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. m3 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

”End customer” End cust., industry 1 ”End customer” Industry, etc. Wood harvest- ing / transport enterprise Traditional model (STAR) Future: Multibranch / Multicustomer contracting Machine enterpr./transp. Today: Area/key contracting (SUBCONTRACTING) Machine enterpr./transp. Enterprise / enterprise network / joint enterprises Enterprise / enterprise NETWORK End cust., ind. 2 End cust,. Forest man ass. End cust., heat plant End customer, forest

• wner(s)

Subcontractors Source: Metsäteho Ltd

Stucture of full time harvesting business in Finland 2007

Turnover class, 1 000 € Enterprises, % Turnover, % Machines, % Machines, median Employees, % Employees, median < 75 9

1

4

1

1

0,2

75 – 150 17 4 8

1

4

0,6

150- 300 24 11 15

2

10

1,6

300-600 26 23 25

2

23

3,3

> 600 24 61 48

5

62

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

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Costs increase faster than compensation

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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

Many harvesting companies make losses

(Statistics Finland, SMF Sweden)

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Debts divided by turnover in Finland 2007

20 40 60 80 100 120 140 160 180 200 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

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Repayment period of debts in Finland 2007

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 0-75 000 75 000 - 150 000 150 000 - 300 000 300 000 - 600 000 Over 600 000 Years

Enterprise turnover class, €, lower quartile, median & upper quartile

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Reserves by turnover class in Finland 2007

Reserve = financing result - debt payment - investments

• 20

20 40 60 80 100 120 0-75 000 75 000 - 150 000 150 000 - 300 000 300 000 - 600 000 Over 600 000 1000 EUR

Enterprise turnover class, €, lower quartile, median & upper quartile

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Forest industry promoted domestic harvesting 2008

(Vehicle Administration Finland 2009)

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Large delayed winter work site reserves show normal removals for February in Finland, but after that ...

Mäki-Simola, E. Metinfo, Metsätilastotiedote 10/2009

Maximum 1999-2008 Average 1999-2008 Minimum 1999-2008

Commercial removals, Mill. m3

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Wood purchases dropped in Finland

Maximum 1999-2008 Average 1999-2008 Minimum 1999-2008

Wood purchases of industry, Mill. m3

Mustonen, M. Metinfo, Metsätilastotiedote 11/2009

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

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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?

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Wage and depreciation cost dominate

(Statistics Finland 2009)

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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

Cash burn rate = endurance in months Enterprise size and type Wage payment Lower quartile Median Upper quartile Small person enterprise Wages paid 1 15 49 Large limited company Wages paid 2,5 6,5 Small person enterprise Wages not paid 4 29 213 Large limited company Wages not paid 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

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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

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Entrepreneurs have to response to changing environment (after Gibb 2000)

Greater uncertainty and complexity

• The need for an entrepreneurial

response

Global Pressures Individual repositioning Organisational repositioning State repositioning

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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

How can entrepreneurs react?

Model of small business information seeking as a response to environmental threat and opportunities

(after Lang, Calantone & Gudmundson 1997)

Perceived

• pportunities

Information seeking Perceived threats Intension to expand firm Market extension in future Association memberships Media usage Use of consultative and

• ther services

Intension to expand product/service Relative competitivenes Competitors as threats

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Questions

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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 ????

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Thank Thank you you! ! Contacts Contacts w elcom e w elcom e! !

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 Ashley Selby Selby ashley.selby@metla.fi ashley.selby@metla.fi Jarmo Mikkola Jarmo Mikkola jarmo.mikkola@metla.fi jarmo.mikkola@metla.fi