Good morning and thank you for inviting me to your conference. The corrugated
packaging business occupies a special place in my heart as I've spent the
greatest part of my career in the containerboard packaging industry.
And a chemical engineer like me always feels at home in a room with so many
technical people. You know what they say about engineers?
An optimist says the glass is half-full.
A pessimist says it's half-empty.
The engineer says: "Looks like you've got 100 percent more capacity than
you need."
Amusing perhaps, but I think the stark reality of our business is that we do
have a bit more capacity than we need at this time. In the case of the North
American packaging business, that means more corrugators and linerboard mills
than demand justifies.
What I'd like to do this morning is share my thoughts about how we've arrived
at such a state of affairs and how we might get out of it. My focus will largely
be on North America, but those of you from other parts of the world should be
able to grasp the implications for your regions.
First, however, I believe it's appropriate to spend a few moments discussing
how the terrorist attacks of a month ago have impacted the United States and our
global business environment. To some degree, we're experiencing a paradigm
shift.
For the U.S. - and for many nations - assumptions about normalcy and security
have been altered. Suddenly, we must contemplate the possibility of unexpected,
wrenching disruptions to our financial and commercial markets. Suddenly, we're
confronted with the possibility that our homes and workplaces are not immune
from attack.
As we all know, there is nothing stakeholders in the business world hate more
than uncertainty and risk.
For the past decade, we have invested in, gloried in, and fantasized about
the boundless promise of new technologies. At the same time, it's become
painfully obvious that technology also has enabled individuals or small groups
to wreak havoc to a degree that would have, heretofore, required armies.
This was proven not only by the events of September 11, and by the worldwide
computer viruses of the following week, but now by biological terrorism.
So, technology has both empowered us and made us more vulnerable. We now face
the fact that small cells of fanatics can cripple cities and stagger societies.
On a more positive note, these events have made Americans - and peoples
around the world - even more aware of how dependent nations are upon each other.
The blows to the U.S. quickly reverberated throughout the global economy. No one
can any longer doubt that some issues can only be resolved on a global basis.
And, perhaps the flip side of America's heightened recognition of global
interdependence, is our rediscovery of our common bonds. A long period of
partisan politics and glorification of our differences has been replaced by a
renewal our of shared values and a common cause.
I hope this spirit lasts. We must celebrate our similarities as well as our
differences.
What does all this mean to the corrugated packaging business? In the short
run, it probably means an even more difficult second half of the year than we
were projecting. Even prior to September 11, box shipments in the U.S. were down
5 percent for the year. And, even before the attacks, consumer confidence had
experienced one of its largest month-to-month drops ever - reaching its lowest
level since 1996.
But the challenges to the North American box business did not begin last
month … or last year. Our problems began decades ago when U.S. manufacturing
started moving offshore. This was the first of three waves of change that have
undercut our growth and profitability.
Some have termed the first wave the de-industrialization of America. Others
have called it, on the positive side, the "Information Economy."
Because of perceived, or real, advantages of manufacturing overseas - including
lower labor costs and less restrictive regulatory environments - many
traditionally American products began to be made in other countries.
This trend has been exacerbated by the fact that much of the emerging
American labor force lacks enthusiasm for manual labor, including the making of
boxes.
At first, these foreign-made, but U.S. bound products, were shipped back in
American-made boxes. But it wasn't long before the producing countries developed
their own box plants. Even then, these plants bought their linerboard from North
America.
Now, as we all know, linerboard capacity is mushrooming outside of North
America. One result is that linerboard exports from North America have declined
more than 50 percent since 1998.
However, overseas packaging producers still need softwood fiber. They've been
getting it from recycled old corrugated containers - OCC - from North America.
So, the trend has been a substitution of OCC for linerboard exports.
Eventually, of course, recycled fibers lose their strength - and there is a
finite supply - and virgin fiber is still required. I'll return to the source of
that fiber later in my remarks.
A second wave of change facing our business is the increasing importation of
agricultural products into the United States - for example, grapes from Chile,
vegetables from Mexico, and ag products from virtually every part of the globe.
As I indicated, this produce is not being shipped to us in U.S.-made boxes.
Finally, we are seeing increasing substitution of competing forms of shipping
containers, primarily plastic boxes.
By now, I'm sure you've heard enough about the threats to our North American
packaging industry. What do we do about them?
Over the long term, I believe stabilization for our U.S. businesses will come
from three sources:
- Continued consolidation of our industry and the closure of excess
capacity.
- Globalization of our business to capture growth opportunities outside the
U.S.
- And, a future-based orientation.
Let's begin with consolidation. It's happening, and I believe that's a good
thing.
The fragmentation of our industry has led to construction binges and
over-capacity - at both the mill and converting levels. It leads to other
manufacturing and distribution inefficiencies. It also makes it difficult to
provide top-quality service to customers who increasingly require national and
now global supply.
To help illustrate this point, all we need to do is take a look at Europe.
Between 1974 and the end of 2000, the stock of Europe's pulp and paper industry
underperformed the overall European equity market by a whopping 914 percent!
And, despite several bouts of consolidation, Europe still has more than 1,000
paper companies - many small or medium-sized family firms.
According to The Economist, "these marginal producers have long
made it hard … to avoid price wars when demand for paper has fallen."
On the other hand, several large consolidations in Scandinavia's paper
industry have resulted in improved performance numbers.
For example, revenue in 2000 for the Scandinavians was nearly $32 billion, a
figure that has doubled since 1996 and quadrupled since 1992. About 90 percent
of the sales from this group are outside the region.
How did they do this?
Consolidation was a key, along with favorable currency exchange ratios. To
mention two major consolidations:
- UPM and Kymmene, both of Finland, merged to become one of the world's
largest forest products companies and recently agreed to buy German paper
producer Haindl. UPM-Kymmene also has made purchases in the U.S. and Canada.
- Stora of Sweden and Enso of Finland merged and then purchased Consolidated
Papers in the U.S.
The people at Stora-Enso say size does count. Size has allowed them to be
more disciplined and focused on creating stable returns, while, at the same
time, giving them flexibility to sell non-core assets.
It's for reasons like these that we at Weyerhaeuser acquired MacMillan
Bloedel and Trus Joist International, and why we're pursuing Willamette
Industries. To paraphrase former CEO Jack Welch of GE, we're taking control of
our destiny before someone else does.
Of course, consolidation is occurring elsewhere in North America.
Over the past few years, we've seen International Paper acquire Union Camp,
Federal Paperboard, and Champion … Georgia Pacific absorb Fort James ...
Jefferson Smurfit combine with Stone Container … Mead and Westvaco plan to
join together … and in recent weeks, Temple-Inland has made a bid for Gaylord.
Another major driver of consolidation is the change in channels to the retail
market - what we refer to as "big-box stores." For corrugated
containers, some of the major players are large supermarket chains. Within the
past two years, we've seen Albertson's buy American Stores … Safeway purchase
Dominick's … and Kroger acquire Fred Meyer.
I know this one well, since I was on the board of Fred Meyer and now am on
the board of Kroger. I guess you could say I got acquired!
Direct corrugated users are combining too. Iowa Beef Packers bought Food
Brands before Tyson Foods bought it … Pepsi-Cola bought Quaker Oats …
Gillette bought Duracell. And the beat goes on!
Why are there so many mergers among our customer base?
Because their customers - our ultimate customers - want:
- Product availability and selection.
- Damage-free goods.
- Choice of features.
- Ease of payment.
- No stock-outs.
- In a word, value.
Consequently, then, our direct box customers want:
- Consistent quality and supply over a wide geographic basis.
- The strongest boxes possible for the least fiber input.
- Specific qualities for their boxes, often including eye-catching graphics.
- Simplified procure-to-pay systems that are convenient and lower their
transition costs.
- Vendor-managed inventories.
- In a word, value - just like their customers.
Changing gears, where does globalization come in and how can it help us in
North America?
Primarily by opening up new markets for our North American production as
markets in other geographies grow - and they're growing faster than those in
North America.
On a long-term, global basis, demand for corrugated packaging is projected to
rise at rates higher than GDP, especially in the developing world.
For example, Asian countries, excluding Japan, are expected to account for 45
percent of world paper and paperboard growth over the next decade.
In this regard, China's output of paper and packaging products - 13 million
tons last year - is projected to rise to 20 million tons by 2005 and up to 30
million tons by 2010.
And, statistics show that, in the past, half of the paper and paperboard for
packaging use has been imported into China.
Of course, if you're a non-North American producer, you're already looking at
these same markets. So, we here in North America have our work cut out for us.
These are some of the obstacles we face:
- Our labor costs are high on a global scale.
- We face long transport lanes to foreign markets, with attendant high
freight costs.
- We must also contend with environmental costs and more restricted
availability of softwood fiber than many other nations.
We do have advantages, of course:
- We are among the quality leaders in building boxes.
- Our graphics design and production capabilities are very high.
- No region yet compares with North America in creating, managing and
improving forests. We're still the source of the world's best softwood
fiber. And we can never forget that softwood fiber drives the box business.
However, harkening back to my theme of globalization, the source of our
virgin fiber is becoming ever more international. In the future, we'll see
significant virgin fiber from South America and Australasia. I know because
Weyerhaeuser will be providing some of it! Even with virgin softwood fiber, we
have to think globally.
Finally, I want to advocate that we all adopt a future-based orientation. The
world is always changing. We must keep moving forward. As the historians Will
and Ariel Durant observed, "The future never just happened. It was
created."
So what are some of the things we must do to create the future we want? I've
already discussed the need for us to continue to consolidate and globalize our
industry. Here are some additional tasks.
Given the ongoing threat of terrorism, we must create a safe and supportive
work environment for our employees. This includes a strengthened effort to
create a physically safe work place and a safety-focused work force.
Distractions caused by world events and marketplace vexations add to the
potential dangers in our work places.
Secondly, we must do a better job of recruiting and mentoring our next
generation of leaders, scientists, engineers and other professionals. In North
America, this task is complicated by the fact that we aren't turning out enough
science, math, engineering or business graduates to meet industry's needs in
general, let alone our own.
My challenge to all of you is to help promote our industry as an attractive
one for talented young people. In the case of Weyerhaeuser, we do so through our
support of the International Corrugated Packaging Foundation. I encourage all of
you not already part of ICPF to join and help create a pool of highly qualified
employees for the future.
We and other companies must also continue to plant the seeds for future
success through research. For example, one of the things we're working to
develop as an industry is super-strong, wood-fiber materials that will compete
successfully with the plastics we see invading our markets today. Some of these
are composites, with plastics and resins added.
At Weyerhaeuser, we continue to pursue innovation. For example, we've
developed a new produce-grade medium that eliminates the use of wax. This helps
us address concerns retailers have with disposing of wax-treated boxes - and
better compete with plastics for the produce-packaging business.
We've also developed an automated paper-recycling machine - PaperSort™ - in
partnership with MSS, a Nashville, Tennessee, company.
PaperSort™ uses advanced UV (ultra-violet) and LED (liquid electronic
display) sensors to process recycled paper at least 40 times faster than via
hand-sorting. It can quickly separate solid-color sheets, newspapers, brown
board, color-printed items, white paper, off-white and other coated papers so
that they can be recycled into the fiber supply for new paper, linerboard and
packaging products. This is revolutionary technology and it's environmentally
beneficial because of the landfill space it saves.
At this time, I'd like to show you a television news spot showing the use of
this technology at our recycling plant. This aired on ABC News with Peter
Jennings on April 27 of last year.
Incidentally, since this spot aired, this technology has advanced to a peak
of 15 tons of wastepaper sorted per hour at a new installation in Sweden.
So, while technology can make us more vulnerable, it definitely can and
should make us more competitive.
In conclusion, despite the current vexing state of our business environment,
I'm optimistic about our industry - if we do the things I've outlined.
We must continue to consolidate and globalize our business. We must look to
the future - and prepare for it. Also, in a world where intention constantly
confronts the unforeseen, we must be adaptable.
Again, if we do these things, I have no doubt that we will succeed.
Thank you for inviting me to share my thoughts with you this morning.
