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The transformation of the forestry-related industries – A Knowledge Economy perspective

Christopher Palmberg

Etlatieto

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Structure of presentation

1. Position of the forestry-related industries in Finland and globally

2. Co-evolution of the forestry-related industries and the Knowledge Economy

3. Preliminary conclusions and next steps

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1. Position of forestry-related industries in Finland and globally

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0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %

1980 1985 1990 1995 2000 2003

Other mfc.

Electronics

Machinery, equipment

Metals, metal products

Chemicals, glass, ceramics

Forestry-based

Textiles, clothing

Foodstuffs

Contribution to the volume of manufacturing production

(Source: ETLA database)

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Economic significance of pulp & paper industries

0 %

1 %

2 %

3 %

4 %

5 %

6 %

7 %

0,0 % 0,5 % 1,0 % 1,5 % 2,0 % 2,5 % 3,0 % 3,5 %

NZLCAN

ESPBEL

JPNNOR

MEX

GRB

NLD

GRC

SWE

ITA

DNK

KOR DEU

AUS

FRAAUTPRT USA

ISL

Finland

Sh

are

of

Tota

l V

al u

e A

dded

Share of Total Employment

(Source: OECD 2003)

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Forestry-related industries in Finland

1980 1985 1990 1995 2000 2002

Manufacturing output

23.4% 18.8% 19.0% 25.0% 24.0% 19.8%

Employment 4.5% 3.8% 3.4% 3.4% 3.1% 2.9%

GDP 6.6% 3.3% 4.5% 6.5% 5.9% 4.8%

Exports 42.4% 36.2% 37.6% 33.7% 26.1% 25.4%

(Source: Lindström et al. 2004)

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The relative technological advantage of Finland

0

1

2

3

4

5

6

AgricultureOil & Gas, Mining

Power Generation & Dist

Food & Tobacco

Textiles & Apparel

Wood & Paper

Chemicals

Pharmaceuticals

Biotechnology

Medical Equipment

Medical Electronics

Plastics, Polym & Rubber

Glass, Clay & Cement

Primary MetalsFabricated Metals

Industrial Mach & ToolsIndustrial Process Equip

Office Equip & Cam

Heating, Vent, Refriger

Misc Machinery

Computers & Peripherals

Telecommunications

Semiconduct & Electr.

Measurement & Control Equip.

Electrical Appl & Compon

Motor Vehicles & Parts

Aerospace & Parts

Other Transport

Misc ManufacturingOther

1980-86

1987-93

1994-2001

(Source: Balaguer & Tsai 2004)(RTA=relative share of US patents in class X in Finland/relative share US patents in class X for the world)

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printing and writing paper exports

0 5 10 15 20 25 30 35 40

pulp machinery exports

paper machinery exports

paper and paperboard exports

forest industry exports

forest industry output

harvesting of industrial wood

timber removal

softwood growing stock

forest resources %

(Source: Finnish Forest Industries Federation 2003)

Finland’s share of the World’s...

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2. Co-evolution of the forestry-related industries and

the Knowledge Economy

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Key issues to be addressed

• How have the forestry-related industries contributed to the development of the Finnish knowledge economy?

• How can the knowledge economy contribute to the further development of the Finnish forestry-related industries?

• What can be learnt from the viewpoint of other countries – the development of knowledge economies based on traditional/resource-based industries?

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Value of exports of forestry-related industries

Exports in billion EURO (log scale)

1600 1700 1800 1900 2000

0.20

0.50

0.85

1.68

3.365

8.4

Tar

Sawnwoodand products

Pulp,paper,board

Forestindustry

machinery

Chemicals

(Source: Lammi 1994)

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The forestry cluster in FinlandSpecial Inputs

Machinery

Associated Services

Primary goods

RelatedIndustries

Customers

•Paper•Cardboard•Pulp

•Sawn Timber•Plywood•Particle Board

•Harvesters•Pulp machines•Paper machines

•Process automation•Power generation•Chemicals

•Forest management•Harvesting

•Publishers•Merchants•Packers•Builders

•Consulting•Education•Research

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Basis for competitiveness – ICT versus forestry-related industries

ICT(mobile phones)

Forestry-related industries

Cost-efficiency

Product characteristics

(Source: Lammi 1994)

1960

1980

2000

1980

2000

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A phasewise account

1. An import-phase 1860-1917

2. An import-substituting phase 1920s-1950s

3. A phase of technological and productivity gains 1960s-1970s

4. An ongoing phase of internationalisation, consolidation and globalisation

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Knowledge economydevelopments – emergence of ICT at the core

Forestry-related industries as early lead users of electronics

and IT in 1970s and 1980s

Intensified ICT usage of future key importance to

forestry cluster?

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1. Import-phase until 1917

• First pulp mill started production in 1860• Close cultural ties, especially with Germany,

paved way for imports of machinery – technology transfer

• Early integration between pulp & paper and related engineering – an atypical pattern!!– Restictions on acquistition of land from peasentry– Transportation routes frozen during winter – in-house

maintenece a necessity– Numerous transportation equipment demanded

indigenous engineering skills

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2. Import-substitution phase 1920s-1950s

• World War I stalled engineering imports, while export markets were lost

• Finland’s independence in 1917 fuelled strives towards national self-reliance– Extensive state-involvement: nationalistaion, state-

owned companies, high tariffs, export cartels – R&D-base strenghtened, KCL founded 1916, METLA

founded 1917 etc.– Inventories, legislation on forest depletion etc.– Licensing combined with emerging user-producer ties

– an ’intelligent followers strategy’

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• World War II stalled imports and exports again…loss of forestry resources

• War repatriations – contributed to futher development of indigenous capability

• Consolidation and shift towards ’integrated production’

• User-producer ties emerge, related industries and services (e.g Jaako Pöyry, VTT in 1942) – embryotic cluster identifiable

• Diversification from sawn wood towards paper brands, paper board and machinery

• Exports reach pre-war levels by end of 1950s

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Integrated production

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3. Technological and productivity gains 1960s-1970s

• Developments (again) spurred by external developments– Liberalisation of trade - Finland participates in EFTA– Post-war boom…followed by energy crises and price hikes– High and fluctuating stumpage prices for wood– Microprocessors, accelerating computerization of production

• Massive capital investments to increase productivity, competitiveness and value-added – average plant size grows

• Development and adoption of process control and automation systems to optimize value chains– User-producer ties between paper and machinery makers strenghten

further, first computer in 1963– From foreign licenses towards in-house adaptation – In-house → spinn-offs → outsourcing,

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• The knowledge economy context…– governmental initiatives:

• State Computer Center (VTKK) founded in 1964• ADP Advisory Board established in 1975• Technology Council founded in 1979

– forestry-related industries provide early market for pioneering electronics/ICT firms

• Strömberg, Ahlström-Altim Control-Honeywell,Kajaani Electronics, Roibox, Acatec,Beamix,Valmet-Metso, Suomen Kaapelitehdas (Nokia),Tietotehdas-Carelcomp-Tietoenator, IBM etc.

• Export-orientation replaces import-substitution • The ’great leap’ of the forestry-related industries

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• Consolidation, internationalisation and further capital investments prompted by…– intensfied competition, EU membership - EMU– Southeast Asian countries enter global competition– continued rise in value-added of end-products – customization– global shift in investment and consumption from US and Europe

towards Asia (especially China)

• Consolidation → specialisation → changing division of labour within forestry cluster

• Internationalisation and globalisation → intensified usage of ICT services to mange global value chains

4. Ongoing phase of consolidation, internationalisation and globalisation

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Consolidation: ”the Million Tonner’s Club in pulp & paper”

1. International Paper 14 423 000 USA

2. Stora Enso 12 971 000 Finland

3. Georgia-Pacific 11 555 000 USA

4. UPM-Kymmene 8 285 000 Finland

5. Nippon Unipac Holding 7 957 000 Japan

6. Smurfit-Stone Container Corp. 7 445 000 USA

7. Oji Paper 7 111 000 Japan

8. Abitibi-Consolidated 6 406 000 Canada

9. Mondi International 5 967 000 South Africa

10. Weyerhaeuser 5 442 000 USA

13. M-Real 4 219 000 Finland

31. Myllykoski 1 859 000 Finland

(Source: Finnish Forestry Industries Federation 2003)

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Specialisation - changing division of labour within cluster

The changingdivision of labour

Services

Forest industry

Engineering and Machinery

Outsourcing to suppliers:• engineering• management of investment projects• maintenance• R&D

Outsourcing to suppliers:• ICT• R&D• Project management• Marketing• Consultancy• Logistics• Maintenance

Outsourcing to suppliers:• Maintenance• R&D-

(Source: Lindström et al. 2004)

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Globalisation and ICT usage: major Finnish pulp & paper firms

0

5000

10000

15000

20000

25000

1990 1995 2000 2002

Mrd

EU

RO

0

0.1

0.2

0.3

0.4

0.5

0.6

% o

f tu

rno

ve

r*

Turnover/Finland

Turnover/abroad

Telecom services

IT services

Telecom equipment

*Procurement of external ICT services

(Source: Lindström et al. 2004)

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3. Preliminary conclusions and next steps

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Conclusions…to be specified• Forestry-related industries constitute the first, but still

significant, pillar of the Finnish economy • An atypical pattern of evolution of forestry-related

industries – from sawn wood to quality paper brands and high-tech– Geography– Governmental initiatives and policies– External constraints and possibilities– R&D, managerial issues

• The contribution of forestry-related industries to knowlede economy developments – Backward linkages from forestry to engineering/machinery– Forward linkages from engineering/machinery to electronics/ICT

• Consolidation, internationalisation and globalistion – knowledge economy developments of key importance?– Tailor-made ICT content, intensified ICT usage – Internationalisation of ICT service providers

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Next steps

• Greater focus on knowledge-economy viewpoints– Early phase of the building of the knowledge

economy in Finland– Present challenges?

• Highlight developments since 1970s, less emphasis on pre-war history

• Illustrative firm-level examples

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Some important references:

• Lovio, R (1989): Suomalainen menestystarina - Tietoteollisen verkostotalouden läpimurto

• Raumolin, J (1992): The diffusion of technology in the forest and mining ssector in Finland

• Kässi, T (1994): Engineering ala Suomessa – toimialasta klusteriksi?

• Lammi, M (1994): Paperin, koneiden ja osaamisen menestystarina• Palmberg, C (2001): Sectoral patterns of innovation and

competence requirements – A closer look at low-tech industries• Jääskeläinen, J & Lovio,R (2003): Globalisaatio saapui Varkauteen• Lindström, M, Martikainen, O & Hernesniemi, H (2004):

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