1.18; Austria: 1.9; Spain: 1.23; Brazil: 1.62; Switzerland: 3.21; Taiwan: 3.95; South Korea: 4.47; U S A: 6; Italy: 6.51; Japan: 12.99; Germany: 14; China: 19.42. Major

Risks and Issues

Risk archetypes Foreign dependency Diminishing manufacturing sources and material suppliers Gap in US-based human capital The risks detailed in the FY2019 version of this report still apply to the machine tools industry.

The playing field is still not level. In addition to widely documented and adversarial economic tradecraft, Chinas application of economic pressure on machine tool producing countries, especially in Asia, have steered products toward China. As Exhibit 3 shows, the US has by far the worst machine tool trade balance in the list. Note that many countries with positive trade balancessuch as Japan, Germany, Italy, Switzerland, South Korea, Spain, and Austriaare hardly low-wage markets. However, all benefit from substantial national government support for machine tool industry R&D. Exhibit 3 FY2019 Largest Trade Balances (Billion $) A horizontal bar graph depicts the Largest Trade Balances in Billions of dollars for financial year 2019. The horizontal axis ranges from negative 6.00 to 8.00 in increments of 2.00. The vertical axis lists 19 countries. The approximate data from the graph are as follows. U S A: negative 3.80; China: negative 2.50; Mexico: negative 2.30; India: negative 1.60; Vietnam: negative 1.40; Russia: negative 1.40; Canada: negative 0.80; Thailand: negative 0.80; Poland: negative 0.70; France: negative 0.60; Hong Kong: 0.10; Singapore: 0.20; Austria: 0.30; Spain: 0.40; South Korea: 1.20; Italy: 2.10; Taiwan: 2.20; Germany: 6.10; Japan: 6.90.

The US machine tool industry continues to lose diversity and capacity to international competition, industry consolidation, and business failure. The economic impacts of the coronavirus pandemic have made the situation much worse for the thousands of small job shops upon which the US machine tool industry and the defense primes rely. Often, consolidations and failures have been the result of increased offshoring to low-cost providers to control costs and gain other tactical advantages. Offshoring can provide short-term benefits, but, in such cases, corporate strategies often diverge from national interest, where better information on the effect of such decisions on the supply chain may lead to more mutually beneficial proactive decisions. It is also prudent to develop an ability to rapidly standup manufacturing capability in sectors that have been downsized in the US or to develop new flexible manufacturing capabilities so that rapid reconfigurations can be realized.Footnote The US still lacks a nationwide machine tool workforce development ecosystem operating at scale and velocity. This ecosystem is needed to replenish a shrinking, aging manufacturing workforce. Scale up of the current innovation ecosystem is required to revitalize our manufacturing base and attract talent through education programs that highlight the possibilities of machining careers. DOD and national efforts to overcome this weakness must address:

1) The cost of machine tool research in terms of equipment, space, and risk;

2) The fact that machine tool research is time-consuming but produces fewer publicationsin journals with low impact factors;

Many university leaders view the machine tool industry as old technology and prefer to focus resources in new areas.

Supply chain impact, economic competitiveness, national security, and support and expansion of the innovation ecosystem are rarely considerations in university-sponsored research decisions. FY2020 Developments In March 2020, the IBAS Program and the Manufacturing Demonstration Facility at the Department of Energys (DOE) Oak Ridge National Laboratory jointly launched Americas Cutting Edge (ACE). ACE is the first in a nationwide network of regionally focused machine tool hubs. ACE has already made notable progress on three initial strategic research thrusts: develop technologies to increase productivity and efficiency of current machine tools; develop novel processes and control algorithms to enable hybrid manufacturing; and establish new machine tool metrology, designs, and controls for large components. In response to the coronavirus pandemic, ACE has also provided rapid tooling development for high-volume personal protective equipment (PPE) production, which provided key insights into control requirements for hybrid (additive plus subtractive) manufacturing.

In August 2020, the IBAS program awarded a National Imperative for Industrial Skills workforce development agreement to IACMIThe Composites Institute. This effort, which has the potential to impact all DOD manufacturing supply chains, operates in close partnership with ACE. It will implement a novel training experience that surpasses current computer-aided design/computer-aided manufacturing capabilities at the root of manufacturing.

Industry Outlook The coronavirus pandemic is leading to decreases in machine tools sales and production. Factory shutdowns worldwide amidst the novel coronavirus pandemic led to months of abnormality in the manufacturing technology industry. As a result, the US is seeing some of the lowest machine tool order numbers in the past decade. According to the Association for Manufacturing Technology (AMT), April and May 2020 produced the lowest monthly manufacturing technology order totals since May 2010.

Indicators show that the industry is now improving as factories reopen. In May 2020, Oxford Economics analysts had predicted that the industry would be down 50% for

FY2020 due to the uncertainty in the return to work across the country and worldwide. Instead, the expected loss is now half of that prediction. It is reasonable to expect that Chinas centrally planned and controlled economy and robust government support will afford it a significant short-term advantage in this area.

Last years report emphasized the importance of the linkage between the ability to conceive, design, develop, and manufacture advanced machine tools and national self-determination. FY2020s coronavirus pandemic supported that lesson in stark terms. The inability to rapidly obtain tooling to produce PPE and medicines required to keep American workers on the job crippled not only health care, but also all segments of the economy. The lack of a robust innovation ecosystem exacerbates the problem. The costs are measured not only in lost sales and production delays on major weapon systems, but also in the loss of the workers and firms that produce the products we need to prevail and thrive.

Technology Trends and Developments

For the next ten years, metal cutting tools (as opposed to metal forming or fabricating machine products), which accounted for over 97% of US manufacturing technology orders in FY2020, are also expected to be a major product line due to the expected demand from industries such as automobiles and construction. Computerized numerical control tools will drive the machine tools market due to increased automation and digitalization across industries. They improve reliability and precision, and shorten production times. New COVID-19 inspired guidelines and regulations affecting worker spacing have made these capabilities even more attractive to customers and, hence, developers.

Case Discussion Questions :

Machine tools are the backbone of manufacturing. Given that the United States has maintained strong machine tool consumption, do the data support a widely held belief that US manufacturing is in decline?

It is rare to find an industry where the worlds two largest economies have the two largest trade deficits. From a resource-based standpoint, what is unique about the machine tool industry relative to other industries such as the aircraft producing industry, the electronics industry, and the toy industry?

Why does China have the second-largest trade deficit in machine tools, although it is the largest machine tool producer in the world?

In comparison with leading machine exporters such as Japan, Germany, Italy, Switzerland, South Korea, Spain, and Austria, do they have anything unique that the US machine tool industry does not have?

Why does the report claim that the competitiveness of the machine tool industry is related to national self-determination? If so, given the current lack of competitiveness of the US machine tool industry, should the US government do something about it? If so, in what ereas?