If only geopolitical events and market forces had the push-button simplicity of a CtP imagesetter or a printing press for a quick reset, do-over, or finish. Print manufacturers, particularly export suppliers from Hong Kong and China, would heave a collective sigh of relief and resume their everyday battles with rising costs, faster time to market, and increased government regulation. As it is, the escalating trade dispute between the U.S. and China and the tightening paper market are monopolizing conversations, sparking speculations, and making the print business tougher than ever.
Mulling Over Tariff Threats
Washington’s latest threat to impose penalties on as much as $450 billion worth of Chinese goods, or nearly 90% of the total value of goods imported into the U.S. from China in 2017, is raising the specter of a full-blown trade war between the world’s two biggest economies. While Washington and Beijing are sparring over trade, Hong Kong and China print manufacturers are assessing the situation and figuring out how to cushion potential fallout.
As Henry Woo, general manager of the OEM business department at Leo Paper, says, “The scope and intensity of further tariffs remain unknown and unpredictable, and we are uncertain as to the impact on our business planning. Of course, we hope for a quick compromise in the dispute or, at least, less tense trade friction. But the persistent concerns are eventually going to hit the stock market and global economy whether we like it or not.”
Alice Fan, overseas sales manager at Magnum Offset, is among the many who are vigilantly monitoring the list of items covered by the ongoing trade dispute. “The proposed list of 6,031 products with 10% tariff, as announced on July 10, included not just paper and paper products but also chemicals and inks,” she says. “This is bound to affect our industry. However, since the Trump policy is constantly changing, a significant negative impact in the short term is unlikely. At this stage, we can only strive to maintain the stability of our operations and business.”
The tit-for-tat countermeasures are certainly moving way too fast for anyone to take a clear measure of the potential effects. “It is difficult to know if the second round of tariffs on $200 billion worth of goods will actually be implemented, but it could start as early as September, with tariffs of 10% to 25%,” says Howard Musk, president and CEO of Imago.
Whether printed products will be affected, and to what extent, is unclear, says John Currie, global business director of CTPS. “What is certain is that most print manufacturers are proactively engaged in their own countermeasures,” he adds. “However, adjusting one’s client portfolio to be less dependent on U.S. business is not going to happen overnight.”
But though printed books are not on the list (as of today), Musk says that “various types of paper are, and this means less imported paper and/or higher prices, which then exerts pricing pressures and may widen the cost gap between China and the U.S. for printed books.” He notes, “Also included in the second round are stationery items such as journals and notepads. If this escalates further, it may encompass a larger range of products, and printed books may get caught in this dispute.”
Matthew Yum, executive chairman of Hung Hing, reiterates that a trade war is never a good thing. “Businesses will naturally adopt a more conservative outlook, which will then lead to an economic slowdown,” he says. “We will see cutbacks in foreign direct investments and product launches and lower buying volumes as importers remain uncertain about the potential cost impact on their offshore sourcing from China.”
Furthermore, Yum says, the print and packaging markets have always been closely tied to the GDP growth rate, which is directly linked to consumption. “Slowdown in consumption means less purchasing of products—books, toys, appliances, and computers, for instance—that require some sort of ink on paper. Unpredictable currency fluctuations in the yuan, the dollar, and the euro are also affecting PLs across the economy.”
The Chinese yuan fell to a 13-month low against the dollar this week, with an 8% drop since April. This has actually made Chinese exports cheaper in foreign markets and buoys exports. With the truly global 21st-century supply chain, there are many other markets aside from the U.S. at play—a blessing in disguise to many.
But Francis Ho, deputy general manager of CC Offset, remains optimistic that books will be the last category to be affected because of their value to education and knowledge. “However, as the list of products subjected to tariff grows, the hit on packaging printers gets bigger,” he says. “For some, one possible way of utilizing the excess capacity on their production floor is to turn to the book market. So, I expect fiercer competition in the coming months.”
Ken Kong, managing director of Jade Productions, shares Ho’s optimistic outlook. “I do believe that books and printed products are way down on the tariff list,” Kong says. “In any case, the print and pulp-and-paper industries have already felt the negative trade impact. China has stopped importing waste paper from the U.S., which is one of its major sources. What we have seen since then are ever-increasing prices of packaging paper, which affects the packaging printing industry, whose clients are seeking alternative packaging methods. For instance, packs of beer and canned drinks in China and Hong Kong are now often shrink-wrapped instead of packed in corrugated boxes.”
For Currie of CTPS, while he and his team work with U.S. publishers closely, the focus is on supporting their clients’ regional print-on-demand and short-run programs for the Asia Pacific and China markets. “In this regard, we operate on a different business model,” he says. “And with our Phygital Book authentication and track-and-trace capabilities embedded in the books that we print, our role for clients is not just as a print manufacturer but also as a protector of their content and copyright.”
At Leo Paper, Woo and his team have been busy diversifying beyond the company’s core export-oriented OEM business by further developing its packaging business. “We have also been proactively expanding our shares in the China market over the past few years,” he says. “From the corporate risk management perspective, this will help us minimize any potential impact from the escalating trade dispute.”
Pinching Paper Prices
Dramatic paper price hikes in 2017 and during the first half of this year have hit the industry after the Chinese government intensified controls on pollution and the use of polluting materials in manufacturing. Chinese citizens have been quick to spread news on social media about pollution caused by neighborhood factories, thus pressuring local governments to act quickly or risk mass demonstrations, says Yum of Hung Hing. “Such moves, in line with the government’s call for social stability and harmony, have resulted in tighter legislation on emissions and proper waste disposal and the drive to install cleaner energy for factories.”
The shuttering of many paper factories is one direct result, causing rising paper costs. “Factories neighboring residential areas are also frequently audited by various environmental agencies on their VOC emissions, handling of chemical materials, and new machine installations,” Yum notes. “In the longer term, these policies on sustainable and eco-friendly practices will benefit the Chinese economy. But the adverse short-term impact will be either rising operating costs at local SME factories or more factory closures.”
The Chinese government’s decision to reduce imports of waste paper for recycling in paper, board, and carton manufacturing has also caused price hikes, Musk says. “In previous years, Chinese paper was significantly cheaper than paper from the rest of the world, but it has now come more into line with the international paper market. But Europe and North America are not immune to paper price hikes. This is partly due to increased demand for virgin pulp in China, but more importantly, it is a rebalancing of supply and demand due to some mill closures.”
Yum says that some of his clients were able to accept the price adjustments, “but more often than not, these adjustments were not sufficient to cover the absolute increases in paper prices.” He adds, “Given the higher costs of raw materials and increased operating costs in China, print manufacturers are struggling to support their businesses. For Hung Hing, we have increasingly become more selective with the products and customers that we deal with. Our steady partnerships, based on mutual benefit, have enabled us to sail through tough periods while sharing the bounty during good times—and we are continuing with this philosophy.”
For Ho of CC Offset, one solution is to use imported paper. “The cost of imported paper is slightly lower only because there is no duty or VAT if the finished products, such as books, are meant for the export market,” he says. “But imported paper requires longer lead time and faces limitations on stock. When you factor in inventory and warehousing costs, there is little advantage to using imported paper. In the past year, however, the supply of imported paper had been more stable than that of Chinese paper, but with the weakening yuan in recent months, any gain from using imported paper is diminishing.”
Seeking alternative paper is a standard practice, says Currie of CTPS. “For coated and semicoated paper, since we use predominantly lightweight 64 gsm that is mostly from European mills operating in China, our alternative source tends to be Japan,” he notes. “But for the very lightweight paper, from 30 gsm to 50 gsm, China mills still provide the best value for money.”
Stocking up and warehousing popular grades to minimize the impact of rising prices may sound logical, but it is impractical, says Fan of Magnum Offset. “For those manufacturing in Hong Kong, the rental costs of factory and warehouse space are simply too high to make the warehousing option viable,” he notes. “Furthermore, it is not just the paper cost that we need to consider. Transportation and postage costs have also risen in recent months. For our regular onshore clients, especially those in the periodical segment, we recommend slightly thinner paper to maintain their budget, which includes mailing costs, while keeping the overall product appearance intact.”
The price of woodfree paper is now higher than that of coated art paper, says Kong of Jade Productions. “But woodfree paper is bulkier than matte art at the same weight; 100 gsm woodfree has about the same thickness as 128 gsm matte art,” he notes. “In earlier days, publishers may have used woodfree instead of matte art to cut costs, but now that is not the main consideration. What the clients want to achieve with their projects determines the type of paper used. For instance, a publisher may want a thick book without the weight, which means that regular coated art paper is not advisable. Instead, uncoated woodfree is an option if the client is flexible in terms of color reproduction. So, unless the client comes right out and says that price pressure is the major issue, we will recommend paper that is best suited to the project in order to achieve the client’s goal.”
As of this week, paper prices have risen about 50% to 60% since the last quarter of 2016, says Woo of Leo Paper. “The price increase in waste paper—chipboard and gray backs, for instance—is even greater, especially after China’s regulation on waste paper imports came into effect last December,” he notes. “Add this to other factors jacking up manufacturing costs in China factories such as the fluctuating yuan and labor shortage, and we see the challenges mounting up.”
For Leo Paper, staying competitive and sustainable means implementing proactive initiatives that range from lean manufacturing to reengineering processes to minimize waste and enhance overall supply chain efficiencies. “It is impossible to absorb all cost increases on our own,” Woo says. “So, as a total solutions provider, we do our utmost to add value to clients’ products, such as creating unique ideas using our Magic Paper World and sound book solutions. When clients share their annual order forecasts with us as early as possible, we can manage our paper inventory plan in advance to mitigate potential cost increases.”
Overall, Currie sees a more stable upcoming quarter and a sunnier shorter-term outlook compared to the same period last year. “Print manufacturers and publishers are becoming much more prudent when it comes to lighter-paper inventories,” he says. “In fact, there is an obvious trend of publishers backing away from supplying paper to printers in recent months, thus putting more financial pressures on printers.”
In other words, it is business as usual for the print suppliers featured in this report. The challenges—price pressures and paper-thin profit margins—have always been there, as has the continuing search for more environmentally friendly practices, higher productivity, and faster time to market. Providing more value-added services, paper engineering ideas, unique postpress finishing touches, and enhanced warehousing and logistical support are just some of the ways these export printers differentiate themselves from the run-of-the-mill players. Read on to find out what is happening at their printing facilities and learn about the new strategies they are devising for the publishing industry.
A visit by a group of Canadian companies during the China Green Companies Summit 2018 in March is a testament to CC’s green footprint. “These business leaders were impressed by our investment in greening our facilities,” says deputy general manager Francis Ho. “For instance, on our web printing floors, multiple heat exchange systems use the heat discharged by the presses to power air-conditioning units and water heaters.” Ho adds that these systems have enabled the company to save up to one million kWh of electricity annually.
Then there is the company’s wastewater treatment process, which involves both the central dampening (or fountain solution) supply and the plate output discharge systems. “We filter and recycle the water used for printing so that we can reuse most of it,” Ho says. “Previously, this wastewater discharge, which is mixed with chemicals used in plate output and printing, was sent to a licensed collector for treatment. But the tightening of environmental regulations by the Chinese government has decreased the treatment volume allowed for licensed collectors, making that solution insufficient for our needs. So, two years ago, we began installing our own wastewater treatment system.”
The idea, Ho says, is to collect the discharged water in a central station, where it then is filtered, has its chemicals replenished, and is sent back to each printing press. “This recycling process not only saves water but also cuts down on wastewater discharge and gives us a standardized fountain solution across all printing presses to ensure standardized printing quality,” he notes. “The plate output wastewater discharge treatment follows a similar process. At the end of 2017, we completed our VOCs [volatile organic compounds] treatment facility, which has been approved by local governments.”
Meanwhile, CC’s investment in its production facilities has continued even in tight economic situations. “In the second half of this year, for instance,” Ho says, “we will add major binding equipment for paperback and hardcover that is more suitable for shorter print runs, which are now the norm in the publishing industry.”
And it is no longer just about printing at CC, Ho notes. “Providing great value to each customer goes without saying—that has always been at the core of our company—but we are also about environmental protection, social accountability, and diversification of services.” Right now, CC is working on connecting the different services within its holding company, Sino United Publishing, which also offers a China-based online shopping platform and bonded warehousing services.
Redefining the company as a core book printer with a slew of enhanced solutions offerings remains the focus at CTPS. “We have developed and put together these solutions—EDI, inventory control, end-to-end project tracking, lettershopping, and logistics, for instance—since our investment in digital printing technology in 2011,” says global business director John Currie. “However, this concept is generally challenging to sell to publishers because they often regard printers are pure print producers and not necessarily as solutions or IT companies.”
But those publishers that have engaged in digital supply chain transformation see the potential for printers that provide software solutions or cloud-based content repository capabilities and production workflow to help them meet shifting industry needs. “We see this with educational and STM publishers who are looking at our cloud-based platform to track files coming from their content service providers and to monitor the whole printing and distribution processes,” Currie says. “At the end of the day, our cloud-based solutions platform is helping publishers to move into much leaner practices—just-in-time [JIT] and reduced inventory, print-to-order, and print-on-demand—that better suit current publishing and economic realities.”
In 2015, CTPS partnered with an IT firm specializing in banking and financial information security to create its patented Phygital Book technology, which offers encrypted QR code solutions for content protection against counterfeiting and parallel importing. “We are currently applying two different QR code technologies for two publishing clients that have embarked on global protection of their titles,” says CEO Peter Tse. “The complex workflow—covering our digital production system and the full activation, authentication, and track-and-trace process—brings e-commerce services into play.”
Two months ago, Tse also appointed a business partner to allow CTPS to directly print and deliver to China. “This brings in new opportunities, particularly for digital print production services in the booming Chinese market,” he notes. “Digital printing is the most appropriate technology for print-to-order and print-on-demand.”
CTPS, Tse says, “can offer print runs as low as 30 copies in soft- and hard-bound through our digital operations, which combine cover printing on Indigo presses with ink-jet web printing.” He adds, “Books with high page counts and lightweight paper with PUR binding, plastic spiral/tabbing, or leather/PU bound and special finishes remain our niche segment. Our experience with printing on ultra-lightweight paper is not easily replicated here in Asia or elsewhere. And now, with our Phygital Book technology and cloud-based solutions platform, we are in step with publishers looking for partners to help them navigate a challenging and changing business environment, which is due mostly to digitization and globalization.”
The consolidation of Hung Hing’s conventional printing business in its Heshan manufacturing facility is complete, says COO Richard Lim. “This will enable better asset utilization and higher efficiencies in production planning,” he notes. “With the greater number of binding lines in one location, we will be able to capitalize on the increased capacity to produce larger volumes of projects with shorter turnaround times.” Presently, the Heshan facility has three hardcover and two limp-binding production lines that are complemented by an additional hardcover line in its Hong Kong plant.
This consolidation is one result of an exercise in identifying the core expertise of the facilities that Hung Hing operates in China and Hong Kong. “Our product ranges from children’s novelty items and board books to corrugated packaging for international and domestic clients,” Lim says, “and each facility has its unique solutions and service levels. By identifying the core expertise and investing appropriately, we will help each facility and business unit manager to be more focused on servicing client needs and expanding accordingly.” Hung Hing’s litho-laminate packaging business, for instance, operates on a two-week turnaround from receipt of orders and is required to provide storage facilities for JIT deliveries.
Hung Hing’s recent acquisition of Rengo Shunde in Guangzhou is one step toward expanding its corrugating business to meet domestic packaging demands with an eye on the indirect export market in the coming years. The purchase of two digital postpress machines—Highcon for laser die cutting and Scodix for finishing enhancement—is all about short-runs, personalization, and high-end touches. “Laser die cutting has always been popular for greeting cards, and more publishers are adopting it to create unique book designs,” says executive chairman Matthew Yum. “There is also a growing interest in applying the technique to rigid boxes and folding cartons, especially for cosmetics and FMCG products.”
Early this year, the team partnered with Fotomax, in Hong Kong, to supply personalized red envelopes for the Chinese New Year celebration; customers added their names in hot-foil or laser-die-cut text through POS kiosks and had the finished product delivered to them within seven days. “Aside from supporting our existing B2B business for short-runs, we are also busy exploring new applications suitable for the B2C market,” Yum says.
A new greenfield factory in Vietnam, scheduled to commence operations in mid-2019, kick-starts another new strategy for Hung Hing. “We are seeking to leverage our risks and tap into resources outside of China as we grow our core print and packaging businesses,” Yum says, adding that the factory will first serve Vietnam’s domestic packaging market and then look into opportunities for direct paper product exports.
Recent months have seen the Imago team busy experimenting with XCMYK, which offers an expanded color gamut while retaining standard CMYK inks. “There are limitations in that it can only be used on coated stock and must be printed stochastically,” says president and CEO Howard Musk. “But it definitely has some promise.”
Musk notes that one of his production facilities “has recently installed an MGI JETvarnish, which can do intricate raised UV digitally and inline foiling with tight registration.” He adds, “This solution is targeted at the packaging industry but can have great applications for book covers and dust jackets.”
At another production site, a gilding process that can deboss patterns into the foil has been developed. “One of our cover material suppliers has also developed a PU material that is made of two different colored layers,” Musk says. “The top layer can be laser-etched away in intricate patterns to reveal the bottom layer—something that is not achievable with thermo-reactive or foil stamping. Stickers for both kids and adults are a big hit right now, so we are also looking at new techniques for creating die-cutting molds that will allow for more detailed kiss cutting.”
Business has been good for the last few years, Musk says, a trend that has continued into the first half of 2018. From his perspective, the U.S. publishing industry “looks healthy.”
“Our clients are being quite aggressive on first printing quantities for high-profile authors,” Musk notes. “Publishers also continue to want their books to stand out with cool-looking covers, unique materials, and interactive inserts. There is also the continuing trend for a portion of the print run to be a special edition with upgraded materials and a slipcase.”
The idea of the book as a well-designed beautiful object is very much alive, Musk says. “This extends beyond the traditional publishing industry. Clients from commercial and nonprofit organizations are looking for promotional pieces or guidebooks and wanting them in creative formats and packaging.”
Understandably, some Imago clients are concerned about the ongoing trade war between China and the U.S. “While Imago’s base is in China, we always have facilities in Southeast Asia, Europe, and the rest of the world,” Musk says. “This makes us uniquely positioned to provide alternative solutions for dealing with issues such as content that cannot be printed in China, tight schedules, or rising costs in a shifting global print market.”
Working with self-publishing clients is not for short-term thinkers or the impatient. “There is often a considerable lapse of time between their orders,” says managing director Ken Kong. “Self-publishing clients also have little, if any, experience in getting their products manufactured, overseas or locally. The hand-holding tends to be time-consuming compared to dealing with established publishers. But experience has shown us that these satisfied clients and repeat customers are great at recommending our services, especially to their self-publishing community. So, for us, the rewards come in the longer term, mostly through referrals and word-of-mouth.”
Encouraging self-publishing clients to share as much information about their titles and ideas as possible is the first and most important step. “The more we know about their content, target consumer, price point, and thoughts, the better our recommendations on paper, ink, binding, and packaging get in terms of meeting the actual requirements,” Kong says. “[Our team] may know of techniques, accessories, or stocks available in the market that will best suit the book concept. Self-publishing clients may not be privy to such market information, which is often practical, if not cost saving.”
The same goes for helping clients to understand shipping options and related fees, Kong says. “Take shipping document charges as an example. This cost is usually around $80, but freight forwarders will charge an additional $60 or so for the telex release fee unless we courier to the consignee the hard copy of the shipping documents required for custom clearance.”
Most clients, however, prefer telex release, Kong says. “Once other shipping-related fees are added, the total comes to around $250. That is a vast increase from the $20 fees of, say, 15 years ago when freight forwarders were making reasonably good money on shipping costs. But when clients started to handle the shipping details themselves and major publishers consolidated shipments through hard negotiation, freight forwarders began increasing their FOB Hong Kong costs to counter shrinking margins. This is something that we have to explain to clients, especially those new to offshore manufacturing.”
The past year has seen publishing clients becoming more active than in previous periods, Kong says. “They were reprinting, albeit in small quantities. While we expect their business to further improve this year, we are also busy working on advancing our contacts within the self-publishing community, whose referrals often open up new business opportunities for us.”
Thanks to long-term strategic corporate planning and business development needs, Leo Paper opened a new factory (for roughly 1,000 workers) in Hunan Province last year. “We simply do not see any easing up on labor pressures—including tight supply and high wages—in Guangdong Province in the near future,” says director Alvin Lai. “Setting up a new factory in Hunan, which is the province north of Guangdong, makes perfect sense. Having factories in different locations to meet different product needs is a strategic move that also supports our transformation goal of technology-based smart operations.”
Last year, Lai and his team kick-started a new initiative, Factory Next, to bring about real-time, data-driven production operations and new applications in manpower and technology. “The main goal is to increase operational efficiencies and enhance our agility in meeting fast-changing market and client needs,” he says. “The groundwork commenced when we implemented lean manufacturing and management processes back in 2007. The ensuing reengineering of our business process had simplified complex and inefficient workflows, standardized processes, and improved efficiencies. Now, as we embark on the next phase in our manufacturing journey, we are more convinced than ever that we are on the right track toward a smarter and more sustainable future in our business.”
Deskilling workers is also taking place in the factory. “This is the result of long-term manpower planning and concerns over occupational health,” Lai says. “Now that our skilled workers are nearing retirement age, we are working to simplify their labor-intensive tasks by means of automation. This reduces the workload on existing workers, making it a win-win proposition in terms of occupational health and labor retention. At the same time, certain tasks are becoming data-driven and require fewer skills under smart manufacturing.”
Meanwhile, one innovative offering from its LeoTouch secondary processes is set to provide book covers with an even stronger visual impact. “Our multilayer and multidimensional embossing process will make a book stand out on the shelf,” says Henry Woo, general manager of the OEM business department. “It will help our clients to achieve market competitiveness and product differentiation—the two areas crucial to their bottom line.”
Woo’s team has seen significant growth in the children’s book business in recent months. “We saw growth of more than 30% in board book orders in the first half of 2018 compared to the same period in the previous year,” he notes.
Leo Paper’s in-house experts have also successfully introduced three new eco-friendly types of materials for silk-screen varnishing, UV curing, and adhesive cleaning that further enhance its green manufacturing capabilities.
Reliability, efficiency, and security are behind Magnum Offset’s booming business in exhibition and financial products. “In May and June and from August through October, the volume of orders received is often overwhelming,” says overseas sales manager Alice Fan, who attributes the company’s success at meeting the demands and rising production volumes of these clients to a strong and experienced operations team.
“But there is an obvious talent shortage in the print manufacturing industry,” Fan says, “which requires us to offer wages that are slightly higher than the market rate.” She adds that rental fees for factory and warehouse space in Hong Kong have increased significantly alongside costs of raw materials, transportation, and shipping in recent months. “Unfortunately, because it is difficult to increase our prices, especially in the periodical, exhibition, and financial product segments, the overall turnover has been lower compared to previous years.”
However, with more than half of Magnum Offset’s business coming from domestic clients, there is a buffer in the event the escalating trade conflict between the U.S. and China hits the export printing market. “At the end of the day, our business strategy remains simple: work hard and help our clients to the best of our ability and production capability,” Fan says. “We believe that loyalty, reasonable prices, and the willingness to service projects that other printers do not even want to consider are crucial to our business longevity and prosperity. Magnum Offset has been around for 33 years, and our stability, reliability, and efficiency wins clients and earns their trust. These traditional business principles have worked in the past and will work as we go forward.”
Trendwise, the use of mirror card on covers remains popular. “The application of Cellotouch lamination to dress up book covers is gaining favor,” Fan says. “Such lamination offers a luxurious velvetlike texture and protective matte finish, which is both unusual and attractive, and is the perfect choice of lamination for high-end products due to its durability and upmarket appeal.”
On the other hand, there is now a new range of paper on the market that can provide even more depth to the embossing effect. “The paper heightens the tactile experience, makes a greater impact, and delivers high-quality appeal in products such as coffee-table books or high-end marketing collateral,” Fan says. “Since there have been no developments in embossing techniques for a long time, I am really excited to see this new paper range and its potential applications in embossing not just for covers or dust jackets but also for interior pages of a book or catalogue.”
This feature is published with the support of the printers covered in these articles.