Crouching Tiger, Hidden Opportunities

Cheap, easy and fast. That's how the world likes it and that's how China delivers it.

China is winning the game when it comes to manufacturing products, including those in the printing industry. According to data released in March by IHS Global Insight, the United States handed over its place as the world's top manufacturer to China last year.

China assumed a 19.8 percent (or $1.995 trillion in U.S. dollars) share of total manufacturing in 2010, a dramatic increase compared to that of 6.9 percent a decade ago.

China may be strangling the U.S. manufacturing sector, but it's not dead yet. The U.S. continues to topple China when it comes to productivity rates and production methods, but that's not enough. China's production and manufacturing sector will continue to grow and so will those of other countries. When it comes to the print industry, professionals say U.S. print manufacturers need to recognize, represent, build relationships and adapt to continue competing.

Where the Paper Industry Stands Today

Currently, international printers have a fundamental advantage over those in the U.S., according to Terry Hunley, acting president of the Americas for Singapore-based Asia Pulp & Paper (APP), a major exporter of coated paper from China and Indonesia.

"Paper can represent 30 percent to 50 percent of a print job's cost. Paper is less expensive outside the U.S. because tariffs and environmentalists have artificially raised the cost of imported paper. Since 2008, the U.S. printing industry has lost more than 75,000 jobs, and the number continues to increase. But, to preserve their sales here at any cost, three of North America's largest paper producers recently won a legal battle to impose tariffs on coated paper from both China and Indonesia, artificially raising the price," he said. "These tariffs have disrupted paper supplies, raised the cost of paper and forced many customers to seek cheaper printing solutions in Canada, China or Mexico—or [to] forgo printing some printed products altogether. By sourcing their print jobs internationally, companies here benefit from lower paper and production costs while avoiding the artificial mark-ups imposed by tariffs."

Hunley explained paper from countries like China or Indonesia is cheaper because it is produced by companies that are vertically integrated, which means companies there control the plantations, the pulp mills and the paper mills, eliminating many of the "middlemen" found in North America.

"Until the U.S. market removes its trade barriers, allowing printers to compete on price, we will continue to see growth in the overseas printing market as U.S. producers continue to source their materials from far more affordable sources," Hunley concluded. "Meanwhile, as business flows to international printers, they are investing new more modern, cost-effective equipment—further expanding their advantage over U.S. printers."

But those aren't the only factors putting the United States at a disadvantage.

Ron Hira, associate professor of public policy at the Rochester Institute of Technology whose research focuses on offshoring and U.S. manufacturing industries including the print industry, said there are many reasons for the growth of Chinese exports to the U.S.: trade policy, subsidies/incentives, market access, lower cost labor, currency manipulation, lower environmental and other standards and trade agreements that are more about creating cheaper export platforms than trade.

"I think this is compounded by the fact that the overall U.S. market in print has not grown. For example, China is gaining market share in a shrinking overall market. That hurts even more. The U.S. has no national policy strategy for manufacturing. The export initiative of the Obama Administration is so limited that it isn't even worth mentioning. American policymakers have sat idly by while America's manufacturing capability has been hollowed out at a dramatic pace in the past decade," Hira said.

Hunley believes it is because international companies have invested in their businesses while U.S. businesses haven't.

"In fact, the U.S. printing and paper making today is in the same boat as the U.S. auto industry during the 1980s," he remarked. "When car makers did not invest in new technology to increase production efficiency, it opened the door to international competitors stealing market share—first by importing more vehicles, then by investing in manufacturing operations here. U.S. carmakers never recovered market share. Unless something happens here today, the same will happen with the printing and paper industries. The fact that many companies are contracting with international printers proves it."

He added there is plenty of evidence of international companies investing here to achieve greater market share. Hunley noted that international companies have bought at least six Canadian paper mills in just the last five years.

"Many of the mills had been closed by North American companies many years ago, but the international investors not only bought the facilities but are also finding ways to invest in new technology," he commented.

In order to stay in the game, Hunley said U.S. printers need to wake up to what's going on.

"We live in a global economy and U.S. print professionals need to recognize that," he explained. "A few years ago, only the biggest printers could afford the infrastructure to serve clients globally. Today, mid- to large-size printers can achieve the same level of client service and reach with much lower investment in technology. And, smaller companies can establish strategic alliances with printers in other geographies to deliver the level and volume of service that much larger companies have traditionally done. By establishing a global network, printers can offer their customers a single contact for design or mechanical changes, and production changes can be made globally in seconds. For smaller printers, the future may depend on specialty printing. As large printers move towards national accounts, smaller shops can develop industry-specific capabilities for such things as point-of-sale displays, direct marketing and other small print-run options."

So, what about tomorrow?

These professionals agree offshore and overseas printing will continue to grow.

The savings are too important to ignore, Hira explained.

"I think it will continue to take market share," Hira said. "The cost advantages are simply too compelling. Not everything will move offshore but as technology advances and as managers in companies learn how to coordinate offshore work, the overseas printers will gain market share. It is unlikely that many U.S. print facilities, except in niche markets, will take advantage of the very fast-growing markets abroad like India, China and Brazil."

Offshore printing will continue to thrive for 
several reasons.

"Again, looking at just the paper supply, the obvious heart of the printing industry, no U.S. producers have invested in technology in over 20 years, while overseas producers continue to grow, invest and enhance their product offerings. Many offer a true integrated solution not found anywhere in the U.S. In addition, the nature of the printing industry will continue to change. The market for printed newspapers and magazines is declining. Growth lies in high-end printing, such as packaging and branded materials. These materials often have longer lead times, and can be easily outsourced, taking advantage of overseas cost benefits," Hunley concluded.