11/24/2019 | 6 MINUTE READ

Capital Spending Survey Projects 5% Decline in Machine Tool Buying for 2020, but Spending Level Still Above Average

Originally titled '2020 Machine Tool Spending: Down, But Still Above Average'
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Machine tool buying is predicted to be down but still strong. Job shop spending is predicted to be 10% above its five-year average.

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Higher-performing shops update their equipment more frequently, so they remain apt to spend even within the possibly contracted machine tool market as the article below describes. Going further, our survey analysis shows these shops’ preference for horizontal machining centers and pallet-changing automation. This application at Mach Machine includes both: Okuma HMCs and a Fastems flexible manufacturing system. Photo: Fastems

 

Higher-performing shops update their equipment more frequently, so they remain apt to spend even within the possibly contracted machine tool market as the article below describes. Going further, our survey analysis shows these shops’ preference for horizontal machining centers and pallet-changing automation. This application at Mach Machine includes both: Okuma HMCs and a Fastems flexible manufacturing system. Photo: Fastems

In 2020, will the market for machine tools in the United States be strong or will it have contracted? Yes to both, according to our survey predictions. The 2020 Capital Spending Survey, conducted by Gardner Intelligence, projects next year’s machine tool consumption will fall by 5% compared to 2019, to $6.993 billion. But this level of machine tool buying is still above the historical average for the country’s annual machine tool purchases.

Our ongoing survey measuring business activity by U.S. machine tool users, the Gardner Business Index (GBI): Metalworking, validates a coming reduction in machine tool demand. The GBI: Metalworking peaked in February 2018. Throughout the rest of 2018 and into 2019, the index moved lower, indicating that the industry was growing at a slower rate. Then, the index contracted in July and August. These were the first two months of contraction since early 2017.

The Gardner Business Index for metalworking is coming down from its high. Peak US metalworking business activity as measured by this index occurred in February 2018.

The Gardner Business Index: Metalworking is coming down from its high. Peak U.S. metalworking business activity as measured by this index occurred in February 2018.

There was also a similar trend in our subset index of metalworking backlogs, although the backlog index started contracting this year several months earlier than the contraction began in the total index. The likely reason is that machine shops were keeping production levels elevated by filling their backlog orders as new orders started to slow down. This type of activity is an important early warning sign of contraction in the metalworking industry.

 

Backlogs lead machine tool orders

Backlogs lead machine tool orders. After the one drops, meaning shops are working down their backlogs because new work has slowed, a drop in machine tool orders generally follows.

Finally, other leading indicators, such as durable goods industrial production, capacity utilization and new orders indicate that manufacturing and the machine tool industry will see a contraction in 2020 (or they might be in one by the time you read this).

If true, this will be the second straight year of falling machine tool consumption, but again, remaining above the historical average for this buying as measured since 1937.

2020 machine tool consumption is projected to decline 5%

2020 machine tool consumption is projected to decline 5%. This level of buying is still above the historical average.

The strength comes from certain places. Even though the projection is down for 2020, there are pockets of strong spending on machine tools. Looking at the current spending projection versus its previous five-year average gives us an idea of the parts of the market that are projected to see higher than usual spending. One of these is job shops.

Big Spenders

Because there are more than 20,000 of them in the United States, job shops are always the largest spending industry category. Job shops plan to spend more than twice as much on machine tools as any other end market next year, and the projection for job shops is approximately 10% above its five-year average. Of the top seven projected industry categories for 2020, six plan to spend anywhere from 3 to 15% more than their five-year average. Aerospace is the only one of the top seven industries with projected spending below its five-year average.

Machine tool buying projections by industry category, largest of which is job shop

Machine tool buying projections by industry category. Vertical marks are five-year averages for that category.

Mid-size plants are projected to spend significantly more in 2020 than they have the past five years. The projection for machine shops with 20-49 employees is roughly 40% higher than the five-year average spending in those facilities. Also, machine shops with 50-99 employees plan to spend about 15% more in 2020 than their five-year average.

Is the Prediction Accurate?

Over the last six years, our survey projection has missed actual machine tool consumption by ±5% on average. Given the trends in the leading indicators for durable goods manufacturing generally and metalworking specifically, it is likely that any error in our forecast for 2020 will tend to overstate machine tool consumption. That is, actual machine tool consumption in 2020 is more likely to be lower than the projection rather than higher. If actual machine tool consumption comes in 5% lower than the projection, then consumption in 2020 would be $6.6 billion.

Across a longer time span of more than 20 years, the average error rate of our machine tool consumption survey has been ±17%. The increased error rate accounts for the fact that some years within this time span included major economic, political or societal events such as the dot-com bubble bursting or the Great Recession. Next year, if the trade war between the United States and China heats up, then there could be a larger contraction in U.S. machine tool consumption. A miss of 17% from the current projection would put 2020 U.S. machine tool consumption at $5.8 billion.

Best Shops Still Buy

A different survey we run, Modern Machine Shop’s Top Shops survey benchmarks machine shop performance. It reveals another way of visualizing not only the machining facilities that will be buying machines in next year’s (likely) contracted machine tool market, but also the types of machines they will be buying. Simply put, this survey has found that the best performing facilities are routinely looking for opportunities to add equipment, whether it is a new machine tool or some type of automation to increase productivity. Gardner Intelligence analyzed the more than 3,000 shops that have participated in the annual Top Shops benchmarking survey since 2012 to see how capital equipment investment correlates with their revenue and profit margins.

First, we looked to this multi-year data to compare U.S. machine shops on gross sales per machine. The top 25% of shops by this measure reported a gross sales per machine of at least $278,000, while the bottom 25% were below $10,000 in gross sales per machine. In the top 25%, the median shop spent $450,000 last year on capital equipment compared with $40,000 at the median shop in the bottom 25%. Which machines? The shops in the top 25% were much more likely to invest in a horizontal machining center or pallet-changing automation suited to unattended or lights-out machining.

We also compared machine shops on gross sales per employee. The top 25% had a gross sales per employee of at least $180,000, while shops in the bottom 25% had gross sales per employee less than $10,000. Gardner Intelligence found a nearly identical investment strategy for machine shops that had high revenue per employee as the shops that had high revenue per machine. The median shop in the top 25% of gross sales per employee spent $400,000 in the last year on capital equipment compared the median shop in the bottom 25% that spent just $20,000. Equipment choice was the same, notably a preference for horizontal machining centers.

Finally, Gardner Intelligence compared machine shops on profit margin. The top 25% of machine shops by this measure had a profit margin of at least 14% compared with the machine shops in the bottom 25% that had a profit margin less than 0%. The difference in the amount invested in capital equipment wasn’t as large as the difference described above, but it was still quite significant. The shops in the top quartile of profit margin spent $200,000 last year on capital equipment versus just $60,000 for shops in the bottom quartile of profit margin.

It's also worth noting that shops in the top quartile of profit margin have newer machines than shops in the bottom quartile of profit margin. The average age of the machine tools in the median shop in the top quartile of profit margin is just five years compared with 10 years for the median shop in the bottom quartile of profit margin.

All of this points to the nature of the spending that is likely to remain if some machine tool spending is lost from this year to the next. The highest-performing shops continue spending on newer equipment whether market conditions at large are up or down.

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