Global MBA

Global Supply Chain

Héctor Fabio Bianchá
ID Number: 1130597873

Arauco Case Analysis

Is it a good idea For Arauco to build the New Aldea Project?

It is well known Arauco is one of the biggest pulps and wood producers in Chile. As a matter
of fact, at the time of the case, it owns more than 1 million hectares of forest in different
countries in South America, which it is described as advantage since its trees take less time
to mature than its competitors. From the very beginning of the case, we are placed in
Alejandro Perez, Arauco’s CEO, who is currently betting to foster develop the second phase
of Nueva Aldea Project, which involves building Arauco’s 6th pulp plant.

If the project is successful, this would tie Arauco to its Brazilian competitor Aracruz as the
world’s largest pulp producer since the second phase of the project would add about 3.0
million tons to Arauco’s full capacity. However, the decision is not as simple due to different
factors such as the volatility of market prices which has forced Arauco to seek for different
ways to diversify its products into the paper market. After this synopsis, this case analysis
will focus on why it is better for Arauco to invest on the New Aldea Project second phase
rather than investing on the diversification of products into the paper market.

As mentioned in the previous paragraph, based on the information presented in the case and
its exhibits, I believe it is a good idea for Arauco to continue with phase II of the New Aldea
Project. First and foremost, because increasing Arauco’s market pulp capacity will enable
the company to greater perform in economies of scale maintaining its cost advantage as it is
presented in exhibit 6 in the case.
This exhibit displays that Arauco’s cost advantage comes primarily from the low cost of the
wood and labor which will actually be enhanced by building a new plant. Arauco is the owner
of more than 33% of Chile’s total plantations, and this country’s climatic condition have
enabled Arauco to ideally grow pine contrary to other countries like Finland and The U.S.A
By increasing its capacity, Arauco can keep aiming at increasing the market share in the
international market pulp, as plants will be using higher than 80% of their total capacity
taking full advantage of Arauco’s ideal terrains.

Secondlu, even though, it is expressed in the case that investing in the New Aldea Project
cost about 1 billion dollars, one could assume this cost will be recovered in about three years
after the plant is fully operational specially when analyzing the information presented in
exhibit 2a and 2b where Arauco’s total sales revenues has been doing quite well for the last
three years. On top of that, if one take into consideration the investment Arauco has already
done in research and development in their last project Valdivia, it is almost certainly true that
the New Aldea Project cost will be lower than expected.

Finally, exhibit 14 shows a drop in the pulp price, however, exhibit 8 illustrates a tree
diagram, one could assume that by building a new pulp plant Arauco would be able to use
every little part of every single tree they have at their disposition. Being flexible towards the
pulp price in the market and deciding what part of the trees would be better to cut off.

Deciding whether to keep the New Aldea Project alive or investing into new paper markets
is not an easy decision, having said that, the information provided in the case strongly
suggests that Arauco should keep going towards participating in economies of scale and
bigger markets rather than pursuing an already occupied Chilean market where their expertise
and competitive advantage is not the greatest.