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STRATEGIC ANALYSIS INC.

ANALYSIS OF THE IMPACT OF IMPORTS ON THE U.S. FLEXIBLE

PACKAGING INDUSTRY

A presentation to

FLEXIBLE PACKAGING ASSOCIATIONFALL EXECUTIVE CONFERENCE

CHICAGO, IL

September 22, 2004

VISIT SAI’S WEBSITE: www.strategicanalysis.com

BELGIUM • CANADA • CHINA • INDIA • JAPAN • MEXICO • SINGAPORE • UNITED STATES

PRESENTATION OVERVIEW

STRATEGIC ANALYSIS INC. (SAI)

International business consulting firmMarket research, competitor analysis and related servicesBusiness-to-business field-oriented research140 employees in 11 operations worldwideOver 200 projects in flexible packaging industry globally

SAI’S INTERNATIONAL PROJECT TEAM

20 Individuals from SAI’s operations in:United States IndiaChina South Korea

TODAY’S PRESENTERS

Bruce W. Deckman, PresidentViola Pressley, Project Director

PRESENTATION OVERVIEW (cont’d)

PRESENTATION OUTLINE

Project description

U.S. flexible packaging industry statistics

FPA member survey results

Select country perspectives

Product analysis

Overall assessment

PROJECT DESCRIPTION

U.S. FLEXIBLE PACKAGING INDUSTRY STATISTICS

FPA MEMBER SURVEY RESULTS

SELECT COUNTRY PERSPECTIVES

PRODUCT ANALYSIS

OVERALL ASSESSMENT

APPENDIX

OVERVIEW

OBJECTIVE

Evaluate the impact of imports on the U.S. flexible packaging industry

PROJECT DESCRIPTION

NOT

FPA is not looking:For reams of import statistics

To conduct an in-depth study of all sources of current or potential imports into the United States

SCOPEScope Description

Geographic Base country United States

Impact analysis Any foreign country

Product analysis

Three specific countries China India South Korea

Product Five specific packaging structures

Base year 2003 unless otherwise noted

SAI’S INFORMATION SOURCESPROJECT DESCRIPTION

SECONDARY DATA

Published industry statistics-aComputerized literature search

RESPONDENTS: 19

Supplier5%

Converter95%

FPA MEMBER SURVEY

INTERVIEWS: 157

Suppliers12%U.S. end

users10%

Other-b3%

Foreign packaging

manu-facturers

75%

SAI FIELD INTERVIEWS

CLIENT INTERACTION

Periodic reviews with SAI and FPA Task Force throughout the project (4/15/04 - 9/30/04)

a- Census Bureau, USITC and otherb- Includes foreign trade associations, foreign customers and U.S. customs

ANALYTICAL FLOWPROJECT DESCRIPTION

PERSPECTIVE ANALYSIS

BROAD

SPECIFIC

l U.S. flexible packaging industry statistics

l FPA member survey results

l Select country perspectives

− China

− Korea

− India

l Product analysis

− Five specific packaging structures

l Future Outlook

PROJECT DESCRIPTION




PRODUCT ANALYSIS

OVERALL ASSESSMENT

APPENDIX

NAICS Availability

SIC

codes Description NAICS codes Description

Import/Export data

U.S. employment

data

2671

Paper coating and laminating, packaging

322221

326112

Coated and laminated packaging paper and plastics film

Unsupported plastic packaging film and sheet, including film and film structures

-a-

-a-

X

X

2673

Bags: plastics, laminated and coated

322223

326112

Plastics, foil, and coated paper bag

Unsupported plastics bag, including film and film bags

X

-a-

X

X

2674 Uncoated paper and multiwall

322224 Uncoated paper and multiwall bags

X X

3497 Metal foil and leaf

322225

3329991

Laminated aluminum foil for flexible packaging uses

Converted unmounted aluminum foil packaging products

X

-a-

X

-a-

a- Data for NAICS code not reported separately

Note: SIC 2671 may be included in SIC 2673 and SIC 2674 due to trade code classification

REPRESENTATIVE SIC/NAICS CODESU.S. FLEXIBLE PACKAGING INDUSTRY STATISTICS

US$ million

Country 2000 2001 2002 2003 CAGR

2000-2003 2003

% of total

China $ 384 $ 448 $ 539 $ 653 19% 31%

Canada 484 517 534 574 6% 28

Germany 123 140 144 139 4% 7

Thailand 22 29 48 76 51% 4

Mexico 58 61 62 68 5% 3

Taiwan 39 41 43 54 11% 3

South Korea 54 44 46 49 (3%) 2

Japan 75 50 27 38 (20%) 2

Italy 22 23 27 37 19% 2

Indonesia 32 32 30 33 1% 2

All other 242 266 298 354 14% 17

Total $1,535 $1,651 $1,798 $2,075 11% 100%-b

BOLD- Indicates top 10 export country

a- Includes SIC codes: 2674- Uncoated paper and multiwall bags 3497- Metal foil and leaf 2673- Bags; plastics, laminated and coated

b- Does not total 100% due to rounding


IMPORTS BY COUNTRY 2000 - 2003-a

SOURCE: Foreign Trade Division of the Census Bureau


US$ million

Country 2000 2001 2002 2003 2003

% of total

Canada $ 331 $ 345 $ 352 $ 379 39%

Mexico 225 236 228 285 29

Japan 36 40 48 48 5

United Kingdom 21 22 27 37 4

Malaysia 16 22 25 20 2

Dominican Republic 8 8 11 16 2

China 7 8 9 13 1

Costa Rica 9 10 9 11 1

South Korea 6 10 8 10 1

Ireland 3 3 4 9 1

All other 222 190 189 148 15

Total $884 $894 $910 $976 100%

BOLD- Indicates top 10 import country

a- Includes SIC codes: 2674- Uncoated paper and multiwall bags 3497- Metal foil and leaf 2673- Bags; plastics, laminated and coated


EXPORTS BY COUNTRY 2000 - 2003-a



0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

2000 2001 2002 2003

Thou

sand

US$

2674

34972673


IMPORTS BY PRODUCT CATEGORY

Uncoated paper and multiwall bags

Metal foil and leaf

Bags; plastics, laminated and coated


CAGR 2000-200311%

SIC Code:



EXPORTS BY PRODUCT CATEGORY

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

2000 2001 2002 2003

Thou

sand

US$

267434972673


CAGR 2000-20033%


Metal foil and leaf


SIC Code:


IMPORTS VERSUS EXPORTS

-1,200,000

-1,000,000

-800,000

-600,000

-400,000

-200,000

0

2000 2001 2002 2003

Thou

sand

US$

-a

267434972673


TRADE BALANCE BY PRODUCT CATEGORY


Metal foil and leaf


a- Negative number means imports exceed exports


CAGR 2000-200319%

SIC Code:


0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

2000 2001 2002 2003

Tota

l Em

ploy

men

t, th

ousa

nds

322223322225322221322224326112326111


INDUSTRY EMPLOYMENT LEVELS

Plastics, foil and coated paper bag

Laminated aluminum foil for flexible packaging uses

Coated and laminated packaging paper and plastics film

Uncoated paper and multiwall bag

Unsupported plastic packaging film and sheet, including film and film structures

Unsupported plastics bag, including film and film bags

SOURCE: USITC & CENSUS BUREAU

CAGR 2000-2003-2%

PROJECT DESCRIPTION




PRODUCT ANALYSIS

OVERALL ASSESSMENT

APPENDIX

Large24%

Medium52%

Small24%


RESPONDENTS BY COMPANY TYPE

COMPANY SIZE- FLEXIBLE PACKAGING

Designation Net sales range, $

million

Small <$25

Medium $25 - $99

Large >$99

Supplier5%

Converter95%

TOTAL RESPONDENTS: 19

0 5 10 15 20

Material costIndustry competition

VolumeUS Economy

Customer considerationsForeign imports

TechnologyCapacity

Packaging growthGovernment regulations

Labor

NUMBER OF RESPONDENTS

Rank Code Top 5 issue

#5 Most important

#4

#3

#2

#1 Least important


ISSUES IMPORTANT FOR COMPANY SUCCESS -- 2004


Q.From the eleven listed issues, SELECT the TOP FIVE that you expect to be most important to your company’s success for the remainder of 2004. Indicate the degree of importance of each of your TOP FIVE issues by ranking your TOP FIVE issues from #5 most important to #1 least important:


Rollstock33%

Bags14%

Pouches,retort9%

Pouches,stand up

9%

Pouches,lay flat12%

Stretch film7%

Shrink sleeves5% Equipment

5% Labels2%

Wrappers2%

Other2%


PRODUCT AREAS IMPACTED BY IMPORTS -- 2004

Q.The product areas I believe imports are currently having the biggest impact on my company’s flexible packaging related business is:


Retail, food23%Industrial applications

20%

Retail, nonfood17%

Institutional, nonfood14%

Consumer products11%

Institutional, food6%

Medical & pharmaceutical

6%

Other3%


END USES IMPACTED BY IMPORTS -- 2004

Q.The end-use areas I believe imports are currently having the biggest impact on my company’s flexible packaging related business is:

PERCENT OF REVENUES LIKELY TOBE IMPACTED BY IMPORTS IN 2004


41%-50%of revenues

31%-40%of revenues

1%-10% of revenues

11%-20%of revenues 21%-30%

of revenues


PERCENT OF REVENUES IMPACTED BY IMPORTS

REVENUES LIKELY TO BEIMPACTED BYIMPORTS IN 2005


Stay the same32%

Decrease0%

Increase68%

Q.The approximate percent of my company’s flexible packaging related revenues that are potentially impacted by imports in 2004 is:

Q.For the year 2005, the percentage given above is likely to:

53%

5%

5%21%16%

11%

57%

32%

11%

26%

63%

0% 10% 20% 30% 40% 50% 60% 70%

Not at all likely

Somewhat likely

Definitely likely

20052004


LIKELIHOOD OF PRICE EROSION

Q.Is price erosion a likely impact that imports will have on my company’s flexible packaging related business in the given year


11%

47%

42%

11%

21%

68%

0% 20% 40% 60% 80%

Not at all likely

Somewhatlikely

Definitely likely

20052004


LIKELIHOOD OF PROFIT EROSION


Q.Is profit erosion a likely impact that imports will have on my company’s flexible packaging related business in the given year

16%

63%

21%

11%

47%

42%

0% 10% 20% 30% 40% 50% 60% 70%

Not at all likely

Somewhat likely

Definitely likely

20052004


LIKELIHOOD OF VOLUME LOSSES

Q.Is volume loss a likely impact that imports will have on my company’s flexible packaging related business in the given year


79%

16%

58%

21%

21%5%

0% 20% 40% 60% 80% 100%

Not at all likely

Somewhat likely

Definitely likely2005

2004


LIKELIHOOD OF LINE SHUTDOWN

Q.Is the shutdown of a line or portion of a facility a likely impact that imports will have on my company’s flexible packaging related business in the given year


95%

5%

0%

89%

11%

0%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Not at all likely

Somewhat likely

Definitely likely

20052004


LIKELIHOOD OF PLANT CLOSURE

Q.Is closure of an entire facility a likely impact that imports will have on my company’s flexible packaging related business in the given year


68%

21%

11%

47%

32%

21%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Not at all likely

Somewhat likely

Definitely likely

20052004


LIKELIHOOD OF EMPLOYEE REDUCTION

Q.Is employee reduction a likely impact that imports will have on my company’s flexible packaging related business in the given year


74%

21%

5%

72%

17%

11%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Not at all likely

Somewhat likely

Definitely likely

20052004


LIKELIHOOD OF NEW FOREIGN OPPORTUNITIES

Q.Is creation of new opportunities for my company in foreign countries a likely impact that imports into the United States will have on my company’s flexible packaging related business in the given year


53%

47%

0%

0% 10% 20% 30% 40% 50% 60%

Not at all likely

Somewhat likely

Definitely likely


LIKELIHOOD OF EXPORTS OFFSETTING IMPACT OF IMPORTS

Q.In the year 2004, the opportunity for my company to offset the negative impact of imports through exports is:


PROJECT DESCRIPTION




PRODUCT ANALYSIS

OVERALL ASSESSMENT

APPENDIX

Flexible packaging industry status

Technology&

equipment

Currency&

interest rates

Transportation

Government programs

ISSUESINVESTIGATED

Manufacturing cost drivers


FLEXIBLE PACKAGING INDUSTRY STRUCTURE-aSELECT COUNTRY PERSPECTIVES

Issue China South Korea India United States

Estimated sales 2003, US$ million-a

$5,500 $2,000 $2,100 $20,000

Estimated number of converters and film producers (companies)

25,000 200

270 450

% of companies grouped by revenues, US$ million

<$25 99% 80% 95% 24%

$25-$99 <1% 7% 5% 52%

>$99 <1% 13% 0% 24%

Trade associations 2 1 0 1+

a- Generally defined as package or past a package whose shape can be readily changed. It includes bags, pouches, liners, overwraps, etc. utilizing paper, plastic, film, foil, metalized or coated papers and films or any combination of these materials

FLEXIBLE PACKAGING INDUSTRY DOMESTIC OUTLOOK


Issue China South Korea India

Forecast domestic consumption CAGR 2004-2008

15%-20% 4%-8% 12%

Each country has a growing domestic market

FLEXIBLE PACKAGING INDUSTRY EXPORTSSELECT COUNTRY PERSPECTIVES

Item China South Korea India

Local country statistics 2003

Estimated sales-a, US$ million $5,500 $2,000 $2,100

Estimated total exports, US$ million

$1,103 $400 $225

Exports as % of sales, % 20% 20% 11%

U.S. exports, US$ million $321 $60 $40

U.S. exports as % of all exports, % 29% 15% 18%

U.S. import statistics-b, US$ million $653 $49 $6

a- Includes domestic consumption and exports b- Foreign Trade Division of the Census Bureau for SIC codes 2673,

2674 (may include 2621) and 3497

Local country and U.S. statistics regarding exports/imports of f lexible packaging do not jive


TECHNOLOGY AND EQUIPMENT


Overall capabilities

Relative to international standards

Local companies: 5 to 7 years behind

Multinationals/Joint ventures: on par

Generally on par Highly advanced

10-15 players on par

Strength Simple structures Single web widths Very thin film

Printing Laminating Customized products

Customized products


TECHNOLOGY AND EQUIPMENT (cont’d)


Equipment source Locally built by three formerly state-owned enterprises

Imports/Licenses from: Germany Japan

Multinationals/JV’s

Foreign sources (Japan, Germany) of machines for: Printing machines Extrusion-coating Laminating Bag making Slitting and spout cap

Local for: Gravure printing Dry laminating

Local for converting: Rotogravure printing presses, laminators, slitters, pouches machines, filling, sealing and wrapping

Imports for top-of-the line machines

PE blends Uncommon Uncommon Common


MANUFACTURING COST DRIVERS 2004

Issue China South Korea India United States

Large volume resin price, US$/MT April - August

LLDPE $890 - $1,200 $910 - $1,043 $1,037 - $1,188 $1,267 - $1,355

LDPE $940 - $1,390 $852 - $1,250 $1,200 - $1,375 $1,433 - $1,520

Labor US$/hr-a $0.80 $10.00 $1.12 $22.00

Relative to U.S.-b 4% 45% 5% 100%

CAGR increase 2004-2009

8% 4.5% 7% 2.5%

Electricity cost, US$/kwh $0.03 $0.05 $0.08 $0.048

Relative to U.S. 60% 104% 160% 100%

Comment Brown outs Back-up generators

- - -

a- Typical U.S. rate is $22/hr, including benefits b- Including applicable benefits


GOVERNMENT PROGRAMS


Incentives/ Subsidies

Specifically targeted for flexible packaging industry

No No No

Development zone/Other

Yes Yes Yes

Corporate tax rate

33% 15%-27% 35%

VAT/Duties/ Export tariffs/Drawback

Manufacturers include 17% VAT in sales price

Trader receives 10% rebate upon export

None applied to exports None applied in practice due to local sourcing

Exporter is eligible for a duty drawback for raw materials used if duty paid

U.S. Import tariff 3% 3% 0%-a

a- Exempt under most favored nation status


TYPICAL TRANSPORTATION


Domestic, US$ per 20 ft container

$165 - $205 $500 $150 - $450

Trans-ocean, US$ per 20 ft container

$2,300 $1,800-$2,700 $2,600

Trans-ocean-a time, days

10-20-b 14-21 25-30

a- Approximate sailing time, does not include 2-4 week lead time from order placement

b- Currently, material may sit at dock for an additional 5-20 days


CURRENCY AND INTEREST RATES


Valuation Fixed Undervalued by as much as 40% if allowed to float (market value)

Market value Market value

Bank interest rates

5% to 6% 5% to 6% Approximately 12%

PROJECT DESCRIPTION




PRODUCT ANALYSIS

OVERALL ASSESSMENT

APPENDIX

PRODUCT ANALYSIS

DESCRIPTION OF TARGET STRUCTURES

Packaging structure Example

Material/ Construction Size

Print process

Print coverage

Order quantity

Price quote

1 Multipurpose (i.e. bird seed)

LLDPE/LDPE blend, 2 mil

12" x 18" x 3" gusseted

Surface print; 4 colors

100% 1 million bags wicketed

$/1000 bags

2 Fractional coffee packs

Metalized PET, 48 gauge/adhesive/1.5 mil LLDPE/LDPE blend

Rollstock Unprinted - Container load, 20,000 lbs

$/msi

3 Home use fertilizer bag

3-5 layer high strength coextruded opaque film, 3.5 mil, over –lacquered

Zipper bag

16" x 21" Surface print; 4 color process up to 8 colors

100% 1 million bags

$/1000 bags-a

a- Separate cost of the rollstock versus final bag/pouch cost

Packaging structure Example

Material/ Construction Size

Print process

Print coverage

Order quantity

Price quote

4 Snack food bag

OPP film, 75 gauge corona treated/ adhesive/metalized OPP film, 150 gauge with sealant layer

Rollstock- 18" web with 15" repeat

4 color process up to 8 colors

200% 1 million bags

$/msi

5 Retort pouch (i.e. dog food)

PET, 48 gauge reverse printed/adhesive/ 0.00035 aluminum foil/adhesive/cast PP, 2.2 mil

Rollstock- 3.875” x 4.875” x 2.0” bottom gusset

Reverse print

150% 5 million pouches

$/1000 pouches-a

a- Separate cost of the rollstock versus final bag/pouch cost

PRODUCT ANALYSIS

DESCRIPTION OF TARGET STRUCTURES (cont’d)

PRODUCT ANALYSIS

DIFFERENCES BY COUNTRY

Package structure Example

Material/ Construction China South Korea India

1 Multi-purpose (i.e. bird seed)

LLDPE/LDPE blend, 2 mil

Structure is as specified

More commonly a 1.6 mil single film LDPE or LLDPE bag of smaller size

Single film layers of LDPE and LLDPE instead of LLDPE/LDPE blend

80:20 ratio blend

2 Fractional coffee packs

Metalized PET, 48 gauge/ adhesive/1.5 mil LLDPE/LDPE blend


Commonly available

PET/Al/LLDPE/LDPE Aluminum foil

replaces metalized PET

Single film layer of LLDPE and LDPE instead of LLDPE/LDPE blend

Does not export structure


3 Home use fertilizer bag


Zipper bag


Few can produce more than 3 layers due to equipment limitations

Three layer PET/PA/LLDPE opaque of 3.5 mil total thickness

Does not export structure

Metallocene film

PRODUCT ANALYSIS

DIFFERENCES BY COUNTRY (cont’d)

Package structure Example

Material/ Construction China South Korea India

4 Snack food bag

OPP film, 75 gauge corona treated/adhesive/ metalized OPP film, 150 gauge with sealant layer


More typically, cast PP replaces metalized OPP Metalized OPP must be imported

Sealant layer is HS OPP

Cast PP is used instead of metalized OPP

Sealant layer is HS OPP

5 Retort pouch (i.e. dog food)

PET, 48 gauge reverse printed/adhesive/ 0.00035 aluminum foil/adhesive/cast PP, 2.2 mil


More commonly uses 0.00028” aluminum in construction

3 layer (PET/Al/RCPP) Heat conditioned to 120°C

or 3 layer (PET/Al/CPP) heat conditioned to 100°C non-reverse printed

RCPP is imported and converted to pouch

11.75” web width

PRODUCT ANALYSIS

FOREIGN MANUFACTURERS ANALYZED

Company designation

Structure Example China South Korea India

1 Multipurpose (i.e. bird seed) A1 K1 F1 2 Fractional coffee packs B1 K1 G1 3 Home use fertilizer bag C2 L1 F1

4 Snack food bag B1 M1 H3 5 Retort pouch (i.e. dog food) C2 N3-a/M1-b H3

a- Conditioned to 120° Celsius b- Conditioned to 100° Celsius

COMPANY SIZE

Code Designation Net sales range,

$ million

1 Small <$25

2 Medium $25 - $99

3 Large >$99

NOTE: Seven of the ten foreign competitors analyzed fall into the small size category. This is reflective of the many small competitors that exist in the fragmented flexible packaging industries in these countries.

PRODUCT ANALYSIS

U.S. MANUFACTURING COST DATA

l Through FPA, SAI solicited input from member companies

lA critical requirement is that SAI receive input from at least three member companies

lOnly for Structure 2 -- fractional coffee packs -- did SAI receive a sufficient

lA comparison between the four countries is presented for Structure 2

l For the four other packaging structures, SAI:

− Provides the cost analysis for the three select foreign countries

− Provides a side-by-side comparison to the FPA’s average 2003 breakdown of flexible packaging business costs and expenses

− Leaves it to the FPA member companies to draw conclusions

PRODUCT ANALYSIS

FPA AVERAGE COST/PROFIT BREAKDOWN 2003

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

U.S.-a

Ex-w

orks

, % o

f tot

al

Operating profit (before interestand taxes)SG&A and R&D

All other manufacturing costs

Labor (only direct labor)

Raw material

Average selling price

Not specified

Example Material/Construction Size Print

process Print

coverage Order

quantity Price quote

Fractional coffee packs



$/msi

PRODUCT ANALYSIS

ANALYSIS EX-WORKS -- STRUCTURE 2

0

0.05

0.1

0.15

0.2

0.25

China South Korea India U.S.

Ex-w

orks

, $/m

si

Net profitTaxes

InterestLogistics/WarehouseCorporate OverheadR&D

SG&AManufacturing overheadUtilities

LaborRaw material

$0.1130

$ 0.2030

$ 0.1477 $ 0.1397



process Print

coverage Order





$/msi

PRODUCT ANALYSIS

ANALYSIS DELIVERED SAN DIEGO --STRUCTURE 2

-0.05

0

0.05

0.1

0.15

0.2

0.25

China South Korea India U.S.-a

Deliv

ered

San

Dieg

o, $

/msi

Import tariffTransoceanic transport & feesVAT/Duty drawbackVAT/DutiesInland transportationSelling price, ex-works

$0.1239

$0.2030

$0.1598$0.1490

a- Average selling price, ex-works


ANALYSIS COMPONENT CONTRIBUTION -STRUCTURE 2

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

China South Korea India U.S.

Ex-w

orks

, % o

f tot

al

Operating profitLogistics/Warehouse

Corporate OverheadR&D

SG&AManufacturing overheadUtilities

LaborRaw material

PRODUCT ANALYSIS


process Print

coverage Order





$/msi

$0.1130 $ 0.2030$ 0.1477 $ 0.1397



process Print

coverage Order





$/msi

PRODUCT ANALYSIS

OTHER PARAMETERS INFLUENCING EXPORT DECISION – STRUCTURE 2


Capacity, tonne 150,000 3,000 208,000

Utilization, % 75% 90% 75%

Capacity growth, CAGR% 2003- 2006

12% 5% 5%

Domestic Demand, % of production

70% 100% 98%

SOURCE: SAI’s research and analysis.

0

10

20

30

40

50

60

70

CHINA South Korea India

Ex-w

orks

, $/1

,000

bag

s

Net profitTaxesInterestLogistics/WarehouseCorporate OverheadR&DSG&AManufacturing overheadUtilitiesLaborRaw material


process Print

coverage Order


Multipurpose (i.e. bird seed)

LLDPE/LDPE blend, 2 mil 12" x 18" x 3" gusseted



$/1000 bags

PRODUCT ANALYSIS


$32.00

$40.90

$63.33



process Print

coverage Order






$/1000 bags

PRODUCT ANALYSIS


-10

0

10

20

30

40

50

60

70

80

China South Korea India

Deliv

ered

San

Dieg

o, $

/1,0

00 b

ags

Import tariffTransoceanic transport & fees VAT/Duty drawback

VAT/DutiesInland transportationSelling price, ex-works

$35.72

$68.50

$44.60



process Print

coverage Order






$/1000 bags

PRODUCT ANALYSIS

ANALYSIS COMPONENT CONTRIBUTION –STRUCTURE 1

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Ex-w

orks

, % o

f tot

al

Operating profitSG&A and R&DSG&AAll other manufacturing costManufacturing overheadUtilitiesDirect laborLaborRaw material

a- 2003 FPA average cost breakdown


$32.00 $40.90$63.33 Not specified

PRODUCT ANALYSIS

OTHER PARAMETERS INFLUENCING EXPORT DECISION– STRUCTURE 1


Capacity, tonne 50,000 45,000 630,000-a

Utilization, % 80% 75% 70%-a


7% 3% 1.5%-a

Domestic Demand, % of total production

0%; custom orders only 98% 99.9%

a- Film capacity


process Print

coverage Order






$/1000 bags



process Print

coverage Order


Home use fertilizer bag


Zipper bag


100% 1 million bags

$/1000 bags

PRODUCT ANALYSIS

ANALYSIS EX-WORKS -- STRUCTURE 3 (BAG)

0

50

100

150

200

250

300


Ex-w

orks

, $/1

,000

bag

s

Net profit

TaxesInterest

Logistics/WarehouseCorporate Overhead

R&DSG&A

Manufacturing overheadUtilities

LaborRaw material

$165.00

$79.87

$260.69


-50

0

50

100

150

200

250

300

350


Deliv

ered

San

Die

go, $

/1,0

00 b

ags

Import tariffTransoceanic transport & fees

VAT/Duty drawbackVAT/DutiesInland transportation

Selling price, ex-works

Example Material/Construction Size Print process Print

coverage Order




Zipper bag


100% 1 million bags

$/1000 bags

PRODUCT ANALYSIS

ANALYSIS DELIVERED SAN DIEGO --STRUCTURE 3 (BAG)

$176.44

$280.16

$86.80


PRODUCT ANALYSIS

ANALYSIS COMPONENT CONTRIBUTION –STRUCTURE 3 (BAG)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Ex-w

orks

, % o

f tot

al c

ost

Operating marginLogistics/WarehouseCorporate OverheadR&DSG&A and R&DSG&AAll other manufacturing costManufacturing overheadUtilitiesDirect laborLaborRaw material


process Print

coverage Order




Zipper bag


100% 1 million bags

$/1000 bags


$165.00 $79.87$260.69 Not specified



process Print

coverage Order



3-5 layer high strength co-extruded opaque film, 3.5 mil, over –lacquered

Zipper bag


100% 1 million bags

$/1000 impressions

PRODUCT ANALYSIS

ANALYSIS EX-WORKS -- STRUCTURE 3 (ROLL)

0

50

100

150

200

250


Ex-w

sork

s $/

1,00

0 im

pres

sion

s

Net profitTaxesInterestLogistics/WarehouseCorporate OverheadR&DSG&AManufacturing overheadUtilitiesLaborRaw material

$72.06

$237.30

$120.96



process Print

coverage Order




Zipper bag


100% 1 million bags

$/1000 impressions

-50

0

50

100

150

200

250

300


Deliv

ered

San

Die

go, $

/1,0

00 im

pres

sion

s

Import tariffTransoceanic transport & feesVAT/Duty drawbackVAT/DutiesInland transportationSelling price, ex-works

PRODUCT ANALYSIS

ANALYSIS DELIVERED SAN DIEGO –STRUCTURE 3 (ROLL)

$131.51

$250.29

$78.80



process Print

coverage Order




Zipper bag


100% 1 million bags

$/1000 bags

PRODUCT ANALYSIS

ANALYSIS COMPONENT CONTRIBUTION –STRUCTURE 3 (ROLL)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Ex-w

orks

, % o

f tot

al

Operating profitLogistics/WarehouseCorporate OverheadR&DSG&A and R&DSG&AAll other manufacturing costManufacturing overheadUtilitiesDirect laborLaborRaw material

$72.06$237.30$120.96 Not specified



PRODUCT ANALYSIS



Capacity, tonne 50,000 1,000 630,000-a

Utilization, % 70% 85% 70%-a


8% 5% 1.5%-a


97% 2% 99.9%

a- Film capacity


process Print

coverage Order




Zipper bag


100% 1 million bags

$/1000 bags



process Print

coverage Order


Snack food bag




200% 1 million bags

$/msi

PRODUCT ANALYSIS


0

0.05

0.1

0.15

0.2

0.25

0.3

0.35


Ex-w

orks

, $/m

si

Net profit

TaxesInterest

Logistics/Warehouse

Corporate OverheadR&D

SG&A

Manufacturing overhead

UtilitiesLabor

Raw material

$0.2770

$0.1879

$0.2929


-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4


Deliv

ered

San

Die

go, $

/msi

Import tariffTransoceanic transport & feesVAT/Duty drawback

VAT/DutiesInland transportation



process Print

coverage Order


Snack food bag




200% 1 million bags

$/msi

PRODUCT ANALYSIS


$0.2965

$0.1965

$0.3070


PRODUCT ANALYSIS

ANALYSIS COMPONENT CONTRIBUTION –STRUCTURE 4

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Ex-w

orks

, % o

f tot

al



process Print

coverage Order


Snack food bag




200% 1 million bags

$/msi

$0.2770 $0.1879$0.2929 Not specified



PRODUCT ANALYSIS



Capacity, tonne 250,000 30,000 123,000


Capacity, CAGR% 2003- 2006

8% 5% 5%


80% 95% 55%


process Print

coverage Order


Snack food bag




200% 1 million bags

$/msi



process Print

coverage Order


Retort pouch (i.e. dog food)

PET, 48 gauge reverse printed/adhesive/.00035 aluminum foil/adhesive/cast PP, 2.2 mil

Rollstock- 3.875” x

4.875” x 2.0” bottom gusset

Reverse print


$/1000 pouches

PRODUCT ANALYSIS

ANALYSIS EX-WORKS -- STRUCTURE 5 (POUCH)

0

10

20

30

40

50

60

70

80

90

100

China South Korea-a South Korea-b India

Ex-w

orks

, $/1

,000

pou

ches

Net profitTaxesInterest

Logistics/WarehouseCorporate Overhead

R&DSG&AManufacturing overhead

UtilitiesLaborRaw material

$24.26

$29.15$38.54

$86.37

a- Conditioned to 120° Celsius -- for pet food, is the export grade for U.S.

b- Conditioned to 100° Celsius



process Print

coverage Order






Reverse print


$/1000 pouches

PRODUCT ANALYSIS

ANALYSIS DELIVERED SAN DIEGO --STRUCTURE 5 (POUCH)

-20

0

20

40

60

80

100

120

China South Korea-a South Korea-b India

Deliv

ered

San

Die

go, $

/1,0

00 p

ouch

es

Import tariff

Transoceanic transport & feesVAT/Duty drawbackVAT/Duties

Inland transportationSelling price, ex-works

$25.80 $30.00

$40.30

$89.57


b- Conditioned to 100° Celsius


PRODUCT ANALYSIS

COST COMPONENT CONTRIBUTION –STRUCTURE 5 (POUCH)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

China South Korea-a South Korea-b India U.S.-c

Ex-w

orks

, % o

f tot

al

Operating profitTaxesInterestLogistics/WarehouseCorporate OverheadR&DSG&A and R&DSG&AAll other manufacturing costManufacturing overheadUtilitiesDirect laborLaborRaw material


process Print

coverage Order






Reverse print


$/1000 pouches


b- Conditioned to 100° Celsiusc- 2003 FPA average cost breakdown

$24.26 $29.15$38.54$86.37 Not specifiedAverage selling price


process Print

coverage Order






Reverse print


$/1000 impressions

PRODUCT ANALYSIS

ANALYSIS EX-WORKS -- STRUCTURE 5 (ROLL)

0

5

10

15

20

25

30

China India

Ex-w

orks

, $/1

,000

impr

essi

ons

Net profit

TaxesInterestLogistics/Warehouse

Corporate OverheadR&DSG&A

Manufacturing overheadUtilitiesLabor

Raw material

$24.20

$20.62

NOTE:Korea did not report rollstockcosts as rollstock is imported and converted into pouches


-5

0

5

10

15

20

25

30

35

China India

Deliv

ered

San

Die

go, $

/1,0

00 im

pres

sion

s

Import tariffTransoceanic transport & feesVAT/Duty drawbackVAT/DutiesInland transportation


PRODUCT ANALYSIS

ANALYSIS DELIVERED SAN DIEGO –STRUCTURE 5 (ROLL)


process Print

coverage Order






Reverse print


$/1000 impressions


$22.12 $25.00


PRODUCT ANALYSIS

ANALYSIS COMPONENT CONTRIBUTION –STRUCTURE 5 (ROLL)

0%

20%

40%

60%

80%

100%

China India U.S. -a

Ex-w

orks

, % o

f tot

al



process Print

coverage Order






Reverse print


$/1000 impressions


a- FPA average 2003

$24.20$20.62 Not specified


PRODUCT ANALYSIS



Capacity, tonne 200,000 5,000 20,000



10% 7% 3%


75% 67% 55%


process Print

coverage Order






Reverse print


$/1000 pouches


PROJECT DESCRIPTION




PRODUCT ANALYSIS

OVERALL ASSESSMENT

APPENDIX

CONCLUSIONOVERALL ASSESSMENT

U.S. FLEXIBLE PACKAGING INDUSTRY

STATISTICS

Impact of imports on the U.S. flexible packaging industry:

• Are more so in commodities than specialties currently

• Will increase over the next 3-5 as foreign companies also gear up to produce and export more sophisticated structures


SELECT COUNTRY

PERSPECTIVES

PRODUCT ANALYSIS

RAW MATERIALS

ENVIRONMENTAL CONSCIOUSNESS

LABOR

REST OF WORLD


OVERALL ASSESSMENT

0%

5%

10%

15%

20%

25%

Imports Trade imbalance-a

CA

GR

200

0-20

03, %

SIC codes include:2673-b Bags; plastics,

laminated and coated

2674-b Uncoated paper and multiwall


SIC codes include:2673-b Bags; plastics,


2674-b Uncoated paper and multiwall


Imports and trade imbalance have grown at double digit rates over last three years

Conditions are favorable that the trade imbalance will continue

Imports and trade imbalance have grown at double digit rates over last three years

Conditions are favorable that the trade imbalance will continue

11%

19%

a- Imports exceed exportsb- May include SIC 2671, paper coatings

and laminating packaging

$2.1 billion2003

$1.1 billion2003


FPA MEMBER SURVEY RESULTSOVERALL ASSESSMENT

Nearly half or more of the survey respondents report that imports are:

Likely to impact 11% to 50% of their company’s flexible packaging revenues in 2004 and even a greater percentage in 2005

Converter’s concern about importsNot at all likely to be offset by export

opportunities in 2004

Definitely likely to cause profit erosion in 2005

Definitely likely to cause price erosion in 2005

CHINAOVERALL ASSESSMENT

l Accounted for ~30% of flexible packaging imports tracked by U.S. Census Bureau in 2003

l Well positioned to effectively export commodity structures

l Investing in equipment to produce more sophisticated structures

l Inherent advantages compared to the United States:

− Fixed currency

− Relatively low equipment/fixed cost

− Very low labor rate ($0.80/hr)

− Low energy cost

− Very limited investment in safety, environment and healthcare

l No subsidies/incentives specifically targeted for flexible packaging industry

Threat from Chinese flexible packaging manufacturers is real, sustainable and likely to continue

Exports

SOUTH KOREAOVERALL ASSESSMENT

l Already possess international standards in packaging manufacturing capabilities, especially in lamination and printing capabilities

l Forte is higher-end packagingl Low labor rate ($10.00/hr)l No VAT or duty on exportsl No subsidies/incentives specifically targeted for

flexible packaging industry

Korean flexible packaging manufacturers can be formidable competitors

Exports

INDIAOVERALL ASSESSMENT

l Self-sufficient in nearly all major raw materials used in flexible packaging

l Increasing its manufacturing expertise and investment in modern plants and machinery

l U.S. orders are not regular in their frequency; India’s export activities focused elsewhere for now

l Abundant low-cost skilled labor pooll Very low labor rate ($1.12/hr)l No VAT or duty on exportsl No U.S. import tariffl No subsidies/incentives specifically targeted for

flexible packaging industry

India could become a bigger exporter of flexible packaging to United States but at this time producers have set sights on Middle East, East Africa and other Asian countries

Exports

PRODUCT ANALYSISOVERALL ASSESSMENT

l For Structure 2, fractional coffee packs:

Delivered cost/priceto San Diego can be 20% to 40% below the U.S. price ex-works

Represents an alternative to U.S. customers

RAW MATERIALSOVERALL ASSESSMENT

Competitive advantage can disappear in a tight global supply situation

Foreign producers are potentially motivated to export product to the United States

Producers in the select foreign countries analyzed benefited from lower resin prices

AT THE TIMEOF THE STUDY

TYPICALLY ACCOUNT FOR 50% TO 70%OF A PACKAGING

STRUCTURE’SPRICE EX-WORKS

NOW THROUGH 2006

LABOROVERALL ASSESSMENT

U.S. flexible packaging manufacturers are at a clear disadvantage in labor rates now and in the foreseeable future. Labor alone can provide up to 10% cost advantage on comparable U.S. product


Typical labor rate, $/hr-a $0.80 $10.00 $1.12

% of typical U.S. labor rate-b 4% 45% 5%

Outlook Advantage relative to United States does not significantly change due to readily available labor supply

a- Includes applicable benefits b- $22.00/hr, including benefits

Source: knowledge@wharton and SAI research

ENVIRONMENTAL CONSCIOUSNESSOVERALL ASSESSMENT

l U.S.

l South Korea Established interest in environmental protection

l India Intensifying interest in environment

l China Invested in industry at expense of environment

U.S. flexible packaging manufacturers are at a significant disadvantage in relevant environment costs

HIGH

LOW

Other up and comers among top ten importers U.S. imports CAGR % 2000-2003

Thailand 51%

Italy 19%

Taiwan 11%

Canada 6%

Mexico 5%

Germany 4%

Indonesia 1%

REST OF THE WORLDOVERALL ASSESSMENT

SIC codes include:2673-a Bags; plastics,


2674-a Uncoated paper and multiwall


SIC codes include:2673-a Bags; plastics,


2674-a Uncoated paper and multiwall

3497 Metal foil and leafa- May include SIC 2671, paper coatings and

laminating packaging


RECOMMENDATIONSOVERALL ASSESSMENT

l FPA member companies

− Can benchmark themselves against the foreign cost analysis

− Should be cognizant of potential differences in product specifications of imports

l FPA should:

− Continue to track import activity

− Continue to work with the Census Bureau and ITC to maximize the value of the relevant statistics

− Consider periodically updating this impact analysis

PROJECT DESCRIPTION




PRODUCT ANALYSIS

OVERALL ASSESSMENT

APPENDIX

APPENDIX

DEFINITIONS

Term Definition

Raw materials Cost of purchased direct materials with no deduction for waste. Does not include government subsidies

Labor Direct and indirect labor wages and benefit costs. Includes factory administrative, clerical and supervision personnel

Utilities Includes gas, electricity, and water costs

Government incentives/subsidies/support

Government subsidies/support or general government kickbacks or rebates on items such as barge quantities of raw materials for regional distribution or purchases from SINOPEC, equipment, labor, utilities, taxes, etc. Expressed as a negative value (or credit to cost)

Duty drawbacks A rebate on taxes or duty paid for imported goods which are subsequently exported in the same form or a different form. Expressed as a negative value (or credit to cost)

Manufacturing overhead Includes all other factory costs, such as depreciation, operating supplies, rent, real estate/property taxes, insurance, freight allowed and prepaid. Operating supplies includes all manufacturing materials that do not become an integral part of the finished good

Sales, General & Administrative

Cost associated with the operation of sales, marketing and other corporate administrative departments, excluding R&D

R&D Charges associated with research and product development activities

Net Sales Total volume of business transacted less deduction for returns, allowances and discounts

APPENDIX

DEFINITIONS (cont’d)

Term Definition

Corporate overhead Allocation of overhead charges made by the parent company

Logistics/Warehouse Costs associated with manufacturing and distribution planning

Interest Cost of allocated corporate long & short term borrowings and any direct lender payments

Taxes and other Allocated corporate taxes and insurance

Duties/Import tariffs Harmonized tariffs (3.0% of value, according to US International Trade Committee) or other export tariffs

Transportation & other fees

The cost of freight, insurance, and other related charges. May include additional margin for the trader/transporter

VAT Value Added Tax is a general consumption tax assessed on the value added to goods and services

Duties/Import tariffs Harmonized tariffs (3.0% of value, according to US International Trade Committee) or other export tariffs

Fully absorbed cost, ex-works (or FOB plant)

The cost of goods when it leaves the factory gate

Selling price, ex-works The price of goods which includes manufacturing cost and gross profit margin when it leaves the factory gate

Selling price, delivered San Diego

The price of goods, freight insurance, and freight charges at the port of San Diego which includes profit margin, duty, and other taxes

Operating profit Sales - Cost Of Goods Sold- Operating Expenses (before taxes/interest)

Net profit Sales - Cost Of Goods Sold - Operating Expenses (includes taxes/interest)

CONTACT INFORMATION:CONTACT INFORMATION:

Bruce W. DeckmanPresidentSTRATEGIC ANALYSIS INC.2208 Quarry Drive, Suite 100West Lawn, PA 19609-1158Tel: 610-320-6100E-mail: [email protected]: www.strategicanalysis.com

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