Arauco expansion strategy proposal
It has been 2 years sine the board approved the first phase of Nueva Aldea project. Nowadays, there are some different opinions about the second phase inside the company, to construct a new pulp mill or to forward integration into paper manufacturing? I will suggest you to continue investing on the new pulp mill because of three reasons, the high revenue of pulp product, the risk of failure in paper industry, and the increasing demand and price of pulp. First of all, it is obviously that Arauco keeps high profit in current industry. It is not necessary for Arauco to enter a new industry, especially the paper manufacturing. According to Sales Revenues report, the operating margin increased from 23% to 31.3% from year 2001 to 2003.
On the contrary, the profit margin of the Top paper companies in 2002 arrange from -4% to 11.8%, most of which was around 1%-4%. By analyzing the profit data, we can find that even the highest profit margin of paper manufacturing is still much lower than Arauco’s. As a result, there is no reason for Arauco to step into paper manufacturing industry. Second, it will be very risky for Arauco to enter paper manufacturing. Through the history of Arauco, it has no experience in paper manufacturing. Besides, Arauco need to invest a huge number of money to build up paper mill. What’s more, from the low profit margin, we can find that the competition of paper manufacturing is already very intensive.
Arauco will face the direct competition from both domestic and abroad. Since the paper market inside the country is not very big, Arauco need to export paper product to other areas, such as North America, Europe, and Asia. The high cost and high risk of paper transportation will hinder the success of Arauco’s paper business. Finally, the increasing demand and price of pulp provide a good chance and reason for Arauco to invest on its pulp business.
According to the Credit Suisse analyst report, March 9, 2004, although the price of pulp decreased in the last three years, due to the increasing demand of paper consumption in future, the price of pulp will increase. Meanwhile, Arauco has already controlled its costs much lower than other pulp producers. If Arauco can sustain or improve its cost controlling methods, considering the stable cost of maintaining forest and other operations, the increasing price of pulp will dramatically expand our profit margin.
As a result, what Arauco needs to do is to develop new technology to make the cost even lower and to increase the production to fit the market demand in future. Arauco has already very successfully in forest management and pulp producing. In order to ensure the continuing success in future, Arauco should choose the horizontal expansion plan, constructing a new pulp mill, since the pulp business’s revenue is much higher than paper manufacturing, the entrance of paper manufacturing is very risk, and the increasing demand and price of paper will ensure the profit in pulp manufacturing.