INDIANAPOLIS—"Steady with a chance of slowing."
That's the forecast for 2020 for rubber product manufacturers, as determined by the State of the Rubber Industry Study, an annual report compiled by the Association of Rubber Products Manufacturers.
The good news is that "no significant slowdowns" are predicted in the coming year, according to the report, only the estimation that demand in the industry—namely the auto industry—is expected to lag in 2020.
The State of the Rubber Industry was conducted over a six-week period between mid-December 2019 and the end of January 2020, surveying 64 executives of rubber product companies in the U.S., Canada and Mexico. Companies included manufacturers of finished rubber products, injection molders, compression molders, extruders and those who employ other processes, including calendering and custom mixing.
The study found that while defense and aerospace topped the "most optimistic industry" list, there essentially was no general consensus on the most optimistic markets for the coming year.
The automotive industry, however, is predicted to be "not promising" in 2020, according to 42 percent of respondents in ARPM's study, giving the predominant industry for rubber manufacturers the dubious honor of top billing in the "least optimistic" category.
And it was not close, with agriculture coming in at 13 percent in the "least optimistic" category, followed by energy and mining.
"Overall what we're seeing for (rubber product manufacturers) is that they anticipate the auto industry being extremely slow in the coming year," said Ashley Turrell, analytics manager for ARPM. "People cited shutdowns in the industry, especially in areas with such a high presence of automotive, like Ohio and Michigan."
One of the main drivers in the lagging auto industry is the move to electric vehicles, Turrell said.
"A lot of the change is due to EVs, which eliminate the need for a lot of rubber parts," she said. "Those who are heavily into automotive are phasing out certain programs, as the new industry will not require the same materials in powertrain and otherwise."
Optimism in defense, aerospace
In terms of the most optimistic areas, defense led at 16 percent of respondents, followed by aerospace at 11 percent and energy at 10 percent.
According to Turrell, rubber goods firms are expected to gain ground in the aerospace and defense sectors due to increased demand and production, in addition to changing technologies that will require new products.
RPMs already "are looking to diversify in their markets, with budget increases in each category," Turrell said.
Executives' comments about the defense and aerospace markets in the study were evidence of companies seeking a larger share in each.
"The budget here is the largest we've seen," said one executive about defense.
"The industry seems to be booming," wrote another in regards to aerospace.
Turrell noted that many companies make their market decisions based on political climate, and in the case of aerospace and defense, companies will look to capitalize on the defense spending bill recently passed by Congress.
"I think you see this with the 'top challenges' listed by the rubber manufacturers," she said. "Companies are adding more sales departments with a focus on new business and diversifying in more promising industries."
Auto: Reasons for pessimism
Overall, for rubber product manufacturers, defense and aerospace seemed to mitigate sluggish automotive predictions, Turrell said.
But the defense segment is one of the least common industries served by RPMs, with only 16 percent of companies surveyed serving the defense industry, according to the study. In contrast, the auto industry is the most served market, with 52 percent of RPMs involved, followed by construction, mining and aerospace.
Auto has been in the top three "most optimistic" markets for the past five years, according to the ARPM's study, and landed just about in the middle of "most optimistic" industries for 2020 with 8 percent of respondents predicting it as such.
This kind of slowdown can force OEMs to put cost pressure on RPMs, according to the study. As well, the methods by which OEMs respond to global demand and foreign competition also are expected to be a challenge for rubber companies, according to the study.
"It's not unfair to say that auto is hurting the rubber industry overall," Turrell said. "Plastics and others are hurt by slowing automotive as well—across many industries auto is starting to hurt.
"Auto is such a big component of the rubber industry overall, and profits, sales and new customer orders are down for the major players."
Autos peaked at 95.2 million vehicles sold worldwide in 2017, and below 90 million are expected to be produced in 2020, according to the study. As well, a decline in China's enormous market also is expected to be a factor in sluggish vehicle sales.
Some respondents commented that the auto industry will have depressed projections for the next two years, and that the sector is being hurt by the ongoing trade wars.
Other markets with a less-than-optimistic outlook for some respondents included agriculture, energy and mining.
Moving back home
The study showed a positive 5-year trend in regards to reshoring, as only 9 percent of rubber product manufacturers said they were "aggressively looking" to offshore manufacturing. Conversely, 37 percent of RPMs surveyed said they were relocating some manufacturing back to the U.S.
"We anticipate these trends to continue," said Turrell. "People are a lot less likely to push for offshore, the study found, as a lot more OEMs and other customers are wanting to bolster their domestic identities.
"There is more control in being a domestic manufacturer, and slowly but surely we believe RPMs will relocate."
Most of the companies said in the study that OEM industrial customers want a local supply. "Customers are trying to move back onshore, but are price-shocked regardless of material compliance," one RPM executive stated.
"Our customers source domestically," stated another.
In addition, the 5-year trend for market share gained from foreign companies increased by 5 percent over 2015 statistics, according to the study.
In 2015, only 13 percent of RPMs surveyed said they gained a market share from foreign suppliers; in 2019 that number rose to 18 percent of RPMs reportedly gaining a market share from foreign companies.
"A lot of people anticipate there will be market uncertainty in Europe, and there is the trade war with China having a huge effect," Turrell said. "Those are the two main things. Having a domestic presence allows for reliability and control by having things onshore. This has been a big push for the entire industry."
Challenges and impacts
The biggest challenge for RPMs still is work force development, which topped the list for the fifth time in five years. According to the study, 84 percent of RPMs placed this at the top, down from 98 percent in 2019.
Coming in second was new business development—whether diversifying markets, forming new marketing plans, updating sales strategies or developing new product lines.
RPM respondents said the biggest impacts on the rubber industry will be automation and EVs.
The 2020 outlook comes after a 2019 that was predicted to be "solid and steady," and the description was on the mark, according to Turrell.
"It was (a true prediction), we noticed," Turrell said. "2019's fourth quarter is when the pain really started for people. We will do another analysis soon, and the good news is people expect an uptick by the end of this year."
For more details on industry trends and market forecasts, and to purchase the 2020 State of the Rubber Industry Study, visit arpminc.com/publications.
Member cost is $299 and non-member price is $399 for the study.