Indonesian Economy: Asia Pulp and Paper

Indonesian Economy Asia Pulp and Paper A short strategy analysis of APP mission , vision and strategy Indonesian Economy Asia Pulp and Paper A short strategy analysis of APP mission , vision and strategy Summary Introduction2 I. company overview3 II. APP’s financials, environment issues and mattel4 1. APP’s financials 2. Environment issues 3. Mattel III. The challenges and recomanded strategy7 1. The challeges 2. Recommandations IV. APP, a company to watch9 Conclusion10 References Introduction
Corporate governance refers to the control of the firm, its ownership structure, and the disclosure quality. It was widely discussed in relation to the Asian crisis in 1997-98, because poor firm performance was assumed to be related to bad corporate governance . In particular, the East Asian economic model was said to reveal a “crony capitalism”, with the presence of numerous family-controlled groups, a high ownership concentration, a weak public governance, and poor monitoring of bank loans .
The group Asia Pulp & Paper (APP) expanded impressively in the 1990s and became the largest pulp and paper producer in Asia outside Japan, and one of the top ten producers in the world. It attracted investors from all over the world in a context of “Asian miracle”, and because the giant pulp mills built in Indonesia were assumed to produce at the lowest cost in the world .

Surprisingly, the group announced a debt standstill on $13 billion in 2001, the largest default for a private group in an emerging country At the same time, it was revealed that the industrial capacities had expanded at a much faster pace than the forest plantations, thus representing a high risk that operations would not be sustainable. Available studies showed the apparent lack of rationality in the decisions of the group, and the critical situation it faces from both financial and wood supply points of view.
However, another explanation would be more convincing, which is based on the very rational behaviour of the ultimate owners of the group. This rationality being related to their ability: to increase their control of the decisions and accounts compared to their direct financial investments, to finance the expansion mainly with debts in order to reduce their own risks and to maximize their short-term profits, ,to benefit from a lax public governance context and a free access to natural forests for supplying fiber to the pulp mills.
APP’s trajectory has not been clean of obstacles , so with the tools provided by the theory strategy and organizational management we ‘re going to try to find the « good » way to manage that company . This is important because APP’s default has attracted much attention so far, and the resolution of the case will impact on the willingness of foreigners to invest back in Indonesia. I. Company overview Asia Pulp and Paper (APP) has its roots in 1972, when the company Tjiwi Kimia was founded by Eka Tjipta Widjaja as a small caustic soda manufacturer.
In 1978, Tjiwi Kimia commenced paper production of 12,000 tons/year. In December 1976, Indah Kiat was formed as a joint venture between CV Berkat (an Indonesian company), Chung Hwa Pulp Corporation and Yuen Foong Yu Paper Manufacturing Company Ltd. from Taiwan. In April 1979 Indah Kiat Tangerang mill’s Paper Machine 1 and 2 started with a production of 100 tons/day of wood free paper. By March 1984 Indah Kiat Perawang mill’s Pulp Machine 1 started producing bleached hardwood kraft pulp with an initial capacity of 250 tons/day.
In May 1986 Sinar Mas Group acquired 67% of Indah Kiat’s total shares. Chung Hwa and Yuen Foong Yu had 23% and 10% shares respectively. In 1987 the first cast coating machine installed at Tjiwi Kimia, and in April 1990 Tjiwi Kimia was listed on the Jakarta and Surabaya Stock Exchange. In 1991 Tjiwi Kimia’s PM 9 started operation with an annual capacity of 207,000 tons. The following year Indah Kiat acquired PT Sinar Dunia Makmur, a manufacturer of industrial paper located in Serang with a 2. roduction capacity of 900 tons/day. jiwi Kimia commissioned the Carbonless Paper Plant in March 1993, an experiment The company Pindo Deli under control of APP in Feb. 1994, and by 1997 its paper machine #8 and #9 would both have begin operation with production capacity of 240,000 tons per year. In 1998, paper machine #11 started tissue production in Pindo Deli with annual production capacity of 400,000 tons started to operate. APP-China began investing in China in 1992, with an emphasis on the Yangtze and Pearl River Deltas.
APP-China’s pulp and paper mills now include Ningbo Zhonghua, Goldeast Paper, Ningbo Asia, Gold Huasheng, Gold Hongye, and Hainan Jinhai Pulp and Paper. APP-China was registered in Singapore in October 1994. APP-China employs over 37,000 people and created 5,000 new jobs in 2009 II. APP’S Financials, Environment issues and Mattel 1. APP’s financials Growth of the pulp and paper industry in Indonesia mainly came from leverage, which drove returns on equity ever higher. International financial institutions had played a central role in supplying the finances for APP. Its assets totaled US$17. billion, of which shareholders had financed 25 per cent (the most important shareholders being the Widjaja family, and the American fund managers, Franklin Templeton Investments and Capital Group), bondholders 38 per cent and banks 20 per cent. Over 300 international financial institutions, including many leading financial institutions (e. g. , investment banks in the U. S. , The Netherlands, Switzerland and Germany) and export credit agencies were among those heavily involved in providing and guaranteeing this finance over the 10 years prior to 2001. Among the private financial institutions were Barclays Bank,
NatWest, Morgan Stanley Dean Witter, Credit Suisse First Boston, Goldman Sachs, Franklin Templeton, Capital Group, Merrill Lynch, Bank of America, Deutsche Bank, ABN Amro and Bank of China. The use of financial “mark-up” practices – that is, the artificial inflation of the cost of an investment project – had allowed some pulp and paper products to secure much larger amounts of financing for their projects than they actually needed. In fact, financial institutions queued up to invest in the Indonesian pulp and paper companies because they perceived that they had a competitive advantage due to their access to cheap raw material resources.
The situation turned difficult for APP in April 2001 when it announced that it had failed to include a US$220 million loss on two currency swap contracts in its financial statements, quickly followed by an official announcement that earlier financial statements for 1997 to 1999 “should not be relied upon”. A confidential 2,000-page report from KPMG released in July 2001 listed questionable transactions and accounting entries made in 1999 and 2000 by APP’s four Indonesian entities, and noted $1. 6 billion in provisions for doubtful debts, reclassification of receivables as well as a $672 million in derivative losses from various APP units. Other transactions, including $457 million in guarantees for non-APP companies, brought the total amount in the “questionable” category to $4. 41 billion. 2. Environment issues APP-China invested over 300 million RMB in environmental conservation facilities and activities in 2009 alone, and had invested over 5 billion RMB in environmental protection by 2009. APP-China inn 2009 also achieved 100% treatment of its solid waste from its six major pulp and paper mills.
APP-China was honored in 2009 with the “Award of Contribution to Low Carbon Business (Multinational Corporation)” at the first meeting of the Low Carbon Forum hosted by the National Committee of the Chinese People’s Political Consultatative Committee (CPPCC) and the China Association for Science and Technology. APP-China also received the “Green China Campaign-2009 Scientific Development of Forest Plantation Special Award” by the China Green Foundation and the State Bureau of Forestry, Center for Economic Development Research.
Further, APP-China received the “2009 Scientific Forest Plantation Development Award” by the China Green Times. In November 2007, Forest Stewardship Council (FSC) decided to rescind the rights of APP to use their logo, following pressure from other FSC Stakeholders, and a new policy approach by FSC Board of Directors. A investigation published in March 2008 by an environmental coalition called Eyes on the Forest showed evidence of a new road built by APP, heading through the Kampar peninsula, one of the world’s largest contiguous tropical peat swamp forests, with more carbon per hectare than any other ecosystem on Earth.
The investigation found tracks on the new road of the critically endangered Sumatran Tiger, whose wild population has been reduced to less than 500 individuals. APP claimed that it was building this state-of-the-art, paved highway for the benefit of the local communities, though satellite imagery shows that the road does not go anywhere near the two settlements. 3. Mattel
On June 8, 2011, Greenpeace launched “Barbie, It’s Over”, an international campaign criticising Mattel’s use of Asia Pulp & Paper’s products in its packaging, particularly in its line of Barbie products. Within two days of the campaign’s start, Mattel ordered its packaging suppliers to stop buying from Asia Pulp & Paper pending an investigation into Greenpeace’s deforestation allegations, and further ordered its suppliers to report on how they source materials.
Asia Pulp ; Paper welcomed Mattel’s response, believing that Mattel’s investigation would conclude that its “packaging materials are more than 95% recycled paper sourced from around the world. ” On October 5, 2011, Greenpeace announced that Mattel stated that it would no longer purchase pulp and paper products from Asia Pulp ; Paper due to the effects that its logging practices had on the Sumatran tiger population III. Challenges and recommanded strategy 1. The challenges The Strategy Group has identified many significant challenges facing the ndustry, including: * loss of demand for its products due to the consequences of the global financial crisis in late 2008 and early 2009 * increased consumer and business use of digital communications, resulting in a slowing of the growth in consumption of paper-based communication, including newspapers * increased competition from cheaper imports, often using fibre from unsustainable sources, resulting in an uneven international playing field * projected shortages in available wood-based fibre to provide feedstock for existing pulp and paper facilities, especially due to limits on timber plantation establishment * escalating costs of key industry inputs, especially electricity, and limitations on the ability of the industry to capitalise on its innate energy generation capability * level of investment has been low—those mills lacking investment are facing closure while others which have continued or increased investment have become automated and more efficient * he growth of China, India and other emerging economies such as Indonesia, which is significantly altering the traditional supply and demand dynamics for paper products * the low level of R;D by Australia’s pulp and paper companies affecting the level of innovation and international competitiveness they can achieve * government and community responses to climate change, affecting all industries in Asia, including the pulp and paper industry 2. Recommandations Recommendations can be grouped into four major themes: innovation, investment, sustainability and productivity. The first recommendation is fundamental to the entire strategy and stretches across all four themes. It deals with the government’s commitment to the long-term viability of the pulp and paper industry in Asia and its workers.
Asian Government( China, Japan, Singapour,indnesia) make a clear public statement supporting the value and long-term viability of the Asian pulp and paper industry, recognising the industry’s commitment to good environmental outcomes and its key role in the provision of economic and social opportunities for thousands of Asian, many in vulnerable regional communities. Innovation A Pulp and Paper Industry Innovation Council shloud be established and appropriately funded to build a culture of innovation in the industry. The Innovation Council will recognise Asian’s competitive strengths in fibre production, product innovation and renewable energy, and focus on long-term issues facing the industry. Investment The asian Government establish a plantation investment model that delivers the re-establishment and expansion of timber plantations to underpin existing processing industries or led to the creation of new processing industries in asia . Sustainability
The Australian Government work with industry to support internationally recognised forest certification schemes (including the Indonesian Forestry Standard, the Programme for the Endorsement of Forest Certification and the Forest Stewardship Council’s certification scheme) that provide for legal and sustainable forest management which ensures transparency, accountability and global and local consistency of application. Productivity Noting the significant price increases associated with the exercise of generator market power in the National Electricity Market, the Ministerial Council on Energy should accelerate efforts to improve competition in the wholesale electricity market, including by increasing penalties and developing rule changes to limit the exercise of generator market power. The Asian Government should support workforce planning and development initiatives that underpin future economic opportunities for the pulp and paper industry and its workforce. IV. APP, a company to watch
APP is a company more in the news than not, and for some good reasons; it has a well known plan to be the Number 1 pulp and paper company in the world; it operates in one of the “hottest” regions, Indonesia, when it comes to the NGOs focus on deforestation and climate change; it has a strategy of organic growth that includes the installation of the biggest and very best and in pulp and paper technology: and a strategy of acquisitive growth that will probably put it firmly in the RISI headline news stakes even more regularly next year. With its bold mission to be the number 1, APP is going to have yet another tough year in 2011 as it comes under even closer scrutiny regarding its forestry and plantation operations in Indonesia.
Indeed 2010 saw a ramping up of NGO activity aimed against the company, particularly from Greenpeace, in which it published a series of reports highlighting alleged environmental transgressions, as well as naming some of the major brands around the world that were buying the company’s products. APP in return commissioned a series of independent reports, including one by former Greenpeace founder Dr Patrick Moore, refuting the allegations. But perhaps the real reason this company is one of our Five to Watch for next year is its seemingly unstoppable progress, with new expansions in both pulp and paper too numerous to mention, including the start up of the world’s biggest fine paper machine located on Hainan Island, China.
One of the main areas of interest is where all the fine paper that APP is producing is going to go as duties have now been imposed in both the US and Europe on fine paper coming in from China. Duties are also now being talked about in Brazil and India as anti-dumping fears in those countries come to the fore. Another major development on the horizon is APP’s aggressive acquisition strategy abroad through its subsidiary Paper Excellence based in Holland which has already seen it buy up four pulp mills, two in France and two in Canada. Could we see APP making an acquisition of a major European or US pulp or paper company in 2011? Conclusion APP’s trajectory since the early 1990s has been very impressive for several reasons.
Focusing at first on Indonesia to develop a pulp and paper empire in order to become one of the top ten producers in the world, the group achieved its objective owing to very lax attitudes on the part of investors both from Indonesia and abroad. The context of the early and mid 1990s, with the so-called ‘Asian miracle’ and the Indonesian government’s official policy of pushing industries with a clear export-oriented stance, and the availability of huge forest areas for conversion, permitted the extraordinarily fast expansion of APP’s capacity. This expansion has been mainly based on debts, either through bond issuance or bank loans. In conclusion, Asia Pulp & Paper seems to illustrate the theories saying that the divergence between ownership and control through pyramid structures corresponds to poor corporate governance and leads to lower firm performance. References “Why a ‘Green’ Logo May Mean Little,” Wall Street Journal, 30 Oct 2007 * New APP Logging Road Threatens One of World’s Biggest Carbon-Storing Forests, Tigers; Eyes on the Forest, March 2008 * Logging Road Threatens Rare Peat Dome, Tigers * People’s Daily Online – Forestry authorities charges Singaporean paper giant with illegal logging * Asia Times Online :: Southeast Asia news and business from Indonesia, Philippines, Thailand, Malaysia and Vietnam * a b FSC rules in upheaval after green groups level accusations at APP | printweek. com | Latest Print Industry News, Jobs, Features, Product Reviews, Used Printing and Packaging Machinery * FT. com / Home UK / UK – The usefulness of scholarships and tigers * Ethical Corporation: Archive – APP decision a “landmark” for China’s environmentalists * http://www. rainforest-alliance. rg/forestry/documents/app. pdf * wikipedia * APP ‘ s Annual report 2010 , from www. freereport. com * http://www. ppimagazine. com/ppiissue/ ——————————————– [ 1 ]. Sumatran Tiger incident : During late July 2011 Greenpeace revealed images and footage on their website that showed a critically endangered Sumatran tiger. This tiger had become trapped by an animal snare at the edge of an APP concession, and had been there for at least seven days, without food or water. Attempts to tranquilise and rescue the tiger failed due to its poor condition of health. APP denied any responsibility, despite reports to the contrary.

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