TABLE 6 MEASURES OF PRODUCTIVITY IMPROVEMENT: Per Employee ($) 34,170 37,835 40,071 44,266 46,252 50,506 55,040 57,093 33,006 32,877 33,224 35,880 42,843 42,297 47,513 50,827 Value Added Value Added All U.S. Mftr. Value Added As a % of Value of Shipments All U.S. Mftr. 23.75 26.39 28.93 31.93 35.01 37.36 39.91 42.11 29.11 29.14 28.69 31.73 35.75 43.53 43.30 45.05 Paper Mach. Ind. 60 53 49 50 SOURCE: Bureau of the Census, U.S. Department of Commerce. handling equipment, and recently, computer-aided design and computer-aided manufacturing systems and flexible manufacturing systems. Given this cautious attitude towards new capital expenditures, the industry nevertheless managed a sixfold increase in current dollar capital expenditures between 1968 and 1980. As shown in Table 8, expenditures rose most rapidly between 1975 and 1980, following the 1974 recession. Between 1980 and 1983, new capital expenditures trended steadily downward. From an all-time high of $55.6 million in 1980, new capital expenditures skidded to $15.7 million in 1983. partial recovery of 1985, however, fueled a sharp jump in new capital expenditures by the industry. From the 1983 recessionary low new capital expenditures rose by 170 percent to $41 million in 1985, before falling back to $38 million in 1986. The Data Note: Data for Harnischfeger do not reflect Beloit Corporation acquisition and involvement in this industry until 1986. for Thermo Process Systems are for that segment only of Thermo Electron Corporation. The recency of several acquisitions precluded inclusion of data for Combustion Engineering, Inc. in this table. Source: This table was prepared from annual reports of the companies and from 10-K and 10-Q reports and stock prospectuses filed with the Securities and Exchange Commission (SEC). Selling the Machine to the Mill. A web of long-standing relationships exists between suppliers andusers in the paper machinery industry. Quite obviously, the Source: Annual Survey of Manufactures, Statistics for Industry Manufactures, Special Industry Machinery, MC (82)-35D, both paper machinery industry sells nearly all of its product to pulp, paper, and paperboard mills. As is true with supplier firms, leading pulp, paper, and paperboard producers generally have maintained a long and stable existence. Although recent waves of mergers in the paper industry have reduced the number of producing firms and operating mills, the mergers have not altered the primary importance of such factors as service, reliability, and trust in securing new orders. Traditionally, the supplier of an existing machine has obtained an advantage in providing new or upgraded equipment for that machine. This "incumbency advantage" has helped U.S.-based producers win rebuild orders in North America and abroad because so much U.S.-built original equipment is currently in place. However, suppliers will frequently be successful in securing orders to rebuild or upgrade a competitor's original equipment. For example, as top formers have been installed on existing fourdriniers, companies such as Beloit, Black Clawson, Voith, and Valmet have competed for and won orders to upgrade equipment initially installed by competitors. Various instances of this have been reported in the Pulp and Paper Project Report or elsewhere in the trade press. The configuration of paper industries machinery, as to width, trim, capacity, and grade of paper to be produced, makes it almost impossible to estimate a typical price for a machine. One industry source indicated that, depending on these and other factors, newsprint machines have sold for between $5 million and $50 million. Typically, major pieces of equipment such as headboxes, fourdrinier tables, dryer sections, or pulp digesters have been constructed at the supplier's factory and installed in the mill by field erection personnel employed by the supplier. On a large machine rebuild or a new mill project, an architect/engineering firm will normally supervise the erection and installation of equipment. However, the supplier firm is generally obligated to provide initial setup and training of the mill personnel designated to operate the equipment. The major suppliers maintain regional service personnel and field erectors for this purpose. Rapid deployment of troubleshooters to a mill is expected by mill personnel in order to reduce machine downtime. Domestic suppliers have sought to emphasize the ability to provide rapid service in competing with foreign suppliers. Consequently, most foreign producers have established service outlets in the United States and Canada to quickly service imported machinery. Machine Rebuilding Market (1) to Over 40 percent of all mill jobs which were planned in the United States and Canada between 1986 and 1988 were machine rebuilds. In a rebuild, an existing machine is shut down for a period of time and key components replaced. Such shutdowns normally last from several weeks to over 2 or 3 months, depending on the extent of the rebuild. A rebuild is ordinarily undertaken for one of five reasons: increase production capacity; (2) to change the product or grade of paper produced on the machine; (3) to install new technology on the machine; (4) to increase machine efficiency; and (5) to improve product quality. A typical example of such a rebuild involves installation of a twin-wire or top former on an existing fourdrinier table. Rebuilding may also involve sections of the machine such as the press and dryer sections, or installation of a new headbox. When complete, the rebuilt machine will be restarted and will be, in effect, renewed equipment. Typically, a paper machine, while bearing its original number and remaining physically in place at the mill, will undergo several rebuilds during its useful life.3 3 For a concise discussion of why rebuilds are undertaken see McCollister, Mark A., "Well Planned Rebuilds Can Revitalize Dated, Slow-Speed Paper Machines", Pulp & Paper, January 1985, pp. 90-93. Although rebuilding is practiced worldwide, North American rebuilds have been particularly vital in allowing U.S.-based companies to maintain healthy order books during the period since 1983. Rebuilds have accounted for up to 70 percent of the new orders received by U.S. suppliers since the 1982 recession. For example, in the South alone five paper companies announced major rebuild projects in early 1987 although only two new paper machines were due to come on-stream in the region during the year. In the Northeast, three major rebuild projects were under way in late 1987. Traditionally, U.S. suppliers have been better positioned to receive orders for rebuilds than for new machines, since the equipment to be rebuilt has usually come from a U.S.-based supplier. However, this U.S. advantage is less pronounced today than it was in the past. As noted earlier, feasibility studies for a machine rebuild in a U.S. or Canadian mill are more likely to be provided by a U.S. or Canadian consulting firm. Hence, North American suppliers will usually have a leg up in bidding for such projects. U.S.-based suppliers also appear to be better able to apply geographic advantages (quicker field service and easier access to field erection personnel) to rebuild orders. In executing rebuilds, mills seek to reduce downtime and, therefore, require quick deliveries and rapid work schedules. Depending on scale, machine rebuilds may exhibit the long lead-time characteristics associated with new machine installations. Rebuilding also occurs in such other aspects of machine operation as calenders and dryer sections, press sections, and pulp lines. Recent reports by consultants to the paper industry have indicated concern about the growing age of the machinery in place. Despite extensive rebuilding, it appears that U.S. pulp and paper mills will face increasing pressure to modernize machinery in the face of foreign competition. If properly exploited, these conditions, bred by the boom-bust cycle affecting the paper industry since 1974, may offer substantial new sales opportunities to U.S.-based machinery producers. The scope of the rebuild market can be seen from assessing the age of the paper machines currently in place at U.S. pulp and paper mills. According to an annual survey conducted by the American Paper Institute almost half of the 1,044 paper and board machines in place surveyed as of January 1, 1986 were installed or last rebuilt prior to 1971, and 9 percent of the machinery dates from before 1950. These older machines accounted for 37 percent of the paper and paperboard production capacity, with the pre-1951 installations representing 4 percent of the machinery in place. Machines over 15 years old accounted for 30 percent of the newsprint capacity surveyed, 48 percent of the tissue machines, and two-thirds of the machinery for making recycled paperboard. Pre-1951 installations were concentrated in printing and writing papers (22 machines), converting (19 machines), and recycled paperboard (25 machines). Geographically, the older machines are most numerous in the East North Central states, a region encompassing the major paper producing states of Wisconsin and Michigan. Nearly 41 percent of |