Why are investors turning their backs on the plastics processing industry? North America's business climate is supposed to be healthy and vibrant, with barely a soft spot worth mentioning. The plastics industry is supposed to be outperforming the overall economy. Yet some of the biggest names in plastics processing have run into financial trouble in the past few weeks.
Tucker Housewares. Key Plastics LLC. Breed Technologies Inc. Cambridge Industries Inc. Packaging Resources Inc. All of their stories are different, yet many ran into the same pitfalls.
One reoccurring problem: finding and keeping steady sources of financing.
A few years ago, Breed, Key and Cambridge were all piling on debt and growing steadily, largely through acquisitions. But they all experienced an unexpected hiccup, and investors lost their nerve.
It's too simplistic to say the financial community has lost interest in plastics. In some cases investors were probably right to pull the plug.
But what is clear is that investors aren't looking for steady, unspectacular growth. They want double-digit annual returns, and they'll look anywhere — dot-coms, flashy initial public offerings, the Dow today, Nasdaq tomorrow — where they can satisfy their need for greed.
These plastics processors wanted a share of the pie, but found they couldn't keep up with the high expectations that went along with the cash.
Lack of financing isn't the only problem plaguing processors. Many, like Tucker, have just been bruised and battered after years of what we'll call the traditional processor squeeze: They're stuck when resin suppliers hike prices but customers refuse to accept an increase.
Discount retailers have the worst reputation, but they're not alone. As long as resin prices were heading south processors were safe. But rising prices in the past year have meant shrinking margins, and customers don't seem bothered when processor suppliers run into trouble. After all, there are plenty more willing to pick up the load.
That brings up complicated issues of overcapacity and international competition; problems that are rarely blamed for processors' troubles, but always lurking just below the surface.
How can processors avoid all these sticky problems? Above all, there's no substitute for good management. Not just good managers, but people who make the right bets when their company's future is on the line.
Leaders who know when to acquire a company, how much to pay, how to predict and handle changes in raw material pricing, and how to negotiate with customers.
These skills are always in scarce supply, but they're not becoming any less important. Because, although Washington and Wall Street both seem to believe that the strength of the U.S. economy isn't an issue in the 2000 elections, the health of these leading processing companies has us thinking that there's serious trouble for some manufacturers just around the corner.