Putting China’s moldmaking industry in perspective

The China peril to U.S. moldmakers, and maybe moldmakers everywhere, seems more anecdotal than factual. Don’t believe it? Read on: The author’s experience in Chinese mold shops dates back to the advent of that country’s moldmaking industry.

Just 20 years old, China’s moldmaking industry is in its infancy. But in that short time, China has become the world’s second-largest plastics processing market (behind the U.S.) and the third largest moldmaker (following the U.S. and Japan). The growth of China’s moldmaking industry has been spectacular, and the pace of that growth has proven cause for concern for moldmakers elsewhere.

China’s annual mold sales

In 2002, the accumulated turnover of China’s moldmakers was estimated at $875 million. The 2005 revenues of moldmakers exceeded $7.6 billion, with exports of $925 million—the latter a staggering 50% increase over 2004. However, as in many sectors, China continues to import high-tech, high-precision molds and export less-complex, labor-intensive molds. In 2005, China’s mold imports exceeded $2 billion. China imports high-quality and complex molds requiring multicavities, multicolor, and multimaterial, and a high degree of precision, with most of these from Japan, Korea, and Taiwan.

The mold industry in China is fragmented with only a handful of mold makers having annual turnover of more than $10 million.

Concentration in Guangdong could slow growth

Guangdong province (primarily the areas around Shenzhen & Dongguan) accounts for approximately 40% of China’s total mold production. Moldmakers here also have the best processing equipment compared to other areas in China. But Guangdong’s economic success will cause problems for moldmakers there. After almost three decades of breakneck growth, Guangdong is now the richest province in the mainland. Guangdong’s GDP reached $159 billion in 2005 (11.9% of PRC’s total GDP). By comparison, Hong Kong’s GDP in 2005 was $173 billion. (In terms of per capita GDP, however, Guangdong lags far behind Hong Kong.) Guangdong Communist Party chief Zhang Dejiang believes that the province’s economy will be as big as Taiwan’s in a couple of years and South Korea’s in another decade.

If he is correct, the chronic shortage of cheap labor for manufacturing industries in Guangdong will become worse as other sectors take off. More and more workers are leaving manufacturing for better pay and conditions in the services sector. As Guangdong becomes wealthier, living costs are soaring and employers have to offer higher pay for workers. The Pearl River Delta has labor-intensive industries such as electronics, textiles, food processing, and plastics, which employ about 15 million rural migrant workers from other relatively poor provinces. Normally, these workers return home for the Lunar New Year holiday and rush back to work after the long break. Until two years ago, employers in the Pearl River Delta could hire from a large pool of migrant workers after the Lunar holidays. A salary of $112 a month was sufficient for a migrant worker. Things have changed. Now even at $150 a month, factories cannot find enough hands.

There is also a startling change in people’s attitudes. Jobs such as taxi driving, waiting on tables in restaurants, and working as domestic maids—once considered menial —are more attractive than factory work for many. The labor shortage sweeping the Pearl River Delta will require profound restructuring of attitudes and even of the economy.

Even with the labor “shortage” in South China, labor in China is still a fraction of the cost in the U.S. While China’s labor force has a long way to go before it attains the skill sets of U.S. toolmakers, average wages in China are only a tenth of that in the U.S. and the Chinese workers’ skill set is developing rapidly with the transfer of industries from other countries.

Chinese threat to U.S. mold makers —real or imagined?

There is a great deal of anger and frustration with Chinese moldmakers who “are taking our jobs away.” However, the ire may be greatly misplaced—at least for now. The perception of the Chinese threat to moldmakers in the U.S. is amplified manifold by the paranoia that China’s exponential growth over the past 30-odd years has created. It must be remembered that China started with a zero base and, while China has the resources to maintain such a speed of growth for several more years, the rate of growth will inevitably taper off as the economy matures.

The emergence of China as a player on the world stage combined with the flattening of the world by advancements in technology has created uncertainties for workers everywhere—not only in the U.S. Many Chinese workers are also bewildered by the dynamic marketplace (where layoffs have now become a fact of life) that has replaced the state’s guarantee of food, shelter, and jobs from cradle to grave.

China’s economic development has benefited U.S. business interests as much as, if not more than, it has China. However, when companies shift jobs overseas, they clearly maximize returns for their shareholders and their executives at the expense of the laid-off workers.

The U.S. imported over $1.5 billion worth of molds in 2005 (less than the $2 billion that China imported). Canada accounted for $800 million of U.S. industrial mold imports—or a whopping 50.70%. China accounted for $79 million. Though China rose from being the eighth-largest exporter of molds to the U.S. in 2000 to the fourth-largest exporter in 2005, it still accounted for less that 5% of the mold imports to the U.S. While China’s mold exports have grown rapidly, it still accounts for a miniscule portion of the U.S. mold market. Canada’s 2005 mold exports to the U.S. were $97 million more than 2004, an increase greater than China’s total exports in 2005. Considering that the U.S. imports only about 20% of its mold requirements, China’s impact is limited to 1% of the U.S. mold business. China also is the third-largest importer of U.S.-made molds, after Mexico and Canada.

At least for now, the China peril to moldmakers seems more anecdotal than factual. China’s mold exports to the U.S. are bound to rise as the quality of Chinese molds improves. However, moldmakers in competing countries like Germany, Portugal, and Taiwan may feel the brunt of the China threat before those in the U.S. do. Nevertheless, there is no gainsaying that Chinese imports of molds to the U.S. will increase at the cost of moldmakers in the U.S. and in the other countries exporting to the U.S. Though China’s contribution to the decline of the moldmaking industry in the U.S. has been negligible hitherto, that is likely to change. The impact of China on the U.S. mold industry will be greater in the years to come. Moldmakers in the U.S. can view the China factor as a threat —or as an opportunity.

Next month: Sourcing molds from China—caveat emptor

About the author: S. R. Nair is the president of ITN Inc., a California corporation with investments in China’s moldmaking industry. He can be reached at [email protected]. ITN’s principals have been engaged in China since the early 1980s. For more information on ITN, visit www.itnusa.com.