Arauco

Q1. What are the sources of competitive advantage for

Celulosa Arauco?
① Competitive Advantage compared to global companies
② Competitive Advantage compared to local and global companies
• Geographical Advantage
- Trees growing faster in Chile because of an optimal climate & good soil conditions
(e.g.) for Pulp logs, in Chile growing requirments = 16 to 18 years
in Northern hemisphere growing requirements = 18 to 45 years

• Economic of Scale ( Cost Advantage )

1 - Low cost production capabilities of pulp production
(e.g.) Less than $300/ton of softwood kraft

• Goverment Support
- Forestry development helping in negotiations & partnerships w/ nations for the rate exchange
(e.g.) European zone & USA
- Goverment policy for forest industry as one of the country growing measure

• Using the advanced technologies & techniques in production

2 process
- Increasing the efficiency of Arauco compare to its competitors
(e.g.) Log Merchandizing, Bioforest
 Q2. Is Arauco’s advantage sustainable?

• Geographical Advantage
- SUSTAINABLE
-> Natural resources (facing no issues as of now), difficult to get control over it

• Economic of Scale ( Cost Advantage )

- NOT SUSTAINABLE BUT BTE IS HIGH
-> High capital requirements, market is already dominated by 2 major companies

• Goverment Support
- NOT SUSTAINABLE BECAUSE THEIR SUPPORT COULD BE ABOLISHED
-> However, forest industry remain as significant for Chile, so support could be received

• Using the advanced technologies & techniques in

production process
- NOT SUSTAINABLE
-> Competitors are also trying to develop their technologies & techniques, so could
bypass Arauco on this level someday (or could be easily)
 Q3. How would you assess the degree of integration
within company?
“5 Activities of Global Pulp & Paper Industry”
-> Forestry, Pulp production, paper & board production, and converting

• Arauco hasn’t done forward integration

- Still under consideration of investing in paper manufacturing
-> Going on fully integrated in the future?
They are backward integrated
= PURSUE “VERTICAL INTEGRATION” ??

• Arauco is for the moment following horizontal integration by

expanding their business through;
- New acquisitions (e.g.) acquired Alto Parana
- Increasing their forestry plantations
- Increasing their mills capacities (e.g.) building a new mill named Valdivia allowing an
increase capacity of 700,000 tons of pulps
 Q4. Why has Arauco moved away from its traditional
“pulp alone” strategy?
• Arauco is getting involved in new businesses;
(1) Forests (e.g.) pulpwoods & sawlogs products
(2) Wood products (e.g.) fiber panels, lumbers, remanufactured woods & flitches

• Differenciation in new products because;

- By developing in new businesses, it allows Arauco to optimize the use of the tree as
following;
Pulp log

Saw timber

Clearwood
(saw timber, plywood)

- Downward trend of the global “pulp alone” market over the last 3 years
- To minimize the impact of the volatility of pulp prices (High fluctuation of the pulp’s
price)
-> Overall stabilization of company/control of the market
 Q5. Do you recommend Arauco to integrate to the
paper business?

“YES”
- The company could reduce its transaction costs (operational effectiveness)
- Having a higher control over its global industry & becoming a bigger
decision-maker
- It could generate high profits in the near future as the paper demand is
increasing according with economic growth

“NO”
- Arauco is already involved in various projects for expansion (e.g.) pulp
mills, sawmill, panel & wood processing facilities building projects over
several years
Hence, it might require too many investments at the same time