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Anti-Friction Bearings 1993
National Security Assessment of the Anti-Friction Bearings Industry
In August 1988, the Office of the Secretary of Defense issued a Defense Federal Acquisition Regulation (DFAR) that required that all Department of Defense (DOD) purchases of antifriction bearings (except ball bearings under 30 mm outside diameter) should be limited to U.S. or Canadian sources. The DFAR was established to address DOD concerns regarding the erosion of this defense-critical industry.
The DFAR was established for a three-year period, with provision for a two-year extension if necessary. In September 1991, Deputy Defense Secretary Atwood announced an extension for 15 months to the end of 1992, during which time the industry's competitive viability and the impact of the DFAR could be assessed. (In the FY 93 National Defense Authorization Act, Congress subsequently directed that the DFAR be extended for a three-year period.)
In January 1992, DOD requested the U.S. Department of Commerce, Bureau of Export Administration, Office of Industrial Resource Administration (OIRA) to assist in its study effort. To gather information for this assessment, in May 1992, OIRA distributed a survey questionnaire on a voluntary basis to all known bearing producers in the United States. Survey respondents represent about 90 percent of 1991 industry shipments and employment.
Most bearing companies reported that the DFAR had a positive impact on their production capacity, employment, investment, R&D and profitability. In addition, the companies commented that the DFAR improved entree to defense prime contractors, increased awareness of U.S. bearing producers' capabilities, and supported U.S. maintenance of technological proficiency in superprecision bearing production. Some companies replied, however, that the effects of the DFAR were at times overshadowed by the negative impacts of defense cutbacks and the current economic downturn.
Eliminating the DFAR at this time would have a very detrimental impact on the defense superprecision bearings sector. The impact would be less pronounced on firms producing lower precision bearings, although it could severely impact their defense divisions by expanding competition in a shrinking market.
DOD is the major market for superprecision bearings, accounting for over 36 percent of superprecision shipments in 1991. Direct and indirect defense requirements for all antifriction bearings, however, currently account for about 10 percent of the value of bearings produced in the United States, down from close to 15 percent in the mid-1980s.
From 1979 to 1987, more than $1 billion (over 20 percent) of U.S. bearing production capacity was retired, leaving U.S. capacity at a 30-year low. Since 1987, the antifriction bearing industry has undertaken a major expansion in capacity as firms invested large sums of capital into new plant and machinery. The expansion is projected to continue for several more years, although future investment plans may be modified in light of changing business conditions. Bearing production capacity in units increased 18 percent from 1987 to 1991, and is projected to increase another seven percent by 1995.
Much of the expansion was undertaken by foreign-owned bearing companies who are expected to account for two-thirds of capacity added in the 1987-95 period. In terms of value, foreign-owned bearing firms account for about half the expansion because of lower unit values of ball bearings - their area of highest concentration.
Superprecision bearing capacity rose 16 percent from 1987 to 1991, and is projected to increase another 12 percent by 1995. However, almost all of the reported gain in superprecision capacity is dedicated to lower-value non-aerospace/military applications, such as bearings for machine tool spindles, or small high-precision ball bearings used in computer disk drives.
Regular precision ball bearing production capacity increased from 191 million bearings in 1987 to 285 million bearings in 1991. Most new investment was undertaken by foreign-owned firms. Capacity is projected to reach 337 million by 1995, for a total increase of 77 percent. In dollar value, the increase between 1987-1991 is estimated to be $238 million, up 29 percent. Another $170 million in new capacity is anticipated by 1995. About 70 percent of ball bearing capacity is foreign-owned.
Roller bearing production capacity is projected to expand 11 percent by 1995. While the total unit expansion is 66 million bearings, the total value increase is $685 million - a 25 percent increase. Tapered roller bearings, up 24 percent in units, show an estimated $133 million increase (1987-1995). The highest degree of foreign ownership (over 70 percent) is in spherical roller bearings.
Overall bearing shipments peaked in 1990 at $4.1 billion, before falling to $3.8 billion in 1991. Radial ball bearing shipments in 1991 ($703.9 million) are nearly 20 percent above their 1987 level, reflecting newly installed production capacity and displacement of imports. Angular contact ball bearings also experienced strong growth over the period as several major firms installed relatively high-valued wheel hub unit capacity. In the roller bearing segment, tapered roller bearings also displaced imports, and showed growth over the period, peaking at $977 million in 1990. Needle roller bearing shipments (used extensively in motor vehicles) have been flat since 1987.
Bearing import penetration was 22 percent in 1991. This percentage changed little over the 1987-1991 period, ranging from a 1987 low of 19 percent to a 1989 high of 23 percent. Bearing imports increased over the period from $758 million in 1987 to $893 million in 1991, with a peak exceeding $1 billion in 1989. Roller bearing imports dropped over the period from a peak of $358 million in 1989 to $254 million, while ball bearing imports fell from a peak of $574 million in 1987 to $494 million in 1991.
The United States continues to run a significant trade deficit in antifriction bearings. The trade deficit peaked in 1988 reaching almost $590 million. The gap narrowed for the next three years to $425.1 million in 1991. However, preliminary data for the first six months of 1992 indicate that the deficit may be widening again, as the deficit increased by $47 million over the first six months of 1991. This is due primarily to the relatively stronger economic growth in the United States compared to Japan and Europe. The still relatively small volume of exports and a large increase in imports from Japan were the major factors in this rising deficit.
Japan continued to have the largest bearing trade deficit ($299 million) in 1991 with the United States. The United States also runs substantial trade deficits with Germany ($102 million), China ($30 million), Singapore ($27 million), and France ($24 million). The United States had bearing trade surpluses with Mexico ($48 million), Australia ($14 million), and Canada ($14 million). The surpluses with Canada and Mexico primarily represent exports to U.S.-owned auto assembly operations in these countries.
The global bearing industry is dominated by five giant bearing companies, all headquartered outside the United States. These companies control over 50 percent of the $19.5 billion global bearing business. The next five largest companies, including two headquartered in this country, control another 19 percent. The top four U.S. producers account for about 60 percent of the $4 billion U.S. market.
The competitive environment in the U.S. bearing sector has never been more intense. During the last decade, mostly undercapitalized mid-sized U.S.-owned companies and much larger foreign-owned companies competed fiercely for U.S. market share. In the past decade, U.S. bearing sales by foreign-owned firms (including bearings produced here and abroad) rose from about 25 percent of the market to nearly 60 percent today.
The competitive standing of the U.S. bearing industry has improved in the last five years as many companies took steps to modernize facilities, adopt modern management techniques, and enhance labor training. However, less than half of domestic-owned companies expect their competitiveness to improve over the next five years. In contrast, nearly two-thirds of foreign-owned companies expect their competitiveness to improve.
Despite huge investments during the last five years, the U.S. bearing industry's major competitive problem remains its difficulty in accessing capital. The most commonly reported competitive disadvantage was a lack of sufficient funds for product development and capital equipment purchases. Related concerns were outdated equipment, limited product offerings, and a limited skilled labor pool.
Capital equipment in foreign-owned bearing plants is more modern and technically advanced than in U.S.-owned plants. Machines in domestically-owned bearing facilities have an average age of 19 years, compared to a 12 year average in foreign-owned facilities.
Problems in the defense superprecision bearing sector are mounting. Defense suppliers of superprecision bearings are working down defense order backlogs, and competition for the few new orders has intensified. At the same time, U.S. aircraft engine producers positively evaluate the progress made by U.S. superprecision bearing companies in upgrading facilities, improving quality, and meeting delivery schedules. U.S. superprecision capacity utilization (excluding ball bearings under 30 mm) was only 60 percent. Firms will not maintain expensive surplus capacity, unless they see prospects improving, so capacity retirements can be expected as defense spending declines further.
Superprecision firms are having difficulty exporting. The globalization of the aerospace industry is fragmenting the superprecision bearing market. Firms recognize the importance of exports, but have experienced difficulties in gaining access to foreign markets. Industry officials report that the Japanese market is closed, and that the Airbus consortium favors its own nationals. In addition, superprecision capacity is in surplus worldwide. Several industry officials state that removal of the DFAR procurement restriction at this time would further intensify the competition and put remaining American suppliers in greater jeopardy.
Investment in the U.S. bearing industry soared during the last five years to its highest levels since the industry mobilized for World War II. From 1987 to 1991, investment totaled $1.31 billion. In 1990 alone, investment reached $352 million, and the industry invested another $309 million in 1991. Five major companies, three foreign-owned, were responsible for about 60 percent of these investments. In total, foreign-owned manufacturers accounted for $665 million, slightly more than half of the five-year total.
From 1987 to 1991, annual R&D spending by the U.S. bearing industry increased from $40 to $50 million. Over two-thirds of R&D expenditures were allocated to bearing production processes, as firms focused on ways to increase efficiency and reduce production costs.
Foreign-owned firms account for a small and declining share of total U.S. R&D spending; 9.5 percent in 1987 falling to less than 7 percent in 1991. This is in sharp contrast to foreign-owned firms' 37 percent share of U.S. shipments in 1991.
However, foreign bearing firms outspent U.S. bearing firms by a 5-to-1 ratio in worldwide R&D. At least $250 million in bearing-related R&D was expended outside the United States by foreign-owned bearing firms that have production operations here, versus only $3.1 million in R&D spending within this country by these same companies.
U.S.-owned companies reported much higher profitability than their foreign-owned counterparts. U.S.-owned manufacturers' profits (before taxes) averaged 6.8 percent on sales, and 9.0 percent on assets. In contrast, foreign-owned firms reported profits averaging 2.3 percent for both sales and assets. Fifty-eight percent of foreign-owned firms yearly observations were losses, contrasted with losses for only 28 percent of U.S.-owned firms' yearly observations.
Several foreign-owned bearing firms reported cost of goods sold averaging over 90 percent for this period, substantially above the all-industry and all-foreign firm average. Several possible explanations exist for this phenomenon. First, since these firms import components, they may be transferring profits to their home countries by increasing the intracompany transfer price of imported components. Second, they may be lowering prices to barely cover costs (or taking losses) within the United States to gain market share and achieve higher rates of capacity utilization. Third, it is possible, but unlikely, that these firms are less efficient since they are subsidiaries of some of the leading international bearing producers.
Many foreign-owned bearing firms are not financially solvent. The current ratio (current assets over current liabilities - the most widely used measure of short-term solvency) for foreign-owned firms fell from 1.31 in 1987 to only .94 in 1991. In contrast, the current ratio for U.S.-owned firms fell from 2.65 to 1.65. (All U.S. manufacturing's five-year average was 1.48). The quick ratio of very short-term solvency (current ratio excluding inventories) for foreign-owned firms averaged only .44. (The quick ratio for U.S.-owned firms averaged .93, more than twice the foreign-owned figure.) By these measures, foreign-owned firms in the aggregate are not solvent, and apparently remain in business with the sponsorship or subsidy of their parent firms. Again, this appears to be a tactic for increasing market share.
An increase in foreign ownership of U.S. bearing facilities has led to declining purchases of U.S. machine tools and other key elements of the supporting infrastructure. Foreign-owned bearing firms, for example, imported 80 percent of their machine tool purchases in the last five years, while U.S.-owned firms imported only 29 percent of machine tools they purchased during the same period.
There were major differences in sourcing patterns between U.S.-owned and foreign-owned bearing manufacturers. Domestically-owned firms report using very low levels of imported components. The highest level of foreign sourcing of any component by U.S.-owned companies occurred in 1988 when 1.5 percent of unfinished races were imported. In contrast, foreign-sourcing of unfinished races by foreign-owned companies rose from 24 percent of consumption in 1987 to 43 percent last year. Further, U.S.-owned bearing manufacturers imported 46.6 percent of their steel requirements in 1987, declining steadily since then to 36.4 percent in 1991. In contrast, foreign-owned bearing manufacturers increased their steel imports from 52 percent of consumption in 1987 to 61 percent in 1991.
As demonstrated above, the viability of the defense-critical superprecision bearing sector is threatened. The Department of Defense must pay careful attention to this sector to ensure that further decline does not increase U.S. national security vulnerability.