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No time to rest: taking advantage of Spain's growing market

February 1, 2006

9 Min Read
No time to rest: taking advantage of Spain's growing market

As if indicative of Spain''s new economic vitality, the government is said to be considering ending the long-cherished practice of afternoon siesta. The decision will ultimately speak volumes about the direction Spain has chosen to steer its economy during the last 10-15 years.

While most of Europe''s traditional economic powerhouses have been mired in economic malaise, Spain has managed to foster truly impressive growth. Estimates put forward by both the IMF and the EU''s commissioner for economic and monetary affairs estimate that Spanish GDP grew by 3.2-3.4% in 2005, and is on track to continue to grow by 3-3.2% in 2006.

In fact, while major markets like Germany and France have been avoiding difficult but necessary changes to their labor and tax systems, Spain has become an example of how these very reforms can encourage renewed growth.

During the 1990s, Spain made bold moves to restructure its tax system, flattening it to create better incentives to work and invest. At the same time, the government took pains to create a more business-friendly labor market, granting employers greater freedom to both hire and fire new employees.

These reforms have paid off, allowing Spain to achieve impressive GDP growth while also lowering unemployment from rates that once exceeded 23% to levels estimated at around 8.4% in 2005. Processors have reaped the rewards of Spain''s success, making this both an attractive investment market and a growing export destination.

The domestic plastics market

The 1990s were an explosive decade for the Spanish plastics industry. Between 1990 and 2000, Spain''s plastics consumption rate grew the fastest of any nation outside Southeast Asia, and sales of plastic processed products experienced real annual growth rates as high as 30%.

This phenomenal growth helped attract greater investment from major international producers including General Electric, DuPont, Eastman, Dow Chemical, Basell, and Bayer, and further develop local firms like Aisondel, Catalana de Polimers, and Brilen.

Data compiled by the Council of International Plastics Association Directors (CIPAD) listed Spain as the world''s eighth-largest producer of plastics resins in 2001, and ranked the country 10th among plastics converters. On the consumer side, CIPAD ranked Spain sixth in per capita plastics consumption in 2002, when the average Spaniard consumed 108 kg of plastics annually.

Exports have also been strong. In 2004, Spain exported 2.8 million tonnes of resin and semifinished plastics valued at over €3.8 billion, representing a 9.2% jump from 2003 levels. Spanish exports of finished plastics goods exceeded 428 million tonnes, 13.2% greater than in 2003.

Turkey, the U.S., Morocco, Switzerland, and Poland are Spain''s top five plastics export markets. While the climbing value of the euro is expected to slow exports, especially to key markets like the U.S., Mexico, Brazil, and Chile, growth is still expected in 2006.

Spain''s plastic imports come primarily from the other EU members. Outside the EU, China is Spain''s leading plastics supplier. Chinese imports are almost exclusively finished goods like film, bags, and simple plastic consumer items. The majority of U.S. plastics imports, roughly 70%, consist of specialty or engineered plastics, and the remaining 30% are mainly comprised of finished plastic goods. Imports from Saudi Arabia, Spain''s third-largest supplier outside the EU, are almost exclusively in the form of resin.

Spain''s chemical market

Similar to Spain''s plastic processing industry, the nation''s petrochemical providers have reaped the rewards of not only its booming economy but also its key position along the Mediterranean coast and close proximity to the rich oil fields of northern Africa. These factors have helped make Spain a popular destination for many of the world''s major petrochemical suppliers.

The Spanish chemical industry, which accounts for 10% of Spain''s GDP, is estimated to have achieved a 5.8% production increase in 2005, lifting its annual value to just more than $42 billion. This follows a similar production increase of 5.7% in 2004.

Early forecasts for 2006 continue to predict production growth, albeit at a slower pace of 2.8%, according to the industry association, Feique. For processors, increased production should be accompanied by lower prices.

The trend toward greater industry consolidation among Europe''s chemical processors is also unfolding in Spain, a process that should help strengthen the market and stabilize prices in the future.

Labor

Much of Spain''s recent success has been attributed to its flexible labor market, largely facilitated by the institution of short-term employment contracts. These programs, introduced in the early 1980s to accommodate seasonal industries like agriculture and tourism, have now been adopted by other Spanish industries, including the manufacturing and services sectors. As of 2005, roughly one-third of Spain''s workforce was engaged via short-term contracts.

The contracts themselves can last between one day and six months, and allow employers to offer little or no benefits. More significant, these short-term contracts grant employers the flexibility to hire and fire according to fluctuations in their given market.

Of course, short-term agreements are by no means a perfect solution to Spain''s overall labor environment. Temporary employment programs have done little to help boost Spain''s sagging productivity rates, which only grew by an average 0.9% annually between 1995 and 2004-far below regional EU averages. Employers generally do not invest heavily in the training of these employees and it''s hardly surprisingly that workers in low-pay, short-term contracts are not the most efficient and hard-working employees.

There has also been concern that some employers are abusing the program to get around paying costly benefits. To combat this, Spain has passed labor reforms that offer incentives to companies that upgrade employees to long-term contracts.

While a more advantageous approach would be to scale back many of the restrictions associated with long-term labor contracts, short-term programs do at least give employers the flexibility to adjust to market changes and ensure that an employee fits before initiating a costly and long-term commitment.

The housing boom

Spain is only now seeing the downside of an impressive housing boom that began in the ''90s and has done much to keep local processors busy. In 2004, Spain''s construction market had the second-highest rate of turnover in Europe, and its residential subsector registered a record 670,000 new homes.

While still expected to grow in 2006, the pace of growth is predicted to slow considerably. Reflective of this trend, 2006 housing prices are now expected to rise by only about 6%, a far cry from 2003, when prices soared 20%.

Some analysts have expressed concern that in markets like Spain, where interest rates were initially very low and mortgages are generally set at variable rates, any rise in EU interest rates-such as the quarter-point rise announced by the ECB in early December-would slow new home sales and diminish the disposable incomes of existing homeowners.

In assessing the impact of a cooling housing market in Spain, it''s worth noting a couple of facts.

First, it is generally more difficult in Europe than the U.S. to borrow money for consumption against the rising equity of a home; so a slowdown in the housing market should have a consequently lower impact on consumer spending in Spain than it would in the U.S. This is supported by the Organization for Economic Cooperation and Development (OECD), which estimates that Spanish consumer spending is likely to slow by only €2 for each €100 drop in the value of their homes.

Second, no one is predicting a crash in either housing prices or sales. Spain''s housing and construction markets are still expected to remain strong in 2006 as demand continues to outweigh supply in many areas.

Finally, while cooling housing prices might ease some consumer spending, more affordable housing will also help foster sales over the longer term.

Downstream markets

Aside from the housing and construction markets, several other important plastics end-markets should also see growth in 2006.

Spain''s personal computer market has also experienced impressive growth over the last decade, and remains on track to expand further in the coming years.

In 2004, the country''s PC manufacturing market grew 14.3% to reach a volume of 2.8 million units. Currently Spain accounts for almost 7% of the European market. Forecasts by Datamonitor Industry Market Research anticipate that production volumes will grow to 3.6 million units by 2009, an increase of 29.9% from 2004 levels.

While most of the market leaders in Spain are U.S. firms, it''s estimated that around 25% of computers installed in Spain are locally assembled clones. Data published by the U.S. & Foreign Commercial Service (US&FCS) suggest that 60% of the hardware market and half of the software market in Spain are now supplied by imports. Much of the imported hardware is believed to be sourced either from the U.S. or manufactured locally by U.S. subsidiaries.

OECD data estimate that more than 52% of Spanish households had access to computers in 2004, up from roughly 30% in 2000. Other indicators are also encouraging, according to the Computer Industry Almanac''s "Internet Users by Country" report. Spain had the 10th-highest number of broadband subscribers in the world.

In the lucrative medical equipment market, Spain offers promising export opportunities for foreign medical suppliers. As of 2004, imports accounted for 88% of Spain''s $2.7 billion medical market.

U.S. suppliers currently hold around 35% of this market, although US&FCS reports suggest that the actual share may be higher because most medical exporters choose to centralize their manufacturing and import operations in a single country, whence they register and distribute their goods throughout the EU. This practice often disguises real U.S. imports into Spain and other EU nations.

Imports are boosted by Spain''s zero-duty on medical devices. Current estimates project that this market will sustain average growth rates of 10% through 2007.

Spain''s largest manufacturing and export sector-automotive-is also managing to produce consistent growth. Spain currently is the world''s fifth-largest car producer, the third-largest in Europe. Early estimates predict 2005 new car sales at 1.45 million-1.5 million units. In 2004, Spanish new car sales jumped 9.8%, to reach a record 1.51 million units.

While Spanish producers continue to reap the rewards of Spain''s short-term employment contracts, it''s feared that the high value of the euro could threaten export sales and open the door to more imports.

Agostino von Hassell [email protected], and Mark Bella [email protected], of the Repton Group LLC (New York).

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