Treneco July IPBI

SUSTAINABLE SUPPLIERS

1 INTERNATIONAL PAPER BOARD INDUSTRY

T he corrugated industry has to thank a lot of individuals and companies for their

innovations and support that has lasted for more than 100 years. Without innovations like the rotary die-cutter, fingerless single facer, razor slitting, continuous feeding, vacuum transfer, servo technologies and just now the ongoing evolution in digital printing, the landscape of paper-based packaging would look a lot different than we know today. In addition,

if there had not been a number of great minded entrepreneurs in the corrugated industry who were willing to take risks with new technologies, the world of corrugated would not be where it is now.

Great innovations were made by a large number of companies that are no longer around, or that have shrunk to a fraction of their former size and significance. Some of these suppliers have changed ownership, some have

THE MACHINE BUILDER’S DILEMMA!

AN ARTICLE BY ANDREAS TINGVALL, CONSULTANT PARTNER AT TRENECO AB.


INTERNATIONAL PAPER BOARD INDUSTRY 2

formed alliances and joined other companies. Many have simply disappeared.

We all know of many choices of machine brands there were just 25 years ago. That was a long time ago, but a large number of corrugated production plants currently have machines in use that are even older than that. Interestingly, the average lifespan that an OEM would expect from their supplied machines is defined as being exactly that amount of time — 25 years.

Here a few of those companies that have changed ownership over the past 25 years or disappeared from the market:

Why do some machine suppliers disappear and others evolve? Some may call it natural selection and others may call it betting on the wrong horse. Or is it simply bad management that pushed these companies over the edge?

Besides the fact that most of the common business rules apply all over the world, the corrugated industry has gone through some of the same changes that have affected other packaging types — for example, the metal can or the

- Peters- Bendazoli- Agnati- Marquip- Langston- Eterna- Terdeca- Ward- Pallmac- Klett- Simon- United- Fosber- Curioni- Sodeme

- Roda- Rapidex- Celmacch- Massenzana- Cuir- Martin- Ringwood- Fossaluzza- Alliance- Castaldini- Sercoand many more

While a number of these machinery businesses have been merged into larger groups and become successful under a new ownership structure, we can’t ignore that others are on the verge of disappearing or have already disappeared. Furthermore, we have seen the number of suppliers shrink in the USA and Europe while we have to note that new suppliers, mainly from Asia, have come to the global market.

Suppliers to the industry of yesteryear: S&S (top), Peters (below) and Simon (bottom).

MANY COMPANIES HAVE CHANGED OWNERSHIP OVER THE PAST 25 YEARS OR SIMPLY GONE OUT OF BUSINESS.



glass container industries. There is just one major difference. While the can and the glass container industries outputs have shrunk in volume, the demand for corrugated has been growing steadily all over the world. So why is it that so many great machine companies get in to financial trouble in a growing market?

What comes to mind is the following:n The number of corrugated

production sites has shrunk over the past 30 years;

n Mergers and acquisitions of boxmakers leads to consolidation of businesses and periods of low investment;

n Corrugated producers have learned to improve machine utilisation and cut down on new machine investments.Although these reasons have

had an influence on the corrugated industry’s machines suppliers, those can’t be considered as the true causes for their struggles. The opening of eastern Europe has

actually even resulted in some very successful business years for a number of suppliers.

The true reason why so many suppliers to the corrugated industry changed ownership or shrank to insignificance lies with the low sales volumes per machine model, the high development cost for innovation and the low sales prices for these machines. When we compare prices for full corrugators from 20 years ago with today’s prices, we can’t ignore

the fact that a 300m per min 2.5m corrugator is cheaper today in real terms compared to then. If we now add in the supplier’s innovation costs for improved speeds, higher automation, safety, accuracy and quality we must ask how did these suppliers pay for these investments in their technology?

Lets just look at the following example. A company decides to develop a new converting machine like a servo driven rotary die-cutter or flexo folder gluer. If such a high end machine sells for €2,000,000, that machine supplier would normally have a profit margin of less than 10 per cent.

The prototype and the

Converting machine names of the past: Langston (top), Klett (below left), Simon (below right) and Deritend (bottom).

WHY IS IT THAT SO MANY GREAT MACHINE COMPANIES GET INTO FINANCIAL TROUBLE IN A GROWING MARKET?


INTERNATIONAL PAPER BOARD INDUSTRY 4

development cost for this machine would most likely be somewhere between three to five times the achievable market sales price of a single machine. This means that the machine supplier would have to invest at least €6,000,000 into this new product.

This means that 30 machines would have to sell at a 10 per cent margin to get a hint of payback for their investment. The machine introduction into a market might take a minimum of two years, which in consequence leads to a starting point of the ROI after year three. There are very few machine suppliers that have big enough market share and capital that allows them to afford such investment in innovation.

Furthermore this can hardly be called serial production. Almost all machines used in the corrugated industry have a high content of custom engineering and must therefore be seen as custom machines solutions.

At the same time, we must recognise the burden that is put on the machine builders through the CE conformity regulation. Nobody is thinking about the cost of producing and maintaining full documentation in at least eight different languages over a period of 10 years. Machine companies define those costs (dependent on the machine model) at approximately €50,000 per language. For most machine builders, this often represents a significant portion of their cost.

As a consequence and because of the cyclical nature of global investment patterns, many companies end up in financial

difficulties after they decided to develop new technology simply because their projected ROI does not come through.

At the same time we have a large number of Asian suppliers pushing for recognition in the western machinery supply business. By offering significantly lower prices for what appears to be similar specifications, a smaller, traditional western machine supplier will struggle to be competitive. A worthwhile example is the intense struggle that the Italian machine manufacturers have faced over the past 10 years. It was the Italian manufacturers who first tried to counter their eroding market share with innovation and low prices. The result of that can be seen from the number of Italian suppliers that have merged with other suppliers or gone out of business.

The only way to remain competitive for the western machine suppliers is by providing superior product quality, innovation and service. But this also requires significant investment in people and infrastructure as well as a critical volume in orders to achieve a reasonable payback.

When one looks at the annual reports of the suppliers that have the critical mass to remain successful, we see that their profits on new machine sales are far below those of other industries. Even the most healthy, large and strong suppliers achieve less than 10 per cent profit with their new machine sales. In a market that is influenced by low price alternative offerings, the initial sales price is hard to increase. So profits are

made with spare parts, service and other ‘after market’ products. This is something that we have become used to as a concept from the suppliers of office printers. While such printers are cheap because of the strong competition, we pay a disproportional high amount of money for the ink cartridges.

It is not difficult to copy such a strategy if your market is showing similar indicatiors.

Over the past 10 years, the cost for spare parts, consumables and service has risen disproportionally to other costs, with the only other exception being the price for energy.

Machine suppliers had no choice but to consolidate in order to generate revenue and profit opportunities. In a pressured new machine profit situation, the pricing of spare parts, service and after market products represent the only earning opportunity.

This has lead to significant price increases and it has been the subject of many budget discussions in the corrugated industry. The nature of budgeting and annual reporting does not leave room for large price increases on maintenance and consumables over the course of a business year for most corrugated manufacturing companies.

In the corrugated industry, box price increases are typically driven by the following four justification triggers.n Paper pricesn Energy costn Transport costn Labour cost These are the reasons that a

THERE ARE A NUMBER OF ASIAN SUPPLIERS PUSHING FOR RECOGNITION IN THE WESTERN MACHINERY SUPPLY BUSINESS.



corrugated manufacturer would use to argue his price adjustments in front of their customer.

As boxmakers have become accustomed to lower machine prices and alternative suppliers of low cost consumables, their attention to the potential cost of ownership for a production machine has faded. The pressure to deliver on two to four year paybacks for investment to be approved adds to the pricing dynamics for everyone involved.

Unfortunately, this situation increases the pressure on machine prices further. Instead of sitting down with their most important machine suppliers to discuss reasonable win-win solutions, many boxmakers continue to search for even lower cost alternative suppliers in China or elsewhere. This has resulted in a worsening market condition for the traditional western suppliers.

And this is where we close the loop!

If one were to ask which of the Chinese or Taiwanese suppliers has made significant invention or innovation in corrugated production technology, you would find that hard to answer. Everyone will admit that almost all of the significant technology innovation that we know of comes from the traditional western suppliers with the only exception being a few selected Japanese machine manufacturers.

Consequently, we must accept that if we expect those Western and Japanese suppliers to continue inventing and investing, we must also continue the dialogue with them about what is affordable and

what is truly needed. If you agree with that, one must also agree that it is in our own best interest to support these western suppliers at least until a point of time when our new Asian suppliers have started to carry out significant innovations by themself and have developed full CE conformity.

It is essential for any industry to understand their upstream and downstream dependencies and it is of outmost importance for the corrugated industry to recognise how their investment decisions influence their own long term sustainability.

Corrugated industry associations like FEFCO and TAPPI have done a fine job integrating suppliers with their events, nevertheless there is more that needs to be done for the benefit of both. The word for this is ‘Buyers Responsibility’. Many individuals that buy for the corrugated companies have little experience in buying large expensive equipment. The focus is on the money and respectively on the payback. This is understandable at first. But if you think about it, one must come to the conclusion that it makes sense to strengthen those that support your business in the long run rather than aiming for short term gain. n

Andreas Tingvall is a consultant with Treneco AB. He can be contacted on [email protected]

IT IS ESSENTIAL FOR ANY INDUSTRY TO UNDERSTAND THEIR UPSTREAM AND DOWNSTREAM DEPENDENCIES.

MAXDURA

Treneco July IPBI

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