Avoiding The Petrified Forest

Change Isn't Comingó It's Here

Even the most perfunctory look at the international forest and paper industry tells us that it needs to improve its performance to create shareholder value. In Canada, in particular, over the past decade overall results have been moribund.

In theory, therefore, change should not be feared. We all know technology is dramatically changing the ways we work and communicate. Social, political and economic systems tend to change incrementally, like a growing chip pile. Every so often, however, the addition of one more chip changes the entire shape of things. That is what E- Business is doing today: creating dramatic change at an exponential rate.

E- business is integral to the changes coming to the forest industry. Fortunately, players in the industry can, and indeed must, direct the changes wrought by this new communication technology.

The Growing Value Of Customer Relationships

Let's learn from history. Where has shareholder value been created since the Second World War? It has moved from production- related industries, including forest products, to the mega- retailers (Wal- Mart et al), and again, most recently, to those companies that best own and manage the customer relationship. This new model is, perhaps, best exemplified by Amazon. com.

Amazing Financial Facts

(in millions, for year ending Dec. 1998)

Forest & Paper Top 100

Amazon.com

Total Sales Revenue

$273,000

$610

Profit

$6,500

-$124

What They're Worth (Oct. 1999)

$200,000

$27,000

Total Assets

$380,000

$648

†

The world's top 100 forest and paper companies have total shareholder value of $200 billion produced by assets of $380 billionó a one to two ratioó versus $27 billion created by $648 million for Amazon. comó a 42 to one ratio. Amazon's value is only partially a result of hype; the rest lies in the expectation of profit that will be created by the company's outstanding customer ownership and branding.

Why Change Is Necessary

Three related factors are hurting the forest products industry. First, the industry is overly fragmented. Even International Paper, the revenue king among producers, accounts for only three percent of total revenues. Fragmentation contributes to global overcapacity, poor price discipline, and, compared with others in the value chain, little power to determine trends in its own industry. For example, relative newcomer The Home Depot, at $30 billion in revenue and growing at 31% compounded over the last 10 years, is able to demand certified forest products and chain of custody documentation, with the costs being borne by producers. Consolidation is taking place, but the industry has a long way to go, especially...