DOMTAR

CORPORATION
INDUSTRY AND
COMPANYS REPORT
PROJECT COMPLETED BY:
HUSSAIN HAKIM ALI KHAN

DATE OF SUBMISSION:
25TH NOVEMBER 2015

INTRODUCTION:
Domtar Corporation is Canadas largest manufacturer of uncoated paper sheets in
Canada specifically and second largest of the worlds. It is a vertically integrated firm
that involves not only in manufacturing as aforementioned but also involved in
provisioning the resources, manufacturing, marketing and distribution of the product to
its respective target market. It is also a manufacturer of paper grade pulp. Its product
line includes business, commercial printing, publication as well as technical and
specialty papers with recognized brands such as Cougar, Lynx Opaque Ultra, Husky
Opaque Offset, First Choice, Sandpiper (premium 100% recycled unbleached), and
Domtar EarthChoice Office Paper, part of a family of environmentally and socially
responsible papers. After its merger with a US company, it is no longer viewed as a
Canadian company but as a US company but still is eligible for induction in the
Canadian Stock Exchanges. The merger took place in the year 2006, though still it is
based in Montreal, Canada. The total number of people employed in the corporation
numbers 10,000 around the world where it is extant.
INDUSTRY STRUCTURE:
Since the industry structure is comprised of a number of factors, that includes level of
recognition, GDP growth rate of the nation in which it is incorporated, the competitors,
customers in terms of growth rates and their preferences as gauged by their market
research and the governmental regulations that are alternatively an analysis of the
external environment, I have constrained myself to these aforementioned factors and
excluded the potential additional factors that might come into play. To summarize, these
factors are listed as:
(i)
(ii)
(iii)
(iv)
(v)

Level of recognition
GDP growth rate
Customers
Governments including their regulations and
Competition

Level of recognition:
The success and the level of recognition of the firm can be attributed to its
commendable position that it enjoys in terms of the financial strength that it has in
context of the industry it caters to. Other factors included are employee strength, the
extent and scope of business expansion in the overseas, the extent of customer
satisfaction as gauged from customers responses and as estimated by the demand and
supply that it enjoys at the Goliath nations such as USA and Canada it enjoys 80%
market share in those parts of the world, increase in customer database that aids
evaluation of the customers and the level of information that is gleaned from the
database and finally healthy risk structure especially financial risk with low debts.

GDP Growth rate:

US enjoys unsatisfactory GDP growth rates from 2011-2014 as evinced by the following
data that I obtained about the US economy performance from 2011-2014.

US GDP %
2011
1.6%

2012
2.3%

2013
2.2%

2014
2.4%

Hence this factor does not bid well for the company and even if the merger hadnt taken
place then it would be at the same or even worse situation had it been incorporated in
Canada due to the stagnant economy as experienced by the nation under now former
prime minister Stephan Harper.
Customers:
The supply and demand is experienced everywhere in US and Canada and provided its
large market share as exhibited by the fact of its ranking amongst the firms in terms of
size and market share, it shows bright prospects for the company provided future
events remains in favor of the company and no new competitor or technological
prowess is muscled by the potential incumbent firm.
Governments:
It is fully compliant with the environmental and sustainability regulations employed by
the government. They manage resources in an efficient manner and due consideration
is taken for the stakeholders while their decisions impacts the stakeholder in a positive
manner. Minimization of waste and recycling of products had obviously had implication
on the goodwill that it enjoys and government patronage. Certain acts such as
protection of the environment, including those governing harvesting, air emissions,
climate change, waste water discharges, the storage, management and disposal of
hazardous substances and waste, contaminated sites, landfill operations and closure
obligations and health and safety measures. However, as per their 10-K reporting, they
confess that sometimes they fail to maintain regulations and restriction imposed on
them by the government that results in penalty and fines, especially those that are costintensive for the company and a bit difficult to implement, such as installation of
pollution controlling equipments and apparatus or other remedial measures. In a
nutshell, it may entail further capex and operational costs that falls on the onus of the
company.

Competition:
There are many competitors of the Domtar Corporation in North America and also
across the world but not on a like scale of Domtar Corporation. Few of them include
Boise Cascade Holdings, L.L.C. (privately held), Georgia-Pacific LLC (privately held)
and International Paper Company.
The analysis for the competitors shows that Domtar Corporations market capital is
more than the other paper and pulp related businesses. The debt payment has been
reduced to a very low so the earning per share got increase is highest among the same
industries in the world in the paper and pulp.
The competitive advantages of the firm are because of the quality, brand recognition
and cheap prices. The competitors are also not able to compete with it because of the
large segment of paper, pulp and personal care related production and services
because that has acquired the more than 80 % business in the market.
PORTERS FIVE FORCES MODEL OF COMPETITIVENESS:
It has been observed that the intensity of rivalry is high due to certain factors such as:
(i)

(ii)

(iii)

(iv)

Low industry growth As the industrys growth is insubstantial, so does its

contribution to GDP or in other words its slice of contribution towards
aggregate income generation is restrained. A low growth on industry would
definitely impact the company the most because of its business risk owing to
high fixed cost and it will definitely leverage its loss.
High Fixed Cost Capex would not only decrease the cash flow but also
increase its business risk or operating leverage and its value would cascade
downwards towards decreased profits
Brand Identity obviously there is less extant renowned names amongst
paper industry companies that has high brand equity and its application has
been cannibalized by increased use of automation and less red tapism that
are becoming vogue in these times of business.
Low Concentration The paper industry has low concentration, as evinced by
emerging paper making companies and cannibalization of market share by
the incumbent companies.

Growth in the paper industry:

(i)
As per predictions, the turnover growth is about 2%
(ii)
Since 2004, CAGR is 1.14% accompanied by negative growth witnessed in
the last two years
(iii)
Prediction of 4% decrease in employment due to high costs and lesser
margins.

High Fixed Costs:

Fixed costs for the paper industry amounted to $1.5 billion dollars and it does
creates exit barriers due to the illiquidity of the real estate and the plant and
equipments selling. A normal paper machines has astounding dimensions as they
are nearly 40 ft. wide, hundreds of feets long, and over two stories high.
Low Industry Concentration:

International Paper Company 13.2%

Domtar Corporation 9.8%
AbitibiBowater Inc 7.8%
NewPage Corporation 5.7%
Other 63.5%
Top 4 companies control 36.5% of market share
'Others' have 1 4%

Barriers to Entry:
Economies of scale

Purchasing single supplier in most cases and hence reduction of cost in case of
bulk buying and increased bargaining power.
Managerial
Financial
Marketing
Brand Identity explained in the document
Switching Costs Competition leads to increased switching cost and loss of
customer lifetime value
Capital Requirements- Capital requirements are high and hence companies would
be unable to afford machineries and equipments.
Distribution Increased distribution cost and logistics problem will pose a barrier
towards entry.
Government Regulations Government regulation will not give an enabling
environment for other paper and paper products industry to enter since increased
fixed costs need to be expended in order to cater to sustainability and environmental
conditions.

Industry Pricing:
The prices of uncoated fressheets are continuing to show an upward trend after the
$60/ton hike initiatives announced for March are in place. Though, the price is not
standardized for every paper product, as business papers, copy papers prices rose to

$50 /ton and another $10/ton in April. Simultaneously, the demand for these breed of
paper is dwindling.
Consumer Shift:
The other nations are looking out for markets such as Asia and South America with
another factor for the decline is US is fast becoming an import country with respect to
papers and exporting less as it is utilizing tapping into other nations.
Bargaining Power of Suppliers

The high cost and reliance on necessary inputs provides a challenge to the
paper industry
Provides leverage and bargaining power to suppliers Threatens industry
profitability as the court is in the ball for the supplier and they demand their price
at the expense of the buyers.
Companies must position themselves in order to negate this force.

SWOT ANALYSIS OF DOMTAR CORPORATION:

Strengths Data
-domestic market
-experience, knowledge
-location and geographical
-resources, assets, people
-barriers of market entry
-business units
-processes, systems, IT, and communications
-labor costs
-financial reserves
Weaknesses Data
-cost structure
-brand portfolio
-future debt rating
-reliability of data, plan predictability
-productivity
Opportunities Data
-global influences
-volumes, production, economies
-economic
-technology development and innovation

-Information and research

-global market
-merger and acquisitions
-seasonal, weather, fashion influences
Threats Data
-increasing rates of interest
-change in labor costs
-competition and profitability
-increasing costs
-external business risks
-technological problems
-legislative effects
-political effects
DOMTAR CORPORATIONS FINANCIAL INFORMATION:
The revenue earned in the last fiscal year is $5563 million, with profits of $463 million.
The total stockholder equity amounts to $ 2890 million and total number of employees
are around 9,800 around the world. The market value, as of March 2015 is $2947
million. The profit margin is just 7% and the asset turnover is also 7%. The EPS is 14%
totaling to $6 per share. The EPS growth rate over the past five years is 13% with 388%
change over the last two years on account on improvement in stock exchange
performance of USA. Total return to investors, however has been dismal as it is showing
result of -12%, with 9% growth over the last five years.
STRATEGY FOR THE COMPANY RECOMMENDATION:
The company should consider cutting its cost especially finance cost and other
operational costs as interest rate is rising and will likely to rise in the US. This is
augmented by the fact that regulations by the government are conducive towards
increased capex and high fixed cost in contrast to other industries. The discount rate
should be increased in light of increased risk and uncertainty. The competitive
landscape is also not amicable for Domtar Corporation as it is experiencing profit
erosion at the hands of new companies with latest technologies and assets. They
should also capitalize on the opportunities that present itself in the more of more
frequent mergers and acquisitions. They should also work to ameliorate their brand
image and portfolio and extend their product lines by investing in other product lines
such as other types of papers. Just like Intel Inside campaign by Intel helped in
marketing a unknown and dull brand such as microprocessing, similarly, presenting
paper as a necessary product in our daily lives should further their cause. Productivity

can potentially also be enhanced by employing operational techniques that aids

operating efficiency and leverage their economies of scale.

REFERENCES:

http://smallbusiness.chron.com/five-components-organizations-externalenvironment-17634.html
http://www.csed.umn.edu/web3503/pulppaperFiveForces.pdf
https://en.wikipedia.org/wiki/Domtar
http://www.assignmentsupport.com/media/demo_work/essay/domtar_corpora
tion%20_company_analysis.pdf
http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG
http://fortune.com/fortune500/domtar-470/
http://www.investopedia.com/university/ratios/
www.swotdata.com