FORWARD INTEGRATION or

HORIZONTAL EXPANSION ?
Kelompok 6 :
Lukman Hakim 041514353007
Rizki Candra Sakti 041514353013
Theodolus Indiananta 041514353019
Nuril Huda 041514353031
 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
 Product Segments
3 products segments:
– Pulp products
– Forestry products
– Wood products
– Plywood & Fiberboard
 Situation statement
• Should arauco invest $1 billion to construct a
new state of the art chemical pulp plant?
• The plant would take place the company as
the largest producer of market pulp by
increasing its capacity by approximately
800.000 tons to 3,2 millions tons
 Nueva aldea (multiphase project)
• Phase 1: consisted of building a sawmill, a
plywood mill, and energy complex
• Phase 2: involved the construction of a pulp
mill following the inauguration of the new
Valdivia plant on January 30, 2004
 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
• CORE COMPETENCY
– low-cost capabilities in the production of pulp
 Question
Should the company go with an horizontal
expansion and invest US$1 billion to
construct a new specialized chemical pulp
plant (horizontal expansion) or should
Arauco leverage its low-cost advantage in
pulp production by forward integrating
into paper manufacturing?
• Leading business position in volatile market pulp
industry due to its low cost production
capabilities
• Arauco has its own electricity generating turbines
which supply all the power to the mills
• Efficient through its equipment and technology.
Log merchandising
• Increased its land owning
 Opportunities
• Growth in the hardwood side (eucalyptus)
• 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
• 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
• Increasing government regulations
• Growth in recycling paper (42% was
recovered)
• Increasing use of electronics
• Volatility and stability of pulp prices
 Options Generated
OPTION 1: Horizontal expansion through chemical kraft pulp and other
wood product
• Pros
– continue business with their current strategy and capitalize on its core
competencies
– continue its practices with low-cost operations
– Arauco has proven to be very successful in its sales of sawmill products,
making up nearly thirty percent of the company’s current sales
– expand and increase capacity
– the gain in economies of scale will benefit the company in the long run
– benefit the growing demand for panels
• Cons
– potentially risking losing out on other growth opportunities if they continue
their dependence on the creation of kraft pulp for revenue
 ARAUCO REVENUE PROFILE

TOTAL SALES OPERATING INCOME

Other Other
2% 1%

Plywood
15% Pulp Plywood
34% 25%

Pulp
Wood 52%
28% Wood
14%
Forestry
21%

Forestry
8%
 OPTION 1
(HORIZONTAL EXPANSION)
INDUSTRY ANALYSIS (5 Forces)
NEW
ENTRANTS

LOW
Capital requirements are high

SUPLIER Rivalry Among BUYER

Existing Competitor
LOW HIGH HIGH
Most of pulp • Competitor is highly forward Most of paper
manufacturing is & bacward integrated manufacturing is
backward integrated • Prices fluctuated backward integrated
into forestry into pulp manufacturing

SUBTITUTE

LOW
Only 10% pulp originated from
non wood
 Options Generated
Option 2: leverage its low-cost advantage in pulp production by
forward integrating into paper manufacturing

• 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
 FINANCIAL PERFORMANCE
30,000.00

25,000.00

20,000.00

15,000.00 Revenue
Net Income

10,000.00

5,000.00

-
Arauco International Weyerhaeuser Tembec Aracruz CMPC
Paper
 Option 2
(FORWARD INTEGRATION – PAPER MANUFACTURING)
INDUSTRY ANALYSIS (5 Forces)
NEW
ENTRANTS
LOW
Capital requirements are high

Rivalry Among BUYER

SUPLIER
Existing Competitor
LOW HIGH MEDIUM
Most of paper • Competitor is highly bacward Demand determined
manufacturing is integrated (Int.Paper, Georgia- by consumer
backward integrated Pac, UPM, CPMC) willingness to
into pulp manufacturing • Prices fluctuated purchase Product
• Many fragmented paper (magazine,
product newspaper,etc)

SUBTITUTE

HIGH
Increasing use of computers,
handheld devices & mobile
phone
 VERTICAL (FORWARD) INTEGRATION
• ADVANTAGES
 Increase efficiency and bargaining power
 Gain better acces to end user
 Improve market visibility
• DISADVANTAGES
 Increasing business risk
 Less flexibility in accomodating shifting buyer
 May not enable a company to realize economies of
scale
 Capacity matching problem
 Recomendation
Option 1
Horizontal expansion through chemical kraft pulp
and other wood product
• 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
 Conclusion
• Horizontally expanding in the Kraft pulp and
other wood product 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."
 PROBLEMS
• Perez present his recommendation to the board of director for
invest US 1 billion to construct a new state of the art chemical pulp
plant
• First phase, build a sawmill, plywood mill, and energy complex in
2002.
• Second phase, build a pulp mill (Valdivia plant) capacity 700,000 ton
pa.
• Downward trend in market pulp price (3 years)
• Major paper companies, typically backward integrated into the
production of pulp
• Only 2 alternative :
1. Forward integration into paper manufacturing
2. Horizontal growth/expansion plan
 HISTORY
• 1977, Industrias Arauco dijual kepada Compania de Petroleos de
Chile (COPEC)
• 1979, Celulosa Constitucion dibeli oleh COPEC dan dilakukan
merger antara Industrias Arauco dan Celulosa Constitucion
• 1980, membeli lahan dan perkebunan seluas 170.000 Ha dan instal
teknologi baru
• 1990, meningkatkan kapasitas produksi dengan membangun
second line, new bleaching system, new product line, dan energy
generation
• 1996, membeli perusahaan Alto Parana di Argentina untuk
meningkatkan kapasitas produksi
• 2000, membangun pabrik ketiga di Chile, meningkatkan produksi
Argentina, memasuki pasar MDF (medium-density fiberboard) dan
HB (hardboard)
• 2004, Valdivia
 ARAUCO PROFILE
• Struktur organisasi dan bisnis
 ARAUCO STRATEGY
• Global strategy is to strengthen position as one of the
most important forestry companies in Latin America
• By implementing a capital expenditure plan aimed at
increasing capacity, efficiency and productivity in both
pulp and wood product.
• Current strength in softwood pulp (radiata and taeda
pine), wanted to increase in hardwood pulp
(eucalyptus)
• Has leading business position in the volatile market
pulp industry due to low cost production capabilities.
• Has been diversifying business line to minimize the
impact of the volatility of pulp prices.
PRODUCT SEGMENT
SWOT ANALYSIS
STRENGTH
Gross margin >40%
WEAKNESS
Low cost pulp Unexperienced in
production paper
capability manufacturing
Integrated with
forestry

OPPORTUNITY
THREAT
Worldwide paper
market estimated Power of subtitute
greater than 330 Fluctuated price
million, end of 2003
Paperless trend
SWOT ANALYSIS
STRENGTH
Gross margin >40%
Low cost pulp WEAKNESS
production ……..
capability
Integrated with
forestry

OPPORTUNITY THREAT
41 million tons of Power of bacward
market pulp & forward
integrated rival
Shipment increased (142 million tons
± 4% market)
Fluctuated price
 RECOMMENDATION
• Consideration
Arauco has low cost production capabilities
(economies of scale advantage)
High subtitute power of paper use
Too many fragmented paper product
(uncoated, coated, tissue, newsprint,etc)
• Recommendation
Horizontal Expansion