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Exclusive Census Report 2009: Board Converters Are Worried Sick
May 1, 2009 By: Esther Durkalski Hertzfeld Paperboard PackagingThis year's Exclusive Census Report reveals that (no surprise) the board converting industry is depressed.
This year's Paperboard Packaging Exclusive Census Report offers profound insight into the sad landscape of depression. One converter reports "praying a lot." Another is having "doubts about what tomorrow will be like." Square footage production of board is, on average, 15 percent less than a year ago. There isn't much hope on the horizon either.
 How Corrugated Container Plants Describe Their Industry in 2009 |
The Corrugated Container Industry
Nine of 10 box plants report the corrugated container industry as stagnant or depressed. Plants were asked to explain why they had rated their industry this way and most, 57.1 percent, blamed the economy. "All plants have seen a 50 percent or more drop in business," is the staggering reality that one converter reports.
It was only a year ago that box plants reported zero growth. Now they are reporting negative growth and zero cash. Markets, monies, jobs, and customers have vanished, plants report.
 Why Box Plants Report that the Corrugated Container Industry Is Stagnant or Depressed |
Cost cutting is the most popular strategy to negotiate in the current economy, implemented at 63.3 percent of box plants.
Continued cost cutting, which includes people, in a zero cash business environment leads to the zone between depression and bankruptcy. Surviving converters are now in this zone and some can see a future.
 Strategies that Corrugated Container Plants Have Taken in the 2009 Economy |
The level of concern about energy and raw materials costs among converters has plummeted in the last year. New worries for this year include 51.4 percent of box makers who are very concerned about government regulations, which is 24 points higher than a year ago. Another new worry for 47.6 percent is competition from out-of-area plants, up 12 points. Industry overcapacity has 64 percent of box plants very concerned, and this is also up from last year.
For U.S. plants, one worry remains constant. Seventy percent are very concerned about customers moving their manufacturing operations. But is this a worthy worry? Surely in the zero cash environment with downward price pressures on materials and equipment, and many skilled and capable unemployed, U.S. converters have opportunity to magnetize manufacturing.
 Corrugated Container Plants Equipment Buying 2009 |
The marketing plan for box plants in 2009 is focused on customer service. Boxes will be better designed, have better quality, be delivered faster, be fully supported, and cost less. Next priority on the business plan is innovation. This includes lightweighting, bundled solutions, and new protective packaging items.
The data show smaller corrugated container plants, those with less than $10 million in annual revenue, to be more focused on innovation, custom manufacturing, and short runs. Larger plants, those with annual revenue over $50 million, are four times more likely to be engaged in process improvements such as in-house communications. Digital printing is another innovation that is exclusive to larger plants.
 Corrugated Container Plants: Very concerned 2009 vs. 2008 |
Fulfillment services are very important to 43 percent of plants. Two-thirds of box plants consider vendor-managed inventory (VMI) and warehousing very important services to their customers. Moreover, some plants are now reporting warehousing plus just-in-time deliveries. Others mention "reducing warehousing" in favor of JIT as a way to save their customers' working capital.
Equipment, Production Spending
One statistic says it all: 59 percent of converters are spending less on equipment this year.
 Equipment Spending 2009 vs. 2008 |
Why are 13 percent spending more? Some see the recession as an opportunity. One converter has always "wanted a small high speed flexo, and this might be the time if we survive," he says. Standing out from the crowd is one box plant spending $11 million on "an unusually expensive machine to begin making molded pulp." Another sees opportunity in credit crunch sales: "We found a good deal on a press and the interest rates are low compared to 2008."
European box plants are more likely to be buying equipment this year than plants exclusive to the United States — 49.1 percent buying versus 34.4 percent respectively. Box plants should be aware that suppliers are stepping over themselves to sell equipment.
 How Folding Carton Plants Describe Their Industry |
It might be less, but, overall, two in five box plants will buy equipment, especially material handling, diecutters, and converting equipment, in 2009 — primarily between April and September.
Converters want to buy from suppliers selling equipment with the best capabilities. Equipment buying this year is tied in with product alternatives. For example, the data suggest that foam products and corrugated plastic containers are a beginning trend. Other new products include P-O-P, corrugated pallets, digital printing, interior cushioning, and setup boxes.
 Folding Carton plants: Very Concerned 2009 vs. 2008 |
Plants provided the last piece of equipment they purchased. These answers provide a snapshot of actual equipment purchasing activity (rather than intentions, as in what they plan to buy).
Used equipment is another cost cutting alternative and an option for 35.6 percent of equipment buying converters. Interest in new equipment is 65.2 percent, which is six points lower than last year. Half the equipment was an additional piece and the other half was a replacement machine. The combination of interest in used and replacement machines this year reflects converters trying to move forward in a hostile economy.
 Equipment Spending 2009 vs. 2008 |
Almost nine of 10 converters bought their most recent equipment for an existing market and 14 percent are planning on opening up a new market. In terms of markets, converters are focused on packaging, especially brown box. Corrugated, diecut, jumbo, and specialty boxes are also areas of interest. One in five bought equipment to provide P-O-P and graphics. The data show that the pretty recession-proof food industry continues to attract converters.
The data show smaller converters, those with less than $10 million in annual revenue, are the most likely to be spending more on production. Two of five smaller plants will be spending more on labor and training. One in three will focus on specific areas, such as finishing and printing. Another third will be spending to make things faster, such as high volume, plant configurations, and software.
 Production Spending (other than equipment) 2009 vs. 2008 |
On the flip side, most converters are cutting back on production spending and the most frequently mentioned area to trim is labor. A likely explanation is that in the absence of orders, larger converters must continue to reduce expense. Smaller converters, however, can move more quickly toward opportunities in the recovery.
The Folding Carton Industry
One in three box makers continue to be very busy; some actually are experiencing growth. The data show that the folding carton industry has moved from healthy to stagnant in the last year. This is better than the situation for converters who have moved from stagnant to depressed in the last year.
 Folding Carton Plants Equipment Buying |
Worries have changed for carton makers in the last year. Worry about higher energy prices has dived 23 points to 63.6 percent being very concerned in 2009. Also, worry about raw material prices has lessened slightly, down 13 points to 72.7 percent being very concerned.
A year ago, most box makers were very concerned about their customers moving manufacturing operations. That's over now. It's the opposite; most box makers (59 percent) are not concerned about manufacturers moving overseas. The same has happened with competition from out-of-area box makers, most (61 percent) have stopped being concerned about this too.
Industry overcapacity seems to be the panic button for 2009, up 25 points to 63 percent of box makers being very concerned. Likewise, getting customers to pay more for boxes has moved up the scale by 12 points to 73.3 percent being worried.
Unlike converters, box makers are less spooked by government regulations, although there has been a slight up tick such that 41.3 percent are very concerned.
Last year's search for profits through customer service has been replaced with pay-more-for-innovation. This year, 55 percent of box makers are looking to create profits through new designs, new combination products, supply chain solutions, and alternative products.
Cost cutting and zero spending are the competitive strategies for four of five box makers at this time. Once these manufacturers have cut, sliced, and chopped all they can from their own processes (and those of their suppliers), they move to zero spending, which includes halting investments, stopping production, and freezing salaries.
Interest in inventory control might be the beginning of a trend because it shows up as a strategy among both small and large box makers. Lean manufacturing, however, remains a key strategy for larger players. Similar to the move toward profits through innovation, box makers are implementing technology initiatives as a competitive edge.
Services that were very important a year ago are now not at all important. For example, box makers have lost interest in warehousing, fulfillment, and commercial printing. A year ago, 64.6 percent thought warehousing was very important; now 49.1 percent value warehousing highly. Likewise, interest in fulfillment has plopped from 42 percent a year ago to 26.9 percent now rating it very important. It's the same with commercial printing. One in four consider commercial printing very important — last year 36 percent felt this way.
Equipment/Production Spending
One statistic says it all: 56.4 percent of folding carton plants will cut back on equipment spending this year. Box makers say they have all the equipment they need to service a shrinking market.
Those spending more are upgrading or increasing speed through technology. The focus is on better and faster machines rather than more efficiency and cost savings.
Nevertheless, 41.2 percent of folding carton plants will purchase new equipment in 2009, with most interest in printing presses, diecutters, and material handling equipment.
Why does a box maker buy from a specific equipment supplier? Most, 55.6 percent, value customer service, especially response, in their buying decision. Reputation is also highly valued when box makers are out equipment shopping.
The data suggest that equipment suppliers who knock at box plant doors between April and June will find success three out of four times for any interested party. Purchasing activity will remain high through to September for folding carton plants.
Box makers were asked to identify the last piece of equipment they purchased. This provides a snapshot of actual equipment purchasing activity.
Printing presses are at the top of the list with 24 percent purchasing incidence, followed by adhesive and gluing equipment, bought by 15 percent. Diecutters and material handling equipment were each purchased by 13 percent of box makers.
New machines are 68 percent of the purchases and used machines are acquired 32 percent of the time. Two of three box plants bought additional equipment; the remaining third were replacing. All machines were purchased, rather than leased.
New equipment purchasing is for an existing market 86 percent of the time. Sixteen percent, however, buy to open up a new market (some plants are doing both). Top new industries include pharmaceuticals, food, ice cream, beverage, bakery, and frozen food.
Most folding carton plants are holding production spending to last year's levels and 34.6 percent are cutting back. Half of the cutting relates to their workforce.
Half of all folding carton plants also produce other products at their facility. This include rigid/setup boxes, labels, printing, trays, cards, chocolate boxes, corrugated, gable top, inserts, samples, rolls, and tags. New materials include plastic cartons and trays, paper tabbed lids, and vinyl boxes.
Methodology: Penn and Associates, Inc., a Cleveland-based marketing research services company, collected 570 interviews from experts in the board converting industry. Corrugated container plants completed 211 interviews, 71 are folding carton plants, and 288 are from industry suppliers. The number of completed interviews means that Penn and Associates have a 95 percent confidence level, ±3.7 confidence interval, that the results of the study would be the same if they had interviewed all manufacturers and suppliers in the board converting industry.
