Look around your office: Every chair, lamp, pen, and coffee mug likely was made using machines. There are around 18,600 machine shops in the U.S. that process various materials from metal to plastic to composites, or that produce custom parts. Some of these companies specialize in a particular process—such as lathing—or in a specific industry like automotives. Most of these businesses’ projects are low volume but require high precision. The industry consists of numerous small- to medium-sized businesses; interestingly, there are no large companies that dominate within the vertical.

We hear a lot in the news about U.S. manufacturing jobs being sent overseas, and that’s a very real issue for machine shops. These businesses are generally unable to supply customers who move their manufacturing plants overseas where production costs are considerably lower. But there is a bright spot in the machine shop industry. According to a recent article in American Machinist, 2018 is projected to be a banner year for U.S.-based automotive tooling companies based on the increasing numbers of North American new-vehicle programs that will be launching. And two-thirds of these launches involve SUVs and trucks, which require more tooling to manufacture than cars—great news for machine shops that specialize in automotives!

A quick overview of the numbers…

Operating margins for machine shops average 3 to 4 percent of sales. Because equipment is a major investment, most shops monitor total machine uptime (percentage of time machines are in production). Other key metrics include average per-unit manufacturing cost, average machine cycle time, on-time completion rate, scrap/rework costs, and shop revenue per man-hour.

Yet despite being heavily reliant on manufacturing and tied to the U.S. economy’s ups and downs, the machine shop industry’s business failure and merger rate from the end of 2015 to the end of 2016 was only 6.64 percent, lower than the average for all U.S. businesses.

Trends within the machine shop industry

Improving economic conditions are reviving the manufacturing industry. Machine shops are beginning to recover after a few difficult years. The recession, combined with the continuing trend of overseas manufacturing, had resulted in reduced demand for machine shop production. After plummeting 22 percent in 2009, manufacturers’ shipments of fabricated metals rose every year except in 2015, including being up 1.6 percent in the first 11 months of 2016 compared to a year earlier. The recovery of the American auto industry has been especially important in the revitalization of machine shops. 

Both employment and wages are on the rise. Overall employment by machine shops rose 4.7 percent in September compared to a year ago, according to the Bureau of Labor Statistics. Likewise, average wages for non-supervisory employees at machine shops rose to $21.75 per hour in September, a 4.2 percent increase compared to a year ago. Average wages at machine shops rose 2.8 percent in 2016 and 3.1 percent in 2015.

New machine technologies and materials are gaining popularity. New alternative cutting technologies, including water jets and lasers, are more versatile, allowing shops to process materials more accurately and with less potentially damaging heat production. Additionally, some shops are seeing an increase in the number of jobs involving new composite materials instead of traditional metals as many manufacturers (like aerospace) look for lighter, stronger, and more durable materials.

How bankers can help machine shops

• Machine shops must fund new equipment and equipment upgrades to reduce production costs and attract new business, and some of that equipment can cost upward of $1 million or even more.
  Solutions to consider: Term loans, equipment financing
• Collections average 30 to 31 days, so machine shops must manage cash when customers are slow to pay.
  Solutions to consider: Line of credit, remote deposit capture, term loans
• Demand from manufacturing customers can be cyclical, ebbing and flowing with economic cycles, therefore machine shops must work to maintain even cash flow.
  Solutions to consider: Line of credit, term loans
• With payroll accounting for 10 to 11 percent of sales, machine shops must compete to attract and retain skilled machinists.
  Solutions to consider: Payroll services, workplace banking solutions, line of credit

Want to build your book using this type of analysis on more than 300 other industries?

All of the industry information in this post came directly from the Vertical IQ Industry Profile on Machine Shops. Reviewing this profile, or even doing a quick 5-minute review of the industry’s Call Prep Sheet, gives you valuable insights into your machine shop banking prospect–their opportunities as well as the issues that may be keeping them up at night.

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