International Molding Report: Where will Europe go?

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

Europe—overall—is the single most important trading partner for the United States. It is also a key influence in all aspects of injection molding and plastics processing. In fact, about a third of all installed injection machines in the U.S. have been imported from Europe. European injection molded products, including everything from Lego toys and mobile phones to coffee makers and medical devices, have a significant presence in the U.S. market. Injection molders across the U.S. find themselves competing against European imports just as much as they compete against imports from Asia and Japan. The main difference: Europe's exports to the U.S. tend to be primarily high-value-added parts molded to very close tolerances. 

Europe is in the middle of major changes that can be summed up simply: The economies across the continent are struggling to catch up with the U.S. By the words of key political leaders such as German Chancellor Schroeder, "Europe is 10 years behind the United States." 

The changes in Europe will cast a long shadow and are likely to impact U.S. molders directly. But we believe that the pace of change will be relatively slow and that U.S. molders will have plenty of time to adjust to the evolution of a formidable competitor. 

Europe Today 
The European Union (EU) is the U.S.'s second largest trading partner, behind Canada. And the U.S. is the EU's largest trading partner. Last year the U.S. imported more than $150 billion worth of goods and services from the Euro-11 (the 11 countries that have converted to the euro). That represents 22 percent of total U.S. imports. 

In looking at Europe, U.S. molders can anticipate some dramatic changes taking place in many markets in the near future. These changes are caused by the following trends: 

• The populations of Europe are turning grayer every year. This change in demographics forces increased dependence on automation in manufacturing to reduce the labor input in a world where labor will be hard to come by. Europe is faced with negative population growth, considerable unemployment, and, simultaneously, a massive shortage of skilled workers in information technology. For example, in 2000, the EU will have a shortfall of 600,000 skilled information technology workers. The only real solution is immigration, which politically is almost unacceptable in countries such as Germany, France, and Italy. 

• The computer and Internet revolution is starting to impact Europe. The continent is still well behind the U.S. in applying this technology, which has been such a benefit to our economy. The result in Europe will be that many plastics processing companies will either have to change, adapt, or go out of business. The euro has created a new playing field: Competition is truly across Europe, and high-labor-cost countries such as Germany need to adapt now. 

• The dramatic drop in the euro's value has given plastics machinery makers and processors a 20 percent advantage in their sales to the United States. U.S. molders in many high-tech applications say they are increasingly unable to match the low prices offered by European processors. 

So what does this mean to Europe's plastics industry? The domestic market in Europe for new plastics processing equipment, as well as products made via plastics processing, is unlikely to show any significant growth over the next decade. If you compare actual and projected growth in Europe to what is in store for the U.S. you will see a major gap (see charts). Growth in the past five years for plastics processing in Europe has been slow overall. We estimate that actual output growth at EU plastics processing firms has been one-third the rate seen in the U.S. since 1994. 

For instance, Italy's consumption of plastics products over the last five years has grown only .7 percent per year. For 1999, Germany's plastics processors reported very lukewarm results. In early April the German Plastics Processor's Assn., or GKV, said that sales increased just 2 percent compared to 1998, which was a very good year. For 2000, the GKV anticipates sales growth of 3 to 4 percent. 

Catching Up 
As population growth further slows, labor demand and costs increase, and the social welfare burden and taxes increase, Europe's ability to export competitively in a global market will become severely hampered. Also, as Europe attempts to prop up the value of the euro—likely to start later this year—it will be harder for European processors and machinery makers to compete in the U.S. We believe that import of high-quality plastic parts to the U.S. will start declining in 2001, and will continue to decline at a rate of 4.5 percent/year. 

But Europe also has a lagging technology sector. Despite feeble efforts to do so, Europeans as a whole have not been able to stay abreast of the technological revolution. Measured productivity in the U.S. during the past three years has grown twice as fast as the average of the previous 20 years. Not one single country in Europe has kept pace with this progress. 

But in the U.S. we have made even further strides. Mass production was the hallmark of the industrial age, and GDP is a statistic designed for mass production. It measures the number of units made and, since productivity is derived from GDP, we get an adequate measure of productivity. But, with the aid of technology, we have moved from mass production to mass customization. Today's economy is not just about producing more stuff; it is about customizing products to fit particular tastes—producing the right stuff. 

Aggressive adaptation of quick mold change technology and the use of concurrent engineering in product and mold design have been key developments in the U.S. While European firms developed much of the basic equipment—such as sophisticated injection molding manufacturing cells—relatively little of this equipment is used in Europe proper. One reason for this is the lack of funds available for aggressive capital investment. Also, the inability to reduce workforces at will has limited the incentive for European processors to invest in highly automated plastics processing and secondary equipment. 

Just recently Spanish Prime Minister Jose Maria Aznar said, "In Europe we are being left behind for we have not been capable of reproducing the successes achieved on the other side of the Atlantic in the 1990s. Our problem is not the lack of a scientific or technical base. It is the lack of stimulus for business initiatives, which is the key to North America's success." 

As a whole, the Euro-11 countries are experiencing a slightly lower inflation rate than North America, but their combined GDP is about half that of Canada and one-third that of the U.S. GDP in the Euro-11 has grown less than half of that in the U.S., based on factors already mentioned. That will continue to be the case, based on our forecast. 

We did increase our estimated rate of GDP growth for the Euro-11 last month, and there has been some recent speculation that it may grow as high as 3.4 percent based on forecasts made in April by the International Monetary Fund and the Organization for Economic Cooperation & Development (OECD). This upward tick is highly dependent on interest rates in the U.S. and Europe. Despite the movement upward, 3.4 percent will likely fall short of many economies in Asia crawling out of economic recession. 

In the computer and electronics area, the Euro-11 experienced an 8.8 percent growth rate over the last year, which pales compared to the U.S. and Canada. The parity between the North American values and the European value can be attributed to the lack of investment in new computers and electronic technology, which in turn stunts productivity. 

What U.S. Molders Should Look For 
The cost pressures on plastics processors in Europe will, we believe, foster a revolution in machinery design. Molders in Germany, Italy, and France are faced with a situation where they are more or less unable to raise product prices in the face of escalating raw material costs and relentless labor cost increases. Germany's GKV said that in 1999, Germany's processors could raise selling prices just .6 percent while average resin prices jumped 80 percent. 

Starting with NPE 2000 we believe that Europe will begin to demonstrate a generation of new equipment that is designed to minimize operations costs (lower energy consumption, reduced maintenance needs) as well as lower labor requirements. This, say European molders, is what is needed to be able to compete. 

"We have to reduce the direct labor input for each plastics part by almost 75 percent over the next 10 years to become truly competitive again," a major automotive parts supplier in Germany told us. The major hurdle here is lack of funding for capital investment. Across the EU plastics processing has shown practically no growth in five years, discounting the effect of inflation. Capital spending in plastics processing needs to increase 22 percent annually for the next five years, say German and French processors.