Outlook 2001: Slow growth first, nice pickup later


 
 
Actual growth rate, %
Nov. 1999-Nov. 2000
Projected growth rate, %
Nov. 2000-Nov. 2001
Projected growth rate, %
Nov. 2001-Nov. 2002
Projected growth rate, average %/year
Nov. 2000-Nov. 2006

While preparing this report in late November 2000, quickly moving economic and political developments forced us to revise near-term growth projections for molding downwards several times. Still, we project excellent growth prospects for the general injection molding market for the next six years. But we do anticipate a minor recession or at the very least a clearly measurable economic slowdown in the first part of 2001. Some pickup in economic activity is expected toward the end of 2001, kicking off likely solid growth through 2006.

We are not alone with these projections. Business Week in late November 2 0 00 projected that the new president will preside over the sputtering of the longest economic expansion in U.S. history. The Federal Reserve Bank in Philadelphia projected a sharp slowdown in growth in early 2001.

The growth for injection molding since 1991 the start of the current expansion has been nothing but spectacular. Sure, in 1997 and 1998 manufacturing slumped into a mini recession as a result of the financial and economic turmoil in Asia. But overall injection molding has enjoyed solid growth. Since 1994 when IMM's Molders Economic Index started the injection molding market has grown a cumulative 38 percent.

But this growth will slow in 2001. Most economists anticipate the U.S. GDP to slow its growth rate to less than 3 percent, down from roughly 5 percent in 2000. And some even say that GDP in the first six months of 2001 will show no growth at all. 

The signs of slowdown are everywhere. U.S. manufacturing output has fallen at an almost 2 percent rate in the third quarter, led by a 32 percent decline in the production of appliances and a 25 percent decline in truck production. Meanwhile, car sales have been softening. And inventories in most manufacturing plants have risen sharply.

Lack of Growth Abroad
Exports of high-value-added molded parts or products containing significant amounts of injection molded parts have slowed considerably in the third quarter of 2000 and are likely to slide further.

This is a result of both the strong dollar and slower demand in Europe and Asia. Projections of European growth in 2001 are being ratcheted down. Signs of weakness abound. West European new-car sales fell 4 percent in October compared with a year earlier. Meanwhile, German retail sales fell in September for the fourth time in five months.

In Asia, there are similar signs of weakness. Industrial production fell sharply in September in both Japan and Korea. And the bankruptcy of South Korea's Daewoo Motor may trigger massive layoffs in that country and hamper growth.

Continued Capital Spending
U.S. manufacturers as a group will continue to increase capital spending. The Repton Group anticipates capital spending among injection molding plants will grow at least 5.8 percent in 2001, and average 6 percent annually in the years 2002 to 2006.

The solid capital spending growth of the past five years continues as more injection molders benefit from improvements in manufacturing capacity. More productive machinery, aggressive use of computer technology and labor saving devices, and the increasingly tangible benefits of an Internet economy have combined to give manufacturers steady productivity increases. 

In a climate that discourages any form of price increase regardless of higher energy prices and more costly raw materials manufacturing profitability can only be generated through productivity.

Sector by Sector Analysis
Transportation. Molders supplying automotive parts face another trying year. Their customers, the big car manufacturing companies continue to demand lower prices from suppliers while orders for new parts show virtually no growth.

Car and light truck sales are also likely to show little or no growth in the first part of 2001. The third quarter of 2000 saw the import of automotive parts soar 11 percent compared to the same quarter in 1999. Most worrisome to some automotive molders is that since September 1999 the import of low-cost car parts made in China has doubled, taking away significant business from U.S. molders in applications such as door knobs and handles, rearview mirror assemblies, and other components.

Some molders have abandoned this market and others have found relief from these pressures through consolidation. And about the only way automotive molders can improve the bottom line is through productivity improvements or by adding value. This is hardest for small molders, those with sales of less than $75 million/year.

We believe that overall output of molded automotive parts will grow less than 1 percent in 2001. Some molders may even see negative growth depending on the extent of likely production cuts by U.S. carmakers.

What if there's a recession?



Electrical and electronics. We anticipate output growth for molders of electronics and electrical parts to slow sharply in 2001. In case of a recession growth will be just 8 percent; with a minor slowdown anticipate a 9.8 percent rate. This is down considerably from the 11.9 percent growth rates seen in the last year. In late 2001 and for most of 2002 we anticipate annual growth to jump considerably to 12.1 percent. The reason: Many of the major corporate PC buys seem to move in two-year cycles.

The market for molded products used in electronics and electrical parts has become very complicated. While U.S. molders still see new orders coming in, molders in Asia and Mexico have benefited the most from global growth. It is hard for U.S. molders to compete with imports. That applies to molders who are on the leading edge in terms of automation, advanced molding technology, and sophisticated parts assembly.

An Oregon molder of computer keyboards says that its margins have been reduced by more than 50 percent in the past year in order to compete with imports. And the retail market's move to lower-cost package deals - the typical PC package, with printer, is now priced at less than $900 in the U.S. has forced U.S. molders to accept lower prices for their products. 

The global PC market is the gauge to watch, and global market opportunities may be one way for U.S. molders to restart growth. This would include moving manufacturing and assembly operations abroad.

Here is a quick look at global growth in PCs: In 2000, U.S. domestic PC shipments grew about 10 percent, down from the 15 percent rate seen in 1999.

We project excellent growth prospects for the general injection molding market for the next six years.

In the third quarter of 2000 global PC shipments jumped 15 percent. The Asia-Pacific PC market experienced strong growth in the third quarter as shipments totaled 4.6 million units, an increase of 34 percent over the same period last year, according to Dataquest Inc., a unit of Gartner Group Inc. China continued to lead the PC market in the region with a market share of 39 percent in the third quarter of 2000. That market grows at an annual rate of 14 percent. Japan's shipments of PCs rose 23 percent in 2000, according to the Japan Electronics & Information Technology Industries Assn.

Latin America was the fastest growing region in the PC market during the third quarter, according to Dataquest. PC shipments there approached 1.9 million units, an increase of 47 percent over the same period last year. Interestingly, many of these PCs are sourced in the U.S. However, that export opportunity will shrink in the next few years as Latin American economies build up domestic PC manufacturing capacity.

Europe is a different story. PC shipments in the third quarter of 2000 totaled 8.1 million units, a 9.9 percent increase over the same period last year. This is the slowest rate of growth of all major regions.

Molders making DVDs have seen spectacular growth. This market had U.S. growth rates of 18 percent in 1999 and more than 22 percent in 2000. This growth, however, has hurt molders making videocassettes. Videocassette shipments declined about 8 percent in 1999 and may see an additional 11 percent decline in 2000. Depending on how rapidly the U.S. consumer embraces DVD technology, the videocassette market - once a very lucrative molding application - will decline even further.

Medical. Output growth for medical devices and machinery and disposable medical products will slow in 2001 to 7 to 7.5 percent, down from 9.7 percent growth in 2000.

Overall health care spending in the U.S. is still growing but outlays for new products have slowed somewhat. One reason is that advances in pharmaceutical technology have allowed drug therapies in some cases to obviate the need for in-hospital treatment. The result: sharply higher spending on prescription medicines and reduced spending on the many disposable plastic products used in hospitals and doctors' offices.

One Michigan-based molder of syringes says that for the past 10 years his business grew annually more than 12 percent.  But for the past 14 months this rate of growth has been cut in half. The demand is just not there, says the molder.

Toys. This category, which includes sporting goods and some electronic games, is not doing well. While U.S. sales of such products are increasing 6.3 percent annually, according to the U.S. Department of Commerce, domestic producers are seeing less of this growth as imports gain ground. For 2001 we project a contraction of as much as 2.4 percent.

Packaging. Growth in this market may slow to as little as 2.6 percent with a recession, or to 3.6 percent with a minor slowdown in 2001. Several developments impact growth of injection molding output in the packaging field.

Imports - mostly from Mexico and increasingly from Brazil, have limited the ability of U.S. molders to fully benefit in a market where overall growth in 2002 was about 6.8 percent. U.S. molders only saw growth of 4.3 percent.

Blowmolding is another factor. Products typically injection molded, such as drug containers and other similar small packages, are migrating to blowmolding as technology there has boosted productivity well above what injection molding can deliver.

Building and construction. Late 2000 saw several signs of weakness in the housing market even though building permits are still being issued at a high rate. Higher mortgage rates are likely to slow growth in housing for most of 2001. In October 2000 housing starts inched up to a seasonally adjusted annual rate of 1.53 million. While this is a high rate by historical standards, it is important to note that even with the small advance, new housing construction declined each month from May through August. For the first 10 months of 2000, housing starts were down about 3.5 percent.

A general trend in the U.S. to build larger houses brings a boost in the use of molded parts.

We anticipate no growth in housing starts for 2001, but the good news is that new applications are boosting orders for molders active in this market. New molded components are being used in novel window and door designs. And a general trend in the U.S. to build larger houses boosts the use of molded parts in plumbing, fixtures, and electrical parts. We anticipate output growth for molded parts in 2001 to exceed 3 percent.

Furniture and furnishings. This market is driven very much by the housing market. While slower consumer spending will have some impact here, we still anticipate solid growth for molders in the 3.3 to 3.6 percent range for most of 2001.

Appliances, durable goods, consumer goods. From 5.3 percent growth in 2000, this market will drop down to a 2.9 percent growth rate with a recession, or 4.1 percent growth with a minor slowdown.

Durable goods orders, which include many consumer products and appliances, have been trending down for the past few months, indicating weakness in early 2001. Appliance production and orders are off by the steepest margins as imports have grabbed a growing share of the new home market.

The long-term outlook remains good. Appliance molders are aggressive buyers of advanced injection equipment and downstream assembly devices. This will restore their competitive stance and allow them to compete effectively with imports.

Issues to Watch in 2001
The global economy faces numerous uncertainties in 2001 and injection molders are advised to keep a close eye on several key issues that could affect growth prospects.

  • Oil prices, which show no sign of moderating, may impact Asia's economies and slow demand there for U.S.-made products. High-value-added products such as medical devices, telecommunications equipment, and some computers are most likely to be affected.                        
  • Keep an eye on foreign currency reserves across Asia. With the exception of booming Taiwan, none of the Asian tigers has built up sufficient currency reserves to withstand a prolonged financial crisis triggered by high oil prices and slumping domestic demand. And banks, primarily in Thailand, Indonesia, and the Philippines, are still in pretty bad shape, reducing local access to capital for industrial expansion.                        
  • Japan is enjoying a solid recovery and will likely show economic growth close to 2.8 percent in 2001. That is regardless of the oil situation (the Japanese economy has historically weathered this issue well). Japan's economy grew 1 percent in the April to June 2000 quarter compared to the previous three months, the second consecutive quarter of growth. Also, the Bank of Japan's quarterly tankan survey of corporate sentiment in November 2000 signaled an increase in planned investment.                        
  • U.S. molders will be forced to further examine options for moving manufacturing to Asia. Basic design, management, and production operations could remain in the U.S., but the actual molding will increasingly be done abroad.
  • An economic slowdown and rising unemployment might lead to a renewed outcry against imports.  There is a protectionist problem that could arise that might be made more difficult because of the closeness of things in Washington, says Jim Leach (R-Iowa), chairman of the House Banking & Financial Services Committee.

 

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