Corrugated Packaging- Future Perceptions & Global Perspectives

Key Note address by Sri M L Agarwal,

Past President, Asian Corrugated Case Association, Past President FCBM.

Introduction
We meet and discuss this issue at an interesting time. In this paper I am not looking at corrugated industry in isolation but also in the macro economics perception, as usage of corrugated is after all a part of the economic activity. This is also necessitated as the statistics collection for corrugated industry is not prevalent to the desired extent in this region. Hence dependence on the macroeconomic development will give us better insight as to where corrugated industry is headed- in India and Globally.

Indian Economic Scenario

The Indian scenario as changed considerably over the last decade. Earlier, Indian industry and trade were bogged down by slow growth rate, higher rate of inflation, to our credit availability, extremely low foreign-exchange reserves, strict license and control regime, Indian economy was isolated from the world economy and markets, Indian industry and markets were fragmented due to very low capacities and regressive tax structure. To compound all these there was very low self belief and national pride. This has now been replaced with the second fastest growing economy, low inflation rate, easy credit availability, fifth highest foreign exchange reserves, rapid movement towards free-market economy and integration with the world economy, promising consumer markets, significant investments in

infrastructure, booming IT & ITES segment. Most important the emergence of growing self belief and a great surge in national pride. In terms of purchasing power parity in years is the fourth largest economy. The current market rates the Indian GDP ranks number 10. Based on the current growth rates, The Indian economy is set to become the third largest economy, by the year 2020 with the GDP surging from less than 1000 billion US dollars to more than 13,000 billion US dollars. Another advantage, India enjoys is in demographics. Besides being one of the largest and fastest growing consumer markets, led by exploding middleclass, which is already more than 340 million strong. More than 50% of the Indian population is under 25 years and this trend is slated to continue till the year 2050. This will result in India having a working population of more than 60%, whereas most other economies would be having working population much below 50%, putting tremendous pressure on the social infrastructure to support the ageing population. With requisite investment in education, India will become the worlds knowledge economy, with the highest or qualified engineers and a large pool of qualified and skilled workers. India will continue to occupy the pre-eminent position as the global hub or outsourcing of services and manufactured goods. India's rapid emergence as a key player in the global economy offers huge opportunities for global investors. There is tremendous surge in the FDI, FII, and debt market, leading to the reserves crossing 270 billion US dollars. Indian foreign trade, which till recently was inward looking, is now booming, with the growth of 25 to 30%.

Indian Paper Scenario

Having looked at the rosy picture, Indian economy presents, Let us now look at the Indian paper market. There is strong demand growth for paper, and it is one of the fastest growing markets in the world. Among these corrugated papers is by far the largest segment. There is tremendous growth in demand for Packaging Boards led by high end, bleached boards. In the year 2005 the total paper, demand was 6.1 million tonnes and is expected to be more than 7.5 million tonnes Currently. The domestic paper market is experiencing a growth of 8% and is met by enhanced domestic supply. The key growth driver's for increasing demand of paper are priority for education, massive investments in printing industry with India becoming a global hub for high-quality printing, strong consumer demand or packaged goods with growing disposable incomes and changing lifestyles. In a paper industry is dominated by a large number of small and medium paper mills using wastepaper or agricultural residue. 12 Large paper mills, using wood as raw material to produced to 2.5 million tonnes with a share of 40%. The balance 600 mills account for the balance 60% capacity,

producing 3.6 million tonnes. On the Corrugation paper side, there has been tremendous change in the scene, with massive growths in capacity and capability. Whereas till recently, mills have capacity of 40 to 50 TPD were considered large, we now have number of mills with capacities of 150 to 300 TPD. A Number of mills with twin wire are in operation today, producing substantially better papers using the same raw material. With larger capacities paper mills are able to produce better quality paper more cost effectively. In comparison with countries in Asia, not to speak of developed economies, the per capita consumption of paper is abysmally low at 6.5 KGs and is no comparison to China, which stands out with a per capita consumption of 42 KGs. This shows that there is tremendous potential in the paper segment. The per capita consumption of corrugated board shows a similar trend, Indian per capita consumption being 4 square meters as compared to 20 for China, and 41 countries like Malaysia. India's low per capita consumption offers a huge opportunity for growth of corrugated packaging industry, and also for the paper industry.

Indian Corrugated Packaging Scenario

Before we look inwards, let us look at where Indian Corrugated Industry, stands in comparison with the other countries. At the macro level, the Indian Corrugation Industry stands at number 10 Based on the production in square meters, with a production of 3900 MSM. With a projected growth of 12% in the corrugation industry over the next five years, The Indian industry will leapfrog to number five position at the year 2010, with a production of approximately 7000 MSM.
Top 15 Countries 2005 by Area of Output Production 2005 Forecast Growth 05 - 10 Msm Tonnes Msm Tonnes % p.a. 39991 27157 2667 1811 1.3 25536 18598 16178 9571 10.3 13729 8770 473 206 0.7 7923 4051 672 237 1.6 6448 3829 851 471 2.5 5707 2967 397 165 1.4 4667 2645 789 368 3.2 4324 2261 92 -64 0.4 4005 2157 655 243 3.1

1 2 3 4 5 6 7 8 9

Country USA China Japan Germany Italy France Spain UK Brazil

10
11 12 13 14 15

India
Canada South Korea Mexico Thailand Russia

3900
3485 3157 2922 2593 2351

2535
1884 1834 1893 1669 1322

306 8
70 684 564 528 1113

1995
2 288 346 241 586

12.3
0.4 4.0 3.6 8.6 8.1

46+

Others Total

35202 163589

20504 102755

7875 35565

3863 19743

4.1 4.0

The Indian industry, and also the Indian corrugated packaging industry is undergoing a paradigm shift, with a high growth economy, being fuelled by growing consumerism, movement towards organised retailing. Very rapid increase in the middle class and changing consumer preferences will lead to massive increase in the requirement of packaging materials as a whole, and also for corrugated packaging. There is also a concerted effort by the user industry towards scale of production and consolidation of purchase orders, leading to larger volumes from a single customer. Source reduction, is becoming a norm by the user industry. All this presents the Indian packaging industry, with lots of opportunities and challenges.

Opportunities
Innovations in Packaging Innovations in packaging are driven by various factors. The key factor is distribution of goods, without compromising on the quality or the quantity, to large number of people scattered all over the globe. The question is, what would drive the future innovation. I feel that there is not one but lots of factors that will impact the way products are packaged and distributed. There is a clear indication that Demographics will play a leading role as far as packaging innovations are concerned. We are witnessing changes in the family structures; the population profile is also rapidly changing with higher number of aging people. Besides consumers are today, demanding a wider range of products and greater segmentation (by size, flavour, etc) within those products. Convenience / quick preparation foods, providing smaller/single serve portions are also growing in demand. There is also a movement away from Loose to packed commodities, from unbranded to branded. Electronic business process/ information transfers will eventually link the entire supply chain starting at Raw material suppliers, Packaging manufacturers, Packaging users, Retailers and the consumers. This will provide immediate and accurate information, reduce cost and time delays, simplify logistics and inventory operations and provide a better response to consumer demands. Besides, all companies in the supply chain are under constant pressure to drive down production costs, including cost of packaging. Technological advances in printing mean that packaging industry can now create personalized, individual products in full colour at high speeds with minimum of notice meant for specific market.

MODERN PACKAGING TECHNOLOGY Reflects mastery of technological achievements. Preserves quality of life and health Provides orderly and economic distribution of product Essential component in moving goods from point of origin to point of consumption Adds value to the product

Corrugated Packaging
Within the packaging segment, Corrugated Packaging is beyond doubt the largest industry by tonnage and also value. Worldwide corrugated industry produces more than 165,000 Million Sq meters, of which Asia accounts for a handsome 45%. India as mentioned earlier has rapidly climbed to number 10 spot and growing. Packaging in India. Indian corrugated industry being fragmented; collection of data is impossible task. Indian Corrugated Box Industry by conservative estimates produces over 1.8- 2 million tones of boxes and is growing at over 10-12% currently, well above the industrial growth. With anticipated increase in industrial growth and also due to growing consumerism, the rate of growth of corrugated industry is set for much higher rate in the coming years. The Corrugated Box Industry is very much distributed across the country. There are nearly 8000 box manufacturers in the country, employing about 10000 single facers of 1000-1800 mm width. The industry employs more than 250,000 persons. Bulk of the paper is made indigenously with imports accounting for less than 2%. However with reduction in Import duties to 10% and slated to slide further soon, an appreciation of Indian Rupee in relation to US $ Imports will be viable now. Increase in share of better quality imported paper should have its impact on the design and cost soon.

Future Prospects: The future for the corrugated industry holds both opportunities and challenges. As already mentioned rapid growth in consumerism and industrialization will lead to increasing demands for the corrugated packaging. I expect the growth to be in the region of 12-15% in the next 5 years. The corrugated box industry till now was placed under small-scale sector, which placed a cap of INR 10 Million in production plant and machinery. Now that this has been increased to Rs.50Mi, new investment in advanced machines is possible. Due to changing market scenario, the way corrugated box business has been done till now is set for paradigm change. This will make it possible to invest in large plants, which not only will enjoy advantages of economies of scale, but will also be able to effect vast improvements in quality. Quality perception is fast undergoing change in the market. Corrugated box is more and more being perceived as value addition as against unnecessary cost addition till now. Graphics are fast becoming more complex and intricate. The high tech plants will only be viable provided customers pay extra value for quality improvements. Massive investments will be needed for meeting the changed quality requirements, particularly in the graphics side. On the commercial side one major development is the supply source reduction across all sectors of industry. With the consolidation of orders box makers are getting benefit of economies of scale. This will not only reduce the costs for customers but also accelerate the process of automation, which needs larger volumes to be viable. On the negative side E Bidding is pushing down prices and creating unfair competition. The Govt has initiated several steps to boost the economy. It is expected that the pace of liberalization will be speeded up to attract more investment from private sector, both domestic and foreign. The Introduction of State VAT system in place of the regressive Sales tax has made the business scene more congenial and will also reduce costs of Exports. This will enable and motivate the Indian businesses to look out ward and to increase capacity utilization by more exports. If more products get exported it automatically means more corrugated packaging requirements. A major portion of the corrugated boxes produced in countries like China, Malaysia, Thailand, etc are exported indirectly along with the end product. Access to international financing coupled with large pool of technical manpower at a competitive cost, can also open up markets for export of boxes.

Challenges
One of the major challenges facing the corrugated industry is scarcity of fibre. India will continue to be dependent upon imports for quality fibre. Another area of concern is the high energy cost and with the spiralling cost of petroleum products, and coal closely following in its footstep, this area will continue to

bother the corrugated packaging industry, particularly those operating on automatic process. Global warming and related environmental issues will affect the corrugated packaging industry directly and indirectly. The raw material for corrugated packaging, paper, is highly dependent upon forest resources, and also uses considerable energy for production, and also produces substantial effluents, which cause environmental concerns. The corrugated packaging industry will have to look at ways and means to reduce the quantity of paper used in a particular box. The sheer size and the consolidation of customers world-wide (Unilever, Heinz, Procter and Gamble etc.) make it mandatory that our industry has to find unity at various levels. Among these are standards, such as technical standards. A very example is adoption of common foot print cartons for fruits and vegetables. Another area is the Good Manufacturing Practices in the production of corrugated. In addition HACCP/ ISO 22000, requiring all processes in the food value chain observe food safety practices. This will take GMP to a much higher level and would require investments in maintaining proper hygiene in the factory. If we as an industry cannot agree to unite behind one common approach we will be confronted with customer specific requirements that will make life unduly expensive and miserable. We need to unite to evolve a common code of conduct at national level as well as global. The small and fragmented production operations will become less viable in the days to come. Combined with the about challenges and source reduction by customers, strategic alliances, both in production and marketing will become a norm in the near future. The ownership issues will have to take a back seat, and survival and growth of business will have to be given prime importance. Without this approach, the massive investments required for continuing and growing in business will not be possible. Such an approach will create the required mass for induction of contemporary technology and viable production capacities. Just as we are sitting down to the realities of VAT the bugle has been sounded or introduction of GST. A single GST at the centre and state level would have been ideal. However, from the news coming from the government, a dual level GST at the centre and the state level is proposed to be introduced from the year 2010. Once the initial problems are overcome, this should bring out more transparency in business transactions, and also should reduce cost of production. And with CST becoming zero the protection enjoyed by local units would get reduced and industry will be faced with greater competition across the entire nation.

Industry Focus

As we have discussed above, the industry focus should be on fundamental transformation in investment strategies and by market demand and competitiveness issues on quality and cost. The industry must move is from fragmented production to medium scale, with contemporary technology and greater emphasis on aesthetics and graphics. The mindset has to change to customers centric and corrugated boxes have to metamorphose from a commodity to a branded product. The end-user is undergoing large-scale modernisation and automation in the packaging. The industry must gear up to meet the requirements of quality and quantity. With the movement of corrugated boxes from the back store to the point of sale, the industry must focus more and more on value-added products. The industry must look outward towards the international markets to capitalise on the advantages enumerated above. I'm confident that there is sufficient resilience within the industry to overcome and master all these challenges, and I look forward to interesting times ahead. Best of luck & and thank you for your kind patience.