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.

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 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

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 Table of Contents

Title Page

Acknowledgments i
Abstract ii
Table of Contents iii
List of Figures v
List of Tables vi

Chapter 1 Introduction 1
1.1 Problems Statement 2
1.2 Objectives of Study 3
1.3 Expected Outcomes 4

Chapter 2 Wood Pellet Product and Production Processes 5

2.1 Wood Pellet Product 5
2.2 Quality Standard of Wood Pellet 6
2.3 Raw Materials of Wood Pellet 7
2.4 Production Processes 8

Chapter 3 Market Analysis and Marketing Plan 11

3.1 Market Analysis 11
3.1.1 Economic factor 13
3.1.2 Environmental and government policy 14
3.1.3 SWOT analysis 16
3.1.4 Competitive advantage 16
3.1.5 BCG matrix 18
3.2 Marketing Plan 19
3.2.1 Segmentation 19
3.2.2 Targeting 20
3.2.3 Positioning 21
3.2.4 Marketing mix 22

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 3.2.5 Marketing cost 26

Chapter 4 Operational Plan and Financial Analysis 28

4.1 Operational Plan 28
4.1.1 Facility location 28
4.1.2 Capacity and production planning 29
4.1.3 Logistic plan 31
4.1.4 Human resources planning 32
4.2 Financial Analysis 32
4.2.1 Sales forecast 32
4.2.2 Manufacturing cost structure 34
4.2.3 Income statement 35
4.2.4 Cash flow forecasting 37
4.2.5 Sources of fund 39

Chapter 5 Conclusions and Recommendations 40

5.1 Conclusions 40
5.2 Recommendations 41

References 42

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

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 List of Figures

Title Page

Figure 2.1 Wood Pellet 5

Figure 2.2 Wood Pellet Production Processes 8
Figure 2.3 Vertical Mounted Ring Die Type 9
Figure 2.4 Pelletizing Machine 10
Figure 3.1 Energy Price Comparison 13
Figure 3.2 Relative Emissions of Fine Particles 14
Figure 3.3 Pricing Differentiations of Fuel Types in Denmark 15
Figure 3.4 BCG Matrix Portfolio 19
Figure 3.5 Segmentation of Wood Pellet Market 20
Figure 3.6 Targeting of Wood Pellet Market 21
Figure 3.7 Positioning Map of Wood Pellet 22
Figure 3.8 Pellets in Large Bags with High Endurance from Humidity 23
Figure 4 Supply Chain Diagram 31
Figure A Wood Pellet Manufacturing Machine Module 44
Figure B1 Wood Pellet Stove Operation 45
Figure B2 Wood Pellet Stove 46

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 List of Tables

Title Page

Table 2.1 Wood Pellet Properties 6

Table 2.2 Swedish Pellet Classification SS 18 71 20 7
Table 3.1 Annual Consumption of Wood Pellet 12
Table 3.2 SWOT Analysis 16
Table 3.3 Product Pricing 24
Table 4.1 Employee Structure 32
Table 4.2 Sales Forecast in each Target Market for Year 2008 to 2012 33
Table 4.3 Sensitivity of Sales Volume Forecast in Year 2008 to 2012 33
Table 4.4 Sensitivity of Sales Amount Forecast in Year 2008 to 2012 34
Table 4.5 Manufacturing Cost Structure 35
Table 4.6 Income Statement from Year 2008 to 2012 36
Table 4.7 Cost Structure 36
Table 4.8 Investment Details 37
Table 4.9 Cash Flow Forecasting for Year 2008 to 2012 37

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 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.

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 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

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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.

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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.

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 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

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(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.

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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

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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.

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 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

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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).

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 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.

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Table 3.1 Annual Consumption of Wood Pellet
Annaual Counsumption
Country
(Tonnes)
Sweden 800,000
Denmark 250,000
Austria 120,000
Germany 100,000
Finland 75,000
UK 50,000
France 13,000
North America 850,000
New Zealand 2,000
Japan 10,000
Total 2,270,000
Source: Garnet (New Zealand) Ltd

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.

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 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.

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 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

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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

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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
Weaknesses
Use high cost of investment
New brand
Lack of good financial status
Problem with distributions
High transportation cost

Opportunities Threats
Environmental Agreement (Kyoto
Strengthening of Thai Currency
Protocol)
Environmental tax and CO2 tax High potential of new competitors
Increasing of fuel price New substituted products
Fluctuation of fuel price

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.

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 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)

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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 (15-
40 kW)

4 5 3. Medium sized commercial

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

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

Fossil Energy
Asian Pellet
Competitor

High Price
Low Price Overseas Pellet Competitor (Cost/unit)
(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 Target Market Price
Small Bag Nordic Countries 5 Euro/bag
Small Bag Central European 4.5 Euro/bag
Small Bag Japan 6 USD/bag
Small Bag North America 6 USD/bag
Large Bag Wholesalers 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 Number of Employees
Sales and Marketing 3
Production 3
Finance 1
Accounting 1
Procurement 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 2009 2010 2011 2012
Nordic Countries 200 300 400 600 800
Central European 150 400 500 1000 1200
Japan 0 200 1000 2200 4500
North America 200 300 400 600 1000
Wholesalers 800 1500 1300 1000 600
Total Sales 1350 2700 3600 5400 8100

Table 4.3 Sensitivity of Sales Volume Forecast in Year 2008 to 2012

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

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 2009 2010 2011 2012
Total Sales
6,311,250 11,622,500 16,830,000 25,245,000 37,867,500
(Most Likely)
Total Sales
5,680,125 11,360,250 15,147,000 22,720,500 34,080,750
(Pessimistic*)
Total Sales
6,942,375 13,884,750 17,250,750 27,769,500 41,654,250
(Optimistic**)
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 Cost per Ton (Baht)
Direct Material Cost (DM)* 1,500
Direct Labour Cost (DL) 125
Factory Over Head Cost (FOH)** 550
Manufacturing Cost per Unit 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 2008 2009 2010 2011 2012
Sales Revenue 6,311,250 11,622,500 16,830,000 25,245,000 37,867,500
Cost of Good Sold (COGS) 3,106,350 5,876,700 8,067,600 11,993,400 18,638,100
Gross Profit 3,204,900 5,745,800 8,762,400 13,251,600 19,229,400
Depreciation Cost 895,000 895,000 1,790,000 2,685,000 2,685,000
Operating Expense
Sales Expense and Committion 1,436,738 2,763,475 3,831,300 5,746,950 8,620,425
Research and Development 315,563 581,125 841,500 1,262,250 1,893,375
Administrative Expense 353,000 632,900 807,990 924,389 1,064,228
Net Operation Income (EBIT) 204,600 873,300 1,491,610 2,633,011 4,966,372
Interest 247,500 495,000 495,000 495,000 495,000
Earning Before Taxes (EBT) -42,900 378,300 996,610 2,138,011 4,471,372
Coporate Tax (30%) 0 113,490 298,983 641,403 1,341,412
Net Income -42,900 264,810 697,627 1,496,608 3,129,960
Dividend Paid 0 0 200,000 400,000 1,000,000
Additional to Retained Earning -42,900 264,810 497,627 1,096,608 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 2008 2009 2010 2011 2012
Manufacturing Cost 3,106,350 5,876,700 8,067,600 11,993,400 18,638,100
DM Cost 2,025,000 4,050,000 5,400,000 8,100,000 12,150,000
DL Cost 324,000 432,000 648,000 864,000 1,944,000
FOH Cost 757,350 1,394,700 2,019,600 3,029,400 4,544,100
Operating Expenses 2,105,300 3,396,375 4,639,290 6,671,339 9,684,653
Sale Expense and Commission 1,436,738 2,763,475 3,831,300 5,746,950 8,620,425
Committion 63,113 116,225 168,300 252,450 378,675
Advertisment and promotion 631,125 1,162,250 1,683,000 2,524,500 3,786,750
Transpotation 742,500 1,485,000 1,980,000 2,970,000 4,455,000
Administrative expense 353,000 632,900 807,990 924,389 1,064,228
Salaries 119,000 130,900 143,990 158,389 174,228
Utility 154,000 420,000 550,000 650,000 750,000
Insurance 30,000 32,000 34,000 36,000 40,000
others 50,000 50,000 80,000 80,000 100,000
Research and Development 315,563 581,125 841,500 1,262,250 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
Investment Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Working Capital 1,643,000
Fixed Asset
Furniture 100,000
Machine and Equipment 2,850,000 5,000,000
Building 1,000,000
Others
Prepare land 200,000
Registration 7,000
Electric and Water 100,000
Office Accessary 100,000
Total 6,000,000 5,000,000

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

Year Initial 2008 2009 2010 2011 2012
Beginning Cash Balance -6,000,000 -4,900,400 -8,245,590 -5,262,963 -586,355
Cash Inflow
Sales 6,311,250 11,622,500 16,830,000 25,245,000 37,867,500
Available Cash Balance 311,250 6,722,100 8,584,410 19,982,037 37,281,145
Cash Outflow
Investment 6,000,000
Cost of Good Sold 3,106,350 5,876,700 8,067,600 11,993,400 18,638,100
Sales Expense and Commission 1,436,738 2,763,475 3,831,300 5,746,950 8,620,425
Research and Development 315,563 581,125 841,500 1,262,250 1,893,375
Administrative Expense 353,000 632,900 807,990 924,389 1,064,228
Tax 0 113,490 298,983 641,403 1,341,412
Reinvest 5,000,000
Total Cash Outflow 6,000,000 5,211,650 14,967,690 13,847,373 20,568,392 31,557,540
Ending Cash Balance -6,000,000 -4,900,400 -8,245,590 -5,262,963 -586,355 5,723,605
Year End Business Value 8,000,000

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 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)
Most Likely: IRR = 29%,
NPV = 6,970,331.10 Baht.
Pay Back Period = 5 years (Year 2012)
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

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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 25-
30mm 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.

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