of forest, paper & packaging CEOs have implemented cost cuts over the past 12 months.
Forest, paper & packaging (FPP) CEOs aren’t as pessimistic about the global economy as CEOs across our whole sample. But far fewer are confident that they’ll be able to generate revenue growth this year. Why the discrepancy? The answer probably lies in structural changes now happening in the industry.
Dealing with overcapacity through cost reduction
It’s no secret that there’s a lot of overcapacity in the FPP industry, particularly in some paper grades. That may be why around half of FPP CEOs say they’ll stick with the status quo rather than increasing capital investment plans this year. They’re also intensely focused on trimming the fat.
92% of sector CEOs say their company has implemented a cost-reduction initiative in the past 12 months, and 89% are planning to cut costs in the coming 12 months too – more than in any other industry sector. Some headcount cuts look to be inevitable – and next year 18% of FPP CEOs expect them to affect a significant amount of the workforce (more than 8%).
Exiting unprofitable businesses
Part of the challenge for FPP CEOs lies in the capital intensive nature of the sector, which makes it difficult to exit businesses completely without taking a huge hit to the balance sheet. Despite the hurdles, 29% of sector CEOs say they’ve divested a majority interest in a business or exited a significant market in the past 12 months. Capital intensiveness is probably one reason why FPP CEOs are less likely than peers in other sectors to worry that new entrants could pose a threat to growth.
Hope for the future
There are signs that FPP CEOs are beginning to see the light at the end of the tunnel. While sector CEOs are less optimistic than their peers about prospects for the next 12 months, looking further ahead over three years they’re actually more upbeat than the overall sample. 53% are very confident of revenue growth over this longer time-scale.
Getting a handle on scarce resources
Three-quarters of FPP CEOs worry that energy and raw material costs could pose a threat to growth, far more than the average across our overall sample. When it comes to securing natural resources, half of FPP CEOs say they’ll increase their investments in this area over the next 3 years, more than double the overall average. That’s especially telling in light of the pressure on capital investment levels. And more FPP CEOs feel that the government should make securing natural resources a priority (39% vs. 28% overall). They don’t think it’s happening yet. Over half of sector CEOs don’t feel that the government is helping companies secure access to natural resources (e.g. raw materials, water, energy).
With raw materials scarce, supply chain disruption looms larger as a potential threat; nearly half of sector CEOs worry that it could slow down growth. And working closely with supply chain partners is critical; 95% of FPP chief execs say that supply chain partners are influencing their strategy and of those, the large majority are increasing efforts to engage with them.
For the FPP sector, Africa and Latin America are locations for key raw materials; that’s reflected in the larger number of sector CEOs who report that their companies have key operations in these regions.
Changing the business model
We believe that innovation will play a critical role in helping the FPP sector transform its business model. So will new types of partnerships within and outside of the industry. When we asked CEOs to tell us their top 3 investment priorities, R&D and innovation and new M&A/joint ventures/strategic alliances tied for second place, right after improving operational effectiveness. In both areas the emphasis is stronger than across the sample as a whole. For the forest and paper companies in our sample, this result probably reflects the broadening uses that are now being found for fibre (bioenergy, biofuels , textiles etc.).
Moving a business in new directions inevitably means taking on entirely new types of risk. But the majority of FPP CEOs tell us they don’t plan to change their strategies this year. In our view the industry may need to take another look at risk.
Strong leaders and commited staff to make it happen
FPP companies have already put in place a number of leadership programmes to help their managers cope with all the changes and they’re increasing their efforts to engage with their people more generally too. More than half of FPP CEOs say that their employees influence strategy ‘significantly.’ Sector CEOs also acknowledge that they need to match the pay rates of peers in order to retain talent.
Keeping the focus on sustainability
The FPP industry uses natural resources as raw materials; when it comes to wood in particular, the topic of forest management generates a lot of emotion. Over the past few years, we’ve observed that the FPP industry is acutely aware of the sensitive nature of its business. That’s reflected in the fact that compared to the overall sample, sector CEOs are more likely to say that NGOs influence their business strategy. FPP CEOs also place more attention on increasing efforts to reduce the industry’s environmental footprint.
And they’re trying to get the word out. Nearly one-fifth say they'll increase their focus on non-financial reporting (incl. corporate sustainability reporting) ‘significantly.’ Many FPP CEOs also say they'll strengthen efforts to engage a whole range of stakeholders.
Join CEOs and other industry leaders in discussing these topics at PwC’s 26th Annual Global Forest Industry Conference on May 9, 2012 in Vancouver, Canada.These interviews contain the opinions and views of the CEOs interviewed, and do not necessarily represent the opinions and views of PwC.