y^. oi/ ; / A UNITED STATES DEPARTMENT OF COMMERCE PUBLICATION i"V -'■v 5-; CUSTOM PLASTICS INDUSTRIES U.S. DEPARTMENT OF COMMERCE Economic Development Administration Office of Minority Business Enterprise For sale by Superintendent of Documents. U.S. Government Printing Office Washington, D.C., 20402 - Price 30 cents URBAN BUSrNESS PROFILE CUSTOM PLASTICS PROCESSING INDUSTRIES WARM THERMOFORGING COLD STAMPING CASTING FOAMED PLASTICS FABRICATING (THERMOFORMING) SIC 3079 April 1972 EDA-72-59587 Prepared for ECONOMIC DEVELOPMENT ADMINISTRATION in cooperation with OFFICE OF MINORITY BUSINESS ENTERPRISE U. S. DEPARTMENT OF COMMERCE cz: Washington, D.C. 20230 'l^ Peter G. Peterson, Secretary 3 Robert A. Podesta, Assistant Secretary o for Economic Development Q John L. Jenkins, Director 5l Office of Minority Business Enterprise This report was prepared by Boise Cascade Center for Community Development, Washington, D.C., under contract with the Office of Economic Research, Economic Development Administration. The statements, findings, conclusions, recommendations, and other data in this report are solely those of the contractor and do not necessar- ily reflect the views of the Economic Development Administration. FOREWORD As part of a continuing program to provide encouragement and assistance to small business ventures, the U.S. Department of Com- merce is issuing a series of Urban Business Profiles. It is hoped that these reports will serve as a meaningful vehicle to introduce the prospective small urban entrepreneur to selected urban-oriented businesses. More specifically, a judicious use of these profiles could: provide a potential businessman with a better understanding of the opportunities, requirements, and problems associated with particular businesses; provide guidelines on types of information required for location-specific feasibility studies; assist urban development groups in their business creation activities. <. Sj^r-M/^^TK. Robert A. Podesta Assistant Secretary for Economic Development Table of Contents Page I. Recommendation 1 II. Description of the Plastics Processing Industries 2 A. Introduction 2 General — The Processes B. Dimensions of the Plastics Processing Industries 4 General — Types of Processors C. Business Characteristics of the Plastics Industries .... 6 Markets — Processes Suitable to Small Invest- ments — Costs — Productivity — Profitability — ,, Capital Requirements III. Analysis of Business Feasibility 15 A. Factors Influencing Performance 15 B. Projection of Attainable Returns for Five Plastics Processes 15 IV. Starting the New Business 18 APPENDIX A APPENDIX B BIBLIOGRAPHY/TRADE ASSOCIATIONS OFFICE OF MINORITY BUSINESS ENTERPRISE (OMBE) AFFILIATES URBAN BUSINESS PROFILES URBAN BUSINESS PROFILE Custom Plastics Processing Industries (SIC 3079) I. RECOMMENDATION The plastics industries comprise one of the fastest growing areas of manufacturing in the national economy, and plastics processing can provide a handsome profit, fast growth, and an opportunity to be creative. However, it is essential that the prospective entrepreneur have a great deal of ingenuity and creativity in order to perceive the market for plastics products. An affinity for design and its problems, and considerable experience in the industry, are absolutely essentia! prerequisites for business success, whether these qualities are possessed by the entrepreneur, his partner, or his production fore- man. Some form of partnership is important if the entrepreneur is to rely on another person for these skills. Capital needs are minimal ($50,000) for entry into the industry via the five processes recommended in this report. However, swift growth is a characteristic of plastic processors who are successful, and within 2 to 3 years working capital requirements in the range of $250,000 may be necessary at this expanded level of operation. The entrepreneur should be fully conscious of these future capital needs at the outset. Technical knowledge sufficient to assess the right plastic to use for the job and the right production process to choose so as to deliver the item at the lowest cost also becomes more im- portant with growth. This expertise is difficult to hire in the plastics industry, and good "production engineers" are rare. The owner, therefore, must from the outset be prepared to learn a great deal as he progresses. The plastics market can accommodate new small firms, and com- petition on the frontier is not too severe — it only becomes formidable at the larger sizes. The field is recommended for a team of entre- preneurs who collectively have experience in plastics technology and managerial background, who have access to risk capital, and who possess a flair for creativity and ingenuity. II. DESCRIPTION OF THE PLASTICS PROCESSING INDUSTRIES A. Introduction 1. General The plastics industries comprise a very large, amorphous, fast- growing, and heterogeneous group of businesses that sprang into prominence during World War II and have grown at an average annual rate of 10 to 15 percent ever since. They divide into three large categories: (1) the plastics materials manufacturer who produces the basic plastic resin or compound; (2) the processor who converts plastic into solid shapes; and (3) the fabricator and finisher who further fashions and decorates the plastic. This report deals only with plastics processing and fabricating. Resin producers are multimillion dollar organizations who must produce 100,000 tons a year to remain competitive. They need large plants and enormous capital invest- ment, research, and technology. Plastic materials manufacturing is an industry entirely unsuited to the capacities of the small businessman. Standard Industrial Classification (SIC) 3079 covers the whole of the plastics industries. Plastics processors and fabricators make up over 90 percent of the companies in the industry, and they collec- tively produce hundreds of thousands of individual items from a total of 4,000 available individual plastic materials (divided into 40 ''families"). 2. The Processes There are many different methods of processing plastic raw mate- rial. The major methods are useful for developing a wide variety of products, and the choice of method will revolve around the cost per item produced and whether it is more economical to invest a lot of capital in an automatic machine requiring relatively little labor or whether it is better to buy an inexpensive machine requiring more labor. There are also different levels of technological expertise needed to operate the processes economically. The major methods that have particular promise are briefly described below. Additionally, cost, technology, level of required investment, and market orientation will also be compared for each, using specific data derived from field and publication research, oriented towards the establishment of a small business. Those processes suitable for small, urban industrial ventures include: a. Injection Molding — Injection molding is the principal method of forming thermoplastic materials (those plastics that become soft when exposed to sufficient heat and harden when cooled). The process depends on forcing heated fluid plastic material into a cool, closed mold where it solidifies. b. Compression Molding — Compression molding is the most common method of forming thermosetting materials (those plastics that will not soften when reheated). The process involves squeezing the plastic material into permanent shape by the simultaneous appli- cation of heat and pressure. c. Warm Thermoforging — A technique originally developed for the production of metal items, which is now being adapted to plas- tics. Warm thermoforging involves heating a sheet to moderate temperatures and forging particular parts from this sheet. d. Cold Stamping — Another technique developed in relation to the production of metal items, cold stamping involves cutting com- plex shapes out of sheet or forcing sheet into simple shapes by vertical pressure exerted over an appropriate die. e. Casting — In casting, the plastic material is heated to a fluid mass, poured into a mold, cured, and then removed from the mold. The essential difference between casting and molding Is that no pressure is used in casting. f. Foamed Plastics Processing — Most foamed plastic parts are produced by casting and compression molding, with a "foaming agent" added to the raw plastic material. On heating, this agent forms a gas that is distributed through the mix in small bubbles. g. Fabricating (Thermoforming) — This process uses plastic sheet as its raw material. The sheet is then softened for subsequent forming over a mold by the vacuum principle. Other processes, not recommended for small businesses, are briefly described in appendix B. B. Dimensions of the Plastics Processing Industries 1. General According to the 1969 annual Survey of Manufactures, the resin (the raw material of the processing industries) output of the U.S. has increased 15 percent during the last decade and is now approaching 20 billion pounds. By 1967 there were about 5,000 plastics processing companies with revenues totaling $5 billion, an average of $1 million per company. Since then, output has increased. Total output for 1970 is over $7 billion, although the number of firms is unknown, in general, however, (according to the 1967 Census of Manufactures) the number of establishments is growing at a much lower rate than the value of shipments (the latter at over 15 percent per year). This is the fastest growth rate in U.S. manufacturing at this level of generalization. There were many small firms numbered among the 5,000 process- ing establishments in 1967. For instance, 41 percent of the establish- ments had less than 10 employees, but they produced only 2.8 percent of total output. The bulk of the product was produced by the group of firms with 100 to 250 employees averaging 9.5 percent of the total establishments, 29 percent of the total employment and 29 percent of the total output. Firms with more than 250 employees constitute only 3.2 percent of all establishments, and they had 25 percent of all employment and about 36 percent of total revenues. The national distribution of the industries is heavily weighted towards two main regions. The Mid-Atlantic region (New York, New jersey, and Pennsylvania) had over 1,300 companies in 1967; and the East-North-Central region, centered in Chicago, contained 1,310 establishments. Access to the market is an important factor in the location of these industries, but transportation costs tend not to be critical because the output is usually light in weight and of fairly high value. A loca- tion in or near a major population center is, however, generally favored. Nevertheless, detailed location patterns are somewhat con- fused. A location in a fairly cheap rent area with freeway access nearby, on the edge of, or in the old industrial center of the large cities, seems to be the most common feature. Some companies tend to be oriented toward a special market, and their location reflects this. Detroit has a large number of companies because they sell to the auto industry. Michigan is also beginning to develop a plastics processing industry oriented around the furniture industry. 2. Types of Processors Plastics processors can be divided into three major groups, al- though the custom processing industry is the facet of the business that is most attractive to the small businessman. Captive Processors — firms engaged in fabricating their own plastics products as components for their main output, e.g., General Motors pro- duces plastics components for some of its automobile lines. Custom Processors — "independent" processors, who provide a service to other companies, producing plastic parts to order, specifically designed for the customer. Almost all of the output of custom processors is further processed or handled or assembled as a component of the client's main product before reach- ing the market. Proprietary Processors — firms which produce a patented, licensed, or unprotected item for sale. Usually this activity grows out of a custom processing plant, and can involve either products sold to other manufacturers (e.g., drawer clasps to the furniture industry or sheet rod and billet for further processing) or end-use products sold direct on the mar- ket, or via distributors to the consumer (e.g., plastic pens). The Modern Plastics Encyclopedia (1969-70) lists 1,622 custom processors in the United States (Table 1 in appendix A). Over 40 per- cent are primarily in the injection and/or extrusion business, and many are small in size. Modern Plastics estimates indicate that there are more custom operation molding companies than captive ones. Moreover, over 60 percent of the total monthly output (25 million pounds) comes from custom molders. Despite the fact that captive processors are growing in number, in machine capacity, and in resins processed, at a faster rate than are the custom molders, the latter still predominate. Trends indicate that there is a process of elimina- tion of smaller producers in the custom molding field, and output is becoming concentrated in fewer and larger custom molding shops. Nevertheless, most custom molders are still fairly small (Table 2 in appendix A) with 5 percent possessing less than 10 molding machines, 38 percent still in the category of 10 to 24 machines, and only 5 per- cent with 25 machines or more. In terms of employment, the situa- tion is similar, with 57 percent of captive operations employing less than 25 workers on average, and 57 percent of custom processors employing less than 50 (average). C. Business Characteristics of the Plastics Industries 1. Markets The market for plastics products is a vast one. Literally any item nov^ fabricated out of wood, steel, nonferrous metal, or textiles can be considered a potential substitution market for plastics. There are hundreds of thousands of plastic product types, and each week hun- dreds more are developed. Table 3 in appendix A is an attempt at projecting the total market for the plastics industries among various types of customers through 1980. At present, most of the total plastics output is in building and construction, and in the packaging industry. The electrical industry and the transportation industry also consume large portions of out- put. Most categories are expected to grow at the general rate for the plastics industry, about 15 to 40 percent per year, which means that all plastic markets are phenomenal growth areas. The packaging in- dustry and plastics in transportation are expected to grow at rates in excess of these general rates. This level of detail is, however, an inadequate basis for making de- cisions as to which markets have the most potential for a prospective business. Within each of the broad categories there are many other submarkets which spring up each year and often grow in excess of 100 percent per year. The production of recreational vehicles (snow- mobiles) and the small boat industry (glass-reinforced polyester) are two examples. However, predictions of the plastics market are not particularly reliable because of the high rate at which new materials become available and new products (and markets) are created. The market for plastics in furniture, for instance, was almost nonexistent in 1960 (other than P.V.C. as a leather substitute) and now consumes over 1 billion pounds of raw materials per year in such product classes as polyesters, methanes, and vinyls. It is very difficult to pre- dict ahead with any accuracy, and the exercise is not particularly valuable since opportunities in markets are more a function of the initiative of the businessman than the availability of a ready market. One important aspect of the market is the degree to which the out- put tends to be captive as opposed to custom or proprietary. The automobile industry, for instance, might seem to be the fastest grow- ing and most lucrative market to get into. The average Detroit- produced car had 40 pounds of plastics in it by 1963, and over 100 pounds by 1970, while figures of 200 to 300 pounds per car are pro- jected for 1980. Yet, the auto industry relies on very large-scale pro- duction on a scale at which very few custom molders are capable of operating. The investment for serving such a market is very large, and changes in design are frequent. Recognizing this, the auto companies are setting up their own plastics-molding shops, producing as many items as possible in-house. In some ways, the furniture industry also seems to be headed in this direction. Another feature of the plastics market of particular interest to the small businessman is the fact that entry into a market needs to be as early as possible in the product life cycle. A small business with low amounts of capital investment cannot hope to compete with com- panies of high capitalization enjoying well developed markets with immense production runs. The small business must enter the process early, producing new products at reasonable cost which will later be produced much more cheaply by bigger companies on more expen- sive machines as the market grows to a point where really large-scale production is feasible. Expanded operations can be successfully kept within the business if the firm is able to respond quickly with required capitalization. Alternatively, the originating business can take out pat- ents and develop a proprietary line from which future income is assured regardless of by whom the product is manufactured. The speed of product development is peculiar to the plastics in- dustry. This process often takes less than 1 year for a given product. Another approach to the plastics market is that of the custom proc- essor who offers a service to plastics designers, and fabricators at- tached to other companies and other industries. In a sense, this avoids the real market, and relying on others to conceive of the prod- uct, design it, and carry the cost of failure if it does not sell. There is a developed market for this kind of service, but the potential client is difficult to identify and cultivate. Almost any company in any indus- try, other than plastics, may need a plastic component for its finish- ing product. This is increasingly so as industrial engineers and design- ers become aware of the advantages of plastics in their particular fields. The ability to offer a complete service is important in this sort of business. All the skills of engineering and product development and an adequate range of machinery — including extrusion, injection, casting, spraying, and thermoforming are needed to take care of all the client's needs. This represents a sizable capital investment and puts the newcomer to the custom processing field at a disadvantage, since capital requirements will probably limit him to only one or two methods of processing. The custom processor is thus marketing both products and services, and he is likely to succeed best in those situations where he is not close to the end-user but produces an item as a service to a client who then markets it as an entity or combines it with other compo- nents of his product. Throughout the plastics processing industry it has been estimated that 70 percent of individual products are not for end use but are components of goods which another company mar- kets. The custom processor stands at a distance from the market in this situation, protected somewhat by his client from the effects of market fluctuations. 2. Processes Suitable to Small Investments In this section an attempt will be made to describe possible plastics processes available to the small businessman by applying the three following criteria: a. Investment needed must be less than $150,000; b. The degree of sophistication and technological expertise needed must be low; c. The process must be capable of producing a profit at ex- tremely low production "runs" of less than 1,000 items which are sold at competitive prices. It is the application of these criteria which provides a more sound basis for deciding between alternatives than do the market considera- tions discussed above. Each of the processes described earlier will be dealt with in turn. Market comments are added where appropriate. a. Injection — Injection technology is the basis of plastics proc- essing. Injection machinery is expensive, however, and, depending on capacity, one production line will cost from $40,000 to $200,000. Molds average $5,000 per item. These two components make medium-sized runs essential to spread costs over many items. The lower range of run length is perhaps 3,000 items. Technology is fairly complex, and the machines have many variables in their operation. A minimum-sized shop of two 1602 injection machines plus all periph- eral equipment would need $150,000 Investment. Partially recom- mended for beginning small business. b. Compression Molding — This is a less expensive process (in terms of investment) than injection molding and has a very fast cycle time. A shop with two or three presses and peripheral equipment 8 would cost about $100,000. The technology is simpler than in either injection or extrusion, and because of the lower investment and faster cycle time it is more suited to small business. A disadvantage lies in the limited kinds of output feasible, namely small sized thermosets. This restricts the market applications. Partially recommended for beginning small business. c. Warm Thermoforging — Warm thermoforging of plastic sheet can be accomplished with machinery of $100 to $150 per ton capac- ity so that (at 1 ton per square inch) a 12-inch by 12-inch machine might cost $14,000 to $20,000. Warm thermoforging is economical with thick and large surface area parts, but materials costs and operat- ing costs are high, while low cycle times mean low labor productiv- ity. Recommended for beginning small business. d. Cold Stamping — Cold stamping, using metal stamping ma- chinery, is highly feasible because of very fast cycle times, giving high productivity. The machinery is inexpensive and the technology has been well-developed and simplified in the metalworking industry. A four-cavity machine would cost $40,000 compared to an injection machine equivalent of $160,000. So cold stamping is relatively cheap and fast. Disadvantages include the lack of available cold sheet and billet in sufficient variety as yet. However, this picture is changing. Recommended for beginning small business. e. Casting — Technologically the simplest process, casting re- quires low levels of investment, is suited to very low production runs, but is not competitive at high runs. By itself, or in combination with reinforcing by glass fiber, it is a simple method but has high per part cost due to its hard production character. Dispersing equipment, molds, tables, and so on would not cost more than $5,000 for parts up to 3-foot by 3-foot. For bigger parts (including boat hulls, for ex- ample) sprays are still cheap, but molds become expensive. This method has many applications, particularly when used with foamed plastics. Recommended for beginning small business. f. Foamed Plastics — Foamed plastics have a wide variety of ap- plications, and products can be produced in foam by all of the above methods at no extra cost (except materials cost). Foaming agents and dispensers are not expensive. Urethane spray equipment for casting fine furniture, for instance, costs $12,000 and is economical at low production runs. Recommended for beginning small business. g. Fabricating (thermoforming) — The Industry sees this activity as fabricating because the raw material used is preformed stock such as sheet. Technologically simple, this method is also inexpensive to set up, and many small processors build their own equipment. A thermoforming machine merely heats the sheet and (via a pump) creates a vacuum, causing the sheet to take the shape of the mold. Machines of 6 by 6 by 4 feet capacity are available at less than $3,000 and can be built for half this price. v^ The slow cycle time makes cost per item expensive and labor pro- ductivity low. However, it is economically feasible for "runs" as low as 300 to 400. Moreover, injection machines cannot yet produce items as large as thermoforming machines can, while thermoforming can reproduce any injection molded item. An investment of $10,000 to $15,000 would cover two lines. Highly recommended for beginning small business. The above methods all meet or partially meet our three cri- teria. However, among the methods that are fully or highly recom- mended are methods which are high in terms of cost per part be- cause of their relatively high labor input. They are economical in comparison to partially recommended methods only because the latter need high runs to be feasible. The use of lower cost per part methods entailing a higher investment is essential once the business has a high demand and larger production runs. Otherwise labor costs will be too high and productivity too low, thereby impairing the business' ability to compete. Other processes, which do not meet the above-mentioned criteria, are discussed in appendix B. The inverse correlation between cost per part and the price of equipment/technology is an important relationship. The processes above, then, can be viewed in terms of different scales of output as follows: Annual Average run size Investment revenue Fully recommended up to 3,000 less than $50,000 $ 50,000 Partially recommended 3,000 to 80,000 $100,000 to $150,000 $300,000 3. Costs Costs in the plastics processing industry vary with the type of process used. In practice, the most critical controlling factor is the M.H.R. (machine hour rate). The calculation of this rate, composed of labor costs, machine (power) operation costs, amortization of in- vestment, depreciation, and mold or die replacement costs, is critical to the pricing of the final product. In simple terms: Raw materials + M.H.R. cost per item + Cost of production. 10 This formula can give the item cost of production and can be used to make decisions about when to move up to more productive processes at higher levels of investment. Most of these costs are under the con- trol of the firm. Pov^er and labor may not be. Pov^er costs are negligi- ble (5 percent), and labor costs can vary between 30 percent and 50 percent depending on the process and the degree to which the firm makes its own molds and dies and maintains a toolroom. The Society of the Plastics Industry Survey of July 1970 shows that the average plant operates 120 hours per week, on a two- or three- shift, 6- or 7-day basis. This relatively high level of operation is due to the need to keep expensive machinery in operation in order to spread the investment costs. Wage rates are quite varied throughout the country. About half the plants are unionized and are working on a 2- to 3-year contract with several different labor unions. There are only two unions which exist specifically for plastics industry workers. The following are averages presented in the July 1970 study referred to above. Per Hour Wage Rates in the Plastics Industry Premold Compression Injection Blow General workers Foreman $3.78 $3.40 $3.36 $ — $ — Setup man — — — 3.17 — Moiders 2.65-3.04 2.27-2.51 2.50-3.07 — 1.85-2.91 Other Process operator $2.51 Extrusion operator 3.10 Shipping/Receipts 2.59 Packers 2.43 Truckdriver 2.94 Millwright (foreman) 3.86 Electricians 3.86 Foreman toolroom 4.40 Toolroom: Mold/Die designer 4.47 Moldmaker 4.68 Mold repair 3.80 Apprentice ^ 2.82 General helpers 2.36 Wage rates are fairly high by national standards, and critical wage rates such as those for moldmakers can be as high as $6 to $7 per hour in some areas at times of scarcity. Most plastics processing firms are highly dependent on moldmakers, since almost all products re- quire either a mold or die in their production. There is currently a 11 critical shortage of good moldmakers in the industry and this is im- peding growth somewhat. The shortage of workers in other areas is not so critical, but nonetheless difficult, and wages continue to rise as the shortage persists. First-line supervisor foremen, for instance, are paid $1,100 per month in some areas of the country, since their control over the processes is a critical one to production. The need for high productivity once operations begin to require more than four or five employees is obvious, since it is critical to cost control on a per item basis. The plastics processing industry will be requiring highly skilled men in the future who are ultimately either operating highly sophisticated and automated machinery or are pro- ducing highly accurate molds and dies. Costs of materials are fairly standardized. They are cheapest in pellet tons and are sold by weight. In general, materials costs are slowly declining as new and more efficient methods of producing the material are discovered. Some examples are as follows: Material 1904 Price per 1966 lb. in cents 1967 196« ABS .-, >. :■■ 35:. ;: 36 32 31 High density polyethylene (injection) 20 17 18 19 Polypropylene (injection) 25 20 2OV2 19 Polystyrene (high impact) 27 18 18 18 However, delivered costs are a different matter, and there are large savings available for high bulk transfer by both road and rail. Small processors are taking advantage of this by cooperating in their raw material needs, ordering collectively in bulk. Several raw material companies are offering a file-correlation service to allow buyers to coordinate their needs, thus saving on shipping costs. 4. Productivity Generalized measures of productivity in the industry are not based on enough experience to be useful. However, according to a survey conducted by Plastics Technology In 1970, productivity in the plas- tics industry compares favorably with productivity in other Industries. Nevertheless, the rate of Increase In productivity levels has slowed down considerably over the past 10 years. Between 1958 and 1969, all manufacturing Increased 3.4 percent per year, chemicals 5.7 per- cent per year, and plastics 6.6 percent per year. Percentage Increases In the last 5 years, though, reveal that all manufacturing grew at 3 percent, chemicals grew at 4.4 percent, and plastics grew at only 3.7 percent per year, 12 Further statistics from this survey indicate that in 1967 value added per man hour of production was $7.15, up from $5.07 in 1958, a growth of 5 percent per year. Value added per employee grew from $7,987 to $11,796 per annum over the same period, a growth rate of 3.4 percent per year. Payroll in 1967 was 48 percent of value added, a figure unusually high for what is normally thought to be a capital intensive industry. Thus, productivity grows at a moderate rate on the production floor, but administration, sales and other labor costs are causing output per employee to grow only at 3.4 percent per year. This is an indicator of the high cost of the nonproduction activities in this industry. As might be expected, the Plastics Technology survey showed that productivity has improved differently in each major processing area, in general, the overall emphasis is on tooling, better major equip- ment, better resins, automation, and control. Tooling and major equipment were rated as most critical productivity factors for injec- tion molding, and control and major equipment were selected for thermoforming. Unfortunately no data were available for the other major processing areas. 5. Profitability Manufacturing profitability depends greatly on run size and the de- mand (expressed in price terms) for the final product and, accord- ingly, projection of the profits attainable from a particular plastics process requires assumptions about these factors. Some feeling about the profitability of custom plastics processing can be gained, how- ever, from Survey No. 9 of Custom Processors, conducted in 1970 by the Society of the Plastics Industry, Inc. Figures have been rounded slightly for ease in reading. 100% 94% Revenues Expenses (as percent of revenues) Mean Range Materials 37% 30-50% Production labor 15 13-22 Administrative expense 8 7-10 Factory overhead 28 20-31 Selling expense 6 3- 8 Net profit before tax 6%'" Gross margin in the industries is difficult to assess from these very generalized ratios, but it usually lies between 10 percent and 30 per- cent. A fairly high proportion of processing costs are indirect, center- ing around administration, depreciation, rental, and other costs. 13 Profit before tax in the above table is a very generalized figure w/hich masks great ranges of profit. Profit may run as high as 25 per- cent in some areas of the industry, particularly among small custom processors v^ho have just developed a new proprietary product or have just moved into a field not yet penetrated by plastics where prices charged for output are low in terms of the substitution value to the customers but very profitable in terms of costs of production. Such high margins are not average but are certainly available in a situation where a small business creates its own market. They tend to vanish as other producers begin to compete, bidding down the price to levels more closely related to the costs of production. This feature of operating on the frontier does represent an important phase in the growth of small plastics processors and the high profit can often be used to finance expansion into larger capacity and new processes. 6. Capital Requirements Startup capital requirements depend on the scale of initial opera- tions. Most businesses are launched at a level below $50,000 invest- ment, and, at this level, capital procurement can often be a great difficulty, particularly for the minority businessman. The problem re- volves around the market. It is difficult for a potential lender as in- vestor to be assured that a market exists for the output of the pro- posed business. Indeed, success often revolves around the ability of the entrepreneur to create a demand for a product by his ingenuity in perceiving that articles now made of wood or metal can be made more cheaply and effectively out of plastics, leaving a high gross margin of profitability. The beginner often starts by producing a plas- tic substitute for an item with which he already has some familiarity in former occupations. The production of sound-absorbing plastic doorstops helped one company. Another entrepreneur perceived that a wooden sorting tray used by a large state institution could be better made in plastics and won a large contract by taking his plastic sub- stitute into the purchasing agent's office. This kind of ingenuity is vital to success, and hopefully is likely to show up in the ability of the entrepreneur to obtain capital. If the prospective businessman can persuade the banker that he has a mar- ketable operation based on his ability to create demand and his abil- ity to offer a components production service for clients, he is likely to succeed in the business. As the company grows, however, larger amounts of capital are essential. When the business reaches 10 to 20 employees, capitaliza- tion may be necessary at a level one to three times greater than the initial amount. This can be a formidable barrier to growth. 14 III. ANALYSIS OF BUSINESS FEASIBILITY A. Factors Influencing Performance 1. The conceptual ingenuity of the plastics entrepreneur, partic- ularly in relation to marketing and sales, is perhaps his most import- ant skill. Thinking up a product is a process for which there are no established guidelines or training programs. The ability to perceive a need is important and can be developed by bringing to the business some experience in another material for which plastics may be sub- stituted. 2. Experience in some aspects of the plastics industry, even as an employee, is useful and perhaps even critical. The entrepreneur him- self can manage without it, but if this is the case, it is essential that he has working with him a good, experienced machinist who can make simple molds, design and build simple equipment, and who has a thorough knowledge of a number of the plastics, wood, or metal fabricating processes. Successful ventures in plastics processing generally have a good all-around mechanic who is used to producing the simple hardware needed to make simple plastic products. Such a man can learn the operating skills involved in a particular machine and transmit those skills to others. 3. If the entrepreneur does not have these skills and experience, a partnership with an ex-plastics-producing foreman or toolroom man, for instance, would be invaluable. Failing this, the hiring of such a man as an employee, probably costing $800 to $1,200 per month, is very important. B. Projection of Attainable Returns for Five Plastics Processes This profile has discussed several different plastics technologies, and has recommended seven as being suitable for new small busi- nesses. Of these seven, two (injection and compression molding) were only partially recommended because of the size of the initially required capital investment. This section will compare the invest- ment, operating costs, and returns associated with the five fully rec- ommended processes. These processes are: (a) Warm thermoforging (b) Stamping (c) Casting (d) Foamed plastics (e) Fabricating (thermoforming) They also have the advantage of being highly comparable. Parts pro- duced by a casting technique are often made into foamed plastic items or a casted part can be cut and stamped into intricate shapes. 15 This flexibility, at low levels of capital investment, is gained only because we are accepting low labor productivity (except for warm thermoforging), and a relatively high price per part. This restricts the market potential to runs of less than 1,000 pieces each except on very simple parts where parts made with these processes can be made economically at very large runs (particularly with warm thermoforg- ing which competes effectively with injection molding at 50,000 parts and above). For the most part, however, the processes selected are those which are economical at low levels of production. Casting, for instance, can be used with room temperature-cured and foamed resins and silicone molds to produce fine furniture pieces from wood carvings which merit a high retail price (up to $10 per item for 5- pound pieces). Other examples of low-run, high-price, high-margin items abound in the trade magazines. - ^^ ^^ Production runs of each of the five processes are shown below: . ,, V ; > ;, > Items per week at 40-hour week Warm thermoforging - — Fast cycle machine at about 800 per hour (no cooling necessary) Stamping — Regarded as an accessory proc- ess; fast cycle at 100 per hour = 4,000 Casting — 2 banks of 10 molds on rotary table, V2 hour cure == 800 Foamed plastics — 2 banks of 10 molds on rotary tables, with V2 hour curing time z= *; 20 items per hour =: 800 Fabricating (thermoforming) — 2 machines, each producing 5 items per hour (cooling time is fairly long) = 400 The average revenue per item sold is based on assumptions rather than calculations, since precise knowledge of the market is unattain- able with such a wide product mix. Warm thermoforging .08 per item — (small simple parts) Stamping .10 per item — (a simple stamping process) Casting $2.00 per item — (complex, large items) Foamed plastics $3.00 per item — (complex construction) Fabricating (Thermoforming) $4.00 per item — (large size) Utilizing the average 120 hours per week used by the Society of the Plastics Industry Survey of July 1970 as 65 percent of capacity, reve- nue calculations for the five processes are as follows: Capacity Capacity Revenue Revenue per year Process per week per year per item at 65% capacity Warm thermoforging 32,000 1,600,000 .08 $83,200 Stamping 4,000 200,000 .10 $13,000 Casting 800 40,000 $2.00 $52,000 Foamed plastics 800 40,000 $3.00 $78,000 Fabricating (thermoforming) 400 20,000 $4.00 $52,000 16 E .E in r- o o g o o 2 o o R «^"' n-r ^ O O O O O O O O O O O LO O LT) P^ r-" ■*" ^"" fN T— r- tft. ti*^ t«- 0 0_ 0_ tA in ^ O ^ E o (U c J2 o "D rt E c T o c E o E D. u D 3 QJ — 1- z C 1 ^ if LU 1 O 5 0) 2 QJ E 1— c 0) > in UJ > n3 C 8 -^ ^ Z 5 OJ u z 1- < a: UJ a. o Z oj < Qi ^E ° E oJ 5 2^- ^ a) 0) ^ h: o o 0) ^ -Q Si rt g c cu QJ *J- 5 rt QJ D >- 03 cr Si ^ C 03 : q3 ■" ■ ■ : Q. <-" i2 D. o 9- S.o° '" 03 Jf; S QJ « Qi Q 2 c a» u (A O) o u ro O a II OJ 60 O oj •- ? rt o 111 -a .E q; 03 O O O) u QJ 3 O 03 QJ "^ = > 01 O) QJ QJ _ (J '" "^ 00 ^ II E -.E I *w DO ^ 1 o ^ ^ E 00 E QJ c 3 -C -^^ 5^ *^ 3 '^ E -c •- ^ -s 17 Many processors will want to invest in two of the processes and in addition, must invest in stamping in order to extend the range of operations and offer a comprehensive service in fabrication. The pos- sible combinations of processes and the production ratio of each one are shown below: 1. Warm thermoforging/stamping/casting 2. Warm thermoforging/stamping/foamed plastics 3. Warm thermoforging/stamping/fabricating (thermoforming) 4. Stamping/casting/foamed plastics 5. Stamping/casting/fabricating (thermoforming) A financial summary for the various possible combinations of proc- esses is outlined below. The numbers refer to the combinations listed above. Revenue $148,200 $174,200 $148,200 $143,000 $117,000 Expenses 141,000 160,900 138,600 129,800 107,500 Net income 7,200 13,300 9,600 13,200 9,500 Return on sales 4.9% 7.6% 6.4% 9.2% 8.1% Investment 57,500 55,000 51,500 51,500 48,000 IV. STARTING THE NEW BUSINESS The key to starting a new business In the plastics industries is to determine or create the product which can be produced and sold and to establish or acquire the technical ability to produce it. In some cases, the individual desiring to enter the plastics business may, through his knowledge of another industry or in some other way, have discovered how a new item can be produced in plastics and be able to establish the existence of a market for his proposed custom processing business. His next step is to make sure that he, himself, has, or that he can arrange to acquire, the necessary technical ability to produce efficiently and economically. The individual proposing to start such a new business should have some ideas himself about what he wants to produce and where he can sell it. These ideas should stem from his own experience. It is un- likely that someone can enter the custom plastics processing business without previous background in the industry or in a related industry and establish a product line by trial and error afterwards. Moreover, no one would advance money on such a basis. The starting point, therefore, would be an individual or a group of individuals who have some ideas, based on their own experience, about what they want to produce and to whom they propose to sell 18 their production. The next step is to verify this market. A market survey should be undertaken. If the product is a new line or a variation which is a new design of an existing line, samples will be required and visits made to prospec- tive customers to determine their reaction to the line and the price at which it can be sold. Generally speaking, prospective customers can give the market surveyor an idea of how many of the items they might expect to purchase at a given price, how sales have been grow- ing, what the competition is, and so on. This information can be used to determine the expected volume of sales for the new business and the revenue which can be expected. If the proposed new business is to provide a variety of products to an existing industry, such as items for the furniture industry, the mar- ket surveyor should canvass proposed accounts within the industry to develop some estimates of the total volume of business, its growth pattern, the competition, pricing arrangements, and the like. Here again, the information can be used to develop estimates of volume and revenues. If the individuals proposing to start the new business do not them- selves have the technical ability, they should next arrange to acquire a production supervisor. An advertisement in the trade press might secure inquiries from someone who is presently a production super- visor or an assistant. It may be necessary and desirable to offer a part- nership to such an individual, particularly if he is well-experienced, since he will be a key to success in the business. Once the market and production capabilities are in hand, the next step is to arrange for machinery and production space. An automo- bile tour of industrial areas may establish the availability of appro- priately sized and priced space. The production supervisor should advise on whether the space is adequate and of the right type. Indus- trial real estate brokers may also be able to determine what space is available. Machinery suppliers will be listed in such trade press publications as Plastics Age. The production supervisor may also know about nearby dealers in used machinery. Machinery suppliers should be contacted to determine on what terms machinery can be leased or purchased on the installment plan. Some of the elementary machin- ery for thermoforming, spray-up, and casting may be homemade by a good tool and machine man. Used machinery can sometimes be purchased for about two-thirds of the new price. 19 With the market, production capability, location, and machinery in hand, it is time to establish the financial plan. This plan should estab- lish how much capital will be put in by the owners, how much capi- tal investment will be deferred through lease or installment purchase of machinery, how much capital will be needed to finance accounts receivable (until shipments are paid for) and how much will be needed to pay for materials and labor until the output can be sold. In starting a new business of this type, it is essential to provide an allowance for unforeseen startup costs. These are the costs of train- ing new labor, wasted material until the machines are running right, returned shipments due to errors, and the like. With a financial plan in hand, the potential new entrepreneurs should visit a local banker to determine the prospect of securing a loan. In most cases, banks will not normally provide unsecured money to a new business without previous experience. However, if there is a prospect that the Small Business Administration will guarantee the loan, there is more likelihood that the project can be financed. If the prospective entrepreneurs are individuals considered to be members of a minority segment of the population, they should dis- cuss their plans at an early stage with whatever local organization has been established to assist minority entrepreneurs. In many cases, these organizations are affiliates of the Office of Minority Business Enterprise, and they will have information on sources of financing locally. These financial sources may include, in addition to bank loans guaranteed by the Small Business Administration, loans from develop- ment corporations financed under the Special Impact Program of the Office of Economic Opportunity, and loans and equity investments from locally oriented Minority Enterprise Small Business Investment Corporations (MESBIC's). 20 APPENDIX A TABLE 1 Custom Processors and Converters, USA, 1969-70 Blow molders Casting Injection and extrusion Molders of foamed plastics Processors of F.R.P. Formers of thermoplastic sheet Powder molders Total Total Companies 117 ■ ' 790 : aoQ las 210 25 1,622 TABLE 2 Injection Molders, Sample Survey Data Captive Custom A B CAB C 57% 28% 15% 57% 38% 5% Percent of firms Average Number of employees 225 25-50 100-200 250 50-200 Size groups: A — 10 machines; B — 10-24 machines; C — 25+ machines. 2004' Source: Modern Plastics, March 1969, p. 59. TABLE 3 Growth of Plastics Markets (million lbs.) 1960 1965 1970 1975 1980 Building 1400 2900 4250 8370 14000 Transportation 229 610 1820 7500 15000 Packaging 1000 2200 4500 7000 13000 Electrical 830 1200 2000 3300 6000 Housewares •: 31Q 500 1150 1900 3000 Furniture 400 580 960 1750 2900 Appliances 180 300 530 14Q0 2100 21 APPENDIX B Brief descriptions of several plastics processing techniques, not recommended for beginning small business, are outlined below. a. Blow Molding (thermoplastics). This process is used in making bottles and other thin-walled containers. The base machine is an extruder which produces a tube in a downward direction. The tube is captured in a hollow mold. Air pressure is used to inflate the tube and form it against the sides of the mold. Ejection and cooling com- plete the cycle. P.P. (polypropylene) is the major material used in this process. Blow molding of bottles is now a vast industry produc- ing billions of bottles per year on an automated basis. The low price of plastic bottles indicates that high capital investment, high labor productivity, and extremely long runs (in millions of parts per order) are a feature of this process. The average cost of a complete blow molding line is about $115,000, though a new system called "Aero- pall" has recently been marketed at a machine cost of $25,000 (indi- cating a line cost of perhaps about $50,000). However, a blow mold- ing operation to be feasible would need more than one line, and although minimum size is not known, an operation with at least two lines (some sources indicate four is essential) puts investment at about $100,000 to $250,000. The market for plastic bottles and con- tainers is one of the fastest and healthiest plastics markets. Unfor- tunately the market is also well served at the moment by experienced producers working under contract to the large food producers, pack- ers and retailers, and a wide variety of containers is also available out of the stocks held by suppliers. b. Extrusion (thermoplastics). Extrusion machines operate on the same principal as injection machines, except that they have a con- tinuous feed mechanism. The nozzle end is a shaped die, the cross section of which determines the final cross-sectional shape of the extrusion. The extrusion is then uniformly cooled by water or air and carried away on a continuous basis. The main extrusion materials are polyethylene (PE), A.B.S., P.V.C, polystyrene and cellulosics. Trims, sheets, house siding, molding, drinking straws, rods, pipes, hose, are all products made by this method. Extrusion is the second most fre- quently used method of processing plastics, and machinery with diameters up to 12 inches is available, making it possible to produce extrusion in very large lengths and in quantities of 2,000 to 3,000 pounds on a daily basis. Extrusion machinery is often complex (sev- eral screws and barrels are common) and expensive, while the die is the critical feature (similar to the mold in injection) and requires a 22 high degree of skill and experience in its hand production. Diemak- ing is still considered an art, and a library of dies for extrusion is an expensive investment. Long production runs are obviously essential. Variations on extrusion include coating of wire, encapsulating, and blown film extrusion (in which air pressure is used to continuously expand an extruded tube to produce very thin film). Extrusion is the basic process for production of continuous output. Extrusion machines start at $70,000 (lV2-inch capacity). At 4V2-inch capacity, they cost about $150,000. Peripheral equipment for han- dling the extrusion is also expensive. A shop with two extrusion ma- chines of 2V2-inch and 4V2-inch capacity with all equipment would represent an investment of $450,000. This process is highly capital intensive and requires a high degree of skill, particularly by the tool and diemaker who produces the dies which determine product shape. Long production runs are, therefore, essential, and the process is not recommended for beginning small businesses. c. Rotational molding. One of the more recent of the processing techniques is rotational molding. A premeasured amount of plastic in powder form is placed inside a mold which is then rotated bi- axially in a high temperature environment. The centrifugal forces distribute the material over the inside surface of the mold, cooling takes place, whole rotation continues. This method is used to pro- duce large vessels with thick structural walls (e.g., garbage cans) as well as other large heavy parts. The machinery available has four or eight arms rotating around a central point. The molds are attached to the ends of the arms and also rotated. A heating and cooling en- vironment is also essential. The capital costs are fairly high, even though the technology is simple, and the cycle time is long so that speed of output is not fast. Consequently roto molding has had only limited application to date, and the process involves large, complex machinery and various heating and cooling operations. It is not eco- nomical in small runs for the production of large vessels and parts. It requires very large runs to be economically feasible; above one million parts per run it is perhaps the cheapest of all processes. The cost of rotomolding equipment (4 oven, 160-ounce-capacity) means an investment of $100,000 to $120,000 and a large market to justify it. d. Other methods. There are a variety of other methods in com- mercial use, mainly based on adaptations of the above processes, though some are totally different. Laminating involves the extrusion of various plastics layers onto wood, cloth, steel, alloys, or other 23 plastics, producing Items of great strength and toughness. Formica is one such product. Costs of equipment are high, however, and the market specialized. Calendering is the equivalent of the steel rolling mill in which plastic sheet Is heated and by pressure applied through rollers is made thinner, or embossed and changed in shape. Radiation processing involves the impregnation of a base material, wood, brick, concrete, cloth with a resin, and its exposure to cobalt radiation which cures the resin imparting amazing qualities to the base ma- terial. Superhard, long-wearing, abrasion and corrosion resistant wood is produced this way. The technology is fairly simple, but the cobalt radiation machine is as yet an item of high investment. The process is suited to the production of modular building parts in high quantity. Ultrasonic assembly, roll-leaf hot stamping, printing, high fre- quency sealing, electroplating, painting, vacuum metalizing, and dec- orative overlaying are some of the other commercially used tech- niques. However, new techniques, like materials and markets, are invented every week in the plastics processing industry as companies come across new low cost ways to produce plastic items. Most of the techniques now available were begun by small processors building their own machinery in garage-sized workshops. These techniques were subsequently developed by larger machinery companies. ; ' •: • 1 .t . <■ ■ 24 BIBLIOGRAPHY Concise Guide to Plastics. Herbert R. Simonds and J. M. Church, second edition. Reinhold Publishing Corporation, New York, 1963. $12. Encyclopedia of Plastics Equipment. Herbert R. Simonds, editor. Reinhold Publishing Corporation, New York, 1964. $22.50. General Plastics. Raymond Cherry. Revised edition. Taplinger Publish- ing Co., Inc., New York, New York, 1965. $6. Machining Plastics. U.S. Small Business Administration, Washington, D.C. 20416. (In Technical Aids for Small Business, Annual No. 1) $1. Modern Plastics. McGraw-Hill Publications, 1301 Avenue of Americas, New York, New York 10019. Monthly. $10. Modern Plastics Encyclopedia. McGraw-Hill Publications, 1301 Ave- nue of Americas, New York, New York 10019. Annual. Included in subscription to Modern Plastics. Plastics Design & Processing. Lake Publishing Corporation, Box 270, 311 E. Park Avenue, Libertyville, Illinois 60018. Monthly. Free. Plastics Engineering Handbook. Society of the Plastics Industries. Third edition. Reinhold Publishing Corporation, New York, New York. 1960. $15. Plastic Materials. J. A. Byrdson. D. Van Nostrand Co., Inc., Princeton, New Jersey 08540. 1966. $13.50 Plastics: Projects and Techniques Alvin R. Lappin. Taplinger Publish- ing Co., Inc., New York, New York. 1964. $4. Plastics Technology. Bill Publications, Inc., 630 3rd Avenue, New York, New York 10017. Monthly. $10. Plastics Technology, Basic Materials and Processes. Robert S. Swan- son, Taplinger Publishing Co., Inc., New York, New York, 1965. $6.80. The following are available from the Society of the Plastics Industry. 1. Plastics Processing Companies, Labor Survey No. 33, July 1970, 2. Compression and Transfer Molding 3. Injection Molding 4. An Introduction to Extrusion 5. The Story of the Plastics Industry 25 Stanford Research Institute, Menio Park, California 94025. Long Range Planning Service: 1. Reinforced Plastics, Report No. 182, August 1963. 2. Plastics in Construction, Report No. 299, September 1966. 3. World Plastics, Report No. 381, August 1969. 4. Specialty Plastics, Report No. 428, December 1970. 5. Foamed Plastics, Report No. 358, October 1968. U.S. Foamed Plastic Markets & Directory 1969-70, published by the Technomic Publishing Co., 750 Summer Street, Stamford, Connecti- cut 06902. Preliminary Report on U.S. Production and Sales of Plastics and Resin Materials 1969, United States Tariff Commission, Washington, D.C. 20436. 26 TRADE ASSOCIATIONS Society of the Plastics Industry (SPI). Founded 1937. 250 Park Avenue, New York, New York 10017. Membership 1,350. Manufacturers and processors of molded, extruded, fabricated, laminated, calendered, and reinforced plastics; manufacturers of raw materials, machinery, tools, dies, and molds; research, development, and testing labora- tories. PUBLICATIONS: 1) Proceedings of Conferences; 2) Mem- bership Directory; 3) Accounting Manual; 4) Plastics Engineering Handbook; 5) Safety Handbook; 6) Handbook of Reinforced Plas- tics; 7) In-plant training booklets. Plastic Container Manufacturers Institute (PCMI). Box 141, Rumson, New Jersey 07760. Founded 1962. Members, 50. Container manu- facturers, raw material suppliers, machinery manufacturers, and others interested in the promotion of plastic bottles and closures. National Association of Plastic Fabricators (NAPF). 1108 Standard Building, Cleveland, Ohio 44113. Founded 1956. Members 225. Manufacturers of decorative plastic laminate used for counters, furniture, horizontal and vertical surfacing, etc. Distributes infor- mation to members on production, sales, and management matters. Publishes periodic bulletins, technical reports, and specifications. Plastic Products Manufacturers Association (PPMA), 1133 Broadway, New York, New York 10010. Founded 1937. Members, 115. Manu- facturers of housewares, toys, handbag accessories and parts, costume jewelry, optical frames, etc. 27 OFFICE OF MINORITY BUSINESS ENTERPRISE (OMBE) AFFILIATE ORGANIZATIONS Albuquerque National Economic Development Association (NEDA) 1801 Lomas, N. W. Albuquerque, N. M. 87104 508/843-2386 Victor M. 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