| The global plastics industry is increasingly exposed to ‘The China Price', which is compelling companies to establish and leverage their presence in China.
Bolstered by huge global and domestic demand for its produce, China’s plastics industry has grown manifold in the last decade to become the global hub for imports, processing, exports and consumption of plastics. Trailing only United States of America, China has moved on to be the world’s second largest producer of plastic products. The Chinese market grew at over 12% on a year-on-year basis in 2005 while the global growth rate stood at 3% for the same period. With global manufacturers moving or setting up manufacturing plants in China deploying huge investments in its petrochemical and polymer industries, the plastics industry in China seems to be all set for further growth.
Growth @ Leaps and Bounds
China’s accession to the WTO and the huge influx of foreign investments into its manufacturing industry and especially the plastics and petrochemical industry has made it a global hub for cheap plastics manufacturing. Estimates suggest that China could account for nearly 40% of the demand for chemicals by the end of 2006. Global chemical and oil giants like Dow Chemical, DuPont, BASF, Bayer, Chevron Texaco, Shell, Mitsubishi Chemicals and BP to name a few, have already invested or plan to invest in China. Consultancy firm, KPMG, in its report Petrochemicals and Plastics Industry Outlook for China notes that annual investment in China is running at US$ 30 billion, out of which 50-60% is from the foreign investors. With so much comparative and competitive advantage at stake, China's plastics industry could be in for some more preferential investments, thus supporting its growth in the years to come. Further, continued demand from industries like automobile manufacturing and packaging promises to sustain the industry’s growth at double-digit rates in the future as well.
The China Price
The lure of cost savings in the Chinese plastics industry has prompted many multinational companies to set up their plants in China. This in turn is leading to the transfer of technologies and process knowledge, strengthening China’s position as a global leader in the plastics industry. The global plastics giants are compelled to move into China to tap the huge business opportunities that exist for both domestic and international markets. Presence in China also lends MNCs the ability to effectively manage the price risks prevalent in the global plastics industry. ‘The China Price’ and competitive advantage together make it imperative for companies to move fast and intelligently to build on the opportunity in China or face a tough future.
The Hurdles
China’s lack of significant gas and oil reserves and consequent dependence on imports for the raw materials, exposes its plastics industry to price fluctuations in the crude oil markets and impacts the trade flows into the country. Though China is attempting to make up for this lack of natural resources in oil and gas by joint ventures and stakes in important oil and gas fields globally, poor logistics infrastructure, power shortages and dependence on imports for raw materials make China’s plastics industry sensitive to geo-political risks. More importantly, the industry is not yet self-sufficient in terms of manufacturing technology, process know-how and management expertise. Further, China’s plastics industry is still fragmented, under-invested and doesn’t have any formidable company to take on the global plastics giants.
Promising Future
An ever-increasing demand domestically and from industries like automotive, packaging and consumer durables setting up their shop or sourcing plastic components from China, will boost the industry’s growth. KPMG in its report observes that infrastructure, power, intellectual property concerns and supply chain costs will continue to constrain the industry. The report predicts consolidation in the industry leading to emergence of a much leaner and tougher chemicals industry. The opportunities are bright for companies that can better integrate and optimise their global supply chains with local knowledge of the markets to survive in this highly competitive market.
China’s growing appetite for manufacturing is increasing the demand for the high-end machinery and components needed in the manufacturing of plastic products. Already, China’s plastics industry is dependent on imports for the high-end precision engineering machinery and components from Europe and USA for its manufacturing business. The Freedonia Group based in Cleveland, Ohio puts the annual demand for machinery at $3.77 billion in 2009 and expects it to grow to $4.92 billion by 2014. China still has a long way to go to be able to manufacture the high quality plastic components comparable to the ones produced in Europe and America. The Chinese companies which started with simple low-cost plastic components, have now moved onto produce high-end products using the latest technologies and manufacturing processes. This indicates the pace at which the plastics industry in China is evolving and getting integrated with the global economy.
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