SPRU - Science and Technology Policy Research Appendix P 2 LESSONS FROM SCOTCH: S USTAINABILITY, COMPETITVENESS AND TECHNICAL CHANGE Report to the Institute for Prospective Technological Studies, Sevilla for their project on BAT environmental regulations and competitiveness Dr Adrian Smith SPRU - Science and Technology Policy Research Mantell Building University of Sussex Brighton BN1 9RF UK Tel: 0044 1273 877065 Fax: 044 1273 685865 Email: A.G.Smith@sussex.ac.uk SPRU - Science and Technology Policy Research Appendix P 2 1 Contents Contents 1 Introduction 3 The dynamics of technical change in the pulp and paper industry 3 Competitiveness issues in the EU pulp and paper industry 8 Environmental performance in the EU pulp and paper industry 16 Heterogeneity in the EU pulp and paper sector, case study sites and site visits 25 The draft research questionnaire 28 Conclusions 32 References 34 Appendix A - SCOTCH paper sector interviewees 35 Appendix B - Equipment suppliers to the pulp and paper industry 37 Appendix C - The innovation process in pulp and paper making (1980-1995) 40 Lessons from SCOTCH Appendix P 2 2 SPRU - Science and Technology Policy Research Appendix P 2 3 Introduction This report provides information about the EU paper industry learnt during the DGXII funded project, Sustainability, Competitiveness and Technical Change (SCOTCH). It is intended to help the IPTS/DGIII project analysing ‘BAT and competitiveness’ by providing background information about the paper industry case study sector and by offering some general advice concerning the research design. Specific objectives are to cover the following topics: • Providing advice on the dynamics and drivers of technical change in the pulp and paper sector. • An appraisal, from an EU perspective, of the competitiveness issues faced by the EU pulp and paper sector. • Characterising the environmental performance of the EU pulp and paper industry, particularly with reference to implementation of BAT under the IPPC Directive. • Characterise the heterogeneity of the sector and advise on how this can be captured by the BAT and competitiveness case study design. • Review the draft research questionnaire and suggest amendments. • Provide practical advice on plant visits. These will be met from the perspective of the SCOTCH project, whose chief aim was to link quantitative Life Cycle Analysis models with detailed qualitative studies into technical change in a novel, dynamic way. The objective was to assess if such a linkage might improve understanding of the relationship between technical change and environmental performance in a mature process industry. The SCOTCH final report will be passed onto IPTS as soon as it is available. The paper industry was one of two case study industries (the other being PVC). SCOTCH focused specifically on the manufacture of coated printing and writing papers (e.g. LWC grades). This paper grade was chosen because, amongst other things, it had not been so widely researched (unlike newsprint or tissue). The patina of the advice in this project reflects this coated paper focus. The SCOTCH project relied upon semi-structured interviews and a thorough review of primary and secondary literatures across the entire paper production system, from forestry to waste management, chemical supplies to magazine publishers. The list of interviewees is provided in Appendix A. The following sections cover each of the objectives listed above more or less in order (although advice on plant visits is covered in the section explaining the heterogeneity of the sector). The dynamics of technical change in the pulp and paper industry Putting technical change in the pulp and paper sector into some perspective, we see that when combined with printing it generally falls into the low-tech industry category by OECD standards (table 1). Lessons from SCOTCH Appendix P 2 4 Table 1: 1992 business expenditure on R&D as a percentage of production across industries in the OECD-12 countries. Aerospace 12.4 Non-ferrous metals 0.9 Computer and office machinery 11.9 Fabricated materials 0.7 Pharmaceuticals 11.9 Ferrous metals 0.7 Communications/semiconductor 9.0 Other manufacturing 0.7 Scientific instruments 6.4 Food, beverage and tobacco 0.3 Motor vehicles 3.4 Paper and printing 0.3 Industrial chemicals 3.3 Textiles, footwear and leather 0.3 Electronic machinery 2.7 Wood and wood products 0.2 Other transportation 2.5 Shipbuilding - Non-electronic machinery 2.0 Rubber and plastics 1.2 High tech industries 8.1 Non-metallic mineral products 1.0 Middle tech industries 2.5 Petroleum refining 1.0 Low tech industries 0.5 Source: OECD (1996) Within the sector we see that a number of EU Member States, particularly Scandinavian members, perform well compared to other countries, whereas other Member States are in decline (table 2). Table 2: R&D intensity for pulp, paper and printing within the OECD Country 1973 1992 Finland 0.4 0.8 Sweden 0.5 0.8 USA 0.3 0.5 Japan 0.4 0.3 Canada 0.3 0.3 UK 0.2 0.1 France 0.2 0.1 Germany 0.1 0.1 Source: OECD (1996) This could inform the choice of countries in the IPTS project, with a mix of high and low R&D intensity countries chosen, such as Finland and France respectively. However, as Laestadius has indicated, these headline figures overlook significant elements of development not attributed as such by firms owing to the nature of technology development in the industry (Laestadius, 1998). Laestadius thinks these non-attributed R&D costs or effort could be as high as 20%. Analysis of the drivers and loci of technical change in the SCOTCH suggests technical change is a networked process. Figure 1 (below) illustrates this network for coated paper manufacturing. As an example, magazine paper with a high recycled content might fail competitively in an unregulated market because advertisers do not like it, but recycled papers may get used if regulators were to require recycled content and so indirectly drive technical development among suppliers of deinking equipment. These pressures shape and are shaped by the coevolution of a technology. SPRU - Science and Technology Policy Research Appendix P 2 5 Figure 1: drivers in the pulp and paper technology change network. Capital goods suppliers have a particularly important role in innovation processes, through both identifying opportunities and responding to customer needs. Only a few major capital goods suppliers exist globally, and many of these are based in the EU (see Appendix B). The diffusion of technical change with these firms in the vanguard is to the competitive advantage of Europe. Technical changes along each stage of the paper production system (from forestry to deinking of waste paper) are described in Appendix C. Equipment suppliers are important centres for innovation and tend to form partnerships with pulp and paper firms when scaling innovations up to full-size. The Advertisers Readers PublishersPrinters Paper Pulp Forestry Regulators Other inputs NGOs Capital goods technology driver/gate = Key: G G G/D G D D D D D G D D G/D Lessons from SCOTCH Appendix P 2 6 risk sharing over new plant is negotiated. Technological collaboration ‘seems to be the rule rather than the exception’ (Laestadius, 1998). Project teams of suppliers and users are formed, sometimes including consultants who have wider, independent experience on installation and development issues than do the users. So pulp and paper firms tend to work in partnership with suppliers to develop and modify innovations. More fundamental research takes place in the universities or at industry funded research centres. As Richard Phillips, the Senior Vice-President of Technology at International Paper puts it: ‘Paper companies have allowed a major element of the profitability equation to escape their control, relying to excess on engineering prepared by our consultants and on technology developed by our suppliers. There is little to distinguish among companies other than operating efficiency and investment timing’ (Phillips, 1997, p.145). As we shall see, this does indeed have implications for company competitiveness. Suppliers explained in interview that it can sometimes be difficult to persuade pulp and paper manufacturers to enter into such partnerships, particularly if the piloting work threatens to disrupt production (e.g. if it is in-line rather than parallel to production). Down-time for a 300,000 tonne per annum paper machine can cost around US$12000 per hour (Hélioui and Simon, 1997). For this reason, plant expansions provide a good window of opportunity for development work. The scale of the industry is immense. A modern bleached sulphate pulp mill can have a capacity of 500,000 tonnes/year; which suggests the world’s production in 1995 could have been met by only 144 modern mills. A new mill can cost in excess of US$1000 million, i.e. more than US$1 million of capital per employee. Paper machines run into the hundreds of millions of dollars and are equally leviathan. They can produce paper with widths up to ten metres and at speeds in excess of 90 km/hour. Table 1 shows trends in average scale for pulp and paper machines in Sweden. Table 2 presents average paper & board and pulp machine sizes in 1993 for Finland, Sweden and Germany. Capital intensity (annual capital expenditures divided by sales) in the pulp and paper industry is twice the average in manufacturing, running between 7 and 14 per cent in the US, and exceeds other commodity sectors like chemical and allied products and plastics (Butner and Stapley, 1997, p.155-6). In Finland, the capital investment per employee runs at US$62476 and the ratio of investment to sales output is 0.17 (United Nations, 1991). Table 1: average pulp, paper and paperboard mill capacity in Sweden (‘000 tonne/year) 1960 1970 1980 1993 Pulp mills 45 90 145 225 Paper/board 30 70 115 185 Source: Skogsindustrierna (1993) SPRU - Science and Technology Policy Research Appendix P 2 7 Table 2: average paper and board and pulp mill sizes (tonnes/year) in key EU Member States. Paper and board Pulp Capacity Mills Size Capacity Mills Size Finland 11446000 45 254356 11045000 43 256860 Sweden 9385000 50 187700 10990000 50 219800 Germany 15225000 191 79869 2300000 22 104545 Source: Pulp and Paper International (1995) Of the 81 EU facilities making coated graphic papers, 78 report employment data (Pulp and Paper International, 1997). These 78 facilities employ 47,421 people, the smallest having 50 employees and the largest employing 2200 people. The average level of employment for an EU coated graphic paper facility is 608 people. The large scale of plant in the sector is one variable which explains this supplier locus - capital goods suppliers can (hopefully) recoup investment costs through repeat sales in a way the pulp and paper firms cannot. The provision of tailor-made systems (made from standardised units) to pulp and paper customers, compared to the provision of bespoke units, is a strategy which some capital goods suppliers are following to maximise profits. Ongoing service arrangements are another marketing technique aimed at promoting longer term partnership and custom between equipment suppliers and paper makers (Interview evidence). Research and development is a high entry barrier in this sector. Collaborative development and diffusion costs can be high. A single batch pulping project developed in the 1980s between Sunds and Assi cost between 100 and 300 MSEK. Sunds’ Thermopulp™ mechanical pulping technology cost them 17 MSEK and SCA (the user firm) 16MSEK (Laestadius, 1998). Another entry barrier is the significance of track record in providing reliable equipment which meets the original specifications. Past failures (e.g. pulp quality problems from single, displacement bleaching towers sold in the early 1980s) coupled with the scale of any new investment means customers need to be convinced about a suppliers technical competence. The smaller R&D centres maintained by pulp and paper firms serve the function of verifying supplier claims. The exceptions are Finland and Sweden, which retain in-house R&D levels above the OECD average, their R&D indicators both being 0.8 compared to the OECD average of 0.3 (Laestadius, 1998, p.388). Reliability, long lead times between order and commissioning (which can be several years), and the long life of machinery (up to and over twenty years) tend to make the paper industry conservative about new technologies. A final explanatory factor to the capital goods supplier locus for technical change is a paper maker shift in focus from process innovations to product innovation (though the higher productivity and improved process control offered by new machines remains of interest). Product innovation relates to the way paper makers engineer a product which is end-user or market oriented. In this respect, though new process technologies can be bought in, it is the way the paper firms manage the link between skilful process operation and product design and quality which becomes a major source of competitiveness (Interview evidence with paper mill managers). Lessons from SCOTCH Appendix P 2 8 Chemical inputs suppliers operate with paper firms along similar lines (and sometimes with the capital goods suppliers). The locus of innovation is in the chemical firms themselves, and they develop and prove products by seeking partnerships with pulp and paper firms. Given the role of capital goods and chemicals firms as sources of technology, the ability for paper manufacturers to maintain a technological lead over rivals is limited to the investment plans of those rivals. New technologies are available to all paper firms willing to risk the investment. Indeed, a number of interviewees suggested a characteristic of the sector is the desire to be the second to invest in new technology rather than the first (i.e. buy pioneering technology whilst it is still new yet already proven). A second point to bear in mind is the heterogeneity of plant in the sector. The wholesale construction of new mills is a relatively infrequent phenomena, and many sites upgrade existing plant - avoiding expensive civil engineering costs - in a piecemeal manner. Thus a paper machine may have a wire section rebuild but keep the old drying section (although there can be systemic interactions at play, such that the drying capacity must be sufficient for any increase in production speed, which might actually require some drying section modification). Thus different sites may manufacture similar products with ensembles of machinery of various contrasting vintages. Analysis of paper machine vintages at the 81 facilities manufacturing coated graphic papers found 46% had undergone at least one major rebuild within 20 years and 73% rebuilt within 30 years. The average plant life before rebuild or replacement for this sample is 25 years (see later). This is an order of variety different to the more widely recognised vertically integrated and non-integrated manufacturing facilities. Understand technical change and the dynamics of development in the sector may prove an important factor in explaining the development and diffusion of BAT technologies amongst pulp and paper firms, and any consequent differential impacts on their competitiveness. Competitiveness issues in the EU pulp and paper industry The EU pulp and paper industry from a global perspective In terms of volume of sales, the EU 1 pulp and paper industry has recently increased its global share beyond one quarter. The number of EU based firms in the top 50 global pulp and paper firms is relatively stable whilst the number in the top 20 has increased in recent years. This is illustrated in Table 3. Note that this is also the period in which environmental regulations emerge in the EU. 1 1997 membership of the Union is used as a basis in this case. [...]... manufacture of paper entirely in Scandinavia, from forestry through chemical, mechanical and deinked pulp production to the manufacture of paper The markets were assumed to be in central Europe The second model made paper for similar markets but with production split between Scandinavia and central Europe Chemical pulp was made in Scandinavia, but both mechanical and deinked pulp and the coated paper product... facilities, but the capacities of these are lower and their aggregate national capacities for coated paper are around 40-50% of those of Finland and Germany: an indication of the variety of production patterns across the EU Overall, countries with some significant coated graphic paper manufacturing are Finland, Germany, France, Italy, Sweden and the 11 Lessons from SCOTCH Appendix P 2 UK Similar analyses... introduced here and findings for some paper products presented Jaakko Pöyry are the dominant technical and business consultant to the pulp and paper industry They have a collection of industry databases, and it these which they used to develop average industry cost structures for the last quarter of 1995 (Jaakko Pöyry, 1996) The averages are for geographic regions and selected paper products, and each average... 40 120 Finland 11 10 2,390 4,980 France 14 10 1,114 1,487 Germany 12 10 2,366 3,536 Greece 2 1 45 45 Italy 15 11 980 1,265 Netherlands 2 1 200 200 Portugal 1 1 30 200 Spain 4 3 138 168 Sweden 8 6 815 1,515 UK 7 5 458 867 TOTAL 81 62 9516 15443 Source: Pulp and Paper International Yearbook 1997 From the table it is clear that Finland and Germany are the major coated paper producers France and Italy have... 33 Lessons from SCOTCH Appendix P 2 References Butner, R .and C.E Stapley 1997 ‘Capital effectiveness of the paper industry’, TAPPI Journal, Vol.80, No.10 Cockram, R 1998 ‘What future for the market pulp sector?’, Pulp and Paper International 40(10), pp.41-43 Dudley, N., Jeanrenaud, J-P and F Sullivan 1995 Bad harvest? The timber trade and degredation of the World’s forests London: Earthscan Food and. .. coats’, Pulp and paper International, vol.38, no.6 Jaakko Pöyry 1996 ‘Cost analysis of the pulp and paper industry’ London: International Institute for Environment and Development Jaffe, A Peterson, S., Portney, P and R Stavins 1995 ‘Environmental regulation and the competitveness of US manufacturing: what does the evidence tell us?’, Journal of Economic Literature, Vol XXXIII, March Jaggi, B and M Freedman... pollution performance on economic and market performance: pulp and paper firms’, Journal of Business Finance and Accounting, Vol 19, No.5 Laestadius, S 1998 ‘The relevance of science and technology indicators: the case of pulp and paper’, Research Policy, 27, 385-395 OECD 1996 Industry and Technology - Scoreboard of Indicators 1995 Paris: Organisation for Economic Co-operation and Development Phillips, R.B... table and figure illustrate the trends and breadth in these issues Table 27 lists some of the issues faced by the industry past, present and future Figure 3 illustrates how the scope of industry related environmental issues has accumulated over time 24 SPRU - Science and Technology Policy Research Appendix P 2 Table 27: Environmental issues confronting the pulp and paper industry, past, present and future... e.g the change in process efficiency’ category in Tables 12.A, 12.B, and so on, or in the emissions categories elsewhere Updating of equipment Question 2.5, page 2, important updating of equipment Ask the respondent to write when the important equipment updates were done 29 Lessons from SCOTCH Appendix P 2 Competitive advantages and disadvantages Question 5.1, page 4, competitive advantages and disadvantages... right quality and price If this is taken as the definition, would some questions about shareholder returns be necessary in addition to information about labour costs? Moreover, customer values, shareholder values and firm ability to act and react to these values (technology and people in an environment where other organisations provide similar products and services) all become sources (and measures) . SPRU - Science and Technology Policy Research Appendix P 2 LESSONS FROM SCOTCH: S USTAINABILITY, COMPETITVENESS AND TECHNICAL CHANGE Report to the. heterogeneity of the sector). The dynamics of technical change in the pulp and paper industry Putting technical change in the pulp and paper sector into some perspective,