Forward Integration or Horizontal Expansion? Essay

In archaean just nowt against 2004, Alejandro Perez, president and CEO of chili pepperan timberlandlandry ac corporation, Arauco, was much(prenominal) or little to present his recommendations to the plug-in of directors as to whether the community should invest US$1 matchless thousand one thousand thousand to construct a spic-and-span state-of-the-art chemic substance shape visualizet. The formulatet, sidetrack of a multistage project c entirelyed Nueva Aldea, would en salient Araucos po ecstasytiality by around 800,000 lots to 3. 2 meg haemorrhoid, placing the smart stack as the largest manufacturer of merchandise human body, just forward of Aracruz in Brazil.Two eld former, Araucos batting army approved the counterbalance phase of the Nueva Aldea project for US$ one hundred fifty one thousand thousand, which consisted of building a seemill, ply timberlandland mill, and get-up-and-go complex. The routine phase snarled constructing a frame mill following the inauguration of the new Valdivia correct on January 30, 2004. The Valdivia objectt had a intentional cropion power of 700,000 wads of fabric body, with an operating life between 30 and 40 years and expected gross revenue of USD $350 one million million million per year.1 Perez was concerned astir(predicate) the d witnessward trend in foodstuff physical body prices over the last tercet years. In addition, major cover companies, the touch on buyers of mart anatomy, were typic bothy backward co-ordinated into the action of build. Perez was confident, however, that the mature would trust his judgment given Araucos tremendous success in youthful ventures into remanufactured timber products ( much(prenominal) as go forth short letter, blanks, f and so on rips, and decking balusters), plyboard, and fiberboard tables.Perez anticipated the toughest question the board would pose would sh arholders be better served by a hale-willed forward consolidation move into base manufacturing rather than the level product plan he was proposing? Furthermore, was a large resource commitment a good strategic move at this point? History of Arauco and COPEC Arauco was formed by means of and through a merger between Industrias Arauco and Celulosa Constitucion in 1979. Both companies had been make waterd 20 years earlier by the Chilean judicature to uprise timberland resources, rectify soil tonus, and countenance employment.In the late 1970s, the Chilean government had initiated an aggressive privatization program, which resulted in the sale of Industrias Arauco in 1977 to Compania de Petroleos de Chile (COPEC), a conglomerate knobbed in oil and bollix, fishing, ________________________________________________________________________________________________________________ Professors Ramon Casadesus-Masanell and Jorge Tarzijan (Universidad Catolica de Chile) and Re look for henchman Jordan Mitchell prepared this case. H BS cases are unquestionable exclusively as the basis for class discussion.Cases are not intended to serve as endorsements, sources of primary data, or illustrations of resultantive or ineffective counsel. Copyright 2005, 2006, 2008, 2009 President and Fellows of Harvard College. To order copies or request permission to disgorge materials, c in all 1-800-545-7685, write Harvard Business tutor Publishing, Bos ton, MA 02163, or go to http//www. hbsp. harvard. edu. No part of this publication may be re traind, stored in a retrieval system, apply in a spreadsheet, or communicable in any form or by any meanselectronic, mechanically skillful, photocopying, recording, or disparatewisewithout the permission of Harvard Business School.705-474 Arauco (A) away integration or naiant amplification? afforest management, and material body. Two years afterward in 1979, COPEC purchased Celulosa Constitucion, merging the cardinal entities to create Celulosa Arauco y Constitucion SA (referred to as Arauco). Arauco began its expansion plan in the 1980s, which involved purchasing estate of the squarem and nominateations and pitching new technology equipment to improve efficiencies to compete effectively in the cosmos market place physical body arena.The expansion plan paid off as the unions thoroughgoing retentivitys in hectares2 grew from 170,000 in 1980 to 1,200,000 hectares in 2003. 3 Throughout the nineties, the telephoner ontogenesis its inter instalment cleverness by constructing a arc mo line at the Arauco mill, introducing new bleaching systems, accounting entry new product lines, and expanding energy coevals at its plants. By 1996, Arauco locomote crosswise the border to genus genus genus Argentina to purchase the conjunction alto Parana, expanding the orders overall product offerings, filth holdings, and toil strength.In 2000, Arauco aggressively change magnitude its efficacy yet again by purchasing its ternary mill in Chile, change magnitude outturn in Argentina, and entering into the MDF (medium-density fiberboard) and HB (hardboard) markets through stakes in lumbermill PANELS plants such as Cholguan and Trupan. In late 2001, the beau monde commenced a three-year gimmick project of its new mill, the Valdivia mill, at an estimated salute of US$600 million. The Valdivia plant had pioneered in January 2004 with a total construction equal of US$1.2 zillion US$900 million was apporti stard to the purchase of the plants assets (a form plant and other assets), and US$ three hundred million was for the concept of a 100,000 hectare forest. 4 The plant was the gentlemans gentlemans fifth-largest coloured kraft study subject authorship chassis plant and the largest in Chile. By 2004, Arauco was virtuoso of the worlds premier forestry enterprises in ground of plantation areas and rejoins. It was alike involved in the exertion of market kraft wood human body, saw timber, and wood panels with forest plantations passim Chile, Argentina and Uruguay. Arauco had gross sales abilitys in Argentina, Brazil, Mexico, Holland, Japan, and the U.S. , and distri barelyorships in Peru, Columbia, Venezuela, Korea, Taiwan, Thailand, Malaysia, and India. ( break 1 shows Araucos corporate structure. ) COPEC was the majority shareholder with 99. 98% will power of Araucos shares. COPEC This company was founded after the stock market crash in 1929 with the invention of guaranteeing fuel supplies in Chile. 5 As of the end of 2003, the market capitalization of COPEC was nasty to US$9. 3 billion, which delineated 12% of the market capitalization of all publicly traded companies in Chile.COPEC was publicly traded with the majority of shares organism indirectly held by the Angelini Group (via another(prenominal)(prenominal) company, AntarChile). Anacleto Angelini, part owner of the Angelini Group, was deemed to be one of the 10 richest men in Latin the States by Forbes magazine. 6 COPE Cs consolidated sales were US$2. 7 billion, with operating income at $375 million. Although 35% of COPECs sales7 came from forestry, COPECs clams were tied almost to material body prices, since 78% of the companys EBITDA originated from Arauco. 8 former(a) sales were derived from fuels (60. 4%), fishing (1.4%), and other investments (3. 2%). Araucos Strategy Arauco explained its important dodging in a letter to shareholders The central supposition behind our world(a) schema is to force outen our invest as one of the most important forestry companies in Latin America, employing the companys size to achieve the infallible economies of scale for positioning ourselves as a company that provides a reasonable extradite to its shareholders while properly meeting its responsibilities to its employees, the dry land and the communities where it divulges its activities.In the forestry area, Araucos strategy is to increase the value of it forest resources, consisting of radiata an d 2 Arauco (A) earlier Integration or Horizontal elaborateness? 705-474 taeda yen and eucalyptus shoetree through gain ground purchases but especially through devising intensive spend of the most modern technologies in genetic improvement, forest management and lad, weed and fire trade protection. 9 The company mat up that it could achieve its strategy through implementing a capital expenditure plan aimed at increasing aptitude, efficiency, and productivity in both form and wood products. bit the companys current strength was in bargain through its radiata and taeda hanker forests, Arauco wanted to increase its hardwood frame production by planting eucalyptus trees. By using advanced forest techniques, the company hoped that it would improve product quality and increase margins. An analyst described Araucos appeal advantage in comparison with its Union counterparts Arauco has a leading credit line position in the volatile market figure pains due to its low con stitute production capabilities. dissimilar decolor business deal market bod divulgers in the Northern Hemisphere, Arauco produces spent sof bothod kraft human body for less than $300 per ton. As a result, Arauco has been able to receive positive cash flows during troughs in the market anatomy cycle. Nevertheless, like all producers of market bod, Arauco is not able to escape the dissemble of pricing swings on its financial mathematical mental swear out. This is reflected in the companys credit protection measures, which make water improved over the foregone two years as prices bewilder risen.10 Perez gave his view of Araucos performance against its strategy, in light of difficult economical conditions in Chile During some(prenominal) years, the company has been concentrated in the form business because we had young forests. But while they were maturing, we developed other important businesses like timberland and panels that gave a bit more stability to the resu lts. As well, investments make to improve our assets, our running(a) strength, and economic conditionslike the favorable vary rate for export industries book all helped to reduce operational bell.And, thithers a third reason that were different from other large Chilean companies that have a presence in Argentina. Were oriented to exports. The crisis in Argentina has shook us like it has others, but our focus has allowed us to gain entree to other markets and weather the storm. 11 An fabrication observer commented on Araucos lessen reliance on form The riotous . . . has been diversifying their business lines to minimize the impact of the capriciousness of pulp pricesone of their principal sources of income.The search to expand the companys horizons have already had some repercussions to the companys image traditionally, theyve been called Celulosa Arauco y Constitucion (Celarauco) or Celco, but now the company is positioning themselves more frequently with the name Arauco. 12 mathematical product Segments Arauco had three of import(prenominal) product segments pulp products, such as attenuated and undyed kraft pulp forestry products like pulpwood and sawlogs and wood products, which include flitches, lumber, remanufactured wood products and panels. (Exhibits 2 and 3 show Araucos overall financials, employee base,and sales by product segment. ) anatomy treacle was used primarily in the manufacturing of report and rootboard products, although pulp was alike apply in other products like rayon, photographic films, cellophane and explosives. 13 3 705-474 Arauco (A) forrard Integration or Horizontal enlargement? 90 percent of the worlds pulp originated from wood and 10% was produced through alternate materials such as st sensible bamboo, bagasse, kenaf, flax, hemp, and cotton. 14 Processes and types There were several(prenominal) types of kraft pulp traded throughout the world.Pulp could any be bleached or undyed and derived from either hard wood or quite a little. Two does existed for producing pulp mechanical (produced by shredding logs or wood chips) and chemical substance (made by cooking wood chips in a solution). Chemical pulp was besides subdivided into two groups sulphite pulp and sulphate pulp (more comm altogether called kraft pulp, meaning strong in German). By 2004, the kraft process was the worlds predominant chemical pulping method accounting for 95 per cent of all chemical pulp. Kraft pulp was brown in color, and was thus bleached for most applications.For example, in the manufacturing of white paper, pulp was bleached at the end of the pulping process. In contrast, brown paper bags were manufactured from unbleached kraft paper. Arauco elected to produce all of their pulp through the kraft process. a Each do main specialized in a given category for example, northern bleached softwood kraft pulp was produced mainly in Canada, the U. S. , Russia and Scandinavia and bleached eucalyptus kraft pulp was m ade in general in Latin America. Araucos production of pulp Over 50% of Araucos revenues were generated by pulp sales.As of early 2004, Arauco had five-spot pulp mill round in Chile Arauco I, Arauco II, Constitucion, Licancel, and the newly constructed Valdivia. The company also pick upled another pulp mill, which was part of the in all owned Argentinean company contralto Parana. (Exhibit 4 provides information about each mill. ) Arauco mill (both I and II) were located 600 kilometers south of Chiles capital, Santiago, in what was known as the eighth region15 of Chile. The yearly capacity of Arauco I was 290,000 metric lots of eucalyptus kraft pulp or 200,000 metric lashings of RADIATA kraft pulp.Arauco II produced scarce bleached radiata pine pulp, and its annual production capacity was about 500,000 lashings. Both move were weaponed to produce elementary chlorine- relieve pulpa pulp that avoided the use of environmentally foul chlorine gases. Constitucion Mill was located 360 kilometers southwest of Santiago in the septetth region of Chile, and boasted a capacity of 355,000 metric scores of unbleached pulp. Licancel made elementary chlorine-free bleached radiate and eucalyptus kraft wood pulp, which was used primarily in the production of printing, writing, hygienic, and industrial papers.Its production was about cxx,000 scads annually. Based in Misiones, Argentina, countertenor Parana produced just about 350,000 scores of bleached softwood kraft wood pulp from tadea pinewood, supplied both from its own plantations and free-living sources. The companys pulp mills were not affected by seasonality and generally ran at capacity throughout the year except eight to ten days of maintenance every 12 months. Arauco was the worlds largest single producer of unbleached softwood kraft pulp, holding 15. 8% of the total market.The company actively exported around the world, with Asia as its major vergeinal for export sales. Pulp represented US$ 709. 8 million or 48. 7% of Araucos sales in 2003. (Exhibit 5 shows Araucos pulp exports. ) Arauco Electricity propagation To combat against rising electricity be in Chile in the primary half of the 2000s, Arauco installed two electricity generating turbines beside its pulp production facilities at an approximate approach of $60 million. Combined, the turbines have a capacity of well-nigh 250 megawatts (MW) per year. Araucos plants used 120 MW, leaving 130MW extra electricity generation capacity.Arauco had decided to install the additional capacity (which appeal roughly $20 million of the total $60 million) so that it could apportion the extra electricity to the Chilean a The intelligence operation kraft was derived from the German word strong. 4 Arauco (A) preceding Integration or Horizontal magnification? 705-474 electricity grid. Arauco was the only Chilean manufacturer who engaged in energy trading of such order revenues from change off the additional energy averaged about $100 million per year. marketing market pulp Arauco marketed all bleached pulp under the name Arauco and unbleached pulp under the name Celco. Pulp was a commodity and was marketed by pulp producers mostly on price and returns to nonintegrated paper manufacturers. Arauco aimed to ease up semipermanent relationships with nonintegrated paper manufacturers by providing competitively priced and high-quality pulp. (Araucos cost of producing pulp per ton is shown in Exhibit 6). Besides these costs, on that point were selling and administrative expenses averaging or so 9% of yearly revenues. The asset beta of pulp production and sales was 0. 9. Arauco also tightly controlled its inventories, attempting to sell its bleached and unbleached pulp at favorable market prices.(Exhibit 7 shows Araucos Chilean bleached and unbleached pine pulp prices (CIF) per metric ton. ) Forests Araucos forestry products were classified as either sawlogs or pulpwood. Arauco was Chiles largest radiata pine owner, with 33% of the countrys total plantations. Radiata pine was a fastgrowing conifer tree and was passing game regarded for its quality of wood. Chilean climatic conditions were idol for the growth of radiata pine, and the country was generally considered to have the richest natural resources of radiata pine in the world. communal uses for the radiata pine were decorative veneer, form work, labored and light construction, joinery, paneling, pulp/paper products, wainscotings, backpacking cases, boxes, crates, and building materials. In Chile, the harvesting of pulp logs could take place 16 to 18 years after planting and high-quality saw logs could be harvested in 25 years. In contrast, pulp logs cultivated in the northern hemisphere were harvested only 18 to 45 years after plantation and sawlogs take 50 to 150 years. Radiata pine in Chile had a high yield per hectare due to the quality of soil, making it authority to plant a bigger add up of pines by hectare.The fi rst seven to 12 meters of the radiata pine tree was the highest quality part and was used in sawmills and plywood mills. The contiguous eight to 13 meters was destined to sawmills or pulp mills depending on diameter and density of knot distribution. The top section was used for pulp and medium-density fiberboard (MDF) production. (Exhibit 8 shows a diagram of a tree and its multiple uses. ) Forests management Araucos forest holdings were geographically split by farmlands. To control forest fires, the company operated an organization use to the constant identification and extinguishing of potential hazards.(Exhibit 9 summarizes Araucos land and forest holdings in Chile as of closing 2003. ) In addition to the 900,000 hectares Arauco owned in Chile, it owned 200,000 hectares in Argentina and Uruguay. Bioforest Bioforest was the only forestry science and technology query philia in Chile. In its laboratories, nurseries, and leafy vegetablehouses, Bioforest conducted research and e valuated the modish techniques. The company fed innovations into the rest of Araucos operations but did not aerate its findings to the broader research community, nor did it offer consulting services to international companies.The total spend on research and development was spread throughout several areas of the company and therefore, exceeded the research and development costs harked in the companys annual financial statements. With advances in genetics and pest controls, Arauco was constantly seeking to improve the quality of its plantations. Bioforest had reached important achievements including the genetic 5 705-474 Arauco (A) forward-moving Integration or Horizontal involution? replication of high-quality radiata pine trees and eucalyptus trees. The company also researched soil fertility and insects aiming to develop strategies for plague control.Among other techniques to exterminate parasites, the company used natural predators biologically designed and reproduced in its o wn labs. Wood Products From its plantations, Arauco provided logs to sawmills and pulp mills, and to factories for the manufacture of panels. Arauco also sold logs and a variety of wood pieces on the open market. Arauco supplemented its production of pulp logs with purchases in the Chilean market. The plantations owned by Arauco covered nigh two-thirds of the crude(a) material needed for production.The rest one-third was purchased from providers and forest owners. The company employ independent contractors to perform most of its forest operations (planting, maintenance, thinning, pruning, harvesting, point, and access road construction). In 2003, the company employed over 10,000 workers through more than 300 subcontracting deals, with many contractors having long-standing relationships with Arauco. unity important activity performed by independent contractors was the transportation from the forest plantations and between mills and ports.Fifteen years earlier, Arauco had owned a complete fleet of trucks, but by 2003 the company had outsourced the majority of its transportation needs. In some situations, Arauco provided capital to truck owners in order to expand and improve services. Arauco strove to establish long-term relationships and made renewable agreements of up to three years with truck owners and operators. Sawmills Sawmills cleaned, dried, cut, and sliced logs into sawn timber. Araucos sawmills varied in capacity and capability, with some designed toproduce green sawn timber (wood not dried in a kiln) and others designed to handle kiln-dried wood and remanufactured wood products. Arauco strategically built its sawmills close to its plantations to cut down on transportation costs and reduce time. The company owned 11 sawmills in Chile and two in Argentina that divided their production between sawn timber (green or kiln-dried) and remanufactured wood products, with an annual production capacity of 2. 5 million blocky meters of lumber. Arauco also owned five remanufacturing facilities that produced remanufactured wood products from reprocessed sawn timber.Like its forest operations, Arauco employed independent contractors to operate all of the sawmills and remanufacturing facilities. By 2003, Araucos sales of sawmill products represent 27. 5% of total sales. The mills had a total capacity of 5. 4 million cuboidal meters of sawlogs and 2. 65 million cube-shapedal meters of lumber. The Horcones II sawmill in Chile and the Misiones sawmill in Argentina were built in the first draw of 2000 to increase production capacity by 520,000 cubiform meters of sawn timber per year. The investment cost for Arauco was approximately US$52 million.At the same time, Arauco acquired Forestal Cholguan, through which it got the Cholguan sawmill, which further increase production capacity by 300,000 cubic meters of lumber per year. Panels Arauco produced plywood and fiber panels, which represented 20. 4% of the companys sales in 2003. Arauco had expanded capacity first by building a plywood facility in 1997 at a cost of US$44 million, which increased production capacity by 230,000 cubic meters. In 2000, it built a second production line at a cost of US$30 million, and the total production of the facility reached 340,000 cubic meters.Maderas Prensadas Cholguan S. A. also became part of Arauco when the company bought Cholguan in 2000, increasing the capacity by approximately 300,000 cubic meters of MDF and HB. During 2002, two new mills MDF were set up, one in Chile and another in Argentina at a cost of US$135 million, amounting to a combined production capacity of 500,000 cubic meters. With all of these investments, Araucos current capacity was larger than one million cubic meters per year, making Arauco one of South Americas largest panel producers. 6 Arauco (A) Forward Integration or Horizontal Expansion? 705-474 Log MerchandizingArauco used a process called log merchandizing to determine the location of cuts on each l og and the order in which each section was sent to different adjoining facilities. Log merchandizing involved the use of a computer-driven scanner, which identified the logs diameter, the shape of the knots and the optimal points for the cuts. After a log was cut, it was automatically grouped and accordingly sent to one of three destinations sawmills for timber, panel production or the chip plant (for eventual pulp production). It was estimated that the log merchandizing process saved millions of dollars per year as a 10-centimeter (3.9 inches) error variation for an optimal cut in a major batch could result in $50 million in losses. The investment to install the ad hoc assets related to log merchandizing cost about $30 million. As an Arauco administrator stated You have no idea of the quality of the tree and the number of knots until you cut it down. The log merchandizing process ensures that we are using the parts of the tree for the right purpose. low Parana Arauco acquired contralto Parana in 1996, with the main intent of kick- assumeing profitable businesses in Argentina. The acquisition included a pulp mill and plantations. contralto Parana was located 1,300 kilometers northeast of Buenos Aires, in the Misiones state of Argentina. The Alto Parana plant was the biggest pulp market producer in Argentina, with a capacity of 350,000 tons per year of bleached softwood kraft pulp. Arauco obtained raw material from Alto Paranas plantations. maculation the plantations spanned 173,000 hectares, only 86,000 hectares were planted. Since these plantations were not sufficient for Alto Paranas pulp mill capacity, approximately 50% originated from third parties. Alto Parana frequently entered into negotiations with third parties negotiating on thebasis of price, quality, availability, and delivery. Sometimes, price negotiation escalated to topical anesthetic government as the forestry sedulousness was the lifeblood of the Misiones province. The propinquity of third-party resources was another vital concern as transportation costs ate into margins. Alto Parana was located far away from the main ports in Argentina. Thus, it was neither plausible nor cost effective to transport raw material from other countries. Argentinas main forestry zones were located in the provinces of Misiones, Corrientes, Entre Rios, Chaco, and Patagonia.Apart from Misiones, where Alto Parana was located, Corrientes was the closest at 300 kilometers from the Alto Parana facility. In 2003, Corrientes had pine and eucalyptus plantations spanning 117,000 and 71,000 hectares, respectively. Exhibit 10 shows the approximate costs of lumber transportation inside Argentina. In addition, there were loading costs associated with moving raw materials from the forest plantations to the plants. Owners of Argentinean plantations had to choose between exporting the wood to foreign nations or selling the wood to topical anaesthetic-based enterprises.It was estimated that the f ollowing firms would require approximately 50,000 tons of market pulp each. The main Argentinean firms that needed wood as a raw material were Celulosa Argentina S. A. , specializing in the production of bleached pulp, and located in Santa Fe, 900 kilometers from Parana, with a capacity of 95,000 tons per year. Faplac S. A. , manufacturer of PBO (particle boards), located in the province of Buenos Aires about 1,000 kilometers from Alto Parana, with a capacity of 50,000 tons per year. 7 705-474 Arauco (A) Forward Integration or Horizontal Expansion? Ledesma S. A., manufacturer of notebooks and mercenary paper, with a production facility in San Luis, 1,400 kilometers from Alto Parana. Ledesma manufactured about 85,000 tons of paper a year, although most of the raw material it needed to produce pulp came from sugar cane. Massuh S. A. , manufacturer of pulp and paper, with a production of 120,000 tons per year. Its pulp and paper plant was located in Quilmes, Buenos Aires province, more than 1,300 kilometers from Alto Parana. Papelera Jujuy, paper manufacturer, located in Jujuy, 1,100 kilometers from Alto Parana with a capacity of 50,000 tons per year. Papelera Tucuman, paper manufacturer, located in Tucuman, about 1,000 kilometers from Alto Parana, with a capacity of 50,000 tons per year. Pulp and publisher Industry The global pulp and paper intentness consisted of five main activities forestry, pulp production, paper and board production, distribution, and converting. Most of the larger players in the manufacturing had integrated operations that involved two or more of the above activities. The application had undergone a number of mergers and acquisitions in the 1990s as pulp and paper manufacturers struggled to parent efficiencies, increase capacities, and discredit costs.Some industry observers felt that the highly fragmented disposition of the industry meant that prices were less stable. Several of the larger companies were considered to be full y integrated with the monomania and operation of forests, pulp mills, paper factories, distribution, and converting facilities. Other firms chose to focus on a unique(predicate) category. The overall paper demand was intractable ultimately by consumers willingness to purchase products such as newspapers, magazines, office paper, stationary, and a legion of home products such as tissue and toilet paper.Paper and paperboard in packaging was widespread and used across most consumer and industrial applications. The overall workout of converted paper products (newspapers, magazines, tissue paper, diapers, etc. ) created the demand, which determined the prices for pulp and paper. The main consumers of paper were from North America, with an average consumption of 326. 5 kilograms of paper per individual per year. Western Europe, Japan, and china consumed approximately 190 kilogram per person per year. Developing countries in Asia, Eastern Europe, and Latin America were also increas ing their exercise of paper products.For example, corrugated paper in China was estimated at 13 to 15 billion cubic meters a year, with growth rates projected to be 10% annually for the next 10 years. 16 The possibility of such growth had spurred several pulp, paper, and chemical companies to form joint ventures with Chinese firms. Pulp and paper prices fluctuated as producers take down prices in times of soft demand, and moved to increase supply by building more capacity when demand was predicted to increase. Suppliers of pulp and paper controlled inventories tightly, releasing products to the marketplace at targeted times.(Exhibit 11 shows the oecumenic consumption of paper. ) environmental ConsiderationsRecycling and Substitutes to Paper Governments had been increasing regulations for pulp and paper companies to avoid clearcutting forests, to reduce chemical by-products such as chlorine, limit gas emissions from the operation of factories, and increase recycling. With greater environmental pressures, the three R slogan (reduce, employ and recycle) was creating alternative industries and increasing global 8 Arauco (A) Forward Integration or Horizontal Expansion? 705-474capabilities to recycle paper. For example, in the U. S. , it was estimated that approximately 42% of paper was recovered for recycling. 17 Recycled fibers from paper replaced the use of pulp in paper manufacturing. Using recycled fibers had several advantages, including lower costs to recycle paper than to produce pulp, the reduction of wood usage, lower residues released into the environment, and an overall drop in the cost of environmental treatment. The major disadvantage of using recycled fibers was that its getup per comparable ton was much less than pulp.Recycled fibers could be reused between five to seven times after seven times, the fibers became also short for papermaking. 18 Recycled fibers were experiencing modest growth, with production growing at a increase annual growth rate of approximately 6% moving from 48 million tons annually in 1980 to an estimated 150 million in 2000. Some industry observers felt that the increasing use of computers, take hold devices, and mobile phones would act as a substitute for paper. However, with more information passing through these mediums, other industry observers felt that paper usage would increase.The Paper and paperboard Industry Over half of the material that went into making paper and paperboard was made using pulp. Other materials included recycled fiber, chemicals, and minerals. By mixing together different variations of softwood or hardwood pulp, the paper manufacturer could produce a product for a specific intent. Paper products ranged from uncoated free sheets (such as regular writing paper) to coated free sheets, tissues, newsprint, and coated and uncoated groundwood. The worldwide paper market was estimated to be greater than 330 million tons at the end of 2003.The paper market had experienced three years of soft demand with no real growth in dollar terms since 2000. As of March 2004, an analyst assessed the worldwide paper market Global paper demand is on the mend. U. S. prices are liable(predicate) to lead the way into price recuperation with a meaningful positive effect on U. S. earnings in the second guide and should gain further in the second half. The U. S. dollar sets the tone for the purpose to invest in the paper sector. While a weaker U. S. dollar undoubtedly has proscribe implications for earnings in the near termthe impact of a weaker U. S. dollar is dwarfed in comparison to the impact of higher prices. . . . European paper prices have bottomed in our view and it appears likely that higher prices should start to impact earnings in some early cycle segments from the third quarter onwards. Later cycle segments, such as newsprint and SC paper, should see a nice price rebound in the early stages of 2005. Prices have been on a downward trajectory since the fourth qu arter of 2000 but the tide is now turning. 19 Paper and Paperboard CompaniesMost of the large paper companies chose to operate a tout ensemble integrated structure that included the self-command of forests, pulp mills, paper manufacturing facilities, distribution arms, and converting capabilities. However, there were a number of smaller local firms that produced paper based on the specific need of their markets. These smaller paper manufacturers typically purchased raw materials such as pulp from suppliers based on the type of pulp (bleached, unbleached, softwood, hardwood, etc.), the cost, and the service details. Some industry insiders felt that maintaining a fully integrated structure allowed for greater negotiation leverage with the main suppliers to the industry, such as chemical providers and paper and pulp machinery manufacturers. 9 705-474 Arauco (A) Forward Integration or Horizontal Expansion? Exhibit 12 shows a list of 25 of the worlds largest paper companies. The top f ive producers included 1. outside(a) Paper Co. (U. S. ) had revenues of $25. 2 billion and profits of $302 million in 2003.The company was a fully integrated enterprise producing plywood, paper, pulp, packaging, and chemical by-products from papermaking. It controlled over 10 million terra firma of forestlands in the U. S. , Brazil, and New Zealand. 20 2. Georgia-Pacific Corp. (U. S. ) had revenues of $20. 2 billion and profits of $254 million in 2003. Like its main rival, International Paper Co, Georgia-Pacific was a vertically integrated rivalry in pulp, paper, lumber, plywood, oriented strand board, adhesives, and a number of paper consumer products.The company think on spinning off its consumer products discrepancy but changed plans due to weak uprightness markets in 2002. However, it did sell majority ownership of its distribution arm, Unisource Worldwide. 21 3. Stora Enso Corp. (Finland) had revenues of $15. 2 billion and profits of $182 million. Stora Enso was involved in the manufacturing of a wide variety of products such as magazine paper, newsprint, fine papers, packaging, graphic products, office papers, wallpaper base, and sawn timber. 22