Robust auto industry bolsters engg-plastics growth

07 April 2003 00:00  [Source: ACN]

The main market driver for the Thai engineering-plastics industry is the projected growth of the automotive industry.

Engineering plastics such as polyamide, polycarbonate (PC), polyoxymethylene (POM) or polyacetal, polybutylene terephthalate, polyphenylene oxide, and polymethylmethacrylate are used to produce a variety of products such as automobile rear lights, side mirrors, dashboards, and other under-the-bonnet parts.

Also, globalisation is projected to have a positive impact on the industry. As borders open up in the region, production and manufacturing in Thailand will be more attractive than in other Southeast Asian (SEA) countries.

Tax reduction under Afta (Asean Free Trade Area) after 2003 and reduced trade barriers in the form of taxes and tariff will result in increased intra-Asean trade. Thailand has better economies of scale and a more stable political and economic climate (relative to its neighbours).

The country is therefore expected to emerge as the preferred centre for automotive, electrical and electronics manufacturing which in turn implies increased demand for engineering plastics in the country.

An increasing number of end-user industries are already moving out of other countries into Thailand. Many of the moves are by end-user companies looking for cheaper production centres in the region. And Thailand is one of the most cost-effective countries in Asia.

The market for engineering plastics also depends on the health of the electrical and household appliance industry in Thailand. The electrical and household-appliance sectors make up about one quarter of the demand for engineering plastics products in the country.

Thailand has one of the largest production bases of consumer and industrial electronics in SEA. It is also used as a base for exports of these products.

In 2001, US$719m worth of TV sets, US$740m worth of monitors and US$1.1bn worth of printers were exported besides other electric and electronic goods. Twenty-two percent of exports were to Asean (Association of Southeast Asian Nations), 20% to the US, 16% Japan, 17% Europe and 25% to other parts of the world.

The devaluation of the Thai baht has also helped boost exports. While news of a dampened US economy and the US-Iraq war are likely to reduce demand for electronic exports in 2003, volumes should pick up once the economy recovers.

The other key driver of engineering plastics in Thailand is the initiative taken by the Thai government to attract investors. The government has been promoting industrialisation actively through foreign direct investments (FDIs).

Thailand allows 100% foreign-equity ownership of manufacturing projects regardless of location. Most of the FDIs are directed towards the machinery, electronics, and automobile industries. The increased capital inflow is expected to translate into increased wealth for Thai consumers, thereby spurring spending across all markets.

In the coming years, Thais are expected to spend more on consumer goods such as household appliances and automobiles, both of which are major end-users of engineering plastics.

The market for engineering plastics in Thailand was estimated at US$133.9m in 2002 with sales of 55700 tonne. The growth rates forecasted range from 15.3% to 17.6% from 2003 to 2008. Revenue is estimated to reach US$342.7m and shipment almost 110400 tonne by 2008, a doubling of figures from 2002.

While there are a number of positive factors at play, some factors cloud the rosy outlook for engineering-plastics producers.

One of the most important restraints will be the commissioning of new plants in other parts of Asia. Many engineering-plastics companies in SEA are already beginning to lose some of their competitive advantage as increasing globalisation has made businesses and goods more mobile than before

In 2002, the chemicals market, specifically the engineering-plastics market, experienced increased competition from imported engineering plastics from countries such as Taiwan and South Korea. 

New plants have also been set up recently in Malaysia; these pose a threat to Thai manufacturers and importers. Companies that have entered the engineering-plastics market in Thailand recently include the LG and Samsung groups.  

Competition is stiff in Thailand, where there are more than 20 suppliers, both local and foreign entities.  

GE Plastics, Mitsubishi Engineering Plastics (which has a joint venture with Toa Chemicals), Bayer, Ube, Polyplastics, DuPont, Teijin Asahi, Rhodia, Toray, BASF, Thai ABS, Idemitsu, Solutia, Dow, DSM, Nan Ya and Kaneka are some of the players in this market competing across various segments. 

In 2001, DuPont was the top polyamide 66 engineering-plastics player in Thailand.  Although the company does not have a plant in Thailand, it is able to make profitable use of its polyamide plants worldwide. The technology for polyamide 66 is not available in Thailand, and most of the polyamide-66 companies are importing them into the country and redistributing them to their clients.   

In the past few years, some producers have moved slightly ahead of the rest of the pack. These producers have set up plants within SEA, mostly in Thailand and Malaysia. By doing so, they have been able to offer lower prices in return for larger volumes. They have thus gained market share. For example, Polyplastics set up a manufacturing plant for POM in Malaysia recently, and used that as a selling point to serve customers in Thailand.  

Mitsubishi Engineering Plastics has PC and POM plants in Thailand, while Ube has engaged in production of polyamide/nylon in Thailand as well. Players such as DuPont, Bayer and GE Plastics who import all their products into the region are likely to be at a disadvantage when it comes to setting prices in the marketplace.   

Products with local or Asian content may also be more favoured with the implementation of Afta and the establishment of a SEA trading bloc. 

Competition in the engineering-plastics market is good for end-users as it lowers prices. However, in the long run, if prices fall to a level where operations are not profitable, players cannot advance to the next level - for example, from trading to manufacturing - and the industry will not develop. This can damage the growth opportunity of the Thai market. 

Also, the lack of freedom of end-user companies such as the automotive companies to choose their engineering plastics suppliers limits the competition and growth of the engineering-plastics market in Thailand.  

Many engineering plastics companies are frustrated as end-users are usually locked-in to one or two suppliers under the instruction of their parent companies abroad. All the car manufacturers in Thailand are foreign-owned since the country allows the foreign automotive companies to hold 100% stake in their investments. Therefore, decisions on end-user companies are usually made by the parent companies in Europe or Japan.  

Global supplier contracts limit the freedom of Thai engineering-plastics suppliers to compete freely for business in the country. 

Some of the engineering-plastics companies feel the frustration as they try to expand their end-user base. And some, such as DuPont, have done away with their marketing teams, focusing instead on growing the businesses that they already have and servicing their existing clients. Other companies, such as BASF, are following suit and concentrating on maintaining their existing customer base. 

The production cost of engineering plastics depends a great deal on raw materials that come from crude oil and crude oil derivatives. The continuing rise in crude-oil prices is causing the prices of raw materials to increase sharply.  

Crude-oil prices are currently above US$30/bbl  from a low of US$13/bbl in 1998, and may rise further in case of a prolonged US-Iraq war. This has increased substantially the production costs of engineering-plastics companies.  

There may be attempts to raise engineering-plastics prices to cover costs, but weakening demand will limit the extent of price hikes. 

The current lack of investment in R&D in Asia is another factor that is likely to limit the growth of engineering-plastics manufacturing in Thailand.  

Engineering plastics are highly versatile products that can be used in a wide variety of applications. But the lack of R&D investment has meant that new applications are less likely to be discovered for Asia.  

The industries in Asia are slightly different from those in the western countries; thus development efforts done in the western countries may not fully target Asian end-users.  

The lack of resources in Thailand also stunts the growth of new engineering-plastics technologies. There are limited resources available to improve these technologies and use them to attract more demand. 

Despite these negative factors, a market that is expected to see strong growth in the near future definitely bodes well for the industry as a whole. It remains to be seen if any one player will benefit more than others, or whether a few shakeups or mergers will occur in a very competitive market, with none holding a significant lead over its closest rival. - Frost and Sullivan

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