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December 5, 2002

13 Min Read
Outlook 2003

It’s the question many molders are asking: Where do we go from here? Forecasts for next year look bleak, but solutions do exist.

SM_Outlook_graph1.jpg SM_Outlook_g1key.gifLackluster growth will plague most molders for at least the first part of 2003. Manufacturing growth is projected to resume later in the year. Yet the biggest issue for molders is how to rebuild competitiveness for the next decade. Sure, a majority of North American molding facilities already have the most modern injection machines in place. Robots and automated assembly equipment are common. Innovative manufacturing methods constantly evolve and attract imitators from around the globe.

But why are so many molders in trouble today and unable to compete with low-cost imports? Just within the past 12 months the number of molding firms that have shut down or declared bankruptcy escalated. The most common reason: competition from Asia.

So what will it take for North America’s molders to rebuild their manufacturing prowess? The core issue is labor costs. Regardless of the level of automation and the excellence of manufacturing equipment in place, molders find themselves squeezed by foreign imports.

Asian molders can pay as little as $.50/hr, and in some rare cases, even less. The average hourly labor rate in the U.S., with benefits, is about $19/hr, and in many cases higher. Even the most advanced molding plant still requires a substantial reliance on manual labor, at least for now.

Grim Economic Outlook
On the surface, the North American economy appears to be in relatively solid shape. But we see warning signs, which will first affect manufacturing, and then the dominant service sector. 

  • Manufacturing output declined in early fall, and no solid improvement is anticipated for some time. Manufacturing businesses have dramatically scaled back capital spending—already ultralow for the past two years—and may boost such spending about 3 percent in 2003 from anemic 2002 levels.    

  • The uncertainties created by Wall Street and Iraq are starting to hurt the previously impervious consumer spending. Major retailers such as Wal-Mart warn that consumers are spending less, and the early part of 2003 may show real declines in spending on all types of consumer goods. In late October, consumer confidence dropped to the lowest level in nine years.    

  • Housing and automotive remain strong, but manufacturers serving those markets are hurting, as explained below.    

  • Fears are rising that the North American economy may face deflation. This would mean that molders have to cut prices even more without the ability to cut wages. Profits are not expected to grow, either.

    Speculation in Washington suggests that after the new Republican-controlled Congress is sworn in in January, one of the first measures drafted may be a package of economic incentives.

    Such efforts were derailed before, but another try is in the works to shore up an increasingly shaky economy. Tax rebates and major investment incentives for manufacturing firms are high on the list of possible actions.

    The pain in manufacturing is widespread. In the last quarter of the year major retailers typically build up inventories for the holiday season. Yet recent trade data show that much of the buildup is fueled by imports. August 2002 showed a huge widening in the trade deficit, from $35.1 billion in July to $38.5 billion in August. Imports jumped 2 percent from July, and so far in 2002, they have been growing at an annual rate of 23.1 percent.

    Exports, once a major source of growth for molders, do not show any signs of growth. The European economies, major buyers of U.S.-made products, are hurting and are unlikely to return to tangible growth for many months. This past August overall exports of manufactured goods declined by a very sharp 1.3 percent, despite the weaker dollar.

    Overall factory capacity utilization slid to 74.2 percent in September. The average in past years has been 81 percent, and most molders consider expanding when capacity utilization reaches or exceeds 85 percent. With major molding capacity unused, few molders will expand this coming year.

    SM_Outlook_graph2_350.jpgSilver Lining
    Not all molders are struggling to maintain profitability. A solid number of molding shops continue to do well. What makes those businesses different? We did not conduct a scientific survey of all molders in the U.S., Canada, and Mexico, but among those who tell us they are profitable—and in some cases able to increase profit margins—several traits emerge: 

  • Use of new injection machines, takeout robots, statistical process controls, and as much automated assembly as possible helps reduce labor costs.    

  • Concentrating on ultralow-tolerance molding jobs with high value-added helps. Molders who offer a complete package of design and engineering services along with the actual molding seem to be able to attract new business and make money at the same time.    

  • Moves such as ISO 9002 registration and lights-out manufacturing also help reduce the most significant cost factor that makes Asia so attractive as a source of molded parts: low labor costs.

    But probably the most significant secret behind making money in molding operations is innovation and speed. Molders that can marshal the entire tool kit of innovation—from rapid prototyping to quick mold changes, from interesting design solutions to the ability to fill supply lines rapidly—have shown solid profit growth even in the past two years.

    Options in Tough Times
    A growing number of molders are starting to make money by selling their manufacturing expertise abroad. Molders are either partnering with firms in locales as diverse as China, South Korea, and India, or are buying businesses outright.

    While this results in a major drop in injection molding output at home, it does help boost profitability. U.S. manufacturing expertise is desirable and a sellable commodity.

    Just how much of this “export” takes place? Government data on the export of services are somewhat unclear and do not allow us to measure the export of services of molding plants. However, export of “manufacturing services” doubled from 1999 to 2002 (estimate for the whole year) to more than $68 billion.

    Sector-by-sector Forecasts
    For 2003 we project average growth for the North American molding market of 3.38 percent. (See table, above, for specific growth targets by end market.)

    How realistic is this forecast? We strongly believe that as the uncertainties over Iraq are resolved early in 2003, the economy will start growing solidly and return manufacturing to growth territory. However, the first few months of the year will be slow.

    Growth of 3.38 percent is attractive regardless of all the problems. This projected growth for 2003 is quite solid and is somewhat higher than the average growth of the past 10 years. Note that in the 1990s annual growth for all of injection molding never exceeded 7 percent. And those were the boom years of the Internet bubble economy.

    Consumer spending, all projections show, will continue to weaken, which will put negative pressure on manufacturing. But come April or May, consumer spending should recover, and we will see tangible increases in manufacturing output. Month-to-month changes may be often dramatic, but the overall trend is modest growth.

    Following is a market-by-market analysis of what to expect in the coming year.

    SM_Outlook_Transportation.jpgTransportation. We anticipate that injection molding for all types of transportation products will grow a very modest 2 percent in 2003.

    But even this minor growth comes with some bad news. The three major U.S. carmakers—General Motors, DaimlerChrysler, and Ford—are all on a massive cost-cutting kick. For instance, GM has been trying to reduce total spending on supplies from about $74 billion in 2001 to $71 billion in 2002, and to an even lower number in 2003. It’s attempting to accomplish this while still building more cars.

    Carmakers also have to fund the bill for the ongoing cycle of zero percent financing, which is damaging profitability. Thus North American molders must anticipate growing pressure to cut prices or face the grim alternative of more supplies coming in from offshore. Local content in U.S.-made vehicles has dropped to an average of 69 percent per vehicle, and may slide to 67 percent by late 2003.

    Carmakers are quite serious about sourcing more products offshore. The old commitment to buy American is little more than a slogan now, and cheap car parts from China and elsewhere in Asia are a ready solution to the profit crunch in Detroit. A specific example is the deal announced in South Korea this past October. Starting in June 2003, DaimlerChrysler and Mitsubishi motors plan to buy an additional $13 billion worth of auto parts in South Korea, mostly manufactured under supervision of Hyundai Motors.

    Worse for the long-term future of automotive is a push by carmakers to consider moving more assembly plants out of North America to China.

    SM_Outlook_Packaging.jpgPackaging. We anticipate packaging markets to grow slightly more than 2.3 percent in 2003, and we see negative growth for the first four months of 2003 as consumers retrench further.

    One bright spot in packaging is cases for DVDs. Consumer spending on DVDs exceeded $5.4 billion in 2001, up from none in 1997. The sale of VHS tapes and boxes declined some, but still remains a very strong $4.9 billion. Plants making packaging items for these two media are doing very well in North America.

    Building and construction. This market should continue to show growth in 2003. Output growth is fueled by a solid housing market, which has proven surprisingly strong. Even though housing starts are down from the high levels seen in late 2001 and early 2002, we anticipate new housing to continue at a 1.63 million-unit annual rate for all of 2003. This translates into a 2.9 percent growth rate for molders.

    SM_Outlook_Bldg_Constr.jpgThe number of new construction projects in the works right now also assures North American molders of a ready-made market: Buildings started in November 2002 will be consumers of molded parts such as pipe fittings and window components in April 2003. This six-month lag between housing starts and the use of molded parts is like a built-in cushion for molders.

    We also have seen little concrete evidence that imports play a major role here. While it is obviously cheaper to manufacture window parts or plumbing fixtures in Asia, the majority of such products continue to be sourced in North America.

    The biggest problem facing molders in this market is that major construction companies have become slow in paying bills. This creates some pain for molders.

    SM_Outlook_Toy.jpgToys. We saw output for molded parts for toys and sporting goods decline a sharp 3 percent in 2002. Output will grow a modest 1 percent in 2003. The long-term outlook, however, is for little or no growth. Most toys and sporting goods require relatively little in terms of precision molding, and it has become very easy for Asian molders to grab ever-growing segments of the North American market.

    The emergence of electronic toys—which now account, in dollars, for more than 43 percent of all toys sold in the U.S.—is another factor. As is the case with computers, PDAs, and other electronics, molding and assembly are moving offshore.

    SM_Outlook_electrical.jpgElectrical goods. The bulk of growth in this market is in tune with housing starts. Additional growth comes from a burgeoning home improvement market, which is supported by the high level of current home purchases.

    Because of this, we project output in this market to grow 3.1 percent in 2003. North American molders also benefit here from the simple fact that many products can be produced with very high levels of automation, somewhat reducing the labor cost factor.

    SM_Outlook_Electronic.jpgElectronics. Once this was the premier growth market, but not anymore. Almost every week we hear of reduced forecasts for sales of PCs and all types of office and consumer electronics. At the same time, more and more molding jobs are moving away from North America.

    In 2002 electronics growth collapsed to a meager 3.7 percent. For 2003 we project a slight improvement to 5.5 percent. Most of that growth will put more pressure on North American molders to cut prices while offering great flexibility in bringing new products to market in ever-shorter time periods.

    PC makers and others are constantly redesigning products in hopes of rekindling consumer interest and spending. In 2002 global PC shipments will have grown just 1.1 percent to 135.5 million units, projected San Francisco-based International Data Corp. The firm still forecasts growth of 8.4 percent in 2003.

    Some predict that by late 2003 companies will embark on a major spending spree to replace office computers and the like. Companies now typically wait four years to replace PCs, up significantly from the three-year period common for most of the 1990s.

    SM_Outlook_Furniture.jpgFurniture and appliances. The furniture and furnishings market, driven by solid growth in the construction and housing market, should continue to fare well, showing a slight improvement to 3.1 percent growth in 2003. This is up from 3.0 percent in 2002.

    However, appliances have been hit hard by imports, and many molders have seen output growth decline sharply. Overall, North American output of appliance parts in 2002 was just 1.2 percent, but is set to recover modestly to 2.0 percent in 2003.

    SM_Outlook_Consumer.jpgConsumer and institutional. Strong spending by consumers kept growth in 2002 at 2.8 percent, but reduced consumer spending and a growing wave of imports will reduce growth to a very low 2.2 percent in 2003.

    There is some speculation that the massive wave of mortgage refinancing, spurred by ultralow interest rates, will unleash new consumer spending. The cash available will probably help fuel growth in consumer spending in 2003 unless global politics and economic uncertainties further reduce consumer confidence. Note that in the first half of 2002, according to Federal Reserve data, the home equity freed up by refinancing coupled with the improved spending power, as consumers spend less on housing, added fully 2 percent to consumers’ disposable income.

    SM_Outlook_Industrial.jpgIndustrial and machinery. Low capital spending by all types of businesses and manufacturers resulted in 1.2 percent growth for injection molded products in this sector in 2002. This may improve to 1.8 percent in 2003. Solid improvement is unlikely until capital spending returns in full force, probably in 2004.

    Medical. Medical molding is an exceptionally strong market, producing healthy growth along with solid profit margins for molders who specialize in this area. Regardless of the state of the overall economy, 2003 shapes up as yet another strong year. The aging populations of the U.S. and Canada have driven up the need for more medical services.

    SM_Outlook_Medical.jpgWhile overall health care spending in 2003 is expected to grow by more than 12 percent, growth for medical devices and disposable products will be a more modest 4.4 percent.

    Molders of ultralow-tolerance, small parts and nano devices are most likely to benefit from technology innovations in the next few years. Pacemakers are one example. That market is expected to hit $700 million in 2003, and suppliers of these devices are contemplating innovations using tiny molded parts.

    Not all is perfect in the medical molding market. Molders making parts and subassemblies for medical devices will continue to enjoy solid growth as buyers source such products with North American firms. But for medical disposables, where volume is growing, some molders are starting to face substantial pressure to cut prices. The slow change in health care in the U.S. has resulted in coalitions of hospitals that collectively buy in bulk, and they have the purchasing power to demand lower prices.

    Will imports become a major factor in this market? Not for several years, we believe. Overall, we expect the medical plastics market will grow a very solid 9.7 percent in 2003.

    Contact information
    The Repton Group, New York, NY
    Agostino von Hassell
    (212) 750-0824; [email protected]

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