2008 Mid-Year Economic Report

By Jack Kenny | July 21, 2008

A year of challenge

Though just a bit more than half over, the year 2008 is proving to be a bear in many global markets. The credit market problems and the housing financing disaster in the USA have brought on a decline in consumer confidence. The domino effect therefrom has an impact on consumer product companies and their suppliers, which include label converters. Significant changes in currency values has all but the wealthiest US citizens staying at home this year, and at the same time is sending EU export prices into the stratosphere.

And then there is oil. And food prices. And increases in raw materials for every industry. All of these are having daily impacts on label company owners and operators, who find themselves trying to maintain price levels at the same time that they are in competition with others in the same turbulent waters.

Still, there are positives to report. The marketplace still needs labels, and high quality labels at that.
Converters will attend Labelexpo Americas in September and they will be making acquisitions. In the US, converters have an incentive called the 2008 Tax Stimulus Bill, a government program that gives companies a 50 percent bonus depreciation on investment in new equipment purchased and installed this year.

Once again we have invited converters and suppliers to give their views on a specific range of topics: How their company is performing, what changes they have experienced, what pressures or challenges their customers are experiencing, how they plan to invest this year, what they see as the great marketplace challenges, and what thoughts they have about the near future in our industry. This year we are pleased to offer contributions from Shev Okumus of Star Label Products, Margie Kluttz of Harper Corporation of America, Andrea Vimercati of Pilot Italia, and Steve Leibin of Matik North America, representing Omet.

Elisha Tropper, an industry consultant and former label company owner, starts our commentaries with an overview of the economic picture that our readers face today.

Elisha Tropper, president, T3 Associates, Harrison, NY, USA

If instead of Entertainment Tonight there was a daily television show called Economy Tonight, I'm not sure the content would be any less riveting. That's simultaneously a knock on paparazzi journalism and an observation of the fascinating events playing out across the global and US economies that are currently reshaping our world, possibly with implications that may last five, 10, even 20 years and beyond.

If you pause to take a step back from the perspective of your day-to-day business management and reflect on the economic issues and pressures percolating across the globe, you might observe that we are in the midst of a period of a geopolitical tempest whose business, political and societal implications are staggering. While each of these events in and of itself is significant, it is their confluence and the timing of that confluence that is particularly historic. Here are just a few examples of these events:

Energy Crunch: Oil prices are at all-time highs, impacting everything from fuel prices, home heating bills and commodity prices to global oil exploration, the development and expansion of alternative energy sources (solar, nuclear, agricultural), and a potpourri of political, military, ethnic, and religious conflicts.

China 2.0: The changing business face of China is significantly convoluting what for the past decade has been a relatively simple global business equation. Most visibly, rising production costs are impacting the market positioning of Chinese goods. These higher costs have arrived in the form of inflation (raw materials, utilities, freight, etc.), a reduction or elimination in the VAT rebate for exports, and a rash of new labor laws enacted to protect workers and ease international concerns of abuse, resulting in, by some estimates, an increase of as much as 40 percent of the labor costs. In addition, the no-longer fixed Chinese yuan has dramatically risen against the US dollar (10 percent in 2007 alone), resulting in lower export profits. The effects of these changes are beginning to affect the world economy, as lower cost nations are making inroads into the low-end manufacturing sectors, while the (relatively) shrinking margins of Chinese manufacturing is putting pressure on global manufacturers who based financial investments on higher profitability.

The Fed: The US Federal Reserve has succeeded in its effort to devalue the dollar, and is now striving to stave off the inflation that appears to be following. We could debate Fed decision making all day long, but the consequences, however unintended, of the current policies have damaged US credit abroad, slowed economic growth, and enabled foreign investment in US assets at a discount.

Credit Markets: The housing and credit market crunch has dramatically (and disproportionately) had an impact on just about everything financial from Wall Street to Main Street. For businesses, the credit approval process is tougher, loan covenants are stricter, and despite low interest rates, the capital markets are tighter then they've been in very long time.

Election Day: The upcoming US presidential election will have significant ramifications across the board, including the economy, taxes, and international diplomacy (or lack thereof). For example, it would be difficult to imagine any new administration, in the face of budget deficits and political pressure, capable of fending off a congressional effort to raise capital gains taxes, let alone personal income taxes (regardless of the potential damage such moves might make to the overall health of the economy).

There is no doubt that each of our businesses is and will continue to be affected in a very significant way by some combination of these events and pressures. The challenge for us is to harness an understanding of how these economic developments in their various permutations potentially impact our existing businesses, and plot the course of action that gives us the best opportunity to grow and thrive.

Shev Okumus, president, Star Label Products, Fairless Hills, PA, USA (converter)

Performance: Through May we have been even with last year. Based on what I am hearing in the industry, we are satisfied with maintaining the same amount of business that we did in 2007. We provide labels to a variety of industries. Some industries have been affected by the economy and others have not been affected as much. I think serving multiple industries has helped us maintain our numbers.

Changes: We have not really had to make any drastic changes. We continue to do business in the same manner as we always have.

Customers: Our customers in industries that are being affected by the economy are looking for ways to maximize their cash flow. They want to decrease their orders but still reap the cost benefits of higher volume orders. We are seeing more interest in placing volume blanket orders to get a better per-piece price and billing only for what has been shipped. We have also had some customers asking us to extend our payment terms. Some are even willing to pay a premium for longer terms.

Investment: We have recently started to make investments in new equipment. Recently we ordered a vision inspection system and plan to order another system within the next six months. In addition, we will start adding extra features to our existing machinery to give us more versatility.

Challenges: There are multiple challenges. There have been price increases on everything that you need to run your business. It's not just materials. It's everything: fuel, facility maintenance, health insurance, business insurance, office supplies, utilities. The list goes on and on. You can raise your customer's prices only so much before they go and look elsewhere. There will always be someone out there who will cut your price just to get the business. They may go out of business a year or two later, but the damage is already done and the customer is gone. So you have to find ways within your company to increase productivity or find more economical ways to give your customers the same quality product. In addition, you need to continue to give your customers a high level of service and comfort that they may not get from the low cost provider or from an offshore converter.

Future: Our industry needs to come up with ways to keep the business onshore. We need to concentrate on the whole package, not just price. We will never be able to compete with offshore manufacturing on price only. Our government needs to come up with tighter controls and regulations for products coming into our country. Maybe there should be incentives to US companies that buy their products from suppliers here in the US.

I think that as digital printing gets better, more versatile and faster, you will see more and more converters offering this technology. This technology will allow customers to order smaller amounts more frequently without incurring the setup costs of printing their labels on conventional equipment.

Steve Leibin, sales manager, Matik North America, W. Hartford, CT, USA (Supplying Omet equipment in N. America)

Performance: Omet experienced strong growth in 2007 continuing into 2008. Omet's proven technologies – gearless-shaftless sleeve presses and high speed tissue converting machines – have paved the way for converters to improve their efficiencies and compete in their markets with cost effective solutions that require less manpower and produce value-added products. Omet's innovative products have allowed the company to grow rapidly over the last several years.

Changes: Omet continually invests in personnel and in research and development. Among the fruits of that intensive R&D effort is the new X-Flex press, and the Vision fully automatic register control system, which provides new benchmarks in performance in the narrow web industry. The company also has moved a factory trained technician to live in the USA and support North American customers.

Customers: Narrow web customers are feeling the pinch in profitability. The narrow web market is very competitive, yet many converters are still investing in new equipment to improve their efficiencies and enter new markets. Customers are demanding more inline solutions that give them an edge in their marketplace. Providing excellent print quality is almost a given. Very rapid changeovers and flexibility in the press platform are customers' main expectations in today's competitive and changing marketplace.

Investment: Omet continually invests in R&D to stay at the leading edge and to offer customers innovative solutions. The company will continue to expand globally as well as in North America in 2008.

Challenges: The narrow web converter is challenged by shorter run sizes, shrinking margins, new customer demands as well as having difficulties finding trained personnel. Narrow web converters need to invest in new technologies to stay competitive by being able to offer new products and new efficiencies.

Future: Sustainability will be the number one issue for converters over the next five years. Sustainability is not a fad but a long term movement. Either converters, manufacturers and suppliers learn to adapt to this new market force quickly, or they will be at a severe disadvantage in the marketplace.

Andrea Vimercati, director of sales, Pilot Italia, Usmate Velate, Italy (converter)

Performance: In this period of 2008 we have registered two different trends. In the first three months growth was below that of last year. Over the next two months we had growth of 10 percent versus 2007. The health of our company in these difficult times has been guaranteed by important efforts we have made to improve the number of our customers and to strengthen their loyalty.

Changes: Our strategy in the past year has been oriented to improve the efficiency of each step of our production, specifically the introduction of kaizen methods. Last year we also invested in a new offset printing line updated with the most modern technologies.

In the short term we expect to sustain our position against the lowering of prices as practiced by our competitors.

In the long term we expect to increase productivity and improve quality with the same number of workers. This means that it will be possible for us to give more to our customers at the same price of our competitors.

Customers: Our customers expect a static market with increasing difficulties in the turnover of their products. Purchasing patterns are continuously changing because our customers can't reach a clear forecast, so they keep reducing the quantities of each order. The result is an increase in job setups. This depends also on the market sector. The more dynamic customers are stepping up their billing practices.

Investment: In the next 24 months we plan to move our two production plants into one larger and more efficient location. The new plant is almost 8,000 square meters with good storage capacity.
Challenges: In my opinion, narrow web converters have to face the main problem of production flexibility to answer punctually to a market that is increasingly more nervous, and to push packaging evolution towards sleeve, in-mold, etc.

Future: I think that globalization will be the most impacting problem for the narrow web industry.
In Europe, as all over the world, the multinational companies are concentrating their purchasing departments in a few central cities, such as London, Paris or Zurich. They are looking, or will look, for the same supplier for all their European production plants in several different countries. Therefore, a local producer needs to merge or to make a joint venture with similar companies to face this challenge.

Margie Kluttz, president, Harper Corporation of America, Charlotte, NC, USA (supplier)

Performance: We have been running ahead of projections so far in 2008. Our willingness to work with our customers as well as our co-suppliers on development projects, and our continuing efforts to improve our manufacturing processes, are what is helping us weather the economic strain.
Changes: We continue to add equipment with the latest technology available, and we strengthened our commitment to our ISO registration by adding a new managerial position to review and monitor all continuous improvements. These changes keep us performing at the level our customers have come to expect.

Customers: We continue to see consolidation in the narrow web market, though it has slowed recently. The pace of new presses being added also seems to be leveling off.

The narrow web market continues to be a strong segment. We have recently added two individuals with a combined 45 years of narrow web experience to our technical staff. This was done to help our customers try to reduce makeready times through anilox standardization programs.

Investment: As part of our continuous improvement, we are investing in new technology.

Challenges: The greatest challenge is to identify the greatest challenge and invest only in processes and equipment that will help our customers maintain and increase their customers' needs. The narrow web converters have to review their mix of work and decide what segment to concentrate on. Finding a niche that allows the converter to satisfy his or her customers and be in a position where margins are reasonable is the goal of all of us in today's market.

The increasing energy and raw materials prices forces all of us to keep looking at our processes and make sure they are all as efficient as possible. Soaring energy prices, especially gasoline, are forcing us to look at what we can do, scheduling wise, to help our employees.

Future: The best thing that could happen is that the need for labels will continue to grow worldwide. Label printers will have to analyze their market segments and pick the best combination of printing processes that allows them to service that segment. It is apparent that narrow web printers will not be able to identify themselves by their primary printing processes anymore, but by what their customer base needs in response time and printing capabilities. The narrow web printers will have to understand what the capabilities of each printing process can offer them and their customers. Then they can apply that understanding to help their clients with each of their projects. Each process – flexo, offset, gravure, screen, and digital – has a place where it is the most economically and graphically viable process for a particular project. The converter has to help the buyer pick the process that best fits the customer's needs.
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