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The 2011 Report on Manufacturing Paper Bags and Coated or Laminated Paper: World Market Segmentation by City
ICON Group International, Jan 2011, Pages: 336
Market Potential Estimation Methodology
Overview
This study covers the world outlook for manufacturing paper bags and coated or laminated paper across more than 2000 cities. For the year reported, estimates are given for the latent demand, or potential industry earnings (P.I.E.), for the city in question (in millions of U.S. dollars), the percent share the city is of the region and of the globe. These comparative benchmarks allow the reader to quickly gauge a city vis-à-vis others. Using econometric models which project fundamental economic dynamics within each country and across countries, latent demand estimates are created. This report does not discuss the specific players in the market serving the latent demand, nor specific details at the product level. The study also does not consider short-term cyclicalities that might affect realized sales. The study, therefore, is strategic in nature, taking an aggregate and long-run view, irrespective of the players or products involved.
This study does not report actual sales data (which are simply unavailable, in a comparable or consistent manner in virtually all of the cities of the world). This study gives, however, my estimates for the worldwide latent demand, or the P.I.E. for manufacturing paper bags and coated or laminated paper. It also shows how the P.I.E. is divided across the world’s cities. In order to make these estimates, a multi-stage methodology was employed that is often taught in courses on international strategic planning at graduate schools of business.
What is Latent Demand and the P.I.E.?
The concept of latent demand is rather subtle. The term latent typically refers to something that is dormant, not observable, or not yet realized. Demand is the notion of an economic quantity that a target population or market requires under different assumptions of price, quality, and distribution, among other factors. Latent demand, therefore, is commonly defined by economists as the industry earnings of a market when that market becomes accessible and attractive to serve by competing firms. It is a measure, therefore, of potential industry earnings (P.I.E.) or total revenues (not profit) if a market is served in an efficient manner. It is typically expressed as the total revenues potentially extracted by firms. The “market” is defined at a given level in the value chain. There can be latent demand at the retail level, at the wholesale level, the manufacturing level, and the raw materials level (the P.I.E. of higher levels of the value chain being always smaller than the P.I.E. of levels at lower levels of the same value chain, assuming all levels maintain minimum profitability).
The latent demand for manufacturing paper bags and coated or laminated paper is not actual or historic sales. Nor is latent demand future sales. In fact, latent demand can be lower either lower or higher than actual sales if a market is inefficient (i.e., not representative of relatively competitive levels). Inefficiencies arise from a number of factors, including the lack of international openness, cultural barriers to consumption, regulations, and cartel-like behavior on the part of firms. In general, however, latent demand is typically larger than actual sales in a city market.
Another reason why sales do not equate to latent demand is exchange rates. In this report, all figures assume the long-run efficiency of currency markets. Figures, therefore, equate values based on purchasing power parities across countries. Short-run distortions in the value of the dollar, therefore, do not figure into the estimates. Purchasing power parity estimates of country income were collected from official sources, and extrapolated using standard econometric models. The report uses the dollar as the currency of comparison, but not as a measure of transaction volume. The units used in this report are: US $ mln.
For reasons discussed later, this report does not consider the notion of “unit quantities”, only total latent revenues (i.e., a calculation of price times quantity is never made, though one is implied). The units used in this report are U.S. dollars not adjusted for inflation (i.e., the figures incorporate inflationary trends) and not adjusted for future dynamics in exchange rates (i.e., the figures reflect average exchange rates over recent history). If inflation rates or exchange rates vary in a substantial way compared to recent experience, actually sales can also exceed latent demand (when expressed in U.S. dollars, not adjusted for inflation). On the other hand, latent demand can be typically higher than actual sales as there are often distribution inefficiencies that reduce actual sales below the level of latent demand.
As mentioned earlier, this study is strategic in nature, taking an aggregate and long-run view, irrespective of the players or products involved. If fact, all the current products or services on the market can cease to exist in their present form (i.e., at a brand-, R&D specification, or corporate-image level) and all the players can be replaced by other firms (i.e., via exits, entries, mergers, bankruptcies, etc.), and there will still be an international latent demand for manufacturing paper bags and coated or laminated paper at the aggregate level. Product and service offering details, and the actual identity of the players involved, while important for certain issues, are relatively unimportant for estimates of latent demand.
The Methodology
In order to estimate the latent demand for manufacturing paper bags and coated or laminated paper on a city-by-city basis, I used a multi-stage approach. Before applying the approach, one needs a basic theory from which such estimates are created. In this case, I heavily rely on the use of certain basic economic assumptions. In particular, there is an assumption governing the shape and type of aggregate latent demand functions. Latent demand functions relate the income of a country, city, state, household, or individual to realized consumption. Latent demand (often realized as consumption when an industry is efficient), at any level of the value chain, takes place if an equilibrium in realized. For firms to serve a market, they must perceive a latent demand and be able to serve that demand at a minimal return. The single most important variable determining consumption, assuming latent demand exists, is income (or other financial resources at higher levels of the value chain). Other factors that can pivot or shape demand curves include external or exogenous shocks (i.e., business cycles), and or changes in utility for the product in question.
Ignoring, for the moment, exogenous shocks and variations in utility across countries, the aggregate relation between income and consumption has been a central theme in economics. The figure below concisely summarizes one aspect of problem. In the 1930s, John Meynard Keynes conjectured that as incomes rise, the average propensity to consume would fall. The average propensity to consume is the level of consumption divided by the level of income, or the slope of the line from the origin to the consumption function. He estimated this relationship empirically and found it to be true in the short-run (mostly based on cross-sectional data). The higher the income, the lower the average propensity to consume. This type of consumption function is labeled 'A' in the figure below (note the rather flat slope of the curve). In the 1940s, another macroeconomist, Simon Kuznets, estimated long-run consumption functions which indicated that the marginal propensity to consume was rather constant (using time series data across countries). This type of consumption function is show as 'B' in the figure below (note the higher slope and zero-zero intercept). The average propensity to consume is constant.
Is it declining or is it constant? A number of other economists, notably Franco Modigliani and Milton Friedman, in the 1950s (and Irving Fisher earlier), explained why the two functions were different using various assumptions on intertemporal budget constraints, savings, and wealth. The shorter the time horizon, the more consumption can depend on wealth (earned in previous years) and business cycles. In the long-run, however, the propensity to consume is more constant. Similarly, in the long run, households, industries or countries with no income eventually have no consumption (wealth is depleted). While the debate surrounding beliefs about how income and consumption are related and interesting, in this study a very particular school of thought is adopted. In particular, we are considering the latent demand for manufacturing paper bags and coated or laminated paper across some 230 countries. The smallest have fewer than 10,000 inhabitants. I assume that all of these counties fall along a 'long-run' aggregate consumption function. This long-run function applies despite some of these countries having wealth, current income dominates the latent demand for manufacturing paper bags and coated or laminated paper. So, latent demand in the long-run has a zero intercept. However, I allow firms to have different propensities to consume (including being on consumption functions with differing slopes, which can account for differences in industrial organization, and end-user preferences).
Given this overriding philosophy, I will now describe the methodology used to create the latent demand estimates for manufacturing paper bags and coated or laminated paper. Since ICON Group has asked me to apply this methodology to a large number of categories, the rather academic discussion below is general and can be applied to a wide variety of categories, not just manufacturing paper bags and coated or laminated paper.
Step 1. Product Definition and Data Collection
Any study of latent demand across countries requires that some standard be established to define “efficiently served”. Having implemented various alternatives and matched these with market outcomes, I have found that the optimal approach is to assume that certain key countries or cities are more likely to be at or near efficiency than others. These are given greater weight than others in the estimation of latent demand compared to others for which no known data are available. Of the many alternatives, I have found the assumption that the world’s highest aggregate income and highest income-per-capita markets reflect the best standards for “efficiency”. High aggregate income alone is not sufficient (i.e., China has high aggregate income, but low income per capita and can not assumed to be efficient). Aggregate income can be operationalized in a number of ways, including gross domestic product (for industrial categories), or total disposable income (for household categories; population times average income per capita, or number of households times average household income per capita). Brunei, Nauru, Kuwait, and Lichtenstein are examples of countries with high income per capita, but not assumed to be efficient, given low aggregate level of income (or gross domestic product); these countries have, however, high incomes per capita but may not benefit from the efficiencies derived from economies of scale associated with large economies. Only countries with high income per capita and large aggregate income are assumed efficient. This greatly restricts the pool of countries to those in the OECD (Organization for Economic Cooperation and Development), like the United States, or the United Kingdom (which were earlier than other large OECD economies to liberalize their markets).
The selection of countries is further reduced by the fact that not all countries in the OECD report industry revenues at the category level. Countries that typically have ample data at the aggregate level that meet the efficiency criteria include the United States, the United Kingdom and in some cases France and Germany.
Latent demand is therefore estimated using data collected for relatively efficient markets from independent data sources (e.g. Euromonitor, Mintel, Thomson Financial Services, the U.S. Industrial Outlook, the World Resources Institute, the Organization for Economic Cooperation and Development, various agencies from the United Nations, industry trade associations, the International Monetary Fund, and the World Bank). Depending on original data sources used, the definition of “manufacturing paper bags and coated or laminated paper” is established. In the case of this report, the data were reported at the aggregate level, with no further breakdown or definition. In other words, any potential product or service that might be incorporated within manufacturing paper bags and coated or laminated paper falls under this category. Public sources rarely report data at the disaggregated level in order to protect private information from individual firms that might dominate a specific product-market. These sources will therefore aggregate across components of a category and report only the aggregate to the public. While private data are certainly available, this report only relies on public data at the aggregate level without reliance on the summation of various category components. In other words, this report does not aggregate a number of components to arrive at the “whole”. Rather, it starts with the “whole”, and estimates the whole for all cities and the world at large (without needing to know the specific parts that went into the whole in the first place).
Given this caveat, this study covers “manufacturing paper bags and coated or laminated paper” as defined by the North American Industrial Classification system or NAICS (pronounced “nakes”). manufacturing paper bags and coated or laminated paper The NAICS code for manufacturing paper bags and coated or laminated paper is 32222. It is for this definition of manufacturing paper bags and coated or laminated paper that the aggregate latent demand estimates are derived. “Manufacturing paper bags and coated or laminated paper” is specifically defined as follows:
32222
This industry comprises establishments primarily engaged in one or more of the following: (1) cutting and coating paper and paperboard; (2) cutting and laminating paper and paperboard and other flexible materials (except plastics film to plastics film); (3) manufacturing bags or multiwall bags or sacks of paper, metal foil, coated paper, or laminates or coated combinations of paper and foil with plastics film; (4) manufacturing laminated aluminum and other converted metal foils from purchased foils; and (5) surface coating paper or paperboard.
322221
This U.S. industry comprises establishments primarily engaged in performing one or more of the following activities associated with the manufacturing of packaging materials: (1) cutting and coating paper; and (2) cutting and laminating paper with other flexible materials (except plastics to plastics or foil to paper laminates). The products made in this industry are made from purchased sheet materials and may be printed in the same establishment.
3222211
Single-web paper, coated rolls and sheets, incl. waxed, for flexible packaging
32222111
Single_web paper, rolls and sheets, including waxed, for flexible packaging uses
3222211111
Plastics_coated single_web paper, rolls and sheets, for flexible packaging uses
3222211121
Single_web paper (other than plastics_coated), rolls and sheets, including waxed, for flexible packaging uses
3222213
Multiweb laminated rolls and sheets, incl paper-paper and film-paper
32222131
Paper/paper multiweb laminated rolls and sheets, for flexible packaging uses
3222213111
Paper/paper multiweb laminated rolls and sheets, for flexible packaging uses
32222132
Film/paper multiweb laminated rolls and sheets, for flexible packaging uses
3222213221
Film/paper multiweb laminated rolls and sheets, for flexible packaging uses
322221M
Miscellaneous receipts
322221P
Primary products
322221S
Secondary products
322221SM
Secondary products and miscellaneous receipts
322222
This U.S. industry comprises establishments primarily engaged in performing one or more of the following activities associated with making products designed for purposes other than packaging: (1) cutting and coating paper; (2) cutting and laminating paper and other flexible materials (except plastics film to plastics film); and (3) laminating aluminum and other metal foils for nonpackaging uses from purchased foils. The products made in this industry are made from purchased sheet materials and may be printed in the same establishment.
3222221
Printing paper, coated at establishments other than where paper was produced
32222211
Printing paper, coated at establishments other than where paper was produced
3222221111
Printing paper, coated one side (for labels and similar uses), coated at establishments other than where paper was produced
3222221121
Printing paper, coated two sides (for printing of magazines, directories, catalogs, and similar uses), coated at establishments other than where paper was produced
3222223
GUMMED PRODUCTS
32222231
Gummed products
3222223111
Gummed sealing tape, paper base and reinforced base, used for sealing and securing
3222223121
Other gummed paper products, including flat gummed papers, unprinted stock labels, corrugators’ kraft tapes, etc.
3222225
Pressure sensitive products
32222251
Pressure_sensitive single_faced tape, paper backing, excluding electrical
3222225111
Pressure_sensitive single_faced tape, paper backing, excluding electrical
32222252
Pressure_sensitive single_faced tape, film backing, excluding electrical
3222225221
Pressure_sensitive single_faced tape, film backing, excluding electrical
32222253
All other pressure_sensitive tape, excluding surgical and rubber_backed
3222225331
Pressure_sensitive single_faced tape, cloth backing, excluding surgical and electrical
3222225341
Pressure_sensitive single_faced tape, electrical, all backings (except rubber)
3222225351
Pressure_sensitive single_faced tape, reinforced and laminated, all backings, except surgical and rubber_backed
3222225361
Pressure_sensitive single_faced tape, other, excluding surgical and rubber_ backed
3222225371
Pressure_sensitive double_faced tape, excluding surgical and rubber_backed
32222254
Pressure_sensitive base stock for labels
3222225475
Pressure_sensitive base stock for labels
32222255
All other pressure_sensitive products, unprinted
3222225581
Pressure_sensitive base stock for other than labels
3222225585
Pressure_sensitive labels, unprinted
3222225591
All other pressure_sensitive products, unprinted
3222226
Wallcoverings
32222261
Wallcoverings
3222226111
Wallcoverings, paper with less than 2 mils of coating
3222226121
Wallcoverings, paper_coated or laminated with 2 mils or more of plastics, including prepasted and nonpasted
3222226131
Wallcoverings, fabric_backed, coated or laminated, woven
3222226141
Wallcoverings, fabric_backed, coated or laminated, nonwoven
3222226191
Other wallcoverings, including scenic and panel decorations (excluding rigid panels or tile form wallcoverings and wallcoverings that do not contain some paper or fabrics)
3222227
Gift wrap paper
32222271
Gift wrap paper
3222227111
Gift wrap paper, retail counter items, all types and weights, in rolls
3222227121
Gift wrap paper, retail counter items, all types and weights, in folds
3222227191
Other paper gift wrapping (including counter rolls and flat sheets for stores’ own use, and paper gift wrap materials shipped to other manufacturers for further processing)
3222228
CONVERTED FOIL FOR NONPACKAGING APPLICATIONS
32222281
Converted foil for nonpackaging applications
3222228101
Converted aluminum foil, unmounted or coated, plain or printed, for nonpackaging applications
3222228106
Converted aluminum foil, laminated to other materials, for nonpackaging applications
3222228111
Other converted foil, including composition (combination of two metals or more) for nonpackaging applications, and metal leaf (including aluminum leaf)
3222229
Other coated and processed papers, nec, except for packaging uses
32222291
Other coated and processed papers, except for packaging uses
3222229111
Processed papers (embossed, leatherette, etc.), except for packaging uses
3222229121
Waxed and wax_laminated paper for nonpackaging uses, including household
3222229131
Carbonless paper, coated at establishments other than where paper was produced
3222229141
Plastics_coated paper, except for packaging uses
3222229151
Other coated and processed papers, except for packaging uses, including oiled, soap impregnated, treated, etc., but excluding sensitized paper
3222229161
Other coated and processed papers, except for packaging uses, including carbonless, oiled, soap impregnated, treated, etc., but excluding sensitized paper
322222A
GIFT WRAP PAPER
322222A1
Gift wrap paper
322222A111
Gift wrap paper, retail counter items, all types and weights, in rolls
322222A121
Gift wrap paper, retail counter items, all types and weights, in folds
322222A131
Laminated aluminum foil gift wrap
322222A191
Other paper gift wrapping (including counter rolls and flat sheets for stores’ own use, and paper gift wrap materials shipped to other manufacturers for further processing)
322222M
Miscellaneous receipts
322222MM
Miscellaneous receipts
322222P
Primary products
322222S
Secondary products
322222SM
Secondary products and miscellaneous receipts
322223
This U.S. industry comprises establishments primarily engaged in manufacturing bags of coated paper, of metal foil, or of laminated or coated combinations of plastics, foil, and paper, whether or not printed.
3222231
Specialty bags, pouches, and liners, coated single-web paper
32222311
Specialty bags, pouches, and liners, coated and single_web paper
3222231100
Specialty bags, pouches, and liners, coated and single_web paper
3222233
Specialty bags, pouches, and liners, multiweb laminations and foil not film-film
32222331
Specialty bags, pouches, and liners, multiweb laminations and foil, except film_ film
3222233111
Paper/film multiweb specialty bags, pouches, and liners
3222233121
Foil specialty bags, pouches, and liners, and all paper or film combinations with foil
3222233131
Other multiweb specialty bags, pouches, and liners, including paper/paper
322223M
Miscellaneous receipts
322223P
Primary products
322223S
Secondary products
322223SM
Secondary products and miscellaneous receipts
322224
This U.S. industry comprises establishments primarily engaged in manufacturing uncoated paper bags or multiwall bags and sacks.
3222241
Uncoated paper bags
32222411
Uncoated paper grocers’ bags and sacks
322224111
Grocers' bags and sacks
3222241111
Uncoated paper grocers’ bags and sacks
322224112
Variety bags
322224113
Shopping bags
322224115
Other uncoated bags
32222412
Uncoated paper variety bags and pouches (merchandise) and shopping bags
3222241221
Uncoated paper variety bags and pouches (merchandise)
3222241231
Uncoated paper shopping bags
32222413
All other uncoated paper bags and pouches (including specialty bags, mothproof bags, etc.)
3222241341
All other uncoated paper bags and pouches (including specialty bags, mothproof bags, etc.)
3222242
Shipping sacks and multiwall bags
322224211
Single and double wall
322224212
Multiwall (three or more plies)
3222243
SHIPPING SACKS AND MULTIWALL BAGS, ALL MATERIALS, EXCEPT TEXTILES
32222431
Single and double wall shipping sacks and bags, all materials, except textiles
3222243111
Single and double wall shipping sacks and bags, all materials, except textiles
32222432
Multiwall (three_ply or more) shipping sacks and bags, all materials, except textiles
3222243221
Multiwall (three_ply or more) shipping sacks and bags, all materials, except textiles
322224M
Miscellaneous receipts
322224P
Primary products
322224S
Secondary products
322224SM
Secondary products and miscellaneous receipts
322225
This U.S. industry comprises establishments primarily engaged in laminating aluminum and other metal foil into products with flexible packaging uses or gift wrap and other packaging wrap applications.
3222250
LAMINATED ALUMINUM FOIL ROLLS AND SHEETS FOR FLEXIBLE PACKAGING USES (CONVERTING AND PRINTING OR CONVERTING ONLY)
32222501
Laminated aluminum film/foil (without paper) multiweb combinations, rolls and sheets for flexible packaging uses
3222250101
Laminated aluminum film/foil (without paper) multiweb combinations, rolls and sheets for flexible packaging uses
32222502
Extrusion laminated aluminum foil/paper combinations, rolls and sheets for flexible packaging uses
3222250206
Extrusion laminated aluminum foil/paper combinations, rolls and sheets for flexible packaging uses
32222503
Adhesive or wax laminated aluminum foil/paper combinations, rolls and sheets for flexible packaging uses
3222250311
Adhesive or wax laminated aluminum foil/paper combinations, rolls and sheets for flexible packaging uses
32222504
Other laminated aluminum foils and gift wrap
3222250416
Laminated aluminum foil~film~paper combination rolls and sheets for flexible packaging uses
3222250421
Laminated aluminum foil gift wrap
32222505
Other laminated aluminum foils, including laminated aluminum paper/poly and foil/poly combinations (including foil/foil), rolls and sheets for flexible packaging uses
3222250516
Other laminated aluminum foils, including laminated aluminum paper/poly and foil/poly combinations (including foil/foil), rolls and sheets for flexible packaging uses
3222251
Laminated aluminum foil manufacturing
322225M
Miscellaneous receipts
322225P
Primary products
322225S
Secondary products
322225SM
Secondary products and miscellaneous receipts
322226
This U.S. industry comprises establishments primarily engaged in laminating, lining, or surface coating purchased paperboard to make other paperboard products.
3222260
PASTED, LINED, LAMINATED, OR SURFACE_COATED PAPERBOARD
32222601
Pasted, lined, laminated, or surface_coated paperboard
3222260100
Pasted, lined, laminated, or surface_coated paperboard
3222261
Pasted, lined, laminated or surface-coated paperboard
322226M
Miscellaneous receipts
322226P
Primary products
322226S
Secondary products
322226SM
Secondary products and miscellaneous receipts
Step 2. Filtering and Smoothing
Based on the aggregate view of manufacturing paper bags and coated or laminated paper as defined above, data were then collected for as many similar countries and cities as possible for that same definition, at the same level of the value chain. This generates a convenience sample from which comparable figures are available. If the series in question do not reflect the same accounting period, then adjustments are made. In order to eliminate short-term effects of business cycles, the series are smoothed using an 2 year moving average weighting scheme (longer weighting schemes do not substantially change the results). If data are available for a country, but these reflect short-run aberrations due to exogenous shocks (such as would be the case of beef sales in a country stricken with foot and mouth disease), these observations were dropped or 'filtered' from the analysis.
Step 3. Filling in Missing Values
In some cases, data are available for countries or cities on a sporadic basis. In other cases, data may be available for only one year. From a Bayesian perspective, these observations should be given greatest weight in estimating missing years. Assuming that other factors are held constant, the missing years are extrapolated using changes and growth in aggregate national income. Based on the overriding philosophy of a long-run consumption function (defined earlier), cities which have missing data for any given year, are estimated based on historical dynamics of aggregate income for that country.
Step 4. Varying Parameter, Non-linear Estimation
Given the data available from the first three steps, the latent demand is estimated using a “varying-parameter cross-sectionally pooled time series model”. Simply stated, the effect of income on latent demand is assumed to be constant across cities unless there is empirical evidence to suggest that this effect varies (i.e., the slope of the income effect is not necessarily same for all countries). This assumption applies across cities along the aggregate consumption function, but also over time (i.e., not all cities are perceived to have the same income growth prospects over time and this effect can vary from city to city as well). Another way of looking at this is to say that latent demand for manufacturing paper bags and coated or laminated paper is more likely to be similar across cities that have similar characteristics in terms of economic development (i.e., African cities will have similar latent demand structures controlling for the income variation across the pool of African cities).
This approach is useful across cities for which some notion of non-linearity exists in the aggregate consumption function. For some categories, however, the reader must realize that the numbers will reflect a city’s contribution to global latent demand and may never be realized in the form of local sales. For certain category combinations this will result in what at first glance will be odd results. For example, the latent demand for the category “space vehicles” will exist for cities in “Togo” even though they have no space program. The assumption is that if the economies in these countries did not exist, the world aggregate for these categories would be lower. The share attributed to these cities is based on a proportion of their income (however small) being used to consume the category in question (i.e., perhaps via resellers).
Step 5. Fixed-Parameter Linear Estimation
Nonlinearities are assumed in cases where filtered data exist along the aggregate consumption function. Because the world consists of more than 2000 cities, there will always be those cities, especially toward the bottom of the consumption function, where non-linear estimation is simply not possible. For these cities, equilibrium latent demand is assumed to be perfectly parametric and not a function of wealth (i.e., a city’s stock of income), but a function of current income (a city’s flow of income). In the long run, if a city has no current income, the latent demand for manufacturing paper bags and coated or laminated paper is assumed to approach zero. The assumption is that wealth stocks fall rapidly to zero if flow income falls to zero (i.e., cities which earn low levels of income will not use their savings, in the long run, to demand manufacturing paper bags and coated or laminated paper). In a graphical sense, for low income cities, latent demand approaches zero in a parametric linear fashion with a zero-zero intercept. In this stage of the estimation procedure, low-income cities are assumed to have a latent demand proportional to their income, based on the city closest to it on the aggregate consumption function.
Step 6. Aggregation and Benchmarking
Based on the models described above, latent demand figures are estimated for all cities of the world, including for the smallest economies. These are then aggregated to get world totals and regional totals. To make the numbers more meaningful, regional and global demand averages are presented. Figures are rounded, so minor inconsistencies may exist across tables.
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