Manufacturers roundtable: regional player perspective.

The paint and coatings industry faces several critical issues today. Consolidation, rising raw material and energy prices, and increasingly stringent regulatory requirements impact the daily activities of suppliers and manufacturers. Overall the goal remains to provide high performance paints and coatings at an affordable cost--in essence to meet the needs of the end user, whether a consumer or professional painting contractor. Remaining competitive with the large national paint and coatings manufacturers has become a significant challenge for smaller regional producers over the past several years. The growing regulatory pressures have become the primary concern of these players in the paint and coatings marketplace. Working closely with regulators on the one hand and customers on the other, as well as investing in innovative technologies, will be the keys to success, according to the companies participating in this roundtable discussion. JCT COATINGSTECH spoke with Anthony M. Ciepiel, president of The Flood Company; Jim Capitano, vice president of manufacturing with Duron, Inc.; and Tim Bosveld, vice president of marketing for Dunn Edwards.

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JCT: What would you identify as the top three most critical issues facing the paint and coatings industry over the next five years? Why do you classify them as critical, and what impact will they have on the industry?

Anthony M. Ciepiel, Flood: The number one issue facing the industry is the need to create low-VOC (volatile organic compound) paints and coatings that do not compromise performance and can be economically produced. It is easy to create low-VOC formulations, but not easy to do so and maintain the level of performance demanded by the customer. It is yet another challenge to do so at an economic price.

Jim Capitano, Duron: For companies that operate in different geographical areas, the inconsistency in air quality regulations from region to region poses a significant challenge. It appears that many of the regulations are established as part of a political process rather than through scientific exercise and therefore often are not based on sound science.

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The spiral of increasing raw material costs also poses a challenge today. It is difficult to pass these rising costs through to customers, and therefore profit margins are being eroded. The paint and coatings market is very competitive today, and there is always someone willing to take market share by lowering prices and profit. We are in the middle and are being squeezed by basic commodity suppliers on one end and large customers on the other. This scenario is driving consolidation, which will only continue into the future.

Difficulty in recruiting new talent is a third major issue for Duron. There is a perception that the paint industry is stodgy and therefore is not exciting or attractive to new talent.

Tim Bosveld, Dunn Edwards: In addition to the increasing VOC regulations, we are facing escalating raw materials prices and the costs to defend against class action suits related to construction defects. Some of the factors driving up raw materials prices are unprecedented Chinese economic expansion and higher oil prices. In the case of class action suits, lawyers have the ability to bring on these suits, such as mold and mildew, whether they are valid or not. We find ourselves spending more on consumer education and legal expenses to combat this trend.

JCT: What can individual companies and/or the industry as a whole do to manage these issues?

Anthony M. Ciepiel, Flood: We as individual companies and as an industry must work together with regulators to develop reasonable guidelines and timetables for implementing more stringent VOC requirements.

Tim Bosveld, Dunn Edwards: Education of regulators is also very important. There are sustainability and eco-efficiency issues that need to be addressed. One consequence of reduced performance of paints and coatings will be more frequent painting, which in turn will result in increased raw material consumption and waste generation. There is a balance between lack of performance and VOC limits that needs to be considered.

Companies must also develop better mechanisms for product development and find more efficient ways to get products commercialized at a much faster rate. We need a much faster pace of R & D to achieve technological innovations that will enable low VOC formulations to have performance with affordability.

Education is also critical for addressing the construction defects issue. Mold and mildew occur when conditions are right--humidity, moisture, and the right temperature are required in order for these problems to arise. Consumers need to know that paint does not cause the formation of mold and mildew. They also need to be informed about how to prevent their formation.

Jim Capitano, Duron: Consolidation on both the raw material supplier side and paint manufacturing side will continue. In order to prevent further margin erosion, companies need to work closely with both suppliers and customers to continually develop products that provide the performance properties valued by the customer. Making sure that customers understand the value that is provided is also important and may enable paint producers to pass on some of the rising raw material and energy costs.

In order to attract talent, the industry as a whole will benefit from a public relations effort. The paint and coatings industry is a strong industry and continues to grow at a steady rate. It is one of the only industries with domestic manufacturing jobs available and has a lot to offer at all levels of employment. Not enough people are aware of these facts.

JCT: Where do the opportunities lie for the paint and coatings industry, and how is your company planning to take advantage of them?

Jim Capitano, Duron: The greatest potential is where paint and coatings manufacturers can develop strong relationships with their customers. Focusing on meeting their needs and providing them value with high performance products and a solutions approach will lead to opportunities for growth.

Tim Bosveld, Dunn Edwards: The Internet has tremendous potential to improve the efficiency of most aspects of operations in the paint and coatings industry. Online services on the supply side such as vendor managed inventory may provide significant cost savings. On the demand side, services such as account management, education, product specifications, and e-commerce can enhance customer relationships and help foster closer partnerships.

Anthony M. Ciepiel, Flood: Opportunities lie in developing high-performance, low-VOC coatings that provide protection for both existing and new and emerging substrates. Companies that can develop effective paint and coating formulations for composites, cementitious surfaces, and plastics will have a competitive advantage in these new or emerging growth markets.

JCT: What significant activities have taken place within your company during the last year? Do you have anything planned for the near future that you can discuss?

Anthony M. Ciepiel, Flood: We have made an increased commitment to new product development and R & D using a stage-gate new product development process. We are committed to creating new products that meet the changing needs of our paint and coatings customers. Our stage-gate process is intended to speed up the time to commercialization. We are also expanding our existing categories of products, creating a new generation of paint additives that will improve the performance of new low-VOC and waterborne paints and coatings. We have seven decades of experience developing additives for paints and coatings, improving paint performance in the most demanding conditions (high heat, excessive humidity, difficult substrates, etc.). Our new additives will help address the current challenges posed by low-VOC formulation requirements.

Jim Capitano, Duron: The Sherwin-Williams acquisition of Duron is in its final stages. The agreement is a culmination of years of planning by the management of Duron, who recognized a while ago the challenges of the future. We have been one of the faster growing paint companies over the past several years. The way in which we go to market and our focus on the customer has been at the core of our success. Joining the Sherwin-Williams family will only make us stronger, as we will have access to the additional resources that Sherwin-Williams brings to the table.

We have added a new element to our Genesis line of odor-free paints. These low-VOC products have no performance tradeoffs and now provide mildew resistance as well. Because there is no lingering odor, they are excellent for hospitals, hotels, and restaurants because rooms can be painted in the morning and occupied in the evening of the same day.

Tim Bosveld, Dunn Edwards: At Dunn Edwards we focus on professional painters, who make up over 90% of our business. We offer premium coatings with demonstrable performance advantages that are meaningful to our customers. We see professional painters as partners and try to provide them with the resources they need to enhance their reputations and ultimately help grow their business. Contractors rely on word of mouth and need good products in order to develop that good reputation. We also offer our professional customers tools that help educate them about our products so they are better prepared to explain issues to their customers.

We recently launched a line of innovative products, using the latest resin technology, that are specifically designed for new Commercial Tilt-ups. The paint system consists of four products, both primers and finishers, for tilt-up surfaces. These surfaces have unique conditions, such as high alkalinity, that require special paints and coatings. Tilt-Prime[TM] and Tilt-Coat[TM] offer the best performance properties for these surfaces. FlexPrime[TM] is excellent for surfaces with minor cracking, while DuraTilt[TM] is an affordable alternative to Tilt-Coat.

Dunn Edwards will also be introducing later in 2004 a new color system that has been under development since 2002. We conducted a tremendous amount of market research with architects and designers in order to develop a well-rounded palette of colors to choose from. Along with the new color palette we also have designed unique sales visuals that make color selection easier.

Internally we made a major investment in an SAP implementation in 2003 that focused on the financial and inventory management aspects of our business. The next phase will be our point of sales system to improve customer service.

JCT: What are the most recent major events within the industry and what impact have they had?

Tim Bosveld, Dunn Edwards: The increasingly stringent VOC regulations have had a tremendous impact on the industry. In 2005 regulations taking effect in California will again limit the availability of higher VOC coatings that offer superior performance. Unfortunately, these regulations are neither fact-nor science-based, but result in restricting sales of these products and subject us to additional fees and taxes.

Jim Capitano, Duron: The increasing VOC regulations have had the most profound impact over the past several years and they will continue to do so. The industry is also going to experience more consolidation. There is a critical mass needed to be successful given the market conditions of today. In a relatively short period of time, the industry will be comprised of a handful of giants and several niche players, but middle sized companies like Duron will likely be gone.

JCT: What one thought would you like to share with the readers of JCT COATINGS TECH about the future of the paint and coatings industry?

Jim Capitano, Duron: People need to take a proactive attitude about the industry. The paint and coatings industry has a lot to offer. We have over 100 years of stable growth combined with good people, good products, and good companies. We need to make more people aware of these facts.

Anthony M. Ciepiel, Flood: The industry will continue to be challenged to economically create new product formulations that meet changing regulatory requirements and the performance demanded by our customers. We will need to create new paradigms if we are to continue to provide the level of performance that the market expects.

Tim Bosveld, Dunn Edwards: Companies must look for competitive advantage, and product performance is one of the most important ways to attain it. There is a certain level of expectation in the market for performance, and if we don't formulate for performance, then paint will become a commodity product. If this scenario occurs, there will be a significant and detrimental impact on profitability. Performance must be provided affordably, though, because there is also an expectation on the part of both consumers and contractors with regard to acceptable price.

by Cynthia Challener, JCT COATINGSTECH, Contributing Writer