Kicking the Can Down the Road

I recently had two seemingly unrelated experiences that gave me an interesting perspective about the current economy, and machine shops in particular. In early December, I was invited to attend a conference call with a group of economists. As they were discussing the condition of the Medium Three automotive companies, one of them said that he wasn’t surprised at all that they were seeking relief (a bailout) in the form of government-backed loans.

To paraphrase, he pointed out that 0.0% financing for cars was formed out of desperation, because decades of continually rising union wages and “entitlements/benefits for life” for retirees were catching up with them. They had to stimulate sales and profits to keep up, but were putting off the inevitable.

“They were kicking the can down the road,” he said. “It was a system that was unsustainable, and was bound to collapse at some point.”

A few days later, I was listening to the radio in my car. There was an interview with a private banker from a small town, discussing the credit mess and how his and other independent banks were being affected. At one point, he made a very interesting point that has stayed with me since I heard it:

The banker said that he knows everyone in town. He knows their families, their histories, their habits, their children’s names and their businesses. He said he has been successfully lending to these people for years based on this personal criteria. “And yet,” he said, “If they walked into a large corporate bank (with their systemic criteria for grading prospective borrowers) they wouldn’t lend them a dime.”

These two points got me to thinking: are machine tool manufacturers kicking the can down the road? Are they unintentionally contributing to a machining environment of unrealistically low costs for parts, tighter margins for shops and failing businesses, by selling machine tools with little or no barrier to entry to people with machining skills, but little or no business acumen?

Back in 2001, CNC machine tools had become very affordable—about the cost of a car. The shared feeling among established shop owners back then was that there were many new “one-man shops” quoting improbably low costs for work. These “journeymen-to-businessmen” were in part enabled to get into business in the first place by terms that made buying machine tools seem risk-free—like little or no financing charges and no payments for a year. And they indeed bid low and forced the costs of machined parts to new lows.

Today, while in the midst of a much worse economy, many machine tool manufacturers and distributors still offer a low barrier to entry via these same practices to create demand for their product. As it was a few years ago, a byproduct of these practices may be that many people who likely shouldn’t be in business at all are now in the machining business. Many of them still quote work unbelievably low, forcing others to follow them to the bottom of the well.

And what happens to these businesses and machines after the year is up? Machines are repossessed and these start-ups fail because the bill comes due and they’re unable to pay.

Low-cost countries, currency fluctuations, less-than-balanced trade policies, emerging markets and competition certainly contribute to the commoditized pricing of many manufactured parts and products. But might these practices by the machine tool builders—easy credit terms and a disconnected vetting process—actually contribute negatively to the overall, long-term health of our industry, as well?

Similar credit offerings have wreaked havoc on our housing and credit markets. Balloon mortgages and cheap credit gave many that really couldn’t afford either the sense that they could. They kicked the can down the road, too—until the piper came calling.

Related Content

AMBA Joins Coalition To Fix Economy

The American Mold Builders Association (AMBA) has joined a new coalition of business, labor and agricultural groups that will adopt a policy platform with the goal of fixing flaws in the U. S. economy.