Plastics Led Growth: Growth Opportunities in the New Zealand Plastics Industry

Report date: April 2005

Report compiled by NZCIE and Unitec New Zealand for Plastics New Zealand

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Executive Summary

The Plastics Industry covers a wide variety of business types in terms of processes, people, capability and performance.  Opportunities for growth will naturally differ between businesses in any industry, however, this study found that businesses with similar gross profit and sales profiles, also shared common attributes and growth prospects.  By dividing businesses into four generic groups and then aggregating data by group, this study provides insight into why some businesses out perform others and how the industry can improve performance overall.

Background

This Plastics Led Growth research was commissioned by Plastics New Zealand and funded by New Zealand Trade and Enterprise (NZTE) to assist in the development of the Plastic Industry’s long term strategic plan.  Prior to this study, there was very little data on the performance of businesses in the Plastics industry and the types of product/market activity undertaken.

Objectives

The two key objectives of Plastics Led Growth were to:

1. gain an understanding of the current state of the New Zealand Plastics industry with respect to size, scale and activity, and
2. ascertain where the best growth prospects might lie for the industry

The research informs the development of strategies that will assist the industry to meet it’s stated objective of becoming a $4 billion dollar industry within the next ten years.

Methodology

After consultation with Plastics New Zealand and New Zealand Trade and Enterprise, including questionnaire design and testing, a questionnaire was distributed in March 2005 to 334 businesses deemed to be in the New Zealand Plastics Industry.  The overall response rate of 30% was regarded as satisfactory, giving a margin of error of 8% at the 95% confidence level.  However, the results appear to have face validity and many of the findings were supported in the interviews.

The survey was supplemented by the collection of data from Statistics New Zealand and interviews with a number of manufacturing companies, supporting businesses and representatives of key markets.

The Sales/Margin Matrix

The desire to centre analysis around some meaningful outcome measures led to the development of the Sales/Margin Matrix.  This enabled respondents to be grouped along the continuums of low/high sales and low/high gross profit margins. 

Four groups of businesses labelled Stayers, Niche Operators, Go Getters and Volume Operators were described and analysed with respect to processes used, business performance, market focus and innovation/R&D. 

Stayers, Niche Operators, Go Getters and Volume Operators

Stayers represent those businesses with a low gross profit margin and low sales.  They are more likely to be serving the domestic market with some sales into Australia. They compete on service and quality but are largely price takers that fail to capture sufficient margin. They appear to be always looking for ways to create efficiencies so they can continue to offer goods for a competitive price.
Niche Operators represent those businesses with a high gross profit margin and low sales. They compete on finding a niche and providing good service and quality for the niche. They see their individual skills as key drivers of their success and high prospecting activity as the key future success factor. It is unclear why this group does not have higher sales. However, they appear to mirror the challenges facing the New Zealand export scene in general. 

Go Getters represent those businesses with a high gross profit margin and high sales. These are particularly attractive businesses that often work with leading edge plastics technologies and have innovative customers operating in high growth industries.

Volume Operators represent those businesses with a low gross profit margin and high sales. They are often part of a global operation and size allows them to compete on scale and cost.  They rely on large volumes to survive and therefore work hard at maintaining relationships and securing long term supply contracts. 
On analysing the four groups it appears that Niche Operators and Go Getters are in the best position to grow the industry.  However, of concern is the low employment expectations of Niche Operators indicating that many are finding trading conditions difficult in the current environment. 

Current State

The industry currently employs over 8,000 people.  This is likely to grow to over 10,000 people over the next few years.  There are approximately 584 businesses in the industry including 135 owner operators.

Approximately 39% of businesses employ under 6 employees and only 11% of the industry employ over 50 employees.  

Respondents predict growth in employment of 8% over the next 12 months.  The survey indicates that under 50% of the industry’s sales are exported with only 20% of these exports being direct. 

Most businesses have some investment in R&D with half investing more than 5% of annual sales into R&D.

Based on extrapolated survey data, the industry has annual sales of approximately $2 billion with an average gross profit margin of 33%.  There is a significant range in gross profit reported, from 2% through to 76%. 32% of Plastics businesses have 50% or more of their ownership offshore.

Drivers of Growth

Processes and Products

Injection moulding was the most common process across the entire industry.  However, it was used most by Go Getters and appears to be the process most linked to profitability. Profile Extrusion and parts of Film Extrusion were also linked to high profitability.

There was good news and bad news for packaging and as a result relatively static revenue is forecast over the short to medium term.

Businesses

Financial performance varied widely across the industry.  50% of all responding businesses reported annual sales of $6m or less and 18% of respondents reported more than $18m.  Gross Profit margins varied from 14% to 46% across the four key groups.

The industry appears to be relatively optimistic about the future with approximately 70% of respondents expecting their net profits to increase over the next three years.  Almost half of the respondents predicted gross profit growth of 5% or more over the next three years with the average at approximately 11%. This indicates that there are some highly profitable firms in the industry.

Go Getters stood out in terms of growth prospects with high employment expectations, high profitability and high growth expectations.  They listed leading edge technology, design, innovation, access to markets in growth industries, and joint ventures as factors driving future sales and profit.

Markets

Food, Dairy and Meat industries stand out as key markets for Plastics products.  Holding on to volumes in these markets appears to be critical to the survival of the manufacturing base in New Zealand.

When analysing the four business categories there is a clear relationship between % of goods exported and profitability.  However, the % of goods exported directly offshore is relatively low for Go Getters indicating an opportunity to leverage off success in the domestic market. 

Go Getters have had success in the high growth markets of home appliances, cosmetics and electronics whilst Niche Operators have had their main focus on building, home appliances and medical markets.

The regions of Middle East/Africa and Central and South America stand out as regions that the industry is most likely to expand into.  New Zealand and Australian markets are seen as two areas where respondents are least likely to want to expand.  Asia stands out as the export region that is currently the most attractive in terms of contribution to profit.  In terms of industries, electronics, home appliances and retail stand out as the most profitable.

Innovation and R&D

In the last financial year for the Plastics Industry total investment in research and development was $71.7 mill. Into the future, over 70% of respondents expect to invest 3% or more of total sales into research and development over the next 3 years.  Niche Operators and Go Getters are investing the highest % of their annual sales and predict increases over the next three years.

Entrepreneurship

Our interviews indicated that those owners and managers that are capable of innovating and then communicating the value of their innovation to customers are able to extract higher margins than others. Ascertaining the true value-add of the innovation and then negotiating price were two challenging areas identified in the interviews.

Opportunity Areas

This report has identified several growth opportunity areas for the industry.  Growth will best come from:

• Increasing the number of Niche Operators and Go Getters
• Accelerating the growth of Niche Operators and Go Getters 
• Connecting with and understanding the needs of high growth industries (onshore and offshore) and high growth businesses
• Connecting with the strategies of the government’s Design Taskforce
• Establishing technological requirements of customers and encouraging technology specialisation in the industry
• Establishing and promoting the competitive advantages that New Zealand Plastics firms hold
• Developing skills at establishing the true “value add” to customers and claiming fair share of it
• Developing entrepreneurial skill sets

Conclusion

The New Zealand Plastics Industry appears to be in good shape with a relatively high degree of optimism amongst its members.  However, not all parts of the industry will grow in the coming years.  To meet its growth targets, the industry will need to become less reliant on New Zealand customers and it will need to develop new skills around deal structuring and negotiation to capture a fair share of the value that it is creating for others.

The ability to match technological advancements to a wide variety of customer needs places the industry in a unique position where it can add value to other businesses in New Zealand whilst building new markets offshore.  This requires innovation and entrepreneurial skill.  A strong manufacturing base will be critical to ensure an ongoing supply of plastics innovators into the New Zealand economy.  Development of entrepreneurial talent and technique will also be a vital ingredient to ensure that the large number of small businesses in the industry continue to grow.