In the performance benchmarking survey the MMTC compiled, Luria found that the industry has taken a large downturn and companies will continue to suffer if the right proprietary practices are not put in place.
In 2001 data, Luria found tremendous turbulence with companies showing 20, 30, 40 and even 50 percent drops in sales. Luria likened the industry’s problems to those of metals production: U.S. firms were leaders in the ’50s and in trouble by the late ’70s.
“Plastics was this bright spot because it was growing a lot and plastic was replacing metal in a lot of applications … I guess I would be more confident that things were going to work out here if we had seen something (work out) in metals. But we didn’t.”
According to Luria, two factors are having an effect on plastic’s decline. The first is that smaller companies cannot handle high fixed costs in quoting large packages for customers. “They’re not just saying, ‘Okay, we need this part made. What’s the quote?’ They are saying, ‘Okay, if you make this part, you have to make these 15 parts. What’s the quote?’”
Luria said small firms have big problems handling such situations. “Plus — because with these small companies there is a fair amount of leverage and no deep pockets involved —they’re really not bankable for the long periods of time from when you start seeking an order to when you get it and get paid for it. And I think that explains why there are some people whose sales are going up a lot, because they are gaining what these other folks lose.”
He said turbulence is spreading from smaller companies to larger companies and taking a few down with it.
“And it is not just the smaller companies — although the smaller companies, I think, are clearly getting hit. We are seeing $50 million companies become $40 million companies, which is a big drop.”
But a $10 million loss for a big company is nothing compared to a $5 million company becoming a $2.5 million company.
Large companies, he said, can cut overhead when sales decline. But in a $5 million operation, there may be only one engineer, so more costs are fixed and cutting overhead could mean losing the business.
The second factor Luria sees playing into the plastics industry downturn is the growing impact of globalization.
He pointed to China, where the import share in a lot of plastic products is rising very sharply. “If you look at what has happened in toys, a fair amount of plastic work was done in toys, and we don’t do it any more. And this is more noticeable in the past year or so on the mold-making side.
“What has happened is a lot of companies have said, ‘Well, gee, if the parts are going to get molded in China, then why don’t we buy the mold in China?”
One factor that makes China such a strong international player in plastics is that a Northwest 747 can deliver a lot of lightweight plastics on the others side of the world overnight.
“With a plant in Detroit or a plant in Shanghai, you really are talking about one day difference on the shipping side.”
As issues of time and distance fade, the strong dollar makes China much more of a factor. According to Luria, the people getting hammered by China this year are in Mexico. He said the movement of many U.S. firms to Mexico strengthened the peso, making China far more competitive than Mexico-based firms, some of which now are closing.
So what is a company to do in order to compete with China and other plastic molders that are staying on top?
According to Luria, company owners must do two things to compete in the quickly changing world of plastics. Companies are making money, he said, either because they are lean or because they’re striving for the more difficult projects.
“The thing is that it all really boils down to who is willing to take a chance and try the hard stuff,” said Luria. “Having a lean company sometimes isn’t going to matter much, either, because it is really becoming a necessary condition of making money and not something different.”
And the secret to making money in the industry is something fairly elementary, though it is just beginning to catch on: making something that not everyone else can do.
“What this typically means is that either they are making parts that are very, very small and that have to be made in tremendous volumes and with absolutely flawless process control, which many companies cannot achieve,” said Luria. “Or, they have to be making things that are really complicated — which in molding is measured by how many cavities there are in the mold.”
The next question, then, becomes how many molders actually have the skill, ability and engineering overhead to be able to seek these complex jobs and master them?
Luria said it means coming up with relatively cheap solutions to complex projects, to have efficient engineering, to execute a product very well, and to be large enough to afford the overhead in order to cast a wide net looking for complex projects.
The big problem in Michigan, he said, is that many firms are undercapitalized. “They very simply shoot and ship: (they) buy 10 molding machines used, for $50,000 each, and the resins get poured in the top, it is poured in the mold, the part comes out of the mold, they spruce it up and ship it.
“The problem is that it is too easy,” Luria said.
“Because it is too easy, there are too many people doing it, including in China. And the price of that stuff keeps getting pushed down 5 to 7 percent each year, and nobody can increase their productivity by, say, 10 or 12, which is what you have to do because material costs are not controllable.”
In the end, he said, such firms make less and less money until business ceases. The big question for such firms becomes whether it makes any sense to keep doing this.
The good news is there are groups out there that can help companies that have the ability to do complex jobs and the potential to survive.
Luria named a few West Michigan companies as prospects for survival, noting that they are good companies that are making simple parts that have figured out it is necessary to make complex parts, and the resources are all right there. It is not surprising that these are the companies that are hooked in with the MMTC, with Grand Valley State University, with Western Michigan University, and wherever else the expertise is.
A Change In Education?
Luria said the issue of plastics competitiveness must also be solved by education.
Just training people on the right machines is not going to do it anymore,” he said. “We need more engineers. I think there has been an overemphasis on ‘Who can we take from high school and transfer into an $8 to $9 an hour job?’ I think that is the wrong question.
“I think it is the evolving trend of the shops doing the more complex things. And we need to prepare our engineers and prepare our companies to move into the future and learn the survival techniques.”