United States: A View To The Future - Forestry In The New Millennium

The business world has seen more change in the past decade than it has seen in the past century. The explosion in Internet applications, the dissolution of barriers through improved communication and the merging of local economies into an expansive global marketplace have meant big change for all industries – and the forest industry is no exception.

The forest industry has remained relatively insulated from the changes that have revolutionized the world of business in the last decade. In fact, while other industries have undergone radical transformations to maximize their efficiency and bolster their competitive edge, the forest industry has stayed tethered to a more traditional approach to doing business …until now.

In the last few years, the Canadian forest sector has begun to address the issues which are impacting the industry on a global level – such issues as overcapacity, lack of pricing discipline, cyclical commodity markets, new competitors, increased environmental awareness, enhanced technology, and increasingly demanding customers that are becoming larger and more global in nature.

The forest industry is beginning to acknowledge that change is necessary – change in the way businesses operate, change in the way businesses deal with customers, change in the technology employed, and change in the skills of its people. Those who do not adapt to this change will undoubtedly lose market share and risk extinction in the years to come.

The paradigm shift toward new business models and the advanced use of technology has made for some interesting theories and predictions on where the industry is heading. Not surprisingly, many of these predictions surround the key drivers that will give businesses the competitive advantage in the next millennium. These factors include consolidation, environmental marketing and e- business.

In the future we will see fewer players, following a new set of rules on a larger, more aggressive international playing field. Those left standing when the whistle blows will be those who have embraced consolidation, environmental marketing and e- business and have leveraged these factors to their competitive advantage.

Consolidation and the debate over whether bigger is necessarily better have been front and centre on the industry landscape for the past several years. Annual global sales in the forest industry total about US $750 billion dollars, with the largest of the forest products companies having sales of only $20 billion. In the automobile or chemical industries, by contrast, the top five players have about half of the market share. What this statistic confirms is that the forest industry is extremely fragmented, and even with the merger and acquisition activity that has already occurred in the last few years, vast opportunity still exists for consolidation.

The industry has a long history of boom and bust cycles, due in part to high fragmentation, high capital intensity and the commodity nature of most of its products. There are no clear solutions to all these factors, but fragmentation is something that the industry can potentially solve through mergers and acquisitions.

We are already seeing decisive steps in this direction. In the last 18 months alone International Paper bought Union Camp for US $5 billion in stock; Stora Kopparbergs of Sweden merged with Enso Oy of Finland in a US $5.6 billion deal; and Stone Container Corp. of Chicago merged with the US unit of Jefferson Smurfit Group of Ireland, in a US $6- billion transaction.

In Canada, Abitibi- Consolidated Inc. of Montreal teamed up with Norske Skogindustrier of Norway and Hansol Paper of South Korea, to operate an Asian newsprint company in a $1.4- billion alliance. And, of course, there was the recent $3.6- billion acquisition of MacMillan Bloedel by Weyerhaeuser and Canfor's acquisition of Northwood.

It is important to keep in mind that the dust is still settling on many of these mergers and acquisitions, and the net success of these unions still remains to be seen. However, all indications point to this trend continuing into the next millennium – especially in Canada.

In the last decade, the world has moved toward a global economy. This has enabled international companies to penetrate new markets and go head to head with existing competition to win market share. Take for example the rapid pace with which Scandinavian lumber producers have been able to penetrate US and Japanese markets.

This new competition is particularly troublesome for Canadian pulp and paper companies that have per- tonne production costs – fibre, energy, labour – that are generally higher than many of our global competitors (i. e., South America and the Asia Pacific region).

Consolidation with other companies will help Canadian firms better compete by allowing them to generate cost savings through reducing costs, leveraging purchasing power and optimizing capacity utilization in manufacturing.

For example, when Sweden's Stora and Finland's Enso merged in 1998, the group forecasted annual savings of $400 million – 30 per cent from streamlined production; 20 per cent from combined purchasing and logistics activities; 20 per cent from combined administrative costs; and 30 per cent from tighter controls on capital spending and sharing best practices.

Companies can also increase their competitive advantage by divesting those operations that do not contribute to the bottom line. Consolidation can facilitate greater specialization, enabling companies to more clearly describe their corporate strategy, focus resources and concentrate on core businesses.

In short, consolidation can help Canadian companies reduce costs, improve shareholder value, increase market power, attract financing and obtain better access to global markets. This will happen because shareholders will demand it. Companies that cannot return their cost of capital, and there are numerous examples, are living on borrowed time.

The good news is that many industry experts believe that Canadian companies will continue to be courted by those seeking some sort of union. Canadian companies are attractive because they are currently undervalued in many cases, yet are prized due to our fibre quality, educated labour force and first- rate production assets.

A company's ability to differentiate itself by effectively marketing the environmental attributes of its forest products is another factor that will contribute to a competitive advantage in the next millennium. In recent years, environmental activists have shifted their focus away from the forest companies and toward wholesale customers. As a result, buyers of both solid wood and pulp and paper products are insisting that forest companies embrace new ways of managing the forests and conversion facilities, validated through third party confirmation or certification of environmental performance.

A major push toward certification occurred in March 1999, at PricewaterhouseCoopers' Annual Forest Industry Conference in Vancouver. At the conference, The Home Depot announced it was going to make certification a key determinant of doing business. Later in the year, the retail giant went on to promise its customers that it would stop selling wood products from environmentally sensitive areas and give preference to "certified" wood. The Home Depot is one of the largest lumber buyers in North America. As such, their announcement sent tremors through the industry and forced those who had viewed certification as a fleeting trend, to sit up and take notice. Other companies, such as Home Base and IKEA, have since followed suit.

And all signs point to this trend continuing. Competitive pressures and the demands of environmentally concerned customers will no doubt continue to drive forest product companies to apply for formal endorsement of their environmental performance in manufacturing and forest management. In the future, differentiation and competition will increasingly be determined by a company's environmental performance and accountability.

But the clock is ticking. Implementation of environmental management programs can be a lengthy process. Companies will have to move quickly to implement the systems and processes required to meet the new environmental and sustainable forest management standards, in order to avoid losing ground to the competition.

Over the past year several big players have achieved or announced their pursuit of certification, providing them with a competitive advantage. Champion International Corporation announced that it was the first forest products company to commit to independent third- party audits to the Sustainable Forestry Initiative standard in the U. S. In Canada, MacMillan Bloedel's North Island logging division and Weldwood's 100 Mile House operation have achieved certification to the Canadian Standards Association's Sustainable Forest Management Standard. Weyerhaeuser, Canfor, Stora Enso and others have achieved ISO 14001 certification of their timberlands and J. D. Irving achieved certification to the Forest Stewardship Council Standard.

The increasing emphasis on environmental performance will also result in the formation of new strategic alliances between environmental groups, forest companies, government agencies, brokers, retailers and consumers. New alliances may also be cultivated between forest companies and aboriginal communities due to a mutual interest in economic development and environmental concerns.

Another interesting aspect of the environmental issue is the international commitments currently being developed to tackle the problem of global warming. Through fuel conversion, changing forest management practices, and leveraging the opportunities to sequester carbon in soils and new plantations, the forest industry can make a significant contribution to the solution. The sale of carbon credits has the potential to improve financial returns as well. According to The Economist magazine, carbon trading could grow to be a trillion dollar market over the next 20 years.

However, regardless of what may evolve out of environmental concerns in the next millennium, independent confirmation of environmental performance will no doubt grow in importance within the forest industry. With the influence that certification will have in the future, one would expect that the situation will become less complex over time, as the myriad of different environmental standards merge into a handful of certifying bodies with similar certification criteria.

The Internet has been one of the most formidable enablers of globalization. It has given businesses unprecedented transparency in the marketplace by dissolving traditional supply channels, bridging the distance between supplier and customer, and vastly improving the exchange of information.

In the past four years, the number of Internet users has grown from 3 million to 50 million; by the year 2002 it is estimated that this number will jump to an astounding 300 million. And with this boom in users will come a boom in sales. Internet sales have risen dramatically over the last five years, prompting economists and technology pundits alike to forecast that annual sales will exceed U. S. $327 billion globally by 2002. This signals great opportunity for those who embrace e- business and significant challenges for those who do not.

As far as forestry is concerned, the Internet's impact will be far reaching, influencing everything from asset management and procurement to customer relations. E- business is a very recent phenomenon in the forest industry and acceptance of the changes that will be driven by e- business has come in varying degrees – some companies have been content dipping their toes in the shallow end, while others have taken the plunge headfirst and are already seeing a payback.

There are many models and theories within the industry on how forest products companies should organize themselves around e- business. One of the most effective approaches is a staged evolution into e- business that insulates a company from risk while allowing it to maximize the benefits and opportunities of Web- based business.

The first stage pertains to channel enhancement and involves establishing a presence on the Web to offer surfers information about the company and its products. This is a good first step because while it carries very little risk for the company, it still provides exposure to the customer. A 1999 global survey conducted by PricewaterhouseCoopers found that 90 per cent of the top 100 global forestry companies already have Web sites.

The next stage in this evolution focuses on connecting customers with suppliers. At this stage companies are electronically linked with suppliers to allow for the exchange of more detailed information – information that can enable companies to reduce their inventory levels, decrease operating costs and improve customer relationships. This direct link to the customer promises to revolutionize the entire supply chain by making it possible for companies to respond to just- in- time inventory demands, rather than relying on production to drive supply chain requirements.

At the third stage a company's business really begins to transform itself. New partnerships and alliances form around combined assets, activities and services, while such non- core competencies as finance and accounting are outsourced. Companies retain only those core- competency operations that are critical to their business operations and outsource the rest, so that resources can be dedicated to building strategy rather than executing transactions. What this stage reinforces is the importance of specializing. To win in the world market, forest companies must put their focus on core businesses – manufacturing pulp, paper or wood products. In some cases, forest companies have organized their woodlands operations into separate business units. Performing functions that do not add value, or managing activities where we are not true experts, are distractions we simply don't need and can't afford.

Still years away for many forestry businesses, industry convergence is the final stage in the evolution toward e- business. It is, however, already happening in other industries where the boundaries between sectors have been removed and companies have joined forces to participate and conduct business across industries.

Once a company has become an e- business it can expect to see the most dramatic changes in the areas of customer relations and information exchange. Companies will move closer than ever to their end users, shortening and strengthening the links in the supply chain, while effectively lowering inventory levels and increasing performance.

It will also be easier to communicate directly with customers. Increased amounts and speed of information will enable companies to better identify their customers needs and obtain information on what customers are buying. This will help companies react more quickly and fine tune production to fill the pipeline with the right type and quantity of product needed to meet end- user requirements.

But the advantages of e- business can be fully realized only if the professional forestry community makes a commitment to continuing education and the advancement of its technological skill set. One of the biggest advantages of the Canadian forest industry is our educated labour force. Technology will make this education more valuable than ever before. The skill set required of foresters 20 years ago will be barely recognizable in the 21 st century. New skills will have to be developed and new areas of expertise fostered in order for individuals in the industry to keep pace.

In the end, the hoopla around e- business boils down to this: over the next few years, companies in the forest industry will have to embrace e- business to stay in business. Those companies that do not adopt e- business practices will find it increasingly difficult to conduct business in our Web- enabled world; they will find their customers more and more intolerant of their antiquated methods, and they will slowly lose market share until they cease to be viable.

So what will the forest industry look like in the next millennium? The future of forestry will be largely shaped by the factors of consolidation, environmental marketing and ebusiness. A multitude of other powerful factors – competition from substitute products, the impact of improving international literacy rates on paper demand, the trend away from newspapers and toward Web- based news sources, and of course, the general health of the economy, to which the forest industry will always be inextricably linked – will also continue to have an impact on industry fortunes.

But all things considered, one thing is certain: the future of forestry will be much different than the past, and change will come at an ever- increasing rate. The forest products companies of the future will be organized around core competencies and will divest those areas of business that distract them from their bottom line strategy. The companies of the future will have a strong customer focus and will be tightly connected to the needs and demands of their customers through better supply chain management and Web- enabled communications. Companies of the future will have world- class logistics, create significant shareholder value, and will invest in both the technology and human capital required to compete in the global marketplace. The companies of the future will need to accept change and consistently strive to stay one step ahead in the brave new world of the 21 st century.