Corrugated industry faces a brave new world.

Seldom has such a major manufacturing industry with such a long history faced such trying times. "It was the best of times; it was the worst of times." Charles Dickens penned this opening line to his immortal novel. A Tale of Two Cities. He could easily have been describing the corrugated container industry of 2004.

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Major mergers and acquisitions, reduced shipments, declining earnings, and increased competition from overseas locations have characterized this industry in recent years. This has prompted many industry analysts to ask whether this sector can ever regain its stature as an industry leader in productivity and profitability.

Efforts to reverse the current downward trend of the corrugated container industry have seemed hollow. They begin with tough words such as "When the times are tough, the tough get going" and continue with "Necessity is the mother of invention." They also include the proverbial press release that reads:

"In response to ongoing difficulties in the manufacturing economy, (company name) is planning to close its (name the facility) to reduce costs further and rationalize its manufacturing operations. This will result in a workforce reduction of (number) employees and realize annual savings of US$ (Number) million.

"In taking these extremely difficult actions, we are addressing the harsh economic realities facing our company in today's marketplace and believe that our current decisions will position our company for long-term growth and success."

Today, the containerboard industry stands at a pivotal time in its history. Can this sector of the pulp and paper industry overcome the economic recession of the past three years and produce a corrugated container industry that is viable and profitable for the future?

Given the current marketplace, containerboard producers with independent and integrated converters do not shy away from the harsh realities. Simultaneously, these producers believe that the industry will recover. They know that the industry possesses the wisdom to make smart decisions and the strength of purpose to implement them.

CURRENT SITUATION

Throughout its history, the corrugated container industry has usually seen annual increases in the production of linerboard and corrugating medium--the raw materials for making corrugated boxes. This increase came from the assumption that industry shipments of corrugated containers would grow each year. In the past three years, the figures have dropped yearly.

For the past three years, this business model has been unworkable. According to statistics compiled by the Fiber Box Association, Rolling Meadows, Illinois, USA, the containerboard industry has recorded either declining or stagnating production numbers. In addition, the volume and value of corrugated container shipments has followed suit, dropping from an all-time high of US$ 24.5 billion in 2000 to US$ 22.5 billion in 2002. Preliminary results for 2003 show little change.

Although many reasons exist for these disappointing results, the two most prominent are as follows:

* An economic recession that has seen United States manufacturing take a significant hit in terms of money and man-power. As dot.com companies have gone belly-up and other employers laid off workers, unemployment has risen to more than 6%. Capital spending has tailed off. These effects will obviously have negative repercussions on the corrugated container industry.

* A rise in the global economy has eroded the United States manufacturing base. Looking to reduce their manufacturing costs, companies have shifted operations to cheap-labor countries. The end result is that the corrugated containers used to ship their boxes have also moved offshore.

Despite this economic recession, containerboard producers had a Plan B. It called for containerboard producers to offset drops in United States demand with increases in exports. Unfortunately, the opposite occurred in the last three years.

Linerboard exports dropped from a record high of 4.4 million tons in 1997 to 2.3 million tons in 2001 according to the American Forest & Paper Association. Why did this happen? A strong U.S. dollar and the addition of new recycled linerboard capacity in Europe and China caused it.

Despite these dismal results, the industry enters 2004 with a reasonable expectation that things will turn around. The problem is that the expected recovery from the recession will be far different than in previous recoveries. While the corrugated industry has come to expect growth rates from recessions of 5% to 12%, the current hope is for a 2% to 3% growth rate.

NEW BUSINESS MODEL

Containerboard producers and corrugated converters are in the process of change as they enter 2004. A new business model has replaced the old business model for the industry--produce it and they will buy it. The new business model calls for containerboard manufacturers and corrugated converters to work together to manufacture products that "will help customers increase their profitability, efficiency, and productivity."

The cornerstone of the new business model is service. How well are orders handled by the manufacturer? This service component also goes one step further. Does the corrugated container supplier work with the customer to produce boxes that work well in their automated case filling machine? Do the boxes fit well in the customers' stacking system? Does the supplier work with the customers on innovations to reduce costs and increase profitability?

Quality of raw materials and boxes is no longer a question within the industry. Containerboard producers must certify to the "quality of their linerboard and corrugating medium." Converters ship corrugated containers to customers based on the customers' rigorous specifications and deliver the containers on time at a competitive price. This is true of integrated manufacturers and independent manufacturers.

Because quality is a given in today's marketplace, it is also forcing containerboard producers to review and change the way they operate their mills. Linerboard and corrugating medium producers are not running their machines "full out." Instead they are finding the most efficient speed to run their machines to obtain a consistent product of high quality.

The market picture for the corrugated container industry has changed dramatically in the last five years. As a result of mergers, acquisitions, and consolidations, the industry's "Big 5" producers--Smurfit-Stone Container Corp., International Paper, Georgia-Pacific, Weyerhaeuser, and Temple-Inland--have a significantly greater market share than ever before. In 2002, the "Big 5" had a 72% market share compared with only 45% in 1993.

With this large market share, these companies have reviewed their overall operations, closed some mills, and shut down inefficient machines to bring supply in line with demand. But as industry removed capacity, demand dropped, exports declined, and imports increased. Overcapacity still exists.

Finally, the spate of mergers and consolidations designed to improve productivity, create operational synergies, and reduce costs has been less than universally effective.

NEW OPERATING REALITY

Perhaps the most prominent change affecting the pulp and paper industry in the last decade has been the realization that the industry is part of a global economy. Success or failure depends on how the industry adapts to this global economy. Nowhere is this more apparent than in the corrugated container industry.

In previous years, the industry would export more linerboard and corrugated materials than it would import because the United States was the low cost producer. This is not true today. The industry faces competition not only from neighboring countries such as Canada and Mexico but also from Europe and far away places such as Taiwan, China, Thailand, and India.

Perhaps the best way to exemplify the global economy is by citing a real-world example. It involves the president of a corrugated container company in Chicago who came to work one morning and found a corrugated container on his desk. "Where did this come from?" he asked. "Look at the bottom and you will see--China," someone responded.

Subsequent inquiries revealed that the box came from a local customer who asked a Chinese company what it could do to match the local supplier. Given a 17-day lead, the Chinese manufacturer was able to manufacture and send corrugated boxes via ship to Chicago at a lower price than the local manufacturer was selling them.

A second major change in today's operation reality concerns manufacturing. Everyone in the industry needs to look to lean manufacturing. This means they need to reduce costs to the point where no extra costs exist. The emphasis on lean manufacturing is quite simple. In the face of rising taxes, increased health care costs, declining revenues, and stiff competition from overseas, local producers cannot pass along their rising costs to customers. As a result, they must look inside their four walls to discover waste areas and eliminate them.

John Fienning, president of Sumter Packaging Corp., Sumter, South Carolina, USA, said, "Even though I am a marketer and believe in producing value-added products to account for higher costs, the time has come to rely on reducing costs inside our manufacturing operations."

MEETING THE CHALLENGES

The corrugated container industry undoubtedly faces daunting challenges as it enters 2004. Reasons for optimism do exist.

On the economic front, GDP grew at a staggering 8.2% rate in the third quarter of 2003. Economists predict a continued upturn in the economy in 2004. In addition, the decline in the value of the dollar in relation to the Euro and other currencies is making United States products less expensive.

In the United States marketplace, domestic producers may not be the low-cost producers but they are the pre-eminent, one-stop shopping store for corrugated container customers. The "Big 5" integrated organizations are taking the lead in this area of working more closely with their customers. For example, Georgia-Pacific, which sells a large amount of corrugating materials to independent converters, has established an Independent Converters Council to help its independent customers with innovations, discuss common operational problems, and determine how Georgia-Pacific can help Smurfit-Stone Container Corp. has its own technical center to help customers with box and graphic design.

The integrated organizations are learning from their independent brethren about design innovations for customers that allow them to create higher margin products. Indeed, some companies are buying sheet feeders and selling sheets to other plants besides theirs.

Thomas T. Fullove, human resources manager for Green Bay Packaging's Cincinnati. Ohio box plant, said that the industry needs "a new business paradigm" to be successful. "The industry needs to look at human assets and human capital. It must explore human knowledge, skills, and technology to make operations more efficient and more effective," Fullove said.

Fullove, who is chairman of TAPPI's Corrugated Packaging Division, said that while the economic statistics point toward a down industry he is optimistic about the future. "Not every company will survive to 2010, but those that do will embrace a proactive growth and development approach based on human asset development."

Fienning believes that innovation is essential to the industry's success. "We need to be innovative in dealing with customers," he said. "We must help them reduce their costs and increase their profitability if we are to be successful."

Steve Young, president of the Association of Independent Corrugated Converters, said that the industry must communicate with its elected representatives on the issues that matter to them. "We can compete with anybody as long as there is a level playing field," Young noted. He added that most companies are not experiencing that "level field" because other countries are not as rigorous in their labor laws, workplace regulations, and safety measures.

Noting that President Bush has appointed an undersecretary of manufacturing in the Department of Commerce, Fullove, who was a former assistant to Rep. John Kasich of Ohio, said the federal government is taking actions to aid manufacturing in this election year. "I have a saying, 'If you're not at the table, then you're probably on the menu,'" Fullove said. The containerboard industry must be "at the table."

Young concurs by saying that now is not the time to be timid in dealing with our elected representatives. "We must let our representatives know where we stand and what they can do to help us compete in a free-trade marketplace," Young said.

TWO SIDES OF THE COIN

To assess the corrugated container industry is to look at two opposing camps. In one camp are the many industry analysts who remain pessimistic about the corrugated container industry's future. They view the industry's chances of making a significant recovery in the near future as slim. These people describe the industry's situation as "the worst of times."

In the other camp are the industry executives, managers, and employees who believe that they are up to the task. The industry is facing new and daunting challenges, but it also has the knowledge, the resolve, the wisdom and the commitment needed to make it through these tough times.

Although it is still unclear whether this industry can achieve significant growth and development in the near- and long-term future, what is clear is that it will have to adopt new business and operating strategies to be successful in this brave new world.

IN THIS ARTICLE, YOU WILL LEARN:

* The new business challenges facing the U.S. corrugated container industry.

* The new operating environment facing raw material suppliers and converters.

* The importance of innovation, communication, and aggressive marketing to the industry's success.

ADDITIONAL RESOURCES

* Corrugating International, an online publication. Go to www.tappi.org and click on the CI link on the home page.

* TAPPI Corrugating Packaging Division. Go to www.tappi.org and click on the "Divisions" link on the left hand side of the home page.

* Association of Independent Corrugated Converters web site: http://www.aiccbox.org

ABOUT THE AUTHOR:

Jerome A. Koncel is a contributing editor for Solutions! magazine. A freelance writer, he has more than 15 years of experience covering the pulp and paper industry and was editor of American Papermaker. Contact him at [phone] or by email at: [e-mail]

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JEROME A. KONCEL, CONTRIBUTING EDITOR