Case | HBS Case Collection | February 2005 (Revised March 2009)

Arauco (A): Forward Integration or Horizontal Expansion?

by Ramon Casadesus-Masanell, Jorge Tarzijan and Jordan Mitchell

Abstract

Celulosa Arauco is a major Chilean producer of market pulp and wood products. Owning over 1.2 million hectares of forest in Chile, Argentina, and Uruguay, the company's key advantage is the ideal growing conditions in which the company's forests are located. As of early 2004, Arauco is the third largest producer of market pulp (pulp sold on the open market) and is considering increasing its capacity, tying it with Brazilian competitor Aracruz as the world's largest producer. The first phase of the project has been approved by the board of directors and includes a sawmill, plywood mill, and energy complex valued at $120 million. Now, Alejandro Perez, Arauco's president and CEO, is seeking approval for the second phase of the project, which would include the company's sixth market pulp plant at a cost of $1.2 billion. Perez's concerns about the volatility of market prices for the past three years led the company to diversify into wood products like panels, medium-density fiberboard, and other remanufactured wood products. These divisions are highly successful and currently account for approximately 50% of Arauco's revenues. Perez is debating whether the company and its shareholders would be better served by a forward integration into the paper business instead of increasing the company's capacity in market pulp.

Keywords: Decision Choices and Conditions; Competitive Advantage; Diversification; Expansion; Vertical Integration; Forest Products Industry; Chile;

Citation:

Casadesus-Masanell, Ramon, Jorge Tarzijan, and Jordan Mitchell. "Arauco (A): Forward Integration or Horizontal Expansion?" Harvard Business School Case 705-474, February 2005. (Revised March 2009.)