A LOOK At 2003: Some Improvements, But Changes Must Be Made

The top official of the Precision Machined Products Association is expecting 2003 to be a year in which his industry could see some recovery, but he cautioned that many member companies shouldn’t believe that good times will come back and that they can expect a plethora of incoming orders.

The top official of the Precision Machined Products Association is expecting 2003 to be a year in which his industry could see some recovery, but he cautioned that many member companies shouldn’t believe that good times will come back and that they can expect a plethora of incoming orders.

Pete Rosenkrands, president of A.B Heller, Milford, Michigan, and current president of the PMPA, warns precision machined parts producers, which have historically relied on less expensive, volume-oriented products as their bread and butter, to begin considering moving up the value chain to save themselves from extinction.

Mr. Rosenkrands made his comments on the heels of the release of the PMPA’s annual forecast, which is projecting an optimistic business increase of 5 percent over 2002 figures. According to the author of the forecast, Art Langdon, PMPA’s director of statistics and financial management, that increase could be spoiled by several unknowns, including everything from war to additional terrorist attacks to further erosion of our markets by China and India.

2003 Is A Basketful Of Unknowns

“It’s just a basketful of unknowns,” Mr. Langdon says. “The only known is that China is eating our lunch.”

Those factors, as well as consumers’ perceptions of the stock market’s performance and production levels in the auto industry, could determine whether precision machined products companies have a bountiful year or a barren one, says Mr. Langdon, who is projecting growth in a number of important markets for the industry, including:

  • Gas appliances for home and industry
  • Home appliances
  • Machine tool production
  • Fluid power equipment
  • Other industries that also should see upswings this year include
  • Farm machinery and equipment
  • Electrical equipment
  • Pumps and compressors

The PMPA forecast is projecting slight downturns in automotive and aerospace.

Nonetheless, Mr. Langdon says that, overall, the precision machining industry could see a 5 percent increase, which translates into a rise of eight points in the PMPA Index of Sales that employs 1992 as a base year.

Mr. Langdon says, “this figure is a little optimistic over our gut feeling,” which was more of a 3 percent increase. “But some of the major industries we serve (automotive and housing) continue to hold up fairly well. The others look for a turn-around or a better year than they had last year.”

[For a comprehensive view of current and future economic conditions, as well as a look ahead at the precision machined products industry in 2003 and beyond, PMPA members should review the complete PMPA 2003 Industry Forecast available on the PMPA Web site.]

Mr. Rosenkrands agreed with Mr. Langdon that his projections could be optimistic, pointing out, “The picture can change considerably depending upon what happens” in world events in the coming months.

The Challenge: Move Up The Value Chain

Mr. Rosenkrands also threw out a challenge to his industry brethren, especially PMPA members, saying those in the low-end of the market ought to begin considering moving up the value chain to insulate themselves from price-sensitive products.

There’s no question, he says, that large-dollar, high-volume parts that had historically been a part of the industry’s product mix “will go overseas.” As a result, “people competing strictly on price are in for a surprise” when their customers and their markets are taken away by the Chinese and Indian precision machined products industries. Even the value-added services North American companies may provide for those parts are not going to be enough to make up for the “disparity in labor costs” that exists between domestic companies and their offshore counterparts.

“So the member companies that are doing what they have always done are going to get beaten up,” Mr. Rosenkrands says. “It’s going to be a very disconcerting period for them . . . they can get some kind of reprieve if the economy does heat up again. And if its 5 percent, they will probably feel for a while that things are back to the old days. But it won’t be long before they’re back in the same old spot again” of having to ward off foreign competition.

Mr. Rosenkrands says the decisions companies make today about capital investments in their facilities and equipment should be driven by asking “what portion of the products the customer is producing can be made overseas, and what portion of the products they make for that customer cannot be made overseas.

“I’m not saying it’s easy to see the answers to those questions, but if they make it part of their agenda, it will be easier in the future for them to compete,” Mr. Rosenkrands says. “If people don’t want to go into high-value products, my advice would be to sell and get out of this business during the next upturn when buyers might be found. I know that sounds a little rough, but that’s the reality of what we are facing.”

Finding The Right Niches

The PMPA president says companies also have to examine their markets and find niches or segments where there is innovation in the products being produced. While that could be aerospace and medical instruments, he says that innovation also exists in the more traditional markets the precision machined products industry has served over the years.

“There are many niches for people who are willing to look at new ways of doing things,” he says.

Those market segments also are where North American companies hold an advantage over much of the cheaper priced foreign competition—at least for the time being. “You just don’t take people off the rice paddies and turn them into machinists. It will take a generation,” he says.

The loss of the price-sensitive segment of the market probably happened more quickly with the advent of reverse auctions, such as those conducted by Free Markets. “With information getting around faster through the Internet, they can blanket a whole segment of the economy with information quickly and efficiently. The effect is to speed up the process of price reductions faster than we ever anticipated,” Mr. Rosenkrands says.

With the economic shackles having been pulled off China in the last 20 years, the development of India’s economy and the boom of other developing nations, we’re going to face an inevitable eroding of our manufacturing here that will see some markets all but disappear, he adds.

As a result, precision machined products companies need to communicate with each other like they never have before, Mr. Rosenkrands says. That means executives of non-PMPA companies should strongly consider membership in the organization to take advantage of its networking capabilities and the information it has to offer.

“People need to communicate with each other on where to go next and where not to go next, which is probably more important. Where to go in the marketplace is wide open,” Mr. Rosenkrands says. “My hope is companies that become members will gain an advantage over non-members through member services and networking, and that the membership will, as ­a result, help guide them to invest in the right direction, find niches and stay away from places where they can become a victim. If industry in North America has to lose companies to foreign competition, it’s my goal to have them be non-members.”