Arauco Analysis

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Esc Rennes | | Forward Integration or Horizontal Expansion? | | Costa Agustina | 31/03/2011 |

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Arauco: Forward Integration or Horizontal Expansion?


Arauco was formed through a merger between Industrias Arauco and Celulosa Constitución in 1979. With the pass of the years the company become one of the largest timber plantation owner in Latin American and Chile`s largest exporter of timber
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The second phase of the project includes constructing a pulp mill and will cost US$1 billion.
Today (2004) Pérez main problem is that he has to decide whether the company should go through a horizontal expansion or a forward integration. In others words, if the company should continue with the second phase of The Nueva Aldea project becoming the largest market pulp producer in the world and having the possibility of foregoing other large projects in the next decade or to take advantage of their low costs in pulp production by forward integrating into paper manufacturing.

Evaluation of the two alternatives:

As regards the horizontal expansion, there are several points that must be taken into account as they demonstrate that this option will be the correct one: * This expansion will grow the company market share because they have a cost advantage. * For a company is better and easier to grow in a sector that they are presently functioning. * The market seems to be moving in favor. * As a result of a horizontal expansion the company can achieve economies of scale and reduce significantly their costs. * Pulp is Arauco´s main industrial activity, generating up 52% of EBITDA * Pulp production is the core competency of Arauco. * Becoming the market leader will allow them to control supply and demand of the market of pulp. * They have young forests. * Arauco is one of the world´s premier forestry enterprises

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