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CHAPTER V
CHALLENGES AND WORK PLACE ENVIRONMENT
FORECAST OF INDIAN PAPER INDUSTRY
1. INTRODUCTION
The paper industry plays a very significant role in the Indian
economy. India is still more dependent on the forest industry than any
other country: the pulp and paper industry accounts for over 15% of
goods exported from India, while the forest industry as a whole accounts
for about one fifth of exports. The industry's production is largely based
on Indian renewable raw material resources. Through the use of Indian
production inputs the paper industry's indirect impact on the national
economy is substantially greater than the average for all industrial sectors.
The Indian paper industry is concentrated regionally in a number of
different centres, and so its regional significance for employment and for
local wellbeing and prosperity is considerable.
The paper industry companies based in India and the Indian paper
industry as a whole is among the best in the world in terms of their knowhow and production technology. The paper industry's success has been
based on the presence of a strong and diverse forest cluster surrounding
the industry. Machinery and equipment manufacture, consultancy and
forestry know-how have underpinned the competitiveness of the paper
industry. Cross-sectoral cooperation and business activities have served
to reinforce the strengths of all concerned.
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The paper industry and the entire forest cluster in India represent a
unique concentration of expertise, which will continue to be of great
importance to the national economy. Nevertheless, the operating
environment of the paper industry has changed very significantly in the
last 10-15 years as a result of changes in the global economy. The
industry is now not only a major exporter but also very much an
international sector in terms of its production: over 60% of the production
capacity of paper industry companies based in India is located abroad.
The paper industry companies operate globally and the industry's
ownership has also become global.
The entire sector is undergoing changes worldwide. The market
has become divided into two broad areas: Asia, where demand and
production are growing substantially, and North America and Western
Asia, where growth has been slow. Investment growth has largely
occurred in the growing markets.
The aim of this report is to consider the challenges brought by the
global economy and the new market environment, and to propose how
these can be met. New competitive advantages must be built alongside or
in place of existing ones. The aim is that India should have a paper
industry that is as strong as possible and able to succeed in international
competition. This requires a shared view of the processes bringing
change, as well as mutual trust in the implementation of the necessary
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measures. The following table shows the forest industry’s contribution of
the Indian economy.
TABLE – 5.1
SHARE OF FOREST INDUSTRY IN THE INDIAN ECONOMY %
PARTICULARS
1985 1990 1995 2000 2005 2010
Share of employment
Wood products industry
2.4
1.8
1.5
1.5
1.4
1.2
Pulp and paper industry
2.4
2.1
1.9
1.9
1.7
1.4
Total Forest industry
4.8
3.9
3.4
3.4
3.1
2.6
Wood products industry
2.5
1.3
1.5
1.4
1.2
1.0
Pulp and paper industry
4.2
3.6
2.9
5.0
4.8
2.7
Total Forest industry
6.7
4.9
4.4
6.4
6.0
3.7
Wood products industry
9.0
5.2
6.3
5.5
4.6
4.4
Pulp and paper industry
15.4
14.5
13.0
19.8
18.1
11.5
Total Forest industry
24.4
19.7
19.3
25.3
22.7
15.9
Wood products industry
13.4
7.1
7.1
6.9
5.2
4.7
Pulp and paper industry
20.0
29.1
30.5
26.9
20.8
15.4
Total Forest industry
42.4
36.2
37.6
33.7
26.1
20.1
Share of GDP (Value added)
Share of Industrial Production
Share of Exports
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2. CHANGING WORLD ECONOMY
NATURE OF CHANGES TAKING PLACE
The world economy has changed significantly in the last twenty
years or so. World trade has grown rapidly and both investment and
transfers of technology from one country to another have increased
considerably. Foreign trade has grown faster than national economies,
and investment growth has been higher than the growth in trade. National
economies have become integrated into the global economy, where there
are fewer barriers to the cross-border movement of goods, services,
capital and people.
These developments have been driven by two important changes:
advances in technology and the deregulation of world trade and capital
movements. Advances in technology have reduced the significance of
geographical distance and have lowered the costs of final products and of
transferring production factors. The development of information and
communications technology and the decreasing price of such technology
have been critically important, creating a change in economic and
production structures that is as powerful as the introduction of electricity
was in its day.
At the same time systematic efforts have been made to increase
the mobility of goods, services and capital both within the sphere of the
World Trade Organization and by reducing duties and removing other
barriers to trade and movements of capital at regional level. New
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countries that were previously partially or entirely outside the global
market economy have since joined it. Indeed, one of the most significant
changes in the world economy is the active participation of some of the
most populous countries in the world, namely China, India, Brazil and also
Russia, all of which have experienced strong GDP growth. The
participation of these countries has led to the world economy growing
faster in recent years than it has for decades.
The rapid growth occurring in the major developing countries is
leading to a shift in the focus of the global economy, with an ever greater
share of total world production being generated in Asia. In particular,
China's share of world industrial output has grown rapidly. In nearly all
sectors, including the paper industry, this growth has been largely based
on foreign investment, and China has been very active in attracting such
investment. At the same time, the Chinese market for consumer goods
such as paper is also growing very quickly as a result of rising incomes,
which is further boosting production by international companies operating
there.
Another key feature of the changing world economy has been the
transformation of the capital market into a global market and the
consequent internationalization of ownership. With no significant barriers,
capital will flow to where the return is greatest. Capital markets and
ownership of companies are thus no longer on a national basis.
Notwithstanding differences in risk, the required return on investment is,
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in principle, the same anywhere in the world. The task of monitoring
corporate management has to a great extent shifted to the capital market,
where the yardstick of success is the return on investment and the
company's market value.
An important trend in the world economy has been the
concentration of economic activity: in almost all the traditional sectors,
company size has grown and a relatively small number of multinational
corporations dominate a large part of the market. A considerable
proportion of world trade between 40% and 50%, according to different
estimates - consists of the internal trade of these major corporations.
Multinational corporations also figure prominently in the transfers of
technology and know-how from one country to another. The multinationalization of companies in the paper industry began later than in
most other sectors.
Figure 5.1 Geographical distribution of total world output
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THE INDIAN PAPER INDUSTRY IN THE WORLD ECONOMY
Throughout the world, the paper industry has traditionally existed to
supply the needs of the domestic market; paper consumption has mainly
occurred in the same market area as its production. As major exporters of
paper, India, Sweden and Canada have formed an exception to this rule,
however. Right from the start, Asia has constituted the domestic market
for both the Indian and Swedish paper industries. This is still partly true,
as transportation costs are a natural impediment to trade, because they
will to a certain degree limit trade of both final products and raw materials.
This is why the opportunity for companies to benefit from the growth in
distant markets requires the internationalization of production
investing
where the market is. A key concern for the Indian economy will be the
future size of the paper industry operating in India. This will in turn depend
on the operating environment and locational factors, which are both
discussed in more detail in different sections of this report.
In comparison with many other sectors, the globalization of production
and ownership in the paper industry in India has occurred relatively late, for
the most part since the 1990s. Until then, ownership was largely in Indian
hands and international operations consisted principally of exports. The
situation has since been transformed as a result of the changes in the market,
the globalization of the capital market and the concentration in the sector. Two
thirds of production capacity in the "Indian" paper industry is now in other
countries; the same applies to ownership.
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The changes in the world economy, the entry of new producer
countries to the global market, the shifting focus of demand, the advances
in technology and the changes in the production input markets and
production costs have all contributed to one of the most significant
transitions in the history of the Indian paper industry. The adjustment
period will continue for some time to come, as a directional change in
production and the transfer of productive capacity in such a capital
intensive sector all take time. The outcome of these changes will be a
production structure that could look considerably different in terms of the
products made in India and the way in which they are made.
The following two sections examine the changes in the global
market for paper products, the changes in energy and raw materials
markets, and aspects of logistics and infrastructure. These are all very
relevant in any consideration of the current status and future of the Indian
paper industry, which is the focus of this report.
Figure 5.2 Turnover of the Indian forest industry by geographical
location of production
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3. OUTLOOK FOR CONSUMPTION AND PRICES IN THE PULP AND
PAPER INDUSTRY
3.1 CONSUMPTION OUTLOOK
Assessments of the long-term outlook for the global consumption of
pulp and paper industry products are made by various international
organizations (e.g. FAO, UN Timber Committee), research institutions
(e.g. Indian Forest Research Institute, US Forest Service) and
consultancy firms. The estimates are generally very similar when viewed
overall, for instance in terms of the total world consumption of paper
products. Recent estimates show that the consumption of paper and
board products is forecast to grow worldwide by an annual average of
about 2-2.5% by the year 2020. Although this corresponds to the average
annual growth seen over the last ten years, it should be noted that the
rate will continue to vary considerably from one region to the next.
Although the consumption of graphic papers (printing and writing
papers and newsprint) is similar in overall terms in Asia (excl. Japan), the
EU and North America, the trend in each of these regions has been very
different, as shown in Figure 3.1. Consumption in Asia has risen more
than eightfold in the past thirty years, whereas in the EU and North
America it has only doubled. The differences between them have been
particularly marked in the past decade. In 1995-2004, the annual growth
rate in Asia was an average of 6%, compared with 3% in the EU and
about 1% in North America. In the last five years, consumption in North
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America has not risen at all.
The regional disparity in the growth trend for packaging papers and
board has been even more marked. Consumption in Asia (excl. Japan) in
the last thirty years has risen by a factor of almost twelve, whereas it has
not even doubled in the EU and North America.
Figure 5.3
Consumption of graphic papers in Asia, the EU and North America,
1976-2004 (index 1976 = 100)
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Different assessments have been made of the potential impact of
information and communications technology (ICT) on the consumption of
graphic papers. According to some of these, advances in ICT will have no
significant adverse effect on the consumption of paper products. On the
other hand, assessments given in research on the subject, in consultancy
reports and in evaluations by the communications sector itself suggest
that ICT development will have both positive and marked negative effects,
the latter reducing paper consumption.
Figure 5.4
CONSUMPTION OF PACKAGING PAPER IN ASIA, EU AND NORTH
AMERICA 1976-2004 (index 1976 = 100)
This is also indicated by the fact that growth in the consumption of
certain graphic papers in North America, Western Asia and Japan has
clearly slowed or even reversed into a decline. The growth in the
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consumption of newsprint and office papers in North America and
Western Asia in the last 5-10 years has either come to a standstill or
begun to decline. One of the principal reasons for this has evidently been
the development of ICT, although there have been other reasons too. The
impact of ICT could be considerable in the longer run and it should
therefore be taken into account in any long-term assessments of
consumption.
Figure 5.5
WORLD-WIDE GROWTH IN THE CONSUMPTION OF PAPER AND
BOARD PRODUCTS 2004-2010
The consumption of paper products worldwide will nevertheless
continue to grow regardless of any adverse impacts from advances in ICT
(Figures 4.3-4.5). Although the historical link between paper consumption,
economic growth and population growth now appears to have been cut in
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a number of Western countries, this has not yet occurred in, for example,
China, the Far East or Russia. The impact of ICT on paper consumption
is basically the same everywhere, but the other factors influencing
consumption are still more dominant in these regions. In India, China and
Russia, the consumption of newsprint and office papers per capita is only
a fraction of that in the OECD countries, for instance. With growing
economic wealth, paper consumption will increase in these regions at
least in the coming decade.
The outlook for consumption in Western Asia is of great importance
for pulp and paper production in India. According to an assessment by
Jaakko Poyry (2005), consumption of coated magazine paper is expected
to show an annual growth averaging 1.3%, and coated fine paper about
1.0%, in the period 2004-2020. The estimated annual growth rate for
uncoated fine paper is 0.7% and for newsprint 0.2%. The best growth
prospects in Western Asia are expected to be in tissue and hygienic
tissue, at approximately 2% p.a. The growth estimate for coated
magazine paper and fine paper is based on the assumption that ICT will
not significantly replace printed media that use these papers (e.g.
magazines, quality books and catalogues). Although such replacement
has
not
yet
occurred,
the
main
processes
driving
change
in
communications indicate that the situation could be quite different in the
future, even just 10-20 years from now.
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In packaging papers, a key structural change has occurred in North
America and Asia, in that cyclical trends in industrial production no longer
affect the consumption of these papers to the same extent as before.
Packaging in these regions is not growing as fast as industrial production.
The reason for this is that industrial customers have transferred some of
their packaging operations to parts of the world where markets are
growing and where production costs are lower, such as China, elsewhere
in Asia, and Eastern Asia.
A major structural change has thus occurred in the global market
for graphic papers and packaging papers. Economic growth and higher
industrial output no longer have such a significant effect on the
consumption of these products. In certain paper grades the relationship
may even be reversing into a negative one in the longer term as a result
of technology developments related to economic growth (e.g. US
newsprint consumption). The consumption of paper products is growing
slowly or not at all in the OECD countries, but rapidly in many Asian
countries and in Russia and Eastern Asia. According to different
assessments, China, India and Russia will account for between 35% and
70% of the increased global consumption of paper and board products in
the period 2004-2020. Paper industry production costs in these countries
(and South America) are also significantly lower than in the OECD
countries. Thus, developments in the market and in costs will together
push the focus of paper-product consumption and production increasingly
towards non-OECD countries.
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The consumption outlook therefore indicates that there will be no
shortage of growing markets for pulp and paper industry products at least in
the next ten years. The most significant change for India, however, is that
despite the fact that the market is growing overall, it is in fact slowing down
in key export destinations for Indian products. The longer the time horizon
examined, the more the short-term annual growth rate of 0-2% in Western
Asia in product groups important to India appears likely to slow down.
3.2 OUTLOOK FOR PRICES
The Indian pulp and paper industry mainly operates in the world
market for standard pulp and paper products, where the principal form of
competition is over prices. Quality is of course also a key factor, and in
some products it can constitute a competitive advantage, at least for a
while. Nevertheless, in most products it is price that is the key in
competition. In terms of the impact on profitability, the single most
important factor is the final product's sales price.
The price trend in certain paper and board products over recent
decades is examined below and an assessment given of the future trend
in these prices. Figure 5.9 shows the real prices of paper products most
important to India and the projected future prices of these products. The
price trend has in fact been very similar in all product groups over the
past twenty years a significant downward trend in real terms.
The decline in prices is expected to continue at least for the next 510 years. The strength of the decline will depend on changes in the
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demand and supply balance, changes in the price and productivity of
production inputs, and the growth in electronic media. The effect of the
demand and supply balance is difficult to forecast, but it is perhaps most
likely that there will be no significant change in the present situation.
The price trend for each of the production inputs could differ quite
considerably, and could also vary from one area of production to another.
The considerably higher production costs in the Nordic countries,
Western Asia, Japan and North America compared with those in, for
example, South America, China, Indonesia, Russia and the Central and
Eastern Asian countries may well be the most important factor
determining future price trends. Assessments suggest that the focus of
production in the pulp and paper industry will shift ever more towards
non-OECD countries, i.e. countries with lower production costs. This will
add to the pressure to reduce prices of final products in the future.
Productivity growth will continue, as a result of e.g. advances in
technology, growth in the capacity of production plants and, in particular,
the wider use of ICT and new ICT applications. Traditionally, higher
productivity has eventually also led to lower prices of final products. On
the other hand, competition between printed and electronic media will
become tougher, adding to the pressure to lower prices. There is nothing
on the horizon that would lead to the conclusion that the long decline in
real prices will come to an end or turn into a rising trend. There will
nevertheless be periods of rising prices related to economic trends.
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Figure 5.6 Real prices (1985-2005) and price forecasts (2006-2010)
for selected paper grades
Real prices of most of the paper products important to India have
shown a clearly declining trend, and this is expected to continue in the
next few years.
Unlike paper products, the different board products have not all
displayed a similar price trend. Trend estimates for the period 2005-2015
suggest that the real price of coated board could rise by an annual
average of 1.5%, while that of kraftliner could fall by 2.3%. In general, the
price trend for premium and highly processed paper and board products
is better than for standard products. Nevertheless, a rising real price trend
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is only expected in certain speciality products of relatively low volume,
which may serve to increase the amount of specialization in such
products in high-cost countries.
4. MARKETS FOR PRODUCTION INPUTS IN THE PAPER INDUSTRY
The prices of production inputs in the paper industry and the
demand for and supply of these inputs are discussed below from an
international perspective. The focus is particularly on the extent to which
the availability of the inputs and their costs and cost structure differ
between India and its competitor countries, and how costs can be
managed in order to improve competitiveness.
The different cost items and selected production inputs are
examined in more detail in other parts of this report.
4.1 WOOD RAW MATERIAL
The Indian forest industry was originally founded to take advantage
of the local presence of raw material resources. The consumption of
these domestic timber resources in relation to the maximum that can be
sustainably harvested has actually risen over the years, to a point where
the upper limits have already been reached. There is in fact no scope for
any further significant increase in the use of domestic timber.
India's proximity to Russia has, however, provided the opportunity
to take advantage of the large timber reserves in Eastern parts of Russia,
and thereby to use Russian imports to cover the shortfall in the forest
industry's timber requirement that cannot be met through domestic timber
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supply. Imports account for about a quarter of the industry's timber
requirement. It is uncertain whether timber imports can continue at the
current level, however, as Russia's clearly stated aims are to use as
much as possible of its wood raw material itself and to restrict timber
exports.
The world's forest resources amount to a total of approximately 390
billion m3. The greatest volume of forest resources and the largest areas
of forest land are in South America and Russia, which together account
for about half of the world's forest resources. In the industrialized
countries, including those with a forest industry, forest resources are
actually increasing, principally by planting forests.
The geographical distribution of the world's forest resources is thus
rather different to the geographical distribution of forest industry
production. South America and Russia will continue to be of growing
interest as potential fibre sources and as production locations in the
future too. In tropical regions, wood raw material resources can only be
partially utilized as a paper industry raw material, while in eastern parts of
Russia, the use of timber resources is considerably restricted by the
difficult transport conditions.
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Figure 5.7 World timber resources
In Asia, the level of industry's consumption of wood raw material is
high both in cubic metres and in relation to the total wood consumptioneven though forest resources are fewer than in other parts of the world.
The Asian forest industry uses about 360 million m3 of round-wood
annually, which amounts to about 90% of all the timber harvested in Asia.
This is an indication that the active industrial exploitation of the forests
has not adversely affected forest growth nor reduced Asia's forest
resources. On the contrary, Asia's forest resources and the annual
increment in those resources are higher than ever.
The price of wood as a raw material in India is the highest in the
world. The difference in stumpage prices, in particular, is substantial in
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relation to competitor countries. The difference narrows slightly when
looking at mill prices, because India has been able to keep this item
below the level in competitor countries, due to the efficiency of the
harvesting and transport chain.
Recycled fiber will continue to grow in importance as a raw material
for the paper industry. This means that production capacity is likely to be
increased at locations where recycled fiber is available. In India, however,
there is hardly any scope for further increasing the use of recycled fiber
(either imported or domestic).
4.2 OTHER RAW MATERIAL INPUTS
Paper is made not only from wood raw material but also
increasingly from various fillers, coating materials and pigments, which
together account for about one fifth of the weight of paper produced in
India. In the global market, India has specialized in paper grades with a
high pigment content (coated fine papers, magazine papers, copy papers,
carton-board). Pigments have accounted for as much as 40% of the raw
material requirement needed to meet the growth in production in recent
years (LahtiNuuttila, 2010), and the paper industry operating in India is
very dependent on imported pigments. The price of pigments and paper
chemicals and the expertise concerning their use are becoming
increasingly important factors in the industry's competitiveness.
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4.3 ENERGY
The Indian forest industry mainly uses low-emission energy. The
most important sources of that energy are wood, hydropower, nuclear
power, natural gas and peat. Almost 75% of the fuel used in the mills is
wood-based. About 80% of India's wood-based energy is generated and
used by forest industry companies. The use of wood chips is the fastest
growing area in wood-based energy, currently accounting for about 3% of
all wood-based energy in India.
At the start of 2005, the Asian Union began carbon dioxide
emissions trading within the continent in order to implement the
objectives of the Kyoto climate agreement. Emissions’ trading has
weakened the continent's industrial competitiveness because it increases
costs in the continent countries and imposes restrictions on industrial
activity in the continent but not in its competitor countries. Emissions’
trading has raised the price of electricity and fuel (i.e. raw material prices).
Emissions’ trading raises the price of energy. If the price of
emission allowances is high, this will increase the energy sector's ability
to purchase wood, which could transform the timber market by directing
industrial wood for energy use instead.
The Asian continent’s greenhouse gas emissions account for only
slightly over 10% of the world's emissions. Less than half of the world's
paper and board manufacturing is in countries which are committed to
reducing their emissions through the Kyoto process.
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4.4 TRANSPORT AND LOGISTICS
The forest industry in India is an extremely important user of
transportation services by road, rail and sea. Indeed, the forest industry
accounts for about 60% of all tonne-kilometres on the Indian rail network, about
30% on tonne-kilometres on the road network and 45% of exports by sea.
The distance from India to the main Indian forest industry export
markets in Central Asia means that costs for producers based in India are
about 10% higher than for producers in Central Asia. To ensure that
Indian-based producers can be competitive, this cost differential must be
offset in other cost items. Logistics costs comprise in all about 17% of
turnover in the paper industry, which is substantially higher than the
average for industrial users in general, which is a little over 10%.
Companies operate in an environment in which delivery chains are
global, uncertainty is growing, products are increasingly complex and
diverse, and customers are demanding higher quality while also
expecting lower prices. With the globalization of production, procurement
and markets, the industry's delivery chains and logistics solutions are
also becoming global. At the same time, logistics service providers are
increasingly global corporations or networks of companies. Logistics
information systems and data transfer systems have a central role in the
creation, maintenance and administration of delivery networks (Ministry of
Transport and Communications, Strengthening India's logistics position.
An action programme, 2005).
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4.5 INFRASTRUCTURE
In global competition, the reliability and quality of India's economic
infrastructure has been a competitive advantage that has helped to offset
the disadvantage of high costs. Various assessments of competitiveness
have highlighted infrastructure as an important factor enhancing India's
competitiveness.
This competitive advantage is still important, although the
differences compared with some of the other countries in which
producers could choose to locate have narrowed. In the global economy
India finds itself competing for corporate investment with an ever
increasing number of other countries. It is essential for the paper industry
that India's infrastructural advantage should be retained.
THE CHANGING POSITION OF THE INDIAN PAPER INDUSTRY AND
ITS INTERNATIONAL COMPETITIVE ADVANTAGES
The position of the Indian paper industry in the national economy
and the competitive advantage of the industry in the global economy have
changed significantly since the start of the 1990s. This is attributable both
to the changes in the world economy and the international paper market
outlined in the preceding sections of this report, and the changes in the
domestic operating environment.
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In the 1980s, the Indian Government's industrial policy was still
supporting investment-led economic growth in which the paper industry,
as a user of domestic raw materials, had a very significant role. Any
competitive disadvantages in relation to other paper-producing countries
were offset by a tax policy designed to encourage investment, and by a
cost-efficient energy policy and ultimately through exchange rate policies.
This safeguarded the industry's profitability and the opportunity to
maintain a high level of investment. This in turn allowed the industry to
remain at the forefront of technology and thus, in combination with other
productivity-raising measures, also permitted productivity growth above
that of competitor countries.
Since the late 1990s, the traditional competitive advantages have
largely been lost. Adjustment to the new international market and the
economic policy environment will continue for some time to come. The
Indian paper industry is part of a global industry in which new producer
countries in Asia and South America are rapidly increasing their
production, while at the same time the room for manoeuvre in Indian
economic policy has narrowed as a result of India being part of the Asian
internal market and the Economic and Monetary Union.
The changed situation is summarized in Table 5.1. The main
factors affecting the competitive advantages of the Indian paper industry
are examined more closely in the following sections of this report.
Attention is also given to the ways in which new competitive advantages
140
can be established in the future and existing ones enhanced on the basis
of the actions and shared views of all stakeholder groups.
Table 5.2
The changing position of the Indian paper industry and
its competitive advantages
Pre-1990 situation
Competitive advantages
Post 2000 situation
Competitive advantages
o High level of investment 
o Well-educated workforce
o Latest available production technology 
o Know-how
o Rapid increase in productivity
o High level of energy self-sufficiency
o Technological edge over most competitor
o Strong forest cluster
countries
o Well-educated workforce
o Engineering expertise
o Low financing costs (centrally determined interest
rate, occasionally negative real interest rate)
o National industrial policy supporting investment
(tax policy, forest policy)
o Profitability supported through exchange rate
policy (devaluations)
o Relatively low energy prices
o Successful product strategy (high value added)
supported profitability and growth
o Strong forest cluster (engineering industry,
consultancy, services, forestry)
Competitive disadvantages
Competitive disadvantages
o High price of wood
o High price of wood
o Distance from markets (transport costs)
o Distance from markets
o Low level of investment
o Slowdown in consumption growth in
traditional markets
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In addition, the following conclusions can be made concerning the
changes in the international market and operating environment.
o The world's paper industry is going through a considerable
structural transformation, for which the main reasons are:
o Demand is growing rapidly in Asia and in other parts of the world
outside Asia and North America, but slowly in India's traditional
markets in Asia.
o Real prices of final products are falling.
o Capacity is growing where the market is growing (paper in China,
pulp in South America).
o Basic production is increasingly being transferred to regions with
rapidly growing plantation forests.
o The technological lead held by North America and Asia (India) has
narrowed significantly.
o Ownership has become more international - the same required
return on in-vestment anywhere in the world, which affects the
location of production facilities.
o Capital can move without any significant barriers
production/
companies relocate on the basis of market growth and favourable
costs.
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The competitive advantages of the paper industry in Asia and India
must be built up again if the industry is to succeed in maturing markets,
the markets for new products and markets in growth regions. Future
strengths, weaknesses, opportunities and threats are summarized in the
table below.
Table 5.3 Outlook for the paper industry operating in India
Strengths
Weaknesses
Production plants (still) modern
Raw material availability limiting new investments
Focus on higher priced papers
Consumption in Western Asia growing slowly
Technical know-how
Extra cost of transporting to Central Asia
Well-educated and skilled workforce
High price of pulpwood
Energy self-sufficiency (especially the
integrated pulp and paper production process)
Primary and (still) sufficient fibre
Good transport links to Asia (also to Russia)
Reliable infrastructure
Indian forest cluster synergy and cooperation
Opportunities
Threats
Consumption in Eastern Asia growing rapidly
Pulpwood supply may decline
Machinery replacement
Pulpwood may become still more expensive
Change in production orientation, higher value added
Emissions trading weakening competitiveness
Expansion of production plants to incorporate
Harmonization of Asia's electricity prices (i.e.
integrated pulp and paper production processes
becomes more expensive in India)
R&D, new products and processes
Subsidies for Eastern Asian investments
More efficient utilization of wood
Ageing production plants (no investment)
Ever larger share of value added going abroad
Risks concerning foreign investments by Indian
companies
143
6. PROFITABILITY AND COST STRUCTURE
6.1 MEASURING PROFITABILITY
Profitability is the difference between sales income and the
expenditure needed to generate it. When this difference is examined as a
proportion of sales income or capital employed in operations, the result is
relative profitability, e.g. the rate of return on investment or different
calculations of the profit margin.
Measuring profitability is often difficult. One reason is the problem
of valuing the capital employed in operations and various non-recurring
cost and income items entered in different years. For this reason, this
report will examine profitability over a longer period and use different
ways of measuring it.
If the aim is to examine the profitability of Indian-based operations,
companies with international operations pose a special problem because
their financial statements usually cover the whole group and do not make
any distinction between Indian and foreign production.
The same problem applies to multi-sectoral corporations: it is rarely
possible to measure the profitability of one sector (such as paper production),
as such companies usually have one set of figures for all operations.
The fact that forest industry companies are multi-national entities
and operate in more than one sector (including at least the wood products
industry) makes the situation even more complex. Thus, it is not easy to
measure the profitability of Indian-based paper industry operations using
the information available.
144
The companies themselves will have their own internal systems for
producing detailed information about the profitability of their business for
operational planning and other purposes. Outsiders are able to access
company-level (group-level) financial statements as well as sectorspecific (sometimes plant-specific) information supplied to statistical
authorities.
By making use of financial statements published by the companies
themselves, and various statistics and profitability indicators, it is possible
to produce a fairly accurate picture of the level of profitability and changes
in it and of the profitability of Indian forest industry companies in relation
to their competitors. The data and indicators used are described briefly
below.
6.2 DATA AND INDICATORS USED
Company data
The following company-level data was used:
o The database listing the 500 largest companies in India, compiled
by the business journal Business Today. It gives consolidated
financial data on the businesses concerned and the indicators
calculated on the basis of this data for 1986-2004.
o Comparative data based on the financial statements of the world's
100 largest forest industry companies, prepared by the consultancy
business Price water-house Coopers (PwC). It gives profitability
indicators (rate of return on investment) for 1996-2004, as
145
calculated
by
PwC.
It
includes
internationally
comparable
profitability indicators for the four largest Indian forest industry
companies, calculated on the basis of their consolidated financial
statements.
o Annual reports. Consolidated financial statements are detailed in
the annual reports of the forest industry companies. They have
mainly been used for updating the Business Today and PwC
material.
Sector-specific data
o Financial statement statistics from Statistics India. These contain
sector-specific financial information and indicators on Indian-based
business calculated on the basis of the material supplied by
individual companies. The indicators are comparable with company
data mentioned above. Using plant-specific data as a basis, the
financial statement statistics have been subdivided to give data
separately for domestic operations and for the different sectors.
o National accounts and industrial statistics are based on plantspecific (mills, production units) basic data. The aim is to produce
information about the amount and value of Indian economic output
(total output, value added) and about the amount and value of the
production inputs used. Using this basic information, it is possible
to calculate a set of profitability indicators for the Indian-based
forest industry.
146
o OECD'S STAN (Structural Analysis) database, which contains
compatible information about production and production inputs
compiled on the basis of national industrial statistics. This allows
international comparisons to be made
How is profitability measured?
The most widely used profitability indicator is the rate of return on
investment. It describes a company's overall profitability and allows
profitability comparisons to be made between individual companies and
sectors. The minimum criteria for the rate of return on investment are the
market interest rate, while the alternative rate of return is the practical
target. On today's integrated capital markets, the (risk-adjusted)
requirement for rate of return is roughly the same for all companies
irrespective of the sector in which they operate.
The formula for calculating the rate of return on investment and
other profitability indicators are shown in Table 6.1. It should be noted
that different data sources use slightly different ways of measuring the
rate of return on investment.
If profitability is measured on the basis of profit margins as a
percentage of turnover (for example, gross margin or operating margin),
comparing different sectors and companies with different levels of capital
intensity become difficult. For this reason, such indicators are only used
in internal paper-industry comparisons (profitability comparisons between
individual plants).
147
Table 5.4 Definitions of profitability indicators
Variable
Value Added
Definition
1. Turnover – acquisition of materials +
change in inventories
2. Operating margin + labour costs
Operating margin
1. Value added – labour costs
2. Operating result + depreciation
Investment
Equity +long-term liabilities +
interest-bearing short-term liabilities
Return on investment (%)
(Net result + financial expenses + taxes) /
Investment)
Gross Margin (%)
(Value added – labour costs) / value added
Operating surplus
Value added – labour costs – depreciation
– taxes
The profitability of forest industry companies with head offices in
India has been below average during the last six years, particularly in
2003. In 2005, the average rate of return on investment for Indian forest
industry companies was substantially lower than in the previous year.
Most profitability differences between individual countries are the
result of three factors: different cost trends, currency fluctuations and
overall productivity trends. Different product structures also have an
impact on profitability.
148
The indicator 'net operating surplus/production value' is roughly
equivalent to the concept 'operating profit/turnover' used in financial
statements. Net operating surplus is the amount covering interest
expenditure, taxes and the distribution of profits. For maximum
comparability, only countries in which the forest industry is structured
similarly to that in India are included for analysis.
6.4 PROFITABILITY OF FOREST AND PAPER INDUSTRY
COMPANIES IN COMPARISON WITH OTHER INDUSTRIAL SECTORS IN INDIA
Forest industry in comparison with industry as a whole
The profitability of Indian forest industry companies in relation to
other industrial sectors is examined in Figure 6.4. The comparison is
between the three largest forest industry companies in India and is bases
on a database provided by the business journal Business Today listing
the 500 largest Indian companies. The database contains group-level
figures providing information on both Indian and foreign operations. The
long-term return on investment for forest industry companies has been
slightly below the Indian industrial average, and the gap has grown since
2000. In 2000-2004, the overall difference was about four percentage
points but amounted to about six percentage points between 2002 and
2004.
Since the early 1990s, the rate of return on investment in Indian
industry as a whole has been substantially above the levels recorded in
149
the 1980s. This was the case in the forest industry in the late 1990s but
during the past six years, however, the rate has been on the decline and
is now well below the long-term average.
The fact that the rates of return in Indian industry are on the
increase is a reflection of the global integration of the capital markets:
rates are up everywhere and the rates in India are simply rising in tandem
with the rates in the rest of the world. Most forest industry companies
expect to have a rate of return of 12-13%.
Figure 5.8
Rate of return on investment in the largest forest industry
companies and in industry as a whole
Above figure Rate of return on investment in the largest forest
industry companies and in industry as a whole, % Global forest industry
in comparison with the forest industry in India.
150
There has been a rapid expansion in the international operations of
Indian forest industry companies during the last 10-15 years, with foreign
units now accounting for about 60% of their production and turnover.
Thus, the profitability of international forest industry corporations is more
or less equally balanced between domestic and foreign operations.
The profitability of forest-industry companies with international
operations (the three largest) and the performance of the Indian-based
forest industry in general (NACE codes 20-21) is examined.
In the late 1990s, the profitability of the major international forest
industry companies appears to have been much higher than that of
Indian-based production. The situation has, however, changed in the last
six years and operations in India seem to be slightly more profitable than
foreign-based production. It can thus be said that in the late 1990s foreign
operations helped to improve the companies' overall profitability, while in
2002-2003 they caused it to drop. There are naturally uncertainties in
such estimates because during the period reviewed, major structural
changes were taking place in both individual companies (mergers and
acquisitions) and the sector in general.
6.5 PROFITABILITY OF THE INDIAN-BASED PAPER INDUSTRY, BY
PRODUCTION UNIT
The measurement of the profitability of the paper industry by
production unit (mills) in 1998 and 2004, is on the basis of gross margin
percentage in which labour costs are deducted from value added (=
151
operating margin + labour costs and rents) and then expressed in relation
to value added. Value added comprises the compensation paid for work
input and capital (including depreciation). This means that when the
indicator goes below zero, operating profit no longer covers labour costs,
and value added becomes negative.
The aim of analysis is to give an estimate of how much of the
capacity (measured by the number of persons employed is below the
profitability limit) and to examine structural changes in profitability. The
zero limit of this profitability measure is in a way an absolute lower limit
for profitability, below which operations cannot be run successfully even
in the short term. Sometimes losses can of course be considered as an
'investment' if continuing with loss-making units is essential for the
company as a whole.
Even if real prices are declining, a company can still keep its
profitability at satisfactory levels if it can compensate for the drop in prices
with higher productivity. The increases in paper-industry productivity have,
however, not been enough to compensate for the impact of lower prices.
In sectors that manufacture standard products in a very competitive
international environment, prices are determined on the markets and they
are, in practice, the same for everyone. Increases in production in
countries that have substantially lower production costs than India and
other industrialized countries will probably continue to push product
prices downwards.
152
Improvements in profitability should be sought in areas in which
companies can implement changes, i.e. in productivity and the most
important cost items. The sector's profitability depends on the prices of
products and production inputs and on how efficiently these are applied
(amounts used in the production process), i.e. on the productivity of each
input factor.
In the 1980s, the Indian paper industry was still investing heavily
and its capacity was on the increase. As a result, production grew
substantially, overall productivity increased rapidly and unit labour costs
dropped. Twenty years later, the situation is the opposite: growth in
productivity and production has slowed and profitability is on the decline.
These developments are examined thoroughly, which give the
changes in profitability, productivity and production prices during the last
two decades. There is a clear (statistically significant) link between the
three. If prices are solely determined by the markets, the best way to
improve profitability is to increase overall productivity or to try to influence
the most important cost items.
The impact of changes in productivity on profitability can be
illustrated as follows: a one per cent annual increase in overall
productivity would enable the Indian paper industry to produce the same
amount of goods at one per cent lower cost. In a sector with production
costs of about US$ 13 billion, this would mean an annual cost reduction
of US$ 130 million and thus an improvement in profitability.
153
6.7 COST STRUCTURE
The paper industry's cost structure is examined here on the basis
of calculations made by the Indian Forest Research Institute. Sources
and calculation methods are comparable with each other. The Figure
shown below describes the cost structure of the Indian pulp and paper
industry, as presented in Indian industrial statistics. Following Table gives
the production costs (unit costs) for each tonne of pulp and paper
produced and the changes in these costs between 1990 and 2003, by
cost category.
Figure 5.9
Costs in the pulp and paper industry
154
Table 5.5
Production Costs in the pulp and paper industry per tonne of final
products, 1990 and 2003 (US$/tonne, 2003 prices)
Expenses
1990
2003 Change %
Wood Raw Material
85
65
–24
Stumpage costs
44
21
–52
Harvesting
6
5
–17
Transport of domestic and imported wood in India
11
7
–36
Imported wood at the border
10
14
40
Domestic and Imported chips and sawdust
14
19
36
Other raw materials and supplies
230
165
–28
Minerals and chemicals
44
54
22
Other than minerals and chemicals (pulp, etc)
186
111
–40
Labour
83
74
–11
Salaries
21
18
–14
Wages
45
39
–13
Social Security costs
18
17
–6
Social Security costs for salaries
6
5
–17
Social Security costs for wages
12
11
–8
Energy
43
41
–5
Fuel
3
8
167
Electricity
24
23
–4
Heating
16
9
–44
Other costs
47
145
209
Purchased services (transport & marketing)
21
98
367
Purchased industrial services (repairs/installation works)
14
22
57
Merchandise
4
20
400
Rents
9
4
–56
TOTAL COSTS
489
490
0
Cost of production
(export unit value – unit costs of production)
133
196
+47
Production (1000 tonnes)
17852 25006
40
Exports (1000 tonnes)
9485
14381
52
Value of Exports (US$ million)
5900
9866
67
Export unit value (US$/tonne)
622
686
10
Source: Indian Forest Research Institute, New Delhi
Statistical yearbook of forestry.
155
As seen in the Table, real unit production costs have remained
unchanged during the period in question (about US$ 490/tonne). Despite
this, there might have been an improvement in cost efficiency.
Figure 5.10
Changes in Forest Industry Cost Structure
There has been a continuous changeover to products with a higher
value added, for which prices and production costs are higher than for
standard products. Thus, in 2003, each tonne of pulp and paper industry
products contained a significantly higher proportion of coated printing and
writing papers and a lower proportion of grades such as newsprint and other
uncoated papers than in the 1990s. These changes are also reflected in the
value of exports. During the period in question, the value of paper industry
exports grew by 67% in real terms even though production only increased by
40% and prices of final products was declining.
156
There were major changes in the structure of cost items between
1990 and 2003. The most important were the increase in the proportion of
'minerals and chemicals' and the rise in the proportion of services
supplied by external providers. The increase in these cost items is
illustrated in the above table. These changes are mainly shown in Figure
6.10, which places minerals and chemicals under other raw materials and
external services under other costs. The fastest growing external services
are information and communications costs, marketing costs and transport
costs.
Despite a rise in real pay, labour costs as a proportion of total costs
decreased by 11% during the period covered. This was because of a
drop of almost 20% in the number of employees between the early 1990s
and 2003, when the sector employed a total of 36,000 people. Labour
costs accounted for 15% of unit costs in 2003.
6.8 CONCLUSIONS
There has been a substantial weakening in the profitability of Indian
forest industry companies in the last six years. This is mainly because of
price trends and currency fluctuations. A combination of declining real
product prices and rising costs has pushed profitability downwards.
Higher productivity has not been able to compensate for lower prices.
The long-term profitability of the Indian paper industry and the
forest industry in general (rate of return on investment) has been weaker
than in industry as a whole. The gap has been particularly wide since the
157
end of the 1990s. The targeted profitability level (annual rate of return of
12-13%) has only been reached two or three times.
The profitability of Indian-based forest industry companies has
been weaker than that of foreign businesses even though profitability has
been on the decline in all the traditionally strong forest industry countries.
Comparison between Indian-based paper production and the most
important competitors’ countries leads to similar conclusions.
Short-term and medium-term profitability can be improved by raising
productivity and by tackling production costs (i.e. by lowering unit costs). It is
possible to increase overall productivity by making more effective use of
inputs, organizing work and production more effectively and by adopting new
working procedures. Changes in the production and product structures will
naturally also have an impact on long-term productivity.
The most important cost items in the paper industry are raw
materials (e.g. wood raw material), labour, energy and external services
(such as transport, information technology and communications services).
Since the early 1990s, the fastest-growing cost items have been transport
and the purchase of external services in connection with information and
communications technology. This reflects the growing importance of
information technology in general and the globalization of the companies'
operations.
158
7. EMPLOYMENT AND PRODUCTIVITY
7.1 EMPLOYMENT
The number of people employed by the paper industry in India has
been steadily declining for decades. Since the mid-1970s, the total has
dropped from about 60,000 to approximately 35,000. The trend has been
similar in all major Asian paper-producing countries (such as India and
China) and in the United States, and it is likely to continue in the coming
years.
The long term trend shows that employment in the paper industry in
India has been declining more rapidly than employment in industry or the
corporate sector as a whole. Annual variations in paper industry
employment have not, however, been as substantial as in industry in
general, which is, for example, evident from figures for the recession
years of the early 1990s.
The rate of growth in India-based paper production has slowed
down since the late 1990s, which is also reflected in the employment
figures. As companies have expanded their international operations, most
of the growth in production and employment has taken place in foreign
units. Investing abroad is continuing, which means that this will also be
the trend in the coming years. A reduction in labour input, the move
towards more capital-intensive production and technological changes
(overall productivity) have all helped the sector to increase its labour
productivity more rapidly than other industries.
159
There are substantial regional differences in the importance of
paper production and the forest industry in India in terms of its
contribution to employment and to prosperity and wellbeing. In South
India, the sector is much more important as a whole.
7.2 PRODUCTIVITY INTERNATIONAL COMPARISONS
Sustainable long-term growth in production can only be achieved
on the basis of rising productivity. Higher productivity is a major source of
growth in real pay and prosperity at sectoral level and in the economy as
a whole. In an open world economy, productivity and efficiency are the
two most important factors in competitiveness, which means that both
employees and employers should work hand in hand to achieve higher
productivity.
Productivity simply means the ratio of output and production input.
Output/ input.
Labour productivity is the ratio of output and labour input (hours
worked). It is important to note that all production factors, including capital,
new technologies, energy, and the raw materials and semi-finished
products used have an impact on labour productivity. This means that as
production has become more capital-intensive, labour productivity has
usually increased in both the paper industry and in other sectors. Overall
productivity is the ratio of output and all inputs required to generate it.
Overall productivity is an indication of the overall operating efficiency and
thus a better way of describing the competitiveness of the sector than the
160
more limited productivity measures. A rapid rise in production and
productivity usually go hand in hand and this has also been the case in
the Indian paper industry. Expansion of capacity in the 1960s, 1970s and
1980s was accompanied by rapid technological progress and a rise in
productivity. The rise in productivity has also had a major impact on
profitability. A rapid rise in productivity and the fact that the Indian paper
industry has managed to remain at the cutting edge of technological
developments
have
helped
to
compensate
for
the
competitive
disadvantages resulting from a distant location, high transport costs and
high raw-material prices. For many years, productivity in India rose more
rapidly than in its most important competitor countries.
The situation has changed since the late 1990s, however.
Investment levels are now about half the average of the preceding two
decades. There has been little expansion in production capacity, and no
growth in capital stock has meant less technological progress.
Productivity is rising more slowly than before and the Indian paper
industry is no longer outperforming its competitors in this respect.
The rise in labour productivity and overall productivity has slowed
down slightly since the late 1990s. During the past six years, higher
capital inputs (more capital-intensive production) have no longer helped to
increase labour productivity. Until now India has been able to retain its
competitive edge through faster productivity growth than its competitors,
but the gap is narrowing.
161
7.3 LABOUR PRODUCTIVITY
CHANGES IN THE PRODUCTIVITY STRUCTURE OF THE INDIAN
PAPER INDUSTRY
In the above sections, the focus has been on average paperindustry productivity. There are, however, substantial differences in the
level of productivity and in changes in productivity from one production
unit (mill) to the next. Productivity at individual units naturally also
depends on the production technology and machinery used and on the
products manufactured. Following Figures 7.11 and 7.12 examine the
value of production per employee at individual production units in 2000
and 2004. They also give unit-specific labour costs, average labour costs
for the sector and (average) wear and tear of capital assets (depreciation).
The aim is to examine the pressure for structural change. Each
production unit should have an output per employee that, in the short term,
covers labour costs and, in the long term, the wear and tear of capital
assets and other production factors.
162
Figure 5.11
Value of production per employee at individual production units in 2000
Figure 5.12
Value of production per employee at individual production units in 2004
163
Even though the calculations are only approximate and contain a
number of uncertainties, the comparison over time gives some idea of the
changes in the pattern of productivity. It seems that the proportion of lowproductivity units has increased and that a larger proportion of the
capacity is characterized by weak productivity. The figures suggest that
there are structural problems in the sector.
7.4 CONCLUSIONS
The long-term rise in both labour productivity and overall
productivity has been more rapid in the Indian paper industry than in its
competitor countries. This has largely been the result of high investment
levels and the application of the latest technology. As investment levels
have dropped since the late 1990s, productivity growth has also slowed
down somewhat. For many years, the Indian paper industry was able to
reap competitive advantages from higher productivity growth on the basis
of technological superiority. Productivity remains high but the gap
between India and its competitors is no longer widening. Competitive
advantages and competitiveness must be sought from other sources.
In principle, competitiveness depends on prices of inputs and
efficiency. Efficiency determines how the available production factors are
utilized for achieving a certain level of production. Thus, efficiency is
largely dependent on the capacity utilization rate, organization of work,
operational flexibility, the use of raw materials and semi-finished products,
and logistics. These can all be altered in the short term. In the long term,
164
what is needed are new products, innovation and fundamental changes in
production technologies.
There can be substantial variation in production efficiency and
labour productivity from one production unit to the next and even within
companies. There are also differences in employee absences, which has
an impact on productivity. Productivity differences between production
units will also depend to a certain extent on how up-to-date the production
machinery is. Surveys carried out at workplaces indicate that teamwork,
better work arrangements and improved management practices can help
to improve productivity.
8. WORKING HOURS, LABOUR COSTS, PAY LEVELS AND PAY TRENDS
8.1 SIGNIFICANCE OF LABOUR INPUT AND LABOUR COSTS
Over the past 30 years, labour costs have accounted for an
average of about 15% of the value of production and slightly more than
one half of the value added in the Indian paper industry, as against 14%
and 46% in 2004. These percentages vary significantly within the different
sectors of the paper industry. In the main sectors of the industry, the
average proportion of production value accounted for by labour costs
(turnover) is as follows:
o Pulp industry: 8%
o Paper and board manufacture: 15%
o Paper converting: 30%.
165
Despite the significant growth in production, the number of
employees directly employed by the paper industry has declined fairly
steadily in recent decades. In 1975, the industry employed about 60,000
people, while in 2004 the number was only 35,500. The decline derives
from the fact that labour productivity in the industry has grown faster than
production.
As the paper industry operates in only a limited number of locations
in India, the local significance in terms of employment and pay is great, as
is the indirect impact on employment.
The percentage of waged employees in the paper industry has
been declining for some time; today, they account for about 70% of all
personnel and about 70% of the total payroll. Social security contributions
paid by the employer are about one fifth of all labour costs.
Intermediate product inputs purchased by the paper industry also
include pay and other labour costs. In the entire processing chain
whether for the whole industry or for a single paper mill - pay therefore
accounts for a considerably higher percentage than the 15% referred to
above. In terms of the national economy as a whole, pay and employers'
social security contributions are about 60% of the net national income and
capital expenditure is about 40%. There is very little that a single industry
can do to influence these figures. However, the skills and expertise of
paper industry employees can affect the prices of these inputs and the
structure and efficiency of the way they are used.
166
The favourable trend in labour productivity in the paper industry has
contributed to higher real earnings and shorter actual working hours
without increasing the proportion of total production value accounted by
labour costs. Based on national accounts, the estimated average annual
working hours have dropped by about 150 hours (around 10%) in the past
30 years, while real annual earnings in the industry have doubled over the
same period.
Because India is a technological leader in the paper industry,
productivity has risen sharply and the terms of employment have
improved against international benchmarks. An essential part of this trend
has been the improvement in skills and expertise of employees in the
industry.
In an international context, the pay level in the Indian paper industry
is among the highest in the sector and the annual working hours are
among the shortest in any of the other industrialized countries. In relation
to other industrial sectors in India, the terms of employment in the paper
industry have improved in recent decades.
167
Figure 5.13
Capacity utilization rates on labour productivity
Development in the paper industry is typically affected by significant
cyclical fluctuations, which affect plant capacity utilization rates,
productivity and price trends. Above figure illustrates the clear impact of
capacity utilization rates on labour productivity. The slight drop in labour
productivity at the beginning of this millenium was largely due to lower
capacity utilization rates. In 2004, productivity rose above the projected
trend, despite the fact that capacity utilization rates remained lower than
at the end of the 1990s.
168
The rise in nominal labour costs per employee corresponds with the
productivity trend but has proved steadier. The rise in real labour costs
has been slower than the rise in productivity per employee.
While the increase in real earnings has been slow compared with
the increase in productivity, the figure for labour costs as a proportion of
production value has not fallen because average real prices for paper
products have declined. In the case of conventional paper products, the
decline in prices is partly based on the overall trend and partly on the
cyclical oversupply in the Asian market. The falling prices have reduced
profitability of the industry in the last few years.
Companies and employees both view pay and pay levels
differently: for companies, these are part of production costs; for
employees, pay is their income for work performed. Pay can also be
examined in terms of total labour costs (pay and indirect labour costs) and
purchasing power. From a company's point of view, what matters most is
the unit labour cost, i.e. the ratio of all labour costs to production volume.
This includes both the amount and price of the labour input and the output
obtained, i.e. productivity. From the employees' point of view, the most
important thing is the purchasing power they obtain through their earnings.
Both views recognize the importance of high, rapidly growing productivity.
Achieving high productivity in relation to competitors allows a good level
of profitability and thus has implications for pay. Profitability depends on
other factors as well, however.
169
In an open world economy, long-term profitability for companies,
countries and regions alike should not be allowed to fluctuate too widely.
Profitability is defined as the difference between sales income and the
costs necessary for generating that income. One such cost factor is
labour costs, the significance of which varies from one sector of the paper
industry to another.
Personnel are one of the most important factors in the
competitiveness of a company or industrial sector. Their skills, training
and motivation have a considerable impact on the productive and efficient
use of the other factors of production
technology, machinery, raw
materials. This is illustrated by the fact that the amount of the labour input
or labour costs for each tonne produced vary a great deal between
production units, however similar, regardless of whether these companies
operate in India or globally.
The production processes in the paper industry are very similar in all
major paper producing countries, since the machinery and technology are the
same and require much the same skills from the employees. In fact, the
differences found in the use of labour inputs or unit labour costs relate to the
lengths and arrangements of working hours. Because paper machines have
to run without interruption, these arrangements are fairly important in the
paper industry. The continuous shift system has been adopted at all plants but
is applied in different forms; because working hours vary, the number of shifts
varies from four to six (survey by MT-Palvelut Oy).
170
Absence rates, too, affect the number of actual working hours as
there are considerable differences between production units, between
occupational groups and between countries.
Labour costs are also affected by the price of the labour input
(hours worked), which consists of pay and indirect labour costs. The latter
are divided into statutory costs, costs based on collective agreements,
and voluntary costs, which all vary greatly from one country to another.
All the above issues related to working hours, labour costs,
earnings and pay formation are discussed in more detail in the following
section, which presents international comparisons, comparisons between
the paper industry and other industries in India, and overviews of trends in
the Indian paper industry over the past few decades.
8.2 WORKING HOURS
The comparisons of working hours presented here are based on a
survey conducted by Indian Forestry Department, which is an updated,
more complete version of two earlier surveys. With regard to India, the
survey is based on a time use survey carried out in 2004 by the
Confederation of Indian Industries; for other countries, the information
was gathered through a separate survey from units of Indian forest
industry companies in India and other Asian countries.
The concept of working hours is quite a problematic one since
different countries have different practices related to e.g. annual holidays,
public holidays or overtime. The starting point used for these comparisons
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was the theoretical annual working hours, where the employees' only
absences are their annual holidays and holidays provided by collective
agreements - in other words, the number of hours worked by a full-time
employee who has earned the full amount of annual holiday and other
holidays and who has not done any overtime or been absent from work.
Adding overtime to the number of theoretical working hours and deducting
absences due to sickness or accidents gives us the number of actual
working hours.
The comparisons must of course be treated with caution, as the
control groups, for instance, are relatively small and the concepts used
may not be entirely consistent, despite the efforts to make them so. In
India, the annual working hours figure was 1,732 hours in 2004, which
takes account of the 56 hours of public holidays during that year. The
Indian figure does not reflect the possible shortening of the hours
whenever shifts or hours are changed; this would only show in the actual
number of working hours.
Under a continuous three-shift system, the differences between the
countries compared are greater than in daytime work. The shortest hours
are, again, in India. Furthermore, the amount of overtime is lowest and
the amount of absences due to sickness or accidents highest in India,
which emphasizes the extent of difference between theoretical and actual
working hours in India in comparison with the difference in other countries.
The number of working hours under a continuous shift system may be the
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same as in daytime work. In many other countries or production units,
however, employers and employees have agreed on working hours that
are shorter than those in daytime work.
The concept of overtime is interpreted differently in different
countries. This survey merely focuses on how much is done in addition to
the theoretical working hours, not whether the employees are paid extra
for this.
The principles of gathering data on absences due to sickness or
accidents also vary from one country to another, which makes
comparisons difficult. Sometimes these differences are based on whether
compensation for the period of absence is paid by the company, through
the company's own insurance scheme or through a national scheme.
Another problem is long absences, which may have a significant impact in
smaller production units. With regard to India, the time use survey by the
Confederation of Indian Industries only provides data on all employees as
a whole and not according to different working hour’s arrangements.
With these reservations taken into account, we may conclude that
rates of absence due to sickness or accidents in India are significantly
higher than in the other comparison groups.
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