Can US Precision Machine Manufacturing Survive? – Part 4

business developmentThe effect of commoditization of products and services in the industry makes them somewhat subject to the “law of one price” the price dictated by the market. ‘The law of one price’ is an economic hypothesis saying that the price of commodities are the same in different markets.

Given the effects that the internet has in bridging geographical differences, and the low cost of transportation, it is probably more correct than not to consider that this pricing law is in effect in the precision machined products industry markets.

The following graph shows sales of precision machined products (as an index) in the US from Q1, FY- 2008 through Q1-2014. The index data was compiled by the Precision Machined Products Association (PMPA):Sales Index Precision Maching Industry

The industry experienced a significant downturn in business starting in (Q2 – 2008) as a result of ‘The Great Recession.’ The market subsequently recovered to its 2008 level in ( Q4 – 2011). Since Q4 – 2011 the annual total industry sales have been essentially flat through Q1 – 2014. During this flat sales (AMT) period the US Economy (GDP) grew at an average rate of 3.5% per annum. Confirming (to some extent) that the PMPI could be in a maturing phase.

The situation described in these data is one of an industry that is being forced to develop new paradigms for doing business, due to environmental changes. The data may also be indicating a seasonality factor via sharp downturns in business (~20%) in the last quarters of the previous two years. As the old saying goes “one swallow does not a summer make,” meaning that seasonality is not a given but is something to be aware of, and considered.

Given the pricing situation just discussed, Porter’s strategy # 1 “Creating Cost Advantage” would not be a viable strategy for companies competing in the general PMPI market. Companies servicing this market will therefore have to seek to create differential advantages, or discover niche markets that can be profitable to penetrate and defend.