One Takes The High End Road, The Other Takes The LowZachary Schiller
Beset by weak demand and foreign competition that controls nearly half its home market, the U.S. machine-tool industry staggered through the past decade. The future of this industry, which makes the machines that make all the other machines, has been very much in doubt. Now, two of the largest producers are taking aggressive but different approaches to the business. The success or failure of Giddings & Lewis and Cincinnati Milacron will say much about whether U.S. companies can continue to compete in the global manufacturing arena.
GIDDINGS: BRING ON THE BELLS AND WHISTLES
When Giddings & Lewis Inc. and Cross & Trecker Corp. tied the knot last fall, "it wasn't a shotgun marriage," says Giddings Chairman William J. Fife Jr. That's putting it mildly. As the deal closed at 4 p.m. on Oct. 31, Fife and his crew whipped out four-inch-thick binders detailing how they would proceed. How thorough were these post-takeover plans? The binders covered each two-hour period through Christmas.
That thoroughness wasn't misplaced. By taking over Cross & Trecker for just $127 million, largely in stock, the ebullient CEO nearly tripled the size of his company, turning it into the nation's largest and the world's No. 4 machine-tool maker. With estimated 1992 machine-tool sales of $550 million, Giddings' tools are used to cut metal parts for everything from Caterpillar Inc. bulldozers to Pratt & Whitney Co. engines.
`SOLUTIONS.' Now, after hacking away 20% of the work force at near-insolvent Cross, Fife is putting his planning skills to work on the strategic changes that will determine if this merger will succeed: redesigning machines that were too costly to produce, coming up with common machine-control systems, and integrating Cross's European operation.
Giddings is battling a cast of international heavyweights, including Germany's Schiess AG and Japan's Okuma Machinery Works Ltd. The U.S. share of worldwide machine-tool production has tumbled to less than 7% from 19.3% a decade ago. As Fife sees it, the major U.S. machine-tool makers need to forsake narrow targeting to a few companies and become broad-line suppliers.
Cross should help. It adds small lathes and other machines, as well as huge auto-parts machining lines, to Giddings' core products--big tools that can be configured together to cut metal for large, complex parts in auto engines or booster rockets. Customized for each manufacturer, these tools can cost millions. Says Fife, 55: "We're here to sell solutions, not just machines." This focus contrasts starkly with that of rival Cincinnati Milacron Inc., which is looking for growth in a more low-end market. While Fife insists he will still build some cheapermachine tools, it's clear he seeshigh-end tools as the path to growth.
It's hard to argue with Fife, whose company has been a rare success story among U.S. machine-tool makers. Under his direction since 1987, its earnings surged from just above breakeven to $22 million last year. Shares in the Fond du Lac (Wis.) manufacturer have nearly tripled since it went public in 1989.
Granted, Giddings had some big advantages over its rivals. Key U.S. competition in the company's major products has all but disappeared. But Fife, uho briefly ran a Cross division before joining Giddings, can take credit for bringing an intense focus on customers. One true believer is Chuck Gates, technical manager for power-train products at Caterpillar's Aurora (Ill.) plant. When one Giddings machine temporarily couldn't run at the rate Cat needed, Giddings gave him a check to cover a portion of the overtime. Says Gates: "That's a first."
Fife has raised some eyebrows since absorbing Cross. He quickly eliminated Cross and the other long-established trademarks in favor of the Giddings & Lewis brand. More radically, he has centralized and revamped sales so distributors sell all Giddings and Cross product lines, from measuring machines to assembly equipment. Fife also wants to get more out of Cross's factories. Within weeks of the acquisition, Giddings moved work on big Boeing Co. and General Motors Corp. orders from its plants to Cross's vast West Allis (Wis.) factory, for instance.
EURO GROWTH. Perhaps most crucial to Fife's expansion plans is Europe, a huge machine-tool market where Giddings had little presence. Cross has a plant in Germany, and the addition of Giddings' products to the Cross offerings could give it an important advantage. "Major clients, especially, like buying as much as possible from one source," says a top executive at one German competitor.
A solid first quarter, which brought a 73% increase in profits, to $7.3 million, suggests that Fife is on the right track. Still, some critics are waiting for a fall. They claim that by instituting such radical changes in sales and manufacturing, G&L may lose out to aggressive niche players, particularly in Cross's important automotive market. "This is a business of long tradition," notes one rival. But then, the way things have been going in machine tools, maybe some traditions deserve a second look.
MILACRON: SIMPLER IS BETTER
Two years ago, when he set out to design a new line of machine tools for Cincinnati Milacron Inc., Cecil R. Breeden Jr. was determined to find out what his customers wanted. Twice, the veteran project manager led Milacron engineers into customers' plants to watch competitors' models in operation. They handed out 20-page surveys to workers, and they even videotaped the machines for good measure.
These were more than just fact-finding trips: They were survival missions. Badly bruised by its own miscues as well as tough competitive conditions, Milacron suffered losses in 5 of the past 10 years. In 1991, it had a $100 million deficit, including special charges, on sales of $754 million.
Now, after abandoning a 1980s diversification into such unfamiliar areas as robots, laser machines, and semiconductor materials, Milacron is pursuing an ambitious strategy: Rather than focusing on specialized products for growth, the nation's No. 2 machine-tool maker is counting on simpler, lower-priced tools.
That means the Mill, as it has long been known, is battling for share in a market dominated by tenacious Asian companies such as Japan's Mori Seiki Co. and Yamazaki Mazak. A few U.S. manufacturers, including $81 million-a-year Fadal Engineering Co., have succeeded in this $8 billion worldwide market. But no domestic toolmaker has attempted to launch as broad a line as Milacron's. Despite its ambitious cost-cutting program, many question the company's low-end strategy. "If they're successful in getting 30% or 40% of the cost out and keeping the quality in, what will the Japanese have done in the meantime?" says one competitor.
CEO Daniel J. Meyer, 55, naturally takes a more optimistic view. He figures Milacron can grab 20% of what will be a $1 billion U.S. market for computerized standard machine tools, double its current share. These include computerized lathes, which make round parts, and machining centers, which perform a variety of metal-cutting tasks. Together, these metal-working workhorses are used by job shops to make parts for pumps to planes. Prices range from $80,000 to as much as $750,000.
Meyer and President Raymond E. Ross, 55, argue that this low-end business will grow faster and offset demand swings in the specialty markets. The believe increasingly sophisticated computers will expand standard machines' capabilities, and they will erode the market for more specialized machines.
Milacron's aggressive new-product program aims to take 40% or so out of the cost of its standard machines. Dubbed "Wolfpack," because it stresses teamwork, the program was spawned by a successful plastic-molding equipment project six years ago. Wolfpack calls for careful study of what customers want, more cooperation between functions such as purchasing and engineering, and greater attention to manufacturing needs during the design process.
Cecil Breeden's carefully researched new machining centers are promising examples. The Maxim 500, smallest in the line, is 37% cheaper to produce than the model it replaced. By standardizing in every possible way, the company reduced the number of parts by 60%. It takes less than half the time to build, can be installed in a fraction of the time, and requires only half the floor space.
To help sell the Maxim and other new products, the company has revamped its sales force. It dismissed many of its salespeople and signed up 30 independent distributors to cover the marketplace. In two years, it has thus increased its U.S. sales force from 87 to 267.
WAITING GAME. Most industry members and analysts see the Wolfpack producing good, competitively priced machines. Its success will depend on the U.S. machine-tool market. The industry has shown some signs of life, but it is still a long way from vibrant: Through March, orders were up 3% over first-quarter 1991, but were well below the levels of the late 1980s.
Lately, Milacron shares have traded at around 16, more than double last year's low. But they are still onlyhalf their pre-1987 high. Why do shareholders put up with it? The founding Geier family controls a quarter ofthe stock, and shareholders for three years or more get 10 times the voting power of newer owners. "You wouldn't find many companies able to bite the bullet on a three- to five-year program like this," Meyer says. Pretty soon, investors will find out if the wait was worth it.