Forest Products Industry CEOs Say: Back to Basics
Feb. 6, 2008 - Forest, paper and packaging (FPP) companies are
adjusting to a changing business and consumer environment, according to the
2008 edition of "CEO Perspectives," released today by PricewaterhouseCoopers.
The survey of nearly 30 FPP CEOs across the global industry's developed and
emerging markets, 30% from Canada and the US, identified four key priorities: attaining the right business model, cost control, sustainability and
leadership. FPP companies are reconfiguring to meet these challenges, but
views are mixed as to whether the industry has yet reached a turning point in
"The evolving forest, paper and packaging industry is at the heart of
many of the most important and intense debates taking place in North America's
political and corporate circles and within society at large—climate change,
sustainable development, the future of the planet's forests and the most
appropriate use of natural resources," said Bruce McIntyre, leader of
PricewaterhouseCoopers' forest, paper and packaging industry practice in
Canada. "The forest sector's future will hinge upon its ability to address
these challenges through innovation and change mangement."
The PricewaterhouseCoopers (PwC) report found that many of the FPP CEOs
surveyed are eager to get back to basics, i.e. ensuring that they are capable
of delivering a standard, quality product, on time and as economically as
possible. They believe the industry is becoming increasingly commoditised, and
do not see quality or service enhancements generating higher margins. Other
CEOs, whose companies operate further along the value chain, are focusing on
opportunities for differentiating their products and examining their offerings
to ensure that the extra services they provide are really enhancing revenues.
Declining demand is seen as an issue, particularly in commodity segments
like newsprint. In North America, CEOs express deep concerns about the weak
building products market, a sector which has been hard-hit by a dramatic
slowdown in US housing starts. But other executives are more positive and
argue that increasing demand in emerging markets could offset falling demand
in more mature markets. A separate PwC report, "The World in 2050," found that
by 2050, the seven largest emerging market economies (China, India, Brazil,
Russia, Indonesia, Mexico and Turkey) will outstrip the world's largest
developed economies (US, Japan, Germany, UK, France, Italy and Canada).
Most CEOs in the PwC survey are trying to reduce major input costs and
welcome the financial discipline private equity involvement has brought. Fibre
is the single largest cost factor for many players and supply poses major
challenges in some parts of the world. Several CEOs of companies with
integrated supply chains list their access to fibre as a major competitive
advantage. Sourcing fibre cheaply is critical to keeping costs down.
Energy costs continue to be a major factor for some players. Some CEOs
report that their main strategy for reducing energy costs is the modernisation
of existing assets. However, many respondents were more concerned about
transportation costs than direct energy costs. Many executives see
transportation and logistics as one of the most important remaining areas in
which to secure further cost reductions.
Currency exchange rates are yet another major challenge. Countries such
as Canada and Europe have seen their domestic currencies experience gains
relative to the US dollar, thus reducing margins and forcing numerous plant
closures. Producers in several provinces have been hit hard by closures. On
the flip-side, some US companies have seen profits rise on the back of the
weak US currency.
FPP companies are at the forefront of the increased focus on operating in
a sustainable manner. The FPP sector is among the most sustainable industries;
as one interviewee points out, it is the world's biggest producer and consumer
of renewable energy, and 50% of the raw materials used in the European paper
and packaging sector are derived from recovered paper. Forests are also the
biggest binder of carbon on the planet, and have the greatest potential to
offset damage wrought by carbon emissions.
Unfortunately the FPP industry still suffers from a poor image as the
"destroyer" of the world's forests. The CEOs interviewed by PwC generally
agree that the industry must do a lot more to raise awareness of its
responsible approach to maintaining the health and viability of the world's
forests. Suggested measures included sustainability reporting and
collaboration with industry trade organizations and NGOs.
One clearly emerging and significant development is the concept of total
supply-chain, which is being driven by the climate-change and carbon agenda of
powerful customers. One CEO mentioned the increasing pressure to ensure that
the entire supply chain is 'green' - i.e. lumber and paper manufacturers not
only need to reassure retail customers about their own practices, they are
also considered accountable for the practices of the loggers from which they
Several CEOs also express frustration that, while demand for 'green'
products is increasing, customers are often reluctant to pay a premium for
Many of the interviews show that executives are explicitly looking for
leaders who will drive the industry forward and show the way in important
areas like capacity reduction, inventory management and consolidation.
Finding the right talent to pilot the industry in the future may prove
extremely difficult. Many forest, paper and packaging companies, particularly
those in developed markets, are failing to attract the best and brightest new
joiners; without a strong contingent of younger people in the pipeline, they
will be hard-pressed to fill upper-level management vacancies as they arise.
McIntyre added: "FPP companies in Canada and elsewhere will have to learn
how to tap into new markets, such as carbon-neutral energy production, without
jeopardising supplies of economically available wood fibre. These new
businesses have different value chains and markets, and demand skills and
relationships that are different than those traditionally found in the forest
sector. For those companies that lead and make the transition, the rewards
could be significant."
For a pdf copy of CEO Perspectives visit www.pwc.com/fpp.