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November 1, 2003

6 Min Read
ETP migration to China an opportunity or threat?

The emergence of China as a global manufacturing base for a multitude of products is evident. Whether or not China will indeed become the "workshop of the world," it is clear that there will be major growth in manufacturing production capacity. Importantly, a significant share of this capacity is the result of a migration of production from the West and even countries in Asia.

This migration is at a high pace in engineering thermoplastics (ETP), as major international players such as GE Plastics, DuPont, DSM and others expand their facilities in China. This expansion is the result of a similar shift at the end of the supply chain in many applications that consume ETP, such as automotive and electronics. These shifts will have strategic implications to those participating in this supply chain, as the competitive landscape becomes more fluid.

This article describes this shift in ETP compounding to China and the potential threats and opportunities it suggests for market participants. For purposes of this article, Technomic Asia will focus on what are considered the "Big Five ETP" in China, namely PA, mPPO, PBT, PC, and POM. Trends in these ETP are indicative of trends in other segments such as PP, ABS, and AS.

Evolution of China''s ETP market

The ETP market has been developing for only about 20 years in China. However, it has quickly gone through the Embryonic and Early Growth phases and is now at the double digit High Growth phase. It is widely believed to be the fastest growing ETP market in the world.

The demand for ETP, especially the Big Five, is forecasted to grow 17% to 18% per year through 2007, thanks to a number of stimulants. There will be continued localization of molders/end product makers, both for local market consumption and exports, as China becomes a global manufacturing base (process center) for some key industries.

ETP demand is also driven by several very high-growth applications, notably automotive, business machines, and household appliances. The auto industry is one of the most significant drivers for high-end ETP consumption in China in the mid to long run. Currently, the consumption level of ETP in the Chinese auto industry is far lower than that in the West. For example, on average, one locally produced passenger car in China consumes 2.5 kg of PA, while it is about 14 kg per car in Japan, and about 35 kg in a BMW car. The Chinese government has realized this gap, and has published state auto quality standards to encourage more ETP usage in vehicles. The electronics/business machine market segments are rapidly localizing to serve China demand and as an export base for components and complete products. Government''s policy in encouraging ETP products (relatively environmentally friendly) and the rapidly growing economy are also considered important drivers for ETP consumption.

Shift to localization

The Big Five ETP market is presently "import dependent", with imports accounting for about 70% of local demand. Foreign invested enterprises (FIE) lead the local output supply with about two-thirds share. These include companies such as GE Plastics, DSM, PolyOne, Rhodia, and others. Major players such as Bayer and BASF are still importing.

Local supply concentration is low at present, with an estimated 1,000 compounders. The top 30 (approximately) comprise about 65% of production, however. Despite this fragmentation, there is a more concentrated profile in terms of geographic location. Most compounders are located in East China (especially Shanghai, Jiangsu, and Zhejiang) where an estimated 70% of production takes place.

However, this current import-dependent market is rapidly localizing. FIEs are increasingly active, and most have plans for significant expansion. For example, GE Plastics will expand from about 100,000 million tons by end 2002 to 200,00 to 250,000 million tons by 2005. DSM will quadruple its capacity to 50,000 million tons in about 4 years. DuPont is adding a new compounding facility.

This further migration of foreign compounders will make more high-end products available to customers in China. Many of these compounders are localizing, not primarily to lower costs, but for logistical reasons —to be close to their customer base. By 2007, Technomic Asia forecasts that imports will drop to one-third of market supply and FIEs will control about half the locally produced market

As part of FIE localization, some firms are also moving more technical capability to China. A good case in point is GE Plastics opening an R&D center in Shanghai this last summer.

Impact on supply chain

The impact on the supply chain into and out of the ETP compounders will be significant as a result of this localization trend. In an effort to optimize their localization strategies, FIE compounders are pressuring their supply chains to follow, or at least improve their support. The consequence of failing to address these needs is the loss of the account in China, and potentially elsewhere, as these compounders globalize their purchasing activity. Many of these compounders have or are in the process of shifting more sourcing responsibility to their China facilities, both for the China market itself and for other offshore markets, or even globally. For companies like DuPont, which is beefing up its local sourcing management and operations, this phenomenon is widespread across multiple business units in the company.

Another critical aspect of this local sourcing push is the potential for local Chinese suppliers to get qualified and break into these historically unreachable customers. As FIEs attempt to reduce their supply costs, they are naturally seriously considering local China producers who often can offer substantially lower prices. For companies that think the technology gap is too wide for this to happen, we believe they will be rudely awakened. Once a China producer achieves qualification and demonstrates it can meet customer demands, a ready channel is already established for them to sell to the same customers in their plants outside of China.

The future direction of China''s ETP market is clear. ETP will grow rapidly across the board, especially in the Big Five materials, which consume higher quality materials. Virtually all major foreign ETP compounders will rapidly localize production in China over the next 1 to 3 years.

Further, these FIE compounders will make the shift to locally source for much of their ETP needs.

Local China-based suppliers will likely be capable of supplying some of this demand. And some FIE compounders will use China as a supply source for products to export to other compounding facilities, both in Asia and elsewhere.

Those companies involved in this supply chain must respond or could face imminent threat to some of their key accounts. As their customers'' needs evolve and localize to China, their resources must follow suit. And the threat is not limited to China. If a major account is lost there, it opens the door for other geographies.

For those firms that answer the call, potential incremental opportunity awaits. If you are in place in China with the right resources and your competitors are not, this paves the way for you to crack or expand your position with their customers, first in China and then potentially backing into other markets.

The question is not whether to respond or not, but in what way and how fast.

Steve Ganster is managing director of Technomic Asia, a market strategy firm specializing in assisting companies with their growth strategies in China and Asia. Contact Ganster at [email protected], or visit www.technomicasia.com.

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