Plastics Clouds Have A Silver Lining

April 26, 2002
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This may be the worst of times and the best of times for machinery dealers and manufacturers — including West Michigan’s many custom mold makers.

So says Jeff Mengel, of Auburn Hills, the directing partner of the Plante & Moran plastics industry team.

Mengel told the Business Journal that a number of economic forces have conspired to strike hard at industry in general, with a particularly severe impact among second-tier suppliers, such as this area’s mold makers.

Yet, he added, if a firm has a strong balance sheet, now is the time to take advantage of the lull in business.

“If you have a strong balance sheet,” he said, “you can take an offensive position. This is a great time to buy equipment. Equipment is dirt cheap right now because there’s a glut of it on the market.

“You can great terms and position yourself with equipment market as well as attract talent. You won’t have sales, but this is a good time to train people, too.”

Equally important, he said, this is the best possible time for firms in plastics to take a cold hard look at their manufacturing philosophies.

“Many of these molders are good molders — excellent molders — but they’re not necessarily good at manufacturing.”

Molding, he explained, is the technical art of shoving plastic into a mold. “It takes mastery of a lot of chemistry issues and physics,” he said. “It’s science and an art at the same time.”

But, he said, manufacturing consists of a set of entirely different disciplines.

“It’s the business of having the right mold in the right spot; having the right presses in place; having the right tools there and set up appropriately; having it all synchronized and set up so that you do it efficiently.

“Now is the opportunity for molders to become leaner,” he said. “By and large, this industry is not very lean. This is a good time when a lot of inefficiencies can be squeezed out, and to learn new manufacturing disciplines.”

Mengel, who has worked closely for a quarter century with injection molders, mold makers and related companies, covered some of the same ground in a seminar last month at Grand Valley State University sponsored by the Michigan Chapter of the Society of Plastics Industry. Also speaking in the session was Dan Luria, vice president of Strategy and Measurement, Michigan Manufacturing Technology Center (see separate story).

Mengel breaks the plastics industry into four components: resin suppliers, machinery dealers and manufacturers, mold makers, and processors.

He said resin suppliers generally are very large firms with the reserves to withstand hard times. Mold-makers and processors respectively create tools or molds and produce parts.

The machinery dealers and manufacturers, he said, generally are good-sized firms, though not nearly as big as resin suppliers, and currently the dealers and manufacturers don’t have very long financial legs.

Mengel traces their problems not merely to the recession, but also to the entirely unrealistic expectations in American industry prior to the recession — and to several major subsequent lurches in manufacturers’ supply chains.

“The big sucking sound we’ve all heard,” he said, “was a wholesale restructuring of the supply chain, no matter what industry you’re in.”

Expectations, he said, were unrealistic.

“If I was to look back at previous surveys that we’ve done and look at growth plans that people had,” Mengel said, “the projected growth probably would exceed the gross national product of most small countries if I combined them all.”

He explained that every manufacturing sector was projecting continued growth and prosperity.

And he said this led to huge capital investment in new equipment.  “Companies have acquired new equipment and right now the equipment market in the machine tool industry is probably down 60 percent.  That is because they front-end loaded all their sales.”

But with the downturn and drop-off of sales, he said the industry no longer needed the equipment.  “So the used equipment market is really depressed.

“If you look at the collateral value of equipment right now, it’s really low. Banks are having a hard time, and so people [in manufacturing] are having a hard time getting bank financing.”

Industry built up a production capacity anticipating continued future growth, he said. “Two years ago the highest need in industry was having and retaining good employees. The highest need right now is sales.

“Well, not only did the future growth not get there,” he said, “but growth actually declined.

“And what happens when growth declines, is that it declines at the OEM level whether that be Whirlpool, Haworth or General Motors — it doesn’t matter which. First, it declines there, and then it goes to their key suppliers — Tier Ones and integrators. And these tend to be larger companies, and when their sales decline, it goes downstream.

“And then the OEMs say, ‘You know what? This work that we currently outsource to supplier X? We’d like to bring that back in-house.’”

Mengel said this constitutes a double-whammy: loss of revenue not only because of the general sales decline, but also the secondary loss when OEM or Tier One firms avert lay-offs by recapturing work that they previously outsourced. In some cases, he said the newly deprived outsource firm sometimes is staffed by former Tier One or OEM employees who left the mother ship, so to speak, to become an outsource supplier.

Mengel said a prime example of that effect is a firm named Visteon, which Ford spawned in July 2000. Ford was 80 percent of their sales. But now Ford, under pressure not to lay off workers, is recapturing Visteon work

“We built capacity — you know, the build-it-and-it-will-come scenario?” Mengel said.

“Well, it didn’t come. Matter of fact, it declined. And when it did decline, not only did the general sales level decline, but the top tiers’ resourcing strategy also impacted lower tier suppliers. 

“And on top of all that,” he added, “if you wanted to retain your business, you had what they called rebates, or impacts. The higher tiers are saying, ‘If you want to retain this business, we want a 5 percent rebate.’”

He said the decline in capital goods sales has been substantial, the impact upon furniture OEMs being apparent to us all, with a lesser but still substantial impact among automotive suppliers.

But if the double-whammy on all the players in manufacturing has been profound, Mengel said, there’s more.

“Something else that really has impacted has been the globalization of the economy,” he said. “In small appliances, they’re not just declining in sales, they’re actually moving away from this market entirely.”

He said that in small appliances particularly, manufacturing of parts is going either to Mexico or China. “A non-critical component that’s manufactured here but that could be manufactured in a low-cost environment such China or Mexico will go there eventually,” Mengel said.

He said large parts or critical parts in the automotive industry are another story.

“The thing about automotive parts is that they tend to be very critical and they’ve got to fit together, and when they put the 10,000 pieces together, they’ve got to work. The supply base tends to stay around the assembly plants where it’s being put together.  If it’s being put together in China, it’ll be molded in China; if it’s put together here, then it’ll be molded here.

“They won’t move overseas as quickly,” he said.

“They’ll move,” he added, “but not as quickly.”

Another major factor that accounts for the overseas flow of some processes, Mengel said, is the strong dollar.

“It has a huge impact in all this.

“A strong dollar makes it easy to go overseas, particularly for the tool makers — those are the people who make the mold.”

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