News

David Paterson, the chief executive officer of newsprint giant AbitibiBowater Inc., has been dealing for years with the steady decline of markets for his basic product.

So, when the great meltdown of 2008 hit, he was already - as he puts it - "in a mindset of squeezing out costs, taking all the frills out of the business."

The merger last year of two former rivals - Abitibi-Consolidated Inc. and Bowater Inc. - to form AbitibiBowater was born of a crying need for consolidation in a sector struggling to cope with overcapacity, high costs and the erosion of newsprint demand.

Newspaper publishers are in their own fight for survival as the Internet draws readers and advertisers away and ad linage declines. Cost-saving measures such as smaller page sizes and lighter paper are the order of the day.

The current economic downturn has only intensified the crisis.

To manage through the tough times, Mr. Paterson, the head of a major player in the hit-hard forest sector, says he is soldiering on, trying to stay competitive and making the difficult calls to shut or temporarily close mills.

When did you first realize that this [downturn] was big?

From my perspective, I really first sensed that something much worse was going on in the economy from talking to our customers - the newspaper publishers and commercial printers who, in the early summer, started saying the advertising is collapsing, that the ad spend is going to be way down.

The early warning signs were that the Christmas season ad spends were way off. We knew that 2008 would be a tough year in the newspaper business but we got an inkling in the second quarter that it really was going to be a bad year.

How did you react

personally?

We had been aggressively managing the declining consumption environment for at least five years. So I guess it was just how the severity of it intensified. The whole world changed. It was almost like a cliff.

My personal reaction was, 'It's going to be a lot worse than we thought it would be in the second quarter.'

What lessons have you learned?

The short-term lesson is don't get locked into group-think that today's conditions will last forever.

If you start making long-term decisions based on a short-term view, you end up getting burned. You have to think about the long-term implications of short-term decision making more rigorously.

How does this one compare with past recessions?

This is as bad as I've seen since the late seventies, during the Jimmy Carter administration and the stagflation period.

So far, it seems not as bad as that yet because unemployment is not as bad and generally the wealth of North Americans is much higher today than it was in that period, but it has the potential to get that bad.

Any one event or thing that has struck you as being extraordinary in what we are going through?

It's the speed at which the Canadian dollar has devalued. It is a major currency. It's a freely traded currency. To see it go to the low 80s is pretty amazing to me.

The speed at which it moved surprised me. It's a huge impact on our company as well as the industry. The good news is it's made Canada more competitive.

On the policy front, any big blunders that stand out?

On the U.S. side, the initial round of bailouts was not well marketed or sold well to the general public, which has eroded confidence in the system.

So you have a crisis of confidence: 'Who is in charge? Does anybody know what's going on?'

In Canada, the belief was that somehow Canada was immune and that sense lasted too long and resulted in the political freeze you got. The politicians in Canada felt they were immune from the global economy somehow. Maybe 'head in the sand' a little too long?

Best policy move?

The fastest and most-efficient transition of a [U.S.] president and political parties in history. It's all about, 'How do we fix the economy?'

From a Canadian perspective, can the new leadership of the Liberal Party work with the Conservatives in terms of trying to find the right solutions for the country rather than make it a political fight?

Do you see any opportunities out there?

The biggest opportunity is really the currency. Also, this is the time to commit to the products that people are going to want five, 10 years down the road and to start making sure you're making those products now.

The sense of urgency is heightened and in some ways the opportunities are greater because the willingness to change and the acceptance of change are there.

What would be your biggest fear for 2009?

That demand will collapse in the first half of the year because people and companies will not want to spend, so that you just have this unprecedented demand collapse that cannot be dealt with through any action.

How is corporate culture at AbitibiBowater affected?

It's a two-edged sword. People understand they have to change and that management is not asking for change to extract some price from employees that is not necessary. The biggest challenge for us is keeping morale up.

I'm having to do a lot of direct communications with employees to assure we're doing the right things. It helps them when they can ask the boss the questions.

ABITIBIBOWATER

(ABH-TSX)

Wednesday's close 62¢, unchanged

The Threat

AbitibiBowater has been managing a slump in newsprint demand for years. Warning signs of a sharp downturn came in the second quarter of 2008: Advertising - the bread and butter of AbitibiBowater's major customers, North American newspapers - was dropping dramatically.

The Impact

Heightened uncertainty, as if there wasn't enough already, and an urgent sense of the need to adapt.

The Reaction

AbitibiBowater is accelerating attempts to bolster its competitive position and to diversify into higher-value grades of paper, while also looking to sell assets and shut more mills.