Machine politics: the changing supplier arena: tighter markets and a prospective new player may change the game for pulp and paper machinery suppliers.

Is more better? From a buyer's perspective, the answer is usually "yes." That is especially true if more choices lead to stiffer" competition and greater value; the bigger the investment, the more important choice becomes. Pulp and paper industry purchasers welcome supplier alternatives because of their positive effect on investment prices, as well as for the technology and equipment development that the competition can produce. Technology development is necessary for survival--not only for individual companies, but for the entire industry, which must maintain the efficiency of its products against competing media.

The 1999 bankruptcy of machinery manufacturer Beloit was a major blow to the paper industry, and especially to the paper machinery manufacturing industry in North America. Beloit's capital equipment centers in the U.S. no longer exist; its R&D facilities in Illinois and Wisconsin have been dismantled.

Slower industry spending on new investments and lost revenue following disputes over Asian paper machines orders were important contributors to Beloit's demise. Yet while Beloit commercialized many advanced technologies during its long .journey--including gap forming, single tier dryers, shoe presses, and dilution controlled headboxes (now with MHI)--the slower pace of Beloit's later R&D efforts, compared to competitors Metso and Voith Paper, may have contributed to its decline. Metso and Voith Paper have now taken up most of the market share once held by Beloit, although its technology was sold to both Metso and Japan's Mitsubishi Heavy Industries (MHI).

The paper and board industry has been expecting a major third supplier to emerge to substitute for Beloit. MHI, with its vast resources, would be a possible contender for a position among the important technology developers. Yet the question remains: would another big change to the paper machine playing field be good for the industry? As an independent researcher, this author has discussed this question with the major players and reviewed the global markets for paper machinery, including MHI's capabilities (see Figure 1).

BELOIT: DEMISE AND AFTERMATH

Hans-Peter Sollinger, senior vice president responsible for Voith's paper machines and finishing business, feels that entering the field of papermaking technology is nut easy for a newcomer. "The market is in a consolidation cycle and very competitive for paper machinery suppliers and the paper industry itself," he said. "Gaining market share is challenging."

MHI and Beloit had a long-term commercial relationship. Beloit granted MHI a license as far back as 1957, five years after the delivery of MHI's first complete paper machine, at Fuji Paper. Since then, MHI has installed 204 complete paper machines (159 in Japan, and 45 abroad), and rebuilt 800 paper machines.

In 1986, Mitsubishi bought 20% of Beloit for US$87 million. Harnischfeger, based in Milwaukee, Wisconsin, USA, acquired 80% for US$ 160 million. The move guaranteed MHI's continued access to Beloit technology through licensee rights. MHI sought to acquire a majority stake at the time, hut settled for a minority stake for various, including national, reasons.

For more than four decades, MHI held Japan and Korea as its exclusive sales territory in the worldwide Beloit organization. MHI was also the designated vendor for both Russia and the rest of continental Asia as well, although its share of China was limited by Beloit Poland's (earlier Fampa) role. The situation became complicated when Beloit saw orders drop in its traditional markets in the latter part of the 1990s. Falling investments in North America--combined with neglected delivery quality in Europe and the company's failure to keep pace with competitors in terms of new technology--forced Beloit to turn to Asia, the established MHI territory.

Failure on the part of two Indonesian customers to pay for machine orders finally forced Beloit into bankruptcy and liquidation, creating a completely new situation for MHI. Their 20% equity stake in Beloit was suddenly worthless. MHI even faced the prospect of losing the technology, which it partly owned. In the 2000 auction of Beloit's assets, MHI spent US$22 million on Beloit intellectual property. Metso (then known as Valmet) took over the bankrupt company's aftermarket business (Beloit Manhattan and Rolland) along with related production facilities and research equipment. Voith Paper did not participate in the dismantling of Beloit.

Meanwhile, life continued for the former Beloit business units in Europe and elsewhere. Beloit Walmsley (UK), Bolton, was taken over by Sandusky (now Sandusky Walmsley). Management and an electrical equipment supplier took over Beloit Italy, in Pinerolo (now PMT Italia). Poland's Beloit Fampa was also taken over by its management team, together with Beloit Europe's manager Aaron Braaten (the name changed to PM Poland). Kusters-Beloit was reacquired by Kusters.

The Impco and Beloit Jones pulping businesses, Beloit Lenox's finishing machines, as well as Beloit Australia's aftermarket business were taken over by Canadian Groupe Laperrier & Verrault (GL&V). Beloit Canada had already closed. The Brazilian plant was sold to a Brazilian investment group under the name BelMec, after attempts to make it part of Metso.

The central Beloit facilities and the Beloit and Rockton workshops and business centers were closed. The R&D equipment was partly transferred to Metso's European centers. Meanwhile, a 150-person service and rebuild company, Fapercine, was established in Wisconsin by former Beloit managers led by Laurie Wicks. It supplies smaller equipment and services from its base in Beloit.

LIFE AFTER BELOIT

The markets have found new ways of living without Beloit. Metso has strengthened its business following the merger of the former Beloit activities in Beloit Manhattan and Rolland into its existing organization. The move has given the Finnish vendor a "North American" identity as well. The R&D facilities and pilot board machine in Bolton, IJK, still exist, and have been purchased by PMT Italia. The former Beloit Xi Be-roll covering facility in the ancient Chinese capital, Xi'an, is being taken over by PM Poland.

Juhani Pakkala, CEO of Metso Paper, commented on market conditions since Beloit's departure. "Over the last five years we have reduced our capacity in North America, Finland and Sweden," he said. "With the collapse of Beloit, some of the overcapacity of papermaking machinery disappeared but, even after those changes, demand and supply are not in balance. The production capacity of the modern machines has increased and the number of new machines decreased as a result of technology and productivity improvement."

MHI has been affected by the ailing machinery market in recession-bound Japan. Since Beloit's collapse, MHI has not received any new complete paper machine orders, either in Japan or elsewhere. Yet its rebuild business outside Japan, particularly in North America and Europe, has seen some progress.

The Japanese company has taken steps indicating its strategic interest in several markets. These include establishing a 12-person sales office in Beloit, Wisconsin, and cooperation with Papercine in the aftermarket business. Another sales office has been established in Paris to promote MHI technologies along with PMT Italia. MHI's Hiroshima Research Center in Mihara, Japan (see box on page 72) and partnership agreements support MHI's technology.

LOCATION, LOCATION, LOCATION

The manufacturing locations of the major suppliers are today primarily in Europe. Metso Paper has its printing and writing business center in Finland, which is also the location for its finishing and air systems centers. Sweden is Metso's center for tissue and board machinery development (the latter also partly in Finland). Pulp machinery is developed in Sweden and Finland, converting machinery in Italy and UK. Metso also has paper machinery manufacturing units in the U.S., Canada, Italy and China. Sumitomo Heavy Industries is Metso's paper technology licensee in Japan.

Voith Paper has its printing and writing R&D and business centers in Germany, its board machinery in Austria and the U.S., tissue in Brazil, finishing in Germany and the UK, and recycling and stock preparation equipment in Germany and the U.S. Additional manufacturing units are in Spain, Italy, Canada (service), and China (joint venture). In Japan, Voith Paper's joint venture with Ishikawajima Harima Heavy Industries (IHI) comprises two coating and paper machine R&D plants.

MHI's paper and printing machinery division, with 1900 employees, is located in Mihara, Japan. The Mihara operation generates US$I billion/year in sales revenue. The division makes offset printing equipment, including newspaper presses and on-demand printing equipment (67% of sales), corrugating and box making machinery (13%), and paper machines (20%). The same unit manufactures passenger cars for the railways (transportation systems division).

Table 1 compares the three companies' technology centers.

RESEARCH EXPERTISE

The key, suggested Voith's Sollinger, is in technology development. "We have to understand the business environment of the paper machine suppliers. The pulp and paper industry is a very dynamic industry in terms of new technology and innovations," he said. "This requires high investment in R&D for the paper industry as well as for its machine suppliers. Voith spends 5% of its turnover for R&D. This does not include the costs of technology support and the learning experience of new technologies, which would have to be added to the R&D costs."

There were several vendors operating research centers with pilot paper machine development capabilities only three years ago: Metso Paper (then Valmet), Voith, IHI, Beloit, and MH1. Today there are only three. With Beloit closed, Metso and Voith lead development. IHI has reduced its R&D activities by fully joining the Voith Paper team, which runs IHI's research as well. What is left, in addition to these two, are the MHI facilities in Mihara. The Sandusky Bolton pilot board machine is not currently in effective use.

In addition to these research centers, national research laboratories in Canada (Paprican), China (China National Pulp and Paper Research Center, and the South China University), Finland (KCL), France (Grenoble), Germany (Darmstadt), Sweden (STFI), and USA (IPST) still have pilot paper machines. Yet these are primarily used for process development and fundamental research, not for equipment development.

The pulp and paper industry spends 0.5% of sales (turnover) on R&D activities, while suppliers typically invest 3-5%. Thus, machinery suppliers play a critical role in technology development.

"The innovation leap of the past few years, which brought many significant changes to the papermaking process, has created increased productivity and reduced investment costs per annual ton of paper," noted Sollinger. "In a low growing market like the pulp and paper industry, with only 2%-3% demand growth per year, a similar or higher productivity increase has reduced the total machine market volume."

INCREASED COMPETITION?

The introduction of MHI technologies will likely increase competition in the printing/writing paper machinery field--and the investments that MH] has carried out will require a notable business volume. "Papermaking is not just a question of developing individual machines and components--it is more a question of developing the papermaking process as a whole, starting from fiber processing and ending with finished paper," said Metso's Pakkala. "The investments and resources needed for this development require certain critical mass, and it will be interesting to see whether MHI can achieve this in an already very competitive business. Our customers are mostly global players and therefore global technology and process expertise, as well as service capability, are essential elements of being and staying competitive and successful in this business. This will be another hurdle for any new player."

The technologies MHI has developed are serious machinery; and as a whole, MHI is a vast company with financial and human resources that are actually larger than its two major competitors in paper machinery: MHI has a 40,000-strong workforce and annual sales of US$25 billion. MHI also has printing machinery, a nod to the importance of the customer's customer.

Yet ultimately, noted Pakkala, increased competition will not be the primary driver of change. "In the long run, the speed and level of technology development will have to be in balance with what the industry as a whole can afford, and therefore is not just a question of how many players there are."

The final decision lies with papermakers, said Sollinger. "Customers are now in the decisive position: to have several suppliers offering paper machines, or to have long term system suppliers offering reliable and innovative technologies to insure the customers' long term success," he concluded.

GLOBAL AMBITIONS

Shoji Sumitomo, general manager, paper and converting machine sales, described the MHI global sales network. "MHI has a sales office in Beloit for the North American sales. Papercine takes care of a part of the North American aftermarket service for us. In Europe, MHI has an office in Paris, and PMT Italy is the exclusive sales agent for MHI. The other partners in Europe are Sandusky Walmsley, which supplies us with foundry products and roll services; and PM Poland, which delivers equipment for our projects case-by-case. We have a joint-delivery agreement in tissue machinery with Sandusky Walmsley and Fleissner, who used to cooperate with Beloit in TAD technology. In China we cooperate with Xibo Hengxing Electric & Mechanical Equipment Corp."

MHI's target is to sell papermaking equipment totaling US$300 million/year. This includes US$50 million in both Europe and in North America, US$80-100 million in Asia, and US$100-120 million in Japan.

Why is MHI targeting Europe, the home to tough competition from two rival vendors? "Europe is the leading market, considering the advanced technology, along with the U.S., Canada and Japan. In continental Asia, we expect improving demand because Japanese companies are starting to build more local mills in Asian continental markets," explained Sumitomo.

HERE TO STAY

Nobuo Kiyama, general manager of the paper and printing machinery division, says that MHI has all the important technologies needed to supply complete state-of-the-art paper and board production lines. He points to MHI's investments in Beloit technology, and in developing advanced technology with the new pilot equipment in its Hiroshima Research Center.

Japanese costs are high. To overcome this, MHI has created a partnership network with other Japanese and foreign expert manufacturers to reduce costs while maintaining quality, said Kiyama. MHI has no plans to make manufacturing or research investments abroad, but its partnerships will be expanded. In other words, MHI--like its competitors--plans to stay in the market for the long term

SUPPLIER        SALES IN     PERSONNEL     R&D        R&D
                  2001                   SPENDING    STAFF
                (million)                (million)

Metso Paper     US$ 2,500      10,800    US$ 75        550

Metso US        US$ 300         2,300    US$ 25        270
Automation

Voith Paper     US$ 1,500       7,000    US$ 80        480

Voith Fabrics                   2,700

Jagenberg       US 200          1,000
business

MHI             US 200            400    US$ 15      70+
                (a longer                            other
                term                                 plants
                average)

SUPPLIER        PILOT EQUIPMENT

Metso Paper     Two pilot paper machines (Finland), two pilot board
                machines (Finland and Sweden), two pilot tissue
                machines (Sweden), Condebelt, pilot coater, film
Metso US        transfer unit, supercalender, soft and belt calendar,
Automation      runnability systems simulators, winder, pulpingpilot
                plant, recycling and stock preparation pilot plant,
                automation research with other pilot operations.
                Belt development with Albany International.

Voith Paper     Pilot paper machine, coater, reeling and winder
                pilots (Heidenheim), pilot board machine and spe-
Voith Fabrics   cialty machine (Ravensburg), pilot tissue machine
                (Brazil), soft and multinip calendars, roll wrapping
Jagenberg       (Krefeld), stock preparation and recycling research,
business        centers (Ravensburg and Appleton), automation;
                with other pilot units belt and clothing research,)
                Cerestar lab

MHI             Two pilot paper machines, separate simulators for
                each PM section, shoe colander, pilot coater, high
                plants speed running and threading simulator, printing;
                research center, converting equipment (all in;
                Mihara)

Table 1: Supplier volumes and their technology centers.

IN THIS ARTICLE, YOU WILL LEARN:

* The global economic factors influencing the paper machinery market

* Research capabilities of the major end emerging machinery suppliers

* How Beloit's demise affected the paper machinery market

* The historical relationship between Beloit and the newest player

ADDITIONAL RESOURCES:

* For information on the three major players in the global paper machinery market:

* www.metso.com; www.voithpaper.com; www.mhi.co.jp

* For a history of Beloit Corp.: www.finishing.net.com/belhistory.htm

RELATED ARTICLE: Focus on Mihara.

The paper and board R&D operat on of Mistubishi Heavy Industry (MHI)--called the Hiroshima Research and Development Center--is located in Mihara, Japan. In addition to paper technology, this center features converting technology development as well as printing and genera machinery laboratories. The research center focuses on applied physics and vibration, control systems, and materials.

The Mihara pilot plant hosts two pilot paper machines one for heavy weight grades and another for printing/writing papers, A separate cress unit can be used to simulate shoe pressing. The pilot coater has film transfer, blade, fountain-jet and curtain coating capabilities. A new machine is being installed to investigate bottlenecks in high-speed behavior of the sheet and its threading (at 3000 refrain).

Pilot paper machine PM2 was rebuilt to run at up to 2000 m/min and started up in September 2000. The machine has a multi-channel headbox with that a short free jet and no or very short vanes after the tube bank. The forming section has a roll-blade configuration with "serrated shoe blades and loaded counter blades. (Today, all suppliers have roll-blade formers, although Beloit preferred roll forming.) The press section has two consecutive straight-through shoe presses with newly developed compact shoes, which is quite similar to Voith's Tandem press and also to Metso's OptiPress.

The pilot machine's calender is a point of particular interest. MHI has decided not to develop a multi-nip calender but a shoe calender instead, as the company believes this gives versatility for the production of different grades, and has larger calendering quality potential. The shoe calender has a backing roll temperature of 200-250[degrees]C, and the maximum linear load of the 50 mm wide nip is 350 kN/m.

Mihara's manager of paper and board R&D, Setsuo Suzuki, says that Mihara concentrates primarily on the development of newsprint and printing/writing technologies, focusing on "good formation at high speeds."

The Research Center has 26 senior paper machine development engineers, 24 senior printing experts, and 20 senior engineering experts. In addition to these, a varying number of subcontractors work in the laboratories from other MHI laboratories or outside research organizations. Basic research makes up 30% of total expenses, while the company's own direct R&D work accounts for a further 55-60% of costs. Customer trials take up the remaining 10.15% of the budget.

Hanou Oinonen is an economist, engineer and independent market and technology researcher based in Finland. He has carried our extensive research in Asia and is the co-author of several reports on the Asian paper industry. He can be reached at [e-mail]