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nameplate. Suco equipment May remain in Mills for periods exceeding 50 years. Even though this equipment has generally been substantially rebuilt since first installation, the manufacturer is potentially liable for damages attributed to machinery which May no longer meet currently accepted industry operating standards. There is a record of suppliers paying damages in suits arising from machinery in place since the early 1920s. Consequently, the industry has sought, at both State and Federal levels, statutes of repose which would bar damage awards arising from machinery more than 25 years old, unless required safety equipment was not provided. Additionally, the paper machinery industry, along with other capital goods industries has supported broad product liability reform measures currently pending in Congress.

U.S. and Foreign Investment

Limited investment data for this industry suggest that clearly Finland and Japan have invested as much in plant and equipment in both relative and absolute terms as did the U.S. paper machinery industry. For example, capital expenditures by the dominant Finnish firm Valmet, a state-owned Company, were approximately $60 million, 8 percent of total sales, compared to U.S. expenditures of about $40 million, about 3 percent of sales for the entire U.S. paper machinery industry. As regards Japan, one source estimates that over a 5-year period capital expenditures by the Japanese paper machinery industry were 3 to 15 percent of shipments value which in 1985 would translate to a capital expenditures range from $25 million to $125 million. Unfortunately, no West German capital expenditure data are available for this industry, thus no accurate quantitative comparison is possible. However, given that West German exports exceed those of the United States and Japan combined, it is likely that West Germany is among the leaders in capital expenditures by this industry.

U. S. and Foreign Research and Development

The goal of research and development (R&D) is technological discovery and improvement. Commercially this effort May be directed to (1) the manufacturing production process -- in the paper machinery industry leading to more competitive unit costs and prices -- and (2) the product -- leading to better quality paper machinery in terms of efficiency, ease of use, and durability for potential pulp and paper mill customers.

As regards production process R&D, the foreign paper machinery industry is on a competitive level with U.S. industry efforts. For example, leading paper machinery firms in the United States and Finland have developed their own computer aided design and computer aided manufacturing (CAD-CAM) equipment. In the United States, for example, the Beloit Corporation began investigating the use of CAD-CAM equipment in 1977, envisioning it primarily as a drafting

aid. Subsequently, the firm developed a proprietary process known as BEL-CADDR. The first BEL-CADDR systems were brought on line in 1980, with 28 workstations in place by 1983 at Beloit plants. The success of the system has produced exponential growth, with 217 workstations at 8 Beloit plants in 5 countries in operation at mid-1988. Future plans exist to extend use of the system to Beloit foreign licensees in Brazil, Spain, and Japan. 3

In respect to product R&D, U.S. paper machinery in the past had a reputation for the most advanced, efficient, and easiest equipment to operate. Today, however, that advantage is not as clear-cut as foreign competitors devote substantial resources to product R&D. For example, in 1987 Valmet, the Finnish state-owned Company, budgeted approximately $30 million to R&D for paper machinery (4 percent of sales) compared to a U.S. Department of Energy budget of $20 million to $25 million.

Product R&D has focused on diverse areas from whole production systems to individual machinery components. In the last decade, researchers in the United States, Finland, and Sweden have developed mill-wide automated control systems which have become a feature of modern pulp and paper mill operation. In this development, reliance has been not only on R&D within the paper machinery industry but also on technology in the machine tool and other industrial process industries. R&D also has focused on improving technology in areas such as headboxes, twin-wire and top former design, suction boxes, wet pressing, drying systems, winding, sensors, and such off-machine processes as coating and Black liquor recovery.

Summary

World exports of paper machinery have recovered from the recessionary low in 1983. Though the U.S. paper machinery industry continues as the world leader in shipments value, this U.S. industry still ranks a distant second to West German firms in exports value. The three most important price-related competitive factors hindering U.S. paper machinery exporters in the early 1980s were (1) a rising value of the U.S. dollar, (2) effective foreign export financing arrangements, and (3) lower foreign production costs. However, the decline in the value of the dollar since 1985 and improved credit arrangements by Eximbank have strengthened the U.S. competitive position. To sustain long-run competitiveness, the U.S. paper machinery industry must not be overtaken by formidable foreign competitor efforts in investment and R&D.

3 "Customized CAD-CAM Aids Machinery Manufacturer's Drawing Ability," Pulp & Paper, September 1987, pp. 72-73, as updated by Beloit in a later release. See also ibid., "Computer Innovations Challenge Engineers and Optimize Designs," pp. 56-59.

CHAPTER V

FOREIGN COMPETITORS AND REGIONAL MARKETS

This chapter discusses the current status of the paper machinery industry in the United States and key foreign markets. The individual foreign country sections discuss patterns of trade in paper machinery, leading competitor firms, the size and importance of each country's paper industry, research and development (R&D), and government assistance to the industry. These sections provide background for understanding the competitiveness of the major paper machinery manufacturing countries. Canada, with the largest industry and one closely tied to U.S. suppliers, is discussed first and at greater length than other markets. Major manufacturing countries such as Finland, Sweden, and West Germany follow, then rising producers such as Brazil and Japan. Countries such as China, Mexico, Australia, and New Zealand, which are attractive export markets, are grouped regionally with other markets.

Foreign Penetration of the U.S. Market

Foreign penetration of the U.S. market is clearly evident over the 10-year period from 1977-87. During the entire period, 70 paper machines were started up at U.S. Mills or were committed to order. Of these, 52 percent was supplied by U.S.-based companies, and 48 percent was purchased from foreign-based manufacturers.

During the years 1974-77, an overwhelming 86 percent of new U.S. paper machines was purchased from domestically based firms. During 1977-87 barely half of all new paper machines installed in the United States has been acquired from domestically based companies. During one year, 1981, eight out of nine new machines were bought from foreign manufacturers. In 1986, four of the eight machines purchased were acquired from abroad. 1

Between 1977-87, Finland accounted for 50 percent of the imports or 24 percent of overall shipments. Valmet with ten and Tampella with seven split the Finnish share. West Germany supplied 14 machines during 1977-87, of which Voith sold 12 and Sulzer-Escher Wyss two. KMW of Sweden sold two machines with Holder of the United Kingdom taking one. Beloit supplied over 90 percent of the domestically produced machines supplied between 1977-87.

The increased presence of foreign-owned subsidiaries and facilities in the United States has reduced U.S.-based firms' role in key decisionmaking. Now key decisions on R&D, plant location, capital

1 Pulp and Paper 1988 Factbook pp. 75–78.
See also Pulp & Paper, January 1987, p. 112-113.

expenditures, etc. May be made in Finland, West Germany, or Switzerland as well as Wisconsin, Massachusetts, or Ohio. This has lowered the profile of some firms in the small communities where plant facilities are usually located. The family directed, locally based enterprise (which still very much exists in this industry) has long been at the center of local community life. Now with local ties weakened, management May seek more formalized ways of implementing decisionmaking. Furthermore, the decisions made by foreign management May alter impacts on the trade balance or domestic R&D capability.

Since the middle 1980s, foreign-owned suppliers have tended to be government and publicly held firms which are larger in size than their U.S. counterparts, such as Valmet in Finland. U. S. producers have traditionally been smaller, closely held, family-dominated enterprises. Further, foreign suppliers, especially in Finland, are more likely to have substantial interests outside the paper machinery industry such as the shipbuilding and forest products industries. The recent mergers in the U.S. industry have altered this picture somewhat and have given several leading U.S. producers a place as substantial parts of strong, publicly held firms. However, the U.S. industry as a whole still remains at a disadvantage in terms of resources and influence in competing with major foreign producers.

Canada

Canada is the largest market for U.S. paper machinery makers, taking annually about one-fourth of U.S. exports during 1981-85. It is also a major source of U.S. paper machinery imports. This flourishing bilateral trade, with an historic but declining balance in favor of the United States, has produced significant benefits for manufacturers on both sides of the border.

Canadian producers of paper machinery are both competitive with and affected by U.S. producers. The large stake in the Canadian industry held by U.S.-based firms inevitably affects decisions on sourcing, labor relations, equipment purchases, and plant location to name only some obvious circumstances. At the same time, the Canadian branches are expected to yield a profit to their U.S. parent firms and May compete with the U.S. locations for specific contracts for delivery outside Canada and in the United States.

The U.S.-Canada Free Trade. Agreement (FTA) MAY affect the competitiveness of the Canadian paper machinery industry. The tariff structure of the industry will be changed and various government assistance programs to industry May be affected. Under the FTA, Canadian and U.S. tariffs will be lowered to zero over 5 years in annual increments starting January 1, 1989.

Furthermore, the Canadian industry faces challenges from both traditional competitors such as Finland and from new sources such as Brazil. This parallels the experience of the U.S. industry. Canadian domestic producers have also attracted buyers from outside the United States, notably in the case of Valmet (Finland) in its consolidation with Dominion Engineering and its purchase of Sentrol Systems, of North York, Ontario. High labor costs affect Canadian producers in much the manner faced by U.S. firms. Long considered a healthy part of the North American market, Canadian suppliers have had to respond to the globalization of the industry and the need to source outside the country and to seek export markets in nontraditional areas far from home.

Industry Overview. Canada has long been a major producer of paper machinery. Fostered by high tariffs and ample wood resources, production of paper and paper machinery developed rapidly in the 19th and early 20th centuries much in the fashion of the U.S. industry. When the industry's growth spurted in the years following World War II, U.S. producers came to dominate the Canadian industry. Approximately three-fourths of the firms are under non-Canadian ownership, with about half of the industry consisting of subsidiaries or affiliates of U.S.-based companies.

The Canadian industry presently consists of approximately 60 firms of which 15 employ over 100 persons each. Exact employment figures are not available, but employment in the industry, including closely related firms, May reach 3,500 or about one-fifth of the U.S. total. Annual shipments have gyrated as in the United States but have recently exceeded $200 million annually. In 1985, the last year for which precise figures are available, product shipments of paper machinery by Canadian firms totaled $231 million, up by $37 million, or 19 percent from 1984, but still $73 million or 24 percent below the pre-recessionary high of $303 million set in 1981.

Most Canadian producers are located in Quebec, Ontario, and British Columbia. Drawn in part by the presence of PAPRICAN, the Pulp and Paper Research Institute of Canada, a number of major firms have clustered near Montreal, at Pointe Claire, Quebec. Although more of the industry is urbanized than the U.S. industry, major plants of . several U.S.-based firms are located in small towns such as Sorel, Quebec (Beloit) and Owen Sound, Ontario (Black Clawson).

As noted earlier, a large percentage of Canadian paper machinery firms are under foreign ownership, mostly U.S. ownership. NNearly all U.S.-based paper machinery suppliers active in exporting have found it both necessary and desirable to locate plants in Canada or maintain license agreements with Canadian firms. Canadian facilities of major U.S. producers such as Beloit and Black Clawson have capabilities comparable to the equivalent U.S. facilities, and the Canadian plants May, in some instances, compete with U.S. plants for orders both within and without Canada.

Table 23 lists major Canadian firms under foreign ownership. The number of U.S.-owned firms in Canada supplying the paper industry is

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