Name: Muhammad Asif Roll no: 4698/FMS/MBA/F10

Horizontal expansion catapult Arauco toward its goal of strengthening its position as one of the most important forestry companies in Latin America, as well as make it the largest pulp producer in the world. The company would gain market share and increase its capacity to 3.2 million tons. Five plants that Arauco already owns, the new pulp plant would increase the company's capacity by 800,000 tons, and allow Arauco to further improve its economies of scale through state-of-the-art facility that would further decrease its average total cost and help it meet the forecasted increase in demand of pulp. Arauco production is export oriented. About 85% of its revenue is tied to foreign markets, Asia being the major destination, followed by North America and Europe. Pulp sales accounted for over fifty percent of export sales, with Asia, and specifically China with a fast growing paper market, fueling the demand for paper products. Increasing the pulp production capacity would enable Arauco to keep up with the growing demand in the Asian markets and increase its market presence there. The expected increase in production volume fueled by Chiles free trade pact with European Union in 2002, and U.S. in January of 2004, would lead to lower operating and capital costs. As paper industry starts to recover in these two major markets, the increase in demand and strengthening of U.S. dollar will benefit Arauco and help it to improve its gross profits through cost advantage. With the gross consumption of paper and paperboard (MM metric tons; case exhibit 11) in the U.S. almost 3 times of that in China, the free trade pact sets Arauco in good position to increase its market share in the U.S. Arauco research and development business unit, Bioforest, will continue to improve company quality of plantations. Bioforest achievement to genetically replicate high quality radiata pine trees and eucalyptus trees, which account for close to 68% of Arauco plantations, will help to supply the capacity and further improve economies of scale. The high yield per hectare in Chile and expedited log cultivation gives the company an advantage over its northern hemisphere competitors, where it takes 2 to 3 times longer to harvest plantations. Improvement on Arauco economies of scale would result in the allocation of research and development expenses, which accounted for $1.6 million in 2000, to a greater number of outputs. Opening a new plant would be the rise to economically valuable by-products. The volume of waste products could be large enough to warrant their resale, reducing the costs of producing market pulp and opening the company to new markets. Kraft pulp production residues can be utilized in agricultural purpose, in the production of molded egg cartons, and in brick-clay as an organic pore-forming agent. This step towards waste reduction could also positively impact the company intangible assets (i.e. image/reputation), as it moves towards establishing itself as biggest pulp producer in the world and becomes environmentally aware. Becoming the largest producer of market pulp would help Arauco to recoup and strengthen its image as a pulp manufacturer leader. The new plant would improve Arauco competitiveness and strengthen its position in the unbleached softwood kraft global market, where it currently holds 15.8% market share. Being placed as the largest producer of market pulp would give Arauco an increased power on the flow of pulp volume to the market, and consequently, a better control of pulp prices which would be beneficial to Arauco. Analyzing market conditions and Arauco operations and financial information it is in the best interest for the company to grow through horizontal expansion.