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Intro

Aim of the paper


The aim of our presentation is to show you the two
possible alternatives for the future of our company,
Vertical Integration into paper manufacturing or
Horizontal Expansion into pulp production.
During this presentation we will present all the
studies weve done in order to get to our
conclusion.
Were going to analyse first horizontal expansion
and later vertical integration. Once that we have
analysed this strategies well summarize the
output of the analysis showing Pros and Cons and
finally well show a comparison with CMPC, our
main competitor in Chile that is already vertical
integrated in paper manufacturing.
This is the index of the presentation:
OUR STRATEGY
The central idea behind our global strategy is to
strengthen our position as one of the most
important forestry companies in Latin America,
employing (the companys) size to achieve the
necessary economies of scale for positioning
(ourselves) as a company that provides a
reasonable return to its shareholders while
properly meeting its responsibilities to its
employees, the country and the communities
where it develops its activities.
Lets start with horizontal expansion.
We start our analysis pointing out the most
representative figures of the industry.

Horizontal Expansion
1) Pulp and Market Pulp Industry
Products:
Pulp is attained from wood and, depending on the
type of tree that is used, it could be hardwood and
softwood pulp.
The primal is attained from eucalyptus tree, the
latter is attained by radiata pine tree.
Another thing to say is that pulp originally is
brown. Consequently there are two categories of
product, bleached pulp and unbleached pulp. The
primal is attained from chemical treatment, is
white and mainly used for paper manufacturing.
The latter, on the other hand, maintains its original
colour and its mainly used for brown paper bags.
Total Production:
The overall production of pulp amounts at 183
tons, 141 of these are produced by vertical
integrated firms and internally used in order to
produce paper. The remaining 42 tons, on the
other hand, are referred as market pulp and
represent the only commodity in the market.
(picture support)

pulp
market pulp

Source: HBS
Producers:
The sector is highly concentrated and, in fact, the
first 6 market pulp producers own 33% of the
market share.
5 of these 6 producers are located in the Americas,
Arauco is among these 6 and just one is located in
northern Europe. (picture support)

Weyerhaeser (US)
Aracruz (brazil)
Arauco (Chile)
Sdra (Sweden)
International Paper
(US)
Tembec (Can)
Other

Source: HBS

Consumers:
Regarding the consumers of market pulp, we have
identified the major consumer of paper in the

world and concluded that those are the major


consumer of market pulp too (picture support)

Source: HBS
Price:
Price in the sector turns to be volatile especially in
the hardwood sector due to the increasing capacity
in South America (picture support)

source: Harvard Business School

Source: FAO

2) Arauco
Production:
Our production of pulp includes both unbleached
and bleached market pulp.
In the primal market we detain the leadership
owning, alone, the 15,8% of the market share. In
the latter market were the third global producers
owning 5,47% of the market share and producing
2,3 million pulp tons.
We own 5 pulp mills 4 located in Chile and 1
located in Argentina, here you can find the
respective capacity of each mill. (Picture support).

Source: Arauco Annual Report


We operate also in other sector but this turns to be
the most important since it provides over 50% of
our revenues and constitutes the 48,7% of our
sales.
Domestic and Foreign markets:
Our company operates both in the domestic and
foreign markets but were mainly focused on
exports that represents 84,8% of total sales
(picture support).

Source: HBS
We think that well increase our export sales in the
future thanks to the free trade agreement
achieved by Chile government that allows us to
trade freely with Europe from 2002 and with US
from 2003.
3) Our project for Horizontal Expansion
The Nueva Aldea project consists of three
phases.
Two of these three phases have already been

implemented and led to the construction of a


sawmill, plywood mill and energy complex and to
the inauguration of the Valdivia plant with a
designed production capacity of 700,000 tons.
The third phase constitutes our project for
Horizontal Expansion and requires the construction
of a bleached woodpulp mill for pine and
eucalyptus with an annual capacity of 856,000
thousands tons.
This project
Our project consists in the construction of a new
state-of-art chemical pulp plant. This project
includes the construction of a bleached woodpulp
mill for pine and eucalyptus with an annual
capacity of 856 thousand tons.
This project underscores the companys
commitment to the long term consolidation of its
leadership position as one of the principal
worldwide producers of market pulp.
It will, in fact, expand our capacity to 3,2 million
tons making us the largest market pulp producers
in the world.
Nueva Aldea Mill, furthermore, will contribute to
the development of the region through the direct
creation of a new source of employment, and
through the companies that will supply goods and
services to the new facility.
If approved this project is expected to be
completed by late 2006 and requires 1 billion
investment.

Vertical Integration
To better present this second alternative we have
decided first to focus on the analysis of the sector
in which we decide to move .
1) Paper and Pulp Industry

First well analyse whether or not this sector is


attractive, secondly well focus on financial data.
Regarding the first part we conduct the test using
the Porters five forces.
1.1 Porter Five Forces
Industry Rivals: Fierce competition since therere
mainly large vertical integrated firms that detains
control over their market.
Threat of new entrants: It is low because it
requires huge investments to be competitive in the
sector since you need both to build your paper
manufacturing facility and your pulp
manufacturing facility.
Substitute products: New technologies are eroding
market profit and subtracting market shares.
Power of suppliers: Paper is constituted for the
90% by pulp. In this sector most of the companies
are vertically integrated and, so , the power of
suppliers turn to be lower since they dont have a
strong negotiating power.
Power of Buyers: Is high because the product is
highly undifferentiated.
(Summarize in a picture)
1.2 Financial Analysis
To make a financial analysis of this sector we have
taken the top 20 companies operating in this
sector.

From this data we can evince that the sector is


overfilled, revenue growth, in fact, turns to be
negative of within 0 and 5% for the 65% of the
companies.
Regarding the ROE, it turns to be satisfactory at
least for 58% of the companies.
Profit Margin turns to be negative for the 15% of
the companies and within 0 and 5% for the 70% of
the companies.
Earning Per Share, lastly, turns to be negative for
the 19% of the companies and low for the 50% of
the companies.
1.3 Better-off Test
Supply chain paper and pulp

Supply chain Arauco


There is the presence of a relationship-specific
investment. Since looking at the supply chain of
Paper and Pulp Industry we can easily see that
the only part missing is the paper manufacturing.
Pulp is used to produce paper.
The source of Araucos competitive advantage,
furthermore, is upstream and theres the
possibility to exploit further