Anyway you cut it the laser-related job shop business is one to reckon with
David A. Belforte
The news out of the U.S. job shop industry has certainly been mixed since we last reported (November 2002) on this market sector. The effects of the near-death of the telecom industry in 2001 had a severe impact on job shops that directly or indirectly counted on customers from this industry for a major portion of their business. We recall sitting in the office of a West Coast shop owner who, making his point on the fallout from the demise of the telecom business, pointed to a stack of brochures from auctioneers commissioned to sell off bankrupt laser cutting companies, saying, “There are a lot of my competitors in there.”
We have no idea how many shops went under because of this economic problem or how many called it quits when the full impact of the general recession in the overall manufacturing sector took hold. The ILS Buyers Guide database currently lists more than 1600 job shops, but we receive returns to our annual Buyers Guide questionnaire from only about 15 percent of them. This doesn’t mean that non-responses indicate that companies have gone out of business.
In preparation for this biennial review of the job shop market we conducted an unscientific survey of the industry by sending an e-mail questionnaire to 10 percent of the ILS Buyers Guide database. We received a 15 percent response, which was slightly below expectations, but still represents a cross section of job shop descriptions, regions, number of employees, and number of lasers used.
We are not sure if the survey results are truly representative of the entire database, but the sample results were so definite we expect that it is relatively true for most of the shops. Optimism reigns supreme, perhaps buoyed by the turnaround in the fortunes of manufacturing in the U.S. over the past 18 months. Fully 95 percent of those surveyed said they were optimistic about near-term prospects for business.
Competition both local and offshore is, however, a concern with 75 percent of respondents telling us that competition has increased over the past two years and 43 percent telling us this competition was coming from offshore. We did not find this surprising because we have heard anecdotes about shops in China shipping cut plate to West Coast customers. And in the March issue of ILS three U.S. shops using lasers to repair dies commented on offshore competition.
Another series of questions drew interesting responses, which may not be truly indicative of the industry situation. Expanding their facilities was a business decision by 34 percent of respondents, frankly a number that surprised us.
Even more telling was the increase in the number of employees by 52 percent of the companies, a number that may reflect a return to pre-recession levels as much as it indicates expansion. Job shops like the rest of U.S. manufacturing have learned to run lean. This means some of the owners are back out on the shop floor running equipment just as they did when they founded their business.
Although sales of bending and punching equipment were not as strong as pre-recession, 61 percent of the companies reported investing in new equipment and 43 percent of them added laser systems. The latter is not a surprise because we have seen a spurt in laser cutter sales. Optimism seems to be pervasive, as one company told us it will purchase two more laser cutters this year.
All is not golden however, and negative comments raised by a number of respondents included the following: the high cost of metal driven by rising demand, decreased steel-making capacity, and steel shipments to offshore markets, such as China. We were told that sheet metal costs have doubled, affected no doubt by the high cost of coke, a situation exacerbated by increased consumption in China. In fact the cost of materials was the major issue facing shops, even those who perform cladding services.
Few shops raised the issue of government intervention, especially toward leveling the playing field. We suspect this results from the fierce independence of job shoppers who inveigh against government regulations and any surfeit of paperwork and the oversight compliance would cause.
So what does the job shop landscape look like at the beginning of 2005? To begin with there are more than 3800 shops listed in a private database we maintain, down from the 4000 companies we tallied in 2002. Because there is not a procedure to accurately account for companies that have gone out of business we believe this number may be slightly inflated.
FIGURE 1. Demographic breakdown of number of shops offering laser processing services.
Figure 1, a map of job shop demographics, shows that California remains alone as the top job shop state, with Illinois and Ohio slipping back to the 201-300 shop category. Texas and Wisconsin dropped to the 101-200 shop category, while Arizona moved up to the 51-100 and Tennessee and Virginia dropped into the 21-50 slot. Utah climbed into this category, a sign of industrial changes in that state.
A look at the map shows about what one would expect; a heavy cluster of job shops in states around the Great Lakes (the so-called Rust Belt), growing strength in the Southeast and Texas, with California remaining as the leader in entrepreneurial ventures.
ILS classifies shops that gain more than 50 percent of their revenue from cutting metal as sheet metal shops, and they represent about 60 percent of the companies in this year’s report, up 2 percent from the last report. We don’t place much significance on this increase because we tend to hear about these shops more than any other category.
FIGURE 2. Segmentation of the laser job shop industry.
Figure 2 segments the job shops by categories established several years ago. Laser shops, those that only operate laser equipment, slipped 5 percent from the last report due primarily we think to the services diversification effort that is sweeping the job shop industry. Laser-only shops are being forced to offer additional services as competition increases, thus ending up in our “other’ category, which grew 3 percent. Not surprisingly, the remaining categories did not change share percentages. We did take note of the apparent lack of growth in the marking sector because this is such a fast-growing laser application. We think that many shops in other categories may be offering marking services along with their specialties and this may tend to inhibit new market entrants.
FIGURE 3. Number of lasers per shop.
A word about the sheet metal shops: We know, from systems suppliers, that job shops represent about 80-85 percent of the sales of new laser cutters. And we know, courtesy of these same laser system suppliers, that about 35,000 laser cutting systems have been sold over the past 25 years. Which means that between 28,000 and 30,000 units have been installed in job shops around the world. We believe that the U.S. has in place about 20 percent of these units, an estimate supported by the data backing up Figures 3 and 4.
FIGURE 4. Breakdown of laser types per job shop.
Figure 3 illustrates a dramatic shift in the number of lasers being operated in shops today, another indication that shops are beefing up the service they offer to customers, by expanding processing capacity. Today 50 percent of the shops own more than one laser compared to 22 percent in 2002, and, significantly, the number of shops running three or more lasers has tripled in that time.
Interestingly, a greater number of shops are using lasers other than CO2, with solid-state lasers almost doubling since 2002-explained, we think, by an increasing number of laser markers. CO2 is still the only laser in more than 80 percent of the shops because of the dominance of laser cutting as a job shop application. As an aside to suppliers of laser cutters, your near-term markets look good because many of the systems currently in place are getting a little worn and out of date. ILS expects to see a notable increase in the systems replacement business over the next three years.
FIGURE 5. Number of employees per shop.
Employment in job shops is up 20 percent over 2002, due in great part to an improving economy in the U.S. Figure 5 shows the breakdown of employees per shop. The most notable change is that the mid-size shops, those employing more than 5 people, experienced the most growth. We estimate that there could be almost 140,000 people employed in laser-related job shops.
Using as an estimate an average $150,000/laser system/shift we come up with a potential total laser processing business of slightly more than $4 billion. Keep in mind that 60 percent of the shops are sheet metal so they have other fabricating equipment and therefore generate more revenue. Anyway you cut it the laser-related job shop business is one to reckon with.
This article started by reporting on the optimistic view of respondents to our survey. We admire job shoppers for their persistence in the face of adversity, because, like most small to medium businesses, every day brings a new challenge that must be addressed by the owners-not a board of directors, stockholders, or a top heavy management matrix. But we find, for the most part, that the job shopper maintains, at least for pubic viewing, an optimistic outlook. The specter of international competition is just another factor to be overcome. Already we hear about offshore outsourced work being brought back to the U.S. because customers are unhappy with quality, response time, and the ability of some international shops to process complex work.
When we told one shop owner about a Chinese shop that is outsourcing work to the Philippines because the local labor rate was too high, he laughed and speculated that before long his competition might be coming from India, just another in a succession of low-labor-rate countries.
The high cost of material is a short-term phenomenon, and over time it will equalize. Besides, shops are all pretty much in the same cost structure, so any advantage in material cost goes to the relatively small number of very large shops that can bargain for quantity discounts.
The other problems facing shop owners are similar to those of all other U.S. businessmen, so this industry sector isn’t being singled out in that respect.
It’s not an easy business, never was, and never will be. But for owner/operators it is a very satisfying business to be in. The proof lies with the many shops that have been able to add capacity through new equipment. It would be unfair to single out examples but over the course of a year the pages of this magazine have spotlighted success stories. In the past 24 months ILS has introduced readers to about two-dozen shops that personify the vitality of this industry sector.