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Janick Couture

on 18 November 2012

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Transcript of Arauco

Nicholas Sincennes
Janick Couture-Houle
Alex Cook Andrew Jamieson
Carter Maxwell Case #7 What is Arauco? Arauco is a Chilean forestry
company that, for more than
40 years, has been driven
forward by its vision of being
a global leader in sustainable
forest products. 2004 3 product segments pulp products forestry products wood products Situation Statement Should Arauco invest US$1 billion to construct a new state-of-the-art chemical pulp plant? the plant would place the company as the largest producer of market pulp by increasing its capacity by approximately 850,000 tons to 3.2 million tons Nueva Aldea multiphase project
consisted of
building a sawmill,
a plywood mill, and
energy complex PHASE 1
involved the construction of a pulp mill following the inauguration of the new Valdivia plant on January 30, 2004 PHASE 2 Valdivia Plant -expected sales of USD $350 million per year
-operating life between 30 and 40 years
-a designed production capacity of 700,000 tons of pulp low-cost capabilities in the production of pulp CORE COMPETENCY Should the company go with an horizontal expansion and invest US$1 billion to construct a new specialized chemical pulp plant or should Arauco leverage its low-cost advantage in pulp production by forward integrating into paper manufacturing? The Environment Opportunities &
Threats Opportunities • Growth in the hardwood side

• High yield per hectare of Radiata pines in Chile (quality of soil)

• Growth in China and Chile

• More than 50% of material required to make paper and paperboard used pulp •Favourable exchange rate for export industries

•Chilean climatic conditions

•Advances in genetics and pest controls

•North America being the main consumers of paper Opportunities Threats •Increasing government regulations

•Growth in recycling paper (42% was recovered)

•Increasing use of electronics

•Volatility and stability of pulp prices The Firm
Strengths &
Weaknesses Strengths -World’s largest single producer of unbleached softwood kraft pulp

- Arauco has its own electricity generating turbines which supply all the power to the mills

-Efficient through its equipment and technology. Log merchandising Strengths - Increased its land owning

-leading business position due to its low cost production capabilities

-New market awareness Weaknesses - Arauco is not able to escape the ever changing impact of pricing swings on its financial performance

-The volatility of the pulp market affects Arauco a lot because this sector is their major source of revenue. Options Generated OPTION 1 Horizontal expansion
through chemical kraft pulp OPTION 2 Horizontal expansion
through other wood products leverage its low-cost advantage in pulp production by forward integrating into paper manufacturing OPTION 3 Option 1
Pros -continue business with their current strategy and capitalize on its core competencies

- continue its practices with low-cost operations

- Arauco will be helping to decrease the Chilean national unemployment rate of 8.5%

- expand and increase capacity

- the gain in economies of scale will benefit the company in the long run Cons -potentially risking losing out on other growth opportunities if they continue their dependence
on the creation of kraft pulp for revenue Option 2
Pros -Arauco has proven to be very successful in its sales of sawmill products, making up nearly thirty percent of the company’s current sales

- The need and customer demand for diversification had already been established by Arauco

- benefit Arauco’s product portfolio

- benefit the growing demand for panels Cons -risks of damaging this company’s
already fragile name

- challenge for Arauco to gain market share Option 3
Pros -Paper and paperboard product prices have hit lows in the past 3 years. However market trends are changing and the prices, in the early stages of 2005, should in fact begin to rise

- a large increase in revenue for the company as well as some serious cost reductions, as all functions in the paper making process would be kept within the company Cons - costs associated with the creation of new departments

- it requires Arauco to work outside of their core competencies

- Research and development will be needed, as well as large capital investments in property and equipment Recommendations Decision Matrix Option 1 -Maintaining their core competencies
-Through horizontal expansion Arauco will become the leader in market pulp, increasing their current market share
-Lower risks than other options
- With all options having a similar effect on the environment, Arauco will be more likely to control and limit the impact by expanding on what they already know 6 Months Implementation Strategy -Hiring and training -Properly introduce new distribution channels -Respect environmental regulations & laws -Finding new customers and markets -Sell off the excess amount of energy Finance HR Environment 18 Months Implementation Strategy -Reassessment of environmental sustainability -Maintain core competencies -Purchase hectares; Acquire new companies -Going global Conclusion Horizontally expanding in the Kraft pulp market will be the most profitable move. The Nueva Aldea project will be able to respond to Arauco`s vision of being "a global leader in the development of sustainable forest products."
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