CHALLENGES TO THE FOREST MACHINE BUSINESS AS A RESULT OF GLOBAL - PowerPoint PPT Presentation

CHALLENGES TO THE FOREST MACHINE BUSINESS AS A RESULT OF GLOBAL ECONOMIC CHANGE Forestry, Wildlife and Wood Sciences for Society Development Conference on commemorating the 90th anniversary of university teaching in the Independent Forestry Study department of Czech Technical University Praha, 16-18.4.2009 Arto RUMMUKAINEN* Bo DAHLIN** Markku PENTTINEN* Ashley SELBY* Jarmo MIKKOLA* * Finnish Forest Research Institute ** University of Helsinki Metsäntutkimuslaitos Skogsforskningsinstitutet Finnish Forest Research Institute www.metla.fi

Volume of harvesting (Metinfo 2008, Skogsstyrelsen 2008) Finland Sweden Removals, Mill. m 3 2007 66,5 77,6 Value of harvesting, Mill. € 718 620 Number of harvesting enterprises ~1 600 - 3 000 ~1 600

The whole business under hard change pressures anyway: Operations models of contracting in future Wood harvest- ing / transport enterprise ”End customer” Traditional model (STAR) Subcontractors Machine enterpr./transp. Today: Area/key contracting ”End customer” (SUBCONTRACTING) Machine Industry, etc. enterpr./transp. Enterprise / enterprise End cust., industry 1 NETWORK End cust., ind. 2 End cust,. Forest man Future: Multibranch / ass. Multicustomer End cust., heat plant contracting Enterprise / enterprise network / joint enterprises End customer, forest Source: owner(s) Metsäteho Ltd

Stucture of full time harvesting business in Finland 2007 Turnover Enterprises, Turnover, Machines, Machines, Employees, Employees, class, % % % median % median 1 000 € < 75 9 4 1 1 1 0,2 75 – 150 17 4 8 4 1 0,6 150- 300 24 11 15 2 10 1,6 300-600 26 23 25 2 23 3,3 > 600 24 61 48 62 5 8,4 Total, % 100 % 100 % 100 % 100 % Total 1 060 * 498 Mill.€ 2 975 4 059 * Consist all enterprises, which supplied the closing of the books material to Statistics Finland 2007 13.5.2009 4

Costs increase faster than compensation 5 13.5.2009

Wage corrected net profits in Finland and Sweden SF corr. = Statistics Finland material wage correction FFRI corr. = Wage correction 20 000 € for person enterprises and limited partnerships, 30 000 € for partnerhsips and nil for limited companies 13.5.2009 6

Many harvesting companies make losses (Statistics Finland, SMF Sweden) 7 13.5.2009

Debts divided by turnover in Finland 2007 200 180 160 140 120 % 100 80 60 40 20 0 0-75 000 75 000 - 150 000 150 000 - 300 000 300 000 - 600 000 Over 600 000 Enterprise turnover class, €, lower quartile, median & upper quartile 13.5.2009 8

Repayment period of debts in Finland 2007 5.0 4.5 4.0 3.5 3.0 Years 2.5 2.0 1.5 1.0 0.5 0.0 0-75 000 75 000 - 150 000 150 000 - 300 000 300 000 - 600 000 Over 600 000 Enterprise turnover class, €, lower quartile, median & upper quartile 13.5.2009 9

Reserves by turnover class in Finland 2007 Reserve = financing result - debt payment - investments 120 100 80 1000 EUR 60 40 20 0 -20 0-75 000 75 000 - 150 000 150 000 - 300 000 300 000 - 600 000 Over 600 000 Enterprise turnover class, €, lower quartile, median & upper quartile 13.5.2009 10

Forest industry promoted domestic harvesting 2008 (Vehicle Administration Finland 2009) 13.5.2009 11

Large delayed winter work site reserves show normal removals for February in Finland, but after that ... Mäki-Simola, E. Metinfo, Metsätilastotiedote 10/2009 Commercial removals, Mill. m 3 Maximum 1999-2008 Average 1999-2008 Minimum 1999-2008 13.5.2009 12

Wood purchases dropped in Finland Mustonen, M. Metinfo, Metsätilastotiedote 11/2009 Wood purchases of industry, Mill. m 3 Maximum 1999-2008 Average 1999-2008 Minimum 1999-2008

Industry reactions � Industry has cut production in factories � Only ”obligatory" winter site cuttings will be carried out � No wood will be cut for storage; inventories full with imports � Lay-offs of wood procurement personnel � Operations moved to Sweden, imports from there � Wood markets preserved "alive" � Harvesting enterprises at stand still at least 4-5 months 13.5.2009 14

How do customers react on recession? � Sharing poverty Weakest firms fail in every size/enterprise class � Which firms continue? Criteria of choice: price, size, "best-loved" etc. Less transactions, larger enterprises => more negotiation power Let area/key entrepreneurs make decision Own machines or subcontractors � Mixed strategies � Others? 13.5.2009 15

Wage and depreciation cost dominate (Statistics Finland 2009) 16 13.5.2009

Theoretical recession endurance of Finnish harvesting enterprises based on the situation at the end of 2007 Cash burn rate = how long an enterprise can pay obligatory expenditures Here only interests, amortization-free period negotiated Small person enterprise: Turnover < 75 000 €, 1 machine, 0,3 employees Large limited company: Turnover > 600 000 €, 6 machines, 9 employees Enterprise size and type Wage payment Cash burn rate = endurance in months Lower quartile Median Upper quartile Small person enterprise Wages paid 1 15 49 Large limited company Wages paid 0 2,5 6,5 Small person enterprise Wages not paid 4 29 213 Large limited company Wages not paid 0 44 211 In reality times are much shorter Enterprise is usually only source of income for the owner There are other obligatory periodical expenditures Employees can not bear long lay-off 13.5.2009 17

Did the record year 2007 reduce bankcrupties in harvesting business? -There was 2 653 wood harvesting enterprises in 2007 Statistics Finland material -During 2003-2007 share of bankrupties varied in harvesting business 0,4 - 1,0 % and in all businesses 0,7 - 1,0 % - 2008 data not yet complete 13.5.2009 18

Entrepreneurs have to response to changing environment (after Gibb 2000) Global Pressures Greater uncertainty Organisational State and complexity repositioning repositioning - The need for an entrepreneurial response Individual repositioning 13.5.2009 19

How can entrepreneurs react? Minimising cost Negotiations with customers No investments, negotiate amortization -free period Laying-off personnel Developing business Resizing and reshaping for future New compensation structure Part time operations New customers, services or change of business Training and developing him-/herself and personnel Positive attitude to enterprising Seeking new business opportunities Learning processes

Model of small business information seeking as a response to environmental threat and opportunities (after Lang, Calantone & Gudmundson 1997) I ntension to expand firm Perceived Association opportunities memberships Market extension in future Information Use of seeking consultative and other services Intension to expand product/service Perceived Media usage threats Relative competitivenes Competitors as threats 13.5.2009 21

Questions � What is the volume of work after the depression? � Who operates the business, who are operators? � Machines exist, who owns them? � What could be done for future? Proactivity Planning of investments and financing Risk analysis Only profitable agreements => solidity Cost factors affect on compensation New businesses: forest bioenergy? Ability to operate abroad ???? 13.5.2009 22

Thank you you! ! Thank Contacts w elcom e w elcom e! ! Contacts Arto Rummukainen Arto Rummukainen arto.rummukainen@metla.fi arto.rummukainen@metla.fi Bo Dahlin Bo Dahlin bo.dahlin@helsinki.fi bo.dahlin@helsinki.fi Markku Penttinen Markku Penttinen markku.penttinen@metla.fi markku.penttinen@metla.fi Ashley Selby Selby Ashley ashley.selby@metla.fi ashley.selby@metla.fi Jarmo Mikkola Jarmo Mikkola jarmo.mikkola@metla.fi jarmo.mikkola@metla.fi 13.5.2009 23