Can US Precision Machine Manufacturing Survive? – Part 3

Given this (previously described) situation, what are the strategies and courses of action a precision machining manufacturing company can take, to survive and prosper?
business developmentLet’s take a look at the first factor “a maturing industry.” What are the signs indicating that that an industry is maturing? Usually when an industry matures the total available market (TAM) for the industry grows at only (or less than) the rate of growth of the economy. This effect has been accelerated in the US by a significant amount of off-shoring.

Off-shoring has brought with it serious price competition which has caused local markets in the US to shrink significantly. US precision machine shops have found themselves job-shopping in local markets to stay alive. The industry battered by a trifecta of problems, maturation, off-shoring and recession recovery has become a very competitive environment.

The typical precision machine shop’s response to the situation is to compete for business on the basis of price, quality, and customer service. Many companies try to use Lean concepts to improve throughput, efficiency, and delivery time to the customer, as competitive levers. It is difficult to gain competitive advantage by employing methods which most all of your competitors are also using.

This is clearly a situation where companies must innovate their way to growth and profitability. Otherwise companies will find themselves in situations of divestiture, with aging capital assets (e.g. CNC machinery) not capable of providing necessary levels of productivity. In fact these companies will be on long term downward spirals to liquidation.

Michael E. Porter (Harvard) in his famous work on strategies postulated that there are only three macro strategies available to a business:

1. Creating Cost advantages
2. Creating Differential advantages versus competition
3. Specializing in and addressing niche markets

The Precision Machining Industry can be fairly described to be acting as a perfect market, with ease of entry and exit, and ‘perfect competition’ within; (G. Stigler “Perfect Competition, Historically Contemplated” – 1957). The difference (from classical perfect markets) is that it is not the products manufactured that have become commodities, it is machine-hour, materials, and skill level applied that have commoditized.

This level of commoditization, and the fact that companies do not compete directly with each other forces them to compete with the current price in the marketplace. Given the large number of potential suppliers, buyers have the ability to purchase from numerous suppliers at or close to the market price. This results in suppliers working with extremely small profit margins.

Opportunities for sustainable cost/competitive advantages in US markets are limited:
o   Technology and knowledge is stable and well diffused throughout the industry
o   The industry has ease of entry and exit (divestment)
o   Companies typically resist RIF’s and divestment to lower OHs
o   Cost advantages due to economies of scale are greatly affected by foreign competition
o   Difficulties in gaining advantages from material sources and supply chains
o   No differential advantages via efficiencies (e.g. Lean processes (now a requirement)
o   New competition; internal to the customer, due to company divestments (do it yourself)
o  The Reward/Risk ratio and capital availability problems prohibits the acquisition of new and more productive capital assets