North America: the European connection.

"Old Europe" plays an increasing role in North America today as consolidation makes its mark, but where does the transatlantic influence go from here? There appear to be several answers.

Consolidation has transformed the pulp and paper industry over the past couple of decades as the major players have chased economies of scale and lower costs in an effort to stay competitive in an increasingly global business. Inevitably, the defragmentation process has narrowed many gaps that previously existed between both companies and geographic regions, including the transatlantic divide. As a result, North America today plays host to a number of overseas groups, each of which has pursued its own style of management, marketing and investment strategy.

In the case of the European groups that have bridged the Atlantic divide, the companies have adapted to the market in their own particular way. But there do seem to be some recurring themes that have contributed to the performance of each company.

According to one analyst, the general performance can be summed up as follows: "Sappi has done reasonably well in North America, but Stora Enso pulled in higher margins before its big acquisition in the States and has lost some of its competitiveness since being there. UPM is suffering slightly now, but the company has generally done OK and it has been working away quietly trying to cut costs and modify labor contracts, so I think it will do better. Plus, at Blandin they're also looking to make further investment. Of all of them, SCA has probably done best from its investments in America, although it started off a bit wobbly on the protective packaging side in the technology market before starting to concentrate on the pharmaceutical market."

[ILLUSTRATION OMITTED]

ON THE RIGHT FOOT

One key to success in corporate terms, at least initially, is always the same, according to another industry observer--was the entry price right? In this area, most observers feel that UPM probably paid full price, while SCA is considered to have gotten the best bargains. But it is Stora Enso that most observers single out having probably paid the highest price to get into the market when it snapped up Consolidated Papers for just under US$ 5 billion back in 2000.

Even the company's own management concedes that the deal has been costly. As the executive vice president for corporate strategy, Magnus Diesen, explained, "As you know, this was probably not our most successful acquisition so far. But you have to remember that we bought just before the market went into one of the prolonged downturns the United States has experienced, which is something that was a lot more negative than we expected."

Indeed, several other industry commentators expressed sympathy with Stora Enso's plight on this one. As one noted, "It was really tough for them. As it turns out, they bought right at the top of the market and then hit a horrible downturn. But you also have to look at what else they could have done. Asia was still very risky and it's not as if they could expand much further in Europe with the monopoly rules. Stora Enso believes it should be a global player and the United States is still the biggest paper market in the world, so you can see why the company wanted to be in there. Unfortunately, they just made it in time to hit the crash and they've been trying to recover even since."

As part of that recovery process, Stora Enso has spent heavily on what it calls the North American Profit Enhancement Program. The original US$ 250 million program targeted a huge workforce reduction designed to take employee numbers from 7300 in the year 2000 to 5000 in 2005, accompanied by six paper machine closures. Despite the shuts, overall capacity would still rise slightly. Given increased cost pressures in the US, the group announced earlier this year that the program would be extended to reduce annual costs by a further US$ 65 million in an effort to get profitability back up toward the company's internal goals.

While the program may be grim news for some of the company's North American workers, at least one analyst said it highlights the gap between the North American and the European approaches to running the business. "You have to say that the fact that Stora can come in and find such cost savings without cutting output says a lot about the gulf in the approach between the U.S. companies and the Europeans. OK, they have invested some money as well, but in a short period of time they've reduced the workforce by a quarter, closed the older paper machines and boosted productivity by something like 40% on a relatively low spend. You have to ask why U.S. companies aren't out there doing the same things," he said.

At least one analyst reckons he knows the answer to that. According to Lars Kjellberg at Credit Suisse, "If you're asking whether U.S. companies are likely to take a longer term investment approach since they see the Europeans being more successful, my answer would have to be, not necessarily. The problem for a lot of U.S. companies at the moment is that they simply have no mandate to invest from their shareholder base."

[ILLUSTRATION OMITTED]

In recent years, keeping investment levels below depreciation certainly does seem to have been a recurring theme in U.S. financial statements. However, if this trend holds, the outlook does not look great for several U.S. papermakers. Without a steady stream of investment, pulp and paper companies tend to slide down the competitiveness scale and find it harder and harder to be profitable. As a result of being less profitable, companies will find it harder to secure new funds for investment, setting off a vicious downward spiral that becomes even harder to pull away from.

NOTABLE EXCEPTIONS

Clearly, there are exceptions to each trend and some North American companies are investing to maintain their asset bases. For example, Kruger stands out as a company following a focused investment strategy, especially as the group officially started up a new coated paper machine in Quebec in September. Weyerhaeuser is another group that has maintained a decent rate of return without paring investment back to the bone. But the fact remains that the average technical age of paper machines in North America is well behind that of machines in Europe, and this must mean that competitiveness will remain a concern in the foreseeable future.

Indeed, this is where many commentators believe that European companies are likely to make the transatlantic difference count most as the likes of Stora Enso, UPM and Sappi pursue long-term growth strategies that U.S. groups seem to be struggling to match.

That point was highlighted by UPM's executive vice president of business development, Pauli Hanninen, when he said, "We're investing for the next 15-20 years. I think now we're in very good shape over there and of course we're looking at our long-term competitiveness in the U.S. market in the same way we do in our other markets. That's our target--to be competitive."

Not surprisingly, Hanninen is coy about the group's exact investment plans, but events even in the past few months indicate that UPM is working hard to make North America a key performer for the group.

[ILLUSTRATION OMITTED]

On the one hand, the company announced a major restructuring program at the Miramichi facility in New Brunswick that will see the pulp mill at the plant close with the loss of 400 jobs. At the same time, UPM is spending US$ 40 million in additional coating and finishing capacity in Raflatac's pressure sensitive labelstock production facility in Fletcher, North Carolina, and a new publication PM could be in the cards for the Blandin paper mill in Minnesota.

According to Jyrki Ovaska, president of UPM's magazine paper division, "UPM is committed to the U.S. and Canadian markets on a long-term basis. Blandin has gone through a restructuring program over the last two years, which has made the facility a site for potential further development. However, the economic feasibility of a new paper machine must be demonstrated and necessary permits obtained before a final decision can be made."

Hanninen does not believe that UPM can grow satisfactorily by exporting into North America from Europe, so a new paper machine at Blandin would be a major step toward meeting the company's targets for growth; yet, as he also said, "Our strategy is to grow organically and we are looking at plans to build at Blandin. In the end, though, it's all about market growth and I think we're now in a good position to take advantage of that."

RUB OF THE GREEN 

Of course, some of the Europeans have had bit of luck on their side as well. SCA was well positioned to take advantage of a favored buyer position after Georgia-Pacific took over Fort James and the acquisition of Tuscarora in particular looks to have been extremely timely. "The Tuscarora deal has worked out well for them. They acquired an entrepreneurial company and gave them some money to get on with it, and it looks to have paid off," said one analyst.

SCA has not had things all its own way, though. The away-from-home tissue market has been particularly competitive in recent quarters, with operating profit down 35% on the first nine months of 2003. The company's CEO, Jan Astrom, recently noted that prices and volumes were starting to firm up again. The only problem is that rising raw material costs are wiping out any benefits and margins remain under pressure. There is some better news though, as Astrom points out, "The new [away-from-home] plant in Barton has now reached full capacity and as a result cost savings can be reached in other production units."

Of course, SCA has a long history of expansion and the company is not likely to stand still in North America or anywhere else. Indeed, the group recently completed the acquisition of Copamex's tissue operations in a US$ 250 million deal that gives SCA 67% of the capital on a debt free basis. The company's increased presence in Mexico will obviously provide a springboard for further growth in North and Central America.

The Copamex deal follows on from a long line of North American acquisitions in recent years--Alloyd (2003); Southeastern Packaging (2003); Specor Systems (2003); Packaging Resources (2002); Mid-Lands Chemical (2002), Polyfoam Packers (2002); Marko Foam (2001); Encore Paper (2001); ISC (2001); RPA (2001); G-P's away from home tissue operations (2001) and Tuscarora (2001). It seems a fair guess that the Group is likely to make even further inroads into the region, perhaps even driving the U.S. up from number three in SCA's sales ranking after Germany and the UK in the long term.

COMPETITIVE ENVIRONMENT

One of the most successful "Europeans" to crack North America today is Sappi. Although the company's main presence was in South Africa when it took over SD Warren a decade ago, today it has its international headquarters in Brussels and boasts stock market listings in New York, London and Frankfurt, as well as Johannesburg.

Sappi Fine Paper North America is also now the largest coated woodfree producer in the region, running two mills in Maine (Somerset and Westbrook), another in Michigan (Muskegon), and the group's most recent acquisition, the Cloquet mill in Minnesota.

The journey has not always been smooth, though. The last couple of years have seen profitability dip and late last year the company closed one paper machine at Westbrook (admittedly 80-plus years old) and moved production to Muskegon. More recently, the group's U.S. operations showed a US$ 17 million loss in the second quarter of the year, on sales of US$ 363 million, as a result of weak pricing and higher costs. However, demand does seem to be strengthening somewhat and the group is optimistic that prices will follow.

Of course, a weakened U.S. dollar has also played a part as Kathy Walters, CEO of Sappi Fine Paper North America, explained recently. "Imports to the United States have continued despite the weaker U.S. dollar," Walters said. "Many Asian currencies have moved in line with the dollar and the U.S. continues to be an attractive export outlet for producers in these countries. The margin on European exports to the U.S. has been greatly diminished by the weaker U.S. dollar, but European producers have continued to export to the United States to make up for weak domestic demand and low operating rates. Imports, however, have declined from the peak levels of December 2002 and January 2003."

Reading between the lines, it looks as though cost control and securing higher sales prices will be highest on the company's list of priorities. But Sappi's U.S. division will also have a new CEO to do battle with the likes of Stora Enso, Mead Westvaco, and IP. Veronica Hagen will certainly have a tough job on her hands as Walters heads off to Georgia-Pacific, but for the moment, at least, the market looks slightly more promising than this time last year.

BRINGING TECHNOLOGY

Myllykoski is another group that has made a big impact in North America. Through the Madison Paper Group, the company has introduced new investment, as well as leveraging expertise gained in the company's European mills. A case in point is the Alsip mill near Chicago, where the group spent US$ 130 million rebuilding a machine to introduce a deinked pulp process, online multi-roll calendering and coating to produce a high recycled content #5 coated sheet.

[ILLUSTRATION OMITTED]

All in all, European companies appear to be faring reasonably well in North America. According to one pundit, the main difference at the moment appears to be a greater willingness by European groups than U.S. groups to look to the long-term.

In the short term, of course, such differences mean relatively little--especially while many Europeans are too busy right now investigating investment opportunities in Asia, Latin America, and elsewhere. In the longer term, lack of investment in the pulp and paper industry--which has always been capital intensive--is not a viable option.

Whether U.S. companies change their investment profiles or whether groups from Europe or elsewhere gradually take over the industry, one thing is certain: North American papermakers--like pulp and paper companies in every other part of the world--will have to embrace new technology and boost productivity if they plan to stay around for the next 20 years. Old machines will close and jobs will go, but unfortunately international competition will not allow anything else.

WHAT YOU WILL LEARN:

* How European companies established a presence in North America.

* How these companies are combining investment and rationalization.

ADDITIONAL RESOURCES:

* "Stora Enso looks forward to a resurgent 2004," by Jim Kenny, Solutions!, June 2004. To access this article, please type the following Product Code into the Search field at www.tappi.org:04JUNS031.

* "Europeans look east for the long term," by Jim Kenny, Solutions!, June 2002. Product Code: 02JUNS059.

* www.storaenso.com.

* www.sca.se.

* www.upm-kymmene.com.

* www.myllykoski.com.

* www.sappi.com.

JIM KENNY, CONTRIBUTING EDITOR/EUROPE

ABOUT THE AUTHOR

Jim Kenny is contributing editor/Europe, for Solutions! magazine, and is based in Brussels, Belgium. He is the former vice president of editorial for Paperloop and today heads his own company, DSI. Contact him by phone at [phone], or by email at [e-mail].

[ILLUSTRATION OMITTED]