The world of printing is rapidly changing, and with it, the ink industry is undergoing fundamental
Dr. David Hill
As president and CEO of Sun Chemical, Dr. David Hill is positioning his company to make the changes necessary to both benefit customers and help Sun Chemical thrive in these changing times. Dr. Hill, who joined Sun Chemical in 2001 as senior vice president, chief technology officer after a distinguished career at Allied Chemical and JM Huber Corporation, became Sun Chemical’s president and CEO in January 2005. He is the recipient of several awards, including the 1978 AWS Award for research and the 1988 ASM Materials Achievement Award for his work with amorphous metals.
Dr. Hill recently spoke with Ink World on the changes he sees that lay ahead for the ink industry.
In the Ink Industry
Dr. Hill breaks down the changes in the ink industry into two categories: technology, in which advances in digital as well as improvements in conventional printing are changing the nature of printing; and the overall structure of the business, as consolidation impacts the entire supply chain.
“When we talk about the ink industry, we must consider two fundamental areas: technology and the structure of the business itself,” Dr. Hill said. “The issue that faces all industry, including ink and printing, is how to create value that excites the ultimate consumer and revitalizes the value chain. I wish I had a silver bullet to return the sense of excitement about printing and ink to the end customer, but even so, there are a lot of exciting technologies being developed in printing. Printers are reducing costs, whether it is the new wide web triple width presses for newspapers or higher speed presses than anything we contemplated 10 years ago.
“As a result, the inks that ran on slower speed and narrower web presses are not necessarily suited to today’s new technologies,” Dr. Hill said. “We are particularly well suited at Sun Chemical to deliver improved performance. For example, our WetFlex technology is specifically designed to improve performance of packaging without solvents while delivering enhanced performance within the space of conventional printing.
“At Sun Chemical, we look at three components to deliver value to our customers,” Dr. Hill continued. “The first is innovation. We believe through developing emerging technologies, we can lead the way. Second, our commitment to service is critical. With the amount of consolidation that has occurred among our customers, their ability to offer internal support will diminish. We believe that our service capabilities will help our customers be successful. We also must assist the industry in its sustainability. It’s more than environmental consciousness and being frugal in resources and in reducing effluents. We want to help our customers be sustainable and succeed. These are the areas in which we can contribute.”
The printing ink industry has fallen on difficult times. The U.S.-based National Association of Printing Ink Manufacturers (NAPIM) reported that in 2006, the average EBIT (earnings before interest and taxes) for ink companies was a paltry 1.9 percent of sales. In 2005, the EBIT was even worse, at 0.9 percent. Meanwhile, price increases haven’t even covered higher raw material costs.
Against this backdrop, ink manufacturers have taken a wide variety of approaches to minimize their losses. Some companies have chosen to reduce their investment in new markets and R&D, an approach that Dr. Hill said is short-sighted.
“There is always a lot of pressure when an industry struggles to be profitable to reduce investment in tomorrow, which offers a short term benefit,” he said. “But unless we can create real value in terms of product appeal for our customers, they can’t be successful, and we can’t be as well. We have to work to ensure that real value is being created or it will just not be a fun place to be. It will be a tough place to be.
“We have invested in security and brand protection, and have gained a position in both U.S. banknotes and euros,” Dr. Hill said. “To be able to achieve this, our customers have to know that we are here for the long term, and we will be able to help them with their problems. We are continuing our investment in digital, as we develop new platforms in narrow web, corrugated and new technology for CD and DVD printing. We want to sell more than just ink; we want to offer our customers the full package of hardware, software, consumables and service.
“In the packaging space, we are investing to bring value earlier in the chain,” Dr. Hill added. “We want to see market trends better, and better anticipate the needs of our customers and our customers’ customers. We can bring to their attention technologies that they didn’t even know were available.”
The company’s close relationship with Dainippon Ink & Chemicals, its parent company, is a key asset.
“Our colleagues in Japan have a long-term vision and commitment to the ink industry, and we have a very transparent relationship with DIC in terms of technology,” Dr. Hill noted. “Japanese products are engineered to a much higher performance level. They hold themselves to a much higher standard, but this also adds cost. We do share technology through all product lines and work to adapt technology to local cost and performance needs.”
VAT and More Pressure
On the Ink Industry
The ink industry has been under tremendous financial pressure in recent years. Fierce competition took its toll on margins, and when higher raw material and manufacturing costs led by the surging crude energy prices came, ink manufacturers were forced to raise prices.
It is easy for printers to understand price increases for higher energy costs. However, the ink industry faces another major cost hurdle, as China has eliminated the value added tax, or VAT, refund on a wide variety of products made for export. Pigments are among the products that are impacted, as the 13 percent refund is being eliminated by China. As a result, there have been price increase announcements for pigments, which make up the largest portion of raw material costs for inks, and it is likely that ink manufacturers will have to raise their own prices. How then does the ink industry explain to its customers the elimination of VAT refunds?
“The elimination of the VAT on exports from China will be another cost,” Dr. Hill said. “China was under pressure to correct the balance of trade, and one way to do that is to make the cost of goods more expensive. You’ll notice that the VAT reductions did not apply to the high-tech field, where China clearly has an interest in stimulating that area. Commodities are not high-tech.
“Roughly half of the pigment used in ink is sourced from China. Typically, Chinese producers don’t make large profits, nor do ink companies or converters. We’re equally exposed compared to other ink manufacturers. Eventually it will have an impact, and demand will likely go down. We’re all part of the same value chain, and there is an importance of reinvigorating the whole value chain. I’m afraid this will lead to more price increases.”
As a result of China’s price increases, Dr. Hill added that ink manufacturers will be searching for alternative sources for pigments, and he noted that India will likely be a major source of supply.
World of Digital
Digital technologies are one of the brightest spots for the ink industry, as growth remains strong. Dr. Hill sees tremendous opportunities ahead, and has positioned Sun Chemical to capitalize on this potential.
“There has been a whole shift to print on demand and run length of one,” Dr. Hill said. “It has taken a lot longer than most people anticipated but today we are seeing an increased usage in textile and display graphics where inkjet is now the dominant technology, inroads being made in commercial printing as well as niche markets such as label and corrugated printing.
“The break-even run length between conventional and digital technologies seems to be moving downward,” Dr. Hill said. “Where it might have been 150,000 copies a few years ago, it might be down to 25,000 copies today, and as the digital market matures, I imagine it will further decline, and as a result, there will be greater penetration. This fits the cycle of learning vs. economic cost, as experience helps you wring costs out of the system.
“The SOHO market follows the razor blade model, where suppliers give the printer away and make a significant margin on ink,” Dr. Hill noted. “However, the cost of digital presses is still several million dollars. There is no comparable ink pricing model there, which makes the rate of penetration slower. Still, there is a lot more investment in digital technologies occurring that could revolutionize the industry.”
Sun Chemical has made major inroads in the digital ink market, and is likely to continue to grow in the coming years.
“Today, Sun Chemical does $100 million a year in the digital space, through color dispersions, ink, OEM and SunJet,” Dr. Hill said. “Ten years from now, I think we will be at $400 million. That is significant, especially as there is a lot of expensive technology already in the ground in terms of conventional presses.”
Consolidation Among Printers and Ink Companies
Consolidation among printers is continuing at a rapid rate, and is clearly a fact of life for ink manufacturers.
The rate of consolidation among our customers is accelerating,” Dr. Hill said. “While Alcoa’s acquisition of Alcan does not look like it is going to happen, their packaging businesses are still on plan. In the publication and commercial space, RR Donnelley & Sons continues to buy at a rapid pace, most recently acquiring Perry Judd and Banta. ACG and Vertis are merging. On the packaging side, we just saw Graphic Packaging acquire Altivity. Consolidation is an important issue as to where our business is heading – it portends a lot more purchasing leverage and probably will result in significant pressure on prices. The fact is that continuing consolidation is a factor we can’t ignore.”
With this consolidation occurring among its major customers, is it likely that the ink industry will witness another major wave of consolidation similar to 2005? Dr. Hill thinks that is unlikely, particularly in the highly fragmented sheetfed ink market.
“To a large extent, the ink industry has already consolidated,” Dr. Hill said. “There are two or three large suppliers in major markets in North America and Europe. In heatset and coldset, there is Sun Chemical, Flint Group and Huber; in liquid inks, there is Sun Chemical, Flint Group and Siegwerk.
In particular, the commercial sheetfed market continues to be impacted by new technologies.
“The sheetfed market is declining as overall print demand shrinks,” Dr. Hill noted. “There is some consolidation taking place, which is reducing capacity. Small companies are becoming medium-sized, and then are being bought out. That seems to be the business model.
“You have to also remember that the customers of printers are also getting rolled up,” Dr. Hill added. “Think about family drug stores we all knew when we were growing up. Now there is CVS, Walgreens and Eckerd. Retail establishments are diminishing, and franchisees get more leverage when they buy print. When you used to buy a lawn mower, snow blower or another piece of equipment, you would get an instructional booklet. Now you go on the internet. All of those booklets are gone.”
As a result, Dr. Hill said there is not a strong incentive to merging sheetfed ink companies.
“In sheetfed ink, consolidation hasn’t happened,” he added. “There is still a strong regional component in the market, driven by relationships with small- and medium-sized printers, based on trust and service, as well as the higher costs of shipping and service. I don’t see any evidence that this can be overcome in sheetfed or energy curing.”
And the Environment
The growing interest in environmentally-friendly products is a major trend, and Sun Chemical is developing new solutions to meet these needs.
“We find that everywhere we go, every customer is interested in the issue of sustainability, although typically with no increase in their cost,” Dr. Hill said. “There is a whole class of solutions built around lowering VOCs. We have developed a wide range of new offerings. Triton is our lower VOC heatset ink. We were the first developer of water-based inks and soy-based coldset inks. We are trying to reduce our dependence on petroleum and are developing alternate sources of raw materials. We are trying to be more environmentally friendly. There are segments that won’t be as amenable to shifting, such as publication gravure, which won’t readily make the shift from toluene to aliphatics or water, although we could offer it. The infrastructure costs would be difficult.
“WetFlex has gained tremendous traction in Europe, which, thanks to e-beam curing, is greener as it helps reduce carbon footprint and reduces solvents,” Dr. Hill added. “We have set up a WetFlex Center of Excellence in Germany, and have several customers in Europe as well as one customer in the U.S. We’re optimistic about WetFlex.”
The European regulations on REACH (Registration, Evaluation, and Authorisation of Chemicals) will also have a major impact on the environment and the ink industry. The cost of registering every single product will be high, which Dr. Hill said could lead to elimination of some products altogether, ranging from niche substances to major ingredients such as toluene.
“When it comes to REACH, I don’t think that anyone knows the ultimate impact,” Dr. Hill said. “It could be very disruptive. It is likely to lead to the elimination of petroleum hydrocarbons. In Europe, there is a higher degree of concern centered around being green and environmentally responsible, and the new U.S. administration may also bring tighter restrictions.
“The impact of REACH will be widespread,” Dr. Hill said. “There will likely be a much narrower range of products available, as it will cost $100,000 to register each component. That cost will winnow down the number of available products.”
The Future for
With all of these changes, what will Sun Chemical’s role be in the future? Dr. Hill believes that Sun Chemical’s ability to provide value will drive its continued success.
“Right now the industry is evolving,” Dr. Hill said. “We are positioning ourselves as the long-term trusted supplier. Companies rely on us, and know we’ll be here five and 10 years from now. I trust that Sun Chemical 10 years from now will be perceived as a valued and trustworthy supplier by customers, valued for quality and competitive pricing, one where service is a distinguishing factor and helps us win the minds of our customers.”