Forest machine companies have been struggling for some time. Many are in dire straits due to bad harvesting weather conditions, industrial actions and the decrease in demand for wood. The situation for small companies is the most concerning, as many lack the buffer funds to survive tougher times. In its FOBIA project, the Natural Resources Institute Finland (Luke) researched the reasons why some of these companies succeed and some do not.
The research consisted of interviews with forest machine entrepreneurs and reviewing publicly available financial statements. The companies were divided into three classes according to their turnover. Small companies had a turnover of less than 0.6 million euros, medium-sized ones had a turnover of 0.6–2 million euros and the large companies had a turnover of over two million euros.
A wide range of businesses
The small companies had generally started their operations around the turn of the millennium, when the structural change in the logging industry began. Most of the small companies were subcontractors to larger companies. Some of them had joined forces and negotiated shared contracts with forestry companies. Some of the companies acting as subcontractors had subcontractors of their own.
The owners of small companies felt that competition in the industry is fierce. High customer turnover added caused insecurity. Contractors were found to change every three years for the small companies, when customer relationships of the larger companies often lasted 15 years and more.
The share of harvesting in the companies’ turnover was at least 70 percent. The forest industry was the most important customer group for logging companies that also provided long-distance transportation services in cooperation with transport companies. Some had their own vehicles for transporting wood. The small companies provided land development, for example, as an additional service. The middle-sized companies were more clearly focused on harvesting wood and used subcontractors less than the large companies. Additional services were found to not necessarily improve the profitability of the larger companies, but they did make the companies more competitive.
The smaller, the weaker
The average return on invested capital decreased between 2012 and 2017. It was less than three percent for the small companies and around ten percent for the middle-sized and large companies. In reality, the situation is more dire, as no calculatory pay adjustment was performed on the numbers. Variation in financial indicators was large.
The small companies were often in debt. They did not have the resources to make investments, even though last year they did not report feeling like finding funding would be an issue. Most of the entrepreneurs’ time was spent in harvesting work, and they made sacrifices relating to their own income. Workload was reported to be unsustainable at times, and yet the entrepreneurs did not always even reach the pay level of a forest machine operator.
The machines of small companies had the least number of operating hours, and work sites could not be centralised due to the small size of stands. A large part of a harvest’s profitability comes from the work of operators. However, bonus systems were in place mostly only in large companies. Large companies also invested the most in monitoring profitability and finances. Small companies employed the smallest number of certified forest machine operators and often employed unexperienced operators. After the operators earned their stripes, they left for the larger companies.
Room for development in management skills
The entrepreneurs were typically certified forest machine operators or had a vocational education degree. Financial management was limited to checking monthly reports sent by their accounting firm. Even the large companies rarely took full use of systems designed for management and wood procurement.
The need for more extensive business management competence is clear, especially if an entrepreneur is planning on expanding their business. In addition to competence in financial management, negotiation skills are highly necessary, since wood procurement is mainly based on networking. Small companies too should find time to systematically evaluate and plan their business operations, which can be done in cooperation with experts from an accounting firm, for example. Business models should be developed as well. Subcontractors should seek to cooperate with other companies, but navigating the networks requires using brokers.
More responsibility to the value chain
The number of harvesting contracts has been purposefully increased within the forestry industry. Subcontracting has become an integral part of wood procurement, and risk management for large forest machine companies. The development shows that there is very little surplus to distribute within the procurement chain. Even though the price of wood is an important factor in competitiveness, it should be kept in mind that a value chain works best when each of its links can operate in a profitable and sustainable way.