Bombay Plywood Industry in 2008

Abstract

Haji Muhammad Shafi was the founder and Chief Executive Officer of the BPI(Bombay Plywood
Industry) under his leadership till 1980`s the company enjoyed monopoly and was growing with
considerable high growth rate.

The Plywood industry had changed considerably after the year 2008 due to external
environment factors. Because of war on terror this industry was disastrously effected because
it`s raw material mostly came from Swat and nearby areas. The shortage of electricity in
Pakistan also forced many plywood companies to shut down their business or to diversify.

Reflecting on these dramatic changes, the new CEO wondered whether BPI should expand its
product line beyond the manufacture of plywood. For over 43 years BPI had stuck to its core
business, plywood making, but analysts saw problematic manufacturing of plywood in 2008.
Observers forecast the chipboard as the feasible segment for semi-solid wood. As CEO mulled
over his option, he asked: Was it finally time for a change?

The Plywood Industry

The plywood industry was the dominant industry of semi-solid wood in Pakistan in 2008. The
plywood, lamination board, Formica press board meet endless variety of consumers as they
were used in construction (shuttering) and doors. The chipboard industry was second on the list
for semi-solid wood because of its short life span of 5 years as plywood`s 10 to 15 years.

There are major two types of semi-solid wood, i.e. plywood and chipboard. Plywood is made by
boiling logs at high temperature and then peeling them. After peeling it is cut into appropriate
size and then dried. Then it is glued and pressed to make a wood sheet and finally the sanding is
done by sanding paper to finalize the product. The plywood is made in many sizes ranging from
(8ft x 4ft to 6ft x 2.25). Its thickness range from 3mm to 50mm.
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 Bombay Plywood Industry in 2008

The chipboard is made by converting firewood into chips, drying and then gluing the chips
pressing it and then cutting into appropriate sizes and finally sanding the sheet.

Throughout decades plywood was dominating in semi-solid wood because of its durability,
flexibility and aesthetic. After year 2007 the plywood production fell significantly because of
unavailability of raw material and shortage of electricity in Pakistan. The production of
chipboard increased because it was the substitute of this product and was less expensive to
manufacture. It could meet more needs of the customers such as in furniture, cupboards and
room portioning etc.

Industry Structure

Five firms had been dominating the plywood industry in Pakistan. The country`s largest
manufacturer KDC plywood (Jehlum) with 20% market share. The four firms trailing were
Capital Plywood( Islamabad) with 17% market share, BPI 12%, Sunlight plywood (Karachi) 10%
market share and Wood World (Rawalpindi) with 6% market share. Approximately more than
100 firms served the balance of the market.

Pricing and Cost

Pricing in the plywood industry was very competitive. Most companies offered volume
discounts to encourage large orders. Despite persistent plywood demand industry profits were
declining because of intense competition in 2008. The drop in sales was due to increase use of
chipboard as it`s price was less.

In 2008, the price of the plywood was Rs 1000 per sheet. Which cost BPI approx. Rs 975 per
sheet. Because of customize orders mass production was not possible in plywood
manufacturing and as a result (more customize orders less production per day).

Plywood was a semi-finish item on which customer has to do more expense such as polish or
paint etc which could raise price to more than Rs 1200 per sheet. The labor cost of plywood to

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 Bombay Plywood Industry in 2008

BPI was (skilled labor 40%, unskilled 55% and staff 5%). The wages were 8000 – 12000, 6000 –
6500, 10000- 20000 accodingly. In plywood manufacturing atleats 100 labor is required. The
labor cost schedule is shown in Exhibit. The production capacity of the BPI was 300 cubic foot
whose electricity expense was more than 2 lac till the year 2008.

Chipboard has a standard size of 18mm x (8 x 4). It was easy for manufacturers to produce
chipboard as mass production was possible which means economies of scale. The price of
chipboard in market in 2008 was Rs 700 which could cost BPI @ Rs per sheet and making the
profit of Rs 50 per sheet. According to the survey report of BPI managers the production
capacity of plywood could be 600 cubic ft per month which has electricity expense of Rs 3 lac
pm. Only 50 labors are enough to produce 600 cubic ft/pm from which 10% is skilled labor,
unskilled 85% and staff 5% whose salary would be (8000 – 12000), (6000 – 6500), and (10000 –
20000) accordingly.

Suppliers

In plywood industry there were two types of supplier’s local suppliers and supplies that were
imported from different countries. Plywood can be manufactured from different type of wood
which give different color, durability and finishing.

Among local suppliers the largest supplies were from Swat and northern areas which were
adversely affected by terrorism by which price of supplies was increased and material
availability became less in year 2008. Changa Manga(Lahore) and Mona Depot (Sargodha) were
the main suppliers of shesham and poplar wood. Mangla depot was the seller of Deodar wood
and the Multan division was the main supplier of Mango wood.

The logs were also imported from Malaysia, Thailand, Burma, India, Singapore which include
Teak wood and Pine wood.

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 Bombay Plywood Industry in 2008

As opposed to Plywood, Chipboard could be made of any type of wood as it is made up of fire
wood; the farmers from all over the country were the suppliers of fire wood.

Along with wood, glue was was also the main supply in plywood and chipboard manufacturing.
The largest producer of Glue in country was WAH NOBEL CHEMCIAL (Wah) whose quality was
good and rate was Rs 30/kg, it`s production capacity can meet the demand of all the plywood
factories in the country. The second largest producers were DINO CHEMICALS (Karachi) which
price Rs 29.5/kg, SUPER CHEMICAL (Karachi) Rs 29 and Izhar CHEMICAL (Lahore) Rs 28/kg.

Customers

Among the industry`s largest users were the Pakistan Army, Pakistan Railways and housing
societies.

Distribution

Due to bulky nature of plywood, manufacturers located their plants in main cities to minimize
transportation cost. The producers preferred chipboard to plywood because it was feasible to
manufacture. BPI had forward integrated as well. It had the advantage that it was self-reliant in
distribution of their product. It`s showrooms were highest in number throughout the country
than any other competitor. It had its own 15 sales and distribution centers in Rawalpindi,
Islamabad, Peshawar, Gujrat, Gujranwala, Lahore, Multan, Sialkot, Faisalabad, Karachi and
Hyderabad.

While all other companies had difficulty in distributing their product as a result their
distribution cost was also added in their products cost. Due to high distribution cost China was
unable to enter the Chipboard market (as chipboard is heavier then plywood) of Pakistan. But it
was continuous threat for plywood companies.

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 Bombay Plywood Industry in 2008

Industry Trends

The major trends characterizing the plywood industry during year 2008 onwards included 1)
terrorism 2) china`s entrance and electricity shortage etc.

Terrorism

War on terror has dreadfully affected the industrial sector of Pakistan. Plywood industry was
also among them. As the major source of raw material were Swat and Northern areas. Many
plywood manufacturers diversified across the spectrum of rigid plywood to produce furniture
or related industry because of unavailability of raw material.

China`s Entrance

China enter into Pakistan`s plywood industry in year 2006 when government lowered duties.
This action of government almost shrank the plywood industry in Pakistan. China`s plywood
was selling in market at a price of Rs 950 in market which was good in quality as compare to
Pakistani plywood. The reason for its lower price was lower costs. China has cheap labor and
more forests then Pakistan.

China did not enter into chipboard industry of Pakistan because of heavy weight of chipboard.
It`s high carriage expense results high priced China`s chipboard in Pakistan. The price of the
Pakistani Chipboard in the market in 2008 was approx. Rs 1000per sheet. Chinese firms were
unable to compete with this price o it was hard for them to enter this market. Additionally the
government of Pakistan also applied heavy taxes on Chinese chipboard as oppose to its
plywood in Pakistan

Electricity

The shortfall of electricity in 2008 was approx. 2000 MW and that shortfall was expected to
increase in the future. The rate of electricity also increased 25% to 30% in 4 years. Plywood

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 Bombay Plywood Industry in 2008

manufacturing requires more machinery means more electricity as opposed to chipboard

manufacturing. On average the plywood factory with the production capacity of 300 cubic foot
it`s electricity expense was 2lac per month in 2005, which was also expected to increase
dramatically in the future.

Dollar Appreciation

In the start of the year 2007 the exchange rate of dollar was approx. Rs 60. Due to economic
slump Pakistani rupee depreciated and the exchange rate with dollar was around Rs 83 at the
beginning of year 2008. Political instability and war on terror were the major reasons for rupee
depreciation. Because of depreciated rupee the price of imported logs increased radically, so as
a result it became impossible for Pakistani manufacturers to continue their plywood production
with imported wood.

Company`s History

BPI was established in year 1965 by the founder Muhammad Shafi. It was established of an idea
to replace solid wood with less expensive plywood. This firm was among the first movers in this
industry by which it enjoyed monopoly till 1985 after which other firms like KDC jumped into
the market.

Under the paternalistic leadership of Muhammad Shafi BPI prospered in 1980`s by selling to
more than half of Pakistan and ranked first place from all over Asia by winning 3 rd International
Asian Award. In 1980`s when it was growing rapidly it forward integrated in distribution in
contrast to competitors. It has 15 sales and display showrooms across the country.

In very quick time plywood gained customer confidence because it was far better than the solid
wood. It`s main advantage were that it was cheap, light weight, waterproof, flexible and was
available in many sizes.

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 Bombay Plywood Industry in 2008

Major Competitors

For over 30 years, five top companies in plywood manufacturing dominated semi-solid wood
industry.

1) KDC PLYWOOD
KDC plywood had long been a financially stable plywood company. It was established in
year 1974 by Mr Ahsan. It is located in Jehlum. It was the market leader in the industry
as its sales were higher than any other. KDC diversified in chipboard business in year
2007.
2) CAPITAL PLYWOOD
Capital plywood was the subsidiary of Capital group of industries. In addition to plywood
they also make household furniture and were experts in wood floor manufacturing. It
had the second largest market share in the industry. It had 12 showrooms throughout
the country by which it displays and sale its products. It`s manufacturing plant was
located in Islamabad sector I/9.
3) SUNLIGHT PLYWOOD
Its manufacturing plant was located in Karachi and Lahore. It had 4 th largest
manufacturing capacity of plywood in industry. It was established in year 1992. In
addition to plywood it also manufactures Flush doors on orders.

4) WOOD WORLD PLYWOOD

It is located in Rawalpindi next to BPI`s manufacturing plant. It was also established in
1965. It was manufacturing both plywood and chipboard. Wood World started its
chipboard plant in 1990, and was the well-known manufacturer of chipboard in
Pakistan.

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Challenge in 2008

Managers thought long and hard about the options available to them in 2008. They considered
the opportunities in chipboard and the most demanding plywood. With the decline production
of plywood, chipboard was the only semi-solid segment that held much promise. However the
possibility of diversifying beyond the manufacture of plywood altogether had some appeal,
although there was some difficulty in making decision as chipboard also had some
shortcomings. While BPI`s competitors had aggressively expanded in variety of directions,
Managers wondered if now was the time for a change at BPI.

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 Bombay Plywood Industry in 2008

Major Firms in Plywood Industry

Name Years of Production Production Capacity Market Share

KDC 34 500 cubic ft. 20%

Capital Plywood 20 450 cubic ft. 17%

Sunlight 16 280 cubic ft. 10%
Wood World 43 250 cubic ft. 6%

Major Suppliers Of Glue

Name Location Price

Wah Nobel Chemical Wah 30/kg

Izhar Chemical Lahore 28/kg
Super Chemical Karachi 29/kg
Dino Chemical Karachi 29.5/kg

Countries From Where Logs are Imported

Name of Wood Country

Teak Wood Malaysia

Pine Wood Thailand

Burma
Singapore

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 Bombay Plywood Industry in 2008

Major Local Suppliers of Logs

Name Location Type of Wood

Changa Manga Lahore Shesham

Poplar

Mona Depu Sargodha Shesham

Poplar
Mangla Depu Mangla Deodar
- Swat Deodar
- Multan Mangoo Wood

Labor Cost In Semi-solid Wood

Type of Industry Number of labors Labor Percentage Salaries (Rs)
Required Category Requirement

Plywood 100 Skilled 40% 8000 – 12000

Unskilled 55% 6000 – 6500
Staff 5% 10,000 – 20,000

Chipboard 50 Skilled 10% 8000 – 12000

Unskilled 85% 6000 – 6500
Staff 5% 10,000 – 20,000

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 Bombay Plywood Industry in 2008

Size Availability of Semi Solid Wood

Semi-Solid Wood Size Thickness

Plywood 8ft x 4ft 3mm

To To
6ft x 2.25ft 50mm

Chipboard 8ft x 4ft 18mm

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