Photograph: Jesse Burke for Bloomberg Businessweek

Explosives Saved an American Company From Chinese Competition

After a brush with death, New England Paper Tube found a way to compete.

Bill Kirby wasn’t sure what to think at first. He’d been brought to the fourth floor of the New England Paper Tube plant in Pawtucket, R.I. It was a cold day in November 2014, and the only activity inside the block-size red-brick building was two men taking machines apart for scrap. “I knew that there were paper tubes in toilet paper,” says Kirby, a career banker who most recently spent 15 years at UPS Capital, a financial division of the shipper.

Founded 108 years ago, New England Paper Tube makes what its name says. After three decades of losses brought on by changing technology and foreign competition, the family-owned business had been placed in the care of a court-appointed receiver—a form of bankruptcy. Kirby had recently helped turn around another small family-run company, so the receiver, a friend, asked him to take a look at NEPT.

New England Paper Tube co-owners Bill Kirby and Mel Cournoyer
New England Paper Tube co-owners Bill Kirby and Mel Cournoyer
Photograph: Jesse Burke for Bloomberg Businessweek

His tour guide that day was Mel Cournoyer, the plant manager at the time. Cournoyer had drafted a plan to steer the company back to profitability, but he needed someone’s capital and patience. He explained to Kirby that there was still a way to wring value out of the equipment that remained on the floor. “The only reason I came back,” Kirby says, “was because of Mel.”

Cournoyer is now president and part owner of NEPT. Kirby helped the company secure a loan and bought equity of his own. The business logged revenue of $1.2 million in 2015 and projects $1.4 million this year. Its net margin now runs from 7 percent to 10 percent. Of the plant’s 20 floor workers, 17 have been rehired.

NEPT survived for three reasons. Like auto manufacturers and airlines, it shed liabilities as it emerged from receivership, though with less fanfare. Then it limited production to only those tubes that no other company, here or abroad, can or is willing to make. Finally, Cournoyer refused to give up.

The company began with a family fight. In 1908 a Scottish immigrant named John Henry Douglas had a dispute with his brother, left the paper-tube business they’d founded together, and started another one in Pawtucket. By the late 1930s the tube-rolling plant sprawled across a 350,000-square-foot brick mill building, growing alongside the textile industry in the Blackstone River Valley. Dwight Douglas, 84, the founder’s grandson, recalls that in his childhood the river turned colors depending on which dyes the textile plants were using.

In the 1980s, the business employed 375 workers—including five Douglas grandchildren plus one spouse—and had annual revenue of about $12 million. The plant ran three shifts, seven days a week. But many of its products turned out not to have a future. It made bolt cores and spinning bobbins for local cloth mills, which moved to the American South and then abroad. It produced ribbon cores for the 1403, an IBM printer the size of a freezer. “How do you react? It’s nothing we had any control over,” Douglas says. “It was brought about by world politics and world economics.”

Few parts of the U.S. were hit harder than Rhode Island by the combination of foreign competition and domestic recession. For a brief stretch in 2014, the state had the highest unemployment rate in the country. In a paper published in 2013, economists David Autor, David Dorn, and Gordon Hanson showed that the area around Providence ranked second in the nation in exposure to import competition in the 1990s and 2000s.

Cournoyer arrived in 2008 after 30 years working at a cardboard-box plant in Massachusetts. By 2010 it was clear NEPT was in trouble. Sometimes there was no money to pay for paper; several times, Douglas reached into his own pocket to meet payroll. Cournoyer didn’t have access to the company’s records on its more than 500 products, so he began building a detailed spreadsheet. That’s how he discovered NEPT was losing money on more than two-thirds of what it made.

Sitting in his office on the ground floor, Cournoyer pulls up the spreadsheet and points to a row of negative numbers in the profit margin column. One paper tube cost $9 to produce and sold for 40¢. “You can’t make money doing that,” he says.

The owners of family businesses can have a hard time seeing a company as an asset rather than a way of life, says John Davis, founder of the Cambridge Family Enterprise Group, a consulting firm. Older family members, in particular, want to avoid conflict. “They’re thinking of going out with their relationships intact,” Davis says. The third generation of Douglases, all in their 80s, wanted to do right by their workers and longtime customers, Cournoyer says.

His spreadsheet told him there was still a way to make money. There are two kinds of cardboard tube: spiral and convolute. Spiral tubes—what’s left at the end of a roll of paper towels—are cheap to make and not very strong. Convolute tubes, rolled tightly from a single sheet of paper, are stronger, heavier, and harder to get right. They require old machines that the company’s veteran employees know how to run. And they still made money for NEPT. Cournoyer approached the Douglases with a plan to radically simplify the product line. He was too late. In October 2014 the family gathered employees and told them they were closing down the business.

Willy Shih, a professor at Harvard Business School who focuses on U.S. manufacturing, calls bankruptcy a “restructuring tool.” Businesses that fail don’t just have competitive challenges, he says; they’re usually weighed down by liabilities and underperforming assets, too. NEPT had a defined-benefit pension plan, and its obligation to contribute had been growing as interest rates dropped. The Douglas family, on its way out the door, paid out pensions as lump sums.

The receiver allowed Cournoyer to continue with a staff of two, first to fill existing orders using already purchased paper, then to scrap machines. That’s when Kirby showed up. After their first meeting, Cournoyer showed the banker his spreadsheets, along with 13 letters from customers ensuring future orders if the company could reopen its doors. “We will be shutting down production lines if we don’t receive spools in December,” read one. “We are in desperate need of your product,” said another. Kirby persuaded Joe Topper, a friend who was a businessman in Bethlehem, Pa., to lend the company $200,000. And he got his wife to let him take an 80 percent equity stake.

Cournoyer, Kirby, and one other employee are now the only front-office staff, replacing the dozen (including six Douglases) who worked in purchasing, accounting, and receiving. The 17 other employees run the machines. Eduardo Depina, who started work at the plant in 2004, says he prefers the way things are done now—he gets his daily work list directly from the president.

In January 2015 the plant began filling new orders, but for only 140 products. Convolute tubes happen to be very good to explode things in; the company has orders from defense contractors and a California pyrotechnics firm that supplies Hollywood. That’s right: The slimmed-down New England Paper Tube competes with China on fireworks.

The receiver had a final condition for signing off on Cournoyer’s reorganization plan: The company had to leave the old 350,000-sq.-ft. red-brick mill, expensive to heat and 90 percent unused. Kirby, Cournoyer, and Topper have gone in with another investor on a 40,000-sq.-ft. rehabbed mill a block away. NEPT will begin moving, machine by machine, in early 2017.

At the old plant, only one spiral tube machine is still rolling. Five spools of paper run across 30 feet, pass through a basin holding glue, wrap around a steel cylinder, and become a yellow tube, about 1 inch in diameter and 7 inches long. Cournoyer picks up a tube waiting for the wax vat. It will become a mortar shell, one of an order of 35,000 for a contractor working for the Pentagon. “We are the only company in the United States that can make this,” Cournoyer says.

The bottom line: A paper-tube maker in Rhode Island avoided collapse by refocusing production on 140 products where it can still make money.

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