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More mergers are coming, but not just between companies
By David Clark
Over the years, the leading pulp and paper companies have become larger, more international and regionally diverse - a trend which has major implications for the industry as a whole. At first, most of the growth in company size came from increased capacity on ever-larger new machines. More recently though, in North America, Europe and Japan, most of the growth in company size has been achieved by snapping up existing capacity through mergers and acquisitions (M&A). This trend has been driven by a new generation of owners and investors who are more concerned with profitability and shareholder value than size, volume or new machines. More ownership changes among top producers are undoubtedly on the way as companies seek to become larger and more international, with an added focus on core businesses and cost reductions.
Joint research
An industry is more than a simple headcount of companies producing similar products though. To be effective, producers require a framework of central research institutes, trade associations and a common approach to external relations with customers, consumers, politicians and the media. Such a framework has long existed in the pulp and paper industry, but on a national level. This is now being affected by increased concentration, globalization and ownership changes among leading producers. In most countries, there is a much wider gap between the handful of large multinationals fighting for global pre-eminence and the several hundreds of smaller, independent, nationally based producers fighting for survival. The contrast is especially noticeable in Europe where the once important national boundaries have become increasingly irrelevant to many of the key issues facing the industry, such as profitability, global competition and forest certification.
European paper research institutes have long formed an integral part of the industry, providing a fruitful means of technical interchange and development between producers, suppliers, users, academia and governments. The creation of most of these institutes took place on a national basis, in line with the structure of the industry. Pulp and paper has always been a relatively open industry for technical exchange and there are many points of contact and even cooperation between the various national research institutes. On the whole though, their activities are essentially separate and uncoordinated, reflecting the needs of member companies which vary from country to country. There has certainly been some duplication and rivalry for pre-eminence among the national research institutes, which arguably helped to stimulate European technical leadership in several key areas such as pulp bleaching, coating and deinking.
At present, there is growing pressure for change in the research framework of the industry. Governments are now more concerned with helping consumers than supporting producers, while suppliers feel that they have been asked to contribute too much to basic industry research and development (R&D). It is clear that the dependence on suppliers for in-depth technical knowledge has made it relatively easy for newcomers to enter the industry, as witnessed in Asia. Large multinationals now find themselves funding several different national research institutes. Under pressure to reduce costs, they are looking for lower charges through improved efficiency and coordination, avoidance of duplication and more specialization.
There is even the suggestion that national research institutes in Europe should follow the lead of producers and concentrate into a smaller number of larger, more efficient units operating across borders. This would require some form of M&A activity among individual research institutes, which will be more difficult to achieve than concentration among companies. One certainty is that pulp and paper research institutes will tend to become more coordinated, specialist and global in their outlook, driven by the growing importance of multinationals.
For the same reason, pressure for change is at work on paper trade associations which tend to be more fragmented than in competing industries. This is especially true of Europe, where the industry has a multiplicity of associations at both the national and European levels covering lobbying, public relations and statistics for producers, as well as for end-use sectors, specific grades and alliances with customers. There is also a widening gap between the few large multinationals that can participate in various different industry associations and the multitude of smaller local companies who may depend exclusively on one national association. Decisions need to be made over whether the associations should consolidate, integrate backward to the forest, forward to the users, or both. The other option would be to expand geographically toward a more global approach.
Finally, the growing importance of large multinationals makes it possible to take a fresh approach to communicating the proven social value of paper to the general public. This includes the potential environmental sustainability and economic viability of paper compared to newer alternatives such as plastics and electronics. In this case, consolidation among paper producers is the beginning rather than the end of a process which has the potential for radical change in industry structure and attitudes.
David Clark is an independent industry consultant. He was also recently appointed executive director of PaperCom Europe
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