The lure of Asia forces rapid realignment in the U.S.

The opportunities presented by both China and a booming India are forcing a rapid realignment of North American plastics processing.

While manufacturing facilities have been moving to Asia for many years now, the process is accelerating. And this realignment will limit the growth prospects in North America even though the initial data for Q3 2003 show strong 7.2% GDP growth.

Delphi Corp., in October, announced plans to shut down three major plants in North America. One is a battery manufacturing plant in Olathe, KS that molds battery cases, among other products. Even though car and light trucks sales are likely to reach another record level in 2003, domestic automotive suppliers have seen market share shrink.

In late October, Ford Motor Co. announced plans to invest more than $1 billion in China over the next few years to expand Ford production there seven-fold. It is obvious that all types of part suppliers will follow Ford to China. The next step will be to export cars from China back to the United States.

A combination of transplants operating here in the United States and primarily Japanese imports are accounting for an ever-increasing share of the market. The result for automotive parts suppliers located in the U.S. is less business, or, at least, less growth compared to other end markets. U.S. parts suppliers also have a growing problem competing with imported automotive parts, with Chinese imports of such goods growing at an annual clip of about 12%.

With more extrusion, blowmolding, and injection molding plants shutting down in the U.S., major suppliers are realigning their operations. By way of example, the Demag Plastics Group''s machinery production in China and India is slated to double in size, while key Van Dorn facilities in the United States are set for consolidation.

Grim Trade Data

The single largest concern for U.S. plastics processors is trade developments. Imports continue to rise, while exports show little solid improvement.

Note that for every $6 of imported Chinese goods, U.S. manufacturers export just $1 in goods to China. At this current rate of import growth, the ratio could easily reach $9 in imports for every $1 in exports by 2005.

The now much weaker U.S. dollar should eventually push the trade imbalance lower, as buyers adjust to new prices, but the first impact has been to increase the value of imports and thus increase the trade deficit, making any real export growth elusive. The key reason is that one major market—Europe—is stagnant and not buying more U.S. products while Japan, China, and other Asian economies are keeping their currencies undervalued.

We believe that the combination of growing imports and slow growth in exports will keep the actual expansion of the plastics manufacturing segment of the economy at a growth rate of just around 3.2% for at least the next six months.

Solid, ''Boring'' Expansion

While the overall GDP growth is stellar, manufacturing growth is, as one major extrusion executive said to us, "solid but boring." His company''s business—blown film for packaging and T-shirt bags—has shown order increases of more than 3.5% for each of the last six months.

"That''s nothing compared to what we saw in the 1990s," the executive says of a time when orders grew from 6% to 8% annually. Other processors have voiced similar perspectives, experiencing growth that is real and not to be discounted, but undynamic compared to the heydays of the 1990s.

This steady expansion in manufacturing will be helped along by generally lower energy prices, which will reduce operating costs in factories as well as cut into very steep fuel costs for trucking completed goods.

Another factor that will prompt orders to plastics processors is generally depleted inventories by major wholesellers, retail chains, and end customers such as automotive assembly plants. Many carmakers had feared a strike, at least for a while, and consequently cut back on parts orders. But inventories need to be replenished and that will benefit Q4 manufacturing performance.

Many processors will also receive a boost—assuming essentially continued growth for some time—from increased durable goods orders and a strong housing market:

New-home sales dropped in September but still showed their third-highest level on record. According to Commerce Department data, new-home sales came in at a seasonally adjusted annual rate of 1.145 million units in September, a small, .2% increase from August.

  • The National Assn. of Realtors said that existing-home sales rose by 3.6% in September to a seasonally adjusted annual rate of 6.69 million units, the third consecutive month of record-high sales.
  • The Commerce Department reported in late October that new orders for durable goods (manufactured products expected to last at least three years) climbed .8% in September. This reflected stronger demand for cars, communications equipment, and machinery.
  • Excluding orders for the volatile transportation equipment segment, all other orders for durable goods rose 1.2% in September, marking the fifth consecutive monthly increase. For communications equipment, orders rose 5.8%. Orders for machinery increased 1%, after a .2% dip in August. For electrical equipment and appliances, orders increased 1.4% in September, on top of a .9% gain.

In practical terms, virtually all types of plastics processing will benefit from this growth in demand, including: wire and cable coating; extrusion of window profiles and siding; plumbing components; electrical and electronics items; and other similar products. The housing market is of particular importance because it has shown solid resistance to imported components for years.

More on China

A minor change in Chinese tax law may slow the growth in Chinese sales to the United States. The tax law changes, which take effect Jan. 1, 2004, reduce the rebates on tax payments that Chinese businesses can claim for products sold outside China.

Technically at least, this should lead to an increase in prices of Chinese goods in the United States. On microwaves, small appliances, and air conditioners, for instance, the tax rebate will drop from 17% to 13%.

Whether Chinese manufacturers truly increase prices will not be evident until February, or more likely, March 2004. However, not boosting prices could erase very thin profit margins for many Chinese plastics manufacturers.

Some in Washington claim that this change in tax law is a back-door evaluation of the yuan, but, again, whether or not the change is reflected in pricing remains to be seen.

Should it be, the effect could be dramatic. According to a published report, the major microwave oven supplier, Galanz Electronics (Guangdong Province), which sold about two million microwave ovens to the United States in 2003, will have to increase prices on exports by at least 4%.

Agostino von Hassell, of the Repton Group LLC (New York, NY). Contact von Hassell directly at avonhassel@aol.com.

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