Industrial Automation 21st October 2019

Bleak Global Manufacturing Outlook – Machine Tools Market on Crash Course

Tim Dawson
Adrian Lloyd
CEO & Senior Research Director - US

Adrian is a 20+ year veteran of technology research and has pioneered many data analysis techniques that are used widely by analysts today. He brings his expertise to many technology markets from industrial automation products to semiconductors.

Sluggish economic activity in multiple major economies exacerbated by the US-Sino trade war, Brexit, and trade difficulties between Japan and South Korea is taking a significant toll on manufacturing output. Interact Analysis expects the manufacturing outputs of Germany, the United States, and China to grow -4.1%, 0.2%, and 1.8%, respectively in 2019 based on our Manufacturing Industry Output (MIO) Tracker. Figure 1 shows our total outlook for manufacturing by major region.

Worryingly, almost all the sectors that the MIO tracks are struggling, with capital-intensive industries being most at risk. The machinery industries that are suffering the most are machine tools, rubber and plastics machinery and pulp and paper machinery, all expected to be down by about 4% or more globally this year (see Figure 2).

Based on detailed interviews with industry, it is likely that the current market activity for machine tools is being driven by a large order backlog. Typically, machinery companies rely on having a backlog of orders so that when the economic situation worsens, they are buffered from the worst of it. However, the magnitude of the current downturn is much worse than previously expected and so the backlog they have is not enough to shield companies from decline.

This assessment is backed up by the details of order books and press releases from machine tool industry associations. For instance, in October the JMTBA (Japanese Machine Tool Builders Association) released a report which stated that in August 2019 their members had received only 63% of the orders compared to what they had received in August 2018. This would be okay in isolation except that orders for this year are so far at 69.4% of the orders compared to the same period in 2018.

Similarly, CECIMO reported that machine tool orders were down 14% in Q1 2019 compared to Q1 2018 in the 8 largest machine tool manufacturing countries in Europe. This is not being so strongly felt right now as there’s currently enough of a backlog to sustain the machine tools vendors market position. However, if orders keep coming in at a significantly lower rate then we will eventually reach a point where the demand for machine tools is lower than the rate of supply and the market will shrink. Consequently, it’s unlikely the market will continue to withstand the stress it’s currently under.

In China, the machine tool market rapidly developed over the past 10 years; however, the industry has seen a recent downward trend relative to the meteoric growth observed previously. In the second half of 2018 growth tightened significantly and this trend has continued into 2019, so that for the first time we expect to see a market contraction.

There are two key reasons for this, which are symptomatic of the global market as a whole. Firstly, the key end-user markets for machine tools have been experiencing very poor performance since mid-2018 (see Figure 3).

Secondly, almost all Chinese machine tool products were covered in the list of goods which the United States’ administration imposed tariffs upon. This unexpected increase in the cost of imported goods is a key contributor to the sector’s poor performance this year as it’s driving down demand from the US.

Machine Tools are a key component of the manufacturing ecosystem and are especially prolific in automotive and metals production. The Interact Analysis outlook for machine tools in automotive is that the short-term is expected to be poor to very poor. We expect the overall machine tools market to be down by over 8% globally in 2019. The MIO dataset shows how closely correlated the performance of machine tools is to automotive production: small drops in production can have large effects on the market for machine tools. (see Figure 4).

A further challenge is the shift to electric vehicles. Why is this important to the machine tools market? Put simply, a movement towards electric cars will have significant negative effect on the market for machine tools. One of the most abundant uses of machine tools in the automotive industry is the creation of high precision components such as gearboxes, engine cylinders and chassis parts. A move towards electric vehicles which have fewer moving parts puts significant pressure on automotive machine tool vendors.

Insight from Interact Analysis’ Lithium Ion Battery Report means we can state with confidence that investment in automotive battery production is at an all-time high. For instance, CATL (which is one of the top cell makers in the automotive sector) recently had an IPO which raised US $2 billion; US$1.4 billion for production lines and US$0.6 billion for automotive and energy storage research and development. Investments of this magnitude are clear indicators of the longevity and potential of automotive battery research and production and is indicative of the direction the market will trend moving forwards.

Despite the negative outlook, there may be an opportunity for market growth for some vendors of machine tools. Driven by a need to reduce emissions in conventionally powered vehicles and maximise range in electric models, automotive manufacturers are looking for ways to ‘light-weight’ their vehicles by reducing component weight and size.

Aluminium is an ideal alternative material for automotive use as it is lighter than steel with only a small loss in strength. Aluminium casting technology can be used to produce complex components, including parts for new drive technology such as internal transmission parts, housing structures for parts and energy recovery components; as well as parts of the chassis which were originally made of steel. To cope with this shift, companies will need machine tools to mill and manipulate aluminium. While this may make up for some loss in production of machine tools caused by the progression of electric vehicles, it will not replace the original situation and so there will inevitably be a major slow down or possible decline of the machine tool market in the long-term.

Towards the end of 2019 and into early to mid-2020 is where we will most likely see the largest effects of order books being down. Longer-term we expect some recovery; however, this is highly dependent on end-market company investment decisions. Given that machine tool market performance is tied heavily to ICE automotive production, if investment in electric personal and commercial vehicles is getting progressively higher, there is less need for heavy machine tool investment in the automotive industry.

In all cases we expect negative growth that will be felt especially heavily in Germany, Japan, and Korea in 2019 (see Figure 5). For now, we predict a recovery and stabilisation in the mid- to long-term in keeping with the general economic cycle but, as stated previously, this is highly dependent on company investment decisions and will need to be monitored closely. Watch this space.

If you’d like to learn more about the Manufacturing Industry Output (MIO) Tracker then you can download a free sample report and brochure here

Posted in: Industrial Automation.