Taking care of business
By Mark Stephen, associate editor
Anyone who hasn't been hiding in a resin bin lately is probably aware that General Electric Co. intends to sell GE Plastics by the second half of 2007.
Anyone who hasn’t been hiding in a resin bin lately is probably aware that General Electric Co. intends to sell GE Plastics by the second half of 2007.
The news caused consternation throughout the engineering resins industry, in part because, along with DuPont, GE Plastics is the world’s leading supplier of engineering grade resins, according to Cleveland, Ohio-based market research firm The Freedonia Group.
However surprising, General Electric’s decision did not come completely as a bolt from the blue. GE Plastics’ fourth-quarter 2006 figures revealed that earnings had plunged 49 per cent. According to the company, the sale is part of its strategy of exiting slower-growth and more volatile businesses. “This is a world-class business, but it doesn’t fit with the high yield portfolio that General Electric is building,” Russell Wilkerson, General Electric corporate spokesman, said.
GE Plastics is not alone among engineering resin companies in feeling pressure, whether from rising feedstock prices, the constant threat from overseas competition, or a combination of these and other factors.
Nova Chemicals Corp.’s styrenics unit has lost more than US$800 million during the past six years, Eastman Chemical Co. is looking to sell or close several international polyethylene terephthalate (PET) plants and rumours persist that Dow Chemical could be targeted for a buyout effort from a group of private-equity investors.
“The North American engineering resin industry is very unstable at the moment, as many companies find their margins going down,” said Balaji Capaloor, industry manager of chemicals and materials with San Antonio, Tex.-based analyst firm Frost and Sullivan.
Whatever the ultimate fate of GE Plastics (and analysts such as Capaloor agree that its sale to a private equity firm seems most likely), the episode could well mark the beginning of a turning point for the engineering resins industry — the end of the days of doing brisk business in a relatively insular market, and the birth of a new era characterized by business strategies crafted to ensure survival in a fiercely competitive global environment.
One strategy that many of the engineering resin companies are implementing to adapt to this new era involves reform from within, through consolidations to cut costs, run leaner and ultimately perform more competitively.
In February 2006, for example, Lanxess Inc. consolidated its American Lustran Polymers organization to one location near Cincinnati, Ohio. “This relocation was aimed at increasing business efficiency by improving internal communication and thus shortening decision-making channels,” said David Gingras, vice president of sales, marketing and business development for Lustran Polymers in North America.
And in March 2007, Bayer MaterialScience (BMS) began consolidating its organizational structure for much the same reason. “This move will sharpen the business focus of the management body…and create a leaner hierarchy,” Werner Wenning, chairman of the board of management of Bayer AG, said.
GOING TO THE MARKET
No one is suggesting that consolidation is enough, however. A second survival strategy involves embracing the new global market, primarily through the establishment of new overseas engineering resins production facilities in regions with growing economies.
Early this year, for example, Dow Chemical announced plans to start up its first plastics plant in Russia. The polystyrene (PS) production facility, located outside Moscow, is intended to take advantage of the fast growing Russian and Eastern European markets, the company said.
The majority of new engineering resin plants are not being established in Eastern Europe, however, but in polycarbonate-hungry Asia-Pacific, where per capita consumption of plastics is expected to double by 2010. In particular, demand is increasing in China and India, both of which have telecommunications sectors expanding at an annual rate of 15 per cent, or twice that of Europe. “The present boom in Asia-Pacific is leading to significant market shifts, and engineering resin companies are following that market to maintain their competitiveness and benefit from the boom,” Frost and Sullivan’s Capaloor explained.
THE ROAD TO INDIA
Considered by some analysts to be the resin companies’ biggest business opportunity outside of China, it’s no surprise that establishing a presence in India is becoming a key strategic goal.
In February 2007, DuPont announced plans to invest over US$22.5 million to construct a research and development centre in the city of Hyderabad, the company’s first such centre in India. “The establishment of DuPont’s centre in India is consistent with our company’s strategy of going where the growth is,” Balvinder Singh Kalsi, president, DuPont India, said.
In that same month, BASF AG launched its first polyurethane (PU) system house in India, located in Navi Mumbai. “As the PU market in India is growing more dynamically, compared to that in Europe, we anticipate that BASF Polyurethanes will benefit from the strong market potential of India,” Jacques Delmoitiez, president, BASF Polyurethanes, explained.
CHINA: THE MOTHER LODE
Whatever the promise offered by India, there is little doubt among engineering resins companies that China is the real key to future prosperity. “China represents an almost unimaginably large market opportunity, thanks to the country’s vast population and increasing standards of living,” Jos Goessens, president of DSM Engineering Plastics, said.
And many engineering resin companies have finally structured their affairs so as to be ready. “Traditionally, most of our experience has been in the Western Hemisphere,” Ernie Springolo, senior country representative for BMS Canada in Toronto, explained. “We have thought about going into China for the past 15 years, and have now negotiated the sites, the feedstock requirements and the engineering contracts necessary to do so.”
They are also prepared to make the substantial investments necessary. “We are investing very heavily in China,” said Fred Boss, DSM Engineering Plastics Stanyl product manager in Southfield, Mich. “We have a new plant in the Jiangyin province, and announced earlier this year that we are going to build a second polymerization plant for our high-temperature polymer Stanyl engineering resin.”
Taken in combination, other recent examples of engineering resins companies opening, or planning to open, production facilities in China highlight the country’s overwhelming strategic business importance.
In August 2006, for example, BASF opened a US$1 billion PU production plant in Shanghai. “In addition, we will in 2007 open another new facility in Shanghai, which will produce PU specialities tailored to the requirements of our Chinese customers,” Dr. John Feldmann, a member of BASF’s board of directors, said.
And in September 2006, BMS opened its own Shanghai facility, a polycarbonate (PC) and PU production plant. “China is of central importance to [BMS], both as a production base and for our business strategy,” BMS’ Wenning said.
WHAT IT ALL MEANS
With engineering resin companies pushing into the Asia-Pacific region and beyond, North American plastics processors would be well advised to rethink their own resin strategies, according to John Denzer, managing partner at Resin Technology in Hickory, N.C. “Molders should have more than one resin source,” he advised. “Also, develop short- and long-term purchasing strategies in order to maximize savings in the current market environment.”