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Lee & Man Paper Strategy Analysis

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Notes on slide 1

Erica

Erica: Water: shear volume and cleaning process ; terpenes, alcohols, phenols, methanol, acetone, chloroform, methyl ethyl ketone; detergents and surfactants; dyes and pigments; acids; alkaline solutions; sulfides Air: Add to growing concerns about Ozone Depletion, Acid Rains, and Global Warming. carbon dioxide, nitrous oxides, sulfur dioxides, carbon monoxide, ammonia, ash, dust Solid waste: sludge landfills . residual inks, dyes, coatings, starches, pigments, resins, fatty acids, paper fibers and kaolin

http://www.cintrafor.org/CONFERENCE_TAB/China%20Conf%202006/Flynn%202006.pdf

http://www.cintrafor.org/CONFERENCE_TAB/China%20Conf%202006/Flynn%202006.pdf

http://www.cintrafor.org/CONFERENCE_TAB/China%20Conf%202006/Flynn%202006.pdf

Erica

Andrew

Andrew

Andrew: endless stacks of OCC. Having high raw material prices is a huge problem! Especially when 60% comes from North America. Suppliers have too much bargaining power.

Andrew: endless stacks of OCC. Having high raw material prices is a huge problem! Especially when 60% comes from North America. Suppliers have too much bargaining power.

Andrew: I’m not sure if you remember, but there were plenty of pipes and smoke stacks blowing out harmful chemicals into the sky. That’s why the air was so thick and muggy. Uck.

Andrew -add world fight for OCC?, or supply price has lowered profit margins? - Need to differentiate technology/product

Chelsea Papyrus was founded in 1994 with the sole purpose of developing a technology that would address the increasing environmental and regulatory concerns facing the paper industry. The company’s goals were to develop a technology that would reduce the amount of water, energy and chemical additives required for normal paper manufacturing as well as the amount of toxins released during the process. After 10 years of research and help from numerous grants, the company developed what it calls the Papyrus Technology which manufactures paper using the fibers contained in banana tree trunks. Basically, the technology eliminates the pulping process entirely. It takes a banana tree trunk and peels it down to individual layers that are up to eight meters long and as a thin as cigarette paper. The layers are then held together with a natural chemical compound called lignin. The paper can be produced in various sizes and thicknesses ranging from tissue paper to thick cardboard crates. It can even be bleached to produce high-quality writing paper, but Papyrus’s main focus is on packaging materials. Let’s take a closer look at how this technology works: (begin video)

Philip: First thing we will be talking about is stable supply. On the way to Lee & Man, does anyone remember what type of tree we kept seeing?

Philip: On the way to Lee & Man Paper factory, as we sat on the bus. Professor Lamb and I asked, “What are those plants outside the window?” The answer? Banana trees! And we saw a lot of them….

Philip: This basically says where things can grow. Bananas ideally grow in 80-90 degree F. They are one of the “hardiest” plants. SO, they like to grow in the pinkest areas. As you go further up, it gets more difficult to grow; however, there is a large supply of bananas in the bottom 4 colors. So, basically Southern China rocks. 4 out of 6 of Lee & Man’s plants are located within Southern China, where the red oval is. Remember, there was also the recent Vietnam addition. Vietnam produces a total of ______ tons of bananas, which would yield ____ tons of containerboard.

Philip: Mention that the banana industry is also growing in China. SO, it creates a promising future for the banana paper and containerboard industry, b/c this means a stable supply. Note: Make sure you convert tonnes to tons. The conversion is 1 tonne = 1.10231131 short tons. I would do this entire table, but it’s not necessary. I just wanted to get the up-to-date information. (The growth rate of China’s banana production industry

It was Erica that pointed out that on our way to visit the Lee and Man plant in China, that there were miles of banana trees actually growing alongside the road as well. Oversupply also means lower prices that farmers can sell their bananas for, which dropped by over 100%. This is a way for Chinese farmers and government to find other uses for these bananas that will help the economies of farmers. We see increasing amount of exports which comes from overproduction, but we do not see a change in the world price.. And this has not been adjusted for inflation and in terms of real value. So we see tha the price of bananas has in fact been decreasing. “ Since 1997 mainland China has set up nine cross-strait agricultural experimental zones to attract investment”

Banana root is unutilized Low cost of transportation because can be done on banana plants themselves Traditional paper making uses a lot of water, energy, and chemicals to turn the fiber into a usable form. 10 tons of water for every ton of paper Lower energy means lower greenhouse gases This process is a waterless process that does not use resources intensively, and is also nearly eliminates the emission of carbon in the process. The only real by-product of the BTT process is water that comes from the roots, which can be recycled. Renewable

Chelsea Not only is BTT great for the environment, but it has a number of features that make it better than just ordinary paper. As you saw in the video, the banana ply paper is flame retardant. One of Lee & Man’s major concerns is the fear of a fire at the plant which would be devastating to its inventory and its operations. Use of BTT would eliminate this fear. Furthermore, banana ply paper is water resistant, so Lee & Man would not have to cover this material when it rains, as it does with the OCC. The water and flame resistance are not only good for Lee & Man on the production side, but they are great selling points for their packaging materials. Packaging materials that resist flame, water and oil are excellent containers for the preservation and shipment of all sorts of goods. They provide greater protection for the shipper who can now ensure that their goods arrive without damage. In addition, banana ply paper is 300x stronger than traditional papers, making it great for shipping heavier items. These new features will allow Lee & Man to differentiate itself from other paper manufactures and give it a competitive advantage over firms such as Nine Dragons who are moving into the production of other types of specialty board.

Chelsea This graph shows the rising cost of operating expenses for Lee & Man over the past five years. This rise in costs is largely due to the increasing price of OCC. Costs are increasing by 51.2% per year on average. Now let’s say we begin implementing the Papyrus Technology in 2008. Through the implementation plan that Matt will outline in a minute, we can see rapidly decreasing operating expenses for Lee & Man. If Lee & Man decides to switch entirely to the BTT technology by 2010, we will see the operating costs reduced by 80% of their 2007 levels.

Chelsea Let’s take a look at how the BTT technology will greatly reduce these operating costs. First, the BTT production method eliminates the fear of fire so Lee & Man would not need their on-site fire department. This new production segment would not need the rain protection equipment that they use for the OCC. Overall insurance costs would be lower as banana tree trunks are more resilient than the OCC. In addition, one of the most costly parts of the pulping process is the cleaning of the OCC. With BTT, the need for this process would be entirely eliminated. And the capital investment required for this BTT technology is only 3% of that required for pulp paper production. Production costs for this banana ply paper are less than one fifth of those of traditional pulp paper. Since Lee & Man wouldn’t need as much pulp, it could close its pulp plant in Samoa, California. Energy costs would also be lower because no external water supply is needed during the BTT production process and there is also no need for chemical additives. There are no harmful bi-products released during production. The only waste products are water from the tree trunks and scrap pieces of tree trunk that can be used for mulch. Given this information, it is clear that Lee & Man would have little to no disposal costs for this process.

Chelsea Here are a few examples. This is the OCC supply… it was EVERYWHERE! See how it can be damaged by water? With BTT, it’s waterproof. So, no loss from water damage. Lots of savings!

Chelsea: Cost Efficient: Water treatment technology – don’t need this expensive stuff anymore with BTT!

Chelsea Let’s take a look at how the BTT technology will greatly reduce these operating costs. First, the BTT production method eliminates the fear of fire so Lee & Man would not need their on-site fire department. This new production segment would not need the rain protection equipment that they use for the OCC. Overall insurance costs would be lower as banana tree trunks are more resilient than the OCC. In addition, one of the most costly parts of the pulping process is the cleaning of the OCC. With BTT, the need for this process would be entirely eliminated. And the capital investment required for this BTT technology is only 3% of that required for pulp paper production. Production costs for this banana ply paper are less than one fifth of those of traditional pulp paper. Since Lee & Man wouldn’t need as much pulp, it could close its pulp plant in Samoa, California. Energy costs would also be lower because no external water supply is needed during the BTT production process and there is also no need for chemical additives. There are no harmful bi-products released during production. The only waste products are water from the tree trunks and scrap pieces of tree trunk that can be used for mulch. Given this information, it is clear that Lee & Man would have little to no disposal costs for this process.

Matt http://www.ecopapers.com/index.php?main_page=page_2

Matt These trucks can be used to transport the tree trunks, b/c flatbeds are the industry standard for both paper rolls AND trees/logs. So, no need to invest in new trucks for transportation.

Matt Another view of the trucks with the finished product on it.

Erica

Erica

Erica

Pictured at right: Ramy Azer, Papyrus Managing Director

Unlike the OCC/wood-based boxes, you wouldn’t have to “store in a cool dry place”. Water and flame resistant.

Erica

Erica First thing we will be talking about is stable supply. On the way to Lee & Man, does anyone remember what type of tree we kept seeing?

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Lee & Man Paper Strategy Analysis - Presentation Transcript

  1. Lee & Man Paper Strategy Analysis Going Bananas Matt Ahearn Chelsea Campbell Philip Chong Andrew Koo Erica Swallow
  2. Agenda
    • Industry and Company Overview
    • Core Problems
    • Solution: BTT
    • Benefits of BTT
    • Implementation
    • Going Forward
  3. Paper & Pulping Industry
    • China: 11.8% growth (2000-2005)
    • Capital intensive
    • Scarce raw materials
    • High pollution
      • Water
      • Air
      • Solid Waste
      • ⁂ High treating/disposal costs
    http://www.frost.com/prod/servlet/market-insight-print.pag?docid=83462501
  4. - http://www.cintrafor.org/CONFERENCE_TAB/China%20Conf%202006/Flynn%202006.pdf
  5. - http://www.cintrafor.org/CONFERENCE_TAB/China%20Conf%202006/Flynn%202006.pdf
  6. - http://www.cintrafor.org/CONFERENCE_TAB/China%20Conf%202006/Flynn%202006.pdf
  7. Lee & Man Paper ( 理文造紙有限公司 )
    • Founded 1994
    • Mission: “To be the leading paper company in China”
    • 2003: Listed on HKSE Main Board (2314)
    • Public CFB: Lee family (73.4%)
    • Market Cap: US $2.2B
    • Annual Containerboard Production Capacity: 4.25M tons
    • Containerboard Sales (FY07): 1.672M tons
    • Pulp Sales (FY07): 102M tons
    • 57% Sales = Chinese domestic market
    - Deutshe Bank “Lee & Man” Target Price Revision - http://www.leemanpaper.com/template/leeman/pdf/brochure.pdf
  8. Threat of Entry (Low) ● High government regulations ● Low access to distribution ● High capital requirements for purchase of factories Industry Competitiveness (High) ● Strong local competitor: Nine Dragons ● High growth in Asia ● Low product differentiation ● Low informational complexity ● High switching costs and exit barriers Supplier Power ( High) ● 60% of OCC from North America ● Quality Differentiation: North America has highest quality fiber ● Scarce OCC materials with growing demand ● OCC is a large component of product price ● High power in pricing Buyer Power (Low) ● Low substitutes ● Low power in pricing ● High concentration ● Brand identity low ● Consolidation of paper producers due to government regulation Threat of Substitutes (Low) ● Cardboard boxes are the industry standard
  9. Core Problems
    • Raw Material Prices
    Industry Competitiveness Environmental Policies
  10. Skyrocketing Raw Material Prices
    • Lee & Man’s containerboard product contains 85-90% OCC
    • Increased demand for OCC has driven prices up
    • 60% OCC from North America (quality)
  11. Historical OCC Prices Year 2006 2007 2008 Current Price($/MT) $149 $150 $200 $270
  12. Strict Environmental Policies
    • Paper production is one of the most polluting industries
    • China is the 2 nd largest polluter in the world
    • Chinese government is shutting down small inefficient plants
  13. Industry Competitiveness
    • Two Main Chinese Competitors
      • Lee & Man
      • Nine Dragons
    • Low Product Differentiation
      • Nine Dragons has entered into high-tech containerboard market
      • How will Lee & Man position themselves?
  14. Papyrus & BTT Technology
    • Papyrus Australia Limited
      • Founded in 1994
      • Sole purpose to develop a new technology to address the growing environmental and regulatory concerns of the paper manufacturing industry
      • The Papyrus Technology was patented in 2007 both Australia and in 160 other countries
    • Papyrus Technology
      • Basic overview
    - http://www.papyrusaustralia.com.au/aspx/company_history.aspx - http://velocity.ansto.gov.au/velocity/ans0016/article4_print.html
  15. Papyrus Australia Corporate Video
    • - http://www.papyrusaustralia.com.au/aspx/why_banana_overview.aspx
  16. Benefits of BTT
    • Stable Supply
    Environmentally Friendly Product Differentiation Cost Efficient
  17.  
  18. Location!
  19. United States Department of Agriculture
  20. Banana Production Quantity Per Country (tonnes) Note: 1 tonne = 1.10231131 short tons - http://faostat.fao.org/site/567/DesktopDefault.aspx?PageID=567 China’s Average Growth Rate: 5.4% (2000-2006) 2000 2001 2002 2003 2004 2005 2006 1. India 14140000 14210000 16820000 11954300 11388000 11710300 11710300 2. Brazil 5663360 6176960 6422860 6800981 6583564 6703400 7088021 3. China 5142990 5479074 5786295 6128817 6248636 6669679 7053000 4. Philippines 4929570 5060782 5274826 5368977 5631250 6298225 6794564 5. Ecuador 6477039 6077040 5528100 6453806 6132276 6118425 6118425 6. Indonesia 3746962 4300422 4384384 4177155 4874439 5177608 5177608 7. Costa Rica 2250000 2130000 2050000 2028000 2249209 2352618 2352618 8. Mexico 1863252 2027997 1885803 2026613 2361144 2250041 2196891 9. Thailand 1750000 1750000 1800000 1900000 1859442 1864850 1864850 10. Colombia 1613000 1469642 1560953 1536266 1577397 1764501 1764501 11. Burundi 1513997 1548897 1602979 1600000 1556857 1538679 1538679 * Vietnam 1124800 1125500 1097000 1281800 1329400 1344200 1344200 FAOSTAT | © FAO Statistics Division 2008 | 18 April 2008
  21. China Has an Over-Supply of Bananas http://atimes.com/atimes/china/hj28ad01.html
    • Since 1997: Nine Agricultural Zones (to attract investment):
        • Fujian (2)
        • Guangdong
        • Hainan
        • Heilongjiang
        • Jiangsu (2)
      • Shanxi
      • Shandong
      • Shanghai
      • Sichuan (2)
  22. Environmentally Friendly Current waste “ For every 30 kg of banana sold on the market, there are 250 kg of waste” -Ramy Azer Creator of BTT technology
    • BTT is currently unutilized
      • Traditional Paper Making uses 10 tons of water for each ton of paper
        • Reduce greenhouse gases and eliminates CO2 emission
          • Only by-product is clean water
            • Completely Renewable!
  23. Product Differentiation
    • Flame retardant
    • Water resistant
    • Oil resistant
    • 300x Stronger
    www.abc.net.au/stateline/sa/content/2003/s930379.htm
  24. Increasing Costs - http://stocks.us.reuters.com/stocks/balanceSheet.asp
  25. Cost Efficient
    • Cost savings from product features
    • Lower insurance costs
    • Lower OCC cleaning costs
    • Low capital investment
    • Lower production costs
    • Less energy costs
    - http://www.truthforce.info/?q=node/view/1506 - http://www.mitra.biz/blog/archives/2006/05/papyrus_wins_12.html
  26. Rain Protection for OCC
  27. Water Treatment Technology
  28. Cost Efficient
    • Cost savings from product features
    • Lower insurance costs
    • Lower OCC cleaning costs
    • Low capital investment
    • Lower production costs
    • Less energy costs
    - http://www.truthforce.info/?q=node/view/1506 - http://www.mitra.biz/blog/archives/2006/05/papyrus_wins_12.html
  29. Implementation Costs
    • Implementation Cost Savings = 97%
    • Production Cost Savings = 80%
    • Transportation Cost Savings
      • 60% of OCC supply from US
      • 100% of banana supply from local areas
    -http://www.papyrusaustralia.com.au
  30. Containerboard Production Costs Year HKD (millions) OCC
  31. Maintain Current Truck Fleet
  32. Flatbed = Industry Standard
  33. BTT Integration Plan May June July Aug Sept Oct Nov Dec Jan Feb
    • 3 Months Goals
    • May - Aug ‘08
    • Secure BTT technology license from Papyrus
    • Cultivate sustainable relationships with banana supplier in Guangdong area
    • May 2008
    • Initiate banana suppliers negotiations
    • Begin Papyrus licensing process
    • 6 Months Goals
    • Aug - Nov ‘08
    • Complete technology integration in Guangdong production plant
    • Begin BTT production and experimental stage
    • 9 Months Goals
    • Nov ‘08 - Feb ‘09
    • Evaluate BTT experimental production
    • Select full integration production site. Begin supplier negotiations, if necessary.
    • August 2008
    • Construct BTT machinery in Guangdong plant
    • Begin production
    • November 2008
    • Evaluate BTT technology success
    • February 2009
    • Select Full-integration site
    • Begin negotiations with local suppliers
    • Begin production
  34. Profit USD (Millions) Year / % BTT Implementation Total OCC Implementation Period Net Profit Total BTT OCC 10% 20% 30% 40% 50%
  35. Moving Forward …
    • What else can be made from BTT or banana trees?
  36. Banana Bark Textiles
  37. Banana Leaf & Veneer Furniture
  38. Banana Fiber Handicrafts
  39. Recycled Banana Silk Yarn
  40. Banana Ply Clothing & Specialty Paper
  41. Packaging Materials
  42. Core Problems
    • Raw Material Prices
    Industry Competitiveness Environmental Policies
  43. Benefits of BTT
    • Stable Supply
    Environmentally Friendly Product Differentiation Cost Efficient
  44. Any Questions?
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