It Ain't Pretty

Industrie forestière en crise

On a crisp morning in September, I found myself at the foot of Helsinki's
Pohjoisesplanadi—what counts for a swanky avenue in fiercely egalitarian
Finland—staring at the head office building of Stora Enso. "So, this is
where it all starts," I thought as I contemplated my 6,000-kilometre
journey to check out the world's third-biggest forest pro­ducts company.
The inspiration for the trip had come months earlier at my neighbourhood
office supplies store in Montreal. I wanted to buy paper for my printer.
The best buy, labelled "Made in Sweden," bore the logo of Stora Enso. How
could it be, I asked myself, that this paper, shipped across the ocean at
Lord knows what cost, was a better deal than the stuff produced within a
few hours of Montreal? The differential could not be explained away by
lower labour costs or quality or environmental standards. In Scandinavia,
they're all as high, or higher, than in Canada. No, there was some deeper
reason for the uncompetitiveness of the domestic product, one that bespoke
the decline of a once world-beating Canadian industry.
It would be hard to imagine any country more nat­urally destined to
dominate the global forest products industry than Canada. And, indeed, for
decades, we did dominate it. The abundance of our forests—Canada is home to
a third of the world's boreal forests, which are rich in softwood, ideal
for making lumber and paper­—made us the ones to beat. Our political
stability, educated work force, modern infrastructure and proximity to the
world's biggest market all combined to make us king of the forest.
We are still the world's biggest exporter of forest products, sending more
than $40 billion worth of pulp, paper and lumber to other countries
annually (the U.S. takes about 80%). Forest products are still our biggest
net export, too—securing more jobs and boosting our trade balance more than
any other resource or manufactured good, including oil, gas and autos. But
our forest companies have frittered away every competitive advantage they
once enjoyed—mostly, it seems, out of laziness. Content for decades to send
low-value-added lumber and paper products to a hungry U.S. market, and
encouraged by government policy to maximize jobs in far-flung mill towns,
our companies long ignored the need to innovate and modernize. We are now
left with the most unproductive forest products sector in the developed
world, unprepared to contend with either new competition from developing
countries or a weak U.S. dollar. Oh, and contrary to what Canadian forestry
CEOs say, that sinking greenback is not the cause of our uncompetitiveness;
it has merely exposed it.
Canada's forest industry, once the envy of the world, is now a
laughingstock. Canada is the world's biggest producer of newsprint, but
only 7% of our mills are in the industry's lowest-cost quartile. Barely a
third of our pulp mills pass the same test. This is largely an Eastern
Canadian tragedy, since pulp- and paper-making is the sector's first line
of business in Quebec and Ontario. In British Columbia, lumber is the top

Still, why is Stora Enso—operating out of the high­-cost and high-tax
Nordic countries, and facing the same strengthening of its currency (the
euro) against the U.S. dollar—able to succeed where Canada's companies
Part of the reason is that Finland is home to three of the world's 10
largest forest companies. Stora Enso ranks as the biggest outside the
United States. Canada has no players in the top 10 (see table, page 73).
Recent cross-border mergers—Canada's Abitibi-Consolidated has linked up
with South Carolina-based Bowater, while Domtar merged its assets with the
fine-paper operations of U.S.-based Weyerhaeuser—will lend these new
Canadian-based players more heft, but not much more strength. No Canadian
company, for instance, has the balance-sheet strength to invest in China or
India, both of which are on the cusp of an unprecedented boom in paper
production and consumption. The Finns, on the other hand, are everywhere.
The Canadian industry barely earned enough in the booming late 1990s to
pay the interest on its debt, which means that in today's tough competitive
climate, new injections of capital have become a distant dream. Indeed,
depreciation has exceeded investment here for at least a decade. That means
dozens of Canada's pulp and paper mills—already small and old by
international standards—are hopeless causes. The average Canadian pulp mill
has a capacity of about 200,000 tonnes; our newsprint mills average 280,000
tonnes. Compare that with the one million-tonne Finnish-owned mills that
are either already operating or are being built in Latin America. The
federal government's Canadian Forest Service keeps a running tab of
closures or indefinite shutdowns since 2003. More than 200 wood and paper
mills, and 27,300 direct jobs, have gone. By the time you read this, the
list will have grown longer still. And it will continue to do so for months
to come. In early November, AbitibiBowater launched a 30-day review of all
its mills, portending more closures. There is no end in sight.
Innovation might have saved us. But no such luck, or rather, foresight.
"No Canadian-based [forest] com­­­panies have the large in-house R&D
capacity that many of their leading international competitors main­tain,"
the Canadian industry's own competitiveness task force stated in its May
report. "This in part reflects the relatively small size of Canadian-based
firms, as larger companies are better able to manage the risks and capture
the benefits of product and process innovations."
Does it matter? Isn't the forest sector old-economy anyway? Wouldn't
Canada be better off if we spent less time hewing wood and more time
punching BlackBerrys?
The truth is, the forest sector has a brilliant, high-tech future, and
Canada would be foolish to let more than a century of know-how and a vast
renewable resource go unexploited. We must stop seeing trees as fodder for
cheap newsprint, copy paper or two-by-fours. We must think of them as the
raw material for biofuels, pharmaceuticals and nutraceuticals. We must
imagine a world where paper can be implanted with silicon chips and offer
interactive features (becoming akin to paper computer screens), where
science can be harnessed, in the face of climate change, to maximize the
productivity and biodiversity of forests. A world where nanotechnology is
used to identify glitches in the papermaking process before they happen,
vastly improving quality and productivity. A world where computer-automated
harvesting machines start the processing of trees on site and, one day,
render the sawmill redundant.
Sound fantastic? Not to the Finns. They're already partway there.
No economy depends more on its forests than Finland's. Sure, the tiny
Nordic nation (population: 5.3 million) is home to cellphone giant Nokia,
No. 1 in the world, and produces more than its share of NHL hockey players
and Formula One drivers. But historically, the forest sector has been
Finland's main source of wealth, and it remains the single biggest sector
of the economy. It still accounts for more than 20% of national exports,
about $17 billion annually, compared to 10% for Canada's forest sector.
The challenges facing Finland's forestry sector actually are no smaller
than those facing Canada's. Unlike this country, trees are frigid Finland's
only natural resource. The result of this dependence is that, for a long
time, Finland's forests were overharvested and mill workers were granted
salaries and benefits that put them at the top of the country's income
ladder. Better forest management practices in recent decades have brought
the trees back at an impressive rate; harvesting levels can be raised in
coming years. Still, for the time being, Finnish papermakers such as Stora
Enso are suffering from a shortage of raw material. About a fifth of
Finnish paper mills' wood supply must be imported from Russia. But
Finland's elephantine neighbour, home to half of the world's boreal forest,
recently began imposing heavy export duties on raw logs. It is set to
triple the levies by 2009, making it uneconomical for the Finns to use
Russian wood.
As a result, in late October, Stora Enso announced plans to close one
paper mill and partially shut down another. A couple of the company's
Scandinavian pulp mills are also on the chopping block. All told, 1,400
jobs will be cut. These are the first major closures in the Nordic region
since UPM-Kymmene, Finland's second-biggest forest player, last year
shuttered its paper mill in Voikkaa, 150 kilometres northeast of Helsinki.
And that shutdown was epochal. "It was a big shock because it had never
happened before," says Anne Brunila, president of the Finnish Forest
Industries Federation. "The whole village thought this would be a
catastrophe. But of the 700 people who lost their jobs, almost all of them
are either now in new ones or enrolled in some kind of education."
Such active labour market policies are, of course, the hallmark of the
progressive-to-a-fault Nordic countries. While labour unions are strong,
their resistance to change is attenuated by the knowledge that workers will
not be left hung out to dry by globalization. Besides, rural Finns are as
well-educated as urban ones, the fruit of the long-standing policy to make
university free and accessible for everyone. As a result, investment abroad
by Stora Enso and UPM, which both have major operations in Latin America
and Asia, is not seen as a threat to prosperity, even by labour. "There is
much more understanding here among trade unions that to be competitive,
firms must internationalize. It is the best way to protect jobs here," says
Pekka Ylä-Anttila, a research director at the Research Institute of the
Finnish Economy.
That doesn't mean unions will swallow anything. A labour dispute in 2005
halted forest sector production for seven weeks after employers sought
concessions needed to run mills even over Chris­tmas and around the summer
solstice, another traditional holiday. At the end of the day, the
em­ployers won.
Still, the prevailing attitude is of tripartite co-operation, which is
entrenched in efforts like Forest Cluster Vision 2030, an initiative aimed
at applying technology to double the value of the domestic forest sector's
output within two decades—with fully half of the amount coming from
products that don't even exist yet. This is where those "paper computer
screens" come in. UPM is already the world leader in developing paper with
radio frequency identification (RFID) inlays. RFID technology allows for,
among other things, tracking products from manufacturer to end user; the
technology is expected to transform retailing. As with most things in
Finland, education and innovation are at the heart of the forest-cluster
strategy. "Finns will have a leading role in [industry] management and
expert positions, because Finland's share of both the industry's education
and R&D is big compared to the size of the country," notes Ylä-Anttila, who
just completed a study on biotechnology in the forest sector. "In the long
run, the success of the Finnish forest cluster will probably and
specifically be dependent on its intellectual capital."
Canada may have beat Finland to take this year's world hockey championship
in May, but clearly the Finns are whomping our butts where it really
counts: in meeting the challenges of globalization. Helsinki is home not
just to Nokia and three of the world's biggest forest companies. Metso, one
of only three large-scale manufacturers of paper­­making machines left in
the world, is also based in Finland. Canada has no paper machine makers.
The world's biggest man­ufacturer of the chemicals used in papermaking,
Kemira, is also Finnish. Canadian-based chemical makers? None. The world's
leading forestry consulting firm? Again, Finland's Pöyry. Finland is also
the home base of Ponsse, the company that makes those computer-automated
harvesting machines.
These forest and forest-related companies, together with university and
gov­ernment research institutes, make up the Forest Cluster juggernaut. The
result is that wherever a paper or pulp mill is being built in the
world—and there are dozens going up in China, India and Latin America—it
invariably counts on Finnish expertise, equipment, capital, or all of the
above. "I never understood why you don't have that in Canada," a puzzled
Brunila says of the cluster concept. Indeed, why Finland and not Canada?
Part of the answer lies in sisu—inner strength. This stone-faced
determination to plow on in the face of daunting odds has been a common
thread throughout Finland's history. It has enabled the Finns to survive
domination, first by the Swedes, then the Russians, before winning their
independence in 1917. Practical to a fault, the Finns never let hard
feelings get in the way of doing business with their former invaders. As
such, trade (much of it bartered) with the Soviet Union was the backbone of
the Finnish economy until the Communist empire collapsed in 1991. Almost
overnight, Finland's gross domestic product sank 10%; unemployment soared
to 15%.
Anywhere else, it might have meant chaos and political upheaval. Instead,
the Finns came together. They drew on their so-called small-country
advantage—characterized by a homogeneous, highly educated population with a
unique language (practically unlearnable, for a foreigner) and culture—and
took their place in a rapidly globalizing market. Rather than resist
emerging trends, Finland embraced them. Forest companies were allowed to
consolidate, eventually resulting in the merger of Finland's Enso with
Sweden's Stora, and local firms Kymmene and Repola combining to form
UPM-Kymmene. Mills were modernized to specialize in value-added paper
grades that fetched a high enough price on the international market to
compensate for the high cost of shipping from Finland. One result is that
Stora Enso's newsprint production in Finland is limited to satisfying the
domestic market; most of the company's newsprint is now made at mills in
Germany, closer to customers in the heart of Europe.
It was also in the 1990s that Finnish forest firms began investing outside
Europe, becoming among the first in their industry to twig to the long-term
potential of producing pulp and paper in Latin America and China.
North American expansion has not gone as well. Near the top of the paper
price cycle in 2000, Stora Enso bought Wisconsin-based Consolidated Papers,
while UPM-Kymmene made an unsuccessful bid for U.S. rival Champion
International. UPM probably considers itself lucky. This September, Stora
Enso's newly installed CEO, Jouko Karvinen, recruited from the technology
industry, unveiled a massive restructuring that included a $1.8-billion
writedown, almost two-thirds of it on the company's troubled North American
division, made up of the Consolidated assets and a mill in Port Hawkesbury,
Nova Scotia. Days later, Stora Enso sold everything on this continent to a
private equity outfit. By getting rid of its dregs in North America, Stora
Enso reduced that $1.8-billion writedown to $692 million. As for UPM, the
company has also become disenchanted with its New World assets. In August,
it closed its only Canadian mill, in Miramichi, New Brunswick.
While Finnish companies modernized and globalized, the government moved to
boost investments in education and R&D, which were already high by
international standards. The result is that, today, Finland is second only
to Sweden in R&D spending as a percentage of GDP, at about 3.5%. The figure
is lower for the forest sector—about 2.5%—since forest products tend to
have a longer lifespan than, say, the latest cellphone. Even so, Canada
spends less than 2% of GDP on research, and the figure is a pitiful 0.65%
of sales in the forest sector—a number that is itself misleading, since
much of what Canadian companies call R&D is not about new technology. The
spending might more properly be called product development and market
The definition of R&D is not so flexible in Finland. The country,
Ylä-Anttila proudly points out, has 16 researchers for every 1,000
employees—more than any other nation in the world. Sweden has 10, Canada
six. Finland produces seven times more patents than Canada, considering
population differences. Fully half of Europe's forestry engineers are
trained in Finnish universities—in English (virtually all Finns are fluent
English speakers).
Finland has ranked first or second on the World Economic Forum's Global
Competitiveness Index for several years running. Although it slipped to
sixth place in the 2007 ranking released in October, the country is still a
statistical error's throw away from the top spot. Canada is 13th. Finland
also topped Transparency International's list of the least corrupt
countries this year and last. It rates at or near the top in income and
gender equality. Finns are law-abiding—in part, at least, because sanctions
are stiff. Speeding tickets are proportional to income—a few years ago, one
millionaire was fined $237,000 for doing 80 km/h in a 40 km/h zone. Yes,
income and sales taxes are high, but corporate taxes are much lower than in
Canada. And yes, Finland has high rates of alcoholism, depression and
suicide—and, not coincidentally, a penchant for heavy-metal music. But its
geography—Finland sits above the 60th parallel, where the sun barely rises
in winter—most likely has something to do with all that.
More important, Finnish students come out on top in the OECD's Programme
for International Student Assessment rankings in math, science and reading.
While Japan, Korea and even Canada are close behind, "what is unique in the
Finnish case is the low variation among schools and across students," notes
Ylä-Anttila. "We don't give any [non R&D-related] business subsidies. We
take care of education," adds Mauri Pekkarinen, Finland's minister of trade
and industry. Education is such an integral part of the national identity
that even a relatively isolated community like Pekkarinen's home town,
Jyväskylä, boasts several post-secondary campuses. "We have 88,000
inhabitants, and 36,000 of them are students," he says proudly. "You heard
Pekkarinen concedes there are risks in Finland's cluster strategy, in
which government economic policy specifically promotes the forest,
information technology and a few other sectors. "The idea is that, as a
small country, we can not be the best in everything. We have to make
certain choices." He adds: "There is always some danger with this kind of
policy if you make the wrong choices." So far, there is little evidence of
that. After all, this is the strategy that allowed Nokia to evolve from
being a rubber-boot manufacturer to the world's biggest cellphone company.
This on top of the array of global forest and forest-related companies that
remain best in class. Economic growth has outpaced Canada's (and most of
the developed world's) for most of the past decade, with GDP growing 5.5%
last year alone. The government runs a healthy budget surplus despite
operating a cradle-to-grave welfare system. And unemployment has sunk to 6%
(essentially the same as in Canada), even though Finland's labour market
participation rate tops 70%, compared to 68% in this country.
Yet the Finns are not the least bit smug. Their history has taught them to
feel chronically vulnerable. Thankfully, for them, they've got sisu. This
is why no one should doubt for a second that Finland's forest cluster will
meet the lofty targets it has set—remember, doubling output to more than
$42 billion and R&D to about $1.1 billion by 2030. "Everyone knows each
other here, so when you say you are going to spend such and such amount on
R&D, you do it, because it would be a personal disaster otherwise," says
About 70% of R&D spending is financed by companies themselves, compared to
less than half in Canada. To qualify for the government grants that cover
the remaining 30%, companies must do R&D jointly with other members of the
forest cluster. Accordingly, new innovations are readily available to all
companies—big and small—in the sector. "In Canada and the United States,
most government subsidies for R&D are given in the form of tax credits and
the companies that get them do research independently. But here, if you
want to get R&D subsidies, you must participate in the cluster technology
programs," explains Ylä-Anttila. "My American colleagues don't like that
approach. But in a small country like Finland, this approach is better
because you can demand that firms collaborate. But it presupposes a certain
trust between people."
Perhaps it's only in this small, homogeneous nation, where Finns apply
their collectivist values to create a particular brand of capitalism, that
all of this can come together to produce a virtuous circle of co-operation,
innovation and wealth creation. But the lessons of the Finnish model should
not be lost on pol­icy-makers and industry leaders in Canada. Indeed, there
are hopeful signs. The Forest Products Association of Canada's
com­petitiveness task force last year hired Pöyry, the Finnish consulting
firm, to help the industry find its way out of its morass.
And there is finally recognition that increased R&D is the only true
solution to the industry's woes. Earlier this year, Canada's three forest
sector research institutes—respectively focusing on forests, wood products,
and pulp and paper—merged to create FPInnovations, which bills itself as
the "largest private forest product R&D organization in the world." It's a
start. But with an annual budget of only $85 million, FPInnovations does
not represent the massive research push that is needed to reverse the
Canadian industry's decline.
Canada has undoubtedly some of the best forest scientists in the world,
and they are working hard on, among other things, ways to protect our trees
against future epidemics like B.C.'s devastating mountain pine beetle
infestation. But there is little evidence that a true paradigm shift—the
one that will move the forest sector from a low-tech, old-economy mindset
to a high-tech, new-economy one—has taken hold among the sector's CEOs.
They are invariably lifelong forestry executives, used to managing in a
sector driven by the commodity cycle—but not accustomed to a milieu where
only the innovators survive. Maybe what Canada's forest companies need,
then, is more techies at the top. A bit more sisu wouldn't hurt, either.
"Every Finn loves the forest," says Pekka Ylä-Anttila, a research director
at the Research Institute of the Finnish Economy, stressing a cultural
trait that defines the Nordic nation more than Nokia ever could.
It's not just because the winterized cottage is as common as the sauna—a
Finnish invention—that the Finns dig the woods. If they don't directly own
a plot of trees, they almost certainly have a close relative that does.
Indeed, for many Finns, the forest is their RRSP.
Technically speaking, Canadians own their woods, too, but through their
provincial and federal governments, which possess 93% of this country's
forests. Governments award harvesting licences to private operators such as
AbitibiBowater or Tembec to exploit the forest in exchange for royalties,
known as stumpage fees.

In Finland, however, almost 60% of forest land is owned by about 400,000
families. Their plots are small, averaging about 35 hectares, compared to
the hundreds of thousands of hectares typically covered by a single forest
tenure licence in this country.
These legions of owners see their woodlots as a means to supplement their
income or provide a nest egg for retirement. Harvesting and replanting is
done variously by forest-management co-operatives, forestry companies and
state agencies. An average annual harvest—about 140 cubic metres on a
35-hectare lot—nets about $3,460 for owners after they pay a 28% royalty to
the government and partially cover the cost of replanting.
However, the reluctance of many forest owners to start selling their trees
before retirement has contributed to wood shortages for Finnish forest
companies such as Stora Enso and UPM-Kymmene. "For the owners, the value of
the forest is better than having money in the bank, so they don't harvest,"
explains Sirkka-Liisa Anttila, Finland's minister of agriculture and
The result is that, while Finland's forests are growing at an annual rate
of almost 100 million cubic metres, only 60 million cubic metres are
currently harvested. The government is aiming to raise the amount to as
much as 80 million cubic metres, Anttila says, an objective that has become
even more pressing with Russia's move to slap a massive tax on log exports
to Finland. (In Canada, about 200 million cubic metres of wood is harvested
annually on this country's 295 million hectares of commercially available
forest, according to Natural Resources Canada.)
Forest certification—that is, third-party verification to prove certain
standards are met regarding biodiversity, animal protection, regeneration
and the rights of native peoples—has become the hot-button issue within
industry ranks in Canada and Finland alike.
Finland's forest owners have resisted pressure from environmental NGOs to
seek certification from the Forest Stewardship Council (FSC), an
independent body that is widely regarded as the gold standard in the field.
Instead, they have created their own certification program, but it is
regarded skeptically by environmentalists.
"Who should decide the rules? Is it Greenpeace?" retorts Anttila. "My hope
is for the issue to be settled at the level of the European Union. We are
content with our [forest management] standards. Today, we have more money
for forest improvement incentives and biodiversity support. It is the only
way to keep peace with the NGOs."
Greenpeace has targeted Canadian companies that spurn the FSC standard,
starting with the largest, AbitibiBowater. The company has instead measured
itself against a yardstick set out by the Canadian Standards Association.
Not good enough, according to Greenpeace, which is pressuring retailers to
boycott AbitibiBowater's products.
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