Globalization_and_Hardwood_Markets_WERC_June 2 2008

Globalization and Hardwood Markets - - The Future Offers Opportunities and Challenges

Northeast Utilization & Marketing CouncilAnnual Meeting & Training Session

WERC – Princeton, WVBlacksburg, VA

June 2, 2008

Al Schuler - USDA Forest Service, WVUrs Buehlmann - VT( aschuler@fs.fed.us )

We are evolving toward a single world marketFor labor, capital, goods, and services – why – communication and transportation technologies Have lowered the cost of moving information, goods,and services across distance

Significance: Distance is less of an obstacleto competing – e.g., promotes outsourcing and other competitive strategies that were not previouslyFeasible

Your dilemma – figure out a good competitive strategy– vertical integration; cluster strategy; consolidation/cost cutting; strategic alliances,and fragmented companies and value chains (outsourcing,in sourcing, etc.) – your strategy should be based onYour comparative advantage – what you do better than anyone else

One of the flatteners - Transportation Economics

In 1956, it cost $5.86/ton to load and unload a cargo ship by hand – today, using containers, it cost 16 cents/ton

Railroads can move a ton of freight 423 milesOn a single gallon of gas

Multi Modal Transportation

Some Global Trends Facing U.S. Forest Products Industry

• Competition – U.S. is losing market share in many commodity markets

• Fiber & Forestry - structural changes in world log and fiber markets: (1) Demand for U.S. fiber is changing from pulp & paper to

composite/engineered wood products & biofules?? (2) plantations are growing source of industrial roundwood(3) industry forest ownership is being transferred to TIMOS/REITS & others; (4) Russia, the world’s largest log trader, is increasing log export taxes to encourage domestic production & discourage illegal

logging. • Economic activity - Center of Economic activity shifting to Asia

(1) Healthy Forest Products Industry Requires Viable Markets (2) Healthy Forests (Sustainability) Require “Management”(3) “Management” ( road building ( for logging & fire mgt. ), silvicultural, treatments, health/disease/herbicides, and deer management is expensive - “ Stewardship comes at a price”

Bottom Line – Landowners need strong log markets asincentives to actively manage their forests – log marketsare usually driven by product markets

Key to Healthy Forest Products Industry and healthy forestsis viable markets – globalization is making itTougher to find and hold onto viable markets

SAF has identified "global competitiveness"as one of the top five threats to forest sustainability

Key Tenets or Beliefs

Some Stats on the U.S. Hardwood IndustrySolid Wood Products

2006 data* - domestic shipments

• Hardwood Lumber ( 3211131) - $5.28 Billion • H. Veneer/plywood - $3.00 Billion• H. Flooring - $2.25 Billion• Wood Kitchen cabinets & counter tops (337110) - $19.40 billion• Wood furniture ( upholstered, non upholstered, and wood office

furniture) - $20.53 billion

Hardwood Industry is Substantial!!!!

Source: *U.S. Census, ASM

I. Competition – U.S. losing Market Share inMany Forest Product Markets

0%

10%

20%

30%

40%

50%

60%

Kitchen cabinets Upholstered Wood Office

HH Furniture Molding(hwd + soft) Hardwood Flooring*These market shares are conservative because some imported components and finished furniture is included in the domestic shipments

Consumption = shipments + imports – exports. Import share = imports/consumption

Source: Census, ASM; ITA (www.ita.doc.gov)

U.S. Import Market Shares

Secondary Industry - Hardwood market trends – Why alternatives to traditional markets are critical

$0

$2

$4

$6

$8

$10

$12

Bill

ions

of d

olla

rs

Exports Imports Trade Deficit

•Wood household furniture, non-upholstered – NAICS 337122 Source: U.S. International Trade Association

Wood Household Furniture Trade Deficit2007

Imports $10.6 billion

Exports 1.0 billion

Deficit $ 9.6 billion

$0

$2

$4

$6

$8

$10

$12

19

92

19

93

19

94

19

95

19

96

19

97

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98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

Mexico

Indonesia

Viet Nam

Canada

Malaysia

Taiwan

CHINA

Total

Wood Household Furniture Imports (Billion US$)

Sources: U.S. Commerce, Bur. Census, Intl. Trade Adm., Wash., DC

$10.6 billion

500

550

600

650

700

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Furniture & Related Wood Products

Employment Trends

Source: BLShttp://data.bls.gov/cgi-bin/srgate

Thousand

Furniture includes kitchen cabinetsand all types of furniture – NAICS 337

Wood products (hwd & sft) includes lumber,veneer, millwork, windows & doors, containers& pallets, & mobile homes - NAICS 321

U.S. Employment TrendsDecline of Manufacturing Employment

0

20

40

60

80

100

120

0%

10%

20%

30%

Manufacturing share Construction Manufacturing Services

Sector Employment ( million) MFG Share

Source: BLS - http://data.bls.gov/cgi-bin/srgate

1960 MFG share 30%

2007 MFG share 10%

New LacquerCraft Furniture Factory near Shanghai, China

12,000 employees

Every month:

Import over 1,000 containers of US lumber & veneer

Export over 4,000 containers of bedroom furniture back to U.S.

Universal & Legacy Classic brands sold directly to retailers

Also produce for U.S. furniture companies in Dongguan plant

U.S. Hardwood Flooring ImportsHousing’s Impact is Huge

$0

$100

$200

$300

$400

$500

World Imports Imports from China

Customs value (million $)

Source: USDA, FAS

2007

Imports $143 million

Exports 92 million

Deficit $ 51 million

U.S. Housing Decline

U.S. Hardwood Molding Imports

$0

$100

$200

$300

$400

$500

2000 2001 2002 2003 2004 2005 2006 2007

Imports North America Imports East asia

Exports Total Imports

Million $

Source: USDA FAS

Imports $395 million

Exports 24 million

Deficit $371 million

U.S. Hardwood Lumber Consumption Trends See feature article FPJ May 2008

0

1

2

3

4

5

1963 1967 1972 1977 1982 1987 1992 1997 2002

Furniture Construction & Remodeling*

Industrial Exports

BBF

Source: Bill Luppold, USDA FS

* flooring, millwork, trusses, cabinets, & fabricated wood members

Residential markets are now 2.5 times the sizeof furniture markets

U.S. Graded Hardwood Lumber Consumption Trends (BBF)

0

0.5

1

1.5

2

2.5

Furniture Flooring Millwork K Cabinets Exports K Cabinets Flooring Exports Millwork Furniture

1962 2005

Source: Bill Luppold, USDA

Total : 4.60 BBF Total: 6.6 BBF

Total consumption up 2 BBF between 1962 and 2005 - - 44%But dramatic changes in where the lumber is consumed

Changes in U.S. Graded Hardwood Lumber Consumption Trends over the past four decades ( 1962 – 2005 )

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

Furniture Flooring Millwork KitchenCabinets

Export

BBF

Forest Products* Trade

$0

$50

$100

$150

$200

$250

0%

2%

4%

6%

8%

10%

12%

14%

16%

World tradeU.S. share

World Export Trade (Billion US$)

* Round wood, fuel wood, sawn wood, wood based panels, pulp and paperboard

Source: FAOSTAT (http://faostat.fao.org/DesktopDefault.aspx?PageID=381&lang=en

U.S. Share

World trade increasing while U.S. share drops

-$18

-$16

-$14

-$12

-$10

-$8

-$6

-$4

-$2

$0 19

80

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82

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06

U.S. Forest Products Trade Imbalance

Imports $31.5 billion

Exports 18.5 billion

Deficit $13.0 billion

Billion $

2006

U.S. Imports of Timber Products* as a percent of Consumption and Exports as a percent of Production

0%

5%

10%

15%

20%

25%

30%

35%

1965 1971 1977 1983 1986 1992 1998 2004

Imports Exports

Source; USDA, Interim Update of 2000 RPAAssessment, FS – 874, April 2007

U.S. is losing the trade battle

*Primary products – lumber, roundwood,But excluding furniture

The U.S. Trade Dilemma…

We are exporting raw materials and importing finished goods…The U.S. is a major exporter of hardwood lumber and logs…And we are the major importer of finished hardwoodproducts like furniture, flooring, molding & millwork …

This needs to change if the U.S. secondary hardwood processing industry is to survive – think about it - what happens to the primary industry if the secondary industry keeps shrinking???? Exports can’t take up all of the slack because the U.S. has lots of competition in international log and lumber markets

II. Fiber & Forestry Issues

• Demand for fiber is changing – from pulp & paper to engineered wood products

• Plantation acreage increasing - Lots of wood becoming available world wide - With more EWPs, fiber requirements are less quality based and more quantity based

• Bioenergy – opportunity for low grade hardwood fiber??• Timberland ownership changes – impact on future log supply

and sustainable forestry????• Russian log export duty to increase dramatically by 2009

U.S. Industrial Hardwood Roundwood* Usage

0

0.5

1

1.5

2

2.5

3

3.5

1990 1995 2000 2004

Hardwood Pulp Industry Hardwood Lumber OSB

Billion cubic feet

Sources: Forest Resources Assoc., APA, USDA Forest Service

* Pulp industry totals exclude residue chips, but include whole tree chips

Future - Biomass power& Biofuels????

Source: FAO – State of Word’s Forests - 2007

Plantations contribution to global industrial* woodProduction Is approaching 50% according to FAO

* Excludes firewood

Source: Klabin

Fiber grows faster outside North America

U.S. Timberland Ownership by Integrated* Companies

Company 2000 2002 2004 2006 2007p

LP 945 945

Boise Cascade 2,340 2,340 2,240

Bowater 1,800 490 370 250

MeadWestvaco 3,400 3,140 2,150 1,118 <1000??

Temple-Inland 2,200 2,200 2,050 1,990 0

IP 12,025 9,185 6,800 600 200

Potlatch 1,545 1,150 1,455 1,460 1,500

Rayonier 2,100 2,050 2,030 2,180 2,400

Weyerhaeuser 5,700 7,300 6,400 5,640 5,640

GP’sTimber Co.* 4,000

Total 36,055 28,800 23,495 13,238 ~10,000* I included GP’s Timber Co. as an integrated Co. ( A. Schuler – USDA)

Source: RISI

(000 acres)

Structural change in international log markets

(1) Russia is world’s largest exporter ( volume basis) of both hardwood and softwood logs (2) Softwood tax increases from 6.5% today to 80% by Jan 2009 (3) Hardwood sawlogs (Oak, Beech, Ash) tax increases from 20% today to 40% by Jan 2009

0%

10%

20%

30%

40%

China India Finland Sweden0%

5%

10%

15%

20%

25%

30%

Russia U.S. Malaysia France

Temperate Hardwood LogsWorld Share (Value) of top importersand exporters - - $4.54 Billion - 2006

Importers Exporters

Source: Global Trade Atlas

U.S. Hardwood Log Exports

$0

$200

$400

$600

$800

$1,000

2002 2003 2004 2005 2006 2007

World China Canada European Union

Million $

Export trends for 2007

World + 30%Europe + 72%China + 35%

U.S. Hardwood Lumber Exports

$0.0

$0.4

$0.8

$1.2

$1.6

$2.0

2002 2003 2004 2005 2006 2007

World Canada European Union China

Billion $

World exports drop 12% in 2007

U.S. Hardwood Lumber and Log Exports to China : a Comparison

$0

$50

$100

$150

$200

$250

$300

2002 2003 2004 2005 2006 2007

Logs Lumber

Million $

Source: FAS

Log exports increase 35% in 2007 Lumber exports decrease 19% in 2007

Recent China World Import TrendsHardwood Log Imports up 32%

Lumber Imports Flat

$0

$500

$1,000

$1,500

$2,000

$2,500

2006 2007

Logs Lumber

Source; GTA

$1.64 billion

$1.03 billion

$1.03 billion

$2.17 billion

III. Economic Activity Shifting to Asia – creates export opportunitiesfor U.S. Hardwood industry

(if we’re competitive)

How will Changing Global Economy Impact Wood Products Industry?

0%

10%

20%

30%

40%

2004 2025 2050

U.S. EU Japan China India

Percentage of World GDP

Source: Business Week August 22, 2005

China and India’s economy could rival U.S.in less than 20 years??

GDP at Market Exchange Rates and PPP Billion US$

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

2000 2001 2002 2003 2004 2005 2006

China India USA

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

China India USA

Source: IMF

PPP* Market Exchange Rate

PPP – exchange rates adjusted to equalize cost of goods in different countries

Per Capita Wood Consumption

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

China World OECD USA

Source: China Timber Import Export Co/Hardwoodmarkets.com 2003Source: China Timber Import Export Co/Hardwoodmarkets.com 2003

cubic meters per capitacubic meters per capita

Lots of potential to export more wood products to ChinaAffluent population today ~13 million ~$40,000 income (PPP)By 2011, lower middle class ~ 290 million people with income ~ $16,000By 2025, upper middle class ~ 520 million people ~ $25,000

China and US Consumption of Wood Products – What will China’s Share be in the Future and where will it come

from?

0%

5%

10%

15%

20%

25%

30%

35%

China U.S.

Roundwood Sawnwood Wood based panels

Pulp Paper & Paperboard

World Consumption Share

Source: FAO

China’s Hunger for Raw Materials

0%

10%

20%

30%

40%

50%

60%

China’s Share of global consumption (2006)

Source: FAOSTAT

China’s business model – import raw materials and re-export finished goods

IV. Opportunity – Domestic Construction Markets

Residential Construction Markets ( new and remodeling) areCritical for the Softwood Industry - - primarily structuralApplications as 75% of softwood lumber and OSB/plywoodconsumed there

Construction markets ( new and remodeling markets in bothresidential and commercial buildings)are becoming increasingly important to the hardwood industry – examples include decorative/interior (non structural)applications such as flooring, cabinetry, interior trim,moldings, millwork, staircases, and closets

Residential Construction – not much improvement until 2010?

0

0.5

1

1.5

2

Mil

lio

n U

nit

s

Multi family

Forecast – NAHB May 2008

60% drop2005 - 2008

Problems: New Homes - High Inventories, tighter lending standards, Higher mortgage rates, and weak job growth

Existing homes – Same as above plus falling prices and rising foreclosures

Solution - Better demand / supply balance - - address foreclosure problem, & better demand from lower prices

Market size - New Construction vs RemodelingRemodeling becoming increasingly important & is

the key market for hardwood components

191220

280

338

402

230

300

424 418

453

$100

$200

$300

$400

$500

1995 2000 2005 2010 2015

Remodeling New constrcution

45%

42%

40%

45%

47%

36%

38%

40%

42%

44%

46%

48%

1995 2000 2005 2010 2015

Billions 2005 dollars

Source: Harvard JCHS 2007

Remodeling share of residential investment

Hardwood Lumber Consumption Trends

0

1

2

3

4

5

1963 1967 1972 1977 1982 1987 1992 1997 2002

Furniture Construction & Remodeling*

Industrial Exports

BBF

Source: Bill Luppold, USDA FS

* flooring, millwork, trusses, cabinets, & fabricated wood members

Residential markets are now 2.5 times the sizeof furniture markets

Changing Hardwood Component Markets

1984 2008

Furniture 65% 22%Cabinetry 16% 27%

Building Products* 10% 42%Decorative/Specialty 4% 7%Industrial Products 5% 3%

Source: 2008 WCMA Market Study

* residential and commercial, both new construction and remodeling

Components in building materialsinterior trim, moldings, stair parts, flooring blanks

Source: WCMA

Components in cabinetrycabinet doors, and parts

Source: WCMA

Components inin furniture parts

Source: WCMA

V . Opportunity – adding value, customization, market focus

• U.S. is a “high wage” country and Globalization is making it increasingly difficult to make money selling only product –

have to add value via customization, services, installation – goal is happy (and profitable) customers

• Many wood product industries are “production oriented” – we produce what is right for the plant – domestic auto industry is perfect example of what can go wrong when you forget the customer

•Future for hardwood industry is adding value/customization? – Porter’s Centers of Excellence – e.g., Amish Furniture Industry

Strategies for Success in High-Wage Economies ( there is no “silver bullet”)

Produce innovative, customized products Focus on product design, finishing, marketing & distribution

– “the entire supply chain” Automate production to reduce labor Focus on cost reduction Adopt new technologies & lean manufacturing techniques Invest more in education and R&D – continuous learning and

innovation Attract & hold onto skilled workers Keep your customers and your suppliers happy!!!!!!!!!!!!!!! Add value (products and/or services) by exploiting your

comparative advantage ( what you can do better than anyone else)

Strategic alliances – ex. - Weyco and Chevron with biofuels

Service sector provides bulk of employment in high wage countries – can’t make money selling only product – selling

service means installation & more!!

0%

20%

40%

60%

80%

100%

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

Agriculture Manufacturing Services GDP per Cap

Share of employment by sector (2003)

Source: McKinsey & Co, Emerging Global Labor Market, 2005

$GDP per capita

High end U.S. made furniture sold to Affluent customers in China, India, UAR, &Russia is a growing opportunity – “they want to showcaseTheir new status” – Jerry Epperson, furniture analyst

International sales at Henredon, an AmericanCompany, are now over 8%, up from 5%two years ago

10% of Century Furniture sales, based in Hickory, NC,are now international

Dealing with the Impacts of Global Competition on the Appalachian

Hardwood Industry

A survey(2006) of Appalachian sawmilling industryby the Appalachian Hardwood Manufacture's Associationand USDA Forest Service

Conclusion: Pay more attention to the customer!!!

Actions taken ( to date) to deal with globalization – “be more responsive to customer

needs”

0% 20% 40% 60% 80% 100%

"customer relationships"

find new markets

investing in new eqpt

sorting by length/width

sorting by color

developed new grading criteria

don't do anything

Proportion of Respondents

“Future successful companies will provide value (as seen by customer) in the form of quality product & services focusing on customer needs” - - flexibility is a Key strategy !!!

Future Capital Improvements – where will you spend significant $ in next 3 years

focus on efficiency/cost issues and customer needs

0 10 20 30 40 50 60

lumber sorting

sawing

lumber scanning

scanning/measuringlogs

Percentage of respondents

50% of respondents plan to spendOver $1 million on capital improvementsOver the next 3 years

Ohio’s Amish Furniture Cluster*A Hardwood Success Story

Matt BumgardnerU.S. Forest Service

*See Michael Porter’s homepage (http://www.isc.hbs.edu/ )

Fashion for Computers to Add ValueApple added Fashion long before Dell & HP – see results

belowHigher Margins = more profits

Can Wood Products Industry do Same????

Fashion for Computers to ADD Value – How Can You ( wood products) add Value?

Touch Screen Model for the Kitchen

Leather covered Case Targeted for Women

Designed for Young men – makes an engineSound when you boot up

Hospital Furniture designed to make patientsAnd caregivers more relaxed and comfortable

Bariatric seating is for obese people

Waiting room furniture designed For different patient (and visitor) needs

Friendly Furniture

Furniture hides medical utilities ( equipment,electrical outlets) – “friendly furniture”

Toyota Prius sales pass Ford Explorer in USDetroit Free Press - Jan 2008

Americans bought more Toyota Prius hybrid in 2007 than Ford Explorer sports utility

vehicles, the top-selling SUV for more than a decade.

The Importance of Sound Strategic Planning

Toyota saw higher gasoline prices – Ford & GM had accessTo the same information, but drew the wrong conclusions

What trend, already out there, will impact wood useOver the next decade??? – Green Building - - Certification - - Climate change? – Wood based Biofuels? – How can your business benefit??

Concluding thoughts

• Globalization factors forcing U.S. to “rethink competitive strategies” – “move up food chain” - add value throughout the supply chain – personalized products at commodity prices; after sales services; installation; find new markets; think outside the box!!

• Center of Economic activity moving to Asia – China can be an opportunity if you are competitive

• Skilled workforce becoming critical to remain competitive, but chronic labor shortages presents challenges

• Get closer to key customers – focus on customer needs and not simply “selling what you produce” – be innovative!

• Produce what the customer ( domestic and export) will pay for!!!!!!!!!!• Competitive strategies – no silver bullet – different strokes for different folks

(1) vertical integration; (2) fragmented companies and value chains ; (3) consolidation/cost cutting for the commodity crowd ( 4) strategic alliances – Weyco & Chevron for biofuelsYour strategy should be based on what you can do better than anyone else!!!!!