China is moving from a major machine tool country to a strong machine tool country

According to data released by VDW (German Machine Tool Manufacturers Association), China has become the world's largest machine tool market in 2022, with machine tool production and consumption accounting for 32% of the world's total, the highest proportion. The top 5 countries in machine tool production in 2022 are: China, Japan, Germany, Italy, and the United States, with a CR5 of about 72%; the top 5 countries in machine tool consumption are: China, the United States, Italy, Germany, and Japan, with a CR5 of about 62%.

Since 2009, my country has become a major machine tool country. Compared with machine tool powers such as Japan and Germany, we still have several obvious structural differences: 1. The scale of leading Japanese and German companies is much larger than that of domestic companies. Among the top ten machine tool companies in the world, there are 4 Japanese companies, 4 German companies, and 2 American companies. The market value of Chinese machine tool companies is basically below 10 billion; 2. The proportion of Japanese and German machine tool exports in production is much higher than that of my country. In 2022, the proportion of Japanese and German machine tool exports in production reached 71.2% and 72.6% respectively, while my country only had 23.24%.

Looking at the changes in the global machine tool industry, the rise of Japan, the decline of the United States, and the rise of my country are all major events in the changes of the global pattern. This article mainly reviews the major events of the changes in the global machine tool pattern to observe whether they can provide path guidance for the development of my country's machine tool industry.

The rise of Japan and the decline of the United States are almost synchronized, and China has risen rapidly after joining the WTO

The development of Japan's machine tool industry is closely related to the strong support of the Japanese government. As early as during the First World War, Japan's machine tool industry ushered in its first expansion. During the Second World War, Japan promulgated the "Machine Tool Manufacturing Business Law" in 1938, supporting the development of its machine tool industry through tax exemptions, import restrictions, subsidies and other means. By the end of World War II, the output value of machine tools had reached 67,300 units/year. With the end of World War II, Japan, as a defeated country, withdrew 600,000 machine tools and limited annual production to 10,000 units. The machine tool industry shrank sharply and was close to zero. The development of the Japanese machine tool industry before 1945-1955 was mainly driven by war demand, and technology was rapidly improved by imitating European and American machine tools.

From 1955 to 1970, the Japanese machine tool industry quickly emerged from depression with the outbreak of the Korean War. In addition, due to restrictions on foreign manufacturers and subsidies for reverse development, the output of Japanese machine tools increased rapidly. We summarize Japan's policy support during this period: the establishment of the Japan Machine Tool Association, the establishment of an import association, and technical cooperation with European and American companies. The most important during this period was the "Law on Temporary Measures for the Revitalization of the Machinery Industry" ("Machinery Vibration Law") issued in 1956. The "Machinery Vibration Law" promotes equipment renewal through financial support, including but not limited to lowering interest rates, extending financing time, and relaxing guarantee conditions. During this period, the equipment of machine tool companies across the country was replaced with new ones.

1971-1982 was a critical period for Japan's machine tools to overtake. In 1971, Japan implemented the "Mechatronics Law" to promote the integration of the machinery industry and the integrated electronics industry and guide domestic machine tool manufacturers to invest in the development and production of CNC machine tools. In 1978, the "Machinery and Information Law" was further promulgated to encourage technological innovation, especially in the fields of electronic machinery equipment and software development, providing an opportunity to accelerate the high-end process of Japan's machine tool industry.

From 1982 to 2009, Japan's machine tool output value surpassed that of the United States in 1982, and then ranked first in the world for 27 consecutive years. The global machine tool landscape underwent another major change in 2009. China began to rise rapidly after joining the WTO in 2001, surpassing Japan and Germany in 2009 to become the world's number one in machine tool output value. It ranked third due to the financial crisis, and then was greatly affected by the economic slowdown starting in the second half of 2008, ranking third after China and Germany. Since then, thanks to the strong equipment investment demand in emerging countries represented by China, it surpassed Germany in 2010 and returned to the second place.

After 2009, the global machine tool industry landscape has undergone significant changes. Despite the impact of the financial crisis, Japan's machine tool output value has rebounded, driven by equipment investment demand in the consumer electronics field and emerging markets such as China. However, the Sino-US trade conflict in 2019 and the COVID-19 pandemic in 2020 have once again caused Japan's machine tool output value to decline. In the following years, despite the challenges of overseas orders, the order volume in the Asian and North American markets hit a new high by 2022. Entering 2023, due to the slowdown in China's economic growth, orders in the Asian market declined, showing that the global machine tool industry is adapting to new changes in the economic environment and market demand.

Why Japan can achieve overtaking and why the United States will decline

We can see that the overtaking of Japan's machine tool industry and the decline of the US machine tool industry both occurred in the late 1970s and early 1980s. There are many reasons for this phenomenon, including social, political, economic, policy, and technology. We summarize that there are four main reasons for Japan's overtaking of the United States in the global industrial transfer:

1. CNC machine tool technology has put Japan and European and American machine tool powers on the same starting line again:

Before the emergence of CNC technology, traditional European and American machine tool powers have always had a leading advantage in the field of precision manufacturing with the experience accumulated over many years of development. Japan has introduced technology more as a follower, and the emergence of CNC technology has put manufacturers back on the same starting line. Domestic enterprises in Japan have rapidly realized CNC, and extended to distributed CNC systems, flexible manufacturing systems and other fields, and have taken the lead in the world in some fields. Okuma Iron Works, Yamazaki Iron Works, and Mori Seiki, which are in a period of rapid growth, adopted CNC technology at the first time, changing the competitive landscape of the Japanese machine tool industry, and causing large enterprises such as Ikegai Iron Works, Niigata Iron Works, and Hitachi Seiki, which were prosperous before World War II, to come to an end after 2000.

2. Japan focuses on low-cost small machine tools in terms of market strategy, while American manufacturers focus on large high-end machine tools

The market strategy adopted by Japanese CNC machine tool manufacturers in the early 1970s was to give priority to the production of small, low-cost, and simple-function lathes to stimulate the potential demand of small and medium-sized enterprises at home and abroad, with the main goal of occupying a large market and obtaining profits. This strategy is different from typical American manufacturers (including some European manufacturers), which focus on producing expensive large high-end machine tools in the fields of automobiles, aerospace, etc.

3. Japan has advantages over the United States in terms of talent, labor costs, exchange rates, etc.

Japan has significant advantages over the United States in the machine tool industry, especially in talent training, labor costs and exchange rates. In the 1980s, Japan's labor costs were 36% lower than those in the United States, and machine tool manufacturing costs were 23% lower accordingly. It invested more in the training of technical talents, especially in electronics and electrical engineering. In addition, the appreciation of the US dollar has led to rising manufacturing costs in the United States, limiting its competitiveness in the international market. Japan's early focus on and investment in computer technology, combined with lower labor costs, laid a solid foundation for the technological innovation and market advantages of Japan's machine tool industry.

4. The development of Japan's automobile industry has a significant driving effect

The rapid development of Japan's automobile industry significantly promoted the growth and technological innovation of the domestic machine tool industry between 1975 and 2001. As Japan's automobile production led the world in 1983, the demand for related machine tool technology also increased, promoting key technological breakthroughs including flexible manufacturing systems (FMS). In addition, the manufacturing clusters formed by the automobile industry in Tokyo, Osaka, Nagoya and other places have provided strong market demand and innovation power for the machine tool industry, thus promoting the global leading position of Japan's machine tool industry.

my country's machine tool industry is large but not strong, and large-scale equipment renewal + going overseas may be a window for improvement

Although my country's machine tool industry has quickly become the world's largest machine tool market since joining the WTO, it can be seen from the history of Shenyang Machine Tool that my country's process of becoming a machine tool power can even be said to have just begun. State-owned machine tool enterprises represented by Shenyang Machine Tool seem to follow the path of "first grow bigger, then become stronger" in the golden decade after 2001. They hope to achieve technological progress through mergers and acquisitions in one fell swoop, which eventually led to the collapse of many companies that expanded blindly in cyclical fluctuations. The decline of Shenyang Machine Tool reflects the particularity of the machine tool industry:

1. It will not be greatly affected by the cost dividend. Countries with trade surpluses in machine tools such as Japan, Germany, South Korea, and Italy are not low-wage markets. Countries such as Southeast Asia and Mexico, which have vigorously developed manufacturing in recent years, are trade deficit countries.

2. The policy requirements of the machine tool industry are very high. The technical accumulation of the machine tool industry is a long process. It is difficult to guide the manufacturing of high-end machine tools with complete marketization. Referring to the development of Japan and other countries, the Japanese government's guidance and support for the machine tool industry was gradually withdrawn after the Japanese machine tool industry structure was very stable. The government's vigorous guidance of CNC technology has led to the CNC rate of Japanese machine tools from 42.7% in 1955 to 95.1% in 1984. The current CNC rate of machine tools in my country is about 45%. The current main policies of my country: "Promoting large-scale equipment renewal" proposed by the Central Economic Work Conference in December 2023, and the "additional deduction" tax exemption for machine tool enterprises. From these policies, it can be seen that there are similarities with the "Machine Vibration Law".

From a technical perspective, Japan has encountered the opportunity of the emergence of CNC technology. Today, the emergence of intelligent and AI technologies also has the potential to change the manufacturing industry. Although my country's machine tool market is already very large, it is difficult to find increments from the perspective of major technological upgrades, but the technology investment in the machine tool industry has always been forward-looking and high-cost.

From the perspective of going overseas, we can refer to the mutual achievements of Japan's machine tool industry and automobile industry. The 1970s to 1990s were the explosive period of Japan's automobile industry, and the automobile industry was the main source of demand for Japanese machine tools. In 2023, my country has surpassed Japan and become the largest automobile exporter, and the structural opportunities for machine tool going overseas brought about by this are becoming more and more obvious.

From the policy perspective, "large-scale equipment renewal" and "additional deduction" are exactly the same as Japan's "Machine Vibration Law", which encourages machine tool companies to invest in research and development, promote equipment renewal through policies, and improve the overall CNC rate.

Source: New Fortune Industry Research Institute