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September 1, 2003

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Molders Economic Index: Ten-year retrospective on molding economics

Ten-year retrospective on molding economics

When will we see substantial expansion in U.S. injection molding? Not any time soon, according to the detailed data we have collected on injection molding since July 1994. While for the first seven years the Molders Economic Index tracked solid and in some cases explosive growth, the past three years have seen the molding output in the U.S. decline. Much of this is due to the severe manufacturing recession that has idled many U.S. plants. At the same time, imports of molded products are grabbing an ever expanding share of the U.S. markets, leaving U.S. molders with grim choices: Shut down or move manufacturing abroad, mostly to China.

Tepid Growth

For nine years, the MEI has tracked annualized growth rates of key end markets for injection molded products. By our measure the once-solid growth in output started to halt in August 2000 (see Figure 1, p. 51). Of all markets, only medical molding has shown accelerated growth rates in the past three years; this is due to the massive expansion in health care spending in the U.S. caused by an aging population.

Packaging has held steady at an average growth of 4 percent/year. But other markets show sharp declines.

These data are in line with what molders have been saying for several years now. Once-lucrative markets such as automotive are moving to low-cost-labor countries. Annualized growth in the past three years in transportation has dropped from 1.81 percent to just .27 percent; electronics, from 17.04 percent to about 10 percent; and electrical applications, from 17.04 percent to 5.2 percent. Toy and sporting goods production in the U.S. is also declining and may decline further.

Just how much of the market has moved to Mexico and Canada becomes apparent with another set of data collected by the MEI since July 1998 (see Figure 2, p. 51). Note that both Canada and Mexico have had a free ride by keeping their currencies low compared to the dollar, giving those molders substantial pricing advantages.

But we do not anticipate the healthy growth rates for the NAFTA territory to continue. Manufacturing in Canada and Mexico is under massive assault, with molding facilities moving rapidly into Asia.

The Mexican Labor Ministry reported in June 2003 that more than 300 manufacturing plants have shut down in Mexico in the past 24 months and were moved to China. In Chihuahua State, a key location for many molding plants, more than 7 percent of manufacturing jobs were lost between January and April 2003. Foreign direct investment—a measure of how much new manufacturing is set up—declined from an all-time high of about $25 billion in 2001 to about $14 billion in 2002, according to World Bank data.

Structural Issues

What is the outlook? On a positive note, North American molding plants have never been as modern and well equipped as they are now. In the 1990s and well into the year 2000 molders spent heavily on capital improvements.

New injection machines, advanced automation and inspection devices, automated assembly machinery, sophisticated materials handling equipment, and decorating and printing equipment all allowed molders in North America to significantly lower the cost of direct labor used in the manufacture of even low-cost commodity parts. In addition, injection molding plants in North America enjoy the highest possible productivity rates combined with highly advanced product design and materials technology.

But this investment has not been enough to stem the flood of imports and the simultaneous migration of manufacturing operations to Asia. China enjoys an enormous advantage, some of which is created by pure manipulation. China’s currency has not changed in value to the U.S. dollar in many years and is now believed to be undervalued by at least 40 percent—possibly by as much as 60 percent.

There is little doubt that this is a deliberate effort by China to continue boosting manufacturing exports—primarily to the U.S.—with artificially low prices. Imagine how different markets would look if imported Chinese parts cost 40 percent more overnight. A good bit of China’s advantage could vanish. And it is China that clouds the domestic outlook for manufacturing and molding specifically. While there are some efforts from the unions and the manufacturing industry to push for political pressure from Washington, we do not anticipate any real change for some time.

Growth Projections

Growth projections for the next 10 years depend on many factors. Such projections can often change rapidly due to unforeseen events such as war or what is known as “disruptive” technology developments. One example of this is the sharp decline in sales of the parts-intensive VCR tapes being replaced at a rapid clip by DVDs. A major molder of VCR tapes saw sales decline 66 percent in the past 24 months.

In Figure 3, our projections for the U.S., Canada, and Mexico are split in two parts: One assumes no change in policy towards China, while a second anticipates that within three years the pressure on Washington will mount and force a readjustment in Chinese-U.S. trade relations. Washington will pressure China to substantially revalue the currency. The Office of the U.S. Trade Representative as well as the International Trade Commission will also become much more receptive to aggressive anti-China moves such as complaints before the World Trade Organization and substantial antidumping proceedings.

Current News

Here is a snapshot of current key economic news:

  •  The manufacturing sector expanded in July for the first time in five months, the Institute for Supply Management (ISM) reports. The Institute’s manufacturing index stood at 51.8 in July, up from 49.8 in June. A reading below 50 indicates that manufacturing activity is slowing, and a reading above 50 indicates expansion.

  •  The ISM's report also showed that new orders to factories grew sharply in July, rising 4.4 percentage points to 56.6 percent, suggesting future growth.

  •  Similarly, new orders for durable goods jumped 2.1 percent during June, the fastest rate in five months, led by a surge in demand for new aircraft and cars, the Commerce Dept. reports.

  •  Industrial production rose slightly in June, but manufacturers saw their biggest output gain since January, says the Federal Reserve. Overall production at American factories, mines, and utilities rose .1 percent in June, while capacity utilization held firm at 74.3 percent. The MEI reports a similar increase in output.

  •  Factory production, which makes up more than four-fifths of overall industrial output, rose by .4 percent, its biggest gain since January, according to the Federal Reserve.

  •  Continued strength in housing spells good news for molders of electrical parts, furniture components, appliance parts, and plumbing fixtures—markets where import penetration remains low. The Commerce Dept. says housing construction in June rose 3.7 percent from May to a seasonally adjusted annual rate of 1.8 million units, the highest level since January.

  •  Orders (including durable goods) to U.S. factories rose 1.7 percent overall in June—the biggest gain in three months, the Commerce Dept. reports.

Agostino von Hassell of The Repton Group, New York, NY, prepares this index. Contact him at [email protected].

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