Canadian Plastics

Special Report: The China Chill

China is merely the latest threat to emerge from a trend not likely to disappear: Globalization.David McQueen first began to see Chinese exporters in his market about five years ago. "The quality wasn...

November 1, 2003   By John G. Smith



China is merely the latest threat to emerge from a trend not likely to disappear: Globalization.

David McQueen first began to see Chinese exporters in his market about five years ago. “The quality wasn’t there. It was difficult to find commercial relationships you could count on,” says the president of Toronto-based Plextron Plastic Assembly Solutions. But the growing presence of Chinese competitors is a trend he can’t ignore. For example, Plextron lost a recent bid to mold and assemble a handful of photocopier components incorporating a couple of different resins, springs and seals.

The winning Chinese bid was lower than McQueen’s material costs.

“It’s most profound in toolmaking,” he says, referring to price gaps. “We buy 85% of our tools overseas now, and it’s strictly because we can’t compete. The price difference is too large … we’re typically seeing tools in China from 30% to 55% of our cost.”

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China’s Shenzhen Economic Zone now makes 70% of the world’s photocopiers. And companies from Hewlett-Packard to Black & Decker have moved manufacturing operations to Asia, taking related mold-making business with them.

CANADIAN GROWTH

At first glance, a comparison of plastics-related trade between Canada and China doesn’t indicate much of a competitive threat.

Exports of Canadian molds heading to China were up 310% to $13 million during the first seven months of 2003, compared to the same period in 2002, Industry Canada reports. Shipments of plastic products grew 118% to $183 million, and plastics processing machinery exports were up 119% to $49 million. Meanwhile, the value of Canada-bound Chinese molds doubled, but reached only $6 million, shipments of plastic products increased a mere 14% to $304 million, and imports from China of plastics processing machinery actually dropped 41% to $3 million.

Several Canadian operations have found success in the emerging Asian market, where a population of more than 1.26 billion people is demonstrating a growing thirst for everything from automobiles to PET-bottled tea. Husky Injection Molding Systems Ltd., for example, sold Asian customers US $155.11 million in products during the fiscal year that ended in July — a 74% increase over the previous year — largely because of growing PET sales.

Processors are also expanding aggresively into China. Royal Group Technologies Ltd., a Canadian maker of PVC building materials, is adding extrusion lines to meet an expanding need for new vinyl window profiles in China. Companies such as Mold-Masters Ltd., Brampton Engineering and auxiliary equipment manufacturers Berg Chilling Systems Inc. and Mould-Tek Industries Inc. have opened sales offices in the region.

The threat doesn’t emerge until you look south of the border.

CHINA: THE TIP OF THE ICEBERG?

After Canada and Mexico, China is the third-largest supplier of goods to the U.S. The U.S. saw its deficit with China increase to US$11.3 billion in July from US$10 billion in June, according to the U.S. Census Bureau’s Department of Commerce. In 2002, China’s exports to the U.S. were valued at US$103 billion more than the value of U.S. exports to China.

The Society of the Plastics Industry (SPI) has determined that China was responsible for more than half of 2002’s $14-billion trade deficit in contained plastics products — those contained in products such as automobiles, appliances, medical devices, computers and phones. Imports of these products and specific plastic goods listed within the Harmonized Tariff Schedule grew 43.6% between 1997 and 2002, while U.S. exports grew a mere 10.7% during the same period, the group adds.

Canadian molders are bound to feel the impact.

“Canada receives 26.4% of U.S. plastics industry exports and 34.2% of U.S. imports come from Canada,” the SPI notes. “Nearly half the imports of builders’ wares, such as doors, windows and blinds, come from Canada. Another 36.9% are imported from China.”

“China is definitely taking away some of our markets in the U.S.,” agrees Faris Shammas, Ontario executive director of the Canadian Plastics Industry Association. “If you’re in a commodity type of business, with fairly long runs and that kind of thing, you probably will be impacted.”

The trade imbalance has undeniably raised the attention of the Bush administration.

“During our roundtables, no country raised more attention as a source of concern than China,” U.S. Commerce Secretary Don Evans told the Detroit Economic Club this September, while unveiling the administration’s new Unfair Trade Practices Team. “Concerns ranged from inadequate access to China’s markets; rampant piracy of intellectual property in China; forced transfer of technology from firms launching joint ventures in China; trade barriers; and capital markets that are largely insulated from free-market pressures.”

China’s economic policies have been cited as the primary reason behind the elimination of 2.7 million U.S. manufacturing jobs in the past three years. (Canada’s manufacturing sector has fared better, shedding 64,000 jobs from an all-time employment peak of 2.4 million workers at the end of 2002. “So far, the loss in manufacturing jobs in Canada has followed the downturn related to the restructuring of the dollar,” says Jayson Myers, Canadian Manufacturers and Exporters’ chief economist.)

When looking for the source of the trade imbalance between the two nations, U.S. economists invariably point to the Chinese yuan. The currency, officially known as the renminbi, has been pegged at 8.277 per U.S. dollar since 1994, and the fixed rate is undervalued by an estimated 15 to 40%. As a result, China has been able to ride a two-year decline in the U.S. dollar compared to currencies such as the Euro and the Canadian dollar. Its products remain affordable in the U.S., and its plastics industry enjoys a stable currency when buying raw materials and equipment from other jurisdictions.

“There’s a lot to be said for making China clamp down on counterfeit products,” adds the Canadian Manufacturers and Exporters’ Myers. “It’s also a concern when you see the selling price is way under the price of raw materials.”

But the economist says related protectionist sentiments in the U.S. are a greater concern, and suggests Canada wouldn’t be immune from any tightening trade policy.

So far, China has balked at pressures to release the yuan to the world’s currency markets. But political pressure is beginning to mount. With a U.S. election approaching in 2004, the domestic economy is moving higher in the Bush Administration’s agenda. And the U.S. International Trade Commission has begun to investigate allegations that China, Malaysia and Thailand are dumping polyethylene retail carrier bags into the U.S. market, among other challenges.

However, the concerns haven’t stopped many major U.S. manufacturers from increasing their presence in the region. GE Plastics, for example, has announced plans to increase the capacity of its Nansha and Shanghai compounding plants by 50% by this quarter, adding US$5 million to the US$10 million it had already invested in the country. Other expansions are expected in 2004.

In explaining the reason to journalists, GE Plastics general marketing manager Yang Danshi noted that a typical Chinese car contains 3 kg of the company’s plastics, compared to the 11 kg found in U.S. vehicles. There’s simply more opportunity for growth.

The only real question is the scope of potential growth, particularly in the region’s automotive industry. Toyota Motor Corp. Chairman Hiroshi Okuda said during a Washington news conference this fall that China’s car sales will surpass 10 million units by 2010. Consultants at KPMG, meanwhile, aren’t so bullish. They say overcapacity will be a problem within two years, as foreign automakers rush to capitalize on one of the world’s few remaining growth regions.

Dennis DesRosiers, a Canadian consultant who tracks the automotive industry, sees China as an economic scapegoat. “It’s common through the years to focus on individual micro situations when the macro situations could be different,” he says.
“The real problem is globalization. It’s not specifically China, per se… Competition could be from any country. It could be Bulgaria, it could be Malaysia, it could be Taiwan. You’re more likely to lose (automotive business) to an Austrian company, a German company, a French company.

“But it may be causing the parts companies a bigger issue on margin erosion,” he adds. Vehicle manufacturers, for example, are introducing bids from Chinese competitors when inking deals with North American suppliers.

“Every week there’s another chemical company opening another plastics company in China. That’s the real gauge,” says Ed Bernard of Bernard Mould in Windsor, ON. “You make plastic next door to where they’re injecting it.”

FRUSTRATIONS AND OPPORTUNITIES

“It’s frustrating on another level because it’s not a question of productivity,” says Plextron’s McQueen, referring to business lost to Chinese competitors. “It’s not like the Japanese companies of the ’70s and ’80s (when the U.S. trade deficit with Japan reached US $50 billion per year). When we were battling the Japanese, it was a matter of getting our act together.

“In general, what you’re seeing is the impact of low wages… Everything they do is a lot cheaper. I think it makes them a much bigger threat. Every input we have, everything we buy, is much too expensive to compete.”

Assembly line wages in China’s economic hubs of Guangzhou, Zhongshan and Shenzhen are as low as 1/20 of the world’s other major economies. A top plastics engineer in Shanghai can make as little as $9,000 per year.

But it isn’t a case of threats without opportunities. Canada, for example, is a major player in the Chinese market for hi-tech machinery and molds, along with Taiwan, Japan, Germany, Switzerland and the U.S. And China is looking to open its borders through acceptance in the World Trade Organization, agreeing to allow products such as plastics and resins to be imported, and slashing its chemical tariffs in half by Jan. 1, 2005, lowering the average rate to 6.9%.

By 2000, China was importing $1.9 billion in plastics machinery — 41% of that in the form of injection molding equipment. Imports into the country were up 40% from 1998 to 2000 and the growth is expected to continue, according to Canada’s Department of Foreign Affairs and International Trade.

“Generally speaking, the Chinese companies are still pursuing cooperative relationships with foreign counterparts because the Chinese want to learn about technology, and to get involved with the international market. They are looking for every possibility to expand their business,” says Jamie Shen, commercial officer with the Canadian Consulate General in Shanghai.

That hasn’t been the case in every sector. The Chinese are strongest in the business of injection molding, especially the projects involving small, simple molds and labor-intensive jobs, Shen says.

By the end of 2004, foreign companies also won’t require Chinese distributors to sell goods in the market, according to a report published by the Market Research Centre of Canada’s Department of Foreign Affairs. The report states: “However, there may also be negative effects from (World Trade Organization) accession for Canadian companies, such as increased competition from other foreign suppliers sharing market access.”

WHERE’S THE BUSINESS?

Still, Tom Meisels, vice-president of mold supplier FGL Precision Works Ltd., thinks China is simply the latest in a series of offshore competitors in a global marketplace. “We faced the same thing 10 or 15 years ago with Portugal,” he says, adding that prices inevitably increase with a region’s rising technology and input costs.

The jobs that are staying in North America are those involving a high frequency of change, and difficult molds, he says. “The change frequency is really a communication issue. It just gets too difficult to communicate across the ocean.”

And in cases where quotes are linked to detailed specifications, such as a specific brand of hot runners, North Americans can compete, Meisels adds.

The solution is the “path of innovation,” Ed Bernard suggests, referring to his company’s five patents registered in the past two years. And when asked about the type of product that is safe from competition, he refers to his company’s Octodog Frankfurter Converter, which slices hotdogs so they appear like an octopus after being cooked in a microwave.

“Less than 10% of the cost is labor. So even if you consider that the labor in China is 1/20 of ours, the savings you realize there is less than the shipping costs. So this is a product that will stay in Canada.”


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