In the face of rapid changes in the international situation, seeking to expand exports and increase the added value of exports, we must also consider how to build a stronger industrial chain through industrial structure adjustment and international market layout strategies to improve the overall industry’s ability to withstand external shocks.
The dynamics of the machine tool industry under the impact of the 2020 epidemic
Looking back on 2020, the biggest event affecting the world is the outbreak of COVID-19. As of December 23, 2020, a total of 77.35 million cases have been diagnosed globally and 1.7 million people have died. Countries have implemented lockdown and control policies, which have caused global manufacturing chains to be broken. This disruption, along with unemployment, has created a global economic recession.
Affected by the epidemic, U.S. stocks triggered the second circuit breaker in history on March 9 and experienced 3 circuit breakers within half a month. In addition, due to the sluggish demand for crude oil due to the pandemic, the market lacked sufficient buyers to accept the upcoming delivery of crude oil. Oil prices have seen their first negative value in history. After the economic contraction in 2020, the International Monetary Fund (IMF) recently forecasted a global GDP decline of 4.4%. Although the global GDP rebounded to 5.2% in 2021, various industries are not out of the predicament, the economic outlook is still highly uncertain, and various industries are showing a downturn boom.
Taiwan's machine tool industry has been impacted by the epidemic in 2020. As countries successively adopted blockade measures, the global economy fell into recession, unemployment rose, incomes fell, and real economic activities shrunk sharply. With the epidemic raging, the prolonged U.S.-China trade war did not stop. When the first phase of the trade agreement was signed, only some tariffs were reduced. The second phase of trade negotiations was stalled due to the epidemic, and the U.S.-China relationship has still seen no progress. The output value of machine tools in the first two quarters of 2020 showed a continuous decline. However, the global epidemic gradually came under control in the third quarter, with the production of screening and protective equipment gradually stabilizing, and the development of vaccines making breakthroughs. In addition, when governments of various countries implemented fiscal and monetary stimulus measures to support economic growth, global economic activities gradually recovered. Therefore, since the third quarter, the output value of machine tools has begun to increase. But overall, the output value of Taiwan's machine tools in 2020 decreased by about 30% compared with the same period the previous year, but the decline is slowing down.
The overall economy: With the impact of the epidemic, and the dispute between the United States and China continuing, the uncertainty of the global economy is still high
Over the past ten years, China has become an important engine driving the growth of the global economy, and it is also the most important export region of Taiwan's machine tool industry, accounting for more than 30% of the total machine tool exports. China was the first country to report the COVID-19 epidemic. In February 2020, the most severe epidemic was Wuhan, China. After the city was closed in Wuhan, downstream enterprises in the industrial chain outside Hubei also faced the problem of material interruption and production suspension, which brought a serious blow to the Chinese regional economy. Since the U.S.-China trade war unfolded in full swing, it has also brought huge uncertainty to the China economy and consumers. According to China statistics, the annual GDP growth rate in the third quarter of 2020 was 4.9%, an increase of 1.7 percentage points from the second quarter, showing that China has achieved remarkable results in overall epidemic prevention and development. However, the international environment is still severe and there are many uncertainties. The PMI index of China's manufacturing boom is still at 49.5; below the line of prosperity, having declined in 2020.
The United States is Taiwan's second-largest export market for machine tools, accounting for more than 12% of the total export of machine tools. The performance of the U.S. economy in 2019 remained stable, with GDP growth rate remaining above 3%. However, due to the impact of the epidemic in 2020, the unemployment rate rose sharply. The Federal Reserve (Fed) announced in September that it would maintain interest rates and unlimited quantitative easing (QE) policy unchanged. In terms of manufacturing activities, the average PMI index in 2020 was 51.2, which is 0.7 points lower than the average index during the same period in 2019. This is still above the line of prosperity and decline, which symbolizes the continued expansion of the economy.
Under the influence of multiple factors such as Brexit and COVID-19, the European economy and European integration have entered a critical moment. In the latest World Economic Outlook in October 2020, the IMF predicted that the eurozone economy would experience a 10.2% recession in 2020, and the service industry and consumer confidence indicators in the EU and the eurozone would decline. Both are now at recent lows. The district manufacturing PMI index is about 47.4, which means that the European economy is continuing to slow down. With the recent resurgence of the epidemic, and the spread of the virus in the UK, the uncertainty of the future economic recovery will remain high.
Export dynamics: Taiwan's machine tool exports were hit by the epidemic, but orders for export machinery have turned positive
Taiwan's machine tools are mainly exported, and China is the largest export market and consumer of Taiwan's machine tools. China's orders for machine tools can be regarded as a leading indicator to observe the turning point of the country's machine tool exports.
At present, machine tools used in the manufacture of automotive parts and components worldwide account for about 50% of the overall market. According to market research, global car sales in 2020 decreased by 19.2% compared to 2019. The decrease in demand for automobiles has caused serious damage to the machine tool industry, as machine tools are mainly used in the manufacture of automobile parts and components, and the export value has dropped sharply. On November of 2020, the total export value of Taiwan's machine tools decreased by 30.8% compared with the same period in 2019. Among them, the number of exports to China and Hong Kong decreased by 18.1% compared with the same period in 2019; exports to Europe and the new southbound countries decreased by 48.2% and 42.2% respectively compared with the same period in 2019.
Domestic production activities: The sales of main products of the machine tool industry and the revenue of the industry have declined, but the decline has gradually slowed down
In October of 2020, the overall sales value of machine tools decreased by 30% compared with the same period in 2019. Machine tool products with the largest decreases were hydraulic presses (-41.6%), CNC machine tools (-40.7%), and grinders (-40.6%.) Presses, integrated processing machines, other cutting machine tools, etc. saw sales reduced by more than 30% each, indicating poor market conditions in 2020. The global impact of the epidemic has also led to sluggish processing demand. The total revenue of large machine tool manufacturers in October of 2020 decreased by nearly 30% compared with the same period in 2019. However, observing the revenue of the past two months, the decline in revenue of some industries has gradually slowed down, indicating that the easing of the epidemic will help Taiwan's machine tool industry rebound.
Taking the above factors into consideration, according to the statistics of the Industrial Technology Research Institute, the output value of Taiwan's machine tools in 2020 was NT$101.5 billion, a decrease of 31.2% from 2019.
Looking forward to 2021, Taiwan's machine tool industry awaits opportunities
Grasp key issues and usher in new business opportunities
Vaccines can help curb the epidemic, and the performance of global economic activities under the low base period is expected to be better than 2020
Looking ahead to the global and Taiwanese economy in 2021, the impact of the epidemic is expected to gradually fade. Coupled with low base period factors, major international forecasting agencies believe that global economic and trade growth in 2021 will be better than in 2020. With the popularization of vaccines, the gradual transfer of some production lines back to Taiwan, and the booming demand for emerging technologies, Taiwan’s exports can grow substantially. Secondly, semiconductor manufacturers continue to invest in advanced manufacturing processes. This combined with the benefit of the global supply chain reorganization, and the government vigorously promoting green energy construction, will attract foreign investment to Taiwan, which will help drive domestic demand. Overall, domestic, and foreign demand have improved simultaneously, making the economic growth rate for the whole year of 2021 higher than that of 2020. According to the latest forecast by the Chief Accounting Office, the GDP growth rate in 2021 will be 3.83%, an increase of 1.3 percentage points from 2.54% in 2020.
Supply chain reorganization is still ongoing
Biden's election as President of the United States in December 2020 has given a glimmer of hope for easing tensions between the United States and China, but the basic situation in which the United States and China are fighting will not change. Under geopolitical risks, the "de-Chinaization" of the United States, and China's "de-Americanization," forced other countries to choose sides, and Taiwanese businessmen were forced to actively carry out risk diversification. Therefore, the return of Taiwanese companies and the reorganization of the supply chain will continue to be an ongoing process in 2021. It is necessary to continue to pay attention to the trend of foreign business movement in China, which will affect the reorganization of manufacturing bases, and the import demand of processing equipment in various countries.
In October 2020, the Communist Party of China proposed the "14th Five-Year Plan," which laid down a blueprint for political and economic development for the next five years; “China's domestic and international dual-cycle mutual promotion" new development strategy. Under the goal of the 14th Five-Year Plan, the domestic demand market will expand, and the degree of external dependence will decrease. Therefore, the autonomy of strategic resources, key components, and equipment will be accelerated, and the layout will be towards the high-end market. Under this plan, 5G, AI, satellite networks, industrial Internet, data centers, cloud computing, new energy vehicles, monitoring systems, unmanned factories, etc. will be the main development axis and demand direction of the processing equipment industry.
Global Industry Analysts expects the long-term slow growth of the global machine tool market to reach 87.4 billion US dollars by 2027, with a compound annual growth rate of 3.8% from 2020 to 2027. China is the largest machine tool market, accounting for about 35% of the global market in 2020. The Asia-Pacific region (excluding China) is expected to become the fastest-growing regional market, with a compound annual growth rate of 5.0%. It is expected that markets such as Thailand, Vietnam, and India will maintain strong growth, reaching US$12.8 billion by 2027.
The Industrial Technology Research Institute estimates that the output value of machine tools in 2021 will be NT 109.6 billion, an increase of 8% from 2020
Looking forward to 2021, due to the advent of the COVID-19 vaccine, the regulation of economic activities in various countries will gradually loosen, and China's manufacturing industry will warm up. Demand for automobiles and 3C supplies will begin to grow; demand for semiconductors and 5G equipment will grow; Taiwanese businessmen will return to Taiwan to invest, etc. Major international forecasting agencies all believe that the global economic outlook for 2021 is optimistic compared to last year. Although comprehensive international organizations’ forecasts for 2021 show that the global economy and major countries’ economies will turn from recession to growth, it is still important to note that the degree of economic recovery varies from country to country. As major economies play an important role in the world’s consumer market, the recovery momentum also affects the performance of global trade, and the unsynchronized recovery of various regions may affect Taiwan’s export performance. It is predicted that the decline in the output value of Taiwan's machine tool industry in 2021 will gradually shrink, and the overall output value will grow by 8% annually, and rebound to about 110 billion yuan.
Looking forward to 2021, facing the new outlook of the industry and terminal market trends in the post-epidemic era, the market opportunities and integrated technology upgrade development direction of Taiwan's machine tool industry are as follows:
Four major layout directions for enhancing industrial resilience in the post-epidemic era
During the global pandemic in 2020, countries successively initiated epidemic prevention border controls and various epidemic prevention measures, causing the manufacturing industry to face a crisis of shortage of materials, lack of labor, lack of transportation equipment, and lack of orders. In addition, facing the risk of catching the virus, people tried to minimize travel or engaging in crowd gathering activities. Consumer activities such as marketing, display, sales, and services in all walks of life suddenly ended abruptly. Under the two-sided attack of the "production side" risk of supply chain disconnection and material interruption, and the "consumer side" risk of the last-meter service being cut off, "zero-touch epidemic prevention" has become an urgent challenge facing employees and customers. How to maintain "uninterrupted operation" has become the short-term goal of the manufacturing industry.
Four major requirements for building a strong industrial ecology:
In addition, since 2018, the impact of geopolitics on the supply chain has been deepening. In particular, the US-China trade war has caused a sharp increase in tariff costs. Enterprises must move their original production capacity from China to a third-place for production, and supply to the nearest market or locally. Therefore, this short-chain type of "decentralized production" will require a strategic arrangement for enterprises to think about and adjust to. In addition, when Taiwanese companies carry out decentralized production, they need to consider the needs of various regional markets, resource scheduling, machine maintenance, and employee training. Supply chain management and forecasting all rely on the "intelligent decision-making" of the Taiwan headquarters to achieve decisive victories thousands of miles away.
Therefore, in the face of the new normal of post-epidemic conditions, the manufacturing industry will no longer consider large-scale, low-cost, just in time production, but will instead shift to uninterrupted operations and decentralized production. How to assist the industry in building a strong ecological chain will be the direction of the next wave of industrial upgrading and transformation.
Building a strong industrial ecology is like training the human body to have a sound physique, so that the company can maintain normal operations in a long-term and sustainable manner. The four areas that the global manufacturing and equipment industry will invest in in the future are as follows:
- Risk-free human-machine collaboration: The company may adopt enhanced employee protective equipment for personnel epidemic prevention strategies, such as mandatory use of masks, gloves, isolation gowns, etc. Companies will employ body temperature monitoring, control indoor ventilation, and always maintain environmental public health practices etc. They will enhance the company's automated, "zero-touch," human-machine collaboration process, with remote operation or automated operation capabilities. However, if you want to implement remote operations, you must first ensure network information security.
- Resilience manufacturing system: The company must take stock of existing manufacturing processes, and masters the key components of the production system, to ensure the uninterrupted operation of the company. If necessary, to prepare for the possibility of material cuts, it needs to invest in an autonomous, backup, supply source, such as a 3D printer, for strategically required components, equipment, or materials.
- Localized production and supply: Many international brands have moved their supply chains away from China to diversify their risks. Following regional market needs, they are as close as possible to customers and localized production and supply. Therefore, the supply chain will take on a miniaturized and networked appearance. In addition, to respond to potential emergencies that may pose risks to the distributed production system, it is necessary to use the digital technology of the Industrial Internet of Things to establish a highly flexible and intelligent, production and supply model. Therefore, a global manufacturing service system for cloud supply and demand resource scheduling must be established to create value for customers.
- Fast and accurate decision-making: To respond quickly to customers and have a strong operational structure, in addition to risk-free, human-machine collaboration, uninterrupted operation, and decentralized production, it is necessary to make corporate value activity information more transparent, thereby improving supply chain management, production, sales forecasts and operational decision-making. The cloud platform is used to connect and integrate information, machine learning forecasts, and grasp the all-around operation dynamics at home and abroad anytime, anywhere. Companies can take a comprehensive view of the overall situation, and through accurate research and analysis, make intelligent decisions from the headquarters in Taiwan, and quickly dispatch resources for disposal.
Today, corporate resilience has become one of the most concerning topics of global corporate leaders. To cope with the treacherous political and economic situation, Taiwan's machine tool industry itself should undergo a resilient transformation, improve the strong industrial ecological conditions, and establish risk-free man-machines for enterprises. Collaboration, resilient manufacturing systems, localized production and supply, fast and accurate decision-making, and other capabilities, will assist in providing global customers with uninterrupted, continuous production.
Machine networking production platform to create smart manufacturing solutions
Faced with the demand for "uninterrupted operation" and "localized supply" caused by the epidemic, increasing the digitization and informatization of manufacturing equipment has become the first step in the transformation of the machine tool industry towards smart manufacturing. Stand-alone intelligence, combined with intelligent components and sensors, allows the machine to have the capabilities of self-perception, accuracy compensation, automatic parameter adjustment, fault prediction, and maintenance reminders. This can help customers find and eliminate machine processing problems in advance, reduce manpower, reduce maintenance costs and risks of contact infection, and achieve the goal of uninterrupted operation.
Faced with the trend of "uninterrupted operation" and "localized supply" caused by the epidemic, increasing the digitization and informatization of manufacturing equipment, that is, the digitization of manufacturing equipment, has become the first step in the transformation of the machine tool industry towards smart manufacturing. Stand-alone intelligence combined with intelligent components and sensors allows the machine to have the capabilities of self-perception, accuracy compensation, automatic parameter adjustment, fault prediction, and maintenance reminders, which can help customers find and eliminate machine processing problems in advance and reduce manpower maintenance Cost, reduce the risk of contact infection, and achieve the goal of uninterrupted operation.
The third step of smart manufacturing transformation is to further integrate AI, 5G, AR/VR, and other technologies to improve data calculation and transmission efficiency. When operation consultation is impossible (for example, personnel cannot go abroad due to the epidemic), these technologies allow equipment engineers do on-site maintenance. Industry experts, who have a more complete understanding of the real situation of the site, can assist overseas factories or customers to carry out equipment operation, troubleshooting, and maintenance more efficiently.
Furthermore, the epidemic has caused the suspension of many machine-tool related, physical exhibitions around the world and has had a significant impact on manufacturers' international market expansion. To reduce the impact of the suspension of physical exhibitions, and to continue to expand the market, digital marketing models such as online marketing and virtual exhibitions has been the focus of Taiwan’s machine tool industry in the post-epidemic era. Taking TMTS 2020 as an example, considering that international customers cannot come to visit Taiwan due to the epidemic, it was changed to the "TMTS Online Exhibition Hall" format, and a 3D exhibition area was used to present exhibitors' product information. To achieve a marketing effect like a physical exhibition, in addition to conveying product information through texts, images, audio-visual information, 3D models, and online presentations, online virtual exhibitions also combined AR/VR and other technologies to allow visitors to understand the exhibition products more intuitively. Compared with physical exhibitions, how to enable visitors to get more immediate interaction and answers to questions is also a problem that needs to be continuously overcome in the current market.
In the post-epidemic era, facing the slow recovery of the global economy, and changing consumer habits, to meet the diverse manufacturing trends and increase the added value of products, Taiwan’s manufacturers will need to change manufacturing models. If Taiwan’s automation equipment, industrial robots, and tools machine manufacturers will work closely together in the future to provide high value-added "manufacturing services" to their customers, Taiwan’s machine tool manufacturers are expected to create higher profits. If Taiwan's machine tool factories can strengthen their system integration (System Integrate) capabilities to develop automated, flexible, manufacturing units, and at the same time, combine the Industrial Internet of Things (IIoT) technology to develop machine networking, they can provide the client factory with up-to-date integrated solutions. In addition to laying the foundation for the future development of smart automation in Taiwan, it can also lower the threshold for the introduction of end-user equipment. Only in this way can Taiwan machine tool manufacturers find opportunities to win in the post-epidemic era.