International Molding Report: Mexico and Canada: Both opportunity and competition

Editor'snote: This IMM International Molding Report is prepared for IMMby Agostino von Hassell of The Repton Group, who provides IMM'smonthly Molders Economic Index.

Why should U.S. injectionmolders care about the economies in Mexico and Canada? We checkedwith several molders in recent weeks and learned that typicallyMexico and Canada are seen as an opportunity for exports as wellas a source of often sharp competition.

"Our shipments to Mexico have tripled in the past threeyears," a molder of single-use medical devices writes, "andwe see much more growth." A molder of computer printer partsnotes, "We lost a lot of business to molding shops in Mexicoand Canada. Just last week another tool was pulled, and sent toMexico."

These very different views summarize the issue: Both countriesremain attractive markets for high-value-added and often complexmolded parts, but are a major and effective competitor for high-volume,low-cost parts.

U.S. export data for the past three years show a steady increasein U.S. exports of items such as business machines, computers,medical and diagnostic devices, electronics, and small appliances.At the same time, exports into the U.S. from primarily Mexicoof car and truck parts, toys and toy components, and packagingitems have grown sharply. The tables below show projected changesin trade between the United States, Canada, and Mexico for thenext five years.

These figures show projected changes in imports and exports for key products with numerous injection molded components. Data are based on actual growth for the past five years and on general economic trends. The list of products was dictated mostly by the availability of reliable data.COLOR>

Key Trading Partners
For the injection molding market as well as the overall economy,both countries are significant trading partners. Just think ofthe growing volume of injection molded parts entering the UnitedStates from Canada and Mexico. The U.S. trade deficit with Canadahas surged in the first seven months of 1999 to a total of $16.89billion. In July alone, the gap rose to a record $3.29 billion,up from $2.57 billion.

But the gap with Mexico declined to $2.11 billion from $2.46billion in June. Exports surged 33 percent from August 1998 toa record $12.3 billion while imports rose 27 percent to $12.8billion. About 80 percent of exports went to the U.S. The CommerceDepartment said trade with Canada and Mexico-our NAFTA partners-accountedfor nearly one-third of the total increase in the goods deficit.

In 1998, Mexican exports to the U.S. almost doubled to $91billion from $52 billion in 1994, the year the North AmericanFree Trade Agreement was signed. Mexican companies took advantageof access to the U.S. market and learned to compete, especiallyin manufacturing, where low labor costs give Mexican producersan advantage.

Mexico
Mexico's economy is doing much better now and appears to havebeen set on a course towards expansion for the next 12 to 18 months.Part of this is a spillover from the U.S. boom while a generalregional recovery also helps. 

 

Most economists now believe that overall Latin America willbegin to emerge from recession in the fourth quarter of this yearwith growth accelerating to as much as 3.4 percent next year.Yet even with the start of the recovery, the region's economywill contract by .6 percent for all of 1999. In the second quarterof 1999, Latin America's economy contracted 1.2 percent. Thiswill benefit not only molders in Mexico but also across the UnitedStates, as Latin America emerges as an increasingly profitableexport market for high-value-added plastic parts.

Note that Mexico's industrial production in July rose4.4 percent compared with July 1998. The industrial sector accountsfor one-third of the Mexican economy. Also, the economy in thesecond quarter outstripped economists' predictions, growing 3.2percent compared with the April-June period a year earlier. Growthin the first quarter was 1.9 percent.

Molders in high-value-added markets such as medical devices,consumer electronics, industrial machinery, office equipment,and small appliances are likely to benefit. Exports to Mexicoare already rising and will rise to all of Latin America throughout1999.

But Mexico is becoming possibly the single major source oflower-cost plastic parts for markets as diverse as automotiveor packaging. Projections show Mexico will replace Japan as themajor provider of automotive parts in the next few years. Thiswill directly reduce the business for U.S. molders, some of whomhave started to set up shop just south of the border.

Exporting services and knowhow is now a boom market and willalso become one for those molders who desire to sell their experience.We believe that U.S. molders can look towards Mexico as a primelocation for new manufacturing plants, with design and managementoperations retained in the United States.

Many molders see the logic of such a move as they are facedwith increasing difficulty in retaining skilled workers. The newU.S. molding plant may have just a few machines for manufacturingsimulation and prototyping while the bulk of the manufacturingwill be done south of the border.

The fast-multiplying maquiladoras, traditionally assembly plantsrun largely by U.S. companies located just south of the border,now are a primary opportunity for larger U.S. molding shops, whichcan transfer knowhow to such operations-in essence, exportinga service. Forecasts from Mexican government sources peg growthof plants in that area at 17 percent/year for the next three years.

How much of this is injection molding? Data are hard to comeby. Because of the U.S. economic boom, the number of maquiladorajobs in Mexico has more than doubled in the 1990s to 1.1 million.One example is major molder Delphi Automotive Systems. Delphiis now one of Mexico's largest private employers, with 70,000workers at 53 plants.

Injection molders as well as other manufacturers will be affectedafter ministers from 34 nations in the Americas announce sometimethis month a deal to harmonize customs procedures, the first significantagreement in five years of talks on a hemispheric free-trade accord.

The goal is to move towards free trade for all of the Americas.One of the consequences of this five-year evolution is a likelymigration of additional labor-intensive manufacturing industriesto countries such as Mexico, Brazil, and Colombia. As has beenthe case with NAFTA, U.S. molders and other industrial manufacturersexperienced a relatively significant loss of orders as low-costsuppliers set up Mexican operations.

Canada
Canada's economy will lead the major industrialized nations ineconomic growth with a 3 percent expansion next year, reflectinghigher commodity prices and strong U.S. demand for imports. Canadiansources say that their economy will grow 3.6 percent this year.

Canada's economy mirrors in many ways the U.S. economy, expandingat a brisk, noninflationary pace; higher interest rates have notyet been needed to curb price increases. Canada is a major supplierof injection molded parts, high-quality packaging items, and agrowing number of injection molded electronics components. Sportinggoods -primarily for winter sports-remain a major growth marketfor Canadian molders.

Trade is critical to molders in Canada, and the Canadian governmentwill continue to provide trade incentives for exports. Note thatCanada's trade surplus widened to C$3.2 billion in July as relentlessU.S. demand spurred record high exports of Canadian goods. Thetrade surplus was the highest since December 1996 when Canadaexported C$3.4 billion more goods than it imported. Exports tothe United States account for a massive 87 percent of Canadianexports worldwide. Canada's trade surplus with its southern neighborrose to an unprecedented C$5.4 billion in July, up from C$4.97billion the month before as exports climbed 3.3 percent.

However, for many molding plants in Canada-particularly inautomotive and electronics-capacity is getting tight, based onrecent statistics released in Toronto. U.S. molders, faced withequally tight capacities, will be hard pressed to exploit thisopportunity and this spells more imports of high-quality, high-valueplastic parts from locales as diverse as Japan, South Korea, andGermany.

Canadian manufacturing industries raised their rate of capacityuse for a third straight quarter. The rate for the second quarterof 1999 was 83.8 percent, the highest level in almost two years.More than one-third of manufacturers surveyed by the CanadianGovernment reported that they expected to increase productioncapacity.

The data show that in the electrical and electronic productsgroup, producers pushed their rate of capacity use by 5.9 percentagepoints to a record 94.6 percent in the second quarter. Capacityutilization for the general category of "plastics products,"which includes all other processes as well, moved up to 87.9 percent,a 7.2 percent jump.