Caso Arauco Preg3
Should Arauco own both forests and pulp production facilities? Does the Alto Paraná project help you answer this question?
According to the information of the case, clearly Arauco should own it own forests and facilities, because the benefits from Vertical Integration are bigger than it costs. The first case is, even when, the ownership of both kinds of sources can decrease the efficiency of the entire business, it can create an increasing in the location efficiency (because you can locate the factory near of the forest and in that case you can diminish transport’s cost).
Besides, if you are the owner of the forest, you can manage it in a better way, matching the kind of the trees that are planted with the kind of productive plant that is located near of that forest and the availability to make continuous working the factory. (The cost of construction of a plant is very expensive, for example Valdivia’s plant cost about USD 900 millions plus USD 300 millions in forest).
Another reason is that if Arauco is the owner of the forest, there will be no transaction costs from negotiating prices, availability and quality of the trees, because this items will belong to Arauco. Even more, if the resources to produce in the factory have to be bought, there is a risk (that can be low or high), that another company can compete with you for the same resource (in this case, the trees).
From the Alto Paraná factory case, we can conclude that these issues are really happening, because this facility is not producing at it full capacity with it own forests, otherwise they must buy to local producers almost 50% of their current capacity. For example, the problems that are happening are like:
1. They must negotiate prices, availability and shipping dates; this increase transaction costs and the uncertainty of having the factory working 24/7.
2. Transport cost increase the total cost of the pulp, for example if we consider that Alto Paraná plant need to buy 175,000 ton of
According to the information of the case, clearly Arauco should own it own forests and facilities, because the benefits from Vertical Integration are bigger than it costs. The first case is, even when, the ownership of both kinds of sources can decrease the efficiency of the entire business, it can create an increasing in the location efficiency (because you can locate the factory near of the forest and in that case you can diminish transport’s cost).
Besides, if you are the owner of the forest, you can manage it in a better way, matching the kind of the trees that are planted with the kind of productive plant that is located near of that forest and the availability to make continuous working the factory. (The cost of construction of a plant is very expensive, for example Valdivia’s plant cost about USD 900 millions plus USD 300 millions in forest).
Another reason is that if Arauco is the owner of the forest, there will be no transaction costs from negotiating prices, availability and quality of the trees, because this items will belong to Arauco. Even more, if the resources to produce in the factory have to be bought, there is a risk (that can be low or high), that another company can compete with you for the same resource (in this case, the trees).
From the Alto Paraná factory case, we can conclude that these issues are really happening, because this facility is not producing at it full capacity with it own forests, otherwise they must buy to local producers almost 50% of their current capacity. For example, the problems that are happening are like:
1. They must negotiate prices, availability and shipping dates; this increase transaction costs and the uncertainty of having the factory working 24/7.
2. Transport cost increase the total cost of the pulp, for example if we consider that Alto Paraná plant need to buy 175,000 ton of