U.S. Machine-Tool Makers Split on Renewing Import Restraints
A renegade machine-tool maker here is taking potshots at its mainstream U.S. competitors, triggering a nasty argument over how Uncle Sam should nurture the struggling but strategic industry.
Portraying itself as the leading edge of the metal-cutting business, Hurco Cos. Inc. is opposing its own industry’s effort to win continued protection from Far East imports and is calling for no-holds-barred competition.
Hurco’s unusual position has enraged the industry’s lobbyists as the deadline nears for the Dec. 31 expiration of “voluntary” restraints on machine-tool imports from Japan and Taiwan.
Hurco’s critics belittle it as a minor player that just wants to buy cheap overseas machine hardware--not the sort of company to rely on when tools are demanded to cut metal for tanks, planes and other implements of national defense. An executive at one of the nation’s biggest machine-tool makers, Cincinnati Milacron Inc., accuses Hurco of spreading “vicious lies” in its highly public campaign against the import restraints.
But as a leader in making the computer controls that tell today’s sophisticated machine tools what to do, Hurco says U.S. trade policy is unwittingly penalizing the high-tech and protecting the low-tech parts of the domestic industry--and giving Japan a U.S. manufacturing foothold to boot. It is a compelling argument to some.
“I think it’s refreshing to see,” says analyst F. John Mirek, who follows machine tools from Milwaukee for Kemper Securities Group Inc. “They’ve put their money where their mouth is, improved the speed and accuracy of their machines, and they’d love to see the restraints come off so they can compete head to head.”
It is rare for a company to break ranks so loudly with its own industry. But this family brawl reflects today’s brutal climate, and it offers a peek at machine-tool makers scurrying down their own paths to survive in the global marketplace for their critical but little-known products.
The backdrop includes a competitive onslaught by Japanese machine-tool makers who have now erected factories in the United States and, ironically, support an extension of the import limit because it protects them too.
And though the machine-tool imbroglio might become a mere U.S. pawn in trade-policy debates over bigger fish, such as agriculture and automobiles, it poses stark questions about this nation’s shrunken manufacturing base and how it can penalize U.S. competitiveness.
The flight of manufacturing to off-shore sites has transformed the United States into a minor user of machine tools: The nation consumes just 10% of the world’s output and produces only 7% of it.
Even the export-driven U.S. manufacturing recovery of the past few years has been made possible partly by the use of foreign technology, including Japanese-designed machine tools. This has formed a vicious circle for machine-tool firms, says Hurco Chairman and Chief Executive Brian D. McLaughlin.
Describing Hurco as more internationally minded than other U.S. firms--half its revenue comes from overseas customers--McLaughlin argues that the U.S. machine-tool market has become so small that success abroad is the only way a domestic company can grow large and strong enough to achieve technological leadership.
“And the VRAs are an impediment to selling our product overseas,” McLaughlin says, referring to voluntary restraint agreements that restrict imports.
Indeed, the import issue is bigger than the industry. Fewer than 600 machine-tool companies with barely 70,000 employees--down 40% from a decade ago--operate in this country today. The industry shipped $4 billion worth of products last year, about what General Motors sells in 12 days.
But these complex machines cut and shape the components that make up anything with metal in it--the guts of virtually all machinery. As such, the machine-tool industry has long been recognized as fundamental to an industrial economy and to national defense.
In the early 1980s, the Japanese used their better technology, spare capacity and a cheap yen to grab half the U.S. market for machine tools. In response, the Reagan Administration decided in 1986 to protect the domestic industry as a “vital component of the U.S. defense base.”
The White House negotiated a five-year VRA with Japan and Taiwan, limiting imports of lathes, milling machines, machining centers and punching machines--equipment that accounts for about 40% of U.S. machine-tool output.
The agreement, which ends Dec. 31, was intended to give the domestic industry time to rebuild and invest in new equipment and technology so it could combat the growing reliance on foreign machine tools.
Since then, U.S. machine tools have recovered some, but the reasons are disputed. The machine-tool lobby credits the import restraints for a decline in foreign market share since 1986. Still, Hurco and some economists say the weakening of the dollar against the yen had far more to do with Japan’s falloff--and the U.S. industry’s return to profitability--by making the Japanese equipment more costly versus domestic products.
More recently, the recession slashed machine-tool sales for everybody, dropping imports below their quota and making VRAs irrelevant for now. But a three-month surge in new orders through August has raised the stakes as Dec. 31 approaches.
The industry trade group cites figures to show that its members have used the past five years to boost capital spending and improve their competitiveness, as they were supposed to. But the machine-tool makers say the job is not complete. They are asking for up to five more years of protection.
Leafletting the Bush Administration with a long list of weapons systems provided by U.S. machine tools for the war against Iraq, the National Machine Tool Builders Assn. says: “The stark question before U.S. policy makers . . . is whether the companies who helped provide America’s victory in the Gulf War will be around to provide the weapons America needs to win the next conflict.”
As for Hurco, it is dismissed by James Mack, vice-president of government affairs for the trade group, as “somebody in Indianapolis who’s pissed off because he can’t bring in enough cheap Taiwanese iron to put his controls on.”
The White House hasn’t decided what to do about the VRAs, an Administration spokesman said last week.
Founded in 1968, Hurco says it was the first to slap a microprocessor on a U.S. machine tool, and the electronic “brains” of machine tools have been its strong suit ever since. The company imports the “iron” or hardware, which it equips with its Indianapolis-made computer numerical controls. The result is mid-sized, moderately priced machines noted for being easy to use. Hurco’s controls are highly regarded, and analysts say its sales have made it No. 2 behind Fanuc Ltd. of Japan, the world leader in controls.
Its narrow product line and the practice of importing the hardware set Hurco apart from old-line firms such as Cincinnati Milacron, which buys domestic hardware for its broader range of machines in addition to making most of its own controls.
In this dispute, Hurco has an ax to grind because of its past reliance on Taiwanese hardware: The VRA has forced it to get iron elsewhere at higher prices. This has slashed its profit margin by 15% and fouled access to countries that consider the U.S. trade restraints hypocritical from a “free-trade” nation, the company tells anyone who will listen.
Compared to Hurco’s own software and controls, developed in joint ventures with semiconductor giants Intel, Texas Instruments and others, the company and its supporters call the hardware little more than a commodity that’s not worth trade protection.
“Preserving yesterday’s technology in a ‘museum’ of companies than can no longer compete on a world basis in no way serves our national defense,” says Hurco’s McLaughlin.
Replies Daniel J. Meyer, chairman and chief executive of Cincinnati Milacron: “Hurco likes to diminish the value of the (hardware), but that’s like saying we should just import airframes from Taiwan and add avionics to them here. The hardware is very high tech.”
The give-and-take goes on. Hurco charges that some of the industry’s loudest supporters of VRA are “cynically” buying control systems--which are mostly exempted from import limits--from Japan. This makes a mockery of the national-defense rationale for limiting imports, the company says.
“That is one of their most vicious lies,” replies Christopher C. Coles, Cincinnati Milacron’s vice-president for strategy and business development. It does use foreign controls--usually from industry leader Fanuc Ltd. of Japan--when customers insist on it, which is about 5% of the time, he says.
Sniffs Meyer, “Our controls division alone is probably equal to the whole Hurco company.”
The controls they are arguing about enable an operator to draw dimensions of, say, a helicopter blade on the screen of a powerful personal computer, which instructs the machine’s cutting apparatus, elevating the machine tool to new levels of precision.
Hurco and one of its chief competitors, 1982 start-up Fadal Engineering Co. of North Hollywood, became rising U.S. stars in the world of machine tools during the 1980s by finding ways to compete against low-cost producers from not only the Far East but Mexico, Turkey, Poland, Germany, Switzerland and other nations.
There’s one big difference between Hurco and Fadal, however: The family-owned California firm not only develops its own computer controls but gets its hardware from U.S. foundries--and manages to undercut nearly everybody on price with its no-frills machines.
Professing not to care about the VRA, Fadal co-owner Adrian Caussin says, “I don’t need it to compete. But we as a matter of principle would not import the iron. The United States is losing its foundry capacity, and this is vital. We buy only domestic castings.”
Responds Hurco investor Richard T. Niner: “We’ve looked all over this country for iron, and it’s more expensive. If it doesn’t work economically, it won’t work for national defense purposes either.”
While the debate rages, several Japanese machine-tool makers--mirroring Japanese auto makers, which responded to a VRA on cars in the 1980s by building factories here--have begun making their machines in places like North Carolina and Kentucky. Now they’re quietly supporting a continuation of VRA because it protects their big share of the U.S. market.
Japan’s arrival might not be comforting for U.S. machine-tool makers in the marketplace, but it helps for the moment in the political arena because it suggests that VRAs have worked: They resulted in new capacity for making machine tools on U.S. soil after years of shrinkage.
GROWING IMPORTS OF MACHINE TOOLS
Foreign machine tool makers, principally from Asia, gained a greater share of the U.S. market in the early 1980s largely because of the then-strong dollar, lower costs, better technology and, some contend, unfair trading practices. But the imports’ share has leveled off in recent years.
