An Independent’s Perspective On Vertical Integration In 2024 BY JOHN WIDERA
Names like International Paper, a publicly owned company, and Geor- gia Pacific, a privately owned company, are synonymous with integrat- ed conglomerates. Other multinational integrated forest products mills rely on similar business models that control containerboard capacity
with pricing by unifying upstream supply and demand. Historically, paper mills were subsi- dizing their converting plants because they wanted to be low-cost producers. The result? The rest of us continued to be an industry of sheared sheep. The big mills that own internal supply chains are a good fit of raw materials such as wood chips, old corrugated containers (OCC), and
John Widera
chemicals processed with water into a slurry on a 500-foot-long multi- tiered paper machine (PM) to produce five to 10-ton rolls. Then they are shipped “downstream” where the 5-foot diameter rolls are sold, traded, or converted into fluted corrugated sheets, boxes, etc. Most U.S. and Canada paper mills are called vertically “integrated” if 51 percent or more of the input of basic products comes from their own subsidiaries (or tangible assets) or outsource. The expectations are the mini mills with 210-inch or so wide paper machines using only OCC (Old Corrugated Containers). Vertical integration can be compared to a wagon wheel (conglomerate) that has many spokes (subsidiaries), drawn to the center of a hub (headquarters), which controls all its com- panies. Vertical integration can be defined as the merging of several businesses that are at different stages of production, as shown: Vertical (downstream) Paper Mill Integration: • Trees – renewable resources from tree farms or forests • Recovered fiber OCC from recycled paper • Sawdust, pulp, energy • Paper machines technology, labor • Roll stock, linerboard medium, multi-wall • Trades • Corrugators/converting • Logistics • Sell direct, export sheet plants, brokers sheet feeders, and distrib- utors • Recycle, reuse A big reason why buyers prefer vertical integrated mega companies is that they have more control over board supply and price. Integrated competitors (mills) boast more facilities, more capacity, and more re- sources. Therefore, they are selling the perception of strength through size. Independents, on the other hand, should be selling the perception of strength through service and quality. The biggest reason for prefer- ring independents is that they provide better service and flexibility. Obviously, there are consequences for independents to constantly outperform their peers, by being better before cheaper, and put rev- enue (high margins) before cost (low prices). In a truly free market, an integrated can leapfrog over one independent, but it’s hard to stop an alliance which doesn’t have “Quality Fade” or no cash flow problems. There are also horizontal integrated paper mills controlling vertical
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April 8, 2024
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