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January 4, 1999

15 Min Read
For 1999, uncertainty rules as global turmoil continues

While the predictions on the timing and depth of recessionary times vary widely, business for injection molders still looks positive. Here are our predictions on growth in molding's major markets for the near and longer term.
By Agostino von Hassell, The Repton Group

Probably not since the end of World War II have fundamental conditions in the United States been better for solid economic growth affecting all segments of the very diverse injection molding market. Interest rates remain low and are likely to decline further, inflationary pressures remain light, and solid consumer spending fuels a still growing U.S. market.

At the same time, uncertainty about which way the U.S. economy will move is considerable. Some economists say we are already in a recession. Others say a recession is just around the corner-meaning early 1999-while others confidently predict solid growth after a very brief and light slowdown. Part of the uncertainty stems from the sad fact that economists have to make projections based on data often three months old or older with only minor hints as to current conditions.

What is our prediction? Rather than taking the safe middle ground, we do believe the continuing foreign economic turmoil will cause the United States to slip into a recession, but solid growth will resume after a three or four month contraction. However, for most injection molders, the recession will be quite mild.

Strong '98, Weak '99, Strong '00
On average, all injection molding markets showed a growth of 4 percent for the period from November 1997 to November 1998. This is well above the rate anticipated of 3.5 percent for 1998 for the entire economy. As shown in the graphs below, some markets have outperformed this average: Molders in electrical and electronics applications saw output jump 12.87 percent. Medical is another leader, returning a 4.20 percent growth. Others lag; for instance, transportation showed a tiny .30 percent growth, largely a result of the GM strike.

Available economic data-some of which are reported here-show the rate of growth has been slowing for several months now. We project that between November 1998 and May 1999 injection molders will, on average, be able to grow just .87 percent on an annual basis. However, if you remove the still bullish electronics sector, the average growth turns into a drop of .10 percent.

Several sectors are likely to contract: transportation, building and construction, toys, and industrial and machinery. For the balance of 1999, we project overall growth of just under half a percent. Again, when you remove the electronics sector from this projection, you will see a .76 percent contraction throughout 1999.

Beyond that? Growth will resume at the same pace seen in 1994-1998, averaging 4.50 percent per year for injection molders.

The following is a look at some of our reasoning and the assumptions that have led to this somewhat bleak near-term forecast. We believe the impact of the Asian contagion has been underestimated and will truly be felt across this country soon. We believe a very strong dollar is creating a new surge in imports of all kinds of plastics parts as well as a growing migration of manufacturing projects from the United States to locales in Asia.

Some injection molders-mostly those making electronics parts of all types-can anticipate yet another year of double digit growth. Even the most negative projections for 1999 show growth in areas such as medical parts and packing applications. Other market segments among injection molders can expect, at worst, a temporary contraction before resuming a high rate of growth in 2000 and beyond.

The Impact of Asia
U.S. economists-including the writer of this article-have consistently been wrong in tracking this crisis. First, we were very late in even recognizing its extent in Asia. Second, we kept minimizing any potential impact on the U.S. economy. We believe data for 1998 and the first six months of 1999 will show the impact of Asia's trouble runs far deeper and will have much more of a lasting effect.

Data for September 1998 show the import of plastics parts in categories that are mostly plastics-interior car parts; medical devices components; components for computers, keyboards, printers, and business machinery-from Asia have jumped 41.20 percent compared to September 1997.

But there is more than just a growing flood of low cost imports. Opportunities for domestic injection molders are fading as major end users pull tools and shift jobs to Asia to take advantage of dropping labor costs there. Late this year, White House economist Janet Yellen said the estimated deteriorating trade has subtracted about 2 percent from the U.S. rate of economic expansion in the first half of 1998. The same or worse is anticipated now for the second half.

Trade Worries
A point of concern has been imports from Asia, ranging from shoes and small appliances to toys. Businesses in the Pacific Rim, hurt by weak domestic economies, have all been taking advantage of their weak currencies to flood U.S. markets. The U.S. international trade deficit in goods and services widened in August to the highest level on record as exports fell to a 11/2-year low and imports increased, Commerce Department figures showed. The deficit rose to $16.774 billion in August after widening in July to a revised $14.547 billion. The majority of our sources predict several months of trade deficits in 1999 with the monthly gap exceeding $20 billion.

Exports of goods and services fell .30 percent to $74.839 billion during August as demand weakened for civilian aircraft, industrial equipment, and farm products. The level of exports was the lowest since January 1997. For molders in particular, exports had provided much of the growth in past years. Further export declines are anticipated. Uncertainty rules on the fate of Brazil, the world's eighth largest economy. And others predict China may finally have caught the Asian bug and may see actual growth for 1998 drop to less than 4.50 percent.

While Asia represents just 3.50 percent of all U.S. exports-and note that region's impact-a downturn in Latin America would be far more significant. Almost 12 percent of all U.S. exports go to Latin America, and 10.10 percent go to Mexico. Imports rose 2.20 percent to $91.614 billion in August, led by autos. Shipments of cars and trucks assembled in Canada and Mexico rose after the end of a 54-day strike in the U.S. against General Motors Corp. Auto imports from Germany, Japan, and Korea also increased. The U.S. trade deficit with China widened in August to a record high as U.S. toy imports surged, rising to $5.909 billion from $5.420 billion in July. Imports from China rose 4 percent in August to a record $6.796 billion. Many of these imports into the United States are relatively low quality products, often of little appeal to domestic molders.

But molders in the high end of the business-molders of medical devices and test equipment, computer components, office equipment, and large appliances-will see their sales abroad decline. U.S. exports to China fell 20.50 percent in August to $888 million.

Another warning sign: U.S. worker productivity fell in the second quarter for the first time in three years as the economy shifted into a lower gear. Productivity fell at an annual rate of .20 percent. That follows a revised 3.50 percent gain at an annual rate in the first three months of the year. For the first six months of the year, overall U.S. productivity averaged a 1.60 percent annual increase-above the 1.40 percent reported for all last year.

Other data confirm this trend. Import of thermoplastic injection molding machines of all sizes show the same slowing trend. While for the first three months of this year, injection machine imports raced ahead by about 25 percent compared to imports in the same period of last year, by August this had melted down to a minor 2.80 percent increase. Overall, machine imports are projected down for the balance of 1998 and down another 3 percent for 1999.

As of this past September, the total value of imports went up from $306 million to just more than $334 million. Average imported machine prices rose 6.07 percent after having shown declines for the majority of the past 12 months.

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Sector by Sector Projections
Injection molding markets will be affected very differently by such a sluggish economy. The key reason is that it will not be a typical recession where all sectors of the economy seem to be hurt more or less simultaneously. This means while some sectors will continue to grow, others will show contraction. So your view of the near future for injection molding is very much contingent on what segment of the business you serve.

Note that these growth projections reflect an increase or decrease in the dollar volume output at U.S. injection molding plants. In other words, this is a composite made up of various factors including resin poundage, products shipped, and actual manufacturing sales as measured in detail and in small industry sectors by the Commerce Dept.

Transportation
The automotive or transportation market was severely battered by the GM strike. Commerce Dept. data show a surge in imports of automotive parts of all types. As of September, and on a year-to-year basis, such imports have risen by more than 21 percent as compared to the first half of 1997.

While we anticipate U.S. car and truck production to remain relatively stable for the rest of the year, a surge of low priced imports will depress growth early next year. At the same time, parts production is increasingly likely to continue to migrate abroad, to Mexico in particular.

We anticipate for all of 1998 car and truck sales will be just below 15 million units and just a touch less in 1999. Growth in terms of units for the years beyond is likely to be minimal at best.

Even taking into account GM's scramble to recapture market share, growth for U.S. injection molders for the next six months will stagnate, dropping a very minor .20 percent.

For the next three years, we project annual growth of 2.20 percent. A partial reason for this growth-far slower than the rest of the economy-is estimates showing few new volume-adding applications for injection molded parts on cars.

Will we see more foreign firms setting up automotive parts production facilities here in the United States or in Northern Mexico? Yes. We do not see any end to this migration into North America, even with Asian currencies temporarily depressed.

Electrical & Electronics
This is a very nice market and will continue to be a star performer for some time. Overall, this market has been moving along at a blistering 12 to 15 percent annual growth rate for several years now. Even a relatively severe recession would only mildly impact such growth. Consequently, we project 9.67 percent growth on an annual basis for the next six months and then a return to the very high 11.60 rate.

What drives this market? New applications are plentiful, and the United States is a world leader in creating such applications. U.S. molders are direct beneficiaries of this. Moreover, many of the top molders in this business have been investing in new machinery and complete automation systems that not only improve parts quality but make labor cost issues increasingly irrelevant. It is in these high-value products such as components for PCs, laser printers, cell phones, and so on that qualified molders will do well and do not have to fear migration of work abroad as much as in other markets.

The extraordinary boom in housing, discussed in detail below, also boosts sales for all types of electrical and electronic products.

One of the most important figures in this market is growth in PC sales. PC sales drive sales of associated equipment such as printers. In the first half of this year, shipments of U.S.-manufactured PCs rose at a 12 percent annual rate. At the same time, worldwide personal computer shipments rose a weak 7 percent in the second quarter as some manufacturers curtailed shipments because of an inventory glut.

Supporting this short term outlook is the latest projection from Dataquest. This San Jose, CA-based market research firm projects global chip demand to recover by growing 12 percent in 1999.

Other reports also confirm this but warn that growth beyond the year 2000 is far more uncertain. Cambridge, MA-based Forrester Research Inc. in October said "the personal computer industry faces tough times ahead as revenue growth is expected to peak in 1999, then sharply decline in 2000." The reason, Forrester Research says, is next year-pressed by the Y2K problem-many computers will be replaced and thus reduce purchases in 2000.

U.S. molders may see growth but may see actual dollar values decline as parts buyers increasingly demand cost reductions in order to service the rapidly expanding below $1000-PC market.

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Toys
This is a relatively small market, yet it continues to offer growth for molders offering rapid production cycles, substantial help during the design and testing phase, and some technological know-how such as assembly. This product category, which includes everything from walkers for babies to electronic chess sets, has grown consistently and in line with consumer spending. The wave of imports and reduction in consumer spending for now, however, will result in a 1.40 percent drop through May 1999 and then a slower contraction of just half a percent.

Medical
This category goes up and down with overall health care spending and, unfortunately for those of us who have to foot insurance bills, health care spending-after a brief lull from 1995 to 1997-has resumed its steep rise, exceeding inflation by about 2.90 percent so far in 1998.

For molders that offer cleanroom operations, production of precision parts, and assembly in this competitive business, this remains a plum of a market with health growth rates. We project a growth of 1.80 percent for the next six months-measured on an annual basis-and an average growth per year of 7.10 percent during the next three years.

Packaging
The injection molding segment of this market has shown consistent growth, tracing consumer spending as well as a general increase in sales of complex electronics items. The continuous flow of new consumer products to the market is another key factor.

Here is one set of data that illustrates this growth: The Packaging Machinery Manufacturers Institute, in its Fourth Annual Packaging Machinery Shipments & Outlook Study, showed United States shipments of packaging machinery increased by 8.10 percent in 1997.

U.S. shipments of packaging machinery are forecast to grow at a cumulative annual rate of 4 percent over the next three years.

We project injection molders in this market to have about 3.40 percent growth for the next three years and about 2 percent growth per year for the next six months.

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Building and Construction
September of 1998 saw a second consecutive monthly decline in U.S. housing starts. Still, a high level of building permits and low mortgage rates mean housing should contribute to the economy's growth in the months ahead. Housing starts fell 2.50 percent last month to an annual rate of 1.58 million, following a 5.20 percent decline in August, Commerce Dept. figures showed.

While starts have declined from their 1998 peak, they're expected to total 1.60 million units this year, making 1998 the best year for home construction since 1987, according to a forecast by the National Association of Realtors.

Based on this and considering the long lead times in housing, we anticipate molders supplying components for housing will see a very minor 1 percent drop in the next six months and a steeper 2 percent drop for all of 1999 before recovering.

Furniture and Furnishings
The same applies to the closely connected furniture market. The American Furniture Manufacturers Association expects consumers to spend nearly $58 billion on furniture this year, up 5.70 percent over 1997. But spending next year is expected to grow at only 2.70 percent, the lowest growth rate since the last recession. The industry trade group expects manufacturer shipments to rise 12.10 percent to $23.80 billion this year. But next year, growth in shipments is expected to slow to 2.10 percent or $24.30 billion.

For the next six months, we project a 1 percent increase in the injection molding portion of this market followed by a relatively steep 1.80 percent contraction for late next year.

Appliances, Durable Goods, and Consumer Products
While a solid inventory for housing starts will assure some growth, the declining consumer confidence will result in reduced growth.

For the first part of 1999, we project a 1 percent growth followed by a 2.50 percent contraction.

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Long Term Forecast
So, finally, what is the outlook for injection molders for 1999 and beyond? We believe, except for a brief recession sometime over the next 10 months, injection molders as a group remain poised for long term healthy growth.

But, like all growth, pain comes with it. This pain is generated by several trends that will continue to pressure molders to constantly reinvest in new technology to be able to meet the frequently and radically changing demands of their customers.

Over the past few years, numerous new technologies have been introduced to the market that allow manufacturers to very quickly change production while collapsing the time needed to bring a new product to market. These technologies include quick mold changes, rapid prototyping, improved integration of CAD and CAM, and general acceptance and implementation of just-in-time principles.

One European manufacturer of vacuum cleaners told us that in the late 1980s it took about 29 months for a new model to go from concept to full production. New technologies have allowed that company-and many others-to collapse this time to 81/2 months.

What this means is the molders who will do well in the future have to become even more adaptable. They have to be prepared to very quickly change production, sometimes several times daily. They have to be able to work in an integrated fashion with parts and mold designers. And they have to have the equipment to support such needs.

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