The changing face of our neighbors to the north: the Canadian market will be opening to U.S. nonwovens suppliers - and vice versa - as a new era in free trade begins; suppliers must assess the importance of 'being there.' (Special Report: Markets for Nonwovens)

The Changing Face Of Our Neighbors To the North

the Canadian market will be opening to U.S. nonwovens suppliers--and vice versa--as a new era in free trade begins; suppliers must assess the importance of `being there' Canada and the U.S. have the world's largest trading partnership, with trade valued at $158.7 billion last year. The approval last fall of the U.S./Canada free trade agreement will effectively eliminate tariffs over a 10-year period. Clearly, some nonwovens companies will benefit from the open borders...some may be hurt.

The Canadian nonwoven products business is about 10% of the size of the U.S. market. The accompanying table, which compares some roll goods volumes in the two major North American markets, gives an idea of the scale of each.

The total retail sales of disposable converted products to consumers in Canada are also approximately 10% of the U.S. market. Although the penetration of baby diapers in Canada lagged behind U.S. penetration several years ago, diaper consumption per capita is now at roughly the same level in both countries.

Today, the positions of consumer brands in Canadian nonwoven converted products are similar to their positions in the U.S. Branded producers have about 80% of the infant diaper market and the major players are Procter & Gamble (53% market share) and Kimberly-Clark (27%). Private label producers have a 20% share; the leaders are Atlantic Packaging (8%), Dafoe & Dafoe (4%) and Weyerhaeuser (5%).

In the sanitary napkin market in Canada, the branded producers account for more than two-thirds of the market. Johnson & Johnson and K-C are the leaders and convert their brands in Canada. P&G imports its "Always" line into the country.

Cascades is the leader in adult incontinence products with about one-fourth of the market. P&G and K-C combined have approximately 35% of the adult market, supported by products converted in their U.S. plants.

Veratec and Stearns produce carded coverstock in Canada and sell to the local merchant market, K-C Canada imports spunbonded coverstock from their U.S. operations despite the tariff barrier, although at times it does purchase from the merchant market.

In contrast to absorbent products, the Canadian usage of a number of other nonwovens is still low compared to U.S. levels. For example, disposable surgical packs and gowns have significantly lower penetration in Canada than in the U.S. The difference is due primarily to the more structured health care delivery system in Canada, which has more similarities to the systems found in Western Europe than to those in the U.S.

Some nonwoven converted product markets in Canada are served by a mixture of domestic and imported goods. Protective industrial apparel, for example, is marketed by Canadian converters such as Brant Packaging, Caldwell, North-West Protective Gear and Healon.

In 1987, more than 17 million sq. yards of roll goods were imported to make coveralls domestically. In addition, the equivalent of more than seven million sq. yards were imported in the form of finished garments. DuPont's "Tyvek" has been the dominant fabric in this application.

There is currently no spunbonded manufacturing capacity in Canada. Spunbonded roll goods for furniture and bedding have been primarily imported from the U.S. The landed prices are equivalent to approximately $2 U.S. a pound, which is about 25% higher than the average price levels for spunbonded fabric in the U.S. The leading Canadian importers and distributors make up for it with a markup of more than 50%.

The capacity situation in Canada varies by technology. Johnson & Johnson produces carded nonwovens in Canada to supply its converted brands. Stearns and Veratec supply the merchant market with carded fabrics.

Almost four million pounds of spunbonded coverstock were imported in 1987, primarily by K-C from its U.S. nonwovens plants. The demand for spunbonded coverstock has grown 41% since 1983. Approximately four million pounds of spunbonded nonwovens have been imported for furniture, geotextile and disposable apparel applications, which have been growing at 12% since 1983. The total Canadian demand, which approaches 9.5 million pounds, makes it an attractive opportunity for a Canadian spunbond investment.

Air laid pulp has been imported into Canada from the U.S. without any Canadian duties because there has been no domestic producer. This year, Merfin Hygienic Products, of Vancouver, BC, is starting up an air laid line in Delta, BC, with plans to serve the Canadian market and export to the U.S. and Europe. Merfin's goal is to export 40% of its 9000 metric tons (20 million pounds) annual capacity to the U.S., equivalent to almost eight million pounds a year. There is also another Canadian company considering an air laid line in eastern Canada.

There is some wet laid production in Canada, for example J. Ford's production of wallcoverings. However, most wet laid materials for the major applications, such as medical disposables, are imported as roll goods or finished products.

Although J&J has a small modified entangled fabrics semiworks line in Canada, there is no significant commercial spunlace capacity in that country today. There is also no melt blown capacity in Canada today.

Overall, the nonwovens penetration in Canada is considerably lower than in the U.S., which suggests that there is higher growth potential in selected Canadian market segments. For example, there are unique opportunities to serve the automotive industry with durable nonwovens. The Canadian furniture and protective apparel industries would welcome local nonwoven sourcing options. The expansion of the medical disposables industry in Canada remains a real question due to the influence of the structure of the country's health care system on purchasing decisions.

While the financial barriers to exports into Canada are declining, U.S. marketers need to determine the importance of "being there" to provide responsive customer service. In some Canadian provinces, the nationalistic and anti-U.S. sentiments may still present challenging barriers to entry. It may be a significant advantage to have local manufacturing capability, if the facilities are cost competitive by worldwide standards. It is timely for American companies to pursue acquisition or joint venture opportunities in Canada to gain local market knowledge and accelerate the establishment of leading market positions.

U.S. companies also need to understand and defensively evaluate the capabilities and strategies of Canadian based competitors with regard to their U.S. market segments. For example, air laid pulp marketers today are assessing the impact of Merfin's announced plans to export to the U.S. Merfin's activies are likely to exacerbate the effect of the developing excess air laid capacity situation in this country.

It is becoming increasingly important to develop and implement business strategies within a total North American framework. This broader perspective will enable companies to identify growth possibilities promptly on the other side of the border and to defend competitive positions and future opportunities effectively in their home markets. The leading companies in this industry are designing their game plans now and are preparing to implement them well in advance of the final tariff reductions.

Pricie Hanna, of John R. Starr, Inc. management consultants, Osterville, MA, presented a paper on "U.S./Canadian Free Trade Agreement: Opportunities for the North American Nonwovens Community" at the recent INDA-TEC in Philadelphia, PA. John R. Starr, Inc. is undertaking a major study to look at North American technology capacity and market demand scenarios under Free Trade to identify investment and market growth opportunities for both U.S. and Canadian companies. What follows are some of her comments as they relate to nonwovens end use markets.