DO WE VALUE RESEARCH & DEVELOPMENT?

IFA Plantation Productivity Symposium 12-14 May 2014 Mt Gambier DO WE VALUE RESEARCH & DEVELOPMENT? Rudolf van Rensburg, Director Pöyry Management Consulting

THE PÖYRY GROUP - GLOBAL EXPERTISE AND ASIAN COMPETENCE CENTRES About 6 500 experts in 50 offices, delivering Management Consulting and Engineering projects in 100 countries worth EUR650 million COPYRIGHT PÖYRY IFA SYMPOSIUM-12 MAY, 2014 2

WE WORK WITH INDUSTRY, BANKS AND PRIVATE EQUITY Some 500 projects in the wood products value chain globally every year, 100 of them in Asia Operational Excellence Markets Pre-Feasibility/IM Support Commercial Due Diligence Pre-Feasibility/IM Support Commercial Due Diligence Strategy BioFuture Technical Due Diligence After Financing Support Technical Due Diligence After Financing Support COPYRIGHT PÖYRY IFA SYMPOSIUM-12 MAY, 2014 3

DO WE VALUE RESEARCH AND DEVELOPMENT? Global R&D Overview Positioning our Industry Today Case Studies- the Importance of R&D Conclusions. COPYRIGHT PÖYRY IFA SYMPOSIUM-12 MAY, 2014 4

GLOBAL R&D OVERVIEW COPYRIGHT PÖYRY IFA SYMPOSIUM-12 MAY, 2014 5

WHO IS INVESTING IN RESEARCH & DEVELOPMENT? Compared to the world leaders within R&D, Australia s investment and number of researchers are low R&D Investment 2006-2013 (USD billion) R&D Investment by Country (2013) 221 638 7% 3% 21% Other China Japan R&D as a % of GDP 4.5 4.0 3.5 Japan South Korea Finland 417 30% Europe 3.0 2.5 2.0 1.5 Germany China US Australia 39% North America 1.0 0.5 0.0 India Indonesia Malaysia Mexico 2006 2007-2012 2013 0 10 20 30 40 50 60 70 80 90 Researchers per 10 000 people Source: Battelle, Strateg&. Size represents annual R&D spending COPYRIGHT PÖYRY IFA SYMPOSIUM-12 MAY, 2014 6

SHIFT IN THE INTERNATIONAL RESEARCH FUNDING ENVIRONMENT The Asian share of global R&D is expected to continue to increase, driven by China, Japan and Korea, while in the US and Europe, shares are expected to decrease. China s growing economy is likely to be the key driver in the country s commitment to R&D. The US and Europe are expected to remain global leaders in high-quality research output. However, the balance is shifting. In Africa, the Middle East and South America, R&D remains relatively small, albeit with some noteworthy national initiatives. COPYRIGHT PÖYRY IFA SYMPOSIUM-12 MAY, 2014 7

POSITIONING OUR INDUSTRY TODAY COPYRIGHT PÖYRY IFA SYMPOSIUM-12 MAY, 2014 8

COMPARISON OF R&D SPENDING BY INDUSTRIES GLOBALLY Investment in forestry R&D is low compared to that of other industries R&D spend as a precentage of revenue 20 15 Software/Internet Health 10 Aerospace/Defence 5 Chemical/Energy Telecom Consumer Automotive Computing/Electronics Forestry Industrials 0 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 190 R&D spend USD billion 2004 2005 2006 2007 2008 2009 2010 2011 Note: Bubble size corresponds to level of total R&D spend in relation to 2004. Source: Battelle, Strategy&, P yry. COPYRIGHT PÖYRY IFA SYMPOSIUM-12 MAY, 2014 9

COMPARISON OF R&D SPENDING BY INDUSTRIES GLOBALLY The role of R&D must be to maximise value potential across the value chain Forestry Logistics Production Sales Distribution Customer Tree genetics Sites Silvicultural Pest & disease Environment Technology Inventory Management Harvesting Optimisation development Supply chain management Transport Log handling Technology CoC New products New materials Design New tools Quality management New processes Substitution New tools Market insight/research Market research methodologies E-commerce Mobile apps Design & estimation tools Consumer trends Source: Pöyry COPYRIGHT PÖYRY IFA SYMPOSIUM-12 MAY, 2014 10

R&D EXPENDITURE PRODUCING FOREST PRODUCTS Machinery suppliers spend considerably more on R&D than panel manufacturers. In the forestry industry, there is stronger emphasis on increasing processing efficiency than on new product development R&D Expenditures Comparison by Value Chain (% of revenues, Ø 2009-2012) Panel 1 Panel 2 Forest Products 1 Forest Products 2 Paper Flooring Paper 2 Machinery 1 Chemicals 1 Chemicals 2 Machinery 2 Machinery 3 Source: Pöyry 0.1 0.2 0.2 0.4 0.6 0.8 1.0 1.5 1.5 1.7 4.0 6.0 COPYRIGHT PÖYRY IFA SYMPOSIUM-12 MAY, 2014 11

FORESTRY RESEARCH ORGANISATION BUDGETS COMPARISON USD, millions 100 90 80 70 FPInnovations (Canada) Canada Forestry is 1.1% of GDP 60 50 40 30 SCION (NZ) New Zealand Forestry is 3% of GDP Australia Forestry is 0.6% of GDP 20 10 FWPA (AU) FFR (NZ) 0 2008 2009 2010 2011 2012 2013 Source: FWPA 2013, www.fpinnobvations.ca, www.scionresearch.com, www.ffr.co.nz COPYRIGHT PÖYRY IFA SYMPOSIUM-12 MAY, 2014 12

FORESTRY RESEARCH ORGANISATION BUDGETS COMPARISON Declining R&D spending within the sector will increase Australia s reliance on foreign R&D and reduce our potential for innovation Australia Forestry Research Organisation R&D Investment (AUD million) 104 Australia Forestry Research Organisation No. R&D Employees 732 74 480 30 252 2008 2013 2008 2013 Source: AFPA COPYRIGHT PÖYRY IFA SYMPOSIUM-12 MAY, 2014 13

FORESTRY R&D MAINTAINING ESSENTIAL KNOW-HOW R&D ability lost today will take years to rebuild to the detriment of the forest industry Eg. Koala bears in Blue Gum plantations Problem/ Opportunity R&D Solution Unexpected problems can arise any day (see case studies) Scientists require years of training Knowledge bases take years to develop Build-up of expert communities takes years May require years of dedicated research/ funding COPYRIGHT PÖYRY IFA SYMPOSIUM-12 MAY, 2014 14

R&D INVESTMENT: INTERNATIONAL EXAMPLES Australian forestry companies do not disclose information on R&D investment R&D Expenditure Comparison by Companies [% of revenues, Ø 2009-2013] Region R&D Investment Trend [2009-2013] Areas of R&D 0.9 Stora Enso Europe Multiple 0.8 0.7 Metsä Group Europe 0.6 0.5 0.4 0.3 0.2 0.1 0.0 2009 2010 2011 2012 2013 Stora Enso UPM Kymmene Fibria MeadWestvaco Mondi Metsa Group Fibria Brazil Genetic improvement, process technology UPM Kymmene Europe, S America Biorefinery, NPD pulping and biochemicals Mondi S Africa NPD kraft paper, industrial bag, consumer packaging MeadWestvaco NA NPD packaging - Australia? Source: Annual Reports COPYRIGHT PÖYRY IFA SYMPOSIUM-12 MAY, 2014 15

WHAT HINDERS R&D INVESTMENT? Despite strong links between R&D, productivity and economic benefits, delays in innovation outcome hinder R&D investment Challenges Overcoming Challenges Focus on short-term financial results (hypothesis: Australian forests today increasingly controlled by financial owners) Measurement of R&D impact on business success Long-term commitment needed Delays between innovation and adoption Undetermined return on investment Attractiveness of R&D investment in Australia vs peers (Brazil, Canada, NZ) e.g. government incentives to R&D Gap between technology research and implementation Industry demographics. More forward thinking industry leaders? Education of the industry s largely new financial owners? Misconception we are an established industry that knows everything already Better standardised approaches to evaluate and value R&D projects. Effective communication of R&D outcomes (FWPA good example) Learn from more innovative peers (e.g. Finland and Canada) Close the physical/distance gap between R&D centres and beneficiaries. Source: Pöyry COPYRIGHT PÖYRY IFA SYMPOSIUM-12 MAY, 2014 16

THREE SHORT CASE STUDIES COPYRIGHT PÖYRY IFA SYMPOSIUM-12 MAY, 2014 17

CASE STUDY #1: IMPACT OF R&D UNDER-INVESTMENT ACACIA MANGIUM PEST AND DISEASE Situation Issue Required Action Ceratocystis wilt is a disease found in Acacia Mangium (AM), the main plantation species planted in South-east Asia to supply the pulp & paper, sawmilling and panel industries. As a result, Ceratocystis wilt has now become a major threat to plantations in Southeast Asia, yields are in decline and thousands of hectares of infected trees are dying. Despite some R&D investment to improve yield, stem and fibre properties, there was limited knowledge about the AM specie s resistance (provenances,clones). No/limited existing platforms for industry collaboration, joint funding. Increase knowledge about biological control options Address shortage of R&D specialist skills Need comprehensive solution: tree breeding. hybridisation, biological control, genetic modification, silvicultural management options. Source: Pöyry COPYRIGHT PÖYRY IFA SYMPOSIUM-12 MAY, 2014 18

CASE STUDY #2: PHYTOPHTHORA PINIFOLIA ASSOCIATED WITH SERIOUS NEEDLE DISEASE OF P. RADIATA IN CHILE Problem In Feb 2004 unusual tree mortality appeared in 6-year old P. radiata (70 ha on Arauco coast of Chile). In the same area serious needle blight disease was observed. Damage increased to cover 60 000 ha by the end of 2006. Was quickly regarded as the most serious problem yet to affect the country s pine forestry. R&D results showed cause to be a previously- undescribed Phytophthora sp. Mortality was probably hastened by opportunistic fungi such as Diplodia pinea. Scientific Opinion Pers.comm. Professor Mike J. Wingfield Over time, cascading effect with diseases and pests of introduced forestry species. Evidence - as time passes, gradual increase in the numbers of pests and pathogens to contend with. Some are more important than others - but the costs rise and the ROI drops. Example: P. radiata has slowly but surely petered out in South Africa - Dothistroma, then Diplodia, then Sirex, then Pitch Canker. R&D Implication Requires increasing investment in research - breeding, selection, hybridization etc... Australia and New Zealand have been fortunate with P. radiata thus far- well, also careful with GREAT QUARANTINE. But how long can the gates hold? Durán, A., Gryzenhout, M, et al 2008, Phytophthora pinifolia sp. nov. associated with a serious needle disease of Pinus radiata in Chile. Plant Pathology, 2008, 57, 715-727 COPYRIGHT PÖYRY IFA SYMPOSIUM-12 MAY, 2014 19

CASE STUDY #3: METSÄ FIBRE ANNOUNCES EUR1.1 BILLION BIO-PRODUCT MILL IN FINLAND Made possible through dedicated R&D and new innovations Annual pulp production capacity of 1.3 million tonnes World's first next-generation bio-product mill that can convert wood raw material into bio-energy and various bio-materials in a resource-efficient way Unique bio-economy ecosystem of companies will be built around pulp production Annual impact on the Finnish economy will be over EUR0.5 billion Will provide 2 500 jobs in the forest industry value chain Annual export increase of EUR0.5 billion. No use of any fossil-based fuels; all energy will be generated from wood The wood raw material and side streams will be utilised 100% as products and bio-energy The mill will increase the consumption of fibre wood in Finland by approximately 4 million cubic metres (some 10%) per year EIA and environmental permit processes to be launched immediately. Expect completion by the first quarter of 2015. Final investment decision to be made in early 2015. The new mill would become operational during 2017. 1 Source: 1 http://www.fordaq.com/fordaq/news/mets%c3%a4_investment_next-generation_bio-product_mill_36785.html COPYRIGHT PÖYRY IFA SYMPOSIUM-12 MAY, 2014 20

CONCLUSIONS Globally, the forestry sector is lagging in R&D investment when compared to other industries In Australia we are seeing a worrying decline in forestry R&D investment No industry has ever prospered without significant R&D investment and innovation The forest industry is particularly complex as it is founded on the biological sciences. The underlying biology and environment is constantly changing, and there are limitations to our understanding of these complex sciences. If we do not maintain investment in R&D it will be to our own peril Problems such as tree diseases appear overnight. They have the potential to make significant impact and can take years to solve New innovative technologies such as bio-refineries require years of investment in innovation R&D expertise takes years to build or to rebuild WE MUST REMAIN COMMITED TO THE FUTURE OF OUR INDUSTRY AND INVEST RESPONSIBLY WITH A LONG-TERM FOCUS IN MIND. COPYRIGHT PÖYRY IFA SYMPOSIUM-12 MAY, 2014 21

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