Molders Economic IndexThe positive impact of China for U.S. molders

You may be startled by the headline. So many of you have seen manufacturing jobs move to China, and others are under daily assault from low-cost Chinese imports.

The macro data are grim indeed. According to a recent analysis by the European Union, China accounts for 50% of global shoe production, 80% of the manufacture of DVD players, and 72% of all toys and sporting goods.

The trade deficit of the Nafta territory with China seemingly worsens every month and opportunities for export growth appear slim, unless you want to export molding plants.So what is good about this?

China Forces Change

Injection molders across North America have been forced to adapt and do so rapidly. What are they doing?

So what are the concrete benefits of all this investment? And how does this boost the ability of more and more molders to compete?

A lengthy visit to the 8-acre Wal-Mart store in Winchester, VA confirms what molders have been telling us for months. Keep in mind that Wal-Mart by itself accounts for about 30% of all U.S. imports from China. But walk the aisles and look at the products. Low-end items are virtually all manufactured in China. But the moment you look at high-end products—specialty cameras, mobile phones, and small appliances—you see "Made in the USA" much more frequently.

The heavy investment in automation and the latest generation of molding machines has paid off in one key area: North American molders can quickly mold precision components in relatively small volumes. They are now able to switch from one product to the next within an hour or less.

This satisfies an end market that demands short product runs to meet the consumer’s desire for highly individualized products. You want a purple cell phone cover? U.S. molders can pump this out on a moment’s notice.

Chinese molders have become very good at mass production of molded parts. But buyers at end users such as computer companies or carmakers complain that it can take months before production runs smoothly. The Chinese still lack the sophistication to rapidly produce high-quality products.

Will China and India catch up? Yes. But it will take time and that gives North American molders the needed breathing room to further boost their ability to react quickly to market changes. North American molders also benefit from close proximity to the market—no six weeks or more for shipping and long delays in ports.

All this makes us bullish on our projections for the next 12 months and beyond. Actual production data are starting to confirm this strengthening trend. But this does not affect all molders.

Key Economic Developments

Orders placed with U.S. factories fell by .4% for the second consecutive month in September, the first back-to-back decline since December 2002. Demand dropped sharply for manufactured goods other than defense materials, the Commerce Dept. reported.Yet orders for durable goods—and these include many high-end items based on molded products—rose .2% in September. Orders for computers and electronic products scored the biggest increase at 9.6%.

October will ultimately show yet another minor slowdown and November looks like flat growth for manufacturing. The Institute for Supply Management’s (ISM) index for manufacturing grew in October for the 17th consecutive month, while the overall economy grew for the 36th consecutive month.

Norbert J. Ore, chair of the ISM’s Manufacturing Business Survey Committee, said, "Strong growth continues in the sector, but at a slower rate than in September. New orders and production remain strong, and employment continues to expand. However, energy prices and commodity price inflation are major concerns for manufacturing buyers."ISM’s Manufacturing Index (PMI) registered 56.8% in October compared to 58.5% in September. ISM’s New Orders Index rose from 58.1% in September to 58.3% in October. ISM’s Production Index decreased 2.7 percentage points from 61.6% in September to 58.9% in October.

In the next few months somewhat higher interest rates will have a limited negative impact on molding. We anticipate continued investment in new manufacturing equipment. Additionally, molders serving the strong housing and electrical markets will continue to enjoy strong growth.

The Outlook for Automotive

In October consumers pushed up overall car and light truck sales by 2.2%. But with the exception of DaimlerChrysler, which shows sales growth of 2%, the only beneficiaries were foreign assembly plants in North America.

General Motors reported a 5% decline and Ford Motor Co. sales dropped 5.3%. Japan’s Nissan, Toyota, and American Honda all reported record U.S. sales in October while South Korea’s Hyundai Kia Motors had double-digit sales gains. Market share of Asian automakers jumped to 35.9%, up from 32.9% a year ago.

Overall sales for the auto industry are up just 1.4% this year, yet output of molders in the competitive automotive business has grown more than 2%, and for some segments more than 4%.

North American molders have now become clear beneficiaries of several trends. The low value of the dollar makes it more attractive for assembly plants to buy in the United States. And foreign makers, with an ear close to the political ground, are boosting domestic sourcing, concerned about possible trade battles in the second Bush administration.But importantly, the long-term outlook for automotive plastics is strong. A recent EU study projects that plastics will account for 25% of total vehicle weight by 2020. In 1980 the figure stood at just 5%, rising to 8% by 1990 and to 13% by 2004. By 2010 the study projects 19% content, based on weight.

This is a global trend and will boost molding across the world.

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