For decades, Fiducia has advised clients in the plastics sector along the entire value chain: from machinery makers, to manufacturers and recyclers, we have built up a strong knowledge base on how the industry works and on understanding the nuances of the market, which we share with you here.
In the 12th Five Year Plan released in 2011, the Chinese government vowed to advance the domestic plastics industry not only in the development of new materials, but also in increasing efficiency and reducing energy consumption. This, coupled with the rapid growth of domestic consumers and dramatic improvement in infrastructure, has resulted in a strong demand for both primary and modified plastics. Modified plastics, for example, have experienced solid and steady growth of on average 20% since 2013. In fact, only 10 years ago most modified plastics were still imported into China, while today close to 90% are produced locally.
While the plastics industry is by no means new in China, there are a number of important, recent trends that will influence how this sector develops in the next years. In this article, we will walk you through these trends and what opportunities they present for foreign companies planning to enter the Chinese market.
Plastics were among the first industrial sectors to develop in China. Hence, it is unsurprisingly already relatively advanced with a large number of international players firmly established for over half a century. As plastics technology is R&D-heavy, international companies always had the upper-hand, especially in the high-end segment, where they hold 90% market share. In contrast, the low-end market is heavily saturated by local players competing for a piece of the pie. But as the middle class continues to grow in China and domestic demand for better quality plastics that are environmentally friendly increases, there is much opportunity to be found in the mid-end segment.
After joining the WTO in 2001, China rapidly developed to be a competitive global trading partner by developing new technologies, materials, and equipment. As a result of government directives, an accelerated upgrading of the manufacturing sector, including plastics processing, took place to keep up with international trends and procedures. After a decade of rapid growth, China had already caught up with its global counterparts. Now, the government is investing resources to move towards higher quality materials and more efficient production to cope with overcapacity.
As China makes a targeted effort to move away from being the â€śWorkshop of the Worldâ€ť, there is much opportunity for international companies with more sophisticated technology and know-how. Skilled labour, improved infrastructure, and advanced supply chain capabilities have contributed to creating a favourable business and production environment.
In addition to the overall growth in the Chinese plastics market, certain industries have been major drivers for development. For example, modified plastics for the automotive sector saw a 180% increase in sales volume from 2008 to 2012 and are expected to continue to grow by 17% annually until 2017. Several trends contributed to this strong growth: for one, the number of vehicles per 1,000 people in China increased from 37 in 2008 to 81 in 2014, a number that will continue to grow by 12% in the next two years. Additionally, 14 new automotive assembly plants of leading Chinese and international car manufacturers will be or have opened in China between 2014 and 2018. Lastly, the rise of e-vehicles, not only as a result of government directives but also due to changes in peopleâ€™s mindsets, is creating sizeable demand for lightweight plastics, usable for interior and exterior applications.
Modified plastics for electrical- and home appliances have also played a role in the growth of the plastics industry in China. The purchasing power of the average consumer in China has increased significantly: more people can afford electrical- and home appliances and as the consumersâ€™ focus shifts to brand awareness and higher-end products, there is also a need for higher quality materials. 98 out of 100 urban households in China now own a refrigerator and in the future, these households are expected to look for energy efficient and higher capacity replacements, with less price-sensitivity. In addition, with the improvement and expansion of infrastructure and electrical networks in China, even rural consumers have access to these products, albeit at a lower price point.
We have identified three major trends that we expect will influence the future of the plastics industry in China:
1. Technology Improvement: As we have outlined above, China is experiencing a significant rise in demand for high-end and higher quality materials for more specialised applications. This, in combination with the governmentâ€™s investment into R&D for new materials and the aim to upgrade the plastics market in general, is a perfect opportunity for international companies with a technological edge.
2. Go West, Go Central: As the Chinese government is developing the coastal areas into R&D and service hubs, it is offering incentives for new plants and production sites to be built in the Central and Western provinces of the country. For primary plastics processing companies, this is beneficial due to the proximity to raw materials. Indeed, many automotive assembly plants (e.g. FAW, VW, GM, Hyundai, and more) are moving to these areas, as well.
3. Environmental Friendliness: Currently, the amount of recycled plastics is low, especially compared to Chinaâ€™s annual plastics products output. This is mainly due to outdated technology, but also lack of government incentives to drive recycling initiatives. However, this is changing, as public sentiment is increasingly favouring the reduction of waste and pollution from production. The government is backing this by offering tax policy support.
Companies investing in the Chinese plastics market should also be aware of a number of risks that could affect their business:
1. Overcapacity: China continues to produce but is there enough demand for all of these products? With the lack of recycling options, overcapacity especially has become a problem, which could eventually lead to dramatic over-supply, with few options for removal. Not only is this a problem for businesses and the government, but the already suffering environment will pay a significant toll. Assessing the demand for your product in advance will certainly help circumvent this problem.
2. Competition: While local plastics manufactures are primarily concentrated in the low-end segment, there are a number who are expanding into the mid- and high-range. With the governmentâ€™s increasing efforts to encourage local R&D, domestic players are becoming more competitive in their know-how and materials. While we are still at the early stage of this development, we certainly encourage all companies wanting to enter or expand in the Chinese market to do a thorough competitor analysis.
3. Rising Prices: Increasing labour costs, a stronger RMB, more stringent government manufacturing requirements, and a general shortage of resources have driven up production costs, making financial planning even more important.
Despite these risks, we expect continued growth potential going into the next Five Year Plan and beyond. With increasing environmental awareness, limited availability of raw materials, and the introduction of mass digitalisation, we foresee great technological advancements in the future – and with this, many opportunities for foreign companies.