Machine shops may prove an Achilles heel during the next upturn in terms of capacity, as there may not be enough of them left to crank out parts for semi manufacturing tools.
The industry may be in for a repeat or worse of what happened in the early 1990s, when a number of machine shops closed during tough economic times at the beginning of the decade. Enough capacity was lost that it caused problems as equipment suppliers tried to ramp up tool production.
Given today’s growing reliance on outsourcing, particularly for parts, coupled with the fact that many machine shops around Silicon Valley and throughout the country have closed, it could be a problem again.
“A lot of shops have gone under. … It might happen again,” acknowledged Paul Givens, president of Givmar Precision Machining, recalling the problem in the early 1990s. Givmar has done work for the likes of Novellus, KLA-Tencor and Teradyne, among others.
Because it has a broad customer base that’s not dependent on the chip industry, Givmar is weathering the tough times. But many shops that concentrated on semiconductor-related work have closed their doors, Givens said. “I don’t know what’s going to happen in the next upturn,” he added. In addition to the lost capacity, qualified machinists have left Silicon Valley, looking for jobs elsewhere. To make matters worse, the National Tool and Machining Association (NTMA) recently had to close its training facility in San Francisco.
But the problem is not just a localized phenomenon. Some 500 machine shops have closed in the past year across the United States, according to Matthew Coffey, president of the NTMA. “We’ve lost companies that I thought were very solid companies,” Coffey said.
Compounding the potential ramp problem, some surviving machine shops that have served high-tech equipment suppliers for decades are now turning their backs on the industry, looking instead to aerospace, medical and military business. Having been caught off guard by the extent and depth of the current semiconductor industry downturn – after adding capacity to meet the booming demand in 2000 – the machine shop industry is feeling forsaken as the industry turns to offshore manufacturing, namely in China.
“Even in a ramp, a lot of these suppliers aren’t going to go back and embrace the electronics industry,” noted Richard Wills, owner of D&H Manufacturing Co., a Fremont, Calif., shop that has been around for 45 years. In the past D&H has done work for many of the large OEMs in Silicon Valley, among them Applied Materials, Lam and Novellus. These companies have tried to drive prices so low during the downturn that shops like D&H have turned down their business because it wasn’t worth it, Wills said.
But these other industries can’t supply the volume of business that companies such as Applied Materials Inc. brought to a business like D&H. “We’ve known they have gone to China. They’ve told us. They’ve found some large [Chinese] suppliers,” Wills said.
Not Everyone Enamored with China
For the machine shop industry, and by association American manufacturing in general, it is China that is the underlying issue in its economic problems. China, which by and large has been embraced with open arms by the semiconductor industry, is drawing jobs and business away under circumstances with which domestic machine shops can’t hope to compete, the industry says.
China has only served to add insult to economic injury, as far as the machine shops are concerned. “Will there be an upturn or will it all be offshore when it turns so it will be irrelevant to domestic manufacturers? ? No one is thinking about that,” said the NTMA’s Coffey.
Both Coffey and Wills pointed out that today much of the machine work is being done on option, being auctioned off via the Internet, and much of it is going to Chinese companies. “The Chinese are always going to bid below us,” Coffey said. “Economic recovery by itself is not going to heal this problem. There is a major systemic shift that is destroying the supply chain infrastructure nationwide.”
Despite the political wrangling over Chinese trade that has taken place in Washington, D.C., over the past several years prior to China’s entry into the World Trade Organization (WTO)—wrangling that has heavily involved the semiconductor industries lobbyists—there are still high tariffs and duties on goods imported into China, according to Coffey and Wills.
“The playing field is not level at all,” Wills noted. In addition to the tariff and duty imbalance, the Chinese and other Asian governments provide a lot of economic support, and environmental regulations are exceptionally lax compared to those in the United States, particularly California, he said.
“I believe the politicians don’t understand that we are losing manufacturing at a tremendous pace. Will we be able to remain a manufacturing power? I doubt it. ? If they are going to use the term, ‘free trade,’ it has to be equal, both ways,” Wills said.
But the NTMA is not taking the issue lying down; it is trying to form a political action committee to bring Washington’s attention to its plight.
Editor’s Note: As explained at length elsewhere on this site, this is a news story written by me that originally appeared on the now-defunct Electronic News’ website, which is long gone. It’s former sister pub Electronic Design News (EDN) currently holds the copyright to all Electronic News copy (to the best of my knowledge). You can still see a copy of this story at EDN.