China takes the lead in plastic coatings for electronics: the increasing electronic boom in...

Consider the following as clues for a puzzle--Electronics, Lenovo, growth, ever increasing influx of investments, intense price competition, and buoyant economic conditions. This puzzle should be one of the easiest to crack as the answer immediately pops out--China.

Ever since the inception

of China into the WTO in 2001, the China market has witnessed healthy growth and has attracted a huge chunk of foreign investments. Zooming in further, China has become the electronic production hub for the world and this in turn has fuelled the demand for coatings used for these applications. China has been the fulcrum of growth with India and SE Asia acting as geopolitical counterweights to China. This article talks in detail about the various market trends seen in the plastic coatings used for electronic applications.

Plastic coatings are used in applications such as automobile parts, electronics, furniture, sports equipment and several other applications. The market for plastic coatings used for electronic products, otherwise known as 3C (C= Communication, C= Consumer electronics C= Computers) coatings, has grown steadily in the last decade aided by the growth in the electronics industry. While Sony of Japan or Samsung of Korea or Acer of Taiwan have become worldwide names in specific electronic segments, it is seen that China is soon becoming the preferred factory of the world with a lot of electronic companies preferring to expand and develop business in China. China's Lenovo has certainly shown the way. As electronic manufacturing increases in China, it has forced the coatings manufacturers to move into China to support their customers in this region. The rising purchasing power levels in China have also undoubtedly fuelled the domestic demand for electronic products and the electronics industry has witnessed a minimum annual growth rate of 20% in the last few years.

ELECTRONICS INDUSTRY DRIVING COATINGS DEMAND

The chief factor that is expected to drive the plastic coatings market is the growth in the electronics production in China. China is expected to become the global production hub for electronic products exporting products to Europe and Americas, apart from other Asian countries, and domestic consumption is also expected to contribute significantly towards the demand. China, with population of over a billion and the economic growth to the tune of 9% has augured well for the electronics industry. The demand for cell phones, laptops, PCs and other electronic appliances are rising exponentially and coatings manufacturers have been offered numerous opportunities to harness the resources available in China to drive their profitability in their electronic coatings business.

Japan initiated the electronics industry boom followed by Korea, Taiwan and China. Taiwan is expected to become the R&D base for these electronic companies and China is expected to become the mass production center. China is the leading supplier of notebooks, cell phones, digital cameras, PDAs and DVD players while Taiwan, Japan and Korea are the biggest manufacturers of PCs, mp3 players and video cameras respectively which imply that Asia accounts for more than 50% of the global electronics coatings demand. India with population over a billion and a huge mass market for electronics is yet another country that has potential to become important for the manufacture of electronic products although it has lagged behind China in the manufacture of electronic products.

With the stagnating Japanese economy, the electronics industry has gradually moved from Japan to China and other countries where the production costs are much cheaper. Sensing the need to provide a better technical assistance to the customers in Asia, the electronics manufacturers have set up various technical centers in Asia that provide instant technical assistance. Foreign electronic coatings manufacturers were also forced to move into Asia as it has proved difficult to meet the demands from Asia through exports to Asia. For instance, AB Wilh Becker initially distributed plastic coatings to the cell phone manufacturers in Korea from Europe but later started a local production facility to meet the growing demand.

Similarly, other companies have adopted the same strategy including the Japanese coatings manufacturers and hence the Asian coatings market is witnessing the entry of a lot of foreign manufacturers. PPG moved to China to cater for companies such as Motorola and Dell, so also Sherwin. It is inevitable that as end-users globalise, the coating manufacturers will also have to follow suit and Asia and China are definitely on the map for the next decade as the choice of growth and expansion.

Besides China driving the growth for plastic coatings, there are other challenges that have arisen for the coating players.

COMPLEX CHAINS OF CONTRACT MANUFACTURING AND GLOBAL SERVICE STANDARDS

While the electronic production in China has triggered the demand for plastic coatings, it does not mean that decision makers for these coatings sit in China. There are a few companies where design and coating specifications are still decided at the HQ of the companies, be it in the US, Europe or Japan.

Therefore coatings manufacturers have to continue to service their clients at their HQ but certainly the decision making process for plastic coatings has become more complex as many times it may be a combination of HQ clients as well as country specific decision makers. This only means the coating players have to influence a lot of people within the electronic companies. With increasing outsourcing or contract manufacturing of electronic components, there could be numerous players involved in coating specifications and applications. It also depends on whether it is a new product or an existing model.

For a new model, decision making may still be the HQ design staff while for existing product, specs may be more standardised. All in all, it goes to show that the value chain for electronics manufacture is long including the OEMs, ODMs, brand owners and the coating applicators. With globalisation, this chain is becoming complex and with it comes demanding service levels and global service standards.

Plastic Coating suppliers therefore have to accept these challenges of the electronic industry and tune their strategies according to end-user demands.

DYNAMIC, EVER CHANGING ELECTRONICS INDUSTRY

The Asian consumer electronics market has witnessed frequent product up gradation to satisfy the diverse needs of the customers. The demand for good appearance is also increasing as customers have become more sophisticated. This has resulted in the introduction of numerous models and designs primarily aimed at appeasing the customers which in turn has triggered the demand for coatings, especially the metallic ones that are most preferred by the customers.

The ever increasing demand for upgrades has shortened the life cycle of each electronic product hastening new models, sleek and coloured ones. The plastic coating suppliers have to continuously monitor not only the product design trends but consumer trends to develop plastic coatings suited to the market. Silver grey, metallic trend in coating colours have driven demand for such types of plastic coatings. Since trends keep shifting and electronic companies are always eager to offer new choices to customers, it is important the plastic coating suppliers are also tracking the end-user behaviour in addition to product formulation trends and plastic substrate trends.

GROWING ENVIRONMENTAL FRIENDLY TRENDS

The growing need for environmental friendly products is driving the research and development of eco friendly coating products around the world. At the same time, some of these trends have not favoured usage of coatings as such. For example, the growing environmental concerns have forced electronic manufacturers to resort to other technologies such as injection molding process using coloured plastics which eliminates coatings from the production process. Manufacturers have also succeeded in improving their appearance and finish through other non coating alternatives such as metal/anodise or oxidation process. The printer industry now appears to use very limited coatings in line with reduction of paints with high VOC levels. Recycled plastics are also on the rise.

The new WEEE (Waste from Electric and Electronic Equipment) directives have not augured well for the coatings manufacturers. The OEM manufacturers have to finance the recovery and recycling costs and the removal of coatings from plastic substrate is time consuming which makes the recovery process costlier. The prices of electronic products are also declining as a result of severe competition and this directive is expected to force the electronic manufacturers to optimise the production and raw material costs leading to usage of plastics that consume minimum amount or coatings.

The escalating raw material costs are also a concern for the coatings manufacturers as their OEM customers are unwilling to absorb the price increase. These factors have slimmed down the profit margins of coatings manufacturers and have led their OEM customers to look for other alternatives.

The increasing environmental issues have also propelled the plastic coating players to invest more in environmental friendly coatings including UV, water and powder coatings.

TECHNOLOGY TRENDS LEANING TOWARDS ENVIRONMENTAL FRIENDLY COATINGS

Although solvent coatings are still to rule in Asia, it is seen that slowly other types of UV and water based coatings are being experimented in some electronic applications. It is interesting to note that perhaps UV and more sophisticated systems of coatings may be adapted faster in plastic coatings as compared to architectural coatings. This is perhaps a lot of electronic products manufactured in China, particularly, are exported out and therefore the manufacturers of these products are forced to use world quality coatings. While architectural coatings, that are more localised, may be slower to adapt to environmental friendly coatings in the absence of any strict local regulations or its implementation.

Plastic coatings for the electronic applications market is expected to move towards waterborne coatings, albeit slowly. The cost involved in shifting to water based coatings from the existing production lines are high, but new and upcoming production facilities are equipped to produce water based coatings. UV cured coatings have also proved to be a cost effective alternative but the problem lies in coating three dimensional parts which have shadow areas that are not exposed to light. With OEM manufacturers increasingly stressing on environmental friendly cost effective application systems, the coating manufacturers have to invest more in R&D to come up with an optimal solution.

In terms of markets, the autoelectronic industry is perhaps likely to be the first to propel the usage of environmental coatings. The automotive industry is generally trying to use more UV coatings and other coatings to be seen as more environmental friendly. This trend is seen not only in coatings but several raw materials including move towards more environmental friendly fuels like biodiesel and hybrid cars.

There is another issue that plastic coating players can look at. It is reported that wastage of coatings in several electronic applications can be high, sometimes more than 100%. Coating companies that provide expertise in reduction of wastage and sophisticated application methods stand to gain. Technology innovations focused at reducing the application time at the OEM production facilities which would help the OEM customers to churn out more number of products in quicker time which would be a boon for electronic companies.

COMPETITIVE LANDSCAPE

The plastic coatings for electronic application in China is generally dominated on one hand by global companies such as PPG and Sherwin while" on the other hand you see plenty of local paint companies who paint lots of electronic components. For example, the TV market in China is serviced by lots of local coating players who provide timely service. Geographical proximity is the key here while quality seems to be lower down in priority while certain applications like flat panel TV's or lap tops, hand phones seem to demand higher quality plastic coatings. Cameras are still largely dominated by Japanese brands who import certain coatings from Japan.

Japanese electronic manufacturers tend to favour Japanese paint companies. This is seen across the entire business landscape, therefore it is important for non-Japanese companies to have some kind of tie-up with Japanese paint companies to penetrate Japanese end-users. One such alliance that was seen includes PPG's alliance with Kansai in 2004.

As international and Japanese companies penetrate the Chinese market, what about the medium and small scale local Chinese companies? They are certainly finding it increasingly difficult to compete with the foreign manufacturers as they are unable to invest in R&D given the slim profit margins because of rising crude oil prices.

Is it a good time for consolidations, mergers and acquisitions to survive in this highly competitive market? It seems to be more clear that local companies need to upgrade their quality and service to international standards otherwise they will be marginalised in the long run. Mergers and acquisitions are expected to continue as foreign manufacturers try to consolidate their position in the market providing the much needed technology expertise to the local manufacturers. Akzo Nobel and Sherwin Williams started production facilities in China in 2004 for manufacturing electronic coatings. Although important high-end plastic coating companies would like to expand their production in China, there is always the concern of the IP issue.

To conclude, the plastic coatings market for electronic applications is poised to witness healthy growth in the coming years bolstered by the favourable economic conditions that are expected to prevail in Asia driven by China and the growth in the electronics industry. UV cured coatings and water based coatings, still in the nascent stage now, are expected to gradually replace solvent borne coatings greatly aided by the entry of foreign manufacturers and with them the technological expertise. The declining prices of electronic products and the price pressures on raw material suppliers will continue to drive the plastic coating suppliers to invest in cost effective and environmental friendly paint products. Companies that take into account these trends and challenges arising out of globalisation are likely to be better positioned to succeed while companies that don't are likely face bitter times ahead.

This article was authored by D Ashwin Kumar, Research Analyst with the Chemicals, Materials & Food division and based out of the Chennai office in India.

Frost & Sullivan is a global growth consulting company that that monitors the Chemicals industries for market trends, market measurements and strategies.

Visit www.frost.com. For more information about this article please contact Donna Jeremiah be email on djeremiah@frost.com, or phone 6-(03)-6204 5832.