Industry Crib Sheet: Chinese Manufacturing Regaining Strength

July 28, 2014

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China's manufacturing sector is rebounding after a second straight month of expansion on new orders and export work, following five consecutive months of decline since the beginning of the year. The Flash China Manufacturing PMI for July, published by HSBC, gained 1.3 points over the previous month to reach a reading of 52.0, an 18-month high. China's manufacturing output sub-index rose a full point to 52.8, a 16-month high.

In July, the major sub-indexes of output, new orders, and new export orders for Chinese manufacturers all signaled accelerating gains, while employment shrank at a milder rate. Work backlogs also grew at a more rapid pace, suggesting improving market conditions and rising capacity pressures once again. Hongbin Qu, HSBC's chief economist for China and co-head of Asian economic research, said the faster destocking that resulted was a sign of recovery in China's economy after the central government implemented measures to boost infrastructure investments and other mini-stimulus actions.

Chinese manufacturers, in June, had signaled the first improvement in overall operating conditions in six months, supported by the strongest expansion of total new work in more than a year. Better volumes of new business led to the quickest depletion of stocks of finished goods in almost three years, according to HSBC. The final PMI reading for June was 50.7, a tick down from HSBC's initial June flash reading of 50.8.

Qu said stocks of finished goods contracted at a slower pace in July, but added that the impact of Beijing's mini-stimulus measures "is still filtering through." He said he expected central government policymakers "will remain accommodative" with accessibility to financing for businesses and pro-manufacturing measures over the next few months to "consolidate the recovery."

Meanwhile, according to Markit Economics, which runs the China PMI with HSBC, U.S. manufacturing in July grew at a slower pace but still held close to a four-year peak. The Markit Flash U.S. Manufacturing PMI declined a full point to 56.3 from the previous month.

U.S. manufacturing employment grew for the 13th consecutive month, but Markit indicated that job creation is at its weakest level in 10 months and slowed down for the first time since April. Markit said July's pace was the slowest improvement in overall manufacturing conditions in three months for U.S. manufacturers. Markit also revised its final June reading to 57.3, down 0.2 points from its earlier flash reading.

U.S. manufacturers saw slower rises in both output and new orders in July, as the output index reading registered 60.4, still a historically strong rate of growth, according to Markit. Most of the demand for goods came from domestic markets, as export growth remained subdued near June's five-month low, hovering near a 50 reading.

Still, Chris Williamson, Markit's chief economists, said the domestic manufacturing sector is enjoying "a summer of scorching growth" and progressing at an annualized rate of 8 percent into the second half of the year. This is in line with the Federal Reserve's second-quarter estimate of annualized 6.7 percent growth for U.S. manufacturing, reported last week.

"The growth rebound that the survey has signaled for the second quarter therefore looks to have been sustained into the third quarter," Williamson said. However, he cautioned, "Worryingly, job creation slid... which in part reflects concerns that current sales growth may not be sustained. A key source of concern is export sales, which continue to show disappointingly meager gains."

Equipment Financing Expected to Heighten

The confidence of equipment leasing and financing industry executives in July was the same as June, though their sentiments on business conditions were generally more positive, according to the Equipment Leasing & Financing Foundation.

The trade group's July Monthly Confidence Index went unchanged at 61.4, a six-month low, after plummeting four full points in June. However, the number of equipment finance leaders that believe business conditions will improve over the next four months rebounded from 23.5 percent in June to 28.6 percent, while the number of executives who believe conditions will worsen shrank by more than half, from 5.9 percent to 2.9 percent.

Lending pressures could be on the rise, according to the newest MCI-EFI data. Executives in the survey suggested more companies might push ahead more quickly with their capital investments while economic and lending conditions are still favorable. The number of those who feel the economy is in "excellent" condition rose a surprising 2.8 points in July, though the number of respondents who believe economic conditions will improve tumbled 6.5 points.

"My concern is that demand still does not seem to be where it should be for an economy that should be expanding at this point," said Valerie Hayes Jester, president of Brandywine Capital Associates. "This tepid demand continues to drive strong competition both on rate and credit window."

The number of finance executives who believe demand for leases and loans to fund capital expenditures over the next four months rose nearly 8 points to 25.7 percent of survey respondents, partially offsetting the 16.7 percent plunge in June, but upcoming access to funding equipment acquisitions may not be as robust. The number of lending professionals who feel there will be greater access to capital fell 0.8 points to 25.7 percent.

The lending industry serves as a proxy for business spending, which despite being generally stronger this year, has shown mixed results over the last quarter. Sentiments among equipment financing executives have followed suit, going from bullish early in the year to more cautious optimism in recent months.

"Economists generally point to a robust second half of 2014," said Thomas Jaschik, president of BB&T Equipment Finance. "I am cautiously optimistic that predictions of a strong recovery beginning in the second half will finally ring true."
Siloed Processes Hurting Product Life Cycles

Compressed product release cycles and customer demands for higher quality are just two issues confronting manufacturers responsible for delivering products to market on time. According to recently published research by Aberdeen Group, manufacturers' struggles with time and cost pressures are being exacerbated by silos between product development and operations.

The analyst's report notes that, at 53 percent of survey respondents, demand for lower costs combined with increased price competition remains the top factor driving focus on manufacturers' operations. This was followed by the need to launch products quickly, at 50 percent, and the need for higher quality and product differentiation, at 43 percent.

RELATED STORY: Enterprise Quality Management Destroys Silos

Siloed approaches to design and manufacturing are compounding internal challenges that companies face in attempting to come up with new product introductions more quickly. Reid Paquin, a research analyst for Aberdeen Group, writes in the report: "Product development and manufacturing are two groups within a company that are generally stand-alone, and in some cases, make every effort to avoid each other whenever possible. I have seen first-hand the tension that can develop between the two groups because of the stakes that both hold in product introductions.

Paquin continues: "If a problem arises after release to manufacturing, the blame gets passed around like the plague. Engineering designed the product with 'X' material that has known quality issues with 'Y' process. Manufacturing decided to tweak the machine run settings and never notified product development of the change."

The symptoms manifest in the form of excessive operating costs and missed new product introduction targets, as well as the need to manage multiple data sets and lower operating capital.

Aberdeen Group segments companies among varying success in product development and manufacturing, and the best companies have a 93 percent overall equipment effectiveness rating. Other benchmarks it cites include at least a 15-percent operating margin, a 92 percent successful new product introduction rate, and a 14 percent decrease in the average number of engineering change orders.

Paquin notes that one of the top strategic actions a company can undertake is, not surprising, fostering a collaborative relationship between product design and manufacturing. And this was the overwhelming top strategy among the best-performing companies, accounting for 58 percent of responses by those respondents, ahead of promoting visibility between manufacturing and the enterprise (20 percent of responses) and building compliance and traceability into manufacturing (17 percent).

The analyst also says that change management -- the ability to make changes efficiently -- is another top factor in improving the new product introduction process at companies. "Even if a designer produces a completely sound product, change can be needed for reasons out of a company's control," Paquin writes. "New regulations could force a change in material, process, or function."

Top companies have standardized processes for operational change requests and reviews before implementation, as well as formal processes for communicating changes. These cover equipment, manufacturing operations, and material modifications.

Other best practices include the implementation of set guidelines for design for manufacturability. Product designers are entrenched in a continuous feedback loop with manufacturing and design engineers. The process hinges on manufacturing data being fed back to product life-cycle management systems.

China, Russia to Lead Polypropylene Resin Production

Global polypropylene (PP) capacity increased at a compound annual growth rate (CAGR) of 5.2 percent from 2003 to 2013, reaching 65 million tons on an annual basis last year, and is expected to continue rising to 86 million tons per year by 2018. This is a slightly higher CAGR of 5.8 percent, according to research and consulting firm GlobalData.

The analyst’s latest report states that China and Russia will be the leading contributors to future PP capacity increases, accounting for a combined 45 percent of global additions over the next five years.

Carmine Rositano, GlobalData’s managing analyst covering downstream oil and gas markets, said capacity additions in China will be targeted at meeting domestic demand. Standard-grade PP serves a variety of applications and industries ranging from packaging to toys and electronics.

“Indeed, China will lead new global polypropylene capacity increases over the next five years, as its goal of self-sufficiency drives 7.48 million tons per year of additions, of which 97.6 percent will come from new plants and the remainder from the expansion of existing facilities,” Rositano said.

GlobalData forecasts that China will account for 62.4 percent and 35.5 percent of planned Asian and global capacity additions by 2018, respectively.

Russia will be the second-largest contributor to capacity growth, mainly due to the country’s recent diversification into the petrochemicals sector. Substantial investments have been made in bulk polymer industries, such as polyethylene in addition to PP.

“Until 2012, Russia’s polypropylene capacity was only 0.65 million tons per year, but this increased to 1.33 million tons per year in 2013 and is further expected to reach approximately 3.48 million tons per year by 2018, with all additions coming from new plants,” Rositano noted.

GlobalData also states that Venezuela and India will be the respective third- and fourth-largest contributors to capacity increases over the next five years, with both countries investing in PP plants to meet domestic market demand and replace reliance on imports.

 

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