PROJECT FEASIBILITY STUDY: WOOD PELLET MANUFACTURING IN THAILAND

By

Chaowatchai Thambanchacheep

SIU PS: SOM-MBA-2006-09

PROJECT FEASIBILITY STUDY: WOOD PELLET MANUFACTURING IN THAILAND

A Project Presented

By

Chaowatchai Thambanchacheep

Master of Business Administration in Management School of Management Shinawatra University

June 2007

Copyright of Shinawatra University

Acknowledgments

I would like to express my special gratefulness to Dr. Chanchai Bunchapattanasakda, my advisor, for his kindly valuable time, useful advice, comments and necessary knowledge during conducting the project. I also would like to express my gratitude to other professors and instructors for kindly providing knowledge and technique during study all courses at Shinawatra University. I also wish to express my gratitude to my colleagues at Shinawatra University for kindly facilitate and share the experience. Lastly I wish to express my appreciation to my parents and my brothers who have been very supporting all the time.

Abstract
Nowadays, Fuel Energy is one of the most essential things in daily life but because the very limited of fossil energy but the demand is abundant which make the price is tend to going up, higher and higher, everyday especially oil that the price of oil has been increased around 151% in the past seven years, 1998 to 2005, (Food and Agriculture Organization [FAO], 2006). Not only problem from increasing of fuel price environmental problem, Greenhouse Effect, Global warming, is now the main environmental problem of the world. The result of global warming is now effecting greatly around the world and have tendency to be more and more severe. As a result of energy and environmental crisis, the regulation, restriction or technology was conducted through many countries and organization such as EURO 3, Ethanol, Bio Diesel and Kyoto Protocol. Wood pellet is one kind of biomass that made from heated and compressed of wood by product such as saw dust and wood shaving. Wood pellet is widely use in European countries and United Stated of America because the environmental effect is very low and the price is compatible with other fuel. Therefore, this study intends to investigate the feasibility of manufacturing wood pellet biomass fuel in Thailand from residual, scrap, saw dust, defect and etc of wood. The main market for wood pellet are the developed country which concern about environmental effect such as European Country, United Stated of America and Japan. The result from the study shown the opportunity of the project the project is very attractive from high growth rate of market developing, few competitors while pleasing return and not much risk. The return from the project is 29% of Interest Rate of Return (IRR), 5 years pay back periods, Net Present Value (NPV) 6,970,331.10 Baht at 8.25% discount interest rate. Thus the wood pellet is very appealing and extremely high potential to invest in Thailand because of high market growth rate, high return with acceptable risk.

Keywords:

Wood pellets Fuel industry

ii

Table of Contents
Title Page

Acknowledgments Abstract Table of Contents List of Figures List of Tables

i ii iii v vi

Chapter 1 Introduction 1.1 Problems Statement 1.2 Objectives of Study 1.3 Expected Outcomes

1 2 3 4

Chapter 2 Wood Pellet Product and Production Processes 2.1 Wood Pellet Product 2.2 Quality Standard of Wood Pellet 2.3 Raw Materials of Wood Pellet 2.4 Production Processes

5 5 6 7 8

Chapter 3 Market Analysis and Marketing Plan 3.1 Market Analysis 3.1.1 Economic factor 3.1.2 Environmental and government policy 3.1.3 SWOT analysis 3.1.4 Competitive advantage 3.1.5 BCG matrix 3.2 Marketing Plan 3.2.1 Segmentation 3.2.2 Targeting 3.2.3 Positioning 3.2.4 Marketing mix

11 11 13 14 16 16 18 19 19 20 21 22

iii

3.2.5 Marketing cost

26

Chapter 4 Operational Plan and Financial Analysis 4.1 Operational Plan 4.1.1 Facility location 4.1.2 Capacity and production planning 4.1.3 Logistic plan 4.1.4 Human resources planning 4.2 Financial Analysis 4.2.1 Sales forecast 4.2.2 Manufacturing cost structure 4.2.3 Income statement 4.2.4 Cash flow forecasting 4.2.5 Sources of fund

28 28 28 29 31 32 32 32 34 35 37 39

Chapter 5 Conclusions and Recommendations 5.1 Conclusions 5.2 Recommendations

40 40 41

References

42

Appendices Appendix A Wood Pellet Manufacturing Machine Module Appendix B Wood Pellet Stove 44 45

iv

List of Figures
Title Page

Figure 2.1 Wood Pellet Figure 2.2 Wood Pellet Production Processes Figure 2.3 Vertical Mounted Ring Die Type Figure 2.4 Pelletizing Machine Figure 3.1 Energy Price Comparison Figure 3.2 Relative Emissions of Fine Particles Figure 3.3 Pricing Differentiations of Fuel Types in Denmark Figure 3.4 BCG Matrix Portfolio Figure 3.5 Segmentation of Wood Pellet Market Figure 3.6 Targeting of Wood Pellet Market Figure 3.7 Positioning Map of Wood Pellet Figure 3.8 Pellets in Large Bags with High Endurance from Humidity Figure 4 Supply Chain Diagram Figure A Wood Pellet Manufacturing Machine Module Figure B1 Wood Pellet Stove Operation Figure B2 Wood Pellet Stove

5 8 9 10 13 14 15 19 20 21 22 23 31 44 45 46

List of Tables
Title Page

Table 2.1 Wood Pellet Properties Table 2.2 Swedish Pellet Classification SS 18 71 20 Table 3.1 Annual Consumption of Wood Pellet Table 3.2 SWOT Analysis Table 3.3 Product Pricing Table 4.1 Employee Structure Table 4.2 Sales Forecast in each Target Market for Year 2008 to 2012 Table 4.3 Sensitivity of Sales Volume Forecast in Year 2008 to 2012 Table 4.4 Sensitivity of Sales Amount Forecast in Year 2008 to 2012 Table 4.5 Manufacturing Cost Structure Table 4.6 Income Statement from Year 2008 to 2012 Table 4.7 Cost Structure Table 4.8 Investment Details Table 4.9 Cash Flow Forecasting for Year 2008 to 2012

6 7 12 16 24 32 33 33 34 35 36 36 37 37

vi

Chapter 1 Introduction
Nowadays, fuel energy is one of the most essential things in daily life of normal people which consume energy more and more everyday while the available of energy is lowering going to be depleted from the world especially the fossil energy. Because the energy resources is very limited but the demand is enormous which make the price tend to going up ,higher and higher, everyday particularly fuel oil that the price of fuel oil has been increased around 151% in the past seven years,1998 to 2005 ( FAO, 2006). Not only the fuel price that has been increasing but also other forms of energy as well such as gas, coal, even the wood cord. The consequence from increasing of energy price is widely effect all around the world since business sector to the single men and from large industrial that uses fuel to manufacture the products until in small house hold that use fuel for heating the house during winter season. Environmental problems are also the problems that were rooted from the energy consumption, one of the major roots, which in the process of using or consuming energy no matter heating or combusting are also generated and emission of CO2 in to the environment. Greenhouse Effect, Global warming, is now the main environmental problem of the world that resulted from emission of CO2 in to the air from combustion, heating, or burning of fuel. The enormous of CO2 will cover the earth in the atmosphere level and making the world hotter and hotter because the Ultraviolet (UV) light can come in to the earth but can not get out from the atmosphere by covered CO2 like in the green house glasses. The result of global warming is now effecting greatly around the world and have tendency to be more and more severe such as Tornado, inundation, and fire in the forest. As a result of energy and environmental crisis, the regulation, restriction or technology was conducted through many countries and organization such as EURO 3, the standard of emission CO2 from combustion engine in vehicle of European country, Ethanol bio fuel, and Bio Diesel. As well as Kyoto Protocol that is going to be perform and enforce in the near future primarily with the developed country to lower the CO2 emission rate and also the consumption rate of energy by collect tax rate for energy product depend on level of CO2 emission.

Additionally to the regulations and policy, Renewable Energy is one of the best solutions to solve the energy and environmental problems because Renewable energy is the energy that can be reuse again and again which can be called as sustainable energy solution. In heating purpose, no matter in household or industrial lever, variety of energy can be used such as propane gas, natural gas, fuel oil, cord wood and biomass. Wood pellet is one kind of biomass that widely use in European countries and United Stated of America because the environmental effect is very low and the price is compatible with other fuel. Wood Pellet is normally use for heating purpose in household or burning to heat water to be steam and use in further process in industrial however it is not widely use because there need initial investment for changing the strove and at before the price of wood pellet is not cheap when compare with other fuel which contrast with now that the price is cheaper and also the supporting from environment regulation in many countries result in high potential to compete in the market of wood pellet. Therefore, this study intends to investigate the feasibility of manufacturing wood pellet biomass fuel in Thailand from residual, by product, scrap, saw dust, defect and etc of wood. The main market for wood pellet are the developed country which concern about environmental effect such as European Country, United Stated of America and Japan.

1.1 Problems Statement Nowadays, the energy from fossil or oil is going to deplete from the world and the price of oil is increasing dramatically thus renewable energy is one of the solution for energy crisis. Renewable energy is the interesting industries that have very high growth and profit rate for all around the world. This feasibility study project will conduct about the wood biomass in wood pellets form which use in household for heating because of availability of resources and dramatically increasing of demand all around the world especially in Europe and United State of Amercia. Furthermore, from the price of oil, the main reason of this attractive opportunity in this project is the Envirnomental concern of CO2 emission from combustion which cause the pollution in the air and the greenhouse effect as well. Wood pellets is one kind of the most popular biomass energy eventhough there are many kinds and forms of biomass energy in the market such as briquettes however briquettes are larger in size and not suitable for automatic feeding system and also 2

larger size of briquttes will be crushed in transportation before combustion. The wood pellets net emission is nearly zero of CO2 from the combustion when compare with the heating oil and natural gas which is much more generated of CO2. The environmental concern from many international agreement amoung developed contries such as kyoto protocol and also the policy in each country such as Denmark which will reduce the emission 20% of CO2 from year 1998 to 2006. Thus the above reasons are very attractive to study on this project. The biomass is one kind of the renewable and sustainable energy that will use the materials produced by metabolic activities of biological systems and/or products of their decomposition or conversion. The sources of biomass can be from many things such as residues from forestry, food indusries, industrial wastes, and etc. The wood pellets is one amoung of the most popular biomass energy because of many reason such as availability of raw material, uncomplicated in processing and easiness in transportating. The transportation is much more easier after processed which will have volume 1.5-1.7 litres per kilogram when compare with the raw materials which have 5-20 litres per kilogram which cost higher for transportation cost per kilogram. In Thailand, forestry indusrtries is the massive size from upstream like saw milling to downstream like funiture manufacture which means the plenty of scrap, resudules, dust, defect and etc from the process in sawmilling, funiture production and ply wood making as well. The business will be about manufacture of wood pellet biomass fuel from residual, scrap, saw dust, defect and etc of wood. Hence this study is intended to feasibility study of manufacturing wood pellet biomass in thailand.

1.2 Objectives of Study The purpose of this project is to conduct the feasibility study of manufacturing wood pellet biomass in Thailand which will have objectives as following: 1) To help the new entrepreneur that want establish new business or support the related of timber business owner to create value added from by product in the country. 2) To introduce wood pellet business in Thailand for further development of biomass energy in Thailand.

1.3 Expected Outcomes 1) The entrepreneur or related timber business owner will get information of establishing wood pellet business in Thailand. 2) Introducing of wood pellet business in Thailand for further development of biomass energy in Thailand.

Chapter 2 Wood Pellet Product and Production Processes

2.1 Wood Pellet Product Wood pellet, biomass fuel, is a fuel product compressed from milled wood. The raw material is mostly dry sawdust, grinding dust, and cutting shavings or other by-products of mechanical wood processing industry. The pellet can also made from fresh biomass, bark, and forest chips as well but the raw material must be milled and dried before pelletising. The wood pellets can not touch directly with water or moisture because it will get damp, expand, and disintegrate. The picture of wood pellet is shown in Figure 2.1 as following.

Figure 2.1 Wood Pellet Source: Alakangas & Paju (2002)

The diameter of pellets is usually 8-12 mm and length 10-30 mm. the moisture content is low, 7-12%. The ash content is 0.5% which is quite low. The weight of a bulk density of pellets ranges 650-700 kg/m3. The net calorific value of pellets ranges 4.7 5.0 kWh/kg (16.9-18 MJ/kg). The energy content of pellet is 3,000 3,300 kWh/loose m3, which is equal to 300 - 330 litre of light fuel oil. One tonne of pellets takes about 1.5 m3 of storage space and is equal to 470 500 litre of light fuel oil

(Alakangas & Paju, 2002). The summary of wood pellets properties can be shown in the Table 2.1 as below.

Table 2.1 Wood Pellet Properties

Source: Alakangas & Paju (2002)

2.2 Quality Standard of Wood Pellet Quality and standard are the tools for control and guarantees the quality of product and production process. Additionally, standard can provide the informations about pellet characteristics to customers as well. The most important qualitative property of pellets is strength or durability because loosen from weak pellets would cause lots of problems in transports and combustion. Depend on each country, the quality standard for wood pellets are developed by their own country. At the moment, the European standard for solid fuel (CEN TC335 Solid bio fuel standard) is developing, which every country is now using standard of their country. This study will use the standard of Sweden pellet classification SS 18 71 20 because the Swedish standard is widely use in Scandinavian country such as Finland and Sweden which are extreme environmental concern country and high quality standard of product as well. The Swedish standard gives limits to pellet characteristics and divided the pellets into three quality classes. The testing or determination of quality that used will applied to each quality classes. The Swedish wood pellet standard is shown in Table 2.2 as below.

Table 2.2 Swedish Pellet Classification SS 18 71 20

Source: Alakangas & Paju (2002)

2.3 Raw Materials of Wood Pellet Wood Pellets are most often compressed from dry sawdust, grinding dust and cutter shavings. Sawdust and cutter shaving are available from sawmills and furniture industries. The material should be dried before pelletising if it is moist. The optimum moisture content is 10 15%. Soft wood is a slightly better raw material of wood pellets than hardwood due to its higher lignin content. Lignin is a natural binding material of wood fibres and also the binding material of pellets. If the raw material of pellets contains bark, the heat value of pellets will be higher. The density of pellets has no effect on their strength, contrary with lignin, which improves strength. The production of one pellet tonne (moisture 7 10%) requires the following amounts of raw materials (Alakangas & Paju, 2002). About 7 bulk m3 sawdust (moisture content 50 55%), or About 10 bulk m3 cutter shaving (moisture content 10 15%).

There are also possible for using fresh biomass as raw material of pellet but the ash content of pellets produced from fresh biomass is higher and the heat value lower than those pellets produced from other raw materials. The pellets produced from fresh biomass do not endure long-term storage as well as those produced from sawdust and cutter shavings. The strength of pellets is reduced, and microbiological

growth has been observed. Thus there are no pellets produced from fresh biomass on the market yet (Alakangas & Paju, 2002).

2.4 Production Processes The processes of pellet production are quite simple with very few of processes or stages which are Drying of raw material, Milling, Pelletizing, Cooling, Fine Separation, Packaging, and Storing. The production process diagram can be shown in Figure 2.2.

Figure 2.2 Wood Pellet Production Processes Source: Alakangas & Paju (2002) Drying is the optional depend on the moisture of raw material, by using drum drier. If the raw material consists of cutter shaving or dry saw dust, drier is no needed. A hot gas generator is most often used for drying. The gas mainly consists of carbon dioxide, water, and nitrogen which will excess sawdust and dust from the production process. Milling is the process to grain raw material to be in smaller size to at least the diameter of the pellet. The ground wood should not be too fine, when there are no longer fibres that in part bind the pellet. Usually a hammer mill is used for grinding, when homogenous raw material is obtained for compression. Normally milling and drying can be combined together because in crushing will make the drying process considerable easier. The particle size that are equal size and have the same moisture content. As the moisture content of all particles is homogeneous, the pellets are more durable.

 Pelletisation is the mechanical process to compress raw material in flat-die or vertical mounted ring die. No additives are normally used in the compression of wood pellets but pellets are formed by the cohesion of inner surfaces by adhesion caused by lignin that is softening by the heat of compression. The temperature of crushed wood material will increases in the pellet compressor and then natural binding material, lignin, melt and binds the pellet when cooling. The pellet will not gain its strength until it is cooled. The die is chosen by the quality properties of the raw material compressed. The pelletising machine is illustrated in Figure 2.3 and Figure 2.4 as below.

Figure 2.3 Vertical Mounted Ring Die Type Source: www.salmatec-gmbh.de

Figure 2.4 Pelletizing Machine Source: www.atlas-pellet.com Cooling is a process after compression which the temperature is high, usually 90 Degree Celsius. The moisture released in the compression stage is removed with heat from product. Cooling stabilizes the pellets and hardens the lignin melt on the surfaces of pellets which result in the shape of pellet that will remain unchanged. Screening is the separation of raw material dusts that mixed with pellets and bring it back to Pelletisation process. Normally the screening is performing by vibrating. Packaging and Storing is the final process by put pellet in to big or small bags for transport to consumers (Alakangas & Paju, 2002).

10

Chapter 3 Market Analysis and Marketing Plan

3.1 Market Analysis The market of biomass especially the wood pellet has been developed very well in last few years in many regions around the world particularly in Scandenavian, North America and European. The main users of wood pellet may vary from household that use for heating in the house until large scale in the industry which may devided as following: Household: - Domestic fires (stoves) Industry: - Centeral heating boilers (15-40 kW) - Medium sized commercial combustion units (50-300 kW) - Small industrial combustion units (1-6 MW) - Large scale combustion units (up to 100 MW) For the annual wood pellet consumption (tonnes) around the world in year 2002 can be shown as following Table.

11

Table 3.1 Annual Consumption of Wood Pellet Country Sweden Denmark Austria Germany Finland Annaual Counsumption (Tonnes) 800,000 250,000 120,000 100,000 75,000

UK
France North America New Zealand Japan Total Source: Garnet (New Zealand) Ltd

50,000
13,000 850,000 2,000 10,000 2,270,000

From the table above, Total demand is around 2 million tons per year but there are some others countries that were not mentioned in the table such as Italy and others Central European countries . For Italy, the annual consumption is incresing faster than the production capacity, year 2003, demand was around 210,000 tons per year while the production capacity was around 160,000 tons per year, therefore a large fraction of the demand is covered by importing pellets for foriegn countries (Zaetta, Passalacqua, & Tondi, 2004). The total demand of wood pellet has been increasing sharply in Scandinavian, Europe and North America and will increase more and more because of Kyoto Protocol agreement. In Asia, Japan is also going to replace fossil and other energy form in order to reduce CO2 and wood pellet is one of the potential to replace coal. Traditionally, Japanese has imported coal which equivalent to pellet equal to 180 millions tonnes per year which mean the potential of wood pellet market in Japan would be 1.8 millions tonnes if the replacement is 1%. In order to understand the wood pellet market more throughly to develop the marketing plan, Economic, Government Policy, Swot Analysis, Competitive Advantage, and Boston Consulting Group Matrix (BCG) will be analyzed.

12

3.1.1 Economic factor. The main reason that why wood pellet has been developed sharply at the past few years is becasue increased and fluctuated of fuel price. Since ,limited resources, fossil energy price were very fluctuated and increased rapidly as shown in the Figure 3.1 below which the price were increaed 151% and 77% for Oil and Propane respectively while the wood pellet was increased only 36% only.

Figure 3.1 Energy Price Comparison Source: FAO (2006)

Additionally to the fluctuation and increasing of oil price, the value added that created from by product of wood processing is another factor that drive the market. Because of forest industry since wood sawmilling until furniture producing have a fierce competition from both local and global thus instead of selling the wood chips, bark, or saw dust in a cheap price while use it to produce wood pellet will make them get more money and lowering their cost. Especially in the rain foreset area which have plenty of wood and aslo the gigantic size of furniture industry like Thailand that have very high potential to be the main producer of wood pellet in South East Asia regional. The plenty of by products in the country can generate lots of income in to country and aslo compensate the deficit from importing of fossil enery from abroad. This project will stregthening the forest industry and also the country economic.

13

3.1.2 Environmental and government policy. Becasue the environmental around the world has been very dreadful since the past decade from human being destruction especially the atmosphere by combustion processes. The combustion of energy from various method such as in the machine from automotive engine and burining of strove in winter time of the household will emission pollution and also CO2 in to the air depends on fuel type and the efficiency of the machine or strove. The hazard from emission of CO2 in the air will cause the Green House Effect which will cause the Ultra Violet light (UV lights) from the sunshine can come in but can not go because of CO2 that has covered in the air of atmostphere consequently higher temperatture for the whole world. The consuquence of increasing of world temperature make the world face lots of diaster such as hurricane, flooding, Tsunami, drought and forest fire which can not estimate the damage value from environmental effect. This is the reason of many policy and agreements among developed countires in order to stop this harzardous situation.

Figure 3.2 Relative Emissions of Fine Particles Source:U.S. Environmental Protection Agency [EPA] (n.d.)

Wood Pellet fuel has been proven to be the cleanest burn of any solid fuel by EPA as shown in the figure that wood pellet stove is the least in emission particle of solid fuel stove (EPA, n.d.). For the CO2, wood pellet is the net zero CO2 Emission becasue the net emission of CO2 included since the time that the trees was absorbed CO2 in the air until it burn as wood pellet in the stove. Nowadays, there are lots of

14

agreement amoung developed countries such as Kyoto Protocol and aslo policy and regulation of each country such as environmental tax and energy in order to decrease the CO2 emission rate to help the world. The consequence of the supporting from regulation and agreement of developed countries, wood pellet market has been developed greatly in the past few years. In the developed country like Denmark, the government has a policy to reduce the CO2 emission in the high rate which mean the high supporting of bio energy and aslo wood pellet. From the figure i below, after environmental tax and CO2 Tax, the price of pellet is cheaper than gas, coal, and fossil energy eventhough the price before tax is higher. Although the wood pellet is a bit higher cost than wood chips but it is much more convenience in many way such as stroage life, automatic feeding and storage space which wood chips and cord wood can not provided. Consequently, the wood pellet is very high compatible in the developed countries market that support biomass energy especially Scanidavian and European.

Figure 3.3 Pricing Differentiations of Fuel Types in Denmark Source: FAO (2006)

In addition to the effect of global warming, every country in the world is encouraging people to maximize their use of natural resource especially the forest resource like Thailand. Even though, at the moment, Thailand does not have any

15

policy for supporting to use resource more effectively but it is the responsible of entrepreneur to the social, country, and the world.

3.1.3 SWOT analysis. To assess our company and the market for wood pellet manufacturing in Thailand, the SWOT Analysis is applied to evaluate the current situation.

Table 3.2 SWOT Analysis

Strengths
Clean and Green product Cheaper material cost Low complexity of manufacturing processes Cheaper and low variation of price High quality product Available of raw- materials Experiences of management team in timber industry New brand

Weaknesses
Use high cost of investment

Lack of good financial status Problem with distributions High transportation cost

Opportunities Environmental Agreement (Kyoto Protocol) Environmental tax and CO2 tax Increasing of fuel price Fluctuation of fuel price

Threats Strengthening of Thai Currency High potential of new competitors New substituted products

3.1.4 Competitive advantage. 1) Intensity of rivalry among established firms Even though existing competitors in the wood pellet market are loads of players from all around and every part of the world since Asia to Europe and USA and The competitors in the market are sizing from small to the gigantic firm but the competition is not too strong because the market is still in very high growth rate and the demand is still more than supply.

16

2) Threat of new entry by potential competitors The risk of new entry in the industry is high because of effortless in starting the business or in other words is low of barriers for entering in the market.

3) Threat of substitute Many substitute of biomass is still now researching and development especially the pellet from agricultural residual which is cheaper but ,at the moment, the quality of pellet from agricultural residual is very low when compare with wood pellet. Thus the substitute product is still low because this product is now the best in quality and there is no other potential biomass fuel at the moment.

4) Bargaining power of supplier The bargaining powers from the supplier seem to be low because of the number of supplier in the market is more than sufficient and the price of raw material in domestic is quite cheap. The reason of cheap raw material is because the residual wood or wood scrap is now mostly used to burn directly in the industry.

5) Barraging power of buyer Threat from the bargaining power of buyer seem to be the medium threat because of the situation nowadays is the seller market, customers have few of choices because of supply is lower than demand. However, the price is still being the main reason of buyer because the quality of product is not much different.

The pellet producers are spreading around the world but mostly are in the European and United State of America (USA). Most producers are chips producers operators and sawmills operators that entering in to pellet market. The producers are variable in size and capacity hence the production varies considerably. The smaller producer produces 300 tons/year, while the medium one produce 25-30,000 tons/year and the largest one produce around 1 million tons/year. The average production per producer is not a significant figure. Most country in European and Northe America needed to imported wood pellet because the capacity is less than demand which growing very fast but only Finland that have production capacity exceeds local consumption by 4-5 times. Major part of pellet manufactured in Finland are exported 17

to other countries like Sweden, Denmark and UK. The reason that some countries have limited production capacity is becasue the potential of biomass from sawmills and wood industry has reached its limit in that countries. The good pellet mostly come from wood residule which normally limited the production capacity. Another reason for limited production capacity is the winter climate that will be obstacel for obtaining raw material and operating as well. In Asia, there are lots of manufacturers in many countries such as China, Philipines, and Indonesia becasue the material availability is high. However, all of manufacturer in Asia are small to medium capacity manufacturer which may becasue of the domestic demand is still low and the investment is too high. Nevertheless, in the near future which Japan is going to be a huge consumer may encourage the manufacturer to establsih the large capacity plant. For the competitive analysis of wood pellet manufacturing in Thailand, most of the forces is low or not much threat for doing this business. The only high threat is the threat from new entry of new competitors in the market because the barrier is quite low. Thus the strategy in entering in to the market first and create barrier to prevent the new entry especailly in the domestic market such as make forward contract with raw material sources.

3.1.5 BCG Matrix. BCG Matrix, Boston Consulting Group Matrix, is based on the product life cycle theory that can be used to determine what priorities should be given in the product portfolio of a business unit. To ensure long-term value creation, a company should have a portfolio of products that contains both high-growth products in need of cash inputs and low-growth products that generate a lot of cash. It has 2 dimensions: market share and market growth. The basic idea behind it is that the bigger the market share a product has or the faster the product's market grows the better it is for the company. Placing products in the BCG matrix results in 4 categories in a portfolio of a company (Carl & Stalk , n.d.) 1) Stars (high growth, high market share) 2) Cash Cows (low growth, high market share) 3) Dogs (low growth, low market share) 4) Question Marks (high growth, low market share)

18

Figure 3.4 BCG Matrix Portfolio Source: Carl & Stalk, (n.d.)

For wood pellet, the characteristic of business is in very high growth rate as same as other renewable energy. Because of both the economic condition, environmental condition, and also the government policy are supporting the growth of this business to increasing sharply in recent year. For the market share, at the moment the market share of wood pellet business is quite few when compare with other fossil energy. Thus the status of the wood pellet business is in the question portfolio of BCG Matrix because the business growth is very high and low market share. However the energy business is the necessarily to use in daily life and wood pellet is becoming standard product because of economic and environmental condition. The market growth in very high rate while the competitor in the market is still low which all of this make this business very interesting for investment.

3.2 Marketing Plan 3.2.1 Segmentation. Since the energy is one of the most important factors for daily use. Every country in the world is using energy in various forms. If we consider to the end user who consume the energy, that would be the mass market. Anyway, since the wood

19

pellet is the substitute product of fossil energy in order to save the climate and environmental thus the end user is the customer in the developed countries such as European, North America, and Japan. In which the customer who use this wood pellet may be the small scale like bin the fire stove until the large scale of combustion units in the industries.

Developed Countries Developing and Under Developed countries

Figure 3.5 Segmentation of Wood Pellet Market

3.2.2 Targeting. According to our product is in premium quality wood pellet, the target customer will be the domestic fires or stove in the household because our product will provide the very low ash residual from combustion which is suitable with automatic feeding system in household. The low ashes residual mean lower maintenance to remove the ash from stove which means more convenience to the users. The household that using wood pellet stove is increasing sharply becasue of lower operating cost and more convenience when compare with other fuel form. In the developed countries, the policy, regualtions and product standard is different thus the target customer can be divided as following: Nordic Countires such as Norway, Sweden, Denmark, Finland and Iceland Central European Countries such as Germany, Austria, Switzerland, Liechtenstein, Poland, Czech Republic, Slovakia and Slovenia Japan North Amercia such as Canada, the United States, Greenland

Additional to the end user ,in the household of the developed countries as mentioned above, the importer is also our target customer becasue this group will

20

make our operation and marketing more eaiser to manage becasue of predictable demand, lower marketing cost and will aslo make our produtction have more economy of scale. Especially in the first phase of business startup which going to be focus more on the wholseller buyer in order to lower the task and cost such as maketing cost, transportation cost and operating cost.

1. Domestic fires (stoves) 2. Centeral heating boilers (1540 kW)

5 2

3. Medium sized commercial combustion units (50-300 kW) 4. Small industrial combustion units (1-6 MW) 5. Large scale combustion units (up to 100 MW)

1 (Stoves)

Figure 3.6 Targeting of Wood Pellet Market

3.2.3 Positioning. In our wood pellet product, the main considering of our products is the quality of products with nearly the same price which mean our product provided more value to customer.

21

High Quality (Low Ash Residual) Our Pellet Asian Pellet Competitor Low Price (Cost/Unit) Overseas Pellet Competitor Fossil Energy

High Price (Cost/unit)

Low Quality (High Ash Residual)

Figure 3.7 Positioning Map of Wood Pellet

3.2.4 Marketing mix. In order to see clearer picture of how this business will be move along, marketing mix in market plan will be clarifying in detail which are product, price, place, and promotion.

1) Product The product in this study will be introduced in the form of high quality wood pellet with low ash content during combustion. For the Domestic fires, our wood pellet will be targeting to the end user of this group by using small bags to be our package while for the importers customer will use large bags as our package which the wholeseller may repackaging and sell it to another group of customer. The wood pellet product will be in to two sizes as following: Large Bags (500 kilograms) Small Bags (20 kilograms)

22

The packaging of large bags will using recycle bags with out any screening or printed in order to lowering the cost which this group of customer will be the wood pellet importer in that country. The small bags will be printed logo in colour scheme which wills selling to end customer. The end user in domestic strove mostly do not have hoist or crane to lift the large bags thus the small bags is the most suitable while the large bags is more appropriate with the importer which have more tools like forklift or cranes. The importers may repackaging in their brand or just send it to customer directly. However, both of packaging must be able to prevent humidity from outside of the bags and also the touching directly of water from outside. The sample of large bags may present as following figure.

Figure 3.8 Pellet in Large Bags with High Endurance from Humidity

The quality standard of wood pellet have to be certified from the organization or any rule in the customer countries such as pellet classification SS 18 71 20 of Swedish Standard.

2) Price The price of wood pellet in the market is differently on each country depends on many factors in which the smaller bags is very different for each countries. In setting the price, value based pricing will be used to set the price which going to be related on our product quality. However, the price of smaller bags will be set to be the same with normal quality pellet in order to enter the market easier. The price of smaller bags needed to make consumer want to try our product and will be perceived

23

our brand after have tried. However, the price would be only the same because the image of our product is high quality product. For the large bags, the price for wholesalers and importers will be set by FOB (Free On Board) price. At the moment the price of FOB that have offered in the e-bay for purchasing is around 100-110 Euro/ton per ton of wood pellet. The price, wood pellet, will be set at same as market rate which is 100 Euro/ton which will be matched with our positioning which is high quality, higher value, but the same cost. The price of each target market will be set as following table. However the price will be changing along with the market price.

Table 3.3 Product Pricing Product Size Small Bag Small Bag Small Bag Small Bag Large Bag Target Market Nordic Countries Central European Japan North America Wholesalers Price 5 Euro/bag 4.5 Euro/bag 6 USD/bag 6 USD/bag 100 Euro/tons (FOB)

3) Place For the distribution channels of our product will be divided in to the wholesalers, joint venture, and exclusive distributor in each target market. At starting phase, wholesalers are the main distribution channel because of the lower cost in marketing and logistic. The later phase in distribution channels is exclusive distributor in target market. Distribution channels of our product for the wholesalers or the importers, the large bags product, our company will sell the product as the manufacturer in order to lowering the marketing and management cost. This wholesalers customer will buy our product in FOB price and may resell it to their customers directly or repackaging it again depends on customers. The large bags of wood pellet will be put on the pallet in the truck and then move the pellet from the factory to the nearest port and then the ship will sail to klongtei port to pay custom and move to destination country. For the exclusive distributor, small bags, the product will be selling thorough our distributor in each target market. Because the distributor in the local area will understand their market better and also lowering the investment cost, marketing cost,

24

and risk. The exclusive distributor have to responsible for marketing cost and other promotion cost by themselves but they will get our product in a cheaper price. The place for selling thorough our distributor may be in the retailer store in the target countries. The retailer for selling wood pellet will be included since small retailer until the giant retailer. After the brand is already widely know in the market, joint venture with domestic company will be applied in order to expand the market. In finding the potential distributor, the exclusive distributor, the suitable one should be able to represent the brand image and also able to distribute the product widely with large amount. The most suitable should be the manufacturer of seller of complimentary product such as wood pellet strove which going to be support each other and also get the better image that guarantee by the pellet strove. The translator may need in some countries in order to communicate better. The finding of exclusive distributor is the important task of management team. For the joint venture, this channel will be selected to the high potential market which have high demand and high growth rate and also can compete with the competitor in the market. Japan is one of the high potential markets because of high potential of demand and supporting regulation from government. The joint venture and distributor will be applied after increasing of production capacity. During expanding the capacity, the brand will be develop and also the acquiring of distributor and joint venture in the target market countries.

4) Promotion Because distribution channel of our product has divided in to three channels which each channel is going to use different promotion and marketing in the market and also the responsibility to conduct and run marketing promotion will be differently on each channel. In the start up, the main target customers that will be focused to sell product through the wholesalers channel which may dwelling in European, North America or others countries. The wholesaler groups will buy products in a large volume in each transaction which is easier to manage. The trading will be on FOB manner which will remove the outbound logistic tasks and also marketing cost. The promotion to attract the wholesaler customer will be the price that cheaper with an acceptable quality. However, if the price that has been set is too low at the first place then product positioning and the price will hard to be changed afterwards. Thus the extra quantity, 25

promotion, that added in the bag with the same price as standard product in the market should be used because it will get attention and easier for wholesaler to buy while still keep the same price and also the positioning of the high quality product. In the end, our product will be cheaper because the extra quantity that provided to customer with in the same price as in the market which going to be easy to attack the market. After a while, the extra quantity can be removed which will make our product price same as in the market but still more value because of higher quality. For the exclusive distributors, the promotion will be responsibility of them because of the marketing promotion cost is very high and it is too risky. Thus the exclusive distributor will handle all the marketing promotion. However, the cooperative and subsidy may provide to distributor depend on the issue or on case by case. Mostly the promotion to increase sale volume will be all responsible by the distributors but the promotion to create brand awareness and perception to customer may be shared. Additionally, to create brand awareness to customer, the main promotion for the end customer will focus on the trial of our product. The free trial for the new buyer of pellet strove will be applied. The customer who buy a new pellet strove will get a small bag of wood pellet for free. This promotion may have to make alliance with retailer and the wood pellet stove manufacturer which is quite easy because of the promotion is win-win for every parties. For the join venture, the promotion will be mainly on the creating of brand awareness to customer which will use the integrated marketing communication such as post advertising both indoor and outdoor. The responsibility will be shared among joint ventures which will cause very high cost thus the joint venture investment will be established in the high potential countries. Another promotion is the free trial of the product which may apply through the manufacture of pellet strove or giant retailers to let customer try our product. The benefit of our product which is the high quality with very ash content will be educate to customer along with the brand awareness creation.

3.2.5 Marketing cost. The cost of marketing will be apply differently depend of the disrtibution channel which compose of Wholesalers, Exclusive Disributor and Joint Venture. The maketing cost are mostly allocate to the promotion cost with the great portion. Mostly marketing cost can be divided in to the activities that apply to the market no matter 26

increase sale volume or communicate to the customer or tarket market. The activities that going to apply as the marketing plan are shown as following: Sales Promotion - Extra Quantity - Free trial with new pellet strove - Special price on wood strove exhibition Print Advertising - Decoration Magazine - Home Magazine Poster Ads (In door and Out door) - Pellet Strove Stores - Hyper Mart

For the wholesaler, the marketing cost is just only the sales promotion which is the extra quantity that going to apply through this channel. For the exclusive distributor, the cost of sales promotion will be discuss on case by case and others marketing cost that use to create brand awareness and brand perception such as Print Advertising and Poster Ads will be shared between our company and the exclusive distributor but there will have limit differently among the market and target countries. Lastly for the Joint Venture, every marketing cost will be shared between our company and the partner depends on the agreement. The marketing cost of Joint Venture will be the highest because all the cost will be shared while other will lessen however, the joint venture channel will apply only to the high potential market. For the marketing cost, the marketing cost will apply for 10% amount of sale volume in each year which going to be expanding year by year related with the sale volume. However, the marketing cost in each target market will allocate differently depend on the profit margin, potential of market, market share, and marketing strategies. The estimate cost in five year related with sale revue will be around 0.6, 1.4, 1.7, 2.8, and 4 millions Baht from year 2008 to 2012 respectively which will be shown in the financial plan.

27

Chapter 4 Operational Plan and Financial Analysis

4.1 Operational Plan The manufacturing operation is the crucial task that needed to bear in mind thoroughly and considerably. Some decisions about operation that have been made will effect greatly to the business and can not be changed again thus the operational plan will be the one of critical success factor of business. The operational plan that have to be consider may compose of many issue depend on the nature of business and manufacturing characteristic which for the wood pellet business will compose of following issue.

4.1.1 Facility location. Because the logistic is very important issue for cost management, the production plant must establish to be nearest with the raw material sources. The main raw material sources is the residual wood, saw dust and wood shaving. In the furniture industries, the largest residual wood that left from the mechanical processing is the saw milling industry. In transformation process of log wood in to processed wood, the by product wood may up to 50% of total input which depend on the raw material quality and the productivity of production processes. The by product from other industries such as furniture is quite little when compare with saw milling at the same size of production. Most of the saw millings are established in the Ayudthaya, Prathumthani, Nonthaburi, and Bangkok province because the convenience in transportation of log via the river and the main market of wood is in the Great Bangkok area. Thus the main location of the plant should be set up at Ayudthaya province because of lots of potential raw material sources, and the convenience in transporting raw materials and finished product via river as well. The company will be located in the north of Bangkok in Lardbualuang District in Ayudthaya province. The company will established and consume only 6 rai of area since the production process is quite simple and need very few of space and warehouse.

28

4.1.2 Capacity and production planning. The capacity for wood pellet production may be limited from many issues such a market, budget, logistic cost and machine but the main things that needed to be considered is the available of raw materials. Because the wood pellets is made from by product of wood which is limited in quantity from each manufacturer. Normally, the large manufacturer will use the by product in the downstream product or the supporting facilities such as boilers in the house while the medium and small size usually sell the by product with out further process. Thus the main raw material sources will come from the small and medium size of wood industries and saw milling which mostly established in the Ayudthaya, Prathumthani, Nonthaburi, and Bangkok. In the starting, the initial production should set not to be very high because of the risk in investment and the market. From the size of the machine in the market, the most appropriate size is around 3 tons a day because the size of machine is not too big and not too small. Even though the more capacity means the better economy of scale but the high capacity, the higher volume of raw material that needed to operate the machine which mean the high range of raw material sources from the plant that needed to transport. For the raw material sources, the capacity that has been determined can be check the possible of the raw material sources. Normally, the saw milling, major sources of wood by product, will use log in to the production process for around 10 12 m3 per day and 16 20 m3 per day for small and medium size of saw millings respectively. The by product that will gain from saw milling production may varies depend on the productivity of production operation such as quality of log, quality of transformation processes, and labour skill. The rate of wood by product is normally around 40 60% of raw materials depends on the productivity as mentioned before thus if the average by product is around 50% then the by product from small and medium saw milling would be around 5 6 m3 per day and 8 10 m3 per day respectively. In the consumption of raw material, one ton of wood pellet will use amounts of raw materials around 7 bulk m3 of sawdust (moisture content 50 55%) or around 10 bulk m3 of cutter shaving (moisture content 10 15%)(Alakangas, E. & Paju, P., 2002). However, the major by product from sawmilling compose of small solid woods which have much more density than saw dust and cutter shaving thus the amount of raw materials usage would be around 3 -5 m3 per one tone of wood pellet. This mean 29

one small saw milling will able to provide raw material for wood pellet production for around 1 1.5 tons per day. However in transportation the raw material from the saw milling needed to have around 10 15 m3 to full fill the truck in order to save the transportation cost. This mean each saw milling can provide the scrap just only 2 times a week only. The production capacity for 3 tons per day will need the raw material for around 9 15 m3 per day which mean a truck of raw material per day. For this capacity, the saw millings will be required around 4 -5 sources of saw millings to operate the production. The production plan will use the capacity in five year as following. In the initial, the production capacity will be 3 tons/shift 6th month use 1 shift ( 3 tons per day) 7-12th month use 2 shift ( 6 tons per day) Expand additional 6 tons per shift in 2nd year by purchasing machine. The production will increase the capacity in each year by working in 2 and 3 shifts per day. 2nd year (9 tons per day) 3rd year (12 tons per day) 4th year (18 tons per day) 5th year (27 tons per day) In the initial of operation, first 6 months, the production will run only one shift in the daytime only which will have capacity around 3 tons per day. After that, get the response from the market, 2 shifts will be applied to increase the production capacity which means the production capacity will be increase to be 6 tons per day, In the second year, expansion in production capacity by purchasing machine will be apply in the second year meanwhile the company will developing the brand and find the distributor and the joint venture to invest in the potential market. In the production processes, the machine will be bought in the market which has very variety of producer such as China, Korea, USA and Europe. The setup, training of operation and maintenance will be included in the purchasing. The transportation of raw material and finished product will be outsourcing in order to lower the initial investment and the management. The truck may be bought later when the company is ready and have more ability to manage the operation.

30

For the quality control, the most important is the humidity prevention and the specification of finished product which have to be test from laboratory. The specimens will transfer to the laboratory to test depend on the market requirement. However, in the house quality control can be tested by the physical appearance and humidity which going to be sufficient because the raw material quality is very outstanding.

4.1.3 Logistic plan. For the logistic of wood pellet, since our factory is going establish in the Ayudthaya province thus the best route is transporting from the factory by the truck and to the nearest port and then travel by water to klongtei port for custom pay and lastly put out to the sea to the destination countries. The diagram of transportation will be shown in the Figure 4 as below

Small Bags

Large Bags Households

Distributors

Retialers

Figure 4 Supply Chain Diagram

31

4.1.4 Human resources planning. The company will be divided in to the following departments which are sales and marketing, production and operation, accounting, finance, and procurement. The number of employees that the company will employ is 9 people as following table in to five function department to deal with the business environment. In the recruitment process, the applicants will seek through freely available websites that related with the job except for the production employee that needed to select from the local area. Training will be provided to develop the skill of employee to create the desired organizational to ensure the sustainable growth of the company. Not only financial or profit driven, the company will also focus on the customers, employee life, and the innovation of organization will be balanced to ensure business growth in the sustainable way.

Table 4.1 Employee Structure Department Sales and Marketing Production Finance Accounting Procurement Number of Employees 3 3 1 1 1

4.2 Financial Analysis The financial analysis includes sales forecasting, calculation and estimation of unit cost, income forecast, cash flow forecast, Internal Rate of Return (IRR), Net Present Value, and Pay Back Period. The time line that will be used is 5 years period since 2008 to 2012 because of the longer forecasting time the less accuracy will get. However, because the wood pellet business will be the great opportunity of energy in the future thus the value of business will be estimated at the end of forecasting in year 5 which will be shown in cash flow analysis.

4.2.1 Sales forecast. The forecast will conduct in five years consecutively from year 2008 to 2012. The forecast sale volume will related with the operational plan in production and

32

capacity planning. In order to see the picture clearly with the operational plan and confusing from variety of bag size, the sale volume will illustrate in the tons weight. The forecast of sales will illustrate in the variety of situations as the sensitivity of the sales figure. Because the product itself is the seasonal product which normally use in the winter time to heat the house or the system. Actually the detail of seasonal effect need to consider especially in the production planning but for the sale forecasting studying the financial feasibility, year sales is sufficient to apply.

Table 4.2 Sales Forecast in each Target Market for Year 2008 to 2012 Sales Forecast (Tons) in Year Target Market 2008 Nordic Countries Central European Japan North America 200 150 0 200 2009 300 400 200 300 2010 400 500 1000 400 2011 600 1000 2200 600 2012 800 1200 4500 1000

Wholesalers
Total Sales

800
1350

1500
2700

1300
3600

1000
5400

600
8100

Table 4.3 Sensitivity of Sales Volume Forecast in Year 2008 to 2012 Sales Forecast (Tons) Target Market 2008 Total Sales (Most Likely) Total Sales (Pessimistic*) Total Sales (Optimistic**) Note: * Pessimistic = Worse case which sale volume less than most likely case 10% ** Optimistic = Better sales volume than most likely case 10% 1485 2970 3690 5940 8910 1215 2430 3240 4860 7290 1350 2009 2700 in Year 2010 3600 2011 5400 2012 8100

33

In the distribution channel, the selling price to each channel and each target may vary differently. Thus in the forecasting, the sale revenue will use the estimate average price which is 100 EUR per tons and the currency exchange as 46.75 Baht per EUR. Thus sales forecast in Thai Baht can be estimated as shown in table below.

Table 4.4 Sensitivity of Sales Amount Forecast in Year 2008 to 2012 Sales Forecast (Baht) Sales In Year

2008
Total Sales (Most Likely) Total Sales (Pessimistic*) Total Sales (Optimistic**) 6,942,375 5,680,125 6,311,250

2009
11,622,500

2010
16,830,000

2011
25,245,000

2012
37,867,500

11,360,250

15,147,000

22,720,500

34,080,750

13,884,750

17,250,750

27,769,500

41,654,250

Note: * Pessimistic = Worse case which sale volume less than most likely case 10% ** Optimistic = Better sales volume than most likely case 10%

4.2.2 Manufacturing cost structure. The manufacturing cost of wood pellet can be estimated roughly by dividing the cost structure in to Direct Material Cost, Direct Labour, and Factory Overhead Cost. Moreover, the transportation cost which is the main component may not see in the cost structure but it will include in the Direct Material Cost and Factory Overhead Cost. In the calculation, the transportation will consider outsourcing because the initial investment is very high and lowering the management tasks which means lowing the fixed cost and risk of the project. The manufacturing cost of wood pellet will be illustrate in the per unit cost or cost per ton of wood pellet which can be shown as Table 4.5 below

34

Table 4.5 Manufacturing Cost Structure Cost Structure Direct Material Cost (DM)* Direct Labour Cost (DL) Factory Over Head Cost (FOH)** Manufacturing Cost per Unit Cost per Ton (Baht) 1,500 125 550 2,175

Note: * The Direct Material Cost (DM) is the price from small size of saw milling in Ayudthaya province with 130 tons/month buying quantity ** The Factory Over Head Cost (FOH) is estimated to be 37% of DM cost

Most of Factory Over Head Cost is coming from the Pelletisation and Drying process which consume lots of energy. Normally in Finland, the Pelletisation and drying cost was around 40% of the manufacturing cost (Alakangas & Paju, 2002). However, in Thailand, the energy is cheaper and the low quality of by product may use in drying process as well. Thus Overhead cost will be estimated to be 37% in this study. For the Direct Material Cost, the main of material cost are the packaging and the wood by product such as bark, saw dust, and wood shaving. The transportation cost of raw material from sources to the factory will be included in the DM cost. For the Direct Labor Cost, the cost is the cost from manufacturing man hour to operate the machine which is quite low because mostly tasks done by machine. The Factory Overhead Cost is the miscellaneous cost such as electricity, cost of testing product properties, and other machine maintenance cost. The manufacturing cost per unit is only estimation because the more production quantity, the less of DL and FOH which will be shared among the production unit which will result in cheaper cost per unit. However, from the cost structure, the main manufacturing cost per unit come from DM which means the lower DM cost will greatly result to the cost per unit of production.

4.2.3 Income statement. From the information about manufacturing cost and sales forecasting, the Income forecasting can be conduct as following Table.

35

Table 4.6 Income Statement from Year 2008 to 2012

Year Sales Revenue Cost of Good Sold (COGS) Gross Profit Depreciation Cost Operating Expense Sales Expense and Committion Research and Development Administrative Expense Net Operation Income (EBIT) Interest Earning Before Taxes (EBT) Coporate Tax (30%) Net Income Dividend Paid Additional to Retained Earning 2008 6,311,250 3,106,350 3,204,900 895,000 1,436,738 315,563 353,000 204,600 247,500 -42,900 0 -42,900 0 -42,900 2009 11,622,500 5,876,700 5,745,800 895,000 2,763,475 581,125 632,900 873,300 495,000 378,300 113,490 264,810 0 264,810 2010 16,830,000 8,067,600 8,762,400 1,790,000 3,831,300 841,500 807,990 1,491,610 495,000 996,610 298,983 697,627 200,000 497,627 2011 25,245,000 11,993,400 13,251,600 2,685,000 5,746,950 1,262,250 924,389 2,633,011 495,000 2,138,011 641,403 1,496,608 400,000 1,096,608 2012 37,867,500 18,638,100 19,229,400 2,685,000 8,620,425 1,893,375 1,064,228 4,966,372 495,000 4,471,372 1,341,412 3,129,960 1,000,000 2,129,960

The detail of Cost structure in the forecasting such as Cost of Good Sold and Operating Expense will be shown in the Table 4.7 below.

Table 4.7 Cost Structure

Year Manufacturing Cost DM Cost DL Cost FOH Cost Operating Expenses Sale Expense and Commission Committion Advertisment and promotion Transpotation Administrative expense Salaries Utility Insurance others Research and Development 2008 3,106,350 2,025,000 324,000 757,350 2,105,300 1,436,738 63,113 631,125 742,500 353,000 119,000 154,000 30,000 50,000 315,563 2009 5,876,700 4,050,000 432,000 1,394,700 3,396,375 2,763,475 116,225 1,162,250 1,485,000 632,900 130,900 420,000 32,000 50,000 581,125 2010 8,067,600 5,400,000 648,000 2,019,600 4,639,290 3,831,300 168,300 1,683,000 1,980,000 807,990 143,990 550,000 34,000 80,000 841,500 2011 11,993,400 8,100,000 864,000 3,029,400 6,671,339 5,746,950 252,450 2,524,500 2,970,000 924,389 158,389 650,000 36,000 80,000 1,262,250 2012 18,638,100 12,150,000 1,944,000 4,544,100 9,684,653 8,620,425 378,675 3,786,750 4,455,000 1,064,228 174,228 750,000 40,000 100,000 1,893,375

The Detail of investment which will have in the year beginning and year 2 which used in working capital, fixed asset, and others cost as shown in the following table.

36

Table 4.8 Investment Details

4.2.4 Cash flow forecasting. The cash flow forecasting will be conducted in five years consecutively from year 2008 to 2012. Additionally in the subsequent year, after year 2012, the value of the business will be estimated and put in to account in the year end of forecasting, 2012, in order to get more accuracy of IRR and NPV calculation. At the year end, the estimation of business value will be estimated to be around 8 millions Baht which including the land, building, machine, and the opportunity of business in the market as well. The value of pessimistic case will be lessen 15% while 15% more than most likely case for an optimistic case at the year end which will be 6 million Baht and 9.2 million Baht respectively. From the Cash flow analysis, in the Table 4.9, the liquidity, payback period and other indicators can be calculated as following.

Table 4.9 Cash Flow Forecasting for Year 2008 to 2012

37

From the cash flow forecasting, the initial investment is 6 millions Baht which will invest in the fixed asset, working capital and others. The second investment or reinvest is in the second year with 5 millions Baht to invest in machine and equipment to expand the production capacity. From the cash flow forecasting, the result shown that the investment will be in positive sign or get return in the fifth year (Year 2012) which may be too long but because the large amount of reinvestment in the second year make the pay back period lengthening than it should be. However, from the income and cash flow forecast, the revenues and profit increase greatly after expanding the production capacity. From the calculation, the Internal Rate of Return is 29% and the Net Present Value from the cash flow with 8.25% discount rate is 6,970,331.10 Baht. In the calculation above, the value that has been shown is the most likely situation which is typically to happen. While there are another two situations which are Optimistic and Pessimistic which also needed to consider. However because the table and calculation is quite the same thus the value of IRR, NPV, and Pay back Period can be summary as following.

Optimistic:

IRR = 33%, NPV = 8,583,522.45 Baht, Pay Back Period = 4 years (Year 2011) IRR = 29%, NPV = 6,970,331.10 Baht. Pay Back Period = 5 years (Year 2012)

Most Likely:

Pessimistic:

IRR = 17%, NPV = 2,575,526.28 Baht. Pay Back Period = 5 years (Year 2012)

From the result, in the most likely and optimistic case, the return are very satisfy because the IRR is quite much high and also the NPV is also high even the use of 8.25% discount interest rate. Even though, the pay back period is quite a bit long because the additional investments in the second year make it lengthen but the cash at the ending balance in the fifth year is very high. For the Pessimistic, the IRR is a bit low when compare with optimistic case but still in the pleasing rate and also acceptable in the NPV. Since the Pay back period is not much different between the

38

most likely case and pessimistic case but in actually the ending cash balance of the two scenarios is enormous different amount for around 4 millions Baht. From the entire scenario, to distinguish the sensitivity of situation in financial of business, the risk is quite low in the acceptable level because in the worst case, the result shown that the pay back period is still in five and IRR is still pleasing. The information result can be interpret that economy of scale is very important, the company must attain high production and sales volume otherwise the return will drop very much because the allocation of overhead cost and expense to unit cost will be very high result to lower the profit. Even though, the return is very good in every situation typical in optimistic and most likely situation but the pay back period is quite long for every situation.

4.2.5 Sources of fund. In the initial investment, the source of fund will be divided in to two sources which is loaning from the bank and another source is collecting from the share holder which in the financial forecasting dividing 3 millions from bank loan and 3 millions from share holders. In the loaning from the bank, the interest rate is set as the moment Minimum Retail Rate (MRR) at 8.25%. The initial investment will spend on the building, land, machine and etc. For the reinvestment in the second year, the sources of fund also come from both loaning from banking and from share holders. The amount of loaning from bank will be 3 millions and another 2 millions will come from shareholders. The amount or reinvestment will use to expand the production capacity by the machine and equipment. In the loaning from the bank, the interest rate also uses Minimum Retail Rate (MRR) at 8.25%. In the investment, the joint venture with existing sources of raw material is one of the profitably way because the business is quite related and both can get benefit. The wood pellet will get the benefit from lower material cost, lower logistic cost, more available source while the saw millings will able to create more value added to their by product.

39

Chapter 5 Conclusions and Recommendations

This Chapter provides conclusions and recommendations to the result of study and analysis of the project.

5.1 Conclusions Based on the study, it was revealed that the wood pellet business is very attractive and the market still developing rapidly around the world especially in the developed countries because of many factors such as economic from fossil energy price, environmental effect like Greenhouse Effect, government policy in developed countries and the national agreement such as KYOTO Protocol. The product it self has more strength and opportunities than others form of energy at the same utility function. The production process is very simple and no more additional additive to use in the process. The available of wood by product raw material especially in the tropical area like Thailand. Those above are the shown the charisma and attractiveness of this business in Thailand. The production facilities will establish nearby the location of raw materials source in order to lowering the transportation cost. The product will first sell through wholesalers to lowering the risk and marketing cost. After that, brand and distribution channel should be develop and penetrate to the target market for more margin. Distributor and joint venture are suitable to use in foreign market because conduct marketing and distribute product in each country is intricate, high cost and high risk as well. The positioning of our wood pellet will be set as premium high quality product while the same price in the market or better value to customer. The investment cost is not much high just around 11 millions Baht while the return is very pleasing. The source of fund will come from bank loan and also the shareholders. The estimation of return from the financial analysis showed the very satisfactory both most likely and optimistic situation just only the return from pessimistic situation that is far below than other case but still in satisfactory rate. The return from the most likely situations are 29% of Internal Rate of Return (IRR), 5 years Pay back periods and Net Present Value (NPV) 6,970,331.10 Baht with 8.25% discount interest rate. However, in the pessimistic case, the result shown the return

40

that quite low because the sale volume is very small which mean the economy of scale is very important to the wood pellet business. Even though most of the cost come from the direct material cost but the low production volume will not able to cover the overhead cost, depreciation and interest cost. The result shown that the project is very attractive, high growth rate of market developing, few competitors while pleasing return and not much risk. Thus the wood pellet is very beneficial to invest in Thailand.

5.2 Recommendations In the investment, joint venture with the saw milling or the sources will be the smart option because of raw materials cost and transportation cost. The main key success factors of this business are the raw material, logistic and the distribution channel. The attaining of high quality raw material with high availability with the acceptable cost is very important. Even though the available of raw materials in the market from many sources in the demand in the country is still exists from the increasing price of fossil fuel. Thus the close connection with raw material sources is very important. The logistic both inbound and outbound is very important because the transportation cost has very high potion in the cost structure then the further study of transportation manner in each country and market should perform thoroughly and accurately. The selecting distribution channel and distributor in each target is very crucial because the distributor reflect the brand and also the attaining of market share depend on the distributor way to penetrate market and conduct marketing activities. Because the target market of this business is the foreign market thus the currency exchange also have to consider as the risk factor of business as well. The researcher believes that the market of wood pellet will continue expand very rapidly in the near future especially after the effect of Kyoto Protocol engagement. The major trend of wood pellet manufacturer will be in the Asian countries because of available of raw materials from geographical area. The research hopes that the information in this document will be beneficial to the people who would like to study further or the investor who interest to invest in this business or related business.

41

References

Alakangas, E., & Paju, P.(2002). Wood Pellets in Finland-technology, economy, and market. Retrieved November 11, 2006, from http://www.irc-finland.fi/opet/pdf/ OPET_report5_june2002.pdf Carl W. S., Stalk G. (n.d.). The BCG matrix product portfolio method. Retrieved November 11, 2006 from http://www.valuebasedmanagement.net/methods_bcg matrix.html Coeur d' Alene Fiber Fuels, Inc. (n.d.), Pellet plant design, construction and equipment. Retrieved December 10, 2006, from http://www.atlaspellets.com/con struction.htm Drying Engineering Inc. (n.d.), Pellet making plant. Retrieved December 10, 2006, from http://www.alibaba.com/catalog/11499020/Pellet_Making_Plant.html Food and Agriculture Organization. (2006). Biomass: More than a traditional form of energy. Retrieved November 11, 2006, from http://www.rwedp.orgacrobatasean. pdf Kotler, P.(2003) SWOT analysis, marketing management. (11ed.). North Western University: Prentice-Hall. Kotler P.(2003)Competitive environment analysis on porters five forces model, marketing management. (11ed.). North Western University. Prentice-Hall SALMATEC. (n.d.). Pelletizers in recycling & waste disposal. Retrieved November 11, 2006, from http://www.salmatec-gmbh.de/english/recycling.html U.S. Environmental Protection Agency. (n.d.). Clean burning wood stoves and fireplaces. Retrieved November 11, 2006, from http://www.epa.gov/woodstoves /basic.html Wikipedia. (2006). Corn and pellet stoves and furnaces. Retrieved December 11 2006, from http http://en.wikipedia.org/wiki/Corn_and_pellet_stoves_and_furna ces Wilson, G. (2002). International pellet markets-lessons for New Zealand. Retrieved November 16, 2006, from www.bioenergy.org.nz/documents/publications/pelle ts_workshop/International%20Pellet%20Markets.pdf

42

Zaetta, C., Passalacqua, F., & Tondi, G. (2004). The pellet market in Italy: Main Barriers and Perspectives. 2nd World Conference on Biomass for Energy, Industry and Climate Protection, Rome, Italy.

43

Appendix A Wood Pellet Manufacturing Machine Module

The manufacturing plant of the wood pellet has abundant of variety of type, designing and scale in the market. The equipment manufacturers are in European, United State of America, China and Korea. The quality of the plant is also varying from high to low quality. Most of the manufacturers usually sell the project as turn key transaction. The pictures below are the instance of Korean equipment module which
consisted of

Chop-mill/separate and screening/drying/pelleting/screening,

cooling line. The combustion biomass boiler and high tech new concept conductive continues saw-dust dryer energy efficiency 70% high value than a conventional drum and belt dryer energy efficiency 30%. Pellet size is 6-8mm diameter, sharp length 2530mm standard dimension automatically The company also provides the instalment, running-test, operator training, machine maintenance, and free of charge and install for twice times before and after shipping in Korea and client plant position for the prefect education and main running.

Figure A Wood Pellet Manufacturing Machine Module Source: Drying Engineering Inc. (n.d.)

44

Appendix B Wood Pellet Stove

Figure B1 Wood Pellet Stove Operation Source: Wikepedia (2006)

Wood pellet stove work by automatically dispensing pellets (made of wood, corn, or some other biomass material) from a hopper into a firepot or burn box. A typical hopper holds from 40 pounds (18 kg) to over 100 pounds (45 kg) of pellets. An auger or large screw, driven by an electric motor, slowly turns around carrying the pellets from the hopper and depositing them at a steady rate onto the hot fire. A fan blows a jet of air across the fire maintaining a high temperature and enabling the pellets to burn evenly and efficiently. A second fan blows hot air, warmed by passage through heat exchanger pipes that run through the interior of the stove, into the surrounding room. Exhaust gases are vented from the stove through a pipe that is narrower and much less expensive to install than an ordinary chimney.

45

Figure B2 Wood Pellet Stove Source: Wikepedia (2006)

Modern pellet stoves come with a thermostat that allows precise control of room temperature by adjusting the rate at which fuel is added; the thermostat may also be programmable so that, for example, at night the stove automatically runs at its lowest feed rate. With just a few pellets it is able to generate a lot of heat and burn the pellets at incredible efficiencies. You achieve something similar in a wood stove when you open up all of the dampers and allow the fire to pull in lots of air to fan the flame. This puts out lots of heat and burns the logs quite thoroughly, but you will also be burning through the available fuel quickly and generating more heat than you can transfer into the room. The one thing a traditional wood stove has over a pellet stove is simplicity. Wood stoves may be inefficient and polluting, but they don't have many moving parts.

46