European molding outlook: Cloudy at best

European injection molders attending K 2001 in Düsseldorf next month will be faced with an interesting question. Is it time now to expand molding plants in Europe? Is it time now to take advantage of the flood of new technology demonstrated at the world's largest plastics trade show? Just what is the outlook for real growth in injection molding shops in Europe? 

No simple answer is available. Much depends on your end market as well as where in Europe you are located. What's more, while the economic forecast for the next 12 months in Europe is slow growth, to say the least, some market segments and some national markets will face recession conditions. The pockets of real growth—more than 3 percent per annum—are few and they are very hard to find. 

For specific industry-by-industry growth forecasts see the table below. These forecasts project actual output growth for injection molders in the listed markets and are compared to the substantially more optimistic projections for the United States. 

Low Growth Seen 
European molders—primarily in Denmark, Germany, Belgium, the Netherlands, and France—have for years depended on healthy exports to grow business. Domestic consumption of molded parts has seen little or no growth (and actually negative growth in Germany). 

The mounting economic woes in Asia—one of Europe's prime export markets—have further reduced the chances for Europe's molders to gain business through market share. 

In addition, there is the problem of the euro. That currency lost considerable value against the U.S. dollar and other major global currencies. Theoretically this should have propelled export growth, making molded products more affordable abroad. But, except for industrial machinery exports (such as injection molding machines, where the European Union has increased its market share in the U.S.), other exports have seen little tangible growth. 

The euro may now cause more problems, predict many analysts in Europe and the U.S. Growth forecasts have been revised downward in Europe for the past few months. Primarily Germany's growth is lagging, holding back the rest of Europe. 

The latest forecasts by the International Monetary Fund see the euro zone economy growing by just more than 2 percent this year and by about 2.5 percent next year. But Germany may see growth of just less than 1.8 percent this year and possibly even less next year. 

What's more, beginning in January 2002, a growing number of Europeans expect price increases as a result of the physical introduction of the euro. Upward price adjustments and other disruptions caused by the currency changeover will most likely increase euro zone inflation and depress consumer spending. 

Major banks in Europe—such as Deutsche Bank—say that the euro introduction is likely to disrupt the flow of retail business, soften consumer spending, and drive up inflation in late 2001 and 2002. The overall effect will prevent any chance for a speedy recovery in the ailing European economy. 

The euro zone economy grew a tepid .5 percent in the first quarter of 2001. The European Central Bank slashed its 2001 euro zone growth forecast June 14 to between 2.2 and 2.8 percent from its December 2000 forecast of 3.6 percent. 

America's Long Shadow 
The cool U.S. economy for the first seven months of 2001 directly hurt Europe's molders. Export opportunities disappeared that were critical for Europe's economy, which exports more than one-third of all items molded there. The U.S. slowdown also hurt Asia, yet another major export target for Europe. Newsweek magazine in July said, "The good news about the U.S. economy is that we're in bad shape, but everyone else is worse off." 

The U.S. economy is on the rebound now, and Europe's molders could realistically anticipate real export growth in late 2001 and for most of 2002. But this growth will be slow initially and may not suffice to boost overall growth. It will be many months before the U.S. resumes a more prominent role as the single largest buyer of foreign-made products from Asia and Europe. 

EU data suggest that plastics processing, including injection molding, grew 5.2 percent across Europe in 2000. In the first five months of 2001 that growth collapsed to a meager 1.3 percent. Exceptions to this downturn are molders of high-tech products such as compact discs and DVDs, as well as disposable medical products. 

How much will plastics processing grow in 2001 and 2002? Projections differ sharply. For 2001 some see overall processing growth as low as .6 percent while others anticipate growth of as much as 2.1 percent. For 2002, projections range from a low 1.8 percent to a high of 4.4 percent. 

Car Sales: A Bright Spot 
We anticipate that production of molded parts for automobiles will continue to grow in Europe. Car sales have defied overall economic trends in Europe, bringing a constant stream of new orders to molding shops everywhere from Denmark to Portugal. 

Sales of new cars in Western Europe rose 5.7 percent in June from a year earlier to 1.39 million vehicles, said market research group J.D. Power-LMC. That brought first-half sales to 8.2 million units, a fall of just 1.8 percent from the first half of 2000. 

Car sales remain strong and are likely to grow for the balance of this year in France, Italy, the U.K., and Spain. Germany, however, remains slow and shows few signs for recovery anytime soon. In June French car sales showed a one-month increase of 20 percent; sales in the U.K. and Italy rose by 11 percent each. 

European molders of automotive parts have invested heavily in past years in new, highly automated injection molding machines and advanced downstream equipment. This has allowed many molders to boost output of high-quality parts without increasing employment. 

Based on anecdotal evidence, European automotive molders will likely be the most aggressive buyers of new equipment at K 2001. 

Electronics Down 
Normally one of the most attractive end markets for molders—electronics—is very weak in Europe and likely to weaken further. The same market in the U.S. is set for a major recovery later this year and into 2002. 

Technology spending is also projected to be slower in Europe than in the U.S. A Merrill Lynch survey of chief information officers published in July indicates that companies' budgets for information technology (IT) in Europe will fall by an average 1.7 percent this year, while U.S. IT investments are set to increase 5.5 percent. 

This leads to overall average growth in electronics of 3.8 percent, down from average overall growth of 9 percent, projected at the beginning of the year. In Europe, technology spending was expected to rise by 13 percent at the beginning of the year. 

Europe has traditionally had slower technology spending. Capital expenditure on technology rose, on average, 17 percent annually during the past decade, compared with 33 percent per year increases in the U.S. 

How to Stimulate Growth 
Europe's molders can take some actions now to build the base for strong growth in the years to come. Other measures that set the stage for a solid recovery have to come from government. 

What can molders do now? 
• Learn from U.S. molders. Over the past 10 years U.S. molders have been on a massive spending spree, buying new injection machinery and auxiliary equipment. The result is that U.S. molding plants are more modern and more efficient than ever. Productivity is up and many U.S. molders can quickly boost output without expanding payrolls. In addition, efficient, modern equipment has allowed many U.S. molders to compete on price against low-cost imports. 

• Drop export prices. The U.S. Dept. of Commerce carefully tracks changes in import prices. The prices of imported European goods have held steady and even risen in many categories since the euro was introduced almost three years ago. Remember, over the same time the value of the euro, relative to the U.S. dollar, has dropped sharply from $1.17 to the euro at its inception in January 1999 to $.88 to the euro in July. 

This should and could have led to a corresponding decrease in the price of European goods exported to the U.S., but it didn't. Thus, popular goods such as European-made small appliances have not seen their sales grow substantially. 

• Relocate. Inside the EU molders are faced with a variety of labor costs. There is no reason why German and French molders cannot relocate some manufacturing operations from high-labor-cost environments to lower-cost locations such as southern Italy, Portugal, or Greece. U.S. molders have done the same with great results, moving manufacturing to Mexico, China, the Philippines, and Thailand. 

Other measures are contingent on government actions. Molders need to add their voices to ever-louder demands from the business community for effective reform. These include key steps such as deregulation and the easing of restrictive labor laws.