Paper E-Commerce: A Status Report
Jun 9, 2014, 09:10 AM
March/April 2001
Though e-commerce hasn’t lived up to its hype, it still holds promise for the paper industry in general and recovered paper in particular.
By Robert L. Reid
Robert L. Reid is managing editor of Scrap.
In the end, the world didn’t change after all.
That, in a very large nutshell, was the conclusion reached by paper industry experts at a recent conference that explored how e-commerce has—and has not—affected the world of primary and secondary fiber.
“E-Commerce in the Paper Industry: Achieving Critical Mass,” sponsored by the American Forest & Paper Association and the industry newsletter Papercast, was held in February at the Venetian Hotel in Las Vegas. Though the two-day event focused primarily on business-to-business (B2B) e-commerce and the paper industry in general, some speakers addressed scrap paper directly while others indicated that many of their primary fiber points were equally applicable to recovered paper.
While one speaker noted that Vegas—where casinos provide round-the-clock service to customers—was a uniquely appropriate venue for discussing the 24/7 world of e-commerce, a common theme in many of the presentations was how the reality of B2B has not lived up to the incredible hype of last year.
In March 2000, noted William Moore, president of Moore & Associates (Atlanta), there were six Web sites that had announced plans to trade recovered paper over the Internet. Three months later, there were 13. Today, some of those sites are doing fine. PaperExchange.com, for instance, says its business increased 575 percent last year, with recovered paper representing about 30 percent of the tonnage transacted, Moore explained. At the same time, several other sites still haven’t traded a single pound of recovered paper, one decided not to enter the market at all, and another—Fibermarket.com—has already shut down, going offline earlier this year.
Likewise, “twelve months ago, our whole research department was completely consumed with the task of understanding B2B,” noted paper analyst Matt Berler, managing director of the equity research department in Morgan Stanley Dean Witter’s San Francisco office. “It was a Wall Street-wide obsession.”
Today, Berler noted, “it’s hard to engage an investor in a discussion of B2B.”
So do Berler and Moore think paper industry e-commerce is a dead issue? Not at all. They and others simply want to ratchet down some rather impossible expectations that have been raised.
Keynote speaker Mark Walsh, chairman and chief strategy officer for VerticalNet Inc. (Horsham, Pa.), which hosts sites for “industrial trade communities” on the Internet, explained how the sales pitch from firms promoting e-commerce solutions often painted an idyllic world in which a paper customer would somehow, miraculously move from his current state of business—with all its unnecessary costs, inefficiencies, and redundancies—to the dot-com dream where “the Internet is a magic bullet that will fix everything.”
In fact, Walsh said, “there is no miracle available to make this happen.” The Internet can be a useful tool for the paper business, he concluded, but “it is not a paradigm shift, it is not a new world.”
Likewise, Berler stressed, “People decided that e-commerce is just another tool. It may improve the efficiency of some aspects of the business, but it’s not something that will transform the industry.”
Rationale for Recovered Paper
So, if e-commerce is not quite the millennial watershed it was touted as, what is it? Or more precisely, what does it mean for the paper industry in general and recovered paper in particular?
Moore, whose firm surveyed those dozen or so e-commerce sites for recovered paper last year, said there are some key obstacles for e-commerce and scrap paper—chiefly the relatively small size of the market and certain cultural biases within the industry. He also stressed five “fundamental reasons why e-commerce trading of recovered paper makes sense.”
• Though it’s transacted on a local basis, recovered paper is a worldwide commodity. Asia, for instance, while “12 time zones away, with different languages, different currencies,” is a major market for scrap paper from the United States, Moore pointed out.
• Recovered paper is subject to extreme price volatility—“on a percentage basis, more so than even the finished-product commodities in the industry,” he said.
• The transaction costs on a per-ton
basis are a high percentage of total costs for this low-value commodity.
• Recovered paper has little price transparency. “It’s about as opaque as it gets,” stated Moore, who emphasized that real-time market pricing is almost nonexistent while the delayed prices that get published “are far from accurate.”
• The range of market prices for a given grade at any point in time is large, with a 25-to-30-percent differential possible, Moore observed.
Moore sees e-commerce benefiting the recovered paper sector in several ways: By reducing transaction costs, providing better real-time pricing information, enabling scrap paper processors to better control their inventory, and offering wider exposure for both buyers and sellers—something that can only help in an industry that still has thousands and thousands of relatively small suppliers who might only deal within 100 miles of their plant, he noted.
Who’s Out There?
Quickly running down the list of recovered paper e-commerce sites (minus those that have already dropped out), Moore highlighted the following firms:
Clickpaper.com L.L.C. (www.clickpaper. com), run by Enron Corp. (Houston), which plans to buy and sell OCC and ONP at specified locations;
eCardboard (www.ecardboard.com), which as its name implies concentrates strictly on OCC and boxes;
e-cycled.com (www.e-cycled.com), which Moore described as almost an electronic broker;
e-Fiber L.L.C. (www.e-fiber.com), which transacts pulp, recovered paper, and paperboard;
ForestExpess (www.forestexpress. com), the site jointly founded last year by Georgia-Pacific Corp., International Paper Co., and Weyerhaeuser Co., which hasn’t yet conducted any Internet transactions of recovered paper but does plan to make scrap one of the first materials it does deal in, Moore notes;
PaperExchange.com Inc. (www.paperexchange.com), which Moore calls a “highly branded” site that’s already transacting a high percentage of recovered paper, relative to scrap’s size in the paper industry;
Paperloop (www.paperloop.com), owned by San Francisco’s Miller Freeman Inc., which Moore called a “very content-oriented” site that has yet to transact any recovered paper;
Paper2Paper (www.paper2paper.net), which Moore has previously described as “owned and backed by recovered paper suppliers” and “dedicated only to recovered paper transactions”;
Recycler’s World (www.recycle.net), a “passive bulletin board” that “has actually caused more transactions in recovered paper” than any other site over the past five years, simply by matching up buyers with sellers, Moore said;
Secondary Fiber Inc. (www.secondaryfiber.com), another supplier-oriented transactional site, he stated; and
SEFEX L.L.C. (www.sefex.com), a “passive bulletin board rather than a transaction site,” Moore said.
Despite the proliferation of sites, Moore noted that a survey by his firm found that just 3 percent of scrap paper transactions were being conducted through e-commerce last fall. In the past, though, electronic trading of recovered paper was even less promising—an experiment by the Chicago Board of Trade in the mid-1990s yielded less than a dozen total transactions over three years, he noted.
Still, Moore spoke positively about the potential for e-commerce in the recovered paper industry, while at the same time warning that there are still too many players. Only about a quarter of the original 13 Web sites will ultimately survive, Moore predicted.
When considering which e-commerce site to use, Moore recommended looking at various factors such as who owns the site; how it is managed; what business strategy and e-commerce models it follows; what user costs and potential transaction savings are involved; what are the site’s shortcomings; what sort of confidentiality safeguards does it offer; what are its logistics capabilities and enterprise resource planning strategy (ERP is a software-based system for integrating various business processes); and what strategic alliances has it formed with other firms.
Challenging Concepts
In discussing e-commerce in general, Mark Walsh noted that his own definition of the term is fairly broad: “It’s whatever the customer thinks it is.”
He disagreed with “purists” who contend that e-commerce only exists when the entire transaction is conducted electronically—from initial inquiry to shipping and settlement. Simply using e-mail as part of a successful transaction should qualify as e-commerce if that’s how your customer found out about a product that he eventually purchased, Walsh said, even if the rest of the deal was conducted through less technological means.
Walsh also maintained that most businessmen and women he knows don’t care about the various technical bells and whistles available for Web sites. Instead, they prefer things like functionality, applicability, and ease of use. Yet today, he stressed, users are being asked to use systems that are expensive and not user-friendly. The technology does not provide the service most people want, Walsh said, “and that means the adoption curve in the paper industry and others will be stunted.”
Moore made a similar point, noting that the simple, user-friendly Recycler’s World Web site has been far more successful than the “elegant” but also “harder” site offered by the now-defunct Fibermarket.com.
Walsh also stressed that the Internet should not be used to “hammer vendors” on pricing—a sentiment that scrap paper processors and brokers will likely welcome because of their own vendor status to consumers. Noting that “healthy vendors mean healthy markets,” Walsh recommended using the Internet to establish new business relationships, strengthen existing ones, and educate customers.
Other speakers challenged some longstanding—at least in the cyber world’s accelerated time frame—beliefs about what
e-commerce offers. For instance, while the notion of e-commerce connecting new buyers to new suppliers is quite familiar, at least one speaker questioned whether companies that have previously been unknown to each other are actually linking up.
Speaking about the Internet in general, Lisa Reisman, director of the digital strategy and research group in Arthur Andersen Business Consulting’s Chicago office, said “the digital exchanges have not really proven their value,” especially in this area. Reisman even listed “finding new customers” as a digital trend that’s “out” and emphasized that instead the “in” trend is using the Internet to strengthen your business’s existing relationships.
Questions About Quality
Another speaker noted that paper products are quite different from other, more interchangeable items being sold over the Internet. When someone buys, for instance, a specific automotive part through the Internet, “a part is a part is a part—there’s no discussion of whether that product is suitable for what you want to use it for,” noted Mark Cubine, vice president of EnteGreat Inc. (Birmingham, Ala.). But with paper products, “no two rolls or pallets of paper are the same.”
Quality variation, Cubine explained, helps explain why paper consumers have such longstanding relationships with their suppliers: It’s because they know what they’ll get from that supplier. So suppliers who want to find new customers over the Internet can easily run up against attitudes like that of one consumer who told Cubine: “We’d have to be absolutely desperate to buy from someone we didn’t already know.”
But there is a way around such a roadblock on the information superhighway, Cubine said.
E-commerce can work for paper products if the industry adopts universally accepted specifications, begins to share detailed quality reports with its consumers, and uses “product lifecycle management”—an information systems strategy that involves organizing and correlating “every piece of information you own about your product,” such as specifications, quality history, process history, customer complaints, costs, sales history, and so on, and then sharing that data with key participants in your supply chain, he explained. E-commerce is an ideal tool for such moves because of the vast amounts of data that would need to be gathered and exchanged.
Though Cubine’s presentation focused on primary paper, he later noted that many of his points can be applied to the recovered market as well.
William Moore also addressed quality issues for recovered paper, dismissing such concerns. Though the digital nature of e-commerce might not permit a buyer to physically examine the material before purchasing it, the same is true of many international deals arranged today over the phone or fax, he noted. “If you’re in India buying OCC from a packer in New York, you don’t get to see it,” he said, “So I don’t think it’s any different with e-commerce.”
Electronic Impact
Several speakers made the point that even though e-commerce has fallen short of its hype, the concept will still be an important part of today’s and tomorrow’s business world. Morgan Stanley’s Matthew Berler noted that there’s a debate over exactly how large the paper industry’s cost savings will be from electronic transactions. “But it doesn’t matter if it’s 5 percent, 10 percent, 15 percent—if there’s a cost savings out there, in this kind of industry you’ve got to get it,” he said. “If you don’t, you know what your profit margins are. So if you miss a 5 to 10 percent cost savings opportunity, it can be the difference between life and death.”
Also remember that in today’s economy, firms aren’t just competing with other companies in their own industry for business—they’re also competing with unrelated industries for important assets such as hiring the best people and gaining access to financial capital, said Douglas Hayhurst, global forest and paper practice leader in PricewaterhouseCoopers’ Vancouver, British Columbia, office. “E-commerce is not an end in itself,” Hayhurst stressed. Instead, the real goal is for companies to adopt so-called New Economy business models that encourage firms to find a stronger customer focus, reduce inventories, outsource noncore activities, and build brand loyalty.
“Of course, the paper industry says it’s not possible to ‘brand’ a commodity,” Hayhurst said, adding that he disagrees on two fronts: First, commodities have been branded in the past—think Chiquita bananas and Colombian coffee. Second, “a brand is not just a product brand, it goes deeper, it’s how you interact with your customers, how you serve them—that’s your brand. Does it improve the paper? No, but it does improve the relationship and the service you wrap around that paper.”
Greg Piper, president of Enron’s Clickpaper.com, noted how his firm plans to “make markets” in certain key locations—such as Chicago, Dallas, and Houston—for OCC and ONP delivered to those sites. “Recyclers have been very receptive,” he reported. “They like the fact that there’s
always a price” for those two commodities. “They may not like the price,” he concluded, “but they enjoy the liquidity.”
Joel Sutherland, senior vice president of Transplace.com (Plano, Texas), stressed the cost savings available from his firm’s transportation logistics services—especially for companies shipping paper in amounts less than a full truckload. Consolidating such shipments to full truckloads and using the Internet to optimize truck schedules can reduce cycle times, lower transportation costs, and enhance service reliability, Sutherland explained. And while Transplace has so far handled recovered paper mainly as backhauls, there’s no reason why recyclers can’t take full advantage of the same techniques, he noted.
Winners and Losers
Most speakers agreed that the adoption of e-commerce will produce winners and losers in the paper industry—it’s just not clear yet who will fill each category.
Brokers, for instance, often see themselves as the field most threatened by online paper trading. But William Moore pointed out that even without e-commerce the percentage of recovered paper handled by brokers has been cut in half over the past 10 years. He predicted that some brokers will likely disappear, while others will start to adopt e-commerce themselves.
At the same time, Arthur Andersen’s Lisa Reisman argued that “brokers often do apply a lot of value. They are often very good at customer service. They give buyers more options—and that’s why they’re still there.”
VerticalNet’s Mark Walsh emphasized that e-commerce winners will be the companies that realize the Web won’t fix bad products, bad pricing, or bad service. Instead, they’ll realize that the Internet can help them add value to their customers in previously unimaginable ways.
The B2B world is “still about communities of buyers and sellers getting together,” he noted. “It’s still about relationships, handshakes, golf games, good products, and good service—that hasn’t changed.”
What is different is the amount of knowledge your customers have about your company and your competitors. Walsh recalled one businessman who criticized an e-commerce site that let his customers quickly and easily compare his products with his competitors’ offerings. “Why would I ever be involved in a situation where it’s that simple for my customer to do that?” the man wondered.
Because “control over customer knowledge is being shattered minute-by-minute and day-by-day by the Internet,” Walsh countered. “Over and over, we see the winners as the companies that let the customer decide” what kind of information they need.
In the end, Walsh said, “all the Internet proves is that Darwin was right—it accelerates the speed at which good companies are discovered and rewarded, and it accelerates the speed at which bad companies are discovered and punished.”
Which might be why e-commerce in the paper industry is turning out to be evolutionary rather than revolutionary. •
Though e-commerce hasn’t lived up to its hype, it still holds promise for the paper industry in general and recovered paper in particular.