6 Feb 2008 - Forest, paper and packaging (FPP) companies are adjusting to a changing environment, according to CEO Perspectives, launched today by PricewaterhouseCoopers. Interviews with around 25 FPP CEOs across the developed and emerging markets identified four key trends – attaining the right business model, cost control, sustainability and leadership. FPP companies are reconfiguring to meet these opportunities-cum-challenges, but views are mixed as to whether the industry has yet reached a turning point in its profitability.
Robert Barnden, forest, paper and packaging leader, PricewaterhouseCoopers, commented:
“The forest, paper and packaging industry is at the heart of many of the most important and intense debates taking place in both political and corporate circles, as well as within society at large – climate change, sustainable development, the future of the planet’s forest and the most appropriate use of fibre resources.
“The industry has already had to cope with a considerable amount of change, but it remains quite traditional in certain respects. If it is to address the challenges it now faces, it will have to shed these traditions and become more innovative. It will also have to develop a robust system for managing change.”
Basics
Many FPP CEOs are eager to get back to basics – i.e. ensuring that they are capable of delivering a standard, quality product, on time and as economically as possible. They believe the industry is becoming increasingly commoditised, and do not see extra services or better quality generating higher margins. Other CEOs, whose companies operate further down the value chain, are focusing on the opportunities for differentiating their products and examining their offering to ensure that the extra services they offer are really enhancing revenues.
Declining demand is seen as an issue, particularly in commodity segments like newsprint. In North America, CEOs express deep concerns about the weak building products market, a sector which has been hard-hit by a dramatic slowdown in US housing starts. But other executives are more positive and argue that increasing demand in emerging markets could offset falling demand in more mature markets. By 2050, the seven largest emerging market economies (China, India, Brazil, Russia, Indonesia, Mexico and Turkey) will outstrip the world’s largest developed economies (US, Japan, Germany, UK, France, Italy and Canada).¹
Another key “basic” is the people who drive organisations. The success with which change - such as refocusing business models or closing plant is implemented, depends on the extent to which people understand their roles in the bigger picture and engage in the process.
Controlling costs
Most CEOs are trying to reduce major input costs and most welcome the financial discipline private equity involvement has brought. Fibre is the single largest cost factor for many players and supply poses major challenges in some parts of the world. Several CEOs of companies with integrated supply chains describe the access to fibre this gives them as a major competitive advantage. Sourcing fibre cheaply from low-cost regions is critical to keeping costs down.
Energy costs continue to be a major factor for some players. CEOs report that their main strategy for reducing energy costs is the modernisation of existing assets. However, many of our respondents were more concerned about transportation costs than direct energy costs. Many executives see transportation and logistics as one of the most important remaining areas in which to secure further cost reductions.
Currency exchange rates are yet another major challenge. One European executive says that the strength of the euro relative to the US dollar is reducing margins to such an extent that some countries are no longer viable manufacturing locations. Also some US companies have seen profits rise on the back of the weak dollar, although others have benefited less due to alleged Far East dumping of certain grades.
Demonstrating sustainability
FPP companies are at the forefront of the increased focus on operating in a sustainable manner. In fact, FPP is among the most sustainable industries in existence; as one interviewee points out, it is the world’s biggest producer and consumer of renewable energy, and 50% of the raw materials used in the European paper and packaging sector are derived from recovered paper. Forests are a major binder of carbon on the planet and have great potential to offset damage wrought by carbon emissions.
Unfortunately the FPP industry still suffers from a poor image as the “destroyer” of the world’s forests. The reality – that the leading companies are actually helping to maintain their health and viability – is little understood by the general public. The CEOs we interviewed generally agree that the industry must therefore do much to raise awareness of its responsible approach.
Some executives think that the best approach is to collaborate with NGOs because this has more potential to effect lasting change than using the customary industry channels or lobbying government. Many CEOs also see trade organisations as important catalysts in communicating what FPP companies do right and representing the industry’s interests, as climate-change regulations evolve.
One clearly emerging and significant development – which is being driven by the green agendas of powerful customers – is the concept of total supply-chain responsibility. One CEO mentions the increasing pressure to ensure that the entire supply chain is ‘green’ – i.e. paper manufacturers not only need to reassure retail customers about their own practices, they are also considered accountable for the practices of the loggers from which they buy.
Several CEOs also express frustration that, while demand for ‘green’ products is increasing, customers are often reluctant to pay a premium for such goods. One executive describes the situation as a delicate balancing act between the need to spend money on proving his company’s “green” pedigree and the need to minimise additional costs.
Leadership
Many of the interviews show that executives are explicitly looking for leaders who will drive the industry forward and show the way in important areas like capacity reduction, price-setting and consolidation. One European CEO expresses frustration at his company’s inability to pass on increases in costs; he calls for more consolidation and for someone to take the lead in setting prices.
Clive Suckling, global forest, paper and packaging director, PricewaterhouseCoopers concluded:
“Even if some leaders emerge from today’s industry players, finding the right talent to pilot the industry in the future may prove extremely difficult. Many forest, paper and packaging companies, particularly those in developed markets, are failing to attract the best and brightest new joiners; without a strong contingent of younger people in the pipeline, they will be hard-pressed to fill upper-level management vacancies as they arise.
“FPP companies will have to learn how to tap into new markets, such as biomass-based energy, fuels and chemicals production, without jeopardising future supplies of wood fibre. These new businesses have different value chains and markets, and demand different skills from which the forest, paper and packaging industry is accustomed. For those companies that lead and make the transition, the rewards could be significant.”
Note(s) to Editor:
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