Special Report — Fighting Back: Short Circuited

Most plastics processors serving the electronics industry have not been spared grief in this economic slump. The telecommunications and computer sectors, in particular, have been hard hit and, by all indications, will be hit even harder as a result of the terrorist attacks in the U.S.

Merrill Lynch & Co. has revised its forecasts and is projecting a sharp decline in worldwide unit sales of personal computers. The forecast now predicts unit shipments of 140 million in 2002, down from the earlier estimate of 155 million. Retail sales, spurred in part by sales of home appliances and electronics, has been a relatively bright spot in the Canadian economy during 2001. StatsCan data show that sales by large retailers were up 4.5% and 9.1%, respectively, in May and June 2001, versus the same months in 2000. However, as a result of the new economic uncertainty, “retail spending remains at huge risk over the next several quarters”, according to one analyst. On the bright side, Merrill is projecting a rebound in the PC market sometime in the third quarter of 2002.

Komtech Plastics Corporation makes products primarily for the electronics and telecommunications sector. The company has 16 injection presses ranging from 28- to 550-tons in clamping force and recently added 16,000 sq. ft. of floor space at its Kanata, ON facility. Raj Mathur, president and CEO said: “We are definitely being affected by the downturn. We’re riding the high-tech wave.” Mathur added that his company is coping by diversifying into the automotive sector as it takes an upswing. Noted Mathur: “We are concentrating on the front end of our operation, adding engineers to the team and designing new products. While it is true that we had layoffs in manufacturing, we recalled some workers in July as business improved.”

Keypads and electronic keyboards for telephone handsets, computers and other instruments are the main products made by Comptec International Ltd. in Surrey, B.C. Ernie Gourley, CEO, said his business is down about 30% from where it was 12 to 18 months ago. This resulted not only in the loss of revenue, but in two significant layoffs this year affecting approximately 60 people out of 170; some have since been recalled.

He is coping by diversifying his products and market capability. For example, he has engaged new reps who are looking at proprietary products. Added Gourley: “We’re also looking into medical markets, which we think are less prone to the ups and downs of the consumer industry.”

Gourley noted that approximately 82% of his business is in export markets, and his competition is mostly from overseas processors. “In my opinion, to survive in this business you have to have niche skills,” he concluded.

Columbia Plastics Ltd. is another Surrey company that has felt the cold blast of the slump, making products for the electronic, semi-conductor and wireless industries. Said Greg Howard, president: “I would say business continued to be strong throughout the first quarter. It was the second quarter when it fell off the table. What struck me this time, having been around long enough to remember previous occurrences, this time it truly did fall off the table. It wasn’t gradual. It wasn’t sort of a drying up. There was no warning. On Monday everything was fine and dandy, and on Thursday people were cancelling existing orders, cancelling outstanding orders, and extending their deliveries.”

Howard said that approximately 80% of his production is domestic, and the export business was not affected as dramatically.

He regards these unwanted occasions as “an opportunity to strengthen the team, to train like crazy. We’ve been quite aggressive in pursuing lean manufacturing. In fact, we are one of the founding members of the consortium of manufacturing excellence in B.C., and so we have been aggressively pursuing lean manufacturing. Nothing encourages training like a crisis.”

Ron Mitchell, president of CPI Plastics Group Ltd. in Mississauga, ON, has a bad news/good news story to report. While the 40% of his business that deals with products for appliances, office furniture, consumer electronics and autos is down 25% compared with last year, he is experiencing some growth in a new category of big-screen televisions. And approximately 60% of his products are exported to the U.S., so he is already well positioned in that marketplace.

Effects of terrorist’s attacks on economy likely to be short-lived

Historical parallels to other national emergencies or international incidents suggest that the economic effects of the September 11 terrorist attacks on the U.S. could be short-term, according to a report issued by PriceWaterhouseCoopers. The report notes that while impact of other major crises — hurricanes, the Persian Gulf War — has been severe in select economic sectors (airlines, tourism, insurance) the damage on the large and diversified US economy has generally been short-lived. Upside and downside economic effects (see below) are proposed. The report, however, asserts that, “Overall, the terrorist actions clearly increase the already present threat of a U.S., and global, recession. However, the preponderance of precedence indicates the economic effects of the tragedy will be moderate and are not likely to significantly intensify or offset existing economic trends.”

Attacks’ likely downside economic effects

Consumer confidence

Financial market instability

Global effects if U.S. falters

Effects on airline, tourism, hotel and insurance industries

Weaker dollar; change in exchange/investment flows

Exacerbates existing economic vulnerabilities

Attacks’ likely upside economic effects

Financial stimulus from increased U.S. defense, security and

construction spending

Potential for lower interest rates to reassure U.S. consumers

Current baseline economic outlook is best case result

Under the “baseline” negative case scenario, the report predicts a slight softening in 2002 before returning to trend data, which is still strong by historic standards.

*Complete report titled “Likely Effects of Recent Terrorist Attacks on the Automotive Outlook” is available from PriceWaterhouseCoopers LLP. in Toronto.