Canadian Plastics

OBSTACLES AND OPPORTUNITIES

Q How would you describe the present state of the Canadian/North American plastics industry?

July 1, 2008   Canadian Plastics



QHow would you describe the present state of the Canadian/North American plastics industry?

Sajjad: The industry is facing the perfect storm — especially in Canada, as our raw material and freight costs are going up dramatically. The high value of the Canadian dollar and increased competition from the U. S. manufacturers are making it very difficult to pass along any of these increased costs.

Serge: It’s definitely a perfect storm for us. Everything is against us: the oil price is going up dramatically, we have a strong Canadian dollar, there’s a manufacturing recession going on, and the rising gas prices are having an effect on people, which further slows down the economy. Each of these things has happened in the past, but never at the same time.

Mark: I don’t like the “perfect storm” analogy, but I would say that we’ve witnessed the convergence of several significant issues. We’re asking for companies to operate and function at the “speed of business.” We’re definitely at a critical point and we’re trying to find the equilibrium between globalization, a balance in fuel, oil and energy costs, and trying to see what will happen in the U. S. economy.

Dan: I would describe it as more of a roller coaster, but — at least for the moldmaking industry — I think the worst is behind us. The thinning out has been both at the Tier 1 and Tier 2 levels. The majority of the companies left standing at this point are pretty strong companies. They still have a lot to learn, but they understand what the problems are.

Tom: The present state of the industry is terrible, especially in Canada. With the dollar being as high as it is, and the U. S. economy being as bad as it is, none of our U. S. customers have any incentive to shop in Canada. The U. S. competition is so hungry that they’re giving away the work, and our high dollar makes it even more difficult to compete.

Dave: People and businesses are under stress from current economic conditions. Our industry has also become a favorite target for environmental groups, particularly in North America. There have been a lot of acquisitions and consolidations in North America over the past few years, which has caused some industry confusion.

QIn your view, what is the single largest obstacle confronting your business in the next five years? What plans do you have in place to overcome this challenge?

Sajjad: The single largest obstacle facing our business is the margin squeeze. We are looking at every cost and making changes to reduce our costs, including reduction in salary headcount, automation, and increasing the size of our business without adding overhead.

Dave: The single biggest challenge we have is lack of skilled labour. In Alberta, there’s just not a lot of labour available for anything.

Another challenge in this jurisdiction is deregulated electrical power. Since September, my company’s invoices for electrical power have gone from between $80,000 to $90,000 per month to $130,000 per month. It’s a bigger part of our costs than labour. Traditionally energy is not a major cost driver, but that’s completely changed. We’ve been able to conserve some energy and sell it back into the “grid”, but unfortunately the grid price is very volatile and is currently lower than our three-year contract price. Not only do you have to be resin processor expert nowadays, you also have to be an energy management expert. Tom: For us, the biggest handicap is still the Canadian dollar; my company exports about 85 per cent of its tooling.

Another challenge is government attitude towards manufacturing, especially in Ontario. Rather than coming to our aid, it’s almost as if the Ontario government is throwing more obstacles against us. For example, the SR&ED program is an incentive program being marketed as better and better, but at the same time the reviewers give you a harder time than ever, and deny us things.

A final challenge involves health and safety inspectors, who are very inconsistent as a group, and who are putting more and more costly, unrealistic demands on companies. I know of companies that spent $90,000 just to satisfy the demands of these health and safety people. They’ve got the power of God, and can shut you down in a second.

Serge: Several years ago we started adapting to lean manufacturing to reduce our costs. We’ve been able to reduce our costs dramatically, which has helped us get through the storm. Also, we’ve been managing our cash flow very strictly. We also made a decision to get out of the automotive industry, and are less vulnerable to changes in that industry as a result. Overall, we’re trying to move out of commodity projects and focus on value-added molding.

QOil and gas prices have had a significant impact on several aspects of the industry, ranging from rising transportation costs to increasing raw material costs. What short-term and long-term effects do you think high prices will have on your operation or sector? Mark: We’re dealing with increases in petrochemical and resin costs, and we’re being challenged by our ability to pass on these costs to the converters, and seeing if the converters can pass those costs on to the packagers, and then ultimately the retailers and consumers. We’re part of the chain, and of the absorption of costs through the chain. Regretfully, we don’t have as much control and power as the petrochemical companies to initiate these cost increases. We’re wrestling with the problem of absorbing costs, or passing them onto the converter, and it’s questionable who will be hurt more by this. We may be able to pass on the costs to a converter, but we have to be sensitive to the direct impact it has on their markets and customers.

Sajjad: Our industry does not have pricing power, so we have to reduce our cost to be viable players in the long term. Our industry is suffering, and unless raw material prices come down soon there will be no choice but to increase prices and risk losing business. Prices came down to compete with offshore competition and the damage is done, and it’s very difficult to get prices back up.

QSpeaking specifically about your business and sector, what growth opportunities do you see?

Dan: According to a Canadian Association of Mold Makers diversification study, for mold, tool and die makers the aerospace industry is the area we feel has the most opportunity. At present, we’re tripping over each other for the same work. If we diversify, in either automotive or aerospace or medical industries, that’s the key to the future.

Dave: The need to reduce freight costs has become somewhat of an opportunity for Western Canadian processors. Companies that were bringing in product from the East have suddenly realized the impact of high freight costs, and are taking a second look at manufactured goods supplied locally or at least regionally.

Sajjad: There’s a lot of emphasis on fresh and healthy eating and this is the major growth area for our business — more salads, more cut fruit, more prepared meals, and since we produce clear packaging the packaging of these products in our type of containers brings about impulse sales. We feel there is room to grow in this area for our industry.

QWhat strengths and advantages do you think Canadian companies have over Asian and other foreign competitors? What weaknesses and disadvantages do we have to struggle against?

Dave: I don’t think we have any advantages over the U. S. As North Americans, the only advantage we have is in our capability. Frankly, I think a big disadvantage for many Canadian firms is that we’ve been a bit fat and lazy in the past, mainly because the favourable exchange rate allowed it. China has never been a threat for our type of beverage business and they are rapidly becoming a net consumer nation.

Serge: The advantages we
have are more for when you work with very technical applications in short runs requiring speed to market. For a Canadian packager to work with commodity applications with large volume, you are very vulnerable. I don’t think the Asian packagers have our capabilities; but even if they get them, factors like transportation will impact their ability to compete.

Mark: I’d rather operate in Canada than anywhere else in the world. You can start up a company in many lower-cost, emerging countries, but you’re not guaranteed the political and economic stability you’ll find in Canada. At the same time, however, we’re being asked to manufacture products in Canada with a certain tax burden, and obeying various progressive environmental rules and regulations and labour codes. While simultaneously, in North America, we’re importing products from countries that are not complying with these types of regulations. Our true challenge is to outperform foreign competitors while complying with global best practice levels. Tom: We have advantages, but they’re slipping away. I still think communication and proximity to the customer base is a big asset. If there is a 10 or 15 per cent cost benefit by going to China, the customer is not going to do it, because it’s not worth the aggravation, the communication difficulty, the distance, and warranty and maintenance issues. Being close to our customer base is still an advantage.

QDo you worry about the possibility of a shortage of skilled and professional workers in the future?

Dan: I believe this will be a real problem for the moldmaking industry. There will be a huge shortage of moldmakers in 10 to 15 years. As far as simple manufacturing goes, Ontario alone is projected to have a shortage of 400,000 skilled workers by 2025. This will trickle down into the moldmaking community. At present, there’s still a surplus of skilled workers in the mold, tool and die sector, who’ve been displaced and are looking for work, but they’re older. It’s very hard to get young moldmaking apprentices. The media, I believe, causes part of the problem. When young people read about plant closures, they ask themselves, “Why would I want to get into a situation like that?”

Mark: There’s definitely a shortage of skilled labour in Canada. The plastics industry has to embrace this challenge and develop its own skilled labour. Unfortunately, until the Canadian government decides to change the immigration policy and executes on that, the shortage will continue. As far as professionals, we have a great resource in the level of education in the population of Canada, but the message being communicated to professionals through both the media and the academic stream is that Canada doesn’t want to support manufacturing.

QIn addition to contending with operational issues, the Canadian plastics industry has also had to deal with negative press and public opinion about plastics products. Do you believe these perceptions are having an impact on the industry’s well being? If so, what in your view must be done to change plastics’ public image?

Dave: The bad publicity is a very big deal, in my opinion, and I’m very concerned. At the moment, we’re not doing enough to counter the negative publicity, and part of the reason is that it takes a huge amount of funding. Organizations like the Canadian Plastics Industry Association (CPIA), the Plastics Film Manufacturers Association of Canada (PFMAC), and the Vinyl Council have raised hundreds of thousands of dollars to campaign against environmental groups, but it’s hard to get the message out without looking defensive. There’s an identity crisis in the industry in Canada, and people are aware of it and are throwing some money at it, but unfortunately there are numerous “free riding” companies not supporting the CPIA. They should all be ashamed. The urgency is better recognized in the U. S., where a large number of players commit to more significant funding. However, the overlay to all this is that there’s an economic challenge at the same time, which has created a dual imperative for most manufacturing companies.

Mark: At times like this, I think we realize we’re very fortunate to have an industry association like the CPIA. Also we have the PFMAC and the Bag Task Force trying to address these issues. We’re seeing a global grass-roots movement against plastics and the various organizations mentioned are trying to battle this. I find it ironic that paper is being touted as a great replacement for plastics when 25 years ago it was the other way around.

The criticism against the industry is broad-streamed, but our response so far has been very targeted and strategic, trying to campaign and lobby decision-makers, at the municipal, provincial and federal level; and also positioned at educators.

Our industry is coming under attack, but so too did other industries, such as steel and paper, and they’ve survived and thrived. I think we will come out from this shadow, but we need more support and assistance for our whole industry membership. We have a lot to be proud of, and our industry achievements are significant and meaningful on a global scale.

CPL


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