Molders Economic Index: The GM strike will cut injection molding growth

GM Strike: The Impact
A slow downturn in the economy for the second quarter, an uncertain international outlook, and reduced growth, along with the GM strike, could be factors that "put us into a recession," an economist at Ford Motor Co. says. Others remain bullish. Two economists at major Wall Street firms say the economy will again pick up steam in the second half of 1998, and any impact of the GM strike will be "very minor." Others say the impact of the Asian turmoil combined with the GM strike will force the economy to slow somewhat, a major relief after the rapid pace set earlier in 1998. This, in turn, will keep interest rates stable and lessen pricing pressure.

While part of the strike coincided with a scheduled shutdown at GM, the strike, as of July 16, means the car giant will produce approximately 350,000 to 450,000 fewer cars and trucks in 1998.

What does this mean for injection molded parts? About 40 million lb of injection molded parts production-mostly in engineering plastics-will be lost. We spoke to various automotive parts molders in the Midwest. Those with active GM business report a "very sharp drop in orders."

Economists say GM accounts for roughly 1 percent of the Gross Domestic Product (GDP). Thus, the lengthy strike is impacting other industries, markedly electronics-because of the sharply reduced demand from Detroit-and consumer goods. It is unlikely GM will be able to make up for lost ground any time soon as it and others are faced with a growing wave of low-cost Asian imports eager to exploit the opening left by empty GM showrooms.

Some Soft Spots
Molders complain about the collapsing Asian currencies creating pricing pressures at home and, in some key markets, significantly cutting into new orders. Asian imports have risen sharply in the first four months of 1998 for such products as toys, telecommunications devices, car parts, and small consumer appliances. On average, according to Commerce Dept. data, imports for these products rose an average of 18 percent in these months as compared to the same period in 1997. The result is a corresponding drop in orders.

National statistics support this data. For the first part of 1998, industrial production rose at a moderate 2 percent annual rate, down sharply from the 6 percent rate set in 1997. Leading indicators showed no change for the second month in a row in May 1998. Inventories for the first quarter jumped very sharply to $106 billion as manufacturers had fewer export orders and some domestic markets showed a slowdown in consumption.

A key statistic is the second quarter GDP. In the first quarter, the GDP rose at a blistering 5.4 percent annual rate. Consensus is the second quarter will show just 1.2 to 1.4 percent growth and overall growth for 1998 will come in at less than 2.5 percent.

As an example of how imports have grown, exports from the Philippines rose 21.8 percent from a year ago in May, supported by strong sales of electronics. The National Statistics Office in Manila reported exports increased 20.3 percent during the January to May period from last year's numbers. Shipments of electronics and components, which account for 45.1 percent of total May exports, rose 21.7 percent. Where were more than 80 percent of these electronic products sent? The United States.

Decreases in Mold Orders
Several moldmakers have reported a decrease in new orders, fewer requests for bids, and sharply cut lead times. But this is unlikely to be a sign of economic weakness in the U.S. (See "Where has all the mold work gone?", July 1998 IMM)

Major buyers of molds-appliance makers, computer manufacturers, and toy sellers-say the introduction rate of new products, which require new molds, has increased, and purchases of molds remain the same or have increased. So why do U.S. moldmakers complain about a decline in orders? It is increasingly difficult to compete with low-cost mold imports from Taiwan and Japan. Sharply reduced currency values make imported tools more affordable than U.S. tools. Commerce Dept. data for the first four months of 1998 show a 34 percent increase in tool imports as compared to the same period in 1997.

Less Gloss in Electronics
First indicators show electronics may see growth slow somewhat in the second half of 1998. Higher imports and a sharp drop in demand combine to shave at least one percentage point off the growth for 1998.

Worldwide sales of semiconductors fell 12.8 percent in May to $9.99 billion from $11.5 billion the year earlier, as reported by the Semiconductor Industry Assn. (Washington, DC). May sales dropped in all four major chip markets. Japanese sales slid the most, falling 19 percent from a year ago. Sales in the Americas dropped 18 percent, while Asia-Pacific sales fell 7.6 percent. Meanwhile, sales of semiconductors in Europe slipped only 2.5 percent.

The Molders Economic Index is prepared exclusively for IMM by Agostino von Hassell of The Repton Group, New York.