Industry Structure and Competitiveness

PAPER INDUSTRY

Introduction

In the manufacture of paper-based packaging, the following paper products are used:

kraftliner/sack kraft paper, multi-ply paper and paperboard, corrugating medium, and

corrugated paper.

The attached linkage chart shows the flow of commodities from the raw materials to

paper-based packaging (see Figure 1). The production process from raw materials to

finished cartons and boxes is as follows:

➲ Pulp and waste paper preparation – involves sorting, handling and feeding

of fiber and old carton/paper into the stock line.

➲ Stock preparation- involves pulping, steaming, screening, refining and

blending of different grades of raw materials.

➲ Filler and additives preparation – involves the storing, diluting and feeding

of rosin, alum and dye to the pulp stock in the machine chest.

➲ Board forming – involves the final screening, pressing (removal of water),

drying and surface sizing of the board.

➲ Finishing – involves the winding, and slitting of rolls to the desired trim size

and roll diameter before storing in the warehouse.

The objective of this study is to provide a competition analysis of the paper industry

which serves as input to the paper-based packaging industry, using an analytical

framework specifically developed for this purpose, and to make recommendations, if

necessary, on how to make the industry competitive or improve its competitiveness. It

is hypothesized that to improve the input sectors of the Philippine export industry will

translate into competitiveness or better competitiveness of Philippine exports. The

packaging industry is critical to the export sector since high-quality and sophisticated

packaging is a requirement for success in the global market.

Competition and Competitiveness Analysis

I Defining the Relevant Market A relevant market is defined as, “… a product or group of products and a geographical

area in which it is produced or sold such that a hypothetical profit-maximizing firm, not

subject to price regulation, that was the only present and future producer or seller of

those products in that area likely would impose at least a ‘small but significant and

nontransitory’ increase in price, assuming the terms of sale of all other products are

held constant. A relevant market is a group of products and a geographic area that is

no bigger than necessary to satisfy this test1”.

Simply put, a relevant market is defined by the product or service involved, the

geographical area in which said product or service is sold, and the sellers and buyers of

such product or service.

! Product Market

The relevant product market is defined as local and imported

kraftliner/sack kraft paper, multi-ply paper and paperboard, corrugating

medium, and corrugated paper.

In defining the relevant product market, the approach followed is: assuming a

hypothetical monopolist for a product, would said monopolist profit by imposing at least

a small but significant and non-transitory increase in price?

In manufacturing cartons, boxes, sacks, bags and other paper-based packaging

containers, kraftliner/sack kraft paper, multi-ply paper and paperboard, corrugating

medium, and corrugated paper are used.

Assuming that a hypothetical domestic monopolist producing these paper products were

to impose a small but significant and non-transitory increase in the prices of said

products, the price increases would probably prove unprofitable since consumers would

likely switch to imported products.

Since the monopolist is unlikely to profit, a relevant product market limited to locally

manufactured paper products is too narrow, i.e. imported paper products should be

considered part of the product market. If the question is again posed on whether a

hypothetical monopolist producing local and selling imported paper products would

profit from an increase in its prices, then the answer would be positive since there would

be no other sources of above products which consumers could switch to.

Thus, the relevant product market is defined as local and imported kraftliner/sack kraft

paper, multi-ply paper and paperboard, corrugating medium, and corrugated paper.

1 As defined by Section 1 of the U.S. Department of Justice and Federal Trade Commission Horizontal

Merger Guidelines dated 2 April 1992.

! Geographical Market

The relevant geographical market, specifically for inputs to the paper-

based packaging industry, is defined as the Philippine national territory.

The geographical market is defined thus: it is the region where a hypothetical

monopolist, being the only present or future producer of the product, could profitably

impose at least a small but significant and non-transitory price increase holding the

terms of sale constant at all other locations. Defining the geographical market has

become much more difficult with the increasing globalization of markets and the use of

electronic trade, e.g. ordering through the Internet.

For purposes of this study, the geographical market for the inputs to the paper-based

packaging industry will be defined as the Philippine national territory. ! Participants in the Market

The relevant participants in the market are the mills manufacturing

kraftliner/sack kraft paper, multi-ply paper and paperboard, corrugating

medium, and corrugated paper for the paper-based packaging industry,

and importers of such materials for sale to the domestic market.

The local pulp and paper industry is currently composed of 42 mills. Of these, one (1) is

a fully integrated pulp and paper mill, four (4) are purely pulp (abaca) mills, and thirty-

seven (37) pulp and reclaimed fiber mills. The major mills registered with the Board of

Investments (BOI) and producing liner board, sack kraft, and corrugating medium are

listed in Table 1. The smaller firms producing specialty paper, i.e. paper not used for

packaging goods for export, do not form part of this study.

PICOP is the largest integrated wood-processing complex. As of 1996, its capacity is

375,714 metric tons per year. The company is a major manufacturer of corrugated

carton, pulp and paper products, and containerboard products aside from supplying

80% of the newsprint paper requirements of newspapers.

The aggregate production of four (4) mills - PICOP, Manila Paper Mills (MPM), Trust

International Paper Corporation (TIPCO), and Container Corporation of the Philippines -

account for at least 43% of the total annual capacity of the entire industry.

The production of packaging paper and board (composed of liner and other boards,

corrugating medium and sack kraft) is dominated by PICOP with a capacity of 66,000

MT per year, and formerly by MPM2 with a capacity of 60,000 MT per year. While

PICOP and MPM account for 40% of capacity, 16 other mills contribute to the

remaining 60%. The annual capacity of paper and board is 1,100,000 MT.

The Pulp and Paper Manufacturers’ Association, Inc. (PULPAPEL) is composed of the

following major paper mills: Bataan Pulp and Paper Mills, United Pulp and Paper

Company (UPPC); Mayleen Paper Inc., TIPCO, and PICOP.

Since imported paper products are considered part of the product market, the import

sector is another market participant.

II Calculating Market Share

In order to make an accurate evaluation of the degree of competition within a market

and the presence of market dominance and abuse, the calculation of market shares is

necessary.

2 MPM has already ceased operations, per BOI data.

Market shares have to be computed using the best indicator of a firm’s significance as a

market player both in the present and in the future. The level of sales is generally

deemed a desirable indicator. However, this data could not be obtained due to the

refusal of the participants to divulge information.

With no information on sales by paper producer, market shares were computed on the

basis of gross revenues. Since the import sector is a market participant, the value of

imports of the relevant paper products was also culled. A competitiveness analysis of

the Philippine market for paper-based packaging is not, however, complete without

considering suppliers thereof that are based abroad but provide the needs of importer.

For the purpose of this paper, foreign manufacturers and suppliers shall be lumped

together as one group and measure their impact on the market by computing the value

and volume of imports of such products.

The market is now considered to be composed of gross revenues plus imports and the

relevant shares were calculated. The top five (5) players in the market and their

respective revenue shares from 1995 to 1997 are shown below:

Table 1. Revenue Shares: 1995 – 1997

Players 1995 1996 1997 Imports 26.1 36.2 35.3 PICOP Resources Corp. 38.1 16.2 22.4 Manila Paper Mills, Inc. 8.7 10.3 4.0 Mayleen Paper, Inc. 6.4 8.3 8.0 United Pulp and Paper Co., Inc. 5.2 8.2 7.4

Source of Basic Data: Foreign Trade Statistics, National Statistics Office Top 7,000 Corporations, Philippine Business Profiles and Perspectives, Inc.

For the purpose of estimating the market shares of imports, importers were treated as a

single market supplier. The lack of available data makes disaggregation according to

importer impracticable. In addition to this limitation, import data are undervalued, on the

one hand, since CIF values were used instead of landed cost (in cases where the

importer is the end-user) or selling price (in cases where the importer is a trader).

Assumptions to be used to adjust these values to the level of landed cost or selling price

may further distort the true cost of the imported product. On the other hand, the import

figure is overvalued since data cannot be disaggregated into the value of inputs used for

the manufacture of paper packaging materials and the value of inputs used for the

manufacture of other made-up paper articles.

III Evaluating Level of Concentration

Market concentration depends on the number of firms in a market and their respective

market shares.

The level of concentration, i.e. ownership of firms and industry structure, in the paper-

based packaging industry was computed using the Herfindahl-Hirschman Index (HHI).

The HHI is an indicator used in the U.S.A. It is the sum of squares of the individual

market shares of all the market participants.

Under American law, the HHI is not strictly mandated in any situation, even in mergers.

Rather, it is used in guidelines of the U.S. Department of Justice when reviewing

mergers. Courts have adopted the guidelines, including the HHI, as useful in analyzing

mergers, and they look to the HHI for guidance in other areas of antitrust law as well.

While the HHI has no “legal” authority, courts, regulators and economists recognize it as

a useful tool in analyzing market concentration in mergers and other areas of antitrust

law. An HHI of 10,000 means a pure monopoly, while an HHI approaching zero

indicates an atomistic market3.

3To aid in the interpretation of HHI, the U.S. uses the following approach: below 1,000 # not concentrated between 1,000 and 1,800 # moderate concentration between 1,800 and 10,000 # high concentration

Due to an insufficiency of data,4 HHIs will be computed on the basis of the market

shares estimated in Table 1. The underlying assumption here is that other paper

producers are minor players in the market. The HHIs for 1995 to 1997 are as follows:

Table 2. HHI: 1995 – 1997

Year HHI 1995 2,276.5 1996 1,815.1 1997 1,882.6

The HHI figures indicate high market concentration over the period. It should be noted

that the HHI figures tend to be overestimated since importers/traders were considered a

single market player.

IV Other Factors Affecting Competition and Competitiveness

! Factors Affecting Entry Into and Exit From the Industry

The conditions of entry into an industry have a significant impact on the degree of

competition within a market. Ease of entry ensures that incumbent firms do not abuse

market power and remain inefficient/complacent since potential market participants,

attracted by excess profits, can readily enter and provide stiff competition. There would

be constant pressure to reduce costs to prevent entry, so output and prices would be at

competitive levels. Prices, in particular, would be maintained at the minimum level

required to maintain profitability (i.e. in the short-run, price = marginal cost and in the

An HHI of above 1,800 is considered “highly concentrated” even though it seems a long way from 10,000, i.e., absolute monopoly power. This is because, in the merger context at least, U.S. antitrust laws are concerned not only with mergers that result in a monopoly, but also with mergers that result in a highly concentrated market.

long run, price = marginal cost = minimum long-run average total cost). On the other

hand, where barriers to market entry exist, anti-competitive actions are more likely. For

instance, an incumbent firm can raise prices since no other firm can fully enter the

market and provide the same good or service at a lower price.

The supply and demand for kraftliner/sack kraft paper, multi-ply paper and paperboard,

corrugating medium, and corrugated paper is viewed within a global market context.

The rest of the world actively exports such commodities to markets including the

Philippines. Thus, factors affecting entry would likewise have an impact on the ease or

difficulty of entry of imports into the Philippine domestic market.

(a) Investment and Sunk Cost

Entry into the industry is difficult, as huge investments are needed to obtain

facilities and technology to start production.

Based on data from the National Statistics Office, capital expenditures of

integrated pulp and paperboard (PSIC 34111) in 1988 amounted to P2.69 million.

By 1994, this increased to P51.53 million.

The BOI estimates investments in paper board production at P375 million to

P525 million for a 15,000/MT/year capacity paper mill.

The industry is highly capital-intensive, i.e. one (1) paper machine, depending on

capacity, costs approximately US$2.5 million. Aside from the huge capital outlay

required, the industry has a long gestation period – at least five (5) years are

needed for the fair recovery of its investments.

4 As earlier stated, no data is public available and the market participants contacted refused to divulge information.

Sunk costs are costs that cannot be recovered and hence serve as a barrier to

entry. In 1997, total investments of the industry consisted of: sunk costs – P13

billion, ongoing projects – P15 billion, and cogen plants – P3.6 billion. Cogen

plants are meant to substitute the high power costs of its plant.

(b) Size of the Market

No data was available from public sources on market size. Market participants

were unwilling to divulge information.

(c) Laws and Regulations

Regulatory policies affect the entry of firms into the market particularly if the

regulation warrants an incentive for higher profit for would-be participants.

(1) Tariff Policy – In 1990, the rates of duty on the inputs to paper-

based packaging ranged from 30%-50% (see Table 3). These duties

have since fallen and are currently pegged at 10% for kraftliner/sack kraft

paper, corrugating medium, and corrugated paper and at 3% for multi-ply

paper and paperboard. The tariff on corrugated paper will fall further to

7% in 2000.

With respect to the rates of duty of the various paper-based packaging

products, these have similarly fallen from 40% in 1990 to 10% at present

and until 2000.

Table 3. Rates of Duty of Paper and Paper-Based Packaging Products (1991 – 2000)

RATES OF DUTY (%) HS

HEADING 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Kraftliner/Sack kraft paper 4804.11 00 50 30 30 20 20 20 20 20 15 10 10 4804.21 00 50 30 30 20 20 20 20 20 15 10 10 Corrugating medium 4805.10 00 40 30 30 20 20 20 20 20 15 10 10 Corrugated paper 4808.10 00 40 40 35 30 25 20 20 20 10 10 7 Multi-ply paper and paperboard 4810.91 90 30 30 30 25 25 20 20 20 3 3 3 4810.99 00 30 30 30 25 25 20 20 20 3 3 3 Cartons, boxes and cases, of corrugated paper or paperboard 4819.10 00 40 40 30 25 25 20 20 20 15 10 10 Folding cartons, boxes and cases, of non-corrugated paper or paperboard 4819.20 00 40 40 30 25 25 20 20 20 15 10 10 Sacks and bags 4819.30 00 40 40 30 25 25 20 20 20 15 10 10 4819.40 00 40 40 30 25 25 20 20 20 15 10 10 Other packing containers, including record sleeves 4819.50 00 40 40 30 25 25 20 20 20 15 10 10 Box files, letter trays, storage boxes xxx of a kind used in offices, shops xxx 4819.60 00 40 40 30 25 25 20 20 20 15 10 10 Source: Tariff Commission

(2) Other Regulations – Table 4 summarizes the lifting of quantitative

restrictions on paper and paper-based packaging products.

Table 4. Import Restrictions in the Paper Industry

Central Bank Circular

Date of Effectivity

Product

850 15 February 1982

Kraft paper, creped or crinkled, whether or not embossed or perforated. Paper, corrugated, embossed or perforated.

1100 30 April 1986 Paperboard, embossed or perforated. 1150 23 July 1987 Sulphite foil laminating-wrapping paper (excluding

other foil laminating-wrapping paper). Colored match wrapping paper. Foil laminating-wrapping paper (excluding sulphite foil laminating-wrapping paper.

Paper (other than printing or writing paper) and paperboard, coated or impregnated with artificial or synthetic resins (excluding adhesives). Paper and paperboard, coated or impregnated, n.e.s.

1167 31 December 1987

Kraft liner with a basis weight of 300 grams or less per square meter. Kraft liner with a basis weight exceeding 300 grams per square meter. Sack kraft paper. Kraft paper, wholly of sulphate. Kraft paper, other than those wholly of sulphate. Kraft board. Semi-chemical fluting paper.

Boxboard (excluding corrugated box board). Paperboard, corrugated. Coated or gummed kraft paper. Claycoated boxboard. Paper bags and sacks for articles weighing 11.36 kg. or less. Paper bags and sacks for articles weighing more than 11.36 kg (except onion bags and sack s made of paper string).

Multi-wall bags and sacks for articles of dimensions 17” x 4” x 7” or smaller. Multi-wall bags and sacks for articles weighing 11.36 kg. or more. Boxes, corrugated carton. Boxes and other packaging containers of paperboard or cardboard except corrugated carton boxes.

Source: Tariff Commission Records Division, Bangko Sentral ng Pilipinas

(3) Investment Incentives – According to the BOI, the following major

players are registered and eligible for incentives: PICOP

Resources, Inc., UPPC, TIPCO, Trans-National Paper, and

Container Corporation of the Philippines.

(4) Trade Facilitation – The Bureau of Customs may hold a shipment

for reasons of misclassification, misdeclaration and undervaluation.

Unscrupulous importers misdeclare goods to enable them to pay

less duties and taxes. On the other hand, industry sources confirm

the pervasive practice of paying “facilitation fees” over and above

the required fees and taxes, in order to expedite document

processing and release of shipments. This additional and

unwarranted expense, which may reach a prohibitive amount,

constitutes a barrier to entry.

! Other Factors Affecting Competitiveness

The competitiveness of a domestic industry vis-à-vis imports are due to factors that are

both internal and external to the industry.

(a) Access to Raw Materials

Most paper mills purchase their raw materials (waste paper, virgin pulp, and

chemicals) from abroad. With the exception of PICOP, paper mills use waste

paper or recycled paper as main raw materials because of greater cost efficiency

relative to pulp. Since local production is insufficient to meet demand, raw

materials have to be imported. A majority of non-integrated paper mills rely on

imports for their supply of raw materials because the country has the lowest

recovery rate for waste paper among Asian nations.

V Assessment of Industry Performance Pulp mills generally produce paper-making fiber from wood pulp sourced from timber.

Paper-making fiber may also be sourced from abaca or made from specialty paper.

The bulk of production of paper-making fiber firms go to local paper mills. Paper mills

manufacture paper using either paper-making fiber or waste paper as inputs.

The major paper grades are newsprint, printing and writing, kraft/corrugating

medium/sack, and tissue/others. In terms of shares to total output, production of

newsprint accounts for 20%, printing and writing – 18%, tissue/others – 5%, and

kraft/corrugating medium/sack – 57%.

! Domestic Manufacturing Industry

The paper industry is composed mainly of large wood pulp and waste/recycled paper

and small abaca pulp mills.

! Employment

No data was available from public sources on employment in the industry. Market

participants were unwilling to divulge information.

! Financial Performance of the Paper Industry

Table 5 (see end of paper) shows comparative statistics on the financial performance of

the industry in 1996 and 1997. The top 7000 corporation lists twenty-three (23) firms

belonging to the industry. Aggregate gross revenues of the industry increased by

16.47% or from P5.6 billion in 1996 to P6.5 billion in 1997. Net income improved but

remained negative in 1997 at (P348) M from P956 million in 1996. Thus, net profit

margin improved from (17.06%) to (6.48%). Aggregate assets, liabilities and equity

increased over the two-year period by 18.62%, 32.83%, and 4.21%, respectively. Debt

to equity ratio deteriorated from 1:1.01 in 1996 to 1:1.29 in 1997. Overall, the industry

performed better in 1997.

! Production and Consumption

Packaging paper and board comprised almost half of total paper production from 1992

to 1994 (see Table 6). Production grew steadily from 1992 to 1995 and sharply

decreased by 9% in 1996.

Table 6. Paper Production by Grade5 (in ‘000 metric tons)

GRADE 1992 1993 1994 1995 1996 Newsprint 103.0 109.7 110.8 142.0 130.0 Printing/Writing 98.0 103.2 103.2 154.0 155.0 Packaging Paper and Board 243.0 252.5 260.1 286.0 235.0 Sanitary/Tissues 19.0 19.4 19.4 - - Specialty Grades/Others* 32.0 32.7 32.9 57.0 60.0

T O T A L 495.0 517.5 526.4 639.0 580.0 Annual Rated Capacity (MT) 635.0 650.0 653.0 685.0 1,100.0 Capacity Utilization (%) 77.95 79.62 80.61 93.28 52.73

* Specialty/other grades refer to chipboard, bristol board, cigarette paper, match wrapping paper, tagboard and crepe paper

Source: PULPAPEL (1992 to 1994) Philippine Pulp and Paper Industry Report, 1997 (1995 to 1996) Aligned to the pattern in production, more than half of total consumption of paper was of

packaging paper and board from 1992 to 1996 (see Table 7). Consumption increased

from 427,000 MT in 1992 to 463,800 MT in 1994 but declined onwards. Local

consumption of packaging paper and board slumped by 25% in 1996. This suggests a

shift of consumption towards imported packaging paper products. However, per capita

consumption of paper has been improving.

Table 7. Paper Consumption by Grade6 (in ‘000 metric tons)

GRADE 1992 1993 1994 1995 1996 Newsprint 105.6 127.8 141.0 171.0 162.0 Printing/Writing 144.1 153.2 168.1 202.0 192.0 Packaging Paper and Board

427.0 446.5 463.8 455.0 339.0

Sanitary/Tissues 21.4 20.5 21.7 - - Specialty Grades/Others* 51.0 51.7 61.2 64.0 73.0

T O T A L 749.1 799.7 855.8 892 766

5 The BOI estimated 1997paper production by grade (‘000 MT) at 634 MT, broken down as follows: 204 for Newsprint, 162 for Printing/Writing, 205 for Packaging Paper and Board, and 63 for Sanitary/Tissues, Specialty and Others. 6 The BOI estimated 1997paper consumption by grade (‘000 MT) at 848 MT, broken down as follows: 170 for Newsprint, 201 for Printing/Writing, 396 for Packaging Paper and Board, and 81 for Sanitary/Tissues, Specialty and Others.

Estimated Per Capita (kg.) 9.5 11.5 12.5 12.7 10.7 Source: PULPAPEL In producing sack kraft, manufacturing overhead contributes the most to the cost to

produce and sell, followed by the cost of raw materials (see Table 8). These two cost

components combined account for 86% of the total unit cost to produce and sell sack

kraft.

The same pattern is evident for corrugating medium. Manufacturing overhead

contributes almost 45% while raw materials account for another 31%.

Table 8. Cost to Produce and Sell: Sack Kraft and Corrugating Medium (in %)

Cost Component Sack Kraft Corrugating Medium

Raw Materials 35.05 31.00 Direct Labor 0.25 0.36 Manufacturing Overhead 51.59 44.74 Electricity 7.95 11.84 Selling and Administrative 5.16 12.06 Cost to Produce and Sell 100.00 100.00

Source: Tariff Commission

! Imports and Exports

The volume of imports of kraftliner/sack kraft paper, multi-ply paper and paperboard,

corrugating medium and corrugated paper has been increasing from 1991 to 1997 (see

Table 9). From 86,848 MT in 1991, the volume of imports of said paper products used

for paper-based packaging amounted to 249,044 MT in 1997. The average annual

growth rate over the period is 20%. In terms of values, imports totaled $42 million in

1991, which more than doubled in 1994 to $95 million. The following year, imports

exceeded the $100 million mark. In 1997, imports of $121 million were recorded.

Exports of the various articles are insignificant.

Table 9. Imports and Exports of Kraftliner/Sack Kraft Paper, Multi-Ply Paper

and Paperboard, Corrugating Medium and Corrugated Paper

Imports Exports Year Volume

(MT) CIF Value

(‘000 US$) Volume

(MT) FOB Value (‘000 US$)

1991 86,848 42,156 --- --- 1992 122,721 58,901 --- --- 1993 139,703 63,835 --- --- 1994 202,044 95,326 * * 1995 204,489 123,893 100 58 1996 234,744 121,146 --- --- 1997 249,044 121,045 --- ---

* Less than a metric ton Source: Foreign Trade Statistics of the Philippines, National Statistics Office (various years)

! Effective Protection Rates7 and Domestic Resource Costs8

The DRC/SER ratios of the industry indicate that it has been highly inefficient since

1983 (see Table 10). By 1988, inefficiency of the industry worsened as indicated by a

negative DRC/SER ratio of 10.30. While the ratio improved in 1994, the industry

remained highly inefficient. It is noted that in the same year, protection accorded the

industry fell to 20.95% from 31.31% in 1988.

Table 10. EPR and DRC/SER of Integrated Paper and Paperboard Milling (PSIC Code 34111)

Year EPR DRC/SER 1983 3.77 1988 31.31 -10.30

7 The effective protection rate (EPR) is defined as the percentage excess of domestic value added over

world market value added due to the imposition of tariffs and other protective measures on a product. The higher the EPR of an industry or activity, the greater the protection enjoyed from tariffs and similar measures.

8 An activity or industry is said to have comparative advantage if the domestic cost it incurs (expressed in shadow prices) to earn or save a unit of foreign exchange is less than or equal to the shadow price of foreign exchange. A decline in the DRC/SER ratio implies an improvement in an activity’s comparative advantage position. The criteria for efficiency used in Tecson (1996) was used to determine degree of efficiency.

1994 20.95 2.68 Source: Tecson, G. and Medalla, E.

! Prices

The prices of locally manufactured kraftliner and corrugating medium were higher than

the prices of the imported counterparts from 1996 to 1998 (see Table 11). However, the

price differential was only 15% approximately and was not sufficiently high to induce

exporters to import packaging materials. The added expense of facilitating customs

requirements for release of any imports would outweigh any price advantage of imports.

Table 11. Comparative Prices (P/MT)

Kraftliner Corrugating Medium Year Imported Local Imported Local

1996 15,700 17,400 11,400 11,600 1997* 15,500 --- 11,600 11,900 1998 3rd quarter 18,400 21,000 11,000 13,500

Source: San Miguel Rengo Packaging Corporation

! Revealed Comparative Advantage

One sector that relies heavily on the paper-based packaging industry is the export

sector. Clearly the success of this downstream export sector depends greatly on high-

quality and competitive paper-based packaging.

The paper-based packaging industry is uncompetitive in the world market as shown by

less-than-one RCA9 estimates for the years 1992 to 1996 (Table 12). Clearly, the

worsening inefficiency of its backward linkage and consequently high-priced kraftliner

9 Revealed Comparative Advantage (RCA) is an indicator of a country’s export competitiveness. It is

computed as the share of a product’s exports to total country exports over the share of the product’s total exports in the world market. A greater-than-one RCA estimate indicates that the country has comparative advantage to export the product in the world market.

and corrugating medium contribute much to the uncompetitiveness of paper-based

packaging products in the world market.

Table 12. RCA Estimates of Pre-Cut Articles of Paper (SITC 642): 1992 – 1996

Year RCA 1992 0.48 1993 0.58 1994 0.50 1995 0.05 1996 0.44

Source of Basic Data: UNCTAD International Trade Statistics.

VI Conclusions and Recommendations ! Conclusions

(a) High Concentration

Estimated HHI values indicate that the market is highly concentrated. High entry

cost contributes primarily to high market concentration. The capital-intensive

nature of the industry clearly discourages entry by other firms, as it is difficult to

obtain needed facilities, raw materials and technology to begin production.

Packaging paper and board (composed of liner and other boards, corrugating

medium and sack kraft) manufacturing is oligopolistic in nature – two big firms

accounting for 40% of the industry’s capacity. These are Paper Industries

Corporation of the Philippines (PICOP) and Manila Paper Mills.10

10 According to the BOI, MPM had ceased operations as of this writing.

Although market concentration may indicate the likelihood of abuse of market

power, such in itself is insufficient to determine whether there have been adverse

effects on competition.

(b) Tariff Structure

Tariffs, pricing behavior, efficiencies and failure, should be examined together

with market concentration.

Entry is affected by the tariff structure. Recent tariff reforms substantially relaxed

entry barriers to imports, and resulted in increased competition for the local

industry.

The lack of information with regard to pricing behavior of the two largest firms

limited the study to determine proof of abuse of market power. Data, however,

indicate that locally-manufactured kraftliner and corrugating medium were priced

higher than their imported counterpart. The higher price is ascribed to high raw

material cost and production inefficiencies, not oligopoly power, because

competition provided by cheaper imports effectively averted the potential for

abuse of market power. In this case, competition played a critical role in ensuring

that oligopoly positions are not abused.

(c) High Investment Cost as a Barrier to Entry

Entry into the industry is difficult, as huge investments are needed to obtain

facilities and technology to start production.

! Recommendations

Competition policy can address uncompetitive behavior, which has a substantial impact

on the competitiveness of the paper industry.

(a) Competition Policy and Trade Liberalization

Competition policy can play a critical role in ensuring that monopoly and oligopoly

positions are not abused. A competition agency to monitor the behavior of firms

is vital.

The thrust towards trade liberalization should be continued. Trade measures

also form part of competition policy since the reduction of trade barriers also

enhances competition in the domestic economy. The lowering of tariff barriers

would induce efficiency in the domestic industry and at the same time discourage

oligopolistic behavior. Moreover, trade liberalization should be complemented

by a national competition policy for the long-run interests of packaging firms and

end-users.

(b) Access to Improved Technology

The industry needs to reduce costs and improve productivity. More importantly,

it has to increase the quality of its paper and board packaging products. One

strategy is for the industry to establish alliances with large companies that can

supply information, technology, and ways to offer more varieties to its

downstream industry -- the paper-based packaging industry.

The government should support initiatives of firms to acquire technology and

capital equipment needed by the industry. After the firm has identified its

alliances, the government may offer to institutionalize the mode of cooperation.

(c) Trade Facilitation

Simplification of customs procedures should also be considered to reduce

transaction costs and facilitate importation of needed inputs by the industry.

Table 5. Selected Financial Indicators of the Paper Industry (1996 and 1997, in P’000)

Gross Revenues Net Income Total Assets Total Liabilities Stockholders Equity 1996 1997 1996 1997 1996 1997 1996 1997 1996 1997 Paper Industry

5,607,616

6,530,928

(956,620)

(422,970)

18,912,764

22,434,933

9,524,600

12,651,261

9,388,164

9,783,676

Source: Top 7,000 Corporations

FIGURE 1

PAPER-BASED PACKAGING PRODUCTS

Kraftliner /

Sack Kraft paper (4804.11/4804.21)

MFN 15%

10% (1999-2000) CEPT 10%

Corrugating Medium (4805.10 00)

MFN 15%

10% (1999-2000) CEPT 10%

Multi-ply paper and

paperboard (4810.91)

MFN 3/15%

3/10% (1999-2000) CEPT 3/10%

Corrugated Paper (48.08) MFN

10% (1998-1999) 7% (2000)

CEPT 10%

CARTONS, BOXES, SACKS, BAGS AND OTHER

PACKING CONTAINERS (48.19) MFN 15%

10% (1999-2000) CEPT 10%

Source: Tariff Commission