While uncertainty reigns elsewhere in the global economy, the plastics industry is standing strong. That’s the conclusion of the latest Plante Moran 2016 North American Plastics Industry Study. Things that keep processors and mold manufacturers up at night might be causing sleep deprivation, but they don't seem to be affecting their bottom line.
Plante Moran acknowledged that “issues could create headwinds for plastics processors in the future.” In the meantime, however, the analysts “are pleased to report that the North American plastics processor industry appears to be staying focused on operating efficiently and continues to offer growth opportunities for many (if not all) processors.”
Key factors include a 10-year high in productivity—up 17.1% from 2004. “Processors continue to carefully manage their labor costs,” Plante Moran noted. “This is usually a processor’s second-highest expense (next to material), and it is an expense for which the average processor has more control as compared to material costs.”
While productivity is up, press utilization decreased for the second consecutive year. “The productivity has been a compounded rate of 2 to 3% for many years, which contributes toward, but does not explain, the whole utilization drop,” Jeff Mengel, National Practice Leader for the plastics industry and author of the study, told PlasticsToday. The study notes that there has been significant investment in new equipment since 2008, which is now showing declines in utilization. Mengel noted that he fears “the acquisition of new equipment has caused some capacity issues” for molders.
Mengel also commented that customers have started to become more aggressive with purchasing practices, again, forcing cost models, undergoing reverse auctions and insisting on productivity givebacks on the total purchase price. “The net of all this is some molders are falling prey to repeating some of the issues of old,” he added. “Still, some molders have retained their discipline. So, it is quite a mixed bag out there that can’t be tightly correlated to any one issue.”
The study reveals that a few select markets, such as transportation, building and construction and consumer products, are showing solid growth, which is also contributing to processors growth. This growth is “fueled by favorable economic conditions including low unemployment and fuel prices, ample access to credit and a strong housing market,” said Mengel.
What drives profitable growth among processors? Plante Moran noted that for the second consecutive year it reviewed some of the key metrics for which successful companies have outstanding results. (Plante Moran defines a successful company as one that exceeds a 10% return on sales before interest and taxes, adjusted for owner compensation; a return on assets in excess of 15%; and sales growth greater than 5%.) Plante Moran also analyzed key business processes, which these companies consistently embrace. These key metrics are effective labor management (value add per labor dollar, turnover and automation); commercial discipline (“only 6% of sales of successful companies have gross margins of 10% or less compared to the industry average of 18%”); and a well-managed balance sheet, which includes return on assets, return on net capital employed and the Altman Z Score. “A strong balance sheet drives positive returns and the ability to grow,” Plante Moran commented.
A fourth key metric that drives profitable growth is innovation. “Successful companies can be innovative by developing product solutions to meet rising customer demand as well as by managing operations more efficiently than competitors,” said Plante Moran.
Key business processes analyzed by Plante Moran included efficient program launches. “Successful companies know that launches can become money pits if not properly managed with formal processes and effective teams,” commented Plante Moran. “Successful companies have operational processes and procedures that are highly aligned with their complexity (which equals the number of resins x number of molds x number of presses). Successful companies with high complexity are skilled at inventory and supply-chain management, plant layout design and customer service,” said Plante Moran. “Successful companies with low complexity are highly skilled at labor efficiency and asset utilization.”
The 2016 study features an analysis of the market in Mexico, where Plante Moran continues to see growth in end markets such as transportation, electronics, medical device and equipment, construction, agriculture and appliances, as OEMs in these markets invest in new manufacturing facilities in Mexico. “The long-term impact on plastics processors located in the United States or Canada (but not in Mexico) is still unfolding,” noted Ted Morgan, Plante Moran’s Plastics Practice Co-Leader. “So far, this does not appear to be an insurmountable threat to plastics processors, as OEMs in several industries continue to operate facilities in the United States and Canada and value having suppliers within a reasonable distance of their facilities. Similarly, for plastics processors in Mexico, we mostly see them supplying their customers’ facilities in Mexico with only a limited amount of plastics being produced in Mexico for immediate exportation by the processor.”
Plante Moran’s study uncovers four major factors driving OEMs to Mexico:
- An improved workforce through government-sponsored development programs to improve skills relevant to manufacturing;
- stabilized energy costs via reform policies that have made it easier to develop infrastructure, thus, stabilizing and reducing costs;
- competitive state incentives for companies making long-term investments in Mexico and creating industrial jobs; and
- favorable export agreements among Mexico and 42 countries, cultivating an environment that encourages exports and sets the stage for significant growth outside of North America.
Along with opportunities for OEMs and suppliers in Mexico, the study also points out challenges. Primary challenges that companies doing business there need to address include:
- Development of local management--candidates possessing the necessary skill sets are in high demand;
- high turnover of hourly workers because of a competitive landscape for skilled labor with companies offering attractive wage and fringe benefit packages;
- development of a supply chain, as Tier 2 and other downstream suppliers are slow to set up operations; and
- financing difficulty, a “large obstacle for smaller domestic and international manufacturers (mostly Tier 2 and 3 suppliers) to fund Mexican operations,” according to Plante Moran.
For more information about participating in these annual studies and receiving a full report, visit Plante Moran’s website.
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