In Pasadena Firm’s Labels, a Reading of the Global Economy

Turmoil in Asia’s economies is spilling over to U.S. financial markets, causing roller- coaster price swings. The bright hopes of developing countries are put on hold; the mysterious paralysis of Japan’s once-admired economy drags on.

Yet the U.S. economic future lies in expanding trade with those countries, said President Clinton last week in calling for authority from Congress to make more trade-opening agreements, particularly in Asia and Latin America. The issue “is whether the world will be growing together or coming apart,” the president said.

It’s enough to make anyone nervous. Clearly, powerful forces in the global economy are affecting all our lives. But how is an ordinary person to understand them when even experts are confused?

One very good way is to study and learn by example. Focus on a single U.S. company that reflects all the recent trends, from restructuring operations to strongly rising stock prices, and that is committed to expansion in Asia and Latin America. “We made that commitment in 1993,” says Chairman Charles Miller of Avery Dennison Corp., a Pasadena-based maker of labels and office products--and best known to the public as the developer of the self-adhesive postage stamp. “I told the board of irectors that we would invest [about $54 million] over three years for expansion in the Asia-Pacific region and in Latin America. I said we would not make any profit for five years but that we had to make a philosophical commitment to get position while we could.”


Avery Dennison reorganized a factory near Seoul, South Korea; opened a factory in Shanghai, China; bought a family company in Bangkok, Thailand; set up distribution in Singapore, Indonesia and India; and added to its operations in Brazil, Chile and Argentina.

The full results of its effort won’t be in until 1998-99, but so far, so good.

The company last year got $200 million of its $3.2 billion in sales from the Asia-Pacific region and hopes to have $400 million by 1999--when Miller projects total sales at $4 billion.

The 62-year-old company is no novice in global business, having first licensed its self-adhesive backing paper for labels in Europe in the 1940s. Miller, who later became chief executive, went to Europe in 1965 to expand operations.

Avery Dennison’s growth through the decades has been driven by the national and global expansion of markets for consumer goods and office products, all of which demand ever more colorful and information-filled labels.

But business is never simple. The company, in a flush of overconfidence in the 1980s, tried to cut in on 3M Corp.'s Scotch tape consumer success and got its ears pinned back. In 1990, Avery--which gets its name from inventor-founder Stan Avery, who is now 90 and long retired--acquired Dennison office products and immediately had to write off $100 million on the latter’s troubled operations. Profit sank to near zero just as the world recession began.

Avery, like so many U.S. companies, was forced to restructure its operations. At about that time, readers may recall, many experts were writing off U.S. companies as shortsighted and incapable of competing globally with those of Japan and Europe.

But Avery, like many others, reduced inventories through just-in-time techniques adapted from Japan. Reducing inventory and other changes conserved capital. Avery now needs less working capital to operate its business and can finance new investments more easily.


And that pattern of making each dollar work harder is important. For Avery and other companies, it has led to profits growing faster and stock prices rising faster than they used to. Avery employment, at 15,800, is also growing again after years of cutbacks.

Restructuring, in short, has led to the bull market and has given Avery and other companies the capital to invest in expansion worldwide.

“China is an exciting story for us,” says Miller, 69, who will step down as chief executive next year, after two decades. “We had $1 million in sales there in 1995, $13 million in ’96, and we’ll do $22 million this year. And we have turned profitable already. We’re going to double capacity.”

But they may be expanding into a squall. Thailand ran into severe financial problems and has devalued its currency--which has reduced the value of the family business Avery paid $3 million to purchase there. Growth of Asian consumer and industrial markets, even in China, is slowing even as new factories go up to produce more goods.


That means it’s hard for a business to maintain prices, much less raise them. “We sell more, but the pressure on prices is intense,” Miller admits.

The problem, explains Charles Clough, chief investment strategist for Merrill Lynch, is that “investment has gone into Asia for 35 years, a tremendous buildup of capacity. But the ability of consumers to absorb all the output has lagged behind, so there is a surplus of most products in the world and deflationary pressure on prices.”

And that may well have a direct effect on the U.S. stock market.

“U.S. company earnings growth in 1998 could slow to 4% to 5%, rather than the double-digit percentages of recent years,” Clough says. That could produce the long-feared “correction” in the stock market.


For the long term, however, Miller--a salesman before he rose through Avery’s executive ranks--is undeterred. He sees demand for consumer goods and labels growing in Asia and Latin America just as he saw it grow in the U.S. and Europe.

Like Clinton, he sees commerce developing a new society.

“We have college graduates working on our coating line in Shanghai. We have to teach them how to print on plastic, to put more colors in the labels, because consumers will demand that,” Miller says.

But what if Avery, in teaching its highly developed processes for paper and film labels, ends up training eventual competitors?


“Fine,” says Miller. The more labels they produce, the more consumer goods will sell, and the more backing paper and film Avery will sell.

That expansive vision has proved a winner for 50 years, or ever since Stan Avery’s original patent expired. Competitors got into making labels but wanted to buy Avery’s paper because his company made it better than anybody else. Later in Europe, Miller expanded Avery’s label business by encouraging others to upgrade the quality of their labels.

The company invests a steady $50 million-plus in research and development to stay ahead. That is how it developed the self-adhesive stamp that is so popular here and, increasingly, abroad.

In short, Avery Dennison is confident for the long term about the world and U.S. economies--and that reflects a broad consensus in U.S. industry.


Summing up the consensus, veteran economist Albert M. Wojnilower of Clipper Group, an investment arm of Credit Suisse First Boston, acknowledges that Asia’s economies will have to reorganize their financial systems. But he points to Mexico’s rapid recovery from its late-1994 devaluation and crisis.

As for the U.S. economy, still good times to go: “I can see a tunnel at the end of the light,” Wojnilower says, “but not for two or three years yet.”


Avery Dennison Corp. at a Glance


Headquarters: Pasadena

Chief executive: Charles Miller

Major products, services: Self-adhesive paper and film for labels and postage stamps; pressure sensitive materials for Band-Aids and labels; name badges.

Net income: (1996): $175.9 million


Revenue (1996): $3.2 billion

Friday’s closing stock price: $39.31