1. Coated Groundwood Retrospective Industry Analysis 1988 Matthew W. Ford College of Business Northern Kentucky University

2. CGW Industry Analysis Coated Groundwood (CGW) NAICS code 322121 Paper Millscode322121 Paper Mills Google Finance: Basic Materials > Paper & Paper ProductsPaper & Paper Products Printing/Writing Paper > Coated Paper > Coated Groundwood (CGW) Geographic Scope: North America

3. CGW Industry Analysis CGW Cross Section base sheet coating base sheet: long fiber (strength) + short fiber* (smoothness, filler) coating: pigment + adhesive (printability) * short fiber is ‘ground wood’- at least 10%

4. CGW Industry Analysis Market magazines (60%)magazines catalogues (10%)catalogues coupons & inserts (30%)couponsinserts buyers = publishers, some printers (~30 total) U.S. (90%+), Canada, Mexico largest = Time Inc (~10% of industry sales)Time Inc HearstHearst, Ziff Davis, McGraw Hill, Valassis, Fingerhut, Newsweek, Reader’s Digest, CondeNast, MeredithZiff DavisMcGraw HillValassisFingerhut NewsweekReader’s DigestCondeNastMeredith

5. CGW Industry Analysis Basic Supply Chain pulp pigment chemicals water energy ‘paper mill’ continuous process (hi volume, low variety) equipmentequipment (specialized) labor (unionized) CGW rolls printing distribution InputsProcessOutputsDownstream

6. CGW Industry Analysis Industry Competitors (TPY capacity, estimated from various sources)

7. CGW Industry Analysis Industry Trends All data estimated, various sources

8. CGW Industry Analysis Industry Age First paper mill 1700s Top 3 competitors founded in 1890s Demand growth closely tied to GDP Mature phase of industry life cycle

9. CGW Industry Analysis Related Institutions American Paper Institute (API)* Key trade publications: Pulp & Paper Paper Trade Journal Paper Age * now known as American Forest & Paper Association (AFPA)AFPA

10. CGW Industry Analysis F1 Rivalry ~15 competitors CR4 = 55%; CR9 = 90% HI = 1072 5 yr price/ton: 975 950 910 880 850 (-13%) 5 yr capacity: 3875 3929 4137 4631 4900 (+27%) Innovations: ultra lightweight sheet, recycled fiber content Capex = 10% of industry sales (avg all mfg = 5%) Capacity utilization (1983: 100% 1988: 93%)

11. CGW Industry Analysis F2 Substitutes Existing: Alternative paper grades coated free sheet (CFS) premium print quality supercalendared (SC) cheaper On horizon: Digital desktop publishing via PC, small printers* electronic media; Web not on radar* * Both industries early in life cycle; growth rates increasing

12. CGW Industry Analysis F3 Seller Bargaining Power Source: company reports

13. CGW Industry Analysis F3 Sellers (cont’d) Industry capex = 10% annual revenues (~$380M) 3-4 paper machine equipment makers Large in-house engineering staffs (backward integration) 10 fiber suppliers + backward integration into pulpmaking 2-3 suppliers for each key chemical Backward integration into energy (> 50% self produced)

14. CGW Industry Analysis F4 Buyer Bargaining Power 30+ buyers CR4 < 30% Captive market for industry products Low cost for buyer to switch suppliers Industry standards for product, packaging, shipping Buyers purchase from multiple suppliers (3-4 at least) Buyers lack knowledge about industry (creative types)

15. CGW Industry Analysis F5 Threat of Entry 1 domestic entry in last 10 yrs (Repap - Canadian) 4-5 European entrants last 10 yrs (5% share & growing) 0 major mergers/acquisitions Large scale economies for new capacity (-20% unit cost) Little product differentiation (ad spending < 1% sales) Capex for new facility: $350 million ‘Open’ distribution channels Capacity utilization (1983: 100% 1988: 93%)

16. CGW Industry Analysis F5 Threat of Entry (cont’d) Equates to ~ 91% learning rate

17. CGW Industry Analysis F5 Threat of Entry (cont’d) EPA, DNR permitting, regulation, monitoring Interest rates falling (US 10 yr T bond: 12%  8%) Euro government subsidies, tax breaks

18. CGW Industry Analysis 5 Forces Summary ForceHighlightsEffect F1 Intensity of Rivalrycapacity +27%; price/ton –12%; modest concentration; capex 10% of sales; falling capacity utilization – F2 Threat of Substitutesdigital substitutes: desktop publishing, electronic media in introductory industry life cycle phase – F3 Supplier Bargaining Powerlarge purchases of specialized equipment; backward integration into equipment design, pulpmaking, energy o F4 Buyer Bargaining Power30+ buyers, low CR4; narrow group of end markets; low switching costs; low buyer knowledge of industry o F5 Threat of Entrycapacity-related barriers, but significant entry; Euro gov’t subsidies; declining interest rates –

19. CGW Industry Analysis Conclusion How attractive is the CGW industry for sustainable profits post 1988? By my assessment, this is a ‘3 minus’ industry

20. CGW Industry Analysis Strategic Map 1988 Age of Capital Equipment Level of Diversification Low High OldNew Niagara Consolidated Champion Blandin Bowater Repap Weyco IP Euro Boise CZ

21. CGW Industry Analysis Strategic Map 2008 Age of Capital Equipment Level of Diversification Low High OldNew Bowater Abitibi NewPage Verso Domtar UPM