When Detroit retools, Fond du Lac smiles
When people talk about all the money Detroit has to spend on "retooling" to produce its new, small cars, it brings a smile to the faces of people like George J. Becker. Between 1979 and 1985, the auto industry is expected to spend
Mr. Becker, president and chief executive officer of Gidding & Lewis Inc., has more than a passing interest in where the auto industry spends all that cash: His Fond du Lac, Wis., company makes many of the metal-cutting tools and parts for robot welders that automakers need to make smaller engines and other components for the lighter, more efficient cars.
Lately, his smile has been turning to a look of concern because these cars, including the highly touted Chrysler Kcars and Ford's Escort and Lynx, are beginning to pile up in dealers' back lots. Many potential car buyers, faced with high interest rates and high prices for the new models, are walking out of showrooms carless, leaving dealers -- who prefer no more than a 60-day backlog -- with 70-to 90-day supplies of compacts and subcompacts. Still, Mr. Becker is optimistic about the long-term picture.
"Even though they [the auto companies] are not meeting expectations now, I am confident General Motors and Ford are not going to goout of business and will meet the competition of Japan and Germany head on," be says. Mr. Becker thinks Chrysler will survive, too, but he does not sound so certain.
Machine-tool makers are more interested in the auto companies' "long-range planning for 1983, '84, and '85 models," said Mr. Becker, who was in Boston to discuss his company with financial analysts. With proper planning, he believes, the industry will be "turned around by 1984."
At that point, says Skip Nagelvoort, an analyst with Goldman Sachs & Co., there will be a "second downsizing" of American cars, which will bring even more business to the toolmakers.
Another analyst, Tim Reiland, with Robert W. Baird & Co., a Milwaukee investment firm, says the automakers have realized they will have to work hard -- and fast -- to regain some of the business they have lost to foreign competition. "Detroit is saying, 'If we want to survive, we have to retool and keep building small cars,'" Mr. Reiland says.
Even so, Mr. Becker says, Gidding & Lewis is trying to reduce its dependence on cars. In 1979, the company received only 17 percent of its orders from the auto industry. Still, this was the largest percentage for any one industry, and Mr. Becker would like to see that reduced.
Thus, he is looking for "alternatives" in other areas, including large appliances, farm equipment, and pharmaceutical machinery. Part of the reason for this strategy, he admits, is to minimize the effects of business ups and downs in the machine tool industry on Giddings & Lewis.
Mr. Reiland agrees: "The machinery industry is very cyclical, and so the machine tooling industry is even more so."
In the past few years, however, investors have been "quite optimistic" about the toolmakers, partly because of the auto industry changeover, but also because of the growth of energy business and brighter days for aerospace manufacturers. Here, the "new generation" of passenger aircraft, the need to replace older, noisier jet engines on existing planes, and renewed interest in increased military spending have boosted orders for the toolmakers. This industry turned in 13 percent of Gidding & Lewis's orders last year.
As for the machine tool industry itself, it may be on the verge of a "bonanza ," Mr. Nagelvoort says. "US industry is really thinking through the whole manufacturing process," he said."They are thinking in terms of whole 'systems' of factories, instead of a building withlots of different machines performing different functions."
The products of this thinking, plus the growing interest in "Reindustrialization," Mr. Nagelvoort believes, will mean that "25 percent of the US economy, which is what manufacturing is responsible for, is going to be pulled through a $3.5 billion industry" -- the machine-tool makers. In addition , the industry will benefit from increased spending on energy, which will require new exploration equipment, as well as the "potentially huge" development of synthetic fuels.
Mr. Reiland sees two possible question marks hanging over the machine tool industry: foreign competition and backlogs. In a way, he says, they are related.
"The industry has tremendous backlogs," he explained. "If you order a large piece of machinery today, you might have to wait 12 to 18 months for it. But if you order a comparable machine from Japan, you'll get it in 3 to 6 months."
However, both Mr. Reiland and Mr. Becker believe the Reagan administration will be more sympathetic to the ideas of tax breaks and investment incentives.
"Anything in the way of reindustrialization assistance will help investment, and this will help the machine-tool makers," Mr. Reiland said. "More-liberal depreciation allowances will help companies write off the cost of new equipment faster. And investment tax credits will make it easier for them to replace old equipment.