Machine tool orders: waiting for a signal

by SR on August 13, 2012

Japan machine tool cumulative orders year-to-date (billion yen)

Conclusion: sitting on our hands

On 9 August the Japan Machine Tool Builders Association (JMTBA) released order data for July 2012. This data told us nothing that was really new. Total orders fell 6.8% year-on-year to 105.6 billion yen and were also down month-on-month by 2.7%. For the January to July 2012 period, total orders reached 742.1 billion yen, which is down 5.8% compared to the same 7-month period of 2011. Within that figure, overseas orders for January to July 2012 have contracted by 6.3% YoY while domestic orders have done a little better at -4.6% YoY. So there’s nothing here that we don’t already know. Domestic demand is weak and overseas orders are weaker.

What we need to now is sit and wait for a change in direction, some kind of inflection point that suggests not that the recovery is firmly in place but that some kind of bottom has been reached. Because machine tools for the auto industry account for 30% of demand in Japan, the strength here has helped offset the negative impact in other areas but machine tools for general machinery make up 45% of domestic demand and that area has been weak (see chart of orders by industry below). What I would like to see is a slowing in the rate of decline in general machinery orders and overseas orders. For overseas, the year-on-year decline of 6.3% mentioned above for the period of January to July 2012 was the same as for January to June 2012, so at least it didn’t get any worse. For now, I still prefer autos (Toyota) and auto parts (Denso, Aisin Seiki) to machinery and machine tools.

Read across in the machinery space:

Some of the major machine tool vendors in Japan are Amada, Makino Milling, JTEKT (a product of the merger between Koyo Seiko and Toyoda Machine in 2006), Okuma and Mori Seiki. Two larger companies that do not count machine tools as their mainline business but which have significant operations are Brother Industries and Komatsu. Outside Japan the main competitors come from Germany and (at least in terms of sheer numbers built) China – two examples are Gildemeister and Shenyang Machine Tool. There are also some major unlisted suppliers, such as Yamazaki Mazak and Trumpf. Meanwhile, the company that dominates the supply of CNCs used in machine tools is the reclusive (and very profitable) Fanuc.

The shape of orders

Why are we looking at this data? Because it provides clues on longer term capex intentions. We can get a rough idea of lead times by comparing the backlog to monthly orders. Over the long term the average has been around 5-6x, suggesting that it takes 5-6 months to convert orders to sales. In other words, orders in July are giving us a view on what companies think they will need for December. Of course, we need to keep firmly in mind the fact that corporates do not have a magic crystal ball that allows them to see the future. Their main advantage corporates have over investors is that they should have a better idea of the short-term needs of their customers.

The JMTBA has a two-fold advantage over the ESRI when it comes to reporting orders. First, it is a month quicker, with the headline figure typically emerging within 7-10 days of the end of the month being reported. Second, it breaks out orders by geographical region, although not in the initial release. As for comparability, the chart below shows that machine tool order data from both agencies move together. JMTBA is more comprehensive, which is understandable given that it is covering only machine tools whereas ESRI is attempting to get a feel for the entire industrial equipment space.

JMTBA and ESRI monthly order data compared (billion yen)

Orders by geographical region look like this. As one might expect given that China is now the world’s largest market for machine tooks, this was the second-largest market for Japan machine tools after Japan itself in 2011.

Japan machine tool orders by region 2011 (% total)

By industry, we have ‘general machinery’ taking by far the largest share, closely followed by autos. Note that this breakdown is for the Japan market only, not for overseas orders. However, I imagine that autos and general industrial machinery account for the majority of overseas orders as well as domestic orders.

Japan machine tool orders by region 2011 (% total)

Previous post:

Next post: