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September 1, 2003

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International Molding Report: The smaller Asian nations: Tigers, not dragons

Despite the recent deluge of attention focused on China, smart investors will not neglect to consider the opportunities presented by other Asian economies. For example, a diversified approach that includes establishing production facilities in an Assn. of Southeast Asian Nations (ASEAN) member nation* would grant potential investors cheap access to a consumer market estimated at around 500 million persons, as well as boasting some of the lowest labor costs in Asia.

*ASEAN member countries are Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. Due to the country’s vast political problems, reliable economic data for Malaysia are scarce. IMM plans to include more in-depth coverage of Malaysia once reliable figures are available.

U.S. molders have for years benefited from setting up production facilities all over Asia. One key benefit that is materializing now is the fast growth of the home markets in those economies. Thus U.S. molders with factories in Thailand, India, or the Philippines can sell products there for a fast-expanding consumer market.

India is another market that investors will ignore at their own peril. With a potential consumer market exceeding 1 billion people and a growing middle class now surpassing 250 million persons, India offers many promising opportunities.

Of course, there are a number of other more traditional markets in this region, like Taiwan and South Korea, that should continue to capture our attention. A brief review of the region will help to further highlight several of the potential rewards as well as the pitfalls that should be considered when deciding to invest there (see Table 1).

Thailand

The Thai plastics market is, of course, closely associated with the health of Thailand’s other manufacturing industries, such as electronics and electrical products, computers, building materials, and especially the auto industry.

It is a good sign that the Thai auto industry is again approaching precrisis 1996 production rates, despite the fact that China is now capturing eight out of every 10 auto dollars that are being invested in Asia outside of Japan. As production regains ground, local plastic producer associations are pinning their hope for continual growth on new export markets within south China and ASEAN.

Thailand’s new export markets and expanded industrial production have spurred increased demand for more technically advanced engineering plastics and have easily outstripped domestic production.

Today, domestic manufacturers satisfy only around 20 percent of the demand for engineering plastics. Many plans for the construction of new plastic-producing facilities were sidetracked when the economy turned sour in the late 1990s, and these projects are just now being reintroduced. It is hoped that these new plants will not only reduce production costs but also help to meet the anticipated 20 percent growth rate.

Philippines

Foreign suppliers should take note that the Filipino government recently decided to maintain its plastics tariffs despite the reductions that were demanded of it by ASEAN membership. While the government has chosen to continue to protect this industry for another two years, it did reduce tariff levels from 15 to 10 percent.

This protectionist policy will no doubt affect U.S. suppliers operating from Singapore. Singapore is currently the leading exporter of plastics to the Philippines, exporting 68,284 metric tons of plastics to the country during the first seven months of 2002. Direct U.S. plastics exports, which are generally more costly, were down 25 percent in 2002, making the Philippines our 30th largest plastics market.

Another area for concern for investors in the Philippines involves resin smuggling. Filipino manufacturers have complained that if smuggled resins are not kept out of the market, processors will be forced to cut production levels and lay off employees. This problem, according to the Assn. of Petrochemical Manufacturers, largely stems from customs-bonded warehouse operators who illegally import and sell duty- and tax-free resins. The practice has seriously affected the sales volumes of those manufacturers that must purchase the more expensive, legal resins.

Indonesia

The weakening value of the rupiah and the increasing unemployment rate have helped to diminish the Indonesian’s purchasing power; as such, the strength of the U.S. dollar has seriously hurt the competitiveness of plastics imports from the U.S. These factors explain why U.S. plastics exports in 2002 were less than one-third 1997 levels.

Investors must also consider other worrying factors aside from the current economic and currency troubles facing this country. Problems associated with political instability and social unrest have already erupted in violence. This situation has resulted in greater regional fractionalization and autonomy, which has in turn seriously complicated domestic shipping and production.

Of course, security concerns have only intensified following the Sept. 11, 2001 terrorist attacks. And while most analysts believe that the Oct. 12, 2002 bombing in Bali successfully alerted the government to the Islamic militancy threat, the number of Muslim fundamentalists continues to swell.

Despite these troubling considerations, Indonesia still has a lot to offer investors. First, its domestic market, which exceeds 212 million people, is again showing signs of recovery. In 2002, trade with the U.S. exceeded $2.5 billion; still more encouraging, domestic plastics consumption has reached precrisis levels.

Imports from the U.S., despite being less cost-competitive, are again increasing as plastics imports grew 27.1 percent in 2003 year-to-date. Furthermore, consumer consumption levels should be additionally stimulated by recent legislation that raised the minimum wage by 24 percent.

Finally, regardless of the political strife, the majority of production—which occurs in the industrial centers of Surabaya and Jakarta, and on the islands of Batam and Bintan—has been largely unaffected. As witness to this reality, it is estimated that in 2000, processors’ demand for resins reached 1.5 million metric tons, just less than the precrisis level of 1.6 million metric tons.

Singapore

The Singaporean plastics market is undergoing significant structural change as producers move low-tech production to neighboring countries and redirect domestic production towards high-tech products and production methods.

As such, Singaporean companies can be expected to capture a greater share of the more automated and sophisticated tooling and processing market as well as be called on to perform such services as research and development operations, regional sales and marketing duties, and pilot runs on new and sensitive products. Singapore may attract companies that are fearful of losing sensitive production techniques or product designs by building facilities in countries where weak intellectual property rights laws pose serious threats to their investments.

Additionally, Singapore benefits from its highly trained labor pool, including experienced engineers and toolmakers. The Singaporean government has helped to enhance this situation by providing processors with subsidies for employee training programs and R&D. The government has also facilitated investment by maintaining virtually no duties or tariffs and the Singapore Trade Development Board has greatly simplified import and export procedures.

Vietnam

The Vietnamese plastics industry, which has been showing annual growth rates between 27 and 35 percent, has, in close cooperation with the national government, created an action plan to further develop this industry through 2010.

The plan’s goal centers on developing a self-sufficient industry by focusing on machinery and equipment for raw material production and finished goods manufacturing. To reach its goal of 30 percent domestic sufficiency by 2005 and 50 percent by 2010 (at the moment native plastics industries can satisfy only around 10 percent of domestic consumption), the plastic industry estimates that it will need an infusion of around $3 billion.

This drive for self-sustaining production will take place in an environment where plastics consumption is on a dramatic rise. While per capita plastics consumption in 2000 was measured at only 11.57 kg, this number is expected to reach 16 kg by 2005 and 50 kg by 2010. To meet its ambitious expectations, the industry will focus on eight technological divisions: plastic raw materials, plastic shoes for export, processed rubber (relating to plastics), civil plastics, high-tech industrial plastics, building material, plastic packaging, and molding.

What this action plan will mean for U.S. investors and U.S. suppliers will vary depending on the business. For example, those who export advanced plastics machinery can expect robust sales and as such, industry experts have predicted that the current U.S. share of the plastics machinery imported by Vietnam, which now stands at 5 to 10 percent, will grow significantly through 2010.

U.S. suppliers should also bear in mind that the U.S. currently has a bilateral free trade agreement (FTA) with Vietnam. (For a more detailed description of the agreement visit the U.S. Vietnam Trade Council website at www.usvtc.org.)

India

The U.S. & Foreign Commercial Service (U.S. & FCS) credits India’s vibrant manufacturing industries with helping to make its plastics industry one of the most successful sectors of the national economy, estimating that throughout the last 10 years it has grown at an average annual rate of more than 20 percent.

U.S. & FCS adds that end users of plastics and plastics materials and resins (PMR) have registered average annual growth rates exceeding 30 percent over the last few years. While India’s per capita plastics consumption is surprisingly low—only 2.8 kg annually, compared to 10 kg in China and a world average of 17 kg—this figure is expected to rise sharply within the next few years.

For example, the 1998 consumption rate for commodity plastics is predicted to almost triple by 2006.

Industrial use of PMR is also rising. An excellent example of this is India’s rapidly growing auto industry, which produced more than 4 million units in 2000. The U.S. & FCS estimates that by 2005 the average car produced in India will use 90 kg of plastics materials, compared to the 50 kg used in cars in 2001, and that the auto industry’s demand for specialty PMR items will expand fivefold by 2006.

This trend is consistent with plastics consumption patterns of other manufacturing industries. The consumer electronics industry, for example, is expected to create a 200,000-metric-ton demand for PMRs by 2006.

However, before deciding to invest in the vast Asian market, producers should be prepared to deal with the improving yet still prevalent problems associated with doing business in India. To begin with, India still has large areas with little or inadequate infrastructure.

More troubling still is India’s bureaucracy. Despite recent trade-liberalizing policies and business-friendly labor reforms, it’s notoriously stifling, with regulations and procedures varying from one locale to another, and indirect local taxes sometimes amounting to 4 percent of material and component costs. Even shipping products within India can be difficult and costly.

Perhaps more importantly for large U.S. suppliers, the majority of PMR end users in India are small and medium-sized companies that require less than 5 metric tons of material at any given time. This low-volume demand makes importing less cost effective, and gives local producers a significant edge.

South Korea

Despite the South Korean production index’s rise by 7.3 percent in 2002 and by 6.1 percent in Q1 2003, overall the South Korean market has not completely rebounded and still suffers from serious problems.

As in the past, it is expected that South Korean plastics producers will attempt to find salvation from their woes by relying on their export markets. This approach will involve an expanded trade relationship with China and renewed attempts to better diversify their existing markets.

South Korea’s export dependency was aptly highlighted by Chemical Market Reporter, which estimated that in 2000 HDPE exports from South Korea equaled 58 percent of total plastics production, and exports of PS and ABS accounted for 68 percent of market output. Unfortunately, this export approach, while no doubt helpful, will not solve the more serious problems facing this industry.

The South Korean plastics market faces several serious challenges, including diminishing sales as a result of the economic slowdown in the West, rising material costs, and even labor unrest, which forced the extended closure of several plants in 2001.

However, it is generally recognized that the most significant problem facing the South Korean plastics market involves product duplication and overcapacity. These issues largely stem from the number of firms operating within this market. However, the persistent inability of the leading South Korean petrochemical corporations to come to an agreement on asset valuations and management control issues has hindered the necessary consolidation that the industry requires. Until producers can merge and coordinate their processing operations, most experts foresee difficulties maintaining long-term profitability.

Taiwan

The plastics market in Taiwan has been shaped by its increasingly advanced manufacturing sector, which grew 6.58 percent in 2002.

As Taiwan strives to better compete with the low-cost-labor markets of its neighboring economies, domestic PMR producers have been moving local processing away from crude, labor-intensive production toward more technologically sophisticated methods and products. Despite this modernizing trend, domestic production of engineering plastics has been unable to meet the skyrocketing demand of its advanced industries. As such, the country must now import around 60 percent of its PMR consumption.

The existing domestic producers have focused on nylon 6, PBT, and POMs, while local environmental protests have hindered the necessary production expansion and diversification. This reality has left the door open for foreign suppliers. Those U.S. companies that wish to begin exporting to Taiwan can expect an import duty of around 2.5 percent (the 1999 level) and the harbor tax of .3 percent.

Where To Go From Here?

While there is little doubt that China offers U.S. suppliers and investors enormous opportunities, the remaining Asian markets also present their own unique benefits that should not be ignored.

These benefits include huge consumer markets for U.S. suppliers as well as access to both cheap labor markets and high-tech production facilities. Finally, as these markets continuously expand their sphere of influence through an ever-growing network of regional FTAs, those foreign producers with existing relationships in this region will be in a better position to reap the inevitable rewards.

Contact Information

The Repton Group
New York, NY
Agostino von Hassell and Mark C. Bella
(212) 750-0824
[email protected]

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