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February 1, 2002

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International Molding Report: Understanding the new NAFTA

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This report is prepared for IMM by Agostino von Hassell of The Repton Group, who provides IMM's monthly Molders Economic Index.

It created a trading boom. But a good number of molders in the United States worry that their growth opportunities are fading, moving into Mexico.

This certainly applies to some molding operations, those that do very labor-intensive postmold decorating and assembly, or those that mold products that require considerable manual operations, such as trimming. But other injection molders have and will continue to benefit from the ability to ship parts to Mexico and outsource labor-intensive parts of the manufacturing process. 

Overall NAFTA has been a significant benefit to the U.S. injection molding market. And it's just getting started. 

NAFTA's Impact 
The North American Free Trade Agreement (NAFTA) has created major changes for U.S. injection molders since the treaty took effect in 1994. But the bulk of the changes are still to come. 

The bottom line for U.S. molders is that shops with little or no automation and labor-intensive production will face ever-growing challenges. It is almost impossible to compete with the low-labor environment of Mexico and the low Canadian dollar. 

But other molders have seen major benefits. They can buy parts for assemblies from both Canada and Mexico, mold some sophisticated, often low-tolerance parts in the U.S., and remain very competitive. As the data on these pages show, exports from the U.S. have grown sharply: It's not a one-way street of low-cost molded parts being shipped into the U.S. 

U.S. government sources say that during NAFTA's first seven years, U.S. employment grew by 12 percent, generating 15 million new jobs. Real U.S. industrial production increased by 43 percent. NAFTA proves that prosperous neighbors help create a prosperous America. In 2000, U.S. jobs supported by merchandise exports to NAFTA partners totaled about 2.9 million. That's up 900,000 since 1994, when NAFTA was implemented. 

NAFTA's aim was and is to create a unified customs territory encompassing the U.S., Mexico, and Canada. But it has done much more, creating the basis for a unified economic market. NAFTA was comprised of more than 400 million people and a combined gross domestic product of $10.3 trillion in 2000. Trade among the three partners more than doubled from $289 billion in 1993 to almost $659 billion in 2000. 

Economic changes on this scale take many years to show effect. Consider that the integration of the European Union took decades to accomplish and that more changes are required to meet the vision of the 1956 Treaty of Rome. 

We believe that the bulk of the changes for U.S. molders will materialize over the next decade, substantially changing the way molding is done. None of these changes is a surprise. And all of these changes are already visible: 

• The lure of low labor costs will continue the heavy transfer of additional molding capacity to northern Mexico, leading to substantial job losses in traditional U.S. molding plants. 

• Injection molders that have specialized in fully automated, high-speed production of items such as outer shells for computers, keyboard components, or caps and closures have experienced sharp increases in exports to both Canada and Mexico. 

• More high-value-added injection molding operations will be set up in Canada, supporting end markets like automotive, sporting goods, and electronics. Somewhat lower labor costs and access to a pool of highly skilled workers drive this change. 

• U.S. injection molders will emerge as technology providers, exporting the actual manufacturing while concentrating on developing advanced automation and manufacturing systems, sophisticated design, and marketing to what remains the single largest consumer market in the world—the United States. 

• President George W. Bush is proposing the expansion of NAFTA from its original three members to 34 nations in the Western Hemisphere. Called the Free Trade Area of the Americas (FTAA), this could create even more change. 

Here is one example of how manufacturing has migrated away from the U.S. Flextronics International Ltd. of Singapore now molds components for the successful Microsoft Xbox in Guadalajara, Mexico. Before NAFTA, sources with the company say, the U.S. could have been considered as a location. 

Another recent example is Sumitomo Electric Wiring Systems, which in December 2001 announced plans to close three plants in south central Kentucky and shift production to Mexico and Asia. The company makes wiring harnesses and electronic components for the automotive industry. 

There are numerous other examples. Practically every major automotive parts molder, supplier of components for computers and electronics, and now even supplier of medical parts has located molding operations in northern Mexico. 

The Current Recession 
The close integration in these three markets comes at a price. As the U.S. economy booms, Mexico and Canada boom along with it. Yet the reverse is also true. As U.S. manufacturing started to contract 16 months ago, the Canadian and Mexican molding industries also started to contract. 

The U.S. manufacturing market is likely to show signs of a strong recovery by late spring 2002. Actually, as reported in the Molders Economic Index, signs of this imminent recovery are increasing. 

How quickly will Mexico and Canada benefit? Most economists say that there is a three- to four-month lag between economic developments in the U.S. and its two NAFTA partners. While Mexico and Canada didn't see manufacturing decline long after U.S. molders saw orders shrink, the same will apply in a recovery. 

Canada is also troubled by relatively high inventories, mostly in high-tech goods. Since 1994 substantial portions of electronics molding operations have moved from the Pacific Northwest into Canada. Now, with the deep slump in electronics, Canadian molding shops are hurting. 

The Lure of Mexico 
Mexico today is the 11th largest economy in the world. Thanks to NAFTA Mexico is expected to show an average economic growth of 4.7 percent per year from 1999 to 2003. In 2000, trade value between the U.S. and Mexico reached a total of $263 billion, more than three times the amount achieved in 1993, the year before NAFTA was enacted. 

While 2001 brought some slowdown, it is far less severe than the manufacturing contraction in the U.S. or even in Canada. Mexico is poised to become even more attractive as President Vincente Fox makes credible moves toward eliminating rampant corruption. 

While trade between the U.S. and Mexico is obviously booming, it has become almost impossible to track specific trade patterns between the two countries. One injection molding company in Alabama that makes crash pad assemblies told us that some subassembly components move across the border as many as four times. 

Here is how this works. In Alabama this molder produces components for the speed indicator and other dials. These parts are shipped to northern Mexico and integrated into a subassembly. This subassembly is then shipped back to Alabama and matched up with the console, which is subsequently shipped back to Mexico for assembly with the rest of the crash pad. Finally, the finished product is shipped back to the U.S. to an automotive assembly plant. 

Don't you lose the efficiencies of low labor costs with all this shipping back and forth? No, says this molder. Even with multiple trips across the border it remains more cost efficient to do it this way. 

The only real problems now, after the Sept. 11 attacks, are massive border delays due to increased scrutiny of traffic into the U.S. To cope, molders north and south of the borders, in Canada and in the U.S., have had to adjust finely tuned just-in-time policies to guard against supply chain interruptions. 

Trade with Mexico is also no longer limited largely to a few U.S. border states, such as California and Texas. In 2000, 15 U.S. states each exported more than $1 billion worth of goods and services to Mexico. While exports from California ($52 billion) and Texas ($19 billion) led the way, exports from states such as Alabama, North Carolina, and Tennessee have expanded greatly. 

Driving this increase is the fact that manufacturers have integrated their production processes, according to the U.S. government. U.S. companies are using Mexican-made components in a wide range of electronics products. Mexico is also the leading supplier of TV sets and laptop computers to the U.S. Meanwhile, the U.S. is Mexico's largest supplier of such products as printed circuits, television tubes, and translators. 

Even more positive for Mexico's long-range growth, U.S. manufacturers are now turning to Mexico's research and development facilities. For example, the Delphi Engineering & Design Center in Ciudad Juarez now employs more than 1500 Mexican engineers. 

So how do U.S. molders benefit? Some 80 percent of all parts used in assembly operations in Mexico are imported from the U.S. For instance, molded outer shells and other components for computers are shipped from the U.S. to Mexico for truly labor-intensive operations: the computer's assembly. 

In contrast, Asian factories—whether for computers, cars, or telecom—use hardly any parts molded in the U.S. 

Canada's Role 
Trading ties between the U.S. and Canada represent the largest bilateral relationship between any two countries in the world. In 2000, imports of goods from Canada totaled $229 billion, an increase of 15.4 percent over the previous year. Exports of U.S. goods to Canada amounted to $178.8 billion, rising 7.32 percent over the previous year. Nearly 86 percent of Canada's merchandise exports are shipped to the U.S., representing 33 percent of the country's GDP. 

Data from various Canadian government sources show that close to $40 billion of all exports to the U.S. were molded plastics parts, mostly for automotive, electronics, telecom, and sporting goods applications. But commodity parts have shown growth, too: Canada's production of plastic plumbing fixtures jumped from Canadian $194 million in 1995 to Canadian $390 million in 2000. Some 40 percent of the increase is due to exports to the U.S. It is the same story for products as simple as stoppers, lids, and caps and closures, or for molded tableware or lighting fixtures. 

Canada is a very attractive location for foreign investment. In 1999, the stock of U.S. foreign direct investment in Canada totaled $111.7 billion. A major factor driving investment in Canada is the devalued Canadian dollar, which makes it cheaper for U.S. companies to operate there. According to a recent report by KPMG Canada, the cost of operating a manufacturing project in Canada runs, on average, 6.7 percent less than in the U.S. 

Canada's role could decline some in future years as Mexico's much larger population (90 million Mexicans vs. 30 million Canadians) becomes a wealthy and therefore more attractive market for U.S. companies. Today Mexico is already a major consumer products market. 

Canada's role producing automotive parts appears secure. In 2001 Canada accounted for 16 percent of light vehicle production and 11 percent of parts production in North America. 

The number of Canadian processing plants molding automotive parts jumped from 64 companies in 1995 to more than 90 in 2000. Their output grew from Canadian $1.76 billion in 1995 to Canadian $2.97 billion in 2000. Again, the overwhelming majority of the increase is due to sales to U.S. assembly plants. 

How NAFTA changed the trade picture

Imports and exports, billion $

 

1993

1994

1995

1996

1997

1998

1999

2000

2001*

Imports from Canada
Percent change, imports

111.2

128.4
15.5%

144.4
12.4%

155.9
8.0%

167.2
7.3%

173.3
3.6%

198.7
14.7%

230.8
16.2%

167.1

Exports to Canada
Percent change, exports
Trade balance

100.4

-10.8

114.4
13.9%
-14.0

127.2
11.2%
-17.1

134.2
5.5%
-21.7

151.8
13.1%
-15.5

156.6
3.2%
-16.7

166.6
6.4%
-32.1

178.9
7.4%
-51.9

125.2

-41.838

Imports from Mexico
Percent change, imports

39.9

49.5
24.0%

62.1
25.5%

74.3
19.6%

85.9
15.7%

94.6
10.1%

109.7
15.9%

135.9
23.9%

99.3

Exports to Mexico
Percent change, exports
Trade balance

41.6

1.7

50.8
22.3%
1.3

46.3
-9.0%
-15.8

56.8
22.7%
-17.5

71.4
25.7%
-14.5

78.8
10.3%
-15.9

86.9
10.3%
-22.8

111.3
28.1%
-24.6

76.5

-22.8

Source: U.S. Census Bureau; *Data through September 2001



Contact information
The Repton Group, New York, NY
Agostino von Hassell
(212) 750-0824
[email protected]

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