What is the State of the Plastics Industry in 2016? What challenges and opportunities lie ahead in the next two to five years? What key things should processors implement now to ensure their companies’ future success? These are some of the questions that Team 1 Plastics, a plastic injection molding company for the automotive industry, recently asked plastics industry expert, Laurie Harbour.
Five years ago, Craig Carrel, president of Team 1 Plastics, interviewed Laurie Harbour, President and CEO of Harbour Results Inc., in a video blog for Plastics Pipeline. Harbour began the 2016 update by articulating how the plastics industry has changed since that interview in 2011. “Plastics as an industry has continued to evolve. There is a greater use of technology in terms of equipment and processing. In addition, the way that the labor force is used has changed due to the lack of skilled and hourly workers. The other major change is that five years ago, the industry was climbing out of a deep recession. As it did, many of the key industries like automotive, appliance, medical, and aerospace, were beginning to experience double-digit growth in sales volume. Processers were at the bottom of a rapid return to high volumes and demand for products.”
Harbour contrasted that double-digit growth to current status. “Today in 2016, we are seeing all of those industries level off. Growth rates are below 2%, and some even predict a small recession in 2019. Although volumes are still high, growth rates will not see the same impact in the next five years, changing plans for processors going forward. Processors now have to capitalize on volumes and efficiency gaints to grow their profitability. In the rapid growth period, we actually saw companies working harder than ever but not making the money they would like to see.”
In the 2011 interview, Harbour had predicted that by 2015, there would only be a 10-20% labor gap between China and the US, making it more financially feasible for companies to build/expand new facilities in the U.S. Team 1 Plastics asked Harbour to comment on this prediction. “The labor rates in China have absolutely risen in the last five years. Although they still have a significant advantage over the U.S., we have seen a great deal of re-shoring occur for plastic parts. Exports in China have gone down dramatically and were actually negative in 2015. We are still seeing quite a bit of tooling or molds coming from China, because there is still a cost advantage. Tooling is becoming a huge cost among large companies today so any savings they can get, they will work to obtain.”
Harbour then focused on North America. “There has been quite a bit of investment in plastics in the U.S. Companies have added buildings or expanded existing facilities. The big change in the global economy is the effect of the exchange rates. The global economy is very shaky -- particularly driven by China which is working to slow its growth. The BRIC (Brazil, Russia, India and China) countries are doing very poorly, and Europe is still on a slow rebound. Right here on our continent, things are changing. The Canadian dollar is down to .70 cents on the U.S. dollar, making Canada a very attractive place for companies to purchase parts and tooling and giving Canadian companies an advantage over U.S. companies. The exchange rate difference is expected to continue through at least 2018. Additionally, Mexico is booming and to some degree is the new China. There is tremendous investment in Mexico, particularly in automotive (over $24 billion in the last few years), and the pull for automotive suppliers to be in Mexico is significant.”
Having commented about how the plastics industry had changed over the last five years, Harbour switched her focus to the current state of the industry. “All of the industries that Harbour Results studies, including medical, automotive, heavy truck, aerospace, and agriculture, are experiencing a flattening of their markets. Some are actually going backwards, such as appliances, because they believe 2016 is an uncertain year due to the U.S. election. Without knowledge of what consumer spending will be like after the election, they are leery to launch new products.
“Big companies, particularly in automotive, are moving to Mexico and putting up new facilities to support the growth in volume in that region. They are asking their supply base to move with them to support production. This is a big ask for companies because the investment is significant. Although labor cost is cheaper in Mexico, it is not necessarily a low cost region to do business in or to set up a new plant.
“Technology continues to be a factor in the plastics industry, specifically, in terms of equipment technology. Varying levels of automation are being invested in across companies. Many companies are evaluating what level of automation is critical for their type of business. They are examining the data and making sure not to over automate -- but to automate appropriately for the right level of efficiency.”
Harbour added that new equipment technology, such as 3-D printing, is beginning to impact the plastics industry. “There are disruptive technologies, like 3-D printing, that are looking to impact processors. We have seen that in low volume applications; the higher volume is just not there yet. But it will be, and it’s clearly something to watch in the near future.”
In discussing the current state of the plastics industry in terms of production, Harbour said, “There is a lot of capacity in the market, and capabilities are strong.” She added, “Our concern is that we still don’t see companies taking advantage of the volumes to drive efficiency during good times. Also in automotive and several other industries, we are seeing a shift from low mix and high volume to high mix and low volume on several key parts, particularly those that are customer interfacing. This is causing new operational challenges for those that are not use to this model of production.
“Cost pressure continues to be a challenge for all companies. The best processors have a very good understanding of their cost and are leveraging their business to fill up their facility and optimize capacity to drive profitability. Others are still struggling to fight tightening of prices and are not working on the right things. Those that focus on what they can control and drive improvement in their business will remain strong and get new opportunities.”
Finally, Harbour discussed how the labor force is affecting the current state of the industry. “The labor force continues to be a challenge for all manufacturing. The U.S. and State governments are still not doing a good job in promoting manufacturing to the younger generation as a viable career choice. As a result, the schools are missing a whole population of people that could be great manufacturing workers. Companies are struggling to find the right people that are highly motivated.” Harbour added, “We don’t see a massive shift in this any time soon. Frankly, processors have to invest in this in order to find and train the people they want.”
When asked about the future of the future of the plastics industry in the next two to five years, Harbour stated, “Each industry will continue to have strong volumes through 2020. However, with an uncertain global economy, concern regarding the U.S. election, and the exchange rates with Canada and the Euro, companies need to closely watch what happens over the next 12 – 18 months as it relates to their growth plans. Due to the uncertainty of the future, now is the time to get more efficient and capitalize on volumes to make more money.
“Technology and investment in process are at the forefront of things that companies will have to work on in the next two to five years. The challenge of good labor will continue as the boomer generation retires and gaps emerge in the employee base. In addition to proactively finding the next generation of manufacturing workers, companies will have to utilize technology to fill the gaps.
“Constant changes in the economy, and their impact on the markets in which companies play will be critical as well. All economists believe another recession will come, or at least an adjustment in the market, around 2019 or 2020. It will not be as deep as 2008, but an adjustment will need to come. Companies have to be prepared for their operations to adjust down and up flexibly in order to maintain profit margins. They have to work now to establish the efficient foundation to manage these peaks and valleys.”
Team 1 Plastics asked Harbour to share three "Keys" that a plastics company should be implementing right now to ensure (as best it can) its success in the next two to five years. Harbour replied, “A long-term strategic plan is the first and most critical key. Most companies that we assess don’t have a long-term plan or vision for where they want to be and how they will get there. The best companies have this and have made significant strides coming out of the recession with this in place.
“The second key is a solid Strategic Sales Process. We have found in the last 12 to 18 months that a solid Strategic Sales Process is lacking for many companies. Most companies are still selling the way they have for 20 years. The problem is that times have changed, the customer has changed, and work does not ‘just come’ anymore. Harbour Results has been working with processors and other companies to develop these demand models, to plan for the type of customer they want in the future, and to determine how to scale their business.
“The last key is to become a more data-driven organization. Not just with operational metrics like efficiency, scrap, changeover time (although those are critical), but gathering data at the front end of the process on sales, hit rate, quote rates, profitability by customer, etc. These front-end metrics are crucial to link the demand and operations together and to drive profit and capital expenditures. Most companies are very weak at sales planning. Bottom line is that we can run plants well, but without sales, it means nothing.”
Harbour then concluded her update of the state of plastics industry, “Times are good in many different industries for processors today. Companies need to stay focused and not become complacent. History shows that things will change -- sometimes slowly and sometimes quickly as in 2008. Companies need to be ready -- being ready means being flexible and remaining profitable.”