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Census Report 2003: Converters Caught in Economic Web
July 1, 2003 By: Jackie Schultz Paperboard PackagingPresent day challenges are weaving a tangle of predicaments for U.S. manufacturers, forcing spending cutbacks.
Seven years ago when Laura Przybylski began her career in the folding carton industry, she saw a business that was healthy and prosperous. Today, however, is another story. Competition is fierce, customers are more demanding, and the economy remains sluggish.
 Corrugated Container -- State of the Industry |
"When I began we were having the best years we had ever had in sales. So I've gone from one extreme to another in such a short period of time," says Przybylski, coordinator of sales and marketing, Rice Packaging Inc., Ellington, Conn.
The downturn in business that Przybylski's plant is experiencing is pretty much true for most board converters in the United States.
Almost our entire sample of folding carton and corrugated container plant managers contacted for Paperboard Packaging's 2003 Census Report said their respective industries were either stagnant or depressed. This is a considerable leap from last year when three-quarters of the plants surveyed said the industry was stagnant or depressed.
Converters are caught in a web of financial and economic constraints. They're struggling to make the right business decisions that in some cases might save their companies from insolvency. Their choices are daunting: do they enter new markets with new products? Do they cut more costs? Do they buy new equipment for more efficiencies? Do they partner with other plants to reach a broader market? Do they sell the plant?
Corrugated Container -- Equipment Spending |
There's no doubt - this is an unprecedented climate of political and economic uncertainty.
Spending is Down
None of this is good news for machinery suppliers. Only a quarter of the corrugated managers and a third of the carton respondents indicated that they would be spending more money on machinery this year.Just over half of the corrugated and carton converters interviewed said they plan to keep their equipment spending at last year's level. Several of the plant managers who are cutting back say they are doing so primarily because they purchased what they needed in 2002.
For both carton and corrugated converters, the most popular pieces of equipment were for printing or diecutting.
One quarter of all respondents said they invested in equipment to enter a new market. For the corrugated industry, the markets indicated were diecutting, graphics, displays, specialty gluing, and new services. New markets for carton converters included food, pharmaceuticals, plastics, books, film, and pallets.
Przybylski says Rice Packaging recently installed a new $3.5 million Heidelberg Speedmaster CD six-color plus coating station press. It replaced an older press. She says the company also is considering purchasing a skin coater and a UV coater to enter the skin packaging market.
Folding Carton -- State of the Industry |
A Mississippi sheet plant recently installed an Emba flexo folder-gluer. The owner says he bought it for the setup capability to speed up turnaround time. "While you're running one box you can be setting up on another," he says.
About a third of the corrugated and carton plant managers plan to open their purse strings for production-related expenses, particularly in the areas of training and labor.
The 2002 Federal Depreciation Act motivated more than a quarter of equipment purchases for corrugated converters and just under 20 percent for carton converters in the last 18 months. The Act offers a 30 percent additional depreciation allowance in the first year for new property. It is available for property acquired after Sept. 10, 2001 and before Sept. 11, 2004.
Mike Sime, president of Creative Carton Corp., Minneapolis, says he is a "poster child" for this tax incentive because his corrugated sheet plant has purchased more than $2 million in equipment in the last year and a half.
Sime, who says he plans to purchase more equipment this year, is in the minority, according to the Census Report.
Almost three quarters of the corrugated plant managers interviewed say they have no plans to buy more equipment in 2003. However, almost half of the carton plant managers said they will be buying more equipment this year.
Methodology |
The products of choice are printing machines for corrugated plants and gluing machinery for carton converters.
Godfrey Demarco, general manager of Menasha Packaging Co., Brooklyn Park, Minn., says he will not be making any major capital purchases for the rest of the year. "Just given the economy right now I don't know how you would justify spending a couple million dollars on new equipment," he says.
Printing Trends
Litho/offset remains the printing process of choice for folding carton converters. Almost three-quarters of the plants use litho while a quarter use flexography. Other printing methods include letterpress (11 percent), and gravure (6 percent).More than half of the carton plants with $20 million or more in revenue offer computer-to-plate (CTP) printing. Only 15 percent of the plants in the range of $5 million to $20 million in annual sales offer CTP.
Almost half of the plants that are not currently offering CTP say they plan to add this technology within the next year.
Just under 20 percent of larger corrugated manufacturers (revenues over $20 million) have CTP capability. Only 8 percent of smaller corrugated plants offer CTP. Less than a handful of corrugated plants are planning to install digital printing this year.
Folding Carton -- Equipment Spending |
Key Concerns
Manufacturers participating in the 2003 Census Report were asked what would have to happen in order for business to pick up. An improved economy was the response from three out of four corrugated manufacturers and four out of five carton manufacturers.About 20 percent of both corrugated and carton converter respondents felt that the U.S. government could alleviate some of the pressures by introducing more tax incentives and business friendly legislation and placing tariffs on imports.
Several converters voiced their concerns that competition from overseas was creating problems for their companies and one person suggested a "buy American" campaign.
The majority of those interviewed for this report expressed an extremely high concern that their customers are relocating their manufacturing facilities overseas.
On a scale of one to five, Demarco gave this a "12."
"We are in the process of losing some more (customers)," he says. "That's what makes this downturn a lot different than others. Other downturns we've had have been shorter and when it's come back, the jobs have come back. I don't know that they will this time. At least not in the same form anyway."
A 30-year corrugated industry veteran who owns a Mississippi sheet plant echoes this sentiment. "Business is down considerably. I don't know that coming out of (a recession) if we've ever had to deal with so much business going offshore. That seems to compound (the present situation)."
Converters were very upset about the state of manufacturing in this country.
"This country is a fool's paradise," says Paul Keyser, president and chief executive officer of Utah Paper Box, Salt Lake City.
"We're getting cheap products at the cost of high paying jobs in the U.S. There's a thought that we can thrive without manufacturing and it's invalid because lots of good paying jobs are going overseas. A $24 hour pressman would earn $8 in service business. This is a threat to the well-being of the United States."
The Mississippi sheet plant owner says companies moving their manufacturing facilities overseas is his No. 1 concern.
"I've lost a lot of business because where we were selling manufacturers that used our boxes, they're now having that manufactured in China. Given that and the current economic climate, it occurred to me that I need to explore that and see if there was an opportunity (to export product)."
Strategy
Most converters contacted for this year's Census Report talked of a plan that they were working on or had already put into action to entice more customers. Just over half of the corrugated converters are focusing on sales and marketing, which includes being more aggressive, entering new markets, introducing new products, and reducing prices. This strategy mirrored what carton converters are doing.It's no surprise that most plants are turning to plant efficiencies and cost cutting and focusing on improved customer service. "We have to be very aggressive with our sales and very responsive to our existing customers," says Steve Campbell, vice president of manufacturing of Carton Service Inc., Shelby, Ohio. "We can't afford to lose any because there aren't any others out there to take their place."
Regarding efficiencies, one carton converter says he is operating machinery during lunches and breaks using a combination of salaried and hourly employees. This gives his plant the equivalent of "an extra shift per week."
A handful of corrugated converters contacted are looking at acquisitions, diversification and specialization as a way to improve market share.
"We're also looking beyond corrugated to strengthen our market share and become a more attractive provider," says one converter.
"We've actually expanded into Mexico to try to follow the markets," adds another converter. "We implemented a rigorous austerity program and created new market segments to combat waning business."
More than half of carton converters and nearly a quarter of the corrugated respondents said they are making or using other materials to add to their products and services.
For carton manufacturers this includes blister cards, setup and corrugated boxes, fulfillment services, wood, chipboard, labels, and plastic.
"We're trying to make (Rice Packaging) more of a one-stop shop," Przybylski says. "For example, in the past we printed the blister cards and our customers would have to go somewhere else to have the blisters made and sealed. Now we're going to be doing that so that they don't have to use two or three places to get the finished product."
One trend is the gradual increase in the number of folding carton manufacturers converting small flute corrugated.
Last year 34 percent said they converted small flute corrugated. That number jumped 10 percentage points this year.
Corrugated converters participating in the Census Report said they have added foam, wood, and plastic to their existing line of products.
"Product innovation has become a fairly large driver with Menasha," Demarco says. "We're looking for ways to enhance corrugated, add to the versatility of corrugated, enlarge the product offering. We are involved in a project right now where we are using a woven polypropylene type material as a sleeve around a corrugated box. It becomes packaging equipment as opposed to a corrugated box. In the past you might have had tri-wall containers with belly bands, you can eliminate that, reduce the amount of corrugated and use this."
Some converters interviewed for this survey are excited by the prospect of entering new markets.
"We adopted some new product lines," says James Clark, president and general manager of Sun Container Inc., Ft. Lauderdale, Fla. "We're also going to fire-up a new waxer we'd rebuilt to enter the seafood market - a niche market. We also make our own cutting tools in-house."
Customers continue to raise the bar on turnaround time, zero defects, price and quality issues.
"They want cut prices and they want shorter delivery dates because they are waiting to see how their product sells on the market before ordering rather than putting their money out there," Przybylski says. "They're not as risky anymore. They wait until they have an order and suddenly when they have an order they need their boxes now."
