Expect a changed game when the world emerges from this recession.
The global economy has started moving again. In May China’s manufacturing economy expanded for the third month in a row. Retailers and manufacturers across the globe have started to rebuild inventories in order to be prepared for the recovery. The Journal of Commerce reported that its index that tracks prices of 18 industrial materials gained 9.5% in May, the most in a month since the measure began in 1985. Asia’s third-largest economy, India, also reported an increase in manufacturing activity for May.
Major shipping lines are taking cargo ships out of dockyards because global trade volume has increased somewhat and is likely to show real signs of life. The questions now are, How should North America’s molders position themselves for the recovery? Or for that matter, where should molders look globally for growth?
The U.S. economy shrank less than previously estimated last quarter, the government said in late May, and a Reuters/University of Michigan index showed confidence among consumers rose in May to the highest level since September.
Preparing for a recovery with uncertain dimensions is difficult. Where will you find real growth opportunities and in what end market? Keep in mind that this will be a “new economy,” hopefully devoid of the excesses and exuberances that damaged the global financial system in the last massive recovery.
The core issue for all molders worldwide is that the deep recession has changed the basic rules of the game and all must adjust to this changed situation. The two areas that represent opportunity more than anything else are global trade and an intensive emphasis on quality.
The new global economy
This will be a very different new global market. Many of the old rules no longer apply. For at least six more months, or longer, investment capital will be exceptionally tight as the global banking system attempts to return to a solid footing.
This will handicap molders eager to finance new capital equipment using traditional bank financing. The lack of hard capital investment dollars is likely the single major inhibitor of recovery. At this time, none of the stimulus funds have entered the economic pipeline, and molders that expand now have to rely on unconventional sources such as long-term financing with equipment makers.
Only in 2010 will we see a solid increase in injection molding machine sales. India and China will resume their role as major buyers of machinery while the European Union will lag all others in terms of positive recovery.
Automotive sales are in the dumps around the globe and the consumer's inability to obtain credit and financing will continue to hurt sales for most of 2009. The upheaval in U.S. automotive companies has also made many consumers stay away from showrooms—uncertain just who will be a "real supplier." The hope that Chrysler and GM will have better sales in late 2009 and in 2010 is high and, in our view, justified.
This recovery—slow initially—will impact the North American market for plastics processing machinery in several ways:
• Even though capital spending remains low and credit is restricted, plastics processors in the NAFTA region will increase buying of modern and highly advanced plastics processing equipment. Major vendors of equipment offer long-term financing and small regional banks are also often available for capital loans.
• Productivity-enhancing tools have proven to be a critical element in maintaining strength, even during a massive downturn. A good number of molders actually expanded in this recession. Located all over Canada, the United States, and Mexico, these molders have several aspects in common: Most concentrated on low-volume (part runs of less than 150,000 units/year), high-quality parts for automotive (yes, some automotive molders expanded), medical, and electronics. Another common aspect of these operations is that product pricing is less dependent on volume pricing and more on their ability to combine heavy-duty molding work with sophisticated design and assembly services. In other words, full-service shops as opposed to traditional custom molding shops will continue to expand.
• Equipment sales to Mexico, Canada, and the United States will increase again. We will see increases in all types of machinery sales later this year and results from NPE2009 will be of great interest.
• The desire for highly automated systems will increase pressure on machinery suppliers.
• We foresee that a trend toward longer-lasting consumer goods—a reverse of the throw-away society—will increase pressure on plastics processors as well as resin suppliers to produce higher-quality goods.
• A trend toward smaller houses will reduce demand for plastics in appliances, construction, furniture, plumbing, and electrical parts.
Current projections see 2009 as flat, with some growth in the latter part. The U.S. economy is recovering and the recession, it is believed, will end this summer. Factors showing positive economic recovery include:
• Improvement in suppliers’ deliveries and new orders.
• A 3.1% rise in the volume of exported U.S. goods after five months of decline.
• The U.S., along with Mexico and Canada, remain the engine of global growth.
• Only investment in new technologies and markets holds the promise of a brighter business future.
• The U.S. trade surplus will narrow some but will remain in deficit. However, the overall NAFTA economy will ultimately show a trade surplus. U.S. manufacturers already skillfully exploit labor cost differentials and shift manufacturing to Mexico and Canada (benefiting there from the low value of the Canadian dollar).
• While sales of machinery to U.S. plastics processors will never recover to the levels seen in the late 1990s, more machinery will be purchased in the United States but shipped elsewhere (see table, "Relative growth of injection molding machine sales").
Pockets and targets of growth
Injection molders in NAFTA will have multiple options outside the region to expand sales of products as well as for joint ventures.
As the table ("Industry automotive sales projections") shows, automotive consumption in the NAFTA region will remain more or less flat while global output of new cars will increase sharply. This means that we now have an opportunity for molders to expand abroad to gain a portion of the fastest-growing markets such as China and India.
In addition, major markets in these economies such as electronics, household appliances and goods, and medical devices are likely to flourish again after major declines. For instance, appliance exports collapsed by 27% in 2008 after having expanded 5.6% in 2007, according to Commerce data.
Trade will resume its role as a growth engine for molders inside NAFTA. As the graph on the next page page shows, the primary trading partners for U.S. molders remain Canada and Mexico. But other trade opportunities will also emerge again into countries such as Vietnam, China, and India.
In the first three months of 2009, total exports of manufactured goods from the United States dropped by 22.6% compared to the same period in 2008. Note that Commerce Dept. figures also show that imports into the United States of manufactured goods dropped by a higher percentage—24.6% (see below for data). But the rate of decline has slowed. The first truly positive growth in export sales is anticipated for Asia and the Pacific Rim, and by the end of the year, based on our projections, export sales of manufactured goods there will have shown an increase over 2008.
Electronics are a major export target for U.S. molders. Yes, everybody thinks that electronics are only imported and the North American manufacturing sector is all but dead. The reverse is true: Electronics is the largest merchandise export sector in the United States. More than $214 billion worth of products was exported in 2007 and about $211 billion in 2008. What creates the confusion is that items labeled “Made in China” often contain components manufactured in the United States, Europe, Vietnam, or Malaysia and are then assembled in China. Trade data as they are collected now do a poor job tracking such re-imports. We anticipate electronics exports to recover in 2010 and show growth of about 10%/year.
Author Agostino von Hassell is president of The Repton Group LLC, New York, NY.
Check out the Commerce Dept. figures that show how the import and export figures have dropped from 2008-2009, but with a markedly slower decline.