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Insight: The Plastics Dilemma

On the one hand, plastics are ideally suited for light-weight requirements. But on the other, components manufacturers are going out of business.

We were struck recently by the juxtaposition of an interesting set of circumstances that illustrate the fun (and by "fun" we mean "challenge") of being in the auto industry:

  • At the end of 2007, Congress passed an energy bill that includes a 40% increase in light vehicle fuel economy standards by 2020: to a 35 mpg fleet-wide average. The National Highway Traffic Safety Administration is in the process of writing rules that describe how the new CAFE standards will be rolled out and enforced for the 2011-2020 model years. One of the areas that NHTSA has identified as being instrumental in meeting the new standards is vehicle weight reduction.
  • Hybrid vehicles and full electric vehicles are currently drawing great interest, primarily due to high gas prices. To keep pushing the performance of hybrid and electric vehicles into the mainstream, automakers are looking to battery suppliers to reduce cost and extend battery life. The major directive for other suppliers is to find ways to offset battery weight, so miniaturization, simplification, material substitution, and integration of systems for overall weight reduction is the order of the day.
  • Because of plastics' value in weight reduction to improve fuel consumption, emissions, and end-of-life recyclability, industry participants are projecting growth in automotive plastics usage. The amount of plastics used could rise from levels estimated at 8 to 14% of light vehicle weight today, to up to 2 to 3 times that by 2015, in the most optimistic scenarios.
  • A look at the roll call of automotive suppliers that have filed for Chapter 11 protection in U.S. Bankruptcy Court shows that plastics and other non-metallic component suppliers have been foremost among the fallen this year (see chart on right). 

It seems ironic that at a time when there are so many factors driving up the attractiveness of plastic components, that the manufacturers of such components are unable to stay in business. What's going on?

It is one more example of the classic dilemma of balancing short-term and long-term needs. In the short term, suppliers of plastic components are struggling with the same forces affecting all suppliers-slow sales, lower-than-projected production volume, rising material costs-that make it hard for some companies to hang in until the market picks up again. In addition, this part of the industry has been characterized by excess capacity, even aside from the industry downturn, due to relatively low barriers to entry for molding. Some of the Chapter 11 filers in this field have been unable to reorganize or find buyers and are simply closing and liquidating assets (e.,g. Progressive Moulded Products). Ford Automotive Components Holdings LLC's difficulty in finding a buyer for its Saline, MI, interiors plant may lead to removal of capacity to the tune of a 1.6-million-ft2 plant if they decide to shut it down. The operating assumption is that in the long term there will always be enough capacity for what is needed-someone is going to be the last molder standing. Wilbur Ross is making a play for that role by continuing to add companies to his International Automotive Components North America, but he also selectively closes facilities to consolidate and reduce capacity. So, some of the disparity between the apparent opportunities for plastics and the current realities for injection molders is from an in-process correction in capacity overhang.

What's more, you could say that the basic plastic building blocks, e.g., injection-molded trim, get no respect. Years ago, we were watching a demonstration of Freemarkets' new reverse auction technology at an industry seminar. As the graphic on the screen ticked lower and lower with supplier quotes on a package of plastic parts, the powder metal salesman next to me leaned over and said, "And that's why you don't want to be in injection molding." To take advantage of the opportunities in an industry that desperately needs lighter vehicles, suppliers need to get beyond the routine commodity parts and into new applications, developing the data and technology to support conversion of more components and systems. This is not an easy assignment when there is little short-term return (e.g., reimbursement for R&D/development dollars) and cash flow is tight, even if in the long term it would pay off. Balancing short-term issues with long-term opportunities may never have been more difficult. For some suppliers of plastic automotive components, the future is bright, but it just can't get here fast enough.

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