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GearsNational Security Assessment of the U.S. Gear Industry
As basic components of most industrial machinery and equipment, construction and agricultural equipment, motor vehicles, ships and aircraft of all types, gears are critical to the industrial base. From a military perspective, gears are critical to both the construction and performance of nearly all weapon systems, either as components of the many different machines required to produce a particular weapon system, or as components of the weapon systems themselves.
The gear industry in the United States has gone through a decade of decline, and the outlook for the 1990s is not promising. As producers of an intermediate product, gear manufacturers can perform no better than their end-markets. And in the early 1980s, many gear end-markets experienced their worse contraction of the post World War II period. Many of these markets only partially recovered with the general economic expansion that followed, as imports of products containing gears in nearly every sector increased, real interest rates remained high, and certain investment incentives were removed from the tax code.
The gear industry is commonly divided into four major market sectors based on end-use orientation. These include the motor vehicle, industrial, aerospace, and marine gear sectors. The motor vehicle gear sector, with 1988 shipments of $10.2 billion, represents about 75 percent of the gear business. The major domestic automobile companies have their own "captive" gear shops, while another group of independent firms such as Eaton, Dana, and Borg-Warner supply gears mostly for larger trucks.
The major domestic auto companies continue losing market share in the motor vehicle market. In 1985, the combined passenger car production of General Motors, Ford, and Chrysler totaled 7.8 million. This year the three are expected to produce only 4.8 million units, down over 38 percent. Truck production by the three rose from 3.2 million units in 1985 to 3.8 million in 1988. However, production of trucks in 1990 is expected to fall to 3.4 million, down 11.4 percent. Lower volumes make it difficult for the motor vehicle gear plants to operate efficiently.
The industrial gear sector shipped $2.1 billion in 1988 to a wide range of end-users in the (SIC 35) producer durables sector. This was up 20 percent from 1984 shipments in nominal dollars, but only five percent in inflation adjusted dollars. Over 40 percent of industrial gear production takes place in captive shops. Large firms such as Caterpillar, John Deere, Cummins Engine, and Lufkin have captive gear shops.
The producer durables sector (SIC 35, except computer and office equipment) has not performed well during the past decade, as real dollar shipments declined over 25 percent from almost $200 billion in 1979 to less than $150 billion by 1986. Employment shrank by about 500 thousand people, which was more than 30 percent of the workforce. While 1988 was a good year by recent standards, many firms within the capital goods sector saw sales soften in 1989, and then worsen more in 1990. The five year outlook for many industrial gear end-markets is for little or no growth.
In 1988, aerospace gear shipments totaled $725 million. More than half the aerospace gear shipments were directed toward helicopter applications, primarily for military use. The gearing on a helicopter, which transmits power from the gas turbine engine(s) to the rotor, and is also used to power auxiliary units, may represent as much as 10-20 percent of the helicopter's value. The gearing on commercial jetliners or fighter aircraft represent only about two percent of the value. The military has consumed about 65 percent of aerospace gear shipments in recent years.
Over the last twenty years total unit production of aircraft has fallen while unit value has sharply increased, mostly because of increased aircraft sophistication, lower production volumes, and the rapid growth of avionics used on aircraft. The gearing has also improved but its relative value to the value of the helicopter or fixed wing aircraft continues to decline. The outlook is for a contraction in the overall aerospace gear market, as defense spending is reduced and helicopter orders decline. However, continued growth is anticipated in the commercial sector as the major aircraft producers work down multi-year order backlogs.
The marine gear sector reported shipments of $356 million in 1988, about 35 percent for defense applications. The last order for a merchant vessel placed with a U.S. shipyard was in 1984. The U.S. Navy is the only remaining buyer of ocean going vessels that require large reduction gears for their operation. A "Buy America" policy for large reduction gears was put into effect in 1986. Although the U.S. Navy placed a 20-year high 32 orders for new war vessels with private shipyards in 1988, a downturn in Navy business can now be expected. In the opinion of one respected observer, only one of six main reduction gear firms may survive the next few years. While some of these firms may go out of business, others are diversifying into other gear markets and other products compatible with their equipment.
In addition to shrinking gear end-markets, the general manufacturing sector is gradually weaning itself away from gears. Between 1975 and 1987, the relative content of gears in all manufactured items declined by over 43 percent. The major reasons for this are: 1) a significant shift has occurred in the United States away from gear intensive industries; 2) alternative technologies have encroached on certain gear end markets; 3) the productivity of all kinds of machinery has increased, reducing both the number of machines (and gears) needed for a given task and the relative value of gears per machine; and 4) imports of gears, particularly industrial gears, have increased and displaced domestic production. We estimate about one-third of the decline in the content measure is attributable to gear imports.
As evidence of a shift away from gear intensive industries, since the late 1970s shipments of farm equipment have dropped 63 percent (in constant 1988 dollars) from $18 to $6.6 billion. Shipments of construction equipment fell from $24 to $12 billion, off 50 percent. Shipments of oil field equipment collapsed from $11 to $3 billion, down 73 percent. And shipments of internal combustion engines (except motor vehicle) dropped 28 percent from $15 to $11 billion.
Alternative technologies have significantly encroached on some markets formerly dominated by gears. A prime example is machine tools, which have largely switched to servo-drives. Servo-drives can be controlled with greater precision, and deliver variable power as needed. In extreme cases as many as 100 gears (50 sets) have reportedly been displaced in a single machine. Heavier equipment (and some lighter equipment) is increasingly using "fluid power" (hydraulic or pneumatic) systems to transmit higher power ratios. Fluid power transmission is flexible where mechanical transmission is not, but fluid power generally remains more expensive than gear systems. Electronics, such as digital clocks and timers, have also displaced many smaller sized gears.
Lastly, machinery productivity has increased tremendously in many areas so that fewer gears are needed. End-users are looking for machines that perform more and more functions. For example, a single machining center has replaced as many as 12 conventional machine tools, and in so doing displaced many gears.
The effects of the market collapse on the gear industry has been dramatic. In the industrial and marine sectors, gear shipments fell by over 30 percent since 1980. Employment dropped by almost 40 percent. The most recent five year investment average (1983-1987) was 34 percent below the previous five year's. Productivity was stagnant, and in fact declined slightly. Also, the number of large establishments (defined as 500 employees or more) fell by 50 percent, as shipments by this group fell by 65 percent, and production workers by 61 percent.
The large gear establishments were in many respects the first line of defense against international competition. The weakening of this group led to a drop in the competitiveness of U.S. gear firms, and in their ability to stave off foreign competitors. This is evidenced by a loss of market share to rising levels of imported products. Imports of industrial gears rose over 100 percent between 1984 and 1988, from $266 million to $561 million.
Investment in the gear industry has been inadequate for the industry to remain internationally competitive. The industry has a history of under investment, which is evidenced by the enormous number of older, and technically obsolete machines in the possession of many firms. Since the end of World War II, gear making equipment has steadily gotten older. By 1989, about 88 percent of the gear making machine tools were over 10 years old (up from 82 percent in 1983), and more than half were over 20 years old. In contrast, all metal working industries reported 62 percent of their machine tools over 10 years of age.
Reasons for a lack of investment by the industry are numerous and complex. Historically there has been an absence of competition in the gear industry which might otherwise have stimulated more investment. The absence of competition was due to the preponderance of subordinated captive production; and in the open market, the technical sophistication of the product has made it expensive for gear customers to switch gear suppliers. Also, in many instances management has been resistant to change, and ignorant about or unwilling to acquire the latest technologies. Moreover, an attitude of getting by with older equipment has persisted at least since the industry matured in the 1960s.
Further, declines in cash flow in the gear industry in the wake of contracting markets, and a reliance on equity or self-financing have combined to reduce investment below historic levels, both in absolute expenditures and as a percentage of sales. In fact, in 1986, 31 percent of all gear firms reported losses. This has all occurred at a time when gear manufacturing has become more capital intensive with significant technical improvements in the machinery. Greater capital intensity implies carrying higher fixed costs on balance sheets. However, many gear firms experience 15-20 percent annual fluctuations in sales, and prefer not to carry high fixed costs as a prudent business practice.
It is imperative, however, that gear firms invest in new machinery to remain competitive, especially as the industry becomes more global in scope. Delays in acquiring state of the art equipment also delay the training of the workforce in its usage. At the same time, new gear cutting and gear grinding machine tool costs and their outfitting are very high relative to most other machine tools. High interest rates in the United States add further to this high cost. Many smaller gear companies lack the sales volume to afford or justify investment in new equipment.
Additionally, the gear industry spends little on research and development (R&D). In 1988, the industry spent one dollar on R&D for each $181 of sales, or slightly more than one-half a percent. R&D expenditures are an important indicator of innovativeness and future competitiveness. In 1988, all U.S. manufacturing firms spent almost three times as much as the gear industry on R&D relative to sales, four times as much relative to profits, and 4.6 times as much per employee. In the international arena, the U.S. gear industry has lost ground technologically and competitively. Gear related R&D undertaken in other countries, notably in Japan and West Germany, has long exceeded the U.S. effort, and firms in these countries now set the world quality standards in many gear product areas.
In the defense preparedness area, the aerospace and marine gear sectors cannot reach emergency surge and mobilization targets as currently constituted. The industrial and motor vehicle sectors can meet the requirements on a selective basis. Some firms in these sectors will need assistance, especially if asked to convert a major portion of their production to defense.
The surge targets were defined as a doubling of defense production in six months, and mobilization targets as a four fold increase in defense production in two years. While the targets assume existing defense production is surged, if new orders are placed that require new designs and engineering, the production increases the firms stated they could reach are greatly exaggerated. The aerospace sector as a group could increase defense production by 83 percent in six months, and by 182 percent in two years. The marine sector could increase defense production by only 69 percent in six months, and by only 87 percent in two years.
Within existing manufacturing facilities, the constraints to increasing production cited most frequently were heat treatment and (post heat treatment) grinding operations. The availability of forgings and castings blanks from which to make gears from outside vendors was identified as the major material procurement problem. In such capital intensive industries, excess capacity is expensive to maintain, and it has been eliminated by many manufacturers. Except under unusual circumstances, the military cannot count on the availability of excess forging or foundry capacity in times of emergency.
The mobilization constraints can for the most part be resolved in the two year interval assumed available for their resolution. However, the surge constraints could pose major problems for the on time delivery or repair of gear systems for many weapon systems. Advance preparedness measures are needed to resolve surge bottlenecks. If all the aerospace and marine bottlenecks are addressed, the reporting companies estimate the cost to be about $53 million.
The gear industry is almost totally dependent on outside vendors for forgings/castings, fasteners, bearings, machine tools, and other items and services. The industry is also dependent on the availability of certain labor skills. These dependencies make forecasting surge and mobilization capability all the more difficult. Collectively, this infrastructure has deteriorated significantly in the last 10-15 years for a number of reasons, including considerable losses of market share to imported product.
Bearings are used extensively in gear systems. Most gear boxes have 10-20 bearings, and more elaborate systems may have two or three times that number. The bearings industry closed down about 20 percent of its capacity during the 1980s because of declining markets and rising imports. In August 1988, bearings were placed under a 3-5 year Defense Federal Acquisition Regulation requiring defense related procurement from domestic manufacturers as a measure to preserve and hopefully enhance defense critical capacity. Relatively few bearing producers supply literally thousands of end-users with tens of thousands of bearing part numbers. Bearing shortages can be anticipated in future emergency surge or mobilization conditions.
Further, in the last five years, more than 40 percent of the machine tools needed to produce gears were imported, mostly from Germany and Japan, including several types which are not manufactured in the United States at all. This large percentage occurred despite a strong deutsche mark and yen, and would have been higher had the dollar remained strong. Machine tools suitable for defense production are long lead time and very expensive items that will pose a major constraint to expanding gear production in a mobilization. The abundance of older and used gear making equipment may help, but more skilled labor, repair parts, and material will be required for their operation.
The skilled labor needed by the gear industry is in short supply. Modernization of the gear industry could reduce this problem. For demographic reasons, and because of the perception that manufacturing in America is not a glamorous, prestigious career, this problem may worsen in the future. As a reflection of this condition, in a surge or mobilization emergency, a shortage in the availability of skilled labor for the gear industry is predictable, and will cause problems in both conversion to defense production and delivery of critical gear systems on a timely basis.
The two most critical job groupings reported were machinists and machine operators. Machinists will be needed in large numbers by each gear sector to keep the old equipment running. Given the 21-month long training period for the machinists trades, the competition between the sectors for the available pool of machinists in a surge/mobilization emergency would be intense.