- May 01, 2002, Simon King, PCI Films Consulting Ltd.
In the $30 billion world market for consumer flexible packaging, the internationalization of packaging substrate suppliers is taken for granted, as is the globalization of major customers such as food groups Nestlé and Mars. But the globalization of converting groups is a comparatively new phenomenon.
A few larger converting groups were drawn to invest in distant overseas markets as long as 15 years ago, led partially by expectations from customers to join them. But with a few notable exceptions (see Amcor Table 1), these ventures were rarely heralded as commercial successes. Rather, they were plagued by barriers of culture, cost base, language, legislation, and unrealistic performance expectations. Yet the trend to invest in geographically distant markets grows ever stronger. Why?
Bought Leigh-Mardon Pty Ltd. (Australia)
Bought Celthene Pty Ltd. (Australia)
Exchanged Canadian assets with Bonar (Canada)
Bought Schroeder & Wagner (Germany)
Bought UCB's flexible packaging business (Benelux, Spain)-completed in 1997
Established new plant in Lodz (Poland)
Bought Pechiney Zhongstan (China)
Formed three-way merger with Amcor, Danisco, and Akerlund & Rausing
Purchased two performance films manufacturing plants in Thetford and Ledbury, U.K., from Rexam plc (U.K.)
Two Types of Markets
The world is a different place today. With the advent of new communications technologies, changes in the political landscape, and growth in disposable incomes, emerging world markets in Southeast Asia and Central and South America, for example, represent more attractive investment opportunities than they did before — often more attractive than many of the more mature markets, which have seen demand growth slow and margins decline.
Most regions of the world market are suffering from overcapacity in printing, lamination, and substrate production. As a result, consolidation has taken place in home territories. Small (often family-owned) converters faced with higher investment costs and increased price pressure are selling out to larger companies. This is happening across the world.
To survive, converters are striving to reduce costs. Some are sourcing staple (low-margin) products for their home markets from a new overseas partner or acquisition. Middle-tier and larger regional flexible packaging groups are securing their position by accessing new technology and finding strong growth in emerging markets.
Where are the Growing Markets and Sources of New Technology?
In the last ten years, the world market for flexible packaging has evolved into two distinct tiers: large, mature markets such as North America, Western Europe, and Japan; and smaller but growing emerging markets such as India, China, Southeast Asia, Eastern Europe, and South America.
Although emerging markets are suffering their own over-supply problems, they offer lower costs and stronger demand growth potential than mature markets. Factors that help drive this growth include:
Established international investments by Western consumer products manufacturers, eg., confectionery, snack foods, and tobacco companies;
Strong, technically competent domestic converters;
Growing consumption of packed products, especially prepared convenience foods;
Increasing disposable incomes among pockets of (typically) urban populations;
Standard packaging formats for end-user's products wherever they are manufactured and sold in the world market;
The evolution of more sophisticated retailing systems.
Things Not as They Seem
If one route to commercial success is to find strong growth in new markets, another is to secure technology or end-user superiority. Sources of new technology lie in both mature and emerging markets, but mature market players can facilitate the adoption of new technologies by providing funds, training, know-how, and marketing expertise. And global end-users may be more comfortable working with local suppliers supported/partnered/owned by a familiar Western flexible packaging group.
While it might seem large Western groups are setting out to conquer the world, the reality is different. Converters in emerging markets are no longer purely the “preyed upon.” When US-owned Bemis set up a joint venture with Brazilian ITAP (ITAP Bemis), it was a win-win deal for both parties. ITAP's parent group sold a one-third share in the company to secure new technology and expertise, while Bemis gained access to the long-term potential in the Brazilian market.
So, increasingly, internationalization is about ambitious companies in emerging markets wanting to keep their competitive edge and actively seeking cooperation with mature players offering unique technologies and expertise.
What About the Future?
Pressures in mature markets look set to continue for the next five years, forcing reduced margins and ongoing rationalization in Europe and America. This will involve plant closures and other measures to reduce overcapacity in the market.
Some companies already have taken steps to tie key customers closer to them, working in partnership to achieve improved levels of service and reduced costs all round. An example of this is the increasing frequency of the on-site location of key employees with the customer, able to provide technical, purchasing, and after-sales support. Converters are working in the same way with their raw material suppliers, e.g., personnel from ink manufacturers managing on-site ink supplies.
For larger converting companies seeking to grow from the development of new market opportunities, Southeast Asia and South America currently are highly attractive. These regions have large populations, with increasing disposable incomes and growing market sophistication at both end-user and converter level. Of particular note are India, China, Indonesia, Brazil, and Argentina. Argentina is still in there despite, or even because of, its present economic situation.
Smaller players may find the solution in developing niche markets, technologies, or “total solutions” in a limited geographic or market area, but even these will be ripe targets for acquisition.
Smart companies in emerging markets will grow stronger, initially following the expansion pattern of mature markets, but increasingly looking overseas for:
technologies that provide competitive advantage (for example high-barrier coating technologies);
supply partnerships with other converters (providing extra volume to one party and a fast track route to market for the other);
acquisitions (particularly with regard to domestic and neighboring markets).
The right strategy will depend upon a company's size, objectives, and attractiveness to potential partners.
The race is on among major players in mature markets to secure footholds and opportunities in emerging markets. And they are not racing just each other. They face strong and acquisitive contenders in emerging markets themselves. To secure a future in this industry, companies must know their strengths, keep track of competitors, clarify their strategy for defense or enlargement, and spot potential investment opportunities early.
Simon King is managing director of PCI Films Consulting Ltd. based in Banbury, U.K. He has more than 20 years experience at senior level in flexible packaging markets and is the author of two new studies:
“Who's Who in West European Flexible Packaging” profiles more than 500 substrate suppliers, converters, ink/adhesives manufacturers, and machinery suppliers. It contains detailed profiles of the top 20 European flexible packaging groups.
“World Flexible Packaging Report” offers statistics on the size of each of the regional markets by value and by major country; a review of regional plastic film, aluminium foil, and paper supplies; and profiles of more than 1,200 flexible packaging converters, alphabetically and by country.
Both reports also will be available and continuously updated on-line, with 12 months' password-protected access, enabling purchasers to conduct subsequent queries and searches independently.
PCI also produces dedicated quarterly business reports and regional supply/demand reports for the polyester and polypropylene film and flexible packaging markets. Contact Mr. King at +44 1295 817670; email@example.com; pcifilms.com.
Examples of the Internationalization of Converting Groups Since 1985
Japanese converters, Toppan, for example, have invested in Southeast Asian markets.
Pechiney (France) has expanded its worldwide interests with acquisitions in Southeast Asia, South and North America, as well as on its doorstep in Europe.
Printpack (USA) has bought companies in Europe and established operations in Mexico.
Huhtamaki (Finland) took over Van Leer Packaging (Netherlands) and with it gained a shareholding in the largest flexible packaging converter in India: Paper Products Limited.
Bemis Inc. (USA) has acquired companies in Europe and set up joint ventures in South America.
Emerging & Mature Markets Compared…
India offers an urban population of more than 200 million people with equivalent spending power to consumers in Western Europe.
Per capita consumption of flexible packaging in most mature markets will range from $20-$30. In emerging markets it will be under $10.
Whereas flexible packaging demand growth rates in mature markets will range from 0%-6%, emerging markets are growing at 10%-15% per annum and offer prospects for even stronger growth.