Globalization and the Plastics Industry
With globalization, everybody wins – sooner or later
By Peter Mapleston
Globalization began well over 2000 years ago when traders moved along a series of routes stretching from the Mediterranean through India to China, which collectively became known as the Silk Road. The trade involved not only silk, but all manner of commodities, including slaves (no plastics however).
So why all the fuss about globalization now? Well, as the Global Policy Forum puts it, human societies across the globe have established progressively closer contacts over many centuries, but recently the pace has dramatically increased. Cheap air and sea travel, global telephone services, instant capital flows and, of course, the internet, have all made the world more interdependent than ever.
Globalization doesn’t always get a good press. Vociferous minorities see it simply as a means for multinational corporations to take advantage of the poor. On the other hand, it has provided billions of people with a choice of affordable goods and services they could only have dreamt of a few years ago.
In the plastics industry, globalization has manifested itself in various forms in recent decades. It has for instance been seen in the way injection molding companies have changed their sourcing policies for molds. Once, virtually all molds were made by manufacturers local to the molder; then overseas locations like Portugal made their name as producers of lower-priced but still high quality products; now – again - all the talk is about China.
Getting molds made in China certainly has advantages in costs, but there are numerous hurdles for would-be specifiers, most of them originating from the distance and the differences in language and culture. Numerous middlemen help molders over that hurdle. One of the best known is Asia Tool Source, headquartered in Drexel Hill, PA, USA. Company owner Carlton Harris has been visiting China regularly since the 1980s. “The changes which have occurred are huge,” he says. In terms of economic development, “China in 1980 was like Burma or North Korea today. China in 1995 was like India today. China in 2010 is like the deep south of the USA today. China in 2025 will be like the USA in total today.”
Chinese mold makers continue to improve their capabilities, Harris says. “They have to respond to their market, and globalization requires them to do a better and better job to continue growing. The market for lower quality goods, like toys or household disposables, is only a certain size. If you want to continue to grow, you have to tap into more sophisticated markets. That means investing in better equipment and training for workers.”
Harris notes that today, there is a labor shortage in much of industrial China. “Labor rates will continue to climb, but not enough to make mold making uncompetitive in China. The Chinese mold making industry has a good mix of low cost and strong capability right now. They can compete with anyone in the world.”
Complementing the rise in Chinese mold making has been the explosion in Chinese processing capability. The Chinese plastics processing sector is different from many others in that a large section of it is at least partly owned by foreign investors, and is largely dedicated to supplying multinational OEMs with operations in China but which supply world markets.
As world markets have crumbled in the global economic crisis, these companies have been changing their strategies and looking inwards. Harris again: “The Chinese consumer has not been very demanding of quality in the goods they purchase. Most Chinese are either poor, or have emerged from poverty within their lifetimes. So just having a car is a thrill, having hot water in the home is a luxury.
“That attitude is changing and will continue to change dramatically in the next two decades, and the Chinese consumer will be much more demanding. As a result, the average quality level of the Chinese manufacturer will have to increase as well. This will drive more Chinese companies to compete with Western companies on an equal quality performance footing.”
Statistics clearly show that China’s appetite for consumer goods is growing at a considerable rate. Per capita spending of Chinese city dwellers in the first half of 2009 rose by 8.9%. China is already the largest automobile market in the world, and could overtake the USA as the world’s largest economy as early as 2020 according to some experts.
Changing capabilities in China
Other changes are taking place too in China. Production of much of the world’s electronic and telecom products is already based on Asia, and most of this is in China. However, according to Singapore-based consultant Intercedent Asia, the dynamics of computers and peripherals and telecom in particular continues to change. “Whereas traditional cell phone manufacturers such as Nokia operate their own production plants, more recent entrants such as Apple and Google outsource the entire production,” it says. “Contract manufacturers are benefiting from this trend at the expense of molders as there is an increasing tendency for the contract manufacturers to handle molding as well. The same is true for computers and peripherals, where entire production is often outsourced with molding also carried out in-house.
“Processors are increasingly turning to sectors such as consumer and personal care, and medical in order to counter this lost business. These areas are growing strongly in Asia accompanying rising living standards and China’s aim to provide basic universal healthcare by 2020.”
Home-grown processing technology in China is incapable of satisfying the world’s rapacious appetite for quality goods. Major Western machinery makers are taking advantage of this with the establishment of their own manufacturing facilities in the mainland. Probably most notable is Engel’s operation making large injection molding machines in Shanghai, which opened in 2007 principally to cater for the local auto industry. ``A wholly foreign-owned facility was not possible before, and the market is now starting to invest in high-quality machines,'' said Engel CEO Peter Neumann at the time. The company had earlier begun making smaller machines in South Korea. (In contrast, it has since closed its operation making small machines in Guelph, Canada, and consolidated North American operations in York, PA.)
Western extrusion equipment makers have also set up shop in China, either on greenfield sites (Battenfeld Extrusion, for example, initially a jv with Hong Kong based Chen Hsong but now wholly owned) or via acquisition (Coperion).
(Screw producer Xaloy however chose Thailand; Günther Hoyt, who was Executive Vice President at the time, says the company benefits from the proximity of various Japanese transplants, which not only provide custom but have also supplied components and training. “Thailand proved to be an ideal location and has proven surprisingly competitive even when compared with Shanghai based manufacturing,” he says. “Today Xaloy Thailand exports to Europe, North America and all of Asia.”)
But China is also looking closer to home to find improved technologies. Liao Zheng Pin and Wang Cheng-ching, respective heads of mainland China’s plastics processors association and Taiwan’s machinery industry association, recently met to discuss mutual prospects for the cooperation between mainland China and Taiwan's plastics industries, and explore the opportunities for growth.
Liao Zheng Pin says that mainland China will continuously seek capital from Taiwan. He says that “by combining the superior design ability of the Taiwanese plastics industry with the huge production capacity of the mainland, cross-straits cooperation will strengthen each side's competitiveness while expanding both industries' share of the global market.”
The economic crisis appears to have accelerated this cooperation. Wang Cheng-ching noted that while Japan is currently the world's largest producer of all electric injection molding machines, there was a drastic drop on its output due to the economic crisis. He said this should be “a golden opportunity” for cross-strait cooperation on the development of the production of all electric injection molding machines.
After China comes India
Many eyes are also on India as a potential major consumer and producer for the plastics industry. The country has many millions of extremely poor people, and that is unlikely to change soon, but the middle class is growing all the time, there is considerable engineering expertise in the country and for the first time this year, manufacturing will overtake agriculture in terms of output.
India fits well into the global trade picture for any number of reasons, many of them related to its past as a British colony. But as already noted, its links with China also date back to the Silk Road, and the Chinese plastics industry is keen to maintain them. According to one recent report, bilateral trade between India and China in the plastics sector may increase to $60 billion by the end of 2010 from $38.7 billion in 2007.
“With Indian plastics per capita consumption set to double by 2012, there is considerable scope for growth of the plastics industry,” Arvind Mehta, president of the Plastindia Foundation said last year. “India and China have good petrochemical as well as downstream capacities.” The Foundation and the China Plastics Processing Industry Association held an India-China Plastics Industry Summit last year, with the theme of ‘Business Opportunities and Trade Complementation’.
On the materials supply side, Bayer offshoot Lanxess considers India among the fastest growing end-consumer markets in the world across various business categories and sectors, and says this will result in the establishment in the country of an increasing number of production sites for intermediates and end-products. “The world’s largest democracy and the second-biggest market in Asia had an economic growth rate last year of 6% at a time when economic growth for the world as a whole was 1.9%,” says Jörg Strassburger, managing director at Lanxess India.
As labor costs in China rise, India is becoming more attractive in this respect, and it has what one close observer says is a huge advantage over China because of its English language skills. “This is very important for international companies. English language skills are improving in China but it will take at least 10-15 years to become comparable.”
But for the moment at least, most attention at polymer producers remains on China. Companies such as BASF, Bayer MaterialScience, Sabic and others are establishing enormous complexes in the country. BASF already has a steam cracker in Nanjing and makes various engineering thermoplastics and polyurethanes at different sites. Last September, BASF and Chinese chemical company Sinopec broke ground for the expansion of the Nanjing site which is estimated to cost $1.4 billion; and in the same month it detailed a proposal to invest in a major polyurethanes feedstock (MDI) expansion. Bayer too has major ETP and PUR interests in the country, and as an indication of the importance of its presence, the groundbreaking of its integrated polymers site in Shanghai in 2001 was marked by the presence of both the German and the Chinese premiers.
Sabic has been developing a close relationship with Sinopec in recent years. In 2008, the two companies formed a jv to establish a massive complex in Tianjin that was due to start making polyethylene and other chemicals in the first quarter of this year.
Sabic Chairman, Prince Saud Bin Thenayan Al Saud, recently said the two companies “have developed great synergy based on our shared goal of providing high quality petrochemical products to the domestic Chinese market.”
China will need synergies further upstream too, because of its limited oil resources. This could finally see Africa play an important role in the globalization equation. China currently imports around half its oil from the Middle East, and one third from Africa. But analysts believe Africa could play an even more important role in the future. There is currently a race on between the USA and China to secure the continent’s oil supplies. It would be nice, although probably naïve, to hope that Africa itself will be able to fully reap the benefits of its rich natural resources.
Globalization comes home?
Peter Mooney at Plastics Custom Research Services (PCRS) has accumulated considerable knowledge of globalization in his many years as a consultant, sufficient to publish a study on it in 2007. He has this to say:
‘For years nearly everyone in U.S. industry has confronted competition from China - the dreaded "China pricing". Yet there is a lot of anecdotal evidence that some packaging projects sent to China in the past are coming back.
‘This is occurring for several reasons. First of all, industrial costs are rising in China. Secondly, as a Chinese middle class emerges there is greater demand for products such as thermoformed packaging, so there is less of an exportable surplus. Thirdly, transoceanic shipping rates surged prior to the global recession. They've fallen back now, yet volatility of shipping rates is a great concern to anyone contemplating importing from China or SE Asia.
‘Finally - and perhaps most importantly - the recession has resulted in profound changes in U.S. business practices. Workforces have been reduced, raising output per head to sustain profitability. Secondly, inventory levels have been sharply reduced ... every company is on a JIT basis. Unless the packaging product is very high-volume and standardized, companies can't afford packages "on the water" for a week, at the port for another 1-2 days, truck shipments from the port to the plant, and so on.
‘Customers want their package design converted from a CAD design to a prototype, approve the prototype quickly, and get it into production within a week. The idea of sending a CAD design to China and have the product arrive after weeks outside of specifications would be a disaster.
‘At this stage examples of products "coming back from China" are a trickle. However, if the Chinese government is forced (due to external pressure and internal inflation) to begin once again revaluing the Yuan, the trickle may become a torrent.’
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