Advanced Arena: A Competitive Environment
Figure 1. Global market for ceramic tools
As discussed in the last installment of Advanced Arena (“Why Ceramic Cutting Tools?,” Ceramic Industry, February 2012), the global market for ceramic cutting tools totaled over $1 billion and equaled 8.5% of the total market for metal cutting tools in 2011. Since their introduction and development throughout the 1980s and 1990s, ceramic tools have become a staple of the metal cutting tools market. Despite their mature history and development, however, few companies are actually engaged in the manufacture of these extremely useful tools.
Although more than 500 suppliers of cutting tools, parts and supplies exist worldwide, the competitive field for ceramic tools is much narrower, and only a handful of companies control the large majority of the market. According to many manufacturers, the largest competitive factors within the ceramic tools market are technical know-how; product differentiation based on type, quality and application; pricing; and access to resources, including raw materials and available capital.
In this case, technical know-how refers to the knowledge and ability to work with the demanding characteristics of ceramics. This quality is deemed one of the highest competitive factors in the industry because it impacts each step needed to manufacture a good product. Unlike carbide inserts, which present their own challenges, ceramic tools offer very distinct challenges due to the material’s properties.
The properties that increase ceramic’s ability as a tool include a high melting point, excellent hardness and good wear resistance. These are extremely desirable qualities for high-speed machining and help to increase the effectiveness of the tool. However, these qualities also make ceramic cutting tools more difficult to manufacture. Further, ceramic has certain negative properties that exacerbate its difficulty to machine. These properties include its extreme brittleness and adverse reactions when working with oxide materials under certain conditions.
As a result, only a few players with advanced experience and product focus have the ability to manufacture ceramic tools, and the market is effectively controlled by these players. Thus, the technical know-how of being able to work with ceramic under a variety of conditions to produce a high-quality tool is considered one of the largest barriers to market entry for new suppliers. Competition is strongly driven by a manufacturer’s ability to work within the technical limitations and abilities of ceramic materials.
The market for ceramic tools can be divided into several key segments: aluminum oxide, silicon nitride and whisker-reinforced products. Within each of these segments, products can differ by material composition and general design—each of which affect the performance of the tool. Further, each product segment has particular characteristics that affect the difficulty or ease to manufacture a cutting tool.
In general, manufacturers need product offerings within each grade of tool in order to meet the requirements of the end user. Therefore, continued product development for specific applications becomes an essential part of the competitive ability of any company. In order to maintain their competitive advantage, companies must continue to add value to their products by improving quality and performance. Each product grade also has particular aspects that increase or decrease the competitive field.
Aluminum oxide is the most widely demanded tool type, followed by silicon nitride and whisker-reinforced products. Aluminum oxide also has the widest field of competition among the types, not only due to the high demand but also because it is the least difficult to manufacture in its standard grades. Low-cost providers of aluminum oxide tools, particularly in China, have begun to emerge and further intensify the competition. Figure 1 shows that low-cost producers account for just over 17% of the total global market.
Silicon nitride is used to machine tougher and specialty materials. Its properties make it less common than aluminum oxide. However, the higher price for silicon nitride tools makes the market value nearly as high as that of aluminum oxide tools. Due to the increased difficulty and greater technical know-how needed to manufacture the tool, the competitive field is narrower.
Whisker-reinforced ceramics have become a growing staple throughout the metal-cutting markets and are widely used in the machining of hardened materials in the aerospace industry. The manufacturing of whisker-reinforced products had been tightly controlled through a patent held by Greenleaf, so intellectual property and licensing obstacles controlled competition over the last two decades. In the last several years, however, several patents have expired, and many companies are developing new products based on whisker technology. This competitive field is widening.
In general, aluminum oxide is approximately 10-20% more expensive than the average coated carbide tool; silicon nitride is slightly more expensive at 25-35% more expensive than carbide, and whisker-reinforced tools are approximately 50% more expensive. However, the return on investment is 2:1, on average.
The average price of a ceramic tool includes:
• difficulties in manufacturing that are dependent on grade and application requirements
• supply channel markups according to quantity
• other competitive forces, such as regional supply chains and the availability of raw materials
Prices for ceramic tools have fluctuated slightly over the last several years but have stayed generally consistent, increasing or decreasing according to time-sensitive market factors. The one major factor that has been affecting the market over the last few years is the increase of low-cost suppliers entering and flooding the market with standard-grade tools. This has driven the price down, particularly in the aluminum oxide grades, and has increased price competition.
Price is also controlled by distribution and other channel markups. The large majority of ceramic tools are sold through distributors (over 90%), and distributor markups can vary from 40-50%, depending on the grade and tool. In an effort to alleviate some of the pressure generated by low-cost suppliers, some manufacturers are trying to serve the end user directly in order to decrease the price increase due to markups. However, this strategy has its drawbacks in that manufacturers are then finding that they must increase their customer service offerings and technical support—which they may not have the capability to do and thus alienating customers and losing market share.
The solution from many suppliers seems to be to increase product focus and specification in order to increase performance. Thus, the price trend is more stable for high-end niche products, and the pricing pressure is confined to low-end, standard products.
In 2011, the largest suppliers of ceramic tools were Kyocera at 16.4%, NGK at 11.3% and Ceramtec at 7.1% (see Figure 1). Other players include Greenleaf, Ceratizit, Saint-Gobain and Kennametal/Hertel. These companies all manufacture ceramic tools and offer their own lines of tools, as well as private label tools for many other companies. It is estimated that over 20% of the market is accounted for in private labeling. Yet larger companies are always looking to expand capabilities, round out product lines and reduce competition by acquiring companies that offer a product that they currently do not.
Companies approach the market from a strategic standpoint in a number of different ways. Some focus on a geographic market, and some focus on an end-use market. For example, Kyocera is the largest manufacturer worldwide, and it focuses mainly on the automotive industry. It is also the largest supplier in its home country of Japan, followed by NGK, which also focuses on the automotive industry.
The global market for ceramic tools is fiercely competitive among the small field of players. The main competitive points are technical know-how, product development and differentiation, followed by pricing and market forces. These elements have maintained a high barrier to market entry except in the low-cost, standard aluminum oxides markets. These factors are not likely to change over the next several years.
Editor’s note: The information within this article is based on the following reports from Dedalus Consulting: “Cutting Tools: World Markets, End-Users & Competitors: 2010-2015 Analysis & Forecasts” and “Indexable Inserts—World Markets, Applications & Competition: 2010-2015.”
Any views or opinions expressed in this column are those of the author and do not represent those of Ceramic Industry, its staff, Editorial Advisory Board or BNP Media.