How has the past and current economy affected the role of the adhesives and sealants industry up to and including 2007 through 2010? What might happen by the end of 2011? Will the recession be over or will it continue?
Table 1. U.S. Sourcing Trends (Source: DPNA International, Inc.)
A Brief History
My parents lived through the Great Depression, and that experience shaped their lives and influenced mine. We lived a frugal life, paid cash for nearly everything, and always saved for a rainy day. Most of all, the security of our jobs or careers was believed to be protected for life. A typical progression through life entailed finding a job, doing it well, advancing in the company, and looking forward to a comfortable retirement.Most companies during the post-Depression period operated similarly and supported this work ethic. They paid cash for raw materials; made the best product possible; hired diligent and devoted employees; paid for performance; and protected their people with good pensions, working conditions, and medical benefits. In a nutshell, that was life-back then.
My generation sought change by improving on the “old order” and discovered fast food, credit cards, “job hopping” for better pay, and constantly challenging the traditional financial “rules.” Our entire society began a foot race to see how much we could acquire in the shortest period of time and how soon we could outdo the Joneses. Our children picked up on this attitude and began running even faster in their higher quality performance running shoes (adhesive-bonded, of course).
By the late 1980s, society was living on maxed-out credit cards and bank credit was covered by increasingly risky collateral. Corporations and banks did the same and began to acquire others in order to gain greater market share and spread costs. They often paid far more than their acquisitions were worth and used highly leveraged capital. When times got tough, they cut employees to achieve the greatest short-term positive effect on the bottom line. Even more costs could be saved by reducing benefits and extending non-secured credit to financially weak customers. The only way out of this downward spiral was to sell the company for an inflated price, invest in hedge funds, and retire to some tax shelter in the Caribbean.
This was all well and good until 2007, when the market could no longer shore up the weight of so much debt. It looked hopeless until the U.S. and other overseas industrialized country governments recognized the record economic growth of the previous seven or eight years was built on sand-and it was collapsing. Private consumer and corporate debt had risen so high that the chances of ending the crisis were nil without major financial help from the government. Our fast running shoes had finally blown out, and it was time to pay up. Industry immediately felt the ripple effect as the economic engine wheels slowed and came to a grinding “slow down”-but not a halt. This period was called a “deep recession” rather than a “depression.”
(Source: U.S. Bureau of Economic Analysis)
The Adhesives and Sealants Sector
How does the recession, which began in 2007, affect the adhesive and sealant industry? That drop or thin layer of adhesive is critical to the performance of nearly everything that touches our lives. Almost every fabricated auto component is a bonded part. A car engine is held in place with fabricated rubber mounts that are made by bonding a layer of rubber between metal plates. The transmission and axles are sealed from leaks with rubber-metal lip seals and boots. Appliances, footwear and wood furniture are assembled using adhesive bonding agents.The adhesives and sealants industry is a very significant component in our economic growth, yet it is too small to gain much notice from the financial markets, analysts, and company and industry planners. Those who participate in our industry are often the last to share in stimulus money or tax incentives. Traditionally, we are considered a cross between a specialty niche industry and a commodity provider. This is why the adhesives and sealants industry is the “affected” not the “effecter” in any economic recovery scheme.
The adhesives and sealants industry is like the tail of the dog, not its body, so we must first look at which industries and market segments are showing signs of growth (and have assurance that this growth will be sustained). It is equally important to review which markets will remain in the U.S. and which are being outsourced overseas.
A quick review of the traditional market segments for adhesives and sealants and their present (2010) and likely future position (2011) is shown in Table 1. Segments listed are those that typically represent the majority of demand for adhesives and sealants in the U.S. market. The percentage ratio is a reflection of that percent that remains in the U.S. as a consumer of adhesive and sealant products vs. the products or production of finished components or final goods that are sourced overseas, bonded or sealed there, and exported back for sale in the U.S. The table illustrates the continuing change in where components are fabricated and the subsequent loss to local adhesives and sealants producers.
About 31% of adhesives and sealants sales are now going to overseas bonders/fabricators, which is constantly eroding the domestic market. When analyzing the adhesive industry, we must consider several other factors that may affect the market:
- Industrial growth
- Market segment growth or change
- Bonding surface area changes
- New product developments
- Price changes
- Customer dislocation
- Raw material availability
- Accessible capital for expansion or modernization
- Employee layoffs
- Competitive environment
- Rising raw material prices
- Profitability
- Company financial health
- Capacity
- Customer requirements
Table 3. U.S. Market Segment Growth (Source: DPNA International, Inc.)
Conclusions
To consider how the market is responding today, examine U.S. gross domestic product (GDP) growth in Table 2 as compared to the market segment changes shown in Table 3. The economy is showing signs of recovery, albeit slowly. Real demand, not dollar value, still lags behind 2007 values due to a number of issues that still depress the adhesives and sealants markets:- Formulators and raw material suppliers stretching existing inventory
- Reduced demand and supply worldwide
- Reduction in value of the dollar, but no market for exports
- Severely restricted credit, making it difficult to obtain loans for expansion or daily operation
- High unemployment, rising social costs
- Reduced tax revenues, leading to reduced government services
- Rapid increases in taxes to cover shortfalls
- Severely depressed building market (all sectors)
Historically, this recession is quite similar to that experienced by Japan, Singapore, Hong Kong, Taiwan, and South Korea during the 1997 Asian financial crisis. Prior to the crisis, Japan and the former “Four Tigers” experienced the greatest growth in the world-even greater than the new emerging economy of China. Today, their economies have recovered very slowly and are still a far cry from the level of growth they experienced before 1997. China, on the other hand, has grown beyond all early predictions. The U.S. is struggling to regain its pre-2007 growth and move forward. In all likelihood, this growth will be slow. Table 3 compares the U.S. adhesives and sealants market segment growth (AGR) from 2007 through 2012.
Therefore, the answer to the question “Is the recession over?” calls for a “maybe.” It is possible that, by late 2010, adhesives and sealants sales growth will increase. The first two quarters in 2010 reinforced this conjecture by showing positive growth. It is doubtful that sales growth will reach the high of 2007 until later in 2011 or 2012. Several economists are concerned that the sign of positive growth in 2010 may dim and lead to the economy slowing and continuing to remain below 1997. This would create the “W” effect-with the magical 2007 sales level a constantly moving target.
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