Are Some Forest Companies Hindering Fair Competition?

Is the increasing corporate concentration of the forest sector in Western Canada creating a one-sided buyer’s market and allowing for abuse of fair competition? The word oligopoly should be part of every silvicultural contractor’s lexicon as some forest companies enjoy increasing dominance of the market.

Oligopolies and the Trend Towards Corporate Feudalims, or Worse, in the Market for Silvicultural Services.

By John Betts
An editorial opinion

If the word oligopoly is not part of many silvicultural contractors’ lexicons it should be. It means a state of limited competition in a market shared by few buyers or sellers. The more familiar word, monopoly, is defined as a state where a buyer or seller has exclusive control of a market. The two words are related, particularly in the economic sense, in that they can both impair proper competition and the benefits it provides to the public and to free enterprise. Both federal and provincial laws protect market competition from dominance by monopolies and oligopolies.

For years the B.C. forest sector has continued a course of corporate concentration. Recently, two major mergers are continuing this trend: the West Fraser/Weldwood and the Riverside/Tolko amalgamations. They are just two in a long list going back into the last decade. If corporate concentration is a horse, it is out of the barn gate in Western Canada’s forest sector.

Most contractors today compete for contracts between fewer and fewer clients as a result of corporate mergers. To the pessimist, the silvicultural market is moving towards a form of a corporate feudalism, where participants increasingly depend on a diminishing number of patron companies for work. Whether the latter is true, the resulting dependency of contractors on fewer forest company clients cast doubts on whether we actually have a functioning market for silvicultural services. There may be just too few buyers.

As a possible example, recently a major licensee announced its intent to tender future treeplanting in a single contract involving tens of millions of trees, spanning two provinces and possibly a few years. This is not a new trend. Other companies, including government’s BC Timber Sales, have been increasing contract size. One of the effects of this practice is that in some markets contractors compete more fiercely for artificially shrinking opportunities, even though the volume of work remains generally the same. In a market with few buyers, these kinds of tactics are an effective way to wring price decreases from bidders. They can also drive dependent contractors out business. They have a depressing effect on prices in general, as displaced firms try to find other footholds in a buyer’s market. And ironically they can possibly harm the “winner” of such contests being the successful contractor must now increase their investment and dependency on a single client, which could have drawbacks.

A few years ago in Western Canada it would have been difficult for forest companies to have the capacity to affect the market so much in their favour. The diversity of buyers ensured protection against such one-sided influence. Contractors could go and find a more agreeable client to work for. But things are different now. What is happening today should signal to contractors the inordinate effect forest company buyers have on the competition for silvicultural work. It should signal, that with continuing forest company consolidation, the silvicultural market is an emerging buyer oligopoly, if it is not one already. What should worry contractors is that buyers have the advantage and some appear to be taking it.

Forest companies have a legitimate right to extract value from the marketplace. Fair competition is what the silvicultural contracting industry is built on. It fosters innovation, invention and harnesses entrepreneurial energy to constructive purposes. However, forest companies do not have the right to extract concessions from contractors through abusing their domination of the market. Take-it-or-leave-it negotiations or one-sided tendering practices that succeed largely because contractors have few other buyers or markets to go to are predatory and ultimately destructive. They are also reviewable by both provincial and federal agencies if complaints from contractors or their associations are judged to have merit. Contractors might be wise to consider the market for their services in the light of federal and provincial laws that govern competition. Particularly, if the present trend and some practices by their clients continue.

For more information on federal competition laws visit Industry Canada’s Competition Bureau website at www.cb-bc.gc.ca