Paper Industry Facts

Today's Paper Industry -- Its Character and Structure

The Paper Industry plays a very prominent role in both the US and world economies. This sector's global annual revenue today, from its over 300 million tons of products, exceeds 500 billion dollars, about one-third of which is attributable to the US Industry.1 This constitutes nearly 5% of the US manufacturing sector's contribution to GDP.2 The ninth largest manufacturing sector in the US, the Forest Products Industry, of which the Paper Industry is a major part, plays a vital role in most regions of the US, where it ranks among the top 10 employers in 43 of 50 states.3 Clearly, the Paper Industry, both in the US and globally, is an integral part of today's social and economic fabric.

The Industry is largely based on a raw material that is derived from forest crops with harvest rotations that can approach 100 years in length. The sheer volume of timber required for the industry's production processes is staggering. Each year, timber harvested (excluding the recycled materials used) to produce the 100 million tons of paper made in the US amounts to a ribbon of wood that, if stacked four feet wide by four feet high, would stretch over 50,000 miles, or from coast to coast 15 times. Given raw material needs of this scale, and because timber is their largest single production cost, paper firms historically have devoted enormous amounts of capital to the ownership and management of secure timber resources.

The processing systems designed to convert such massive amounts of raw material into finished products are similarly substantial in physical scale, technological complexity, and capital costs. The basic production process on which firms rely has undergone a fundamental transformation since the early 1800s, beginning with the invention of the Fourdrinier paper machine in France and England which paved the way for mass production of paper products, much like Henry Ford's production line did later for automobiles.

Especially since the end of World War II, the Paper Industry has experienced a massive wave of technological change that has transformed its basic operating and process management and control systems. Where earlier production processes relied on the craft knowledge of skilled operators and superintendents, newer production processes incorporate sophisticated sensors, information systems, and software-based process controls. This shift, which began in the 1970s, has had far-reaching effects on the industry's fundamental operations. Today, new paper machines are nearly 40 feet wide, hundreds of feet long, and over two stories high. The Industry's capital-intensive pulping and papermaking facilities, which can cost up to 1.5 billion dollars, are designed as high tech computer-based operating systems with paper machines that run at speeds exceeding 60 miles per hour with production outputs of up to 500,000 tons per year.

This significant technological advancement in the Paper Industry has required investments of hundreds of billions of dollars. In fact, the annual capital investment in the US Paper Industry has ranged from 8 to 15 billion dollars per year over the last two decades.4 This has required firms to develop and manage increasingly complex relationships with external and internal suppliers of ever more complex production equipment (including software controls). Automated process control systems also have introduced far-reaching changes into the types of skills needed by production crews, requiring firms to make substantial investments in the training of hourly workers and supervisors, growing numbers of process engineers, and new organizational systems for operations management.

These shifts have required a highly focused effort on the part of Paper Industry's management teams, which have devoted much of the last several decades to developing and perfecting their massive, capital-intensive operating systems. The net outcome has been a management paradigm that has been steeped in the construction of large, complex technical systems for the mass production of paper, thereby achieving economies of scale. The Industry's world view has thus been long term in focus, technically and production efficiency-oriented and, by design, risk-averse.

Yet this historically developed management style has not come without a cost. As the world's social and economic fabric has changed dramatically over the past two decades, and new globally oriented operating and competitive paradigms have emerged, the Paper Industry has struggled with deteriorating success. It has not returned its cost of capital, on the average, since about 1980. The industry has been faced with real price declines for its primary products that average 0.5 to 1.0 percent per year over this twenty-year period.5 Profits and cash flow stagnated in the 1980s and have deteriorated on a real basis since 1990. Stock prices have not nearly kept pace with those of other industry sectors in the US.6

Faced with such economic pressures, firms have sought to restructure their production processes in ways that have caused sharp labor-management conflict throughout much of the 1980s and early 1990s; indeed, the legacy of such labor strife has yet to be overcome. Firms have also begun to reduce commitments to R&D, which has resulted in declining Industry investments, even as other manufacturing industries have expanded their provisions for R&D. Clearly, this key US industry, which is understandably the most capital intensive in the manufacturing sector, has not been able to adjust to its rapidly changing environment, nor to sustain satisfactory financial performance levels over the past two decades.

This reality has not escaped interested industry observers. Peter Drucker, for example, has noted that the Paper Industry represents "the triumph of technology over common sense".7 Drucker is not alone in his admonishment of the Paper Industry. Other criticisms have been heard from a wide array of interests, including financial institutions and consultants, shareholder groups, employees and customers, governments, environmental groups, and even the public the industry serves. Yet the advice coming from these critical arenas often has been far too simplistic and fundamentally contradictory. It has tended to ignore the historical evolution and long-term needs of the industry, and it has often lacked any systematic empirical foundation on which to base meaningful and workable recommendations for sustainable, measurable performance improvements.

The essence of the critics' claims is not difficult to articulate:

The industry is mature, capital intensive, extremely cyclical, seriously affected with failing performance and returns, monolithic and slow to change. Substantive assets are underutilized and under-performing. Leadership seems largely to lack adequate vision, innovative thinking and a good solid understanding about the character of value."8

There is considerable validity in this characterization, but it fails to acknowledge the difficulties the industry confronts. The Paper Industry is being buffeted with winds of global, social economic and political change that have altered permanently the historical paradigm that once drove a very successful industry. Shifting a major industrial sector, trained to operate very effectively in the mass production paradigm to another, as yet uncertain, one is a complex and difficult task requiring serious in-depth evaluations in partnership with the affected industry of the new problems, innovative solutions and time

Paper Industry leaders are not unmindful of these issues and the need for fundamental structural and cultural change. While many executives have grown skeptical toward the "quick fixes" and "programs of the month" they find among the industry's consultants and advisors, they realize that the industry must find ways of adapting its operations to the new realities of global manufacturing and consumer demands. In effect, the industry is beginning to understand Charles Darwin's practical view on change - that it is not the strongest of the species that survives, nor the most intelligent, but the one that is the most adaptable to change.

[1] "Profits Leap Ahead in '99," Paper and Forest Products Industry Survey.: Standard & Poor's, New York, Apr. 13, 2000, p. 1.

[2] "North American Industry Overview: Introduction," Pulp and Paper North American Factbook, 1999. Miller Freeman, San Francisco, 1999, p. 2

[3] "Paper and Allied Products," U. S. Industry & Trade Outlook '99. McGraw-Hill, New York, 1999, p. 10-2.

[4] Statistics of Paper, Paperboard and Wood Pulp, 1979-1999, American Forest and Paper Association, Wash., D.C.

[5] Jaako Poyry Consulting Presentation, Institute of Paper Science and Technology, 1998.

[6] Jaako Poyry Consulting Presentation, Institute of Paper Science and Technology, 2000.

[7] McNutt, J.A., "Lessons from Past, Other Industries Provide Impetus for Transformation," Pulp & Paper, March 2000, Vol. 74, No. 3, p. 50.

[8] McNutt, J.A., "Lessons from Past, Other Industries Provide Impetus for Transformation," Pulp & Paper, March 2000, Vol. 74, No. 3, p. 50.