Pulp and Paper Canada

News
‘BIGGER IS BETTER’ is back, but with a twist


February 1, 1999
By Pulp & Paper Canada

First of four articles dealing with issues the industry must confrontAlthough the survival of the pulp and paper industry is not in doubt, its state of preparedness and competitiveness for the next mi…

First of four articles dealing with issues the industry must confront

Although the survival of the pulp and paper industry is not in doubt, its state of preparedness and competitiveness for the next millennium is. Surprisingly, this is a point that financial analysts, investors, senior managers and unions can agree on, if only in theory. Events of the last year — the Asian financial crisis which has contributed to a reduced global demand for many paper grades such as newsprint; labor strife in British Columbia, Quebec and Ontario; and plummeting prices for commodity-based products like pulp — have contributed to a lacklustre financial performance in 1998.

While few analysts predicted the Asian economic crisis, one can argue that better planning by some pulp and paper producers would have allowed them to weather the storm better. Most agree that the $50-billion industry is at the midpoint of a restructuring phase that started in 1996, and should last at least 18 months before it secures some firm footing. Among the issues senior managers should look at is how to best plan for unexpected dips in the economy. Some North American strategists point to the model used by some Japanese high-tech companies, which operate on 100-year plans that they review and update yearly. Is it reasonable to expect Canadian companies, not known for long-term planning, to adopt such an assiduous approach to management strategy?

Stora Port Hawkesbury in Port Hawkesbury, NS, has a five-year plan in place, and a corporate strategy that extends beyond that. Says president Jack Hartery, “The plan is updated and scrutinized yearly.” Yet, as is now common at many companies, Stora senior executives are (pre)occupied with immediate issues: market fragmentation and overcapacity. “The supply and demand imbalance is the biggest problem we face,” says Hartery, a 25-year industry veteran. The solution? “We need more discipline.”

The call for discipline

Indeed, the industry has taken hold of the idea of discipline, viewing it as the ideal way to contend with overcapacity in many grades. For example, when Montreal-based Abitibi-Consolidated Inc. settled its five-month labor dispute with the Communications, Energy and Paperworkers Union of Canada (CEP) in November 1998, Ron Oberlander, the company’s chairman, called for newsprint producers to voluntarily reduce production. “The industry will have to take more downtime.”

The problem of overcapacity sheds light not only on how little self-discipline the industry has, but on how fragmented it is. In a sense, there are too many pulp and paper producers chasing a shrinking market, says Montreal-based Craig Campbell, partner in charge, at PricewaterhouseCoopers’ Global Forest and Paper Practice. “You have many smaller players acting individually and for their own interest,” he says, referring to what is taking place in Canada. Yet, this pales in comparison to what can happen globally, should the economic problems in Asia sort themselves. “There is all kinds of new low-cost capacity in pulp and paper in Southeast Asia that was planned and put on hold [because of the Asian Flu],” Campbell says. “If that gets fired up again, that will ‘kill’ the supply equation.”

For Campbell and other analysts, senior executives should look to how tissue producers dealt with overcapacity. Tissue producers have the highest concentration of ownership: the top five producers control 76% of global capacity, and the top ten, 90%. “All other grades are way below this high level of production concentration,” Campbell says, “although newsprint is moving in that direction.” On the other end, he points to pulp as the chief example of a commodity that exhibits “a lack of discipline.”

If discipline is one answer to overcapacity, mergers promise to take the big stick to market fragmentation. By concentrating ownership and, hence, production capacity in fewer hands, mergers will bring about an immediate solution to global overcapacity. When two companies unite to become larger, the new entity benefits in three major ways: economies of scale, increased productivity and reduced competition.

In the United States, International Paper announced plans last November to swallow Union Camp, a rival one-fifth its size. Many experts predicted that the $6.6-billion (US) IP deal would set the pace for an increased flurry of mergers, and not only between local companies, but on a transnational level. “IP will have to get together with one of the other big European players,” Campbell notes. (see sidebar for more on mergers).

His reasoning becomes clear when you consider what is happening globally. As large as the IP deal was, it is small potatoes compared to the multi-billion dollar mergers (called mega-mergers) announced in such sectors as telecommunications, financial services, pharmaceutical, chemicals and energy. The reason for mega-mergers, often transnational in scope, has everything to do with size and global economy. “These world-scale industries need a significant size to make them efficient,” points out Basil Kalymon, finance professor at Joseph L. Rotman School of Management, University of Toronto. While not an advocate of all mergers, Kalymon says, “If the merger can be shown to improve cost efficiencies — and not hurt consumers — then I think it is a good thing.”

What the unions want

Yet, all this talk of mergers, curtailed production and discipline makes the unions nervous. To their ears, employers’ current management practices seem calculating and inconsiderate of employee interests. Mergers translate to cost-cutting. Particularly worrisome is when companies say they will benefit from synergies, a euphemism that describes how merged companies can save money in duplicated services such as transportation, accounting, sales and purchasing. The result is that workers often lose their jobs.

The difference in language between labor and management is telling. Senior management talks about asset swaps, consolidation and increased shareholder value. Unions talk about protection from job losses, increased pension benefits and more workplace flexibility. Does there have to be a conflict between shareholder value and employee interests?

“No, it doesn’t have to be that way,” says Fred Wilson, national representative of the Communications, Energy and Paperworkers Union of Canada (CEP) in Vancouver, BC. The reason conflict often results, at least in British Columbia, Wilson says, is because companies are looking at mergers as a way “to lessen competition and reduce capacity.” For Wilson, these are poor reasons to throw people onto the street, whether temporarily or permanently

At the heart of the matter are opposing points of view on what it will take to encourage investment in the industry. In the western part of Canada, the unions say that the corporate culture has changed in the last two decades — from one promoting productivity and efficiency to one where a rapacious senior management always has an eye on share prices. As Wilson says: “Corporations have given up any pretense of serving the public good or employees and have said blatantly, ‘All that matters is share values, and anything that we have to do to increase share prices, we’ll do.'” He adds, in a voice brimming with frustration, “If a company could increase share prices by burning down a mill, they would do it.”

Such volatile language betrays how low morale has dipped and how grim labor relations are in BC, mired by an economy that is facing difficult times. Wilson blames the excesses of capitalism, globalization and foreign ownership as being the root cause for the ills of the industry. At best, these ideas encourage a disinterest in local concerns, and at worst, the loss of the Canadian way of life. “Foreign owners are prepared to see communities like Prince Rupert and Castlegar be wasted in the interest of balancing an international market,” says Wilson about towns struggling for survival in BC.

His solution to what ails the industry is straight out of the handbook of corporate social responsibility. “We would like CEOs to take a more enligh
tened approach to their community, to have a more co-operative and respectful relationship with their employees, and to see them spurn speculative investment.” In an ideal world, Wilson would have CEOs and the boards that oversee companies tell speculative investors who are forever seeking 20-plus percent returns, “Take your money elsewhere.”

The oxygen of business: profits

The mood differs notably in the east, where the tone is less controversial. For example, Stora’s Hartery makes a case for profits. “I think our workforce has to understand that the reason we are here is to enhance the shareholder value. We discuss our financial sheet with all of our workers — in good times and in bad times.”

Georges Cabana, vice-president (HR and public affairs) at Montreal-based Alliance Forest Products Ltd., says plainly: “We define profits as a measure of success, and we are not shy about the profits we’ve made and what are acceptable levels of return. We see profits as the oxygen of our business. We have many investment needs, and if you want re-investment, you need profits.” Such is the message Alliance executives send to employees, he explains.

Cabana says relations with its unions are positive, mainly because they understand the link between investment and job security. “Many pulp and paper employees realize that if you don’t invest and keep your mill competitive, then eventually you will jeopardize job opportunities in our facilities.” Senior executives also hold regular meetings with groups of employees to explain how the operation is doing, answering questions such as 1) Why are we (or not) investing in a particular piece of equipment? and 2) How well are we doing compared to our competitors?

Alliance’s self-described openness with its unions has resulted in labor peace since 1994. With the ratification of the A-C pattern agreement, the company can expect the same until the end of 2004.

Other questions dominate the corporate agenda:

How to regain competitiveness and not depend on a 65-cent dollar;

How to better manage and optimize the fibre supply;

How to pinpoint precisely market niches for value-added products? (see sidebar on marketing strategy); and

How to train workers well enough for a knowledge-based economy.

Truly, management strategy has evolved to the point where many decisions have little to do with the making of paper.

Pump in fresh blood

Despite all the best intentions, consultants like Campbell are blunt in their assessment on how well the industry plans strategy. The weakness can be summed up as follows: too much of the same outdated thinking. As a solution, he advocates something called cross-fertilization. Simply put, cross-fertilization is taking the best ideas of other industries and applying them, in this case, to pulp and paper. Campbell states his case clearly: “What we need in this industry are some very creative thinkers, [who] have been through some of the transformations which have taken place in other industries.”

Alliance’s Cabana says that although cross-fertilization has its merits, there are pitfalls to bringing in just anybody, no matter how qualified, to what he says “is a complicated business. He speaks from experience, having joined the industry 12 years ago as an newcomer. “When you come from the outside, you have to be humble and learn the basics.”

Perhaps, humbleness best describes what the industry is undergoing now. Yet, there are no shortage of ideas — many of them progressive, others traditional — being debated on what it will take to bring the industry onto a firmer footing, as we enter the next millennium. What results will significantly shape an industry that has some very deep roots.

Perry J. Greenbaum is contributing editor of Pulp & Paper Canada. He writes on workplace issues for a number of Canadian publications.


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