While no one is ready to say that the recession is over, there are bright spots on the horizon for the plastics industry as many major original equipment manufacturers (OEM) see a rebound in demand for their products. However, plastics industry processors that serve these major OEMs are experiencing a "new normal," says Jeff Mengel, a CPA and partner at Plante & Moran LLP, according to a March survey by the firm.
Of the 150 plastics processors (injection molders and thermoformers, for instance) that responded to Plante & Moran's survey of the North American plastics industry, fewer than 10 percent indicated that they were still in a contraction phase. A 66 percent majority described themselves as surviving or maintaining in 2009, while 56 percent had a debt to equity ratio of 2:1 or less, and 27 percent reported a strong or unchanged relationship with their banks. While these plastics processors seem stable, 72 percent said the economy would take two or more years to return to normal.
The domino effect of the credit freeze caused customers of these plastics processors to reduce purchase volumes and inventory and begin shopping around for better deals to preserve cash. Sixty-six percent of respondents reported moderate to high levels of new quoting activity, demonstrating more deal-seeking, according to the report. The subsequent loss of revenue by plastic processors was driven more by volume reduction (71 percent lost more than 10 percent of sales due to volume reductions) than by customer bankruptcies or losses to competitors (29 percent lost more than 10 percent of revenue due to these factors).
"The chance of restoring revenue losses from reduced volume is far more likely than restorations of lost customers," Mengel says. "And those who failed to diversify their customer base suffered the most, with 22 percent of respondents losing 15 percent or more of their revenues due to customer bankruptcy or vendor switching."
The plastics industry is the third largest manufacturing industry in the United States, according to the Society of the Plastics Industry. It employs more than 1.1 million workers domestically in approximately 18,500 facilities. The industry creates $379 billion in annual shipments, and had a $10.9 billion trade surplus in 2007. The sector has a presence in every state.
Diversity Shields Recession
Since plastics are a critical component in the manufacture of so many other products, the industry usually doesn't suffer during a downturn for long. Diversity among the customer base drives the success of plastics processors. If business is down in one market segment, it's likely to be up in another. Take the automotive industry. While many plastic components suppliers and moldmakers saw the downturn hit their businesses hard as the automotive industry bottomed out, some turned to what they call a recession-proof market - the medical industry.
Diversified plastics processors emerged better for wear than their automotive-focused counterparts. While a fair number of plastics and moldmaking companies stumbled, the playing field opened up new opportunities for those still standing to gain new business and grow stronger.
Packaging, while largely resilient to the economic forces the world experienced in 2008 and 2009, has taken some hits. Last year was "characterized as one of significant extremes," Mesirow Financial noted in its Packaging Perspectives 2009 Year-End Review. Bankruptcies and the bottoming out of global markets characterized the first half of the year, while the second half saw "improving stock markets and thawing credit markets." Still, doubt lingers. "Significant short-term and long-term economic uncertainty still exists," Mesirow reported.
But there have been bright spots. The downturn in the global packaging merger and acquisition volume has not been as severe as in the overall market, Mesirow noted. "In fact, due to transaction volume in the second half of the year, the full year totals for 2009 are not that different from those of 2008. The second-half total includes Amcor's acquisition of Alcan's pharmaceutical and specialty packaging assets, [and] Bemis' acquisition of Alcan's flexible packaging assets."
Mesirow's outlook for 2010 predicts the improvement of credit markets, and the company anticipates that private equity investors will become more active in packaging industry transactions. Purchase price multiples should improve from the average 2009 levels as credit markets continue to recover. Additionally, "strategic buyers in the packaging industry have proven that value can be created from well-structured acquisition," according to the report. "Buyers such as RockTenn, Bemis, Pactiv, International Paper, Greif, PCA, and Amcor have all been able to expand markets, products, and earnings through strategic combinations, synergies, and capacity rationalization. We expect all of these forces to continue to drive additional consolidation in 2010."
Plastics industry members consider medical products, such as devices and disposables, as recession-proof, since people will always need medical care. While this may be wishful thinking, Ernst & Young's Pulse of the Industry: Medical Technology report for 2009 isn't so optimistic. The overhaul of the U.S. healthcare system brought uncertainty to the industry, and Congress is even considering a "device tax" to help pay the tab for this new legislation.
"The industry's financial performance.has largely held steady," the report noted. "The revenues of publicly traded medtech companies in the U.S. and Europe grew 11 percent to $289 billion." However, the report acknowledged what any company in this sector already knows: "The recession does appear to have taken a toll in the first half of 2009, when revenues remained essentially flat (a decline of less than 1 percent) compared to the same period in 2008."
But the industry generally supports the reform. "While we remain concerned about the effects of the medical technology tax, we applaud expanded insurance coverage for millions of American families and the significant progress in a number of important areas.No industry is better positioned to lead in job creation and trade than the medical technology and diagnostics industry," said Stephen J. Ubl, president and CEO of the Advanced Medical Technology Association (AdvaMed), in a March 21 statement released after the U.S. House of Representatives voted on the passage of healthcare reform legislation.
Appliances tend to follow residential construction trends, and since that sector has been in the doldrums for more than 18 months, so, too, has the appliance industry. However, most of the major appliance manufacturers haven't stopped creating new features and colors to tempt consumers. While sales aren't red-hot, global demand for major household appliances is forecast to rise 2.8 percent annually through 2013, approaching 500 million units, according to a market study from the Freedonia Group, a Cleveland-based market research firm. However, much of that won't be from the U.S. market, but market penetration in developing countries. In developed regions, sales will depend primarily on steady replacement demand, new home building, and the development of new features which prompt upgrading.
In the United States, the recent "Cash for Appliances" program provided a boost for manufacturers and encouraged consumers to replace their older, less energy-efficient appliances with new Energy Star appliances. While the government-sponsored program pumped up sales for the first two quarters of this year, appliance makers expect that when the incentive ceases, sales will likely fall to pre-program levels.
Factory unit shipments increased in March in most of the appliance categories tracked by the Association of Home Appliance Manufacturers. Shipments in the AHAM 6 category of appliances - which consists of washers, dryers, refrigerators, freezers, ranges, and ovens - were up 9.3 percent in March 2010 with more than four million units shipped, compared to 3.675 million units shipped in March 2009. Year-to-date shipments of appliances in the AHAM 6 category were up 5.5 percent from the nearly 8.6 million appliances shipped in the same time period in 2009.
According to the Freedonia Group, there are approximately 50 or so major players in the appliance industry, with the top seven - Whirlpool, Electrolux, Haier, BSH Bosch and Siemens, Panasonic, LG Electronics, and General Electric - holding the lion's share of the market. That group accounted for 57 percent of the global market share in value terms in 2008, the year the report was released. These top companies manufacture multiple appliance lines, giving them an overall competitive edge.
Whirlpool dominates appliances with a 36 percent market share, and its Amana and Maytag subsidiaries take another 12 percent of the market. Whirlpool's first quarter 2010 sales in North America were $2.3 billion, up 7 percent from the same period in 2009, and supported by the $300 million government rebate program to stimulate consumer spending. "We are pleased with the strong operational performance in all of our regions," says Jeff M. Fettig, chairman and CEO of Whirlpool Corp. "We're encouraged with the 18 percent increase in our global unit volumes during the quarter."
In North America, Whirlpool launched a new Vantage brand laundry pair, a side-by-side refrigerator, and a tall-tub dishwasher that holds up to 12 place settings. Its KitchenAid brand introduced a new French door refrigerator.
It's good to supply plastic parts to the appliance industry, according to one molder. Jack Shedd, vice president of sales and marketing for custom molder and contract manufacturer Hoffer Plastics in South Elgin, Illinois, who spoke at the American Mold Builders Association annual convention this year. The appliance industry is one of Hoffer's major markets, and Shedd has worked for years with appliances.
The appliance industry tends to have high volumes, providing opportunities for plastics processors, Shedd says. A Whirlpool factory in Clyde, Ohio makes 22,000 top-load washers a day, and "they make these in the United States because they can't make it in Mexico and ship it back into the [United States] cost effectively," Shedd says. Whirlpool has 25 North American assembly locations and uses lots of plastics.
The appliance market typically has a three year "refresh" cycle in which it uses the same platforms with new features, Shedd says. This drives consumers to purchase new appliances even if their older ones are still in good condition.
The automotive industry may be down, but it's not out. Volkswagen is building a production facility in Chattanooga, Tennessee where it will produce a car designed specifically for North American consumers. The company will invest $1 million, and provide 2,000 new jobs to initially produce 150,000 vehicles. The plant will open early in 2011.
With OEM consolidation and new partnerships, new opportunities will be created for some suppliers, according to SupplierBusiness, an IHS Global Insight Group. However, it will leave others out in the cold. "Cost-saving linkages among vehicle manufacturers will no doubt reduce the size of the supply base, just as they did during the merger frenzy of the 1990s," stated a release from SupplierBusiness. "The changes also will require a strategic response among parts makers - a potentially dangerous one." The last time OEMs went through a period of consolidation, several Tier 1 suppliers sought to mirror their customers, striving to generate size through acquisitions that would allow them to maintain counterbalancing power. That strategy sometimes led to disastrous consequences. The difference this time is that consolidation among suppliers should be more logical, synergistic, and better planned.
With the push toward electric and hybrid vehicles, plastics will play an important role in the light-weighting of vehicles. Suppliers of plastics components and integrated systems - such as interiors, fuel, and under-hood parts - should connect with business opportunities. "Suppliers and carmakers are joining forces to meet the demand for electric vehicles," said SupplierBusiness. "Indeed, co-operation on electric and hybrid vehicles is critical all through the supply chain: between OEMs, between suppliers, and between suppliers and OEMs."