U.S. plastics companies should think of countries like China, India and Vietnam as fast-growing domestic markets, rather than low-cost places to outsource production, speakers said at the Plastics News Executive Forum.
But that requires a new way of thinking. Struggling to rebound from the Great Recession, the U.S. economy is expected to grow only around 2-3 percent a year for the next several years, so it doesn't make sense to bring more cheap goods back over to the United States, the speakers said.
Larry Hotaling bluntly called the United States a “stagnant market.” Terms like “outsourcing” he said, “are history; that's behind us.”
“You can only do so much to service that limited a market. You can only cut your costs so much,” said Hotaling, managing director of Global Diligence Ltd., a Hong Kong-based consulting firm.
Fast-growing Asian nations are building a middle class with money to spend on cell phones, computers, air conditioning and cars, said Roger Young, Asia-Pacific vice president for consulting firm Robert Eller Associates LLC of Akron, Ohio. “A buying boom is taking off” in urban centers of Asian countries including China, Thailand, Malaysia and Indonesia, he said.
Young said the Chinese government is trying to spread prosperity into the country's interior by handing out subsidies for people to buy computers and other products.
The topic of emerging markets got hashed out during several sessions at the forum, held March 7-10 in Tampa.
Hotaling said many American business executives still think China and India are important to help them cut costs. “The discussion over the next year or two, I see changing dramatically, from just cost basis to one of a more strategic-future basis,” he said.
Parmesh Bhaskaran agreed. “In the U.S., in the small to midsized companies, when we say 'outsourcing,' it's basically for getting the lowest-possible-price products from an emerging market. I think we, in the U.S., need to shift our mind-set a little bit and basically say: How can we exploit the emerging market and grow our own business there?” said Bhaskaran, director in the Chicago office of AlixPartners LLP, a consulting and turnaround firm.
Young said that in China, the government wants manufacturing to move up the value chain, emphasizing things such as compounding and biopolymers instead of toys, footwear and textiles. As labor costs go up, Chinese molding operations will boost technology by such means as buying a single, two-shot molding machine instead of molding a part on one press, then moving to a second.
Right now, labor costs are increasing faster that the rate of productivity gains in China (12 percent wage inflation) and India (20 percent), according to another AlixPartners director, Philadelphia-based Dan Frich. In the U.S., productivity is outpacing the rate of wage costs.
Frich outlined AlixPartners' outsourcing index, a study comparing overall costs of manufacturing in emerging markets with costs in the U.S.
Mexico is No. 1 on the list of competitive outsourcing countries for the United States, thanks to NAFTA, proximity to the U.S. market and a weak peso.
Freight costs are a big issue for importing products from China and India — and they can fluctuate dramatically based on the price of oil. For example, in 2007 and early 2008, when oil peaked at $140 a barrel, it cost $6,000 to $8,000 to ship a container from China to the United States. That plunged to $1,000 to $1,500 last year when oil prices plunged during the economic slowdown, he said.
Cheaper shipping costs make U.S. manufacturing less competitive, although the weak dollar lowers the price of exported U.S. goods. But Frich said it's more complicated than any one or two issues, and you have to also look at electricity costs, the cost of machinery and equipment, construction costs and exchange rates.
Frich urged any company considering a plant in a low-cost country to take a long-term approach.
“It's very dynamic. It's very difficult to make a decision based on where things are today, and where you expect them to be in a year, when you have huge wild swings in both exchange rates and shipping costs,” he said.
Another “wild card”: The likelihood of future U.S./China tariff wars.
One Executive Forum attendee, Pat Beirne of Ireland, is bullish on U.S. manufacturing. He owns Castlepollard, Ireland-based Mergon Group, which runs injection and blow molding plants in Ireland, Czech Republic and Anderson, S.C. The South Carolina plant has eight injection presses and 15 blow molding machines.
“I think the U.S. is a low-cost economy in many respects,” Beirne said in an interview. He cited low electricity costs and total labor costs that he said are comparable to central Europe.
“I think that [original equipment manufacturers] in the U.S. should really be looking to local source,” he said.
Beirne said that importing products from China ties up cash while the products cross the ocean, and require larger inventories.
Young pointed out that Mexico, China and India aren't the only emerging markets.
Young said U.S. plastics processors have opportunities in Saudi Arabia, which is making a major push to build integrated clusters of petrochemical and manufacturing complexes, linked to its oil wells.
“Saudi Arabia has built the largest plastics vocational school in the world. It has over 125 machines in it for people to train with,” Young said.
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