On a crisp morning in September, I found myself at the foot of Helsinki’s Pohjoisesplanadi—what counts for a swanky avenue in fiercely egalitarian Finland—staring at the head office building of Stora Enso. "So, this is where it all starts," I thought as I contemplated my 6,000-kilometre journey to check out the world’s third-biggest forest pro­ducts company. The inspiration for the trip had come months earlier at my neighbourhood office supplies store in Montreal. I wanted to buy paper for my printer.

The best buy, labelled "Made in Sweden," bore the logo of Stora Enso. How could it be, I asked myself, that this paper, shipped across the ocean at Lord knows what cost, was a better deal than the stuff produced within a few hours of Montreal ? The differential could not be explained away by lower labour costs or quality or environmental standards. In Scandinavia, they’re all as high, or higher, than in Canada. No, there was some deeper reason for the uncompetitiveness of the domestic product, one that bespoke the decline of a once world-beating Canadian industry.

It would be hard to imagine any country more nat­urally destined to dominate the global forest products industry than Canada. And, indeed, for decades, we did dominate it. The abundance of our forests—Canada is home to a third of the world’s boreal forests, which are rich in softwood, ideal for making lumber and paper­—made us the ones to beat. Our political stability, educated work force, modern infrastructure and proximity to the world’s biggest market all combined to make us king of the forest.

We are still the world’s biggest exporter of forest products, sending more than $40 billion worth of pulp, paper and lumber to other countries annually (the U.S. takes about 80%). Forest products are still our biggest net export, too—securing more jobs and boosting our trade balance more than any other resource or manufactured good, including oil, gas and autos. But our forest companies have frittered away every competitive advantage they once enjoyed—mostly, it seems, out of laziness. Content for decades to send low-value-added lumber and paper products to a hungry U.S. market, and encouraged by government policy to maximize jobs in far-flung mill towns, our companies long ignored the need to innovate and modernize. We are now left with the most unproductive forest products sector in the developed world, unprepared to contend with either new competition from developing countries or a weak U.S. dollar. Oh, and contrary to what Canadian forestry CEOs say, that sinking greenback is not the cause of our uncompetitiveness ; it has merely exposed it.

Canada’s forest industry, once the envy of the world, is now a laughingstock. Canada is the world’s biggest producer of newsprint, but only 7% of our mills are in the industry’s lowest-cost quartile. Barely a third of our pulp mills pass the same test. This is largely an Eastern Canadian tragedy, since pulp- and paper-making is the sector’s first line of business in Quebec and Ontario. In British Columbia, lumber is the top product.

Still, why is Stora Enso—operating out of the high­-cost and high-tax Nordic countries, and facing the same strengthening of its currency (the euro) against the U.S. dollar—able to succeed where Canada’s companies can’t ?

Part of the reason is that Finland is home to three of the world’s 10 largest forest companies. Stora Enso ranks as the biggest outside the United States. Canada has no players in the top 10 (see table, page 73). Recent cross-border mergers—Canada’s Abitibi-Consolidated has linked up with South Carolina-based Bowater, while Domtar merged its assets with the fine-paper operations of U.S.-based Weyerhaeuser—will lend these new Canadian-based players more heft, but not much more strength. No Canadian company, for instance, has the balance-sheet strength to invest in China or India, both of which are on the cusp of an unprecedented boom in paper production and consumption. The Finns, on the other hand, are everywhere.

The Canadian industry barely earned enough in the booming late 1990s to pay the interest on its debt, which means that in today’s tough competitive climate, new injections of capital have become a distant dream. Indeed, depreciation has exceeded investment here for at least a decade. That means dozens of Canada’s pulp and paper mills—already small and old by international standards—are hopeless causes. The average Canadian pulp mill has a capacity of about 200,000 tonnes ; our newsprint mills average 280,000 tonnes. Compare that with the one million-tonne Finnish-owned mills that are either already operating or are being built in Latin America. The federal government’s Canadian Forest Service keeps a running tab of closures or indefinite shutdowns since 2003. More than 200 wood and paper mills, and 27,300 direct jobs, have gone. By the time you read this, the list will have grown longer still. And it will continue to do so for months to come. In early November, AbitibiBowater launched a 30-day review of all its mills, portending more closures. There is no end in sight.

Innovation might have saved us. But no such luck, or rather, foresight. "No Canadian-based [forest] com­­­panies have the large in-house R&D capacity that many of their leading international competitors main­tain," the Canadian industry’s own competitiveness task force stated in its May report. "This in part reflects the relatively small size of Canadian-based firms, as larger companies are better able to manage the risks and capture the benefits of product and process innovations."

Does it matter ? Isn’t the forest sector old-economy anyway ? Wouldn’t Canada be better off if we spent less time hewing wood and more time punching BlackBerrys ?

The truth is, the forest sector has a brilliant, high-tech future, and Canada would be foolish to let more than a century of know-how and a vast renewable resource go unexploited. We must stop seeing trees as fodder for cheap newsprint, copy paper or two-by-fours. We must think of them as the raw material for biofuels, pharmaceuticals and nutraceuticals. We must imagine a world where paper can be implanted with silicon chips and offer interactive features (becoming akin to paper computer screens), where science can be harnessed, in the face of climate change, to maximize the productivity and biodiversity of forests. A world where nanotechnology is used to identify glitches in the papermaking process before they happen, vastly improving quality and productivity. A world where computer-automated harvesting machines start the processing of trees on site and, one day, render the sawmill redundant.

Sound fantastic ? Not to the Finns. They’re already partway there.

No economy depends more on its forests than Finland’s. Sure, the tiny Nordic nation (population : 5.3 million) is home to cellphone giant Nokia, No. 1 in the world, and produces more than its share of NHL hockey players and Formula One drivers. But historically, the forest sector has been Finland’s main source of wealth, and it remains the single biggest sector of the economy. It still accounts for more than 20% of national exports, about $17 billion annually, compared to 10% for Canada’s forest sector.

The challenges facing Finland’s forestry sector actually are no smaller than those facing Canada’s. Unlike this country, trees are frigid Finland’s only natural resource. The result of this dependence is that, for a long time, Finland’s forests were overharvested and mill workers were granted salaries and benefits that put them at the top of the country’s income ladder. Better forest management practices in recent decades have brought the trees back at an impressive rate ; harvesting levels can be raised in coming years. Still, for the time being, Finnish papermakers such as Stora Enso are suffering from a shortage of raw material. About a fifth of Finnish paper mills’ wood supply must be imported from Russia. But Finland’s elephantine neighbour, home to half of the world’s boreal forest, recently began imposing heavy export duties on raw logs. It is set to triple the levies by 2009, making it uneconomical for the Finns to use Russian wood.

As a result, in late October, Stora Enso announced plans to close one paper mill and partially shut down another. A couple of the company’s Scandinavian pulp mills are also on the chopping block. All told, 1,400 jobs will be cut. These are the first major closures in the Nordic region since UPM-Kymmene, Finland’s second-biggest forest player, last year shuttered its paper mill in Voikkaa, 150 kilometres northeast of Helsinki.

And that shutdown was epochal. "It was a big shock because it had never happened before," says Anne Brunila, president of the Finnish Forest Industries Federation. "The whole village thought this would be a catastrophe. But of the 700 people who lost their jobs, almost all of them are either now in new ones or enrolled in some kind of education."

Such active labour market policies are, of course, the hallmark of the progressive-to-a-fault Nordic countries. While labour unions are strong, their resistance to change is attenuated by the knowledge that workers will not be left hung out to dry by globalization. Besides, rural Finns are as well-educated as urban ones, the fruit of the long-standing policy to make university free and accessible for everyone. As a result, investment abroad by Stora Enso and UPM, which both have major operations in Latin America and Asia, is not seen as a threat to prosperity, even by labour. "There is much more understanding here among trade unions that to be competitive, firms must internationalize. It is the best way to protect jobs here," says Pekka Ylä-Anttila, a research director at the Research Institute of the Finnish Economy.

That doesn’t mean unions will swallow anything. A labour dispute in 2005 halted forest sector production for seven weeks after employers sought concessions needed to run mills even over Chris­tmas and around the summer solstice, another traditional holiday. At the end of the day, the em­ployers won.

Still, the prevailing attitude is of tripartite co-operation, which is entrenched in efforts like Forest Cluster Vision 2030, an initiative aimed at applying technology to double the value of the domestic forest sector’s output within two decades—with fully half of the amount coming from products that don’t even exist yet. This is where those "paper computer screens" come in. UPM is already the world leader in developing paper with radio frequency identification (RFID) inlays. RFID technology allows for, among other things, tracking products from manufacturer to end user ; the technology is expected to transform retailing. As with most things in Finland, education and innovation are at the heart of the forest-cluster strategy. "Finns will have a leading role in [industry] management and expert positions, because Finland’s share of both the industry’s education and R&D is big compared to the size of the country," notes Ylä-Anttila, who just completed a study on biotechnology in the forest sector. "In the long run, the success of the Finnish forest cluster will probably and specifically be dependent on its intellectual capital."

Canada may have beat Finland to take this year’s world hockey championship in May, but clearly the Finns are whomping our butts where it really counts : in meeting the challenges of globalization. Helsinki is home not just to Nokia and three of the world’s biggest forest companies. Metso, one of only three large-scale manufacturers of paper­­making machines left in the world, is also based in Finland. Canada has no paper machine makers. The world’s biggest man­ufacturer of the chemicals used in papermaking, Kemira, is also Finnish. Canadian-based chemical makers ? None. The world’s leading forestry consulting firm ? Again, Finland’s Pöyry. Finland is also the home base of Ponsse, the company that makes those computer-automated harvesting machines.

These forest and forest-related companies, together with university and gov­ernment research institutes, make up the Forest Cluster juggernaut. The result is that wherever a paper or pulp mill is being built in the world—and there are dozens going up in China, India and Latin America—it invariably counts on Finnish expertise, equipment, capital, or all of the above. "I never understood why you don’t have that in Canada," a puzzled Brunila says of the cluster concept. Indeed, why Finland and not Canada ?

Part of the answer lies in sisu—inner strength. This stone-faced determination to plow on in the face of daunting odds has been a common thread throughout Finland’s history. It has enabled the Finns to survive domination, first by the Swedes, then the Russians, before winning their independence in 1917. Practical to a fault, the Finns never let hard feelings get in the way of doing business with their former invaders. As such, trade (much of it bartered) with the Soviet Union was the backbone of the Finnish economy until the Communist empire collapsed in 1991. Almost overnight, Finland’s gross domestic product sank 10% ; unemployment soared to 15%.

Anywhere else, it might have meant chaos and political upheaval. Instead, the Finns came together. They drew on their so-called small-country advantage—characterized by a homogeneous, highly educated population with a unique language (practically unlearnable, for a foreigner) and culture—and took their place in a rapidly globalizing market. Rather than resist emerging trends, Finland embraced them. Forest companies were allowed to consolidate, eventually resulting in the merger of Finland’s Enso with Sweden’s Stora, and local firms Kymmene and Repola combining to form UPM-Kymmene. Mills were modernized to specialize in value-added paper grades that fetched a high enough price on the international market to compensate for the high cost of shipping from Finland. One result is that Stora Enso’s newsprint production in Finland is limited to satisfying the domestic market ; most of the company’s newsprint is now made at mills in Germany, closer to customers in the heart of Europe.

It was also in the 1990s that Finnish forest firms began investing outside Europe, becoming among the first in their industry to twig to the long-term potential of producing pulp and paper in Latin America and China. North American expansion has not gone as well. Near the top of the paper price cycle in 2000, Stora Enso bought Wisconsin-based Consolidated Papers, while UPM-Kymmene made an unsuccessful bid for U.S. rival Champion International. UPM probably considers itself lucky. This September, Stora Enso’s newly installed CEO, Jouko Karvinen, recruited from the technology industry, unveiled a massive restructuring that included a $1.8-billion writedown, almost two-thirds of it on the company’s troubled North American division, made up of the Consolidated assets and a mill in Port Hawkesbury, Nova Scotia. Days later, Stora Enso sold everything on this continent to a private equity outfit. By getting rid of its dregs in North America, Stora Enso reduced that $1.8-billion writedown to $692 million. As for UPM, the company has also become disenchanted with its New World assets. In August, it closed its only Canadian mill, in Miramichi, New Brunswick.

While Finnish companies modernized and globalized, the government moved to boost investments in education and R&D, which were already high by international standards. The result is that, today, Finland is second only to Sweden in R&D spending as a percentage of GDP, at about 3.5%. The figure is lower for the forest sector—about 2.5%—since forest products tend to have a longer lifespan than, say, the latest cellphone. Even so, Canada spends less than 2% of GDP on research, and the figure is a pitiful 0.65% of sales in the forest sector—a number that is itself misleading, since much of what Canadian companies call R&D is not about new technology. The spending might more properly be called product development and market research.

The definition of R&D is not so flexible in Finland. The country, Ylä-Anttila proudly points out, has 16 researchers for every 1,000 employees—more than any other nation in the world. Sweden has 10, Canada six. Finland produces seven times more patents than Canada, considering population differences. Fully half of Europe’s forestry engineers are trained in Finnish universities—in English (virtually all Finns are fluent English speakers).

Finland has ranked first or second on the World Economic Forum’s Global Competitiveness Index for several years running. Although it slipped to sixth place in the 2007 ranking released in October, the country is still a statistical error’s throw away from the top spot. Canada is 13th. Finland also topped Transparency International’s list of the least corrupt countries this year and last. It rates at or near the top in income and gender equality. Finns are law-abiding—in part, at least, because sanctions are stiff. Speeding tickets are proportional to income—a few years ago, one millionaire was fined $237,000 for doing 80 km/h in a 40 km/h zone. Yes, income and sales taxes are high, but corporate taxes are much lower than in Canada. And yes, Finland has high rates of alcoholism, depression and suicide—and, not coincidentally, a penchant for heavy-metal music. But its geography—Finland sits above the 60th parallel, where the sun barely rises in winter—most likely has something to do with all that.

More important, Finnish students come out on top in the OECD’s Programme for International Student Assessment rankings in math, science and reading. While Japan, Korea and even Canada are close behind, "what is unique in the Finnish case is the low variation among schools and across students," notes Ylä-Anttila. "We don’t give any [non R&D-related] business subsidies. We take care of education," adds Mauri Pekkarinen, Finland’s minister of trade and industry. Education is such an integral part of the national identity that even a relatively isolated community like Pekkarinen’s home town, Jyväskylä, boasts several post-secondary campuses. "We have 88,000 inhabitants, and 36,000 of them are students," he says proudly. "You heard correctly—36,000."

Pekkarinen concedes there are risks in Finland’s cluster strategy, in which government economic policy specifically promotes the forest, information technology and a few other sectors. "The idea is that, as a small country, we can not be the best in everything. We have to make certain choices." He adds : "There is always some danger with this kind of policy if you make the wrong choices." So far, there is little evidence of that. After all, this is the strategy that allowed Nokia to evolve from being a rubber-boot manufacturer to the world’s biggest cellphone company.

This on top of the array of global forest and forest-related companies that remain best in class. Economic growth has outpaced Canada’s (and most of the developed world’s) for most of the past decade, with GDP growing 5.5% last year alone. The government runs a healthy budget surplus despite operating a cradle-to-grave welfare system. And unemployment has sunk to 6% (essentially the same as in Canada), even though Finland’s labour market participation rate tops 70%, compared to 68% in this country.

Yet the Finns are not the least bit smug. Their history has taught them to feel chronically vulnerable. Thankfully, for them, they’ve got sisu. This is why no one should doubt for a second that Finland’s forest cluster will meet the lofty targets it has set—remember, doubling output to more than $42 billion and R&D to about $1.1 billion by 2030. "Everyone knows each other here, so when you say you are going to spend such and such amount on R&D, you do it, because it would be a personal disaster otherwise," says Ylä-Anttila.

About 70% of R&D spending is financed by companies themselves, compared to less than half in Canada. To qualify for the government grants that cover the remaining 30%, companies must do R&D jointly with other members of the forest cluster. Accordingly, new innovations are readily available to all companies—big and small—in the sector. "In Canada and the United States, most government subsidies for R&D are given in the form of tax credits and the companies that get them do research independently. But here, if you want to get R&D subsidies, you must participate in the cluster technology programs," explains Ylä-Anttila. "My American colleagues don’t like that approach. But in a small country like Finland, this approach is better because you can demand that firms collaborate. But it presupposes a certain trust between people."

Perhaps it’s only in this small, homogeneous nation, where Finns apply their collectivist values to create a particular brand of capitalism, that all of this can come together to produce a virtuous circle of co-operation, innovation and wealth creation. But the lessons of the Finnish model should not be lost on pol­icy-makers and industry leaders in Canada. Indeed, there are hopeful signs. The Forest Products Association of Canada’s com­petitiveness task force last year hired Pöyry, the Finnish consulting firm, to help the industry find its way out of its morass.

And there is finally recognition that increased R&D is the only true solution to the industry’s woes. Earlier this year, Canada’s three forest sector research institutes—respectively focusing on forests, wood products, and pulp and paper—merged to create FPInnovations, which bills itself as the "largest private forest product R&D organization in the world." It’s a start. But with an annual budget of only $85 million, FPInnovations does not represent the massive research push that is needed to reverse the Canadian industry’s decline.

Canada has undoubtedly some of the best forest scientists in the world, and they are working hard on, among other things, ways to protect our trees against future epidemics like B.C.’s devastating mountain pine beetle infestation. But there is little evidence that a true paradigm shift—the one that will move the forest sector from a low-tech, old-economy mindset to a high-tech, new-economy one—has taken hold among the sector’s CEOs.

They are invariably lifelong forestry executives, used to managing in a sector driven by the commodity cycle—but not accustomed to a milieu where only the innovators survive. Maybe what Canada’s forest companies need, then, is more techies at the top. A bit more sisu wouldn’t hurt, either.

EVERY FINN WOULD LOVE A WOODLOT

"Every Finn loves the forest," says Pekka Ylä-Anttila, a research director at the Research Institute of the Finnish Economy, stressing a cultural trait that defines the Nordic nation more than Nokia ever could.

It’s not just because the winterized cottage is as common as the sauna—a Finnish invention—that the Finns dig the woods. If they don’t directly own a plot of trees, they almost certainly have a close relative that does. Indeed, for many Finns, the forest is their RRSP.

Technically speaking, Canadians own their woods, too, but through their provincial and federal governments, which possess 93% of this country’s forests. Governments award harvesting licences to private operators such as AbitibiBowater or Tembec to exploit the forest in exchange for royalties, known as stumpage fees.

In Finland, however, almost 60% of forest land is owned by about 400,000 families. Their plots are small, averaging about 35 hectares, compared to the hundreds of thousands of hectares typically covered by a single forest tenure licence in this country.

These legions of owners see their woodlots as a means to supplement their income or provide a nest egg for retirement. Harvesting and replanting is done variously by forest-management co-operatives, forestry companies and state agencies. An average annual harvest—about 140 cubic metres on a 35-hectare lot—nets about $3,460 for owners after they pay a 28% royalty to the government and partially cover the cost of replanting.

However, the reluctance of many forest owners to start selling their trees before retirement has contributed to wood shortages for Finnish forest companies such as Stora Enso and UPM-Kymmene. "For the owners, the value of the forest is better than having money in the bank, so they don’t harvest," explains Sirkka-Liisa Anttila, Finland’s minister of agriculture and forestry.

The result is that, while Finland’s forests are growing at an annual rate of almost 100 million cubic metres, only 60 million cubic metres are currently harvested. The government is aiming to raise the amount to as much as 80 million cubic metres, Anttila says, an objective that has become even more pressing with Russia’s move to slap a massive tax on log exports to Finland. (In Canada, about 200 million cubic metres of wood is harvested annually on this country’s 295 million hectares of commercially available forest, according to Natural Resources Canada.)

Forest certification—that is, third-party verification to prove certain standards are met regarding biodiversity, animal protection, regeneration and the rights of native peoples—has become the hot-button issue within industry ranks in Canada and Finland alike.

Finland’s forest owners have resisted pressure from environmental NGOs to seek certification from the Forest Stewardship Council (FSC), an independent body that is widely regarded as the gold standard in the field. Instead, they have created their own certification program, but it is regarded skeptically by environmentalists.

"Who should decide the rules ? Is it Greenpeace ?" retorts Anttila. "My hope is for the issue to be settled at the level of the European Union. We are content with our [forest management] standards. Today, we have more money for forest improvement incentives and biodiversity support. It is the only way to keep peace with the NGOs."

Greenpeace has targeted Canadian companies that spurn the FSC standard, starting with the largest, AbitibiBowater. The company has instead measured itself against a yardstick set out by the Canadian Standards Association. Not good enough, according to Greenpeace, which is pressuring retailers to boycott AbitibiBowater’s products.

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