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With subsidies, innovation, China becomes paper industry power

JIN JILING, China

In silent, temperature-controlled labs in a desolate part of Hainan, China's most tropical province, rows of women in medical masks and lab coats clone trees that grow freakishly fast.

The trees have official names, such as APP-22 or DH32-29.

But Wending Huang, Asia Pulp & Paper Co.'s chief forester in China, calls them his "Yao Mings" — after the towering Chinese basketball star. The tiny green tissue samples, methodically implanted in petri jars, will become hardwood eucalyptus trees that need only four to six years to reach full height, up to 90 feet or more.

Each year, Huang's labs clone 190 million ready-to-plant "cutlings," which APP grows on 790,000 acres over eight Chinese provinces. The company cultivates fiber-rich hardwood as intensively as U.S. agribusinesses grow gene-optimized corn and wheat.

The test-tube forests have helped undo the long-standing natural advantage of papermaking states such as Wisconsin, where hardwood trees are plentiful but can take up to 10 times as long to reach harvesting height. What's more, boosted by billions in government subsidies, China has been building massive new mills with automated machines that can produce a mile of glossy publishing-grade paper a minute.

At a time when U.S. paper mills were already fighting off a digital death, China has become a sudden, potent adversary.

China came to dominate the manufacturing of electronics hardware and touch-screen technologies by marrying cheap labor with sophisticated engineering and automation. In a move that has attracted far less attention, China has brought that same approach to paper. Over the past decade, China tripled its paper production and in 2009 overtook the United States as the world's biggest papermaker. It can now match the annual output of Wisconsin, America's top papermaking state, in the span of three weeks.

Paper makes for an exceedingly unlikely focus. After decimating its natural forest cover decades ago, China lacks a fundamental necessity for printing-quality paper: wood pulp. So China created the industrial-scale plantations. And it created the world's biggest and most efficient recycling scheme. It now buys some 27 million tons of scrap paper and used cardboard from around the world each year, then de-inks and re-pulps it for about two-thirds of its own paper and cardboard production.

But that is still not enough — for China's needs or its ambition.

China imports the vast majority of virgin timber and processed pulp from around the world — 14.5 million tons last year alone from places like Russia, Indonesia and Vietnam. China has so disrupted the market that 1.6 million tons came from the United States, where loggers and pulping operators are left searching for new customers when local mills close.

That all has earned the ire of environmental groups, which say China's appetite for wood pulp is destroying the world's forests. It has drawn the fire of Wisconsin politicians who accuse China of unfairly subsidizing its mills and dumping paper on the U.S. market, putting state operations out of business and an entire industry at risk.

With 20 modern megamills spread across China, Indonesia-based Asia Pulp & Paper is at the center of the accusations.

It is an unusual place to find a guy from Wisconsin.

Jeff Lindsay, 52, is a 20-year veteran of Wisconsin's paper industry who was recruited by APP in 2011 to run its growing portfolio of patents. He holds a doctorate in chemical engineering, was on the faculty of the now-defunct Institute of Paper Chemistry and later joined Kimberly-Clark Corp., which gave the world Kleenex. He holds 130 patents and co-authored a 2009 book, Conquering Innovation Fatigue, which took aim at barriers to U.S. innovation.

The West, he says, is in denial about the competitive edge offered by Chinese science, engineering and ingenuity. And Wisconsin's paper industry, he says, has lost the culture of investment, innovation and risk that defined it in the last century. "You have to innovate to survive in this world," he says.

But China's success is not that simple. It does not explain how a Wisconsin tree can be cut down, turned into pulp, trucked to a port, shipped 7,000 miles around the globe and come back as paper less expensive than that produced in the mill a few miles away.

The Washington-based Economic Policy Institute estimates the Chinese government doled out at least $33 billion in paper industry subsidies from 2002 to 2009 — the period that coincides with its stunning growth. That's more than $4 billion a year, a number that is growing. The entire annual payroll for all of Wisconsin's mills is $2.4 billion.

In China, there is government support at every step of the process — money to create plantations, import raw materials, build new equipment and power the mills.

Subsidies support 30 percent of the total annual output of Chinese paper mills, according to Usha Haley, a New Zealand economics professor and author of Subsidies to the Chinese Industry: State Capitalism, Business Strategy and Trade Policy.

To be sure, there are grants, loans and tax breaks in the United States. The largest, in effect from 2005 to 2010, was for an alternative fuel known as black liquor, a byproduct of the pulping process. The subsidy averaged $280 million a year when it was in effect, about 7 percent of the size of the annual Chinese subsidy to its paper industry.

With subsidies, innovation, China becomes paper industry power 12/22/12 [Last modified: Saturday, December 22, 2012 3:31am]
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