CHAPTER VI OUTLOOK FOR THE U.S. PAPER MACHINERY INDUSTRY Outlook for 1989 and Beyond. The U.S. paper machinery industry appears headed for its best period of growth since the 1982-83 recession. After years of "running on yellow" as mill operators cautiously approached new expansion plans, forecasts of new capital spending hint at a substantial jump in shipments during 1988-89. If the forecasts are met, product shipments for 1988 should show an increase of better than 18 percent over 1987 with a further increase of about 13 percent likely in 1989. Such increases should bring product shipments from an estimated $1.44 billion in 1987 to approximately $1.71 billion in 1988 and $1.94 billion in 1989. The expansion of the domestic industry should be accompanied by increases in foreign trade, both in U.S. exports and imports. United States paper machinery exports in 1988 should increase by approximately 39 percent to a record high of $428 million. United States imports of paper machinery, including closely related equipment, should show a further increase of 41 percent in 1988, to a record level of $780 million. Based on announced purchases likely to be delivered in 1989, increased mill capital spending is almost certain to be translated into increased U.S. paper machinery imports, even as domestic product shipments also rise. The U.S. paper machinery industry, the largest in the world, will continue to face strong challenges by foreign rivals in the U.S. market as well as in markets abroad. A closer look at the future of the U.S. paper machinery industry may be cast in terms of three dimensions: (1) internal capability of the sector, (2) market prospects, and (3) external climate that may require U.S. Government action. Producer Capabilities. The capability to produce turnkey systems from a variety of equipment suppliers will continue to be an essential component of the United States' ability to compete in the now globalized paper machinery market. As the producer of the broadest range of paper machinery, this U.S. paper machinery industry sector has the capacity to maintain a competitive edge in these systems. Furthermore, U.S. firms will continue to advance technologically and will continue to produce state-of-the-art equipment. Major U.S. suppliers manage extensive R&D activities required to keep their firms competitive. Although cut back from former levels, leading U.S. suppliers continue to operate foreign subsidiaries and maintain licensing agreements. Market Prospects. As noted earlier, demand for paper machinery in the United States is a function of projected capital expenditures by paper mills. Growth in capital expenditures is expected to be quite substantial in the near term, a dramatic change from the sluggish growth which has prevailed since the 1982-83 recession. The U.S. Commerce Department, Bureau of Economic Analysis (BEA) annual survey of plant and equipment expenditures for 1988 showed an increase of 2 percent to $8.77 billion in 1986 paper industries capital spending, followed by a further 2.8 percent increase in 1987 to a spending of level of $9.01 billion. Based on the July-August 1988 survey, paper mills planned a whopping 23.1 percent capital spending increase in 1988 to a fourth quarter 1988 level of $12 billion. If carried out (and fourth quarter 1987 spending had reached a level of $9.9 billion annually), this spending would set a post recessionary record and likely fuel substantial new paper machinery shipments in 1988-89.1 Also according to an annual survey by Pulp & Paper, published in the January 1989 issue, projected U.S. capital spending by the paper industries for 1988-90 period was up 70 percent from the previous year's estimate for the 1987-89.2 Thus, prospects in the U.S. paper machinery market are probably better than at any time since the 1982 recession. Many good immediate opportunities for U.S. suppliers seem likely in the 1988-90 period as a backlog of domestic mill jobs, postponed by the recession, get under way. Grounds for optimism include brighter prospects for such key segments of the paper industry as coated papers, fine writing papers, and linerboard. Planned expenditures by paper mills, according to the Pulp & Paper survey, include $3.8 billion for new machines and $2 billion for machine rebuilds. The survey reported 34 major mill expansion projects currently under way in the United States. Only two greenfield mill projects were started up during 1987 and none in 1988. Four greenfield mills will enter service in 1989 with five more scheduled for 1990 startup. Five greenfield mill projects were in various planning stages at the start of 1989. Mills started operating six new paper machines at existing sites in the U.S. during 1988. Three of these were tissue machines, with two for coated and one for uncoated free sheets. Beloit supplied the 1 "Business Plans 10.6 Percent Increase in 1988 Capital Spending," Bureau of Economic Analysis (BEA) News Release BEA 88-42, September 8, 1988, Washington, DC. Also see, Plant & Equipment Expenditures, Survey of Current Business, April 1988, pp. 26-30, and following issues. 2 See Pulp & Paper, January 1986, 1987, 1988, and 1989 for results of the annual survey. three tissue machines, with Voith and Valmet providing one machine each. In 1989 five new machines are scheduled to come on stream at existing mills with a further seven paper machines due to follow in 1990. The Lake Superior Paper Industries (LSPI) 235,000 tpy clay-filled supercalendered groundwood mill at Duluth, Minnesota entered into service on November 4, 1987. Built in only 19 months, this mill was almost entirely furnished with foreign equipment including a pressurized groundwood pulping system (PGW) from Tampella (Finland). This is the second such PGW mill in the United States (the first was Madison Paper in Madison, Maine). The mill was one of the largest new capital projects to be completed domestically in recent years. 3 The near-term outlook in foreign markets is mixed. In Canada, our largest export market, 1987 brought the sharpest increase in U.S. exports since the recession. Given the intention of Canadian paper producers to increase capital spending, U.S. exports should remain high in 1988-89. In Mexico and South America the extent of future sales will depend partly on the health of the national economies. As past customers, Saudi Arabia, India, and Nigeria represent markets for possible additional future U.S. exports of paper machinery. In East Asia, heavily forested nations such as the Philippines, Malaysia, and Indonesia offer a significant opportunity for more concentrated market development. As discussed earlier, U.S. trade seminar/missions in 1987 to Australia/New Zealand and to West Germany are examples of an intra-industry trade promotion effort which may eventually yield promising results. External Climate. The degree of success of the U.S. paper machinery industry will depend not only on their own efforts and market demand but also will depend on external economic conditions particularly exchange rates, tariffs, taxes, and interest rates. The recent much lower and more competitive value of the U.S. dollar in relation to principal currencies of Western Europe and Japan should be favorable for U.S. paper machinery firms trying to sell in those markets. The expected further reduction in paper machinery tariffs among the United States and other nations will provide a more open trading environment than ever before. This will intensify competition among major paper machinery exporting nations. 3 The LSPI mill project is described at length in Pulp & Paper, April 1988, pp. 118-123. For an updated list of pulp and paper machine startups in the United States from 1977 to 1987, see 1988 Pulp & Paper Factbook, p. 77, Miller-Freeman Publications, San Francisco, 1988. The elimination of the investment tax credit in the Tax Reform Act of 1986 may cause at least some temporary adjustment in capital expenditures of U.S. paper machinery producers. Whether producers consider the lower corporate tax rates a sufficient offsetting blessing remains to be seen. The industry stands to benefit from reduction of state and locally imposed inventory taxes which are frequently applied to machinery in place. Because the machinery produced by this industry is long-lived and quite immobile the cumulative effects of such inventory taxes may act to discourage increased capital expenditures for new paper machinery. CHAPTER VII ISSUES AND FEDERAL POLICY OPTIONS The paper machinery industry is not well known to the general public. But its ultimate benefits are widespread. Its output makes possible the production of enormous amounts of paper, which in turn is transformed into a myriad variety of goods essential to daily business, education, personal, and government activities of modern societies. It is an important industry whose competitiveness issues deserve equal consideration by government leaders along with better-known and more visible industries. Several issues and options which face the U.S. paper machinery industry have substantial impacts on competitiveness in the international marketplace. "Options" are policies and actions which government could initiate or support. It is not intended that government resources should be, necessarily, committed to all of these alternatives. They require evaluation with respect to potential effectiveness and must be balanced against competing demonds for government resources. Major competitiveness issues confronting the U.S. paper machinery industry are how to: O O O O O о expand export markets improve export financing encourage greater research and development (R&D) efforts promote fairness in product liability laws increase usefulness of U.S. Bureau of the Census statistics insure an adequate national security manufacturing base Expand Export Markets In the past, the U.S. paper machinery industry succeeded by focusing primarily on the huge and little contested U.S. market. However, increased foreign penetration into the U.S. domestic market decreased the U.S. industry's share of the market. Thus, while the U.S. industry is trying to regain lost domestic market share, it also needs to focus more on increasing its world market share. The Earlier, this study showed that West Germany is the leading exporter of paper machinery with about one-fourth of the world export market for this product. The U.S. sector ranks a shaky distant second, hard-pressed by Italian, Japanese, and Finnish competition. Úxport success of foreigners further increases their capacity to penetrate U.S. domestic and third-country markets. Traditionally, this industry has not placed a high priority on export promotion. Realizing the importance of increased exports for long-run survival, the U.S. paper machinery industry has initiated more emphasis on export promotion activities. This industry recently conducted |