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Exclusive Census Report 2008: Board Converters Are Feeling Gloomier This Year
June 1, 2008 By: Esther Durkalski Hertzfeld Paperboard PackagingThis year's Exclusive Census Report reveals that board converters are feeling the industry is increasingly stagnant and depressed.
This year's Census Report provides two stories. One side documents the hard times — so much so that no plant should feel alone in its misery. The other story reveals a mania for new strategies and products, all waiting to blossom once the recovery comes. 2008, therefore, is a time between times.
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Sustainability has impacted the industry so much in the past year, and the Census Report shows that it will have long-ranging impact. The new services and product mania focuses on innovation, lightweighting and new materials and processes.
When the recovery comes, what board converting plants are doing now will ensure that they emerge stronger than ever. To assist, suppliers have been busy incorporating innovation and energy and materials efficiencies into their new machines. Better yet is that plants have been buying.
The majority of corrugated container plants are planning to buy additional equipment in the second and third quarter 2008; folding carton plants will wait until the third quarter.
 Why Plants Say the Corrugated Container Industry is Healthy or Thriving |
The Corrugated Container Industry
Our research finds two of three box plants experiencing a stagnant (43.7 percent) or depressed (18.4 percent) corrugated container industry. In fact, the Census Report has never seen such a high percentage of plants reporting depressed conditions.
"More than 80 percent of the volume in the town we are located has left," is what's happening in Wisconsin.
Collectively, plants in a stagnant region speak of zero growth and being caught between rising costs of materials and an inability to increase board prices to a dwindling base of regular customers. New customers are non-existent.
A Texan plant's bleak experience is that "All customers' business is down a minimum of 5 percent or more, with one being down 50 percent. One has a manufacturing plant moving away."
 How Corrugated Container Plants Describe the Industry in Their Region: |
But some plants are finding a way to survive. "Our company is very diversified, and some of the industries we service are thriving and others are depressed," explains a multi-national corrugated box plant. "On the average I think we'll come in right where we were last year."
Politics has eased the pain for plants in England.
"Local manufacturers are being supported by the government to increase exports, especially to European markets," explains a British box maker. "New trade agreements were signed for duty-free and quota-free movements on all goods."
 Reasons Corrugated Container Plants are Spending More on Equipment in 2008 |
In the U.S., one in three corrugated plants say they are busy — or rather, they say they are "about as busy as they were in 2007." Profit, however, is not mentioned by a single folding carton or corrugated converter located in the U.S.
Responding to the Doom and Gloom
Efficiency continues to be the No. 1 strategy for corrugated plants in 2008 — just as it was in 2007. It's the usual suspects still around from 12 months ago. Corrugated container plants are focusing on lean manufacturing, cost cutting, waste reduction, and supplier consolidation.
New this year, however, is strategy innovation. Rather than investing and renewing customer service initiatives (the main response in 2007), this year, plants are more about strategy — specifically, finding new customers or finding solutions that bring new customers to a plant's doorstep.
Ideas include, in decreasing order of frequency, "sales focus," "analysis of existing markets," finding "higher margin customers," "niche markets," "sustainability," "total rework of corporation," "cycle of success management," "diversification," and "profit improvement plants."
 Corrugated Container Plants Planning to Purchase Equipment in 2008 |
One box plant reporting "double-digit annual growth" is "providing sustainability options for customers, picking up their scrap paper, and promoting cube utilization of trailers in both directions."
 Equipment Spending by Corrugated Container Plants in 2008 Versus 2007: |
Money Concerns
All plants are very concerned about energy prices, and 82 percent worry about increasing raw materials prices. So, on top of slow sales, plants are being stifled by higher costs.
That's not all. Adding to the suffocation, and up from last year, 70 percent of plants are worried about getting customers to pay more for boxes. It's a toxic cocktail: Paying more for supplies, but unable to charge more for products. The knife twists with the fourth top concern — customers moving their manufacturing operations.
Other concerns have moved into the background of worries. Least worries include over- capacity, competition, regulations, Wal-Mart, and other substrates. In fact, plastics are now seen as a solution for some plants. In addition to making corrugated containers, one in five plants manufacture plastic trays, plastic plates, plastic bottles, and plastic corrugated.
Where are the profits? Our research shows that 2008's profits are wrapped up in additional products and services. Additional products, now being offered by about half of all box plants, include specialty corrugated, P-O-P, lightweighting, RFID, E-flute, miniflute, and gluing. Plants offering these products report that customers are willing to pay for them.
Services that can create profits include design, consulting, and fulfillment. In addition, 47.2 percent of plants say that customer service-focused solutions, such as JIT, fast turnaround, small runs, and an emphasis on quality, can also result in profits.
 Corrugated Container Plants 2008 Equipment Buying |
Other profit-making ideas include sustainability products, niche marketing, and strategic alliances with suppliers and other box plants.
"We have targeted lighter weight liners and miniflute products to remain in a competitive position, as well as looking into sustainability and green packaging opportunities," explains one small, but profitable box plant.
The data show 55.6 percent of corrugated container plants will be buying equipment in 2008. So, once the recovery begins, plants will be ready with all the new products and services for their customers.
What's Important
In this year's Census Report research, box plants have provided proof that they are economically smart: They offer products and services that their customers want. These days, warehousing is very important, say 60 percent of the corrugated plants and fulfillment services are very important, say 46 percent.
In fact, fulfillment is the hot item for 2008. Twelve months ago, only 32 percent of plants thought fulfillment very important — but now, 46 percent are on the fulfillment bandwagon.
Another 2008 hot item is sustainability. While practically non-existent a year ago, it is now considered very important by 37 percent of manufacturers.
The data suggest that box plants have been unable to sell supply chain management to their customers, so interest in this service has decreased — just 38.8 percent of plants consider supply chain management very important to their customers at this time.
Similarly, the data suggest that interest in commercial printing and contract packaging has decreased over the last year. Today, 16 percent of plants consider commercial printing very important to their customers, and 19 percent feel that way about contract packaging.
 Most Recent Equipment Purchases By Corrugated Container Plants |
Equipment Spending
Equipment spending is not decreasing in 2008. If the reader thought there would be a decrease in equipment spending because of the economy, then this research exists to prove that assumption incorrect. Just like a year ago, one in three corrugated plants will be spending more on equipment in 2008 compared to 2007.
The top reason for the equipment spending spree is upgrading — mentioned by 46 percent of plants that are spending more. This includes improving productivity and replacing old machines. This is more proof that plants will be in a strong position once the economic recovery begins.
 How Folding Carton Plants Describe the Industry in Their Region |
"We're developing a new production footprint," explains one corrugated box plant.
Another reason plants are spending more on equipment is investment — mentioned by 35.4 percent of buyers. These manufacturers are buying new equipment, new plants, new processes, new technology, and creating new products. Also, growth and increasing capacity is a motivator for 23 percent.
At the other end of the balance sheet, our research finds 32 percent of plants are decreasing equipment budgets in 2008 compared to 2007. But this is not at all dire. Half say they don't need new equipment in 2008 because they bought in 2007. However, one-third blame the economy for being tight, and 25 percent say they are contending with capital/budget constraints.
Whether plants spend more or less in 2008, the fact is that 56 percent will purchase an average of two machines in 2008. Most of this buying will take place in the second and third quarters.
 Very Important Services to Folding Carton Customers |
Hot equipment this year includes flexo folder-gluers and control systems. Material handling equipment continues to be popular with one-third of plants buying in 2008. One in four will buy a new diecutter, and 14 percent will spring for new adhesive/gluing equipment.
 Reasons Why the Folding Carton Industry is Healthy or Thriving |
Why do plants buy from a particular supplier? The principal motivator has changed from a year ago. This year, plants value reputation, mentioned by 50 percent of equipment buyers. (For comparison, 36 percent were motivated by reputation a year ago.) These days, buyers want quality machines that are reliable. Also, they place a premium on a long-term or previous relationship with a supplier.
Cost drives 40 percent of purchasing choices. One in four plants values the support and service — this includes expertise, equipment availability, parts, and delivery — that suppliers offer.
Twenty percent of plants have their own machine specifications. In fact, the data show that plants rate their own specifications above a machine's features, which is something for sales reps to think about before they launch into a presentation about features. Features are important, nevertheless, to 17 percent of buyers. One last important note for suppliers is that 53 percent of plants already have a preference for a certain equipment manufacturer: This leaves 47 percent who are, today, "undecided."
 Production Spending (Other Than Equipment) at Folding Carton Plants in 2008 Versus 2007 |
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). See the chart on page 20.
Up from last year, 72.4 percent of recent purchases were for new equipment — the other buys were for used pieces. Also, 64.3 percent bought additional equipment and 37.6 percent bought a replacement machine. Ninety percent of recent equipment acquisitions were purchased outright and 10 percent are leased.
 Folding Carton Plants Planning to Purchase Equipment in 2008 |
One of five converters made their most recent equipment purchase to open up a new market, and the rest bought to better serve an existing market.
One-third of plants are increasing sales by entering new geographical areas, which includes exporting. One in four has entered a new industry, where food and beverage is the most popular followed by consumer retail.
Another way of increasing sales is to offer additional printing methods, say 19 percent of plants. Ten percent have found success by improving customer service — they now offer short runs, distribution, and warehousing to their customers. Others, 22 percent, are focused on their core business.
Production Spending
Thirty percent of converters will spend more on production (other than equipment) in 2008 compared to 2007. Fifty-seven percent will keep production spending at last year's level. Thirteen percent are cutting back on production spending.
One in three plants increasing production spending will spend additional money on employees, including training, higher wages, and healthcare. Twenty-nine percent will invest in various production areas. Fourteen percent will spend to create fulfillment services for their clients.
Some of this extra spending reflects the current economy of increasing costs. One in three plants will be paying more for overhead items such as energy, transportation, maintenance, and repairs. It's the same with raw materials: Fifteen percent of plants say the extra money will go on materials.
 Folding Carton Plants 2008 Equipment Buying |
New Products
The data show one in four converters manufacturing products other than corrugated. The most popular alternative product is foam (cushions, inserts, molding, and peanuts), mentioned by 22 percent. Pallets and sheets are each offered by 13 percent of plants. Plastic items, including plastic corrugated, are offered by 10 percent. Ten percent offer products with wood.
The Folding Carton Industry
The scales have tipped downward this last year toward a stagnant and depressed folding carton industry. This year's study finds 51 percent of plants experiencing pain.
 Reason Why Folding Carton Plants are Spending More on Equipment in 2008 |
Three of four plants say their stagnant region reflects zero growth. They say margins are slim, competition is fierce, sales are down, and customers are declining. Others, 45 percent, blame the economy. Manufacturers are moving offshore, they say — and this is not just happening in the U.S.
For the other half of the folding carton industry, the business environment is healthy (47 percent) or thriving (3 percent). Of these lucky plants, 59 percent report increased sales and 30 percent talk about being able to charge more — there's even mention of actual profits. One in four report growth such that 19 percent have entered new markets.
"Converters in our area seem busy," reports a plant in Illinois. "We are up 30 percent from last year," is their experience. "Our sales have been double the average of the industry," is the good news from Tennessee.
The top concern for carton makers in 2008 is higher energy prices — 87 percent are very concerned. The next top concern is the increasing price of raw materials — here 86 percent are very concerned. It's a double whammy. Raising prices may be an uphill climb. Difficulty getting customers to pay more for boxes has 60 percent of plants very concerned.
Most plants, 55 percent, are very concerned about customers moving their manufacturing operations, and 46 percent worry about competition from box makers not in their area.
But the level of concern about industry overcapacity has declined from 56 percent being very concerned in 2007 to 36 percent with this worry today. According to the Census, mergers, Wal-Mart's initiatives, plastics, and regulations are of little concern to plants at this time.
 Equipment Spending by Folding Carton Plants in 2008 Versus 2007 |
Profits?
The data show that plants are going back to the tried and true subtleties of customer service for profits in 2008. One in three is improving customer service to include shorts runs, design, inventory, and fulfillment. Also, 26 percent are offering new products and 19 percent are focusing on marketing efforts. Cost cutting represents 16 percent of the efforts, and another 16 percent are focusing on quality issues that include sustainability.
"We are becoming full-service — adding design services, digital options to up-sell and embed new, small customers," explains a converter.
Strategies
To remain competitive, 62 percent of plants are focusing on lean manufacturing and cost cutting. However, many times lean includes investment. "We built a new plant and purchased new equipment for lean manufacturing," says one converter.
Another competitive strategy that is occupying one in three plants is to update equipment and to secure quality certification. Sales are the primary focus for 35 percent seeking profits in a stifling economy. Customer service is the hope for 19 percent. Carton customers are the beneficiaries these days; they have options including distribution, value-added products, design, and logistics.
 Most Recent Equipment Purchases By Folding Carton Plants |
What's Important
The data suggest that folding carton plants have other things on their minds this year beyond our list of services. Only one service, inventory control and warehousing, was considered very important by a significant number of plants — 64 percent.
Although not rated high by most, the importance of fulfillment has increased in the last 12 months. Last year, 35 percent rated fulfillment as very important — now, 42 percent feel this way. It's the same with RFID: There is slightly more interest because 48 percent consider it important. (A year ago, 39 percent rated RFID important).
Interest in supply chain management has slightly decreased over the last year. The data suggest that 33 percent of plants are commercial printers and 22 percent are contract packaging. Sustainability is considered very important by 36 percent of folding carton plants.
Equipment Spending
Folding carton plants are cutting back on the amount they spend on equipment this year, with 41 percent keeping spending at 2007 levels and 30 percent doling out less. Apart from not needing any new equipment, reasons for cutting back are blamed on the economy and capital constraints.
Despite the difficult times, 29 percent of plants will be spending more on equipment in 2008 compared to 2007. Two-thirds of these plants will be upgrading and investing in new machines. One-third are expanding and need new equipment to increase their capacity and capabilities.
 Methodology |
This year, 59 percent of folding carton plants will purchase equipment, new or used. Diecutters and printing presses will be the most popular items — being purchased by 31 percent and 28 percent of equipment buyers respectively.
Why does a plant purchase equipment from a specific manufacturer? The majority of buyers, 52 percent, evaluate a manufacturer's reputation in their purchasing decision. Dependability, quality, and a previous relationship serve to establish a supplier's reputation, by the way.
Forty percent of buyers say they already own a specific machine and so must buy from the same manufacturer in the "upgrading" process. Price is a factor for 26 percent of equipment buyers. Features are important to 19 percent. The support and expert knowledge of a manufacturer influences 15 percent of sales.
It is interesting to note that 54 percent of plants have already identified a manufacturer from whom they will purchase. On the other hand, 46 percent remain undecided.
Folding carton plants were asked to identify the last piece of equipment they purchased. This provides a snapshot of actual equipment purchasing activity.
Diecutters are at the top of the list, with 18 percent purchasing incidence, followed by printing presses, bought by 15 percent. See the chart on page 24 for complete details.
New machines are 68 percent of the purchases, and used machines are acquired 32 percent of the time. Two of three bought additional equipment and the remaining third bought a replacement. Ninety-six percent of machines were purchased — only 4 percent were leased.
New equipment purchasing is for an existing market 82 percent of the time. Also, 25 percent are buying to open up a new market — some plants are doing both. The top industries for which plants require new equipment are food and beverage, pharmaceuticals, cosmetics, and consumer goods.
Production Spending
This research shows that one-third of plants plan to spend more on production than they did last year. Fifty-seven percent will hold spending at 2007's level. Very few (7 percent) will be cutting back on production spending.
The extra production-marked money will go into finishing, printing, and diecutting areas of the plant say 45 percent. In addition, 29 percent will invest in labor.
 Suppliers Versus Box Makers |
Other areas of increased spending reflect higher prices. The data show that 26 percent will have to spend extra money on materials and overhead.
New Products
One in three plants is manufacturing products other than folding cartons. Plastics (sheets and trays) are available from 18 percent, and another 18 percent make setup boxes. Blister, clamshells, litho, and header cards are offered by 15 percent of plants. Labels, mailers, and inserts are another option from 15 percent, 13 percent provide P-O-Ps, and another 13 percent offer specialty products such as miniflute, archival, and windowing.
Other products include sheets, diecuts, rolls, vinyl, and cans, tubes, cores, and edgeboard. Crossing over, 15 percent of folding carton plants also manufacture corrugated containers.
The Supplier Perspective
Almost nine of 10 suppliers believe that technical support is very important to converters. One-third of plants, however, are very satisfied with the technical support they receive from suppliers. On the other hand, very few suppliers rate leasing equipment as important — a mere 5 percent checked very important. With little encouragement from suppliers, 25.2 percent of box makers say they are very satisfied with leasing arrangements.
Regarding parts, two of three suppliers consider them very important to board converters. One in three box plants is very satisfied with the availability of parts from suppliers.
The training issue is likely to become more critical as the months of 2008 tick by. The Census Report research shows one in 10 plants investing in training this year. Please note that plants are training employees rather than downsizing. In the matter of training, then, suppliers are missing an opportunity: A year ago, almost 70 percent of suppliers said training was very important to manufacturers. Now, just when plants have a great need, suppliers' enthusiasm about training has decreased to 58 percent.
Fifty percent of suppliers say maintenance is very important. This compares to 23.3 percent of box makers who are very satisfied with the maintenance services offered by suppliers. One supplier reports "helping to troubleshoot maintenance issues on corrugators," another offers "maintenance seminars." The data suggest that perhaps more suppliers should troubleshoot maintenance for plants.
One in four box makers are very satisfied with online system diagnostics, and 20 percent feel that way about consulting services. One in three suppliers considers these services very important to box makers.
Suppliers have a mirror read on the state of the folding carton industry — their opinion is identical to the experience of the plants. Specifically, 50 percent say it's healthy and 50 percent say it's stagnant.
When it comes to the corrugated container industry, however, suppliers are much more optimistic than the plants' experience. Fifty-four percent of suppliers believe the corrugated container industry is healthy; this compares to 38 percent of plants having a healthy economic experience. Corrugating plants rate their industry as stagnant 62 percent of the time, whereas 46 percent of suppliers give this rating.
Suppliers base their positive outlook on the high demand for machinery, mentioned by 70 percent. Also, 30 percent of suppliers notice that plants are busy and growing. Three suppliers have been able to charge higher prices for their equipment.
"There are more new machines being delivered now than at any time I remember," reports one supplier. "There are also numerous companies that are currently refurbishing their older machines to compete in today's market," he adds.
"The industry is finally seeing a need to change age-old habits, and is starting to be prepared to make lighter weight corrugated boxes that are needed for sustainability reasons," is the opinion of one supplier.
On the flip side, when suppliers report a stagnant corrugated container industry, they find plants cutting back and closing, mentioned by 74 percent. They blame the weak economy 26 percent of the time, and 23 percent say that plants are strapped for cash.
Investment
Top areas for supplier investment this year are sales and marketing, a focus for 65 percent, and customer service, mentioned by 61 percent. Product quality is an investment area for 52 percent, and 45 percent will invest in technology.
Likely in response to similar economic pressures, most suppliers, 56 percent, will hold their research and development budget at 2007 levels. Twenty-seven percent will increase their budget in an effort to bring products to market fast and to be more cutting-edge, staying ahead of the competition.
A reduction in research and development spending will occur among 18 percent of suppliers because they find business slow.
