Outlook 2007The impact of globalization: It's not what you think (Web-exclusive expanded content)

There are many factors that could affect your business next year, but few, if any, will have a universal influence across the country. Keep your eye on your market.

Two lessons can be learned from the past few years:

1. Even major economic changes will impact only segments of the overall economy. Note that the minor recession that followed Sept. 11, 2001 did not affect all segments of the economy, some of which continued to grow. In 2006 a long-lasting price spike for energy and serious concerns about a housing bubble looked like possible derailment for growth; yet this is not the case.

2. Whatever Washington does—and this includes the still very powerful Federal Reserve—has less impact than ever before. The North American economy has grown so large that it is affected mostly by regional trends. Grand policy decisions issued by the White House, Congress, or the Federal Reserve had almost instant impact in the 1930s and well into the 1970s, when Washington’s power to manage the economy then declined. Take, for instance, the extensive legislation enacted to create energy independence and efficiency during the Carter years. What happened? Billions were spent and very little happened.

What does all this mean now for North America’s molders? Is this an unpredictable economy? Are there any useful measures to plan the future and to project with some kind of certainty? Yes, there are plenty. But they cannot be found in Washington, Toronto, or Mexico City.

A key point to accept is that the increased diversity of North America’s economy means that changes tend to be regional or driven by forces in a specific market. Past recessions and reductions in economic growth used to affect the entire country, or so it seemed. But, for instance, the constantly shrinking traditional automotive industry has had little, if any, impact on the rest of the country. Instead, a new, vibrant automotive industry managed by Asians and Germans has evolved far from Detroit.

Last year the United States was recovering from Hurricanes Katrina, Wilma, and Rita. Oil prices skyrocketed and there were predictions of a huge bust in the housing market. Fifty years ago that would have been a recipe for swift inflation and a fierce recession. But that didn’t happen. The continued globalization of the U.S. economy was able to soften the blow.

Today there are workers from around the globe at construction sites along the Gulf Coast. Oil prices have moved up and down like a well pump without triggering inflationary reactions from consumers. North American exports to Asia are up and are filling the void in many regional economies. Fuel cost recovery fees implemented by many industries have become accepted and have not curtailed major purchases.

Conflicting opinions in oil

Economists around the world turn to pricing projection data from the U.S. Dept. of Energy’s Energy Information Administration (EIA) as the basis for industry projections. For many years the data have been solid, but we hesitate to depend on it right now as we believe the 2005 and 2006 data are overly optimistic. According to the EIA, the average price of a gallon of regular gasoline peaked at $2.84 during Q2 2006 and dropped to $2.83 the next quarter.

That doesn’t jive with our informal observations or data collected by industry experts. Lundberg Survey recorded a record-high average for 1 gallon of self-serve regular at $3.015 in July 2006, while American Automobile Assn. data reported the average price at $2.98 for the same day. The EIA projects the average price of gasoline to drop by $.07/gal in 2007. It expects the quarterly West Texas Intermediate spot average prices to drop to $65.92/bbl.

The EIA revised its 2006 estimates for natural gas prices upward midyear and we believe the 2007 estimates are more in line with what we might expect to face. Even though increases are predicted, the numbers are still far below what we saw in 2005. The EIA projects the average wellhead price to increase to $6.90 per thousand cubic feet with the Henry Hub Spot average at $7.53.

Resin continues to climb

Although we saw dramatic resin price increases in mid-2006, they were directly tied to feedstock issues. While several major chemical companies are involved in plans to increase feedstock production, these projects will not begin to impact prices significantly until 2008. Expect to see more price increases in 2007.

Worldwide resin production is up, but that’s a mixed blessing as demand is up, too. The good news is that we do not see any global region that will be able to corner the market on cheap materials. No one area will be able to outbid another on price or force the competition out of business by dumping cheap product into a competitor’s market. As long as these price increases and supply are consistent worldwide, it is unlikely that molders will lose clients to lower bids by the competition.

Where the growth is

We anticipate North America’s molding economy to expand for all of 2007. But keep in mind that this is overall growth. Some molding segments will be hit hard in the first few months of 2007 and are likely to see negative growth, followed by recovery.

What’s more, each segment will grow at a different rate. Some of these growth rates are influenced by market forces both in the United States and abroad. Key factors to keep in mind:

• Europe, led by Germany, is showing surprising economic growth. For Germany to exceed 2% annual growth is big news after having been nearly stagnant for a decade. This creates a richer export market for North American molders. The weak dollar helps boost exports.

• Eastern Europe is booming. Dell just announced plans for a second computer assembly plant in Poland—a great opportunity for molders.

• Key economies such as India, Japan, and China keep growing and this translates into broad regional growth in Asia. For U.S. molders, India should be more of a priority; it is a great place (with a working legal system) for setting up manufacturing plants and joint ventures and is also a solid export market as India breaks down (without much external pressures) import barriers.

• Asia is the hot spot for increasing consumer demand in 2007. International Monetary Fund records indicate that consumer spending in Asia increased more than 6% per year the past two years. This makes sense. The economic downturn in Asia in the late 1990s convinced wary consumers to cut back and postpone purchases. Now that the economy has turned around, consumers are treating themselves to regular purchases plus those they had postponed. Globally, this is a good thing. Increases in consumer spending in Asia will help soften the blow should U.S. spending take a downturn.

• Up to the 2008 Olympics, China will change little. This includes the good and the bad: Human rights abuses will not stop and copyright theft will continue, yet some molders will have the ability to make money. But beyond that all bets are off. The disparity between rich and poor in China has reached a true prerevolutionary stage, to apply the accurate Marxist economic analysis: 900 million impoverished Chinese are likely to revolt in some form against the 240 million wealthier Chinese. Note that the heavy brush of China’s censors kills off news of almost daily regional disturbances. This will get worse.

• The “housing problem” is short term. We will see a decline in orders for many housing-related products—appliances, pipes, window components—but by the middle of 2007, housing starts will again be above the current high levels. We anticipate housing starts will decline to a 1.9 million-unit annual rate for 2006 but will recover in 2007 to about 2.08 million units.

Watch these markets

Keep in mind the following trends in key injection molding end markets when planning for next year:

• Computers. The computers and peripherals market promises to start off the year with a bang and keep right on going. Microsoft is slated to launch its new Windows Vista platform, and all of the major retailers will be offering special deals and bundled equipment to coincide with the launch. If the past is prelude, we can count on a huge initial surge driven by those who insist on having the latest technology; then, if the new platform is perceived as reliable, we will see the general population steadily converting.

While the launch will most strongly affect sales in highly developed markets, a joint venture between Microsoft and Intel Corp. targets emerging markets with a different business model: pay-as-you-go computers. Rather than paying for a machine up front, consumers will be able to purchase tokens to activate their computer for a certain amount of time.

Finally, Dell has launched several new computers from low-end models designed for people who want to use their machines only for word processing and e-mail, to superhigh-end models with top-notch video and massive computing capabilities for serious gamers. If Dell’s strategy takes off in Q4 2006, expect to see its competitors mirror it in 2007.

• Construction. To the chagrin of many realtors, the resale home market has been hit harder than new construction. The cause is attributed to “flipping,” where an investor purchases a home for the sole purpose of gaining a quick profit on a resale. The real estate industry estimates that up to one-quarter of the existing homes purchased in 2005 were not primary or secondary residences; they were purchased to flip. As predictions of a housing burst spread, investors turned their money toward other types of investments and created a glut of homes for sale in the existing home market. Areas where homes were turning over in weeks are now seeing existing homes on the market for several months.

New home construction is more typically tied to a primary or secondary residence and less likely to be an investment. New home figures in September were solid. While new home construction will probably slow during the course of 2007 as would-be new homebuyers find bargains in existing homes, we do not anticipate a hard or sudden crash in new home construction.

• Automotive. This year saw Toyota, Honda, and Nissan continue to make gains in the United States, the world’s largest auto market. During the same year, the traditional Big Three posted billions in losses, prompting massive layoffs, plant closings, and measures to slash production costs. One of the biggest trends was a purchasing shift away from light trucks and large SUVs toward more fuel-efficient vehicles. We expect the desire for better fuel economy to remain in 2007 and that suppliers for the U.S. light truck and SUV end markets will face a difficult year since new models have not significantly switched to lighter, more fuel-efficient, more plastics-based designs.

• Auto parts and accessories. The automotive electronics market will continue to grow in 2007 as more bells and whistles are added to attract new buyers. One standout feature currently on high-end models but soon expected to appear on most models is a device that constantly gauges tire pressure and sends the reading to the dashboard.

• Household appliances. According to the Assn. of Home Appliance Manufacturers (AHAM), household appliances were a $22.5 billion industry in 2006 and that number is expected to rise in 2007. High-style, high-end purchases by U.S. consumers are driving the trend. The kitchen features the hottest items for 2007. Designer and custom-made refrigerators, dishwashers, and ranges will be industry leaders, followed by front-load washers and dryers and central vacuums. The up trend in upscale countertop appliances will continue as well with microwave ovens, coffeemakers, and freestanding mixers leading the pack.

• Telecommunications. For years this market thought smaller was better, but in 2007 the trend will be toward larger combined devices. Consumers tired of carrying a phone, pager, PDA, and MP3 player are now getting all that plus a camera and Web access in one device. While sales of the new devices will skyrocket, sales of the multiple devices they replace will plunge. This is bad news for the plastics industry. A handful of players dominate the mobile phone and handheld markets; they have the power to close ranks and shut out smaller competitors. With the long-term outlook grim, we predict they will do just that.

• Consumer electronics. Television will be the hot item in the 2007 consumer electronics market as more consumers prepare for the United States to drop analog broadcasting and go totally digital. The U.S. will not make the change until Feb. 19, 2009, but we expect to see the surge in television sales to start in 2007 and continue through 2010. This provides tremendous opportunity for molders specializing in low-cost, long-run processing.

• Medical devices. As wealthy nations see their populations age, the medical device and equipment market will continue to prosper. The markets for diabetes supplies, hearing aids, and blood pressure monitoring devices are growing at a tremendous pace with no end in sight. Products designed in each of these areas are being improved and refined, and each consumer can be expected to make several replacement and upgrade purchases.

In 2006, the U.S. healthcare sector saw 73 mergers and acquisitions as of October and the result has been stronger companies better prepared to get products through the government approval process and out into the market faster. These companies will be looking for molders who can handle high-quality, small-run jobs, where North American and European molders have a proven track record.

Mobility devices such as power wheelchairs and scooters is one area at risk for a drop within the durable medical equipment field in 2007. The Scooter Store and Black Bear Medical, two power players in the custom wheelchair market, predict dramatic drops in orders resulting from the Centers for Medicare & Medicaid Services’ (CMMS) decision to cut reimbursements by up to 41% for most power wheelchairs. That means a $6500 machine formerly covered under these programs would now cost the end user $2700. We expect that many end users on fixed incomes will be shut out of the market. CMMS justified its decision as a cost-containment measure, citing a 2700% increase in the use of power chairs and scooters since 1998.

• Packaging. The overall plastics packaging market is poised to continue to grow in 2007 at an annual rate greater than 7%. Similar growth is likely for 2008 and through 2012. These projections are based on a range of market growth forecasts from various industry associations and market research firms such as the World Packaging Organisation and Pira International.

Yet only a relatively small portion of the overall plastics packaging volume comes from IM items. Hot growth areas such as degradable food packaging, flexible packaging, and packaging for electronics benefit primarily extrusion, blowmolding, and foam processors. For instance, the very hot biodegradable plastics packaging market will see growth rates greater than 10%.

Where does this leave injection molders? Some that supply molded closures for the booming drinks market will see growth inside North America in excess of 6.7%. Medical molded packaging will grow at rates close to 8.1%. Overall, however, IM plastics for packaging will grow at a rate of 3.65%. In the overall NAFTA territory, Repton projects plastic molded packaging to grow at a rate of 5.3%.

Lisa Pellegrino ([email protected]) and Agostino von Hassell ([email protected]) are with The Repton Group LLC (New York, NY; www.thereptongroup.com).