Bain Report: Don’t Underestimate the Cost of Overcapacity

Managing overcapacity and the low profit margins that follow is a well-known headache for paper and packaging executives. A new multiyear study by Bain & Company shows why overcapacity persists across industries: Executives are overly optimistic when they make their strategic plan.

Most companies aim to grow their revenues at twice the rate of the underlying market and profits at four times the rate of the market. In reality, only 7% of industrial companies achieve this goal. Furthermore, in capital-intense industries like paper and packaging, these optimistic plans often lead to significant capital spending and persistent overcapacity. Recent geopolitical uncertainty and tariffs have only added further complexity to the overcapacity conundrum.

In paper and packaging, leading companies do not bet on competitors scaling down or disappearing; instead, they focus on improving their own cost advantage, as overcapacity could reoccur. This might mean proactively closing capacity when necessary and avoiding the scenario in which supply so outstrips demand that players keep undercutting each other on price, until only a few can make money. For example, leading producers of graphic paper like UPM, Domtar (formerly Paper Excellence Group), Stora Enso, and Nippon Paper have all closed meaningful capacity in recent years as demand declined.

Don’t Underestimate the Cost of Overcapacity | Bain & Company