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Authors: Bruce Lippke, Rose Braden, Scott MarshallExecutive Summary The Pacific Northwest (PNW) forest sector is strategically linked to Pacific Rim markets, as it has been at a competitive disadvantage with the US South and interior Canada in delivering wood products to the population dense eastern and southern US markets. Deep-water port access to Asia however, has provided the PNW with a comparative advantage in serving what was until recently, the region with the world's highest sustained growth. The Asian financial crisis, which began in 1997, substantially reduced US exports to Asia, and has compounded the negative impacts of the harvest restrictions intended to protect the habitat of endangered species, which began in 1990. Both the Asian financial crisis and the harvest constraints are forcing long-term structural changes. Understanding these changes is important to maintaining the economic and biological health of the forest sector. ![]()
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Authors: Rosemarie Braden and Bob TichyExecutive Summary The South Korean (Korea) market for wood frame housing and building materials has gained more attention from US manufacturers and exporters in recent years. From the end of the Korean War until the recent Asian economic crisis, the Korean economy demonstrated strong growth, making it the eleventh leading economy in the world. Rising consumer incomes have enabled more families to purchase single- family homes. Within this sector, wood frame homes are becoming more prevalent. The Korean government has almost reached its goal of providing a 100% housing supply. The Ministry of Construction and Transportation (MOCT) is redirecting its previous mission to focus more attention on building and promoting higher quality housing and more aesthetically pleasing living environments. As such, attention to wood frame housing as an alternative to high-rise concrete construction is increasing. Despite the Korean government’s activities to allow greater access to its consumer markets, US exporters still face many challenges. Some of these obstacles are specific to wood construction, such as inadequate building codes and lack of technical training. Other obstacles are more generic, including limited information about the import and distribution process, limited port facilities, and domination in the housing sector by concrete construction. Few market reports regarding the wood frame housing industry exist; many that exist are outdated. In order for US exporters to improve their competitiveness in this market they must develop a better understanding of the residential construction industry, business practices, and consumer and government perceptions regarding wood frame housing in Korea. The US wood products industry is also in need of information regarding building codes and safety and testing requirements for wooden building materials as a means to encourage the MOCT to modify Korean building codes to accept wood as a safe building material. The Asian economic crisis has had a profound impact on consumption of luxury goods, particularly wood frame homes and building materials. The Korean economy suffered a loss in investor confidence as a series of corporate bankruptcies occurred and the accumulation of bad loans revealed unstable business practices among several of the country's largest corporations and lending organizations. Consequently, domestic production and consumption declined, unemployment increased, and the overall health of the economy declined. The Korean won devalued against the US dollar, causing the price of imported goods to double. Industry experts estimate that the economy will begin to recover within 2-4 years. Therefore, this report has been written in light of this assumption and describes the wood products industry for the most part during its growth phase, which immediately preceded the Asian economic crisis. This report is the result of a market research project conducted in Korea from February 21-March 6, 1998. Two researchers traveled to Korea and interviewed builders, importers, and members of academia involved in the wood housing construction sector to learn about tariff and non-tariff barriers to wood frame housing and wood construction materials. The researchers also investigated the prevailing building codes related to wood frame housing and future market opportunities. This report offers background information about the Korean market for wood products, the building construction sector, and the environment for foreign businesses, in addition to suggestions for approaching this market. Findings from this project indicate that the consumer perception of wood frame homes is generally positive. Korean people view wood homes and wood in general as healthy and aesthetically pleasing. However, the high cost of building materials and restrictive financing limits single-family home ownership to the affluent. Although a mortgage system exists, interest rates are approximately 20% and the terms are for only a few years. Korean mortgages require the consumer to pay 70-80% of the home cost at the time of purchase and pay the remaining debt within 5-20 years. Recently, some banks have started extending special loans of up to 70% of the home price. However, even though personal savings rates are high, the typical income of a potential buyer cannot support high monthly payments. Efforts to make wood frame homes and townhomes affordable could increase the expansion of wood frame housing. Aside from the fact that many families cannot afford wood frame homes, there are several non-economic factors that affect the widespread adoption of wood frame housing in Korea. One issue that hinders the expansion of US wooden building materials in Korea is limited product promotion in print advertising and home shows. The American Forest and Paper Association (AF&PA) Korea office has been very active in promoting the US wood products industry in Korea through trade shows, trade missions, an annual carpenter training program, wood frame construction seminars, and technical and promotional publications. These activities have contributed to the perception that US manufacturers produce high quality building materials. However, there still appears to be a general lack of knowledge among Korean construction firms regarding what specific products and services are available and which US suppliers exist. Thus, many Korean housing companies use multiple suppliers from around the world. This indicates that there is a need for individual firms to place more emphasis on marketing their goods and services in this market as a means of developing name or brand recognition. In addition, homebuilders, architects, and homeowners lack understanding of the proper use, storage, and maintenance of wood products. It is important that US product literature be translated into Korean so Korean builders will understand proper material handling, storage, and product use. The AF&PA Korea office currently distributes technical information in Korean on the use of specific species and engineered wood products with information from The Western Wood Products Association, the Softwood Export Council, APA-The Engineered Wood Products Association, and the Southern Forest Products Association. Technical transfer is another important issue. Korean carpenters are either good at concrete work (very rough carpentry) or good at finish work (very fine carpentry); they are less skilled with framing. Framing training, in addition to instruction regarding proper handling and storage of materials is critical to the long- term success of wood frame construction in Korea. One way to disseminate information about proper construction techniques within Korea is to train architects, professors, and construction workers in the US. Training should include architectural design, engineering design, framing techniques, and maintenance. For the past three years the AF&PA Korea office has organized an annual two-week long 2x4 construction training program near Seoul in cooperation with the Korean Wood Frame Construction Institute and the Home Builders Institute. The program trains approximately 40 to 50 students about US wood frame construction techniques through classroom and hands-on instruction. Carpenter training is also being taught by a private architect who owns and operates a wood frame design studio in Seoul. However, there are still many carpenters who do not understand the engineering and construction principles associated with properly building a 2x4 wood frame home. It is important for technical transfer to be an integral part of promoting wood frame construction in Korea. The Korean building code represents another challenge to the widespread adoption of high-quality wood frame housing in Korea. The existing building code places restrictions on the accepted height and total floor area of the building, yet it does not include detailed requirements for structural aspects such as proper engineering principles, material use, and foundations (Appendix A). The lack of a detailed building code leaves room for the possibility that construction companies that do not have a complete understanding of wood frame housing may build substandard homes. The impact of poorly built homes may be compounded by the absence of building inspectors for wood frame housing. Instead, Korean law mandates that the builder or architect is liable for any damages resulting from substandard construction. While builders who construct dangerous homes can be criminally charged for any gross injuries, it may be that building codes are enforced only after major damages are incurred. A more likely scenario associated with poor construction is a dissatisfied customer. Given the small size of the wood frame home industry and the reliance on word of mouth advertising, the reputation of a few poorly constructed homes can be widespread. Discussions with MOCT engineers indicate that there may be genuine interest in developing a more complete wood frame building code. The Ministry of Finance has asked the director of the Architecture and Housing Bureau of the MOCT to identify problems associated with accepting a wood frame building code. It must be understood that the MOCT is not staffed to undertake such an effort. Therefore, it is incumbent upon those interested in such a project to push it forward by demonstrating the safety aspects of wood-frame construction through fire and stress tests first applied in the US then again for MOCT in Korea. Encouraging MOCT to expand its wood frame construction building code would be greatly aided by support either from a large construction company or the industry as a whole. There appears little willingness for the MOCT to act unless there is a request from an influential Korean company or organization for such action. MOCT engineers and the division director made it clear that political pressure from non-Korean sources to change the building code would not be effective. The Korean-based Wood Frame Construction Association (WFCA) is working with the AF&PA to promote proper 2x4 wood frame construction in Korea and to help develop a more comprehensive wood frame building code. The committee has drafted a proposed wood frame building code and submitted it to the MOCT for review and approval. In addition to developing working relationships with Korean 2x4 wood frame construction advocates such as the WFCA, the US should begin fire and structural testing in the US, in order to be prepared to replicate these tests in Korea. Such tests would demonstrate to the MOCT that wood construction can be fire and earthquake resistant. Fire tests of wall and floor assemblies using the Korean fire standard should be implemented. The Korean fire standard differs from the US standard, and it is imperative that American engineers understand the performance of US systems under the Korean test procedure. These tests may be initially conducted in the US, where researchers can design a system to meet the Korean code. However, final fire testing must be conducted at a Korean testing facility. In the meantime, trade missions that bring members of Korea's wooden home industry to the US should continue. There is a need to educate Korean experts, particularly those proposing to write Korean building codes. It may also be an opportune time to introduce large construction firms (e.g., Samsung, Daewoo) to wood frame housing as opposed to steel frame construction. Support from large Korean conglomerates may help influence the MOCT to focus more attention on modifying existing building codes to accept multi-story wood frame housing. Four recommendations for US industry in the Korean market are made. First, the US should initiate fire and earthquake testing of wooden wall systems using Korean testing standards to take place in the US. These findings can be replicated later in Korea to demonstrate to the MOCT the safety of wood frame homes. Second, additional housing demographic surveys should be completed in order to assess Korean consumer preferences. There is still a gap of knowledge between what consumers report they want and their actual spending behavior regarding wood homes. Third, cooperative training programs should be established to educate Korean professors, architects, and carpenters at technical schools in the US. Finally, US manufacturing companies should focus on marketing their products in Korea through print ads and trade-shows even in light of the Asian economic crisis. Korean consumers are greatly influenced by advertising, yet there is limited advertising featuring US wood products. While economic recovery is not predicted to begin for at least two years, US producers may use this time to increase awareness of US products in Korea. ![]()
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Authors: Samuel J. Fleishman and Ivan L. Eastin.Executive Summary Argentina’s geography, demographic profile, and level of infrastructural development are very favorable in comparison to other possible sources of plantation timber. It has a highly-educated population of over 35 million people who are generally more sophisticated and accustomed to a higher standard of living than those in other Latin American countries. Its industry and infrastructure, although somewhat inefficient and in need of upgrades in many respects, is also vastly superior to almost every other country in the region. The stability of the government, the financial system, and the overall business climate have traditionally been suspect, but have improved dramatically over the last decade. As part of a dramatic reform plan begun in 1989, Argentina’s government has improved the efficiency of its own operations, deregulated and privatized the banking system, and pegged the currency to the US dollar in order to defeat hyperinflation. The general business climate continues to improve as well, as a new, more efficient way of conducting business takes hold. As a result, Argentina has recently become more attractive to foreign investors. More than forty years of protectionism under the import substitution model left Argentina with hyperinflation, horrible credit, and an economy that was all but closed off to foreign trade. Thanks to the successful economic reforms that have taken place since 1989 under President Carlos Menem and Finance Ministers Domingo Cavallo and Roque Fernandez, Argentina is now on the road to recovery. Thus far, GDP growth has been very impressive, inflation has been defeated, foreign investment and foreign trade have increased dramatically, and the government has restructured its debt and reined in its fiscal policy. On the negative side, unemployment has been slow to recover from massive privatizations, while Argentina’s trade deficit and current account deficit remain larger than many economists would like. These economic reforms withstood a severe shock after the Mexican peso crisis in 1995. It remains to be seen whether or not a similar currency devaluation will occur in Brazil and, if so, how well Argentina’s hard-fought gains will survive another traumatic episode. The total area of forest plantations in Argentina is now approaching 1 million hectares, the vast majority of which are southern pine, eucalyptus, willow and cottonwood. The government estimates that an additional 20 million hectares of land is suitable for forest plantations, in that they have favorable growing conditions and do not compete directly with agriculture or native timber stands. Plantations have been subsidized for decades, but most have not been managed properly until recently. Hence, the quality of the plantation timber available now is still quite low but is rapidly improving. The results of genetic improvement programs, already evident in the production of pine and eucalyptus in the subtropical northern regions of Argentina, are now being developed for Douglas-fir, ponderosa pine and lodgepole pine in southern regions that are similar in climate to the Pacific Northwest. While southern pine grown in the northern regions of Argentina will primarily be exported to North American and European markets, the native hardwoods and plantation softwoods in southern Argentina can also be conveniently shipped and effectively marketed into Asia. Argentina’s government has deregulated the forestry sector and offered subsidies to reimburse plantation development. Due to the low quality of plantation timber and the underdeveloped nature of the industry, Argentina tends to export raw materials such as pulp logs and import higher-value wood products such as paper. Forest products exports, though low by global standards, are increasing at a rapid rate. Argentine producers are now very active in trade within MERCOSUR and have recently penetrated the US structural timber market for the first time. The pulp and paper sector and the composite panel sector are more highly developed than the sawnwood, plywood, and veneer sectors. The former sectors utilize lower quality timber and enjoy higher domestic market demand. The latter two are currently developing, and should continue to do so as more well-managed plantation timber matures. Argentina has made a remarkable transition over the past decade. It possesses the climate, infrastructure, low cost structure, educated labor force, and regulatory freedom required to support a globally competitive forest products industry. Given the rapidly developing nature of the Argentine forest resource and wood processing sectors, the high levels of investment by Chilean forest products companies, and the fact that a substantial volume of future production will be exported to the US, it is timely for US firms to begin looking for ways to understand and participate in Argentina’s forest products industry. From the beginning, the Argentine government has promoted the forestry sector as an integral component of the economic reform plan. By emphasizing Argentina’s favorable climate and low land costs, the government hopes to attract foreign investment and develop new jobs in the forestry sector. The three major challenges confronting the forest products industry are high transportation costs, low domestic demand, and an underdeveloped forest products industry. High transportation costs are being addressed by new road construction and the dredging of the Parana River. Domestic demand for wood products should steadily increase as the government strives to address a serious shortage of low-income housing and Argentines begin to enjoy an increasing standard of living. The underdeveloped forest products industry is improving rapidly due to foreign investment and the surprising success of MERCOSUR. MERCOSUR (the Southern Cone Common Market) has fully integrated the economies of the region (particularly Argentina, Brazil, and Chile) and provides the forest products industry with economies of scale that would not be possible within each country’s individual market alone. Perhaps the most notable impact of MERCOSUR has been the emerging regional dominance of Chilean forest products companies. With available investment capital, confidence in their ability to conduct business with their neighbors, and experience in the global forest products industry, Chilean investments represent over 60% of the foreign investment capital that has flowed into the Argentine forest products sector this decade. As a result, they have acquired large areas of plantation land and further developed every sector of the wood processing industry. They are also working to develop domestic, regional, and global markets and have taken advantage of some of Argentina’s best investment opportunities by moving quickly. While some US companies (e.g., Kimberly-Clark, Union Camp, and Trillium) have already established themselves in this emerging market, the vast majority are taking a more cautious attitude to investing in Argentina. Argentina’s government has worked hard over the last decade to provide an attractive environment for foreign investment. With very few exceptions, foreign companies now enjoy the same rights and privileges as domestic firms. Thus far, Chileans companies have been active in developing new plantations as well as composite panel production facilities. Trillium and Fletcher Challenge New Zealand have each identified exceptional timber sources. Fletcher Challenge has already developed a modern mill complex among the northern forest plantations that produces lumber, plywood, veneer, and moulding and millwork. Trillium, which is now seeking government approval for its lenga project, hopes to do the same in the Patagonia region. Since its domestic market is the strongest, the pulp and paper sector is much more competitive. ![]()
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Author: Vicente CárdenasExecutive Summary This paper provides a projection of wastepaper consumption for the year 2002. Such a projection is difficult because there is no existing database to characterize how wastepaper gets used in each end product yet we know from fragmentary sources that uses are changing. A procedure was developed to allocate collection to uses in several stages in order to balance collection with uses and to characterize how uses have been changing. ![]()
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Authors: Samuel J. Fleishman, Ivan L. Eastin and Steven R. ShookExecutive Summary The US residential construction industry, traditionally the largest market for softwood lumber, has undergone a period of uncharacteristically rapid change over the past decade. The effects of timber harvest restrictions in federal and state forests on softwood lumber price, price volatility, and product quality, combined with technological advances by producers of substitute materials, have contributed to increased use of material substitutes in residential construction. The objective of this research was to assess the extent of material substitution in residential construction and provide insight into the factors driving these changes. The results offer convincing evidence that softwood lumber has continued to lose market share in the residential construction industry and that builders remain concerned about its quality and price. The study also shows a shift on the part of builders towards a more favorable impression of the environmental impacts of substitute products, including steel and concrete, relative to softwood lumber. This study is based on a random sample of 2,400 residential construction firms segmented by geographic region and firm size. The survey was also mailed to the 100 largest home builders, as reported in Builder magazine. The overall response rate was 12.8% (12.1% of the random sample and 37.1% of the 100 largest firms). The results show that residential builders have steadily increased their use of substitute structural materials since 1995. Respondents reported increased use of all of substitute materials included in the survey. Almost all respondents reported using at least one substitute material (compared to 91% in 1995) and over 80% of the respondents reported using glulam beams, wood I-joists, and laminated veneer lumber (LVL). While use of steel, reinforced concrete and plastic-fiber lumber increased, engineered wood products emerged as the clear winners. On a regional basis, builders in the western US reported higher usage of all substitute products. In addition, the survey data suggest that large firms were more likely than small firms to try new substitute products, particularly finger jointed lumber, structural insulated panels, laminated veneer lumber, as well as newer engineered wood products such as parallel strand lumber and laminated strand lumber. The survey data were analyzed to assess the extent to which various structural products were used in walls, floors, and roofs, the three end-use applications that consume the greatest volume of structural lumber. The most commonly used products were softwood lumber, steel lumber, finger-jointed lumber, wood trusses, LVL, and wood I-joists. While softwood lumber still dominated wall framing in 1998, with an 83% market share, it has lost market share (down from 93% in 1995), particularly among large firms. Softwood lumber’s share of the floor framing market declined from 59% in 1995 to 42% in 1998. While it is still the most widely used product, with a 42% market share, the market share of wood I-joists has increased from 23% in 1995 to 39% in 1998. Softwood lumber used to frame roof rafters is no longer the dominant material used in residential roof systems. Survey data show that wood trusses increased slightly from 46% to 48%, while softwood lumber declined from 51% to 40%. To assess builders’ satisfaction with softwood lumber, respondents were asked to rate the level of the importance, and their corresponding level of satisfaction, with 13 softwood lumber attributes. The importance ratings obtained in 1998 were virtually identical to those reported in 1995. Softwood lumber straightness, strength, availability, and lack of defects were rated as the most important attributes. The survey data suggest that price is much more important to large firms than small firms. Builders reported that, while they were more satisfied with the price and price stability of softwood lumber in 1998 relative to 1995, they remained unhappy with softwood lumber quality, particularly with respect to lumber straightness and overall occurrence of defects. A gap analysis highlighted the difference between the mean importance ratings (where 7 indicates “extremely important” and 1 indicates “not important at all”) and the mean satisfaction ratings for each product attribute (where 7 indicates “extremely satisfied” and 1 indicates “extremely dissatisfied”). Survey findings indicate that while builders are less concerned with price issues than in 1995, they remain very concerned about the perceived decline in softwood lumber quality. The data provide clear evidence that residential home builders are least satisfied with product attributes they rate most important, suggesting that builders are dissatisfied with the value (defined as the ratio of price/quality) of softwood lumber. To provide a more concise interpretation of the importance and satisfaction of the different softwood lumber attributes, a factor analysis was performed to group together those softwood lumber attributes that are highly correlated to each other. The results of the factor analysis are almost identical with the results obtained from the 1995 survey and suggest that the 13 product attributes used to describe softwood lumber can be summarized into three factors: quality attributes, economic attributes, and technical attributes. Finally, the survey assessed builders’ perceptions of the environmental impact associated with using substitute products relative to softwood lumber. Although environmental marketing is not prevalent in the US forest products industry, most industry observers believe that it will become more important. While reduced environmental impact had the lowest importance rating of the 13 softwood lumber attributes, survey findings revealed that more builders in 1998 had a favorable perception of the environmental impact of substitute products, including steel and concrete, over softwood lumber than in 1995. This survey clearly indicates that softwood lumber has continued to be displaced by substitute materials in segments of the residential construction industry that it has traditionally dominated: walls, floors, and roofs. To a large degree, this loss of market share can be attributed to a perception among residential builders that the value of softwood lumber has declined: a direct result of rising prices and a perceived drop in lumber quality. Much of the loss in market share experienced by softwood lumber can be attributed to the increased use of engineered wood products. Many would argue that this is a normal process of product evolution within the forest products industry, attributed to technological advances in manufacturing processes driven by the changing forest resource. However, this study identified two trends that should concern managers in the forest products industry. First, the use of non-wood substitute building materials has increased significantly since 1995. Second, there is a growing perception among home builders that using non-wood building materials (including steel and reinforced concrete) is better for the environment than using softwood lumber. This trend away from wood products is likely to continue unless there is an effective response to the challenge posed by substitute materials. ![]()
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Authors: Ivan L. Eastin, Steven R. Shook and Wendy SammarcoExecutive Summary Currently, less than one percent of the private and industrial timberlands in the Pacific Northwest (PNW) are managed for hardwood production. In order to provide an incentive to manage the hardwood resource actively, hardwood stumpage prices must be consistently competitive with conifer stumpage prices, although this has generally not been the case in the PNW. A variety of factors could contribute to hardwoods being more actively promoted in the timberland manager’s portfolio. For example, species diversity provides stability in a cyclical market, improves soil fertility, and promotes biodiversity in forest stands. The hardwood industry in the PNW, largely red alder, has experienced surprising success over the past decade in both domestic and international markets. This success is of interest considering that commercial hardwood species in the PNW have traditionally been considered a low value by-product of the softwood inventory. While PNW hardwoods have enjoyed increased market acceptance, little market research has been done to characterize the hardwood industry or identify the factors that have contributed to its success. The objectives of this research were to: 1) explore the competitive conditions of the hardwood industry, 2) identify the range of products currently manufactured from hardwoods, 3) analyze current hardwood markets (domestic and international), 4) identify the factors that are perceived to restrict the growth of the hardwood industry in the PNW, and 5) assess future market and product opportunities for PNW hardwood products. Since the number of firms involved in hardwood lumber production in the PNW is relatively small (less than 15), a census of the hardwood industry was conducted. The PNW region, for the purpose of this research, consists of western Washington, western Oregon, and northern California. The survey was administered via fax to each firm in the sample frame. Thirteen hardwood manufacturers were contacted. Of the firms contacted, 10 completed and returned the survey, an effective response rate of 76.9%. ResultsThe PNW hardwood lumber industry directly employs approximately 2,000 workers. Collectively, the hardwood lumber manufacturers surveyed in this study produced approximately 450 mmbf of lumber, with exports totaling approximately 126 mmbf or 28% of total production. The range of products manufactured included kiln dried and green lumber, pallet stock, veneer, plywood, agricultural boxes and crates, and chips. Hardwood chips represent the primary by-product and all of the chips produced are sold to pulp and paper manufacturers. Approximately half of the slabs and sawdust generated are sold (as chips and mulch, respectively) with the remainder being burned as hog fuel. Similarly, approximately one-third of the planer shavings and bark are sold for livestock bedding and landscaping bark, respectively, with the remainder being burned as hog fuel. While both large and small hardwood lumber manufacturers sell a substantial percentage of their production direct to the end-user, large manufacturers tend to rely on wholesalers to the exclusion of brokers. In the case of small manufacturers, the opposite is true and they tend to favor brokers while minimizing their use of wholesalers. Problems and Threats to the Hardwood Industry: The problems confronting manufacturers in the hardwood industry were categorized into three areas: domestic regulatory issues, domestic resource issues, and international regulatory issues. Survey respondents were asked to indicate the impact of each factor on the competitiveness of their firm. Respondents utilized a seven-point scale ranging from a value of 1 (Strong Negative Impact) to 7 (Strong Positive Impact). Domestic Regulatory Factors: The range of domestic regulatory factors identified in the survey included: federal harvest regulations, state forest practice regulations, and state taxes. Survey respondents indicated that all three domestic regulatory factors had a negative impact on the competitiveness of their firms. The mean scores for the three factors (state taxes, federal regulations, and state forest practice regulations) were 2.6, 2.8, and 2.9, respectively. Domestic Resource Factors: The specific hardwood resource factors examined in the survey included rising raw material prices, rapid price fluctuations (i.e., price volatility), labor quality, resource availability, and resource quality. Rapid price fluctuations and increasing raw material prices were perceived as having the most negative impact on competitiveness, receiving an average score of 2.8 and 3.1 respectively. Quality of labor (4.1) and resource quality (4.3) were each generally perceived to have relatively little impact on the overall competitiveness of the respondents’ firms. It is interesting to note that resource availability, with a mean score of 4.6, had a slightly positive impact on overall competitiveness. International Regulatory Factors: The international regulatory factors included in the survey were: regional trade agreements, tariff barriers, non-tariff barriers, and sustainable forest certification. The survey results suggest that environmental certification of wood products (3.4) and tariff barriers (3.4) were perceived to have a more negative impact on the competitiveness of hardwood manufacturers than were non-tariff barriers (3.6) and regional trade agreements (3.7), although the difference in score was small. Further analysis of the survey data showed that hardwood firms exporting to Europe perceived environmental certification as having a more adverse effect on their competitiveness than did firms exporting to Asia and North America. Marketing Variables: Survey respondents were asked to evaluate the importance of each variable to the competitiveness of their firm using a seven-point scale ranging from 1 (Not Important) to 7 (Very Important). The importance ratings for the individual marketing variables indicate that a firm’s reputation within the hardwood industry was identified as the single most important marketing variable, receiving a mean score of 6.7. Communicating regularly with customers, product quality control, and providing on time delivery all received relatively high mean scores of 6.3, suggesting that these variables are also very important. Efficient operation of production facilities, with a mean score of 6.1, and procuring raw material, with a mean score of 5.7, were also perceived to be highly important. It is interesting to note that virtually all of the marketing variables associated with innovation received relatively low importance ratings from survey respondents: developing new products (3.9), manufacturing specialty products (3.9), utilizing new marketing techniques (3.8), conducting market research (3.0), and performing promotional and advertising activities (2.5). Only a single marketing variable associated with innovation, product branding (5.2), was viewed as being relatively important. However, given the low level of importance attached to promotional activities, it remains problematic on how a company might successfully brand its products. ConclusionsThe hardwood industry has experienced substantial and solid growth over the past ten years despite the timber regulations that have restricted the harvest levels from federal and state forests. This growth has occurred in both the domestic US market as well as in foreign markets which now account for almost 28% of red alder production. While survey respondents did not feel that harvest restrictions had adversely impacted their industry, riparian zone regulations related to endangered salmon populations could have a severe impact on the hardwood resource, particularly if those regulations are vigorously applied to private forests. Respondents indicated that virtually none of the regulatory factors evaluated in the survey were viewed in a positive light, although few were perceived to have a strongly negative impact on the industry. Despite this, a variety of factors were perceived by respondents to have had a moderately negative impact on the hardwood industry. These factors included: state taxes, federal harvest restrictions, state forest practice regulations, hardwood log price volatility, and hardwood log price increases. It is interesting to note that while federal and state harvest restrictions were perceived to have a moderately negative impact on the industry, respondents indicated that resource availability has not yet had an adverse impact on the hardwood industry. Respondents indicated that those marketing variables that influenced a firm’s reputation and production efficiency were the most important in terms of positively impacting the firm’s performance. In contrast, virtually all of the marketing variables associated with acquiring market information and promoting innovation were perceived to have a negative impact on the firm’s performance. In general, these results seem to suggest that hardwood companies in the PNW are conservative and tend to place a low value on the marketing activities associated with innovation and product differentiation. ![]()
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Authors: Steven R. Shook and Ivan L. EastinExecutive Summary The market for residential siding materials has become increasingly competitive over the past two decades. An increasing assortment of substitute materials, coupled with aggressive promotional and product-service campaigns of competitors, prompted the Western Red Cedar Lumber Association (WRCLA) to focus on marketing programs which would enhance the image and market share of western red cedar siding in the North American market. In 1995, the WRCLA commissioned the Center for International Trade in Forest Products (CINTRAFOR) to conduct an in-depth study of the Puget Sound residential siding market. The results of the 1995 CINTRAFOR study became a component for implementing the WRCLA’s Puget Sound test market strategy in 1996. The current study was commissioned by the WRCLA and reports the results of a mail survey conducted during the fourth quarter of 1996 examining the Puget Sound residential siding market. The fundamental purpose of this study was to assess the impact of the WRCLA’s residential siding promotional strategy in the Puget Sound market over the period of November 1, 1995, to November 1, 1996. The results of this survey were combined with the results of the 1995 survey in order to assess (1) residential siding usage patterns over time, (2) consumer perceptions of residential siding materials before and after the WRCLA promotional campaign, and (3) consumer exposure to the WRCLA promotional campaign and the effects of exposure. The survey results indicate significant instability in the Puget Sound residential siding market, with most of the instability being caused by a huge decline in the use of OSB siding and a considerable gain in the use of wood-fiber cement siding. OSB experienced a 32.6% decline in market share in the one year time period between the two surveys; this decline represents over 5.362 million square feet of siding material. Most of OSB siding’s market share decline was compensated by wood-fiber cement, which increased its market share to 18.3% from 3.21%. The average number of different siding materials builders are utilizing from one year to the next also measures instability. Results from the first survey indicate that builders used an average of 2.66 siding materials in 1994. This average increased to 3.56 the following year. Western red cedar’s 1995 market share in the Puget Sound residential siding market was 6.05% as compared to 8.86% in 1994, representing a decline of 31.7%. We must stress that lower overall market share does not signify that the WRCLA promotional campaign was ineffective. Market share can always be “bought” through several means (e.g., selling high volumes of low quality and low priced cedar in the lower-end home market), but higher market share does not necessarily translate into higher margins and profitability. Additionally, we were not overly surprised to see a decline in western red cedar’s market share since (1) cedar was being heavily utilized in the lower-end home market (while the promotional effort of the WRCLA was targeting the high-end market) and (2) there has been a steady rise in the price of western red cedar siding over the past year which has priced many low-end builders out of the cedar market. Note that the lack of price and shipment data from association membership has made analysis and interpretation of demand effects for western red cedar siding somewhat difficult. Despite the decline in market share, several favorable changes were seen in western red cedar siding usage patterns. The 1995 survey results indicated that for every builder who increased use of cedar siding between 1990 to 1994, 15.3 builders decreased their use. Over the past year, however, this negative pattern reversed; for every builder increasing use of western red cedar siding, only 0.7 builders decreased their use. Furthermore, survey results indicate that western red cedar siding use has been declining in the lower- end housing market while increasing in the upper end. Combined, the market share and usage pattern results suggest that western red cedar siding is beginning to hit an upswing. Unfortunately, the instability of the Puget Sound siding market has played havoc with estimating reliable market share trends. It is very likely that at least one or two years will have to pass before market shares for the various siding materials lose their volatility. Survey results from the past two years clearly reveal that builder preferences for western red cedar on upper end homes have increased, while preferences for western red cedar siding on lower-end homes have declined. In other words, as the price of a new home increases, builders increasingly display a preference for western red cedar siding. These results are one indication that the WRCLA promotional strategy has been effective in changing builder perceptions. The WRCLA promotional campaign was also successful in the level of exposure that it achieved among Puget Sound builders. Nearly 50% of all Puget Sound builders recalled having seen at least three WRCLA promotional advertisements over the past year. Furthermore, the survey results indicated that the purchasing decisions of approximately 12.5% of all builders in the Puget Sound market were influenced by the WRCLA promotional advertisements. This percentage of purchasing decision influence is very high for an industrial product; past market research for other industrial products indicates that advertising generally influences only 3 to 5% of all purchasing decisions within a given market. Approximately 9% of all builders indicated that they perceived that western red cedar siding had decreased in overall quality over the time period covering the two surveys. Over 14% of all builders, however, indicated that they perceived an increase in overall western red cedar siding quality over the same time period; the remaining 77% of builders indicated that they perceived no change in western red cedar quality. These numbers are even more encouraging when the data is disaggregated and applied only to builders who have used western red cedar siding over the past two survey periods. Nearly 65% of actual users of western red cedar siding perceived that the overall quality of western red cedar siding material had increased and 12% perceived a decrease. In sum, the results of the survey presented in this report suggest that the WRCLA promotional strategy was effective. Overall builder perceptions of western red cedar residential siding have improved significantly in less than a one-year time span, especially in the higher-end home market. These results bode well for manufacturers, wholesalers, and retailers of western red cedar siding since higher margins are typically achieved in the higher-end home market. It is expected that the improving builder perceptions of cedar siding will begin to pay off as high-end builders start to shift to a product that possesses an increasingly high-status image and reliable quality. ![]()
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Authors: Rosemarie Braden, Hal Fossum, Ivan Eastin, John Dirks and Eini LowellExecutive Summary Interest in manufacturing clusters has increased since the recognition that inter-firm cooperation has helped develop internationally competitive industries in several European countries. Manufacturing clusters, defined as groups of firms located within a defined geographic region that have developed cooperative links with each other, have been established successfully in industries ranging from textiles to robotics. Manufacturing clusters can provide a region with the basis for economic diversification and competitive advantage even when that region at first glance might not appear competitive in a specific industry. The emergence of manufacturing clusters is not restricted to urban areas or technology-based industries. In fact, manufacturing clusters can provide a substantially greater contribution to the economic development of rural areas than urban areas. Several rural value-added wood products manufacturing clusters have been identified in the Pacific Northwest, including the log home industry in western Montana, to moulding and millwork industry in Bend, Oregon, and the wooden boat building industry in Port Townsend on the Olympic Peninsula of Washington. These examples provide evidence that manufacturing clusters represent an opportunity to promote the economic development of rural areas in the Pacific Northwest. Rural locales, many of which are characterized by a high dependence on timber resources, have perhaps suffered the greatest economic hardship as a result of public policies that have slashed the volume of timber harvested from state and forests. To date there appears to be little empirical research that assesses the emergence and development of value-added wood products manufacturing clusters. This project was designed to develop insights into factors that help clusters form and survive (i.e., geographic location, proximity to raw materials, availability of other resources, industry specialization, firm-specific competencies, and the availability of support services). The specific objectives of this project were to: identify clusters of value-added wood products manufacturers in the Pacific Northwest, develop a spatial map of these clusters based on their geographic location, identify factors that contribute to cluster development, determine how specific factors impact the development of a cluster, identify value-added services (i.e., marketing expertise, product design, or manufacturing technology) that support to manufacturing clusters, and provide a set of suggestions to assist local economic development groups to identify local clusters and assess their competitive advantages. To better understand how rural manufacturing clusters originate and survive economic cycles and resource supply changes, three wood-based manufacturing clusters in three rural communities were examined. Local business people and industry experts were interviewed in order to assess: how each cluster originated, why each cluster was located in a particular location, what role government and industry associations played in the development of the cluster, and how the cluster survives in light of market fluctuations and supply changes. Opinions regarding interaction between firms and associations, the role of government, and recipes for individual firm success varied widely; however, many common elements were repeated during interviews. While the manufacturing clusters presented in this report became established under different circumstances, each encountered common factors that were crucial to their success. An important point to consider is that these clusters did not develop overnight. Each existed for several years with a few small businesses earning moderate profits. As more individuals moved to the area, a cluster of businesses began to form. With the exception of the moulding and millwork industry in Bend, Oregon, the communities examined did not systematically set out to create an industry and the company founders do not appear to have been motivated by the prospect of making large profits. The first common element observed between clusters was proximity and easy access to regional markets. The moulding and millwork industry in Bend, Oregon, originated as a group of mills located near railroad lines. The Bitterroot Valley in western Montana is not only located along interstate highways, but also in a region where log homes are a fashionable form of housing. Finally, Port Townsend’s maritime industry capitalized on its proximity to Seattle, an established boating community, and the boating traffic that cruises among the San Juan Islands and the Straits of Juan de Fuca. A second common element in firms’ decisions to locate in their respective locations was the plentiful supply of raw materials and potential customers. While respondents commented that resources were plentiful when their respective clusters emerged, they all emphasized that there is now a shortage of available timber. Firms are forced to obtain materials from other regions or to develop other technologies for using the available resource. For example, the moulding and millwork industry incorporates medium density fiberboard, finger-jointed lumber, and veneer-overlaid lumber into the products it produces. Respondents also reported spending more time locating suppliers that can supply them with raw materials. Third, skilled labor has been critical to the formation and survival of manufacturing clusters. In the cases of Bend and the Bitterroot Valley, skilled workers already resided in the area, employed either as loggers or sawmill workers. Port Townsend, a long-time port, had a mix of individuals employed in both the maritime and timber industries. The concentrated group of firms and the community’s internationally renowned boat building school continue to draw of skilled workers to the area, which in turn helps the cluster thrive. Each cluster originated with a few firms led by energetic owners. While, these individuals did not set out to create a cluster of similar businesses, they did recognize the advantages of having related companies locate in the same area. They were also generally civic minded and open to working with other firms, either through joint marketing, sourcing materials from neighboring firms, or referring customers to other businesses in the area. For example, the Port Townsend and the Bitterroot Valley clusters started with a few individuals who enjoyed living in their respective area and were looking for a way to earn a living. Because these communities were small, people knew each other socially and in the business arena, and recognized that it was in their best interest to work together. In Port Townsend, business owners worked together to gain city government support and draw more businesses and workers to the area. In the Bitterroot Valley, cooperation took the form of purchasing specially milled logs from neighboring firms and exchanging workers in times of boom and bust among firms. The business environment in all three clusters extends beyond depending upon each other for survival. While businesses are still in competition, it was reported that there is an open exchange of advice, referrals between businesses, and at times, equipment is even loaned. As more companies move to the area, the cluster benefits from its reputation as a regional center for a specific product or service. Another key component in the emergence of these clusters appears to be low levels of competition initially. Each cluster was the first in their respective region to provide their particular good or service. An important point to note is that as the cluster grows, new businesses identify unique niches with either a slightly different product or an entirely new product that complements existing products. While there is some overlap in product offering between firms, it appears that business owners attempt to compete with each other by offering unique products and services. For example, the major log home builders in the Bitterroot Valley specialize in different construction style or log type. For example, one company specializes in large-diameter logs which no other firm in the area uses and concentrates on building high-end log homes or lodges. Another company has developed a planer that enables its workers to process long logs. Other businesses in the area specialize in hand-hewn logs. Respondents in Port Townsend and Bend also indicate that innovation is vital to the success of their clusters. Port Townsend business owners report that spin-off ventures by former employees are not uncommon. It is rare that these new firms are direct competitors of the original company. Rather, the new entrepreneur often identifies a product or service that does not exist. Similarly, innovation in the millwork industry maintain a comparative advantage by developing innovative products such as finger-jointed door jambs that utilize lumber manufactured from small diameter logs. Each cluster’s relatively small size and relationships within the local business community help it adapt to industry changes. Employees working in local businesses are more adept at identifying an industry need and creating a business to fill that need. Spin-off ventures appear to be important to a cluster’s ability to adapt to market fluctuations and regulatory changes. Owners of fledgling businesses in each of these clusters have identified gaps or shortcomings in the industry and work to supply the industry with missing products or services. For example, Edensaw Woods in Port Townsend supplies regional boat builders and woodworkers with hard-to-find, high-quality or exotic wood and veneer. As changes in fishing regulations required commercial fishermen to fish off-shore, other companies that build refrigeration systems or lengthen boats emerged. Similarly, there are several small businesses located in the Bitterroot Valley that specialize in supplying complementary products to the log home industry, such as furniture and cabinets. Unlike the boat building and log home clusters, the millwork industry was developed and nurtured by government. Local government developed the business infrastructure and promoted the millwork industry. While the boat building industry in the Port Townsend cluster originated independently of local government assistance, it now receives below market-value rental space at the Port, community education programs in marine trades, and the town’s Economic Development Council offers business advice and works to draw visitors to the area. The log home industry appears to be the most self-sufficient of the clusters with member firms reporting little government assistance. While government may have helped the clusters in some respects, respondents were quick to point out instances of government interference which they feel restricts their operations. The boat building industry maintains an ongoing debate with local government over issues such as pollution cleanup and abatement costs, potential funding for a large vessel crane, and what industry views as city government’s promotion of the tourist industry at the expense of the maritime trade. Business owners both in Port Townsend and Montana reported that the costs imposed by the state for workman’s compensation are excessively high and represent an industry impediment. Respondents in all industries note that federal and state timber harvest restrictions adversely impact their competitiveness. Industry associations, on the other hand, tend to be viewed more positively, possibly because of the voluntary nature of membership. Associations help establish and maintain contacts within the industry and lobby for the industries at state and federal levels. The Marine Trades Association organizes an annual boat show and makes booths available only to members. Other associations have helped set industry standards and promote their members' products both nationally and internationally. Cluster members also appear to benefit from nonmembership organizations. Port Townsend’s business owners benefit from the independently-run, non-profit Wooden Boat Foundation, which promotes the area’s industry through an annual Wooden Boat Festival. Members of Montana’s log home industry reported that they receive free advertising from log home magazines that often feature their homes in their articles. The results of this exploratory project indicate that manufacturing clusters have been important to the economic development of rural communities in the PNW. Further, a range of factors that have helped in the development of local manufacturing clusters were identified and discussed. This information should prove helpful in providing economic development groups in rural timber-dependent communities with a framework for identifying and assessing the potential of promoting the development of manufacturing clusters in other rural areas. In addition, this research should be useful in helping public policymakers interested in promoting the economic development of rural communities adversely impacted by timber harvest restricted by providing guidance in identifying communities where economic and development assistance have the greatest chance of supporting the development of a competitive industry cluster. ![]()
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Authors: Steven R. Shook, William R. Turner and Ivan L. EastinExecutive Summary A sizable literature concerned with technological substitution modeling exists within the domain of forest products. These models have generally been used to develop market share forecasts for various forest products and their substitutes based on relative product prices. Substitution models usually assume that the potential market size is known and that products can freely substitute for one another. A small but growing literature concerned with the diffusion of new innovations also exists within the domain of forest products. This diffusion literature typically focuses on factors affecting consumer acceptance for product innovations and forecasting the level of demand growth without constraining the potential market size. In this paper, we examine the dynamic sales behavior of three and four successive generations of structural wood panel products using varying forms of a multigeneration diffusion model. The multigeneration diffusion model introduced here, which encompasses the elements of diffusion and substitution modeling, assumes that a new structural wood panel product will diffuse through a population of potential consumers over time and that market share competition will be introduced with successive generations of structural wood panels. Estimation results indicate that market share competition between various structural wood panel products are differentially affected by substitution and diffusion effects. The model results reveal that the aggregate market share growth and decline for southern pine plywood can be attributed mostly to substitution effects (i.e., substitution between western and southern pine plywood), while the aggregate market share growth of oriented strandboard can be attributed to diffusion effects. The model results also suggest that structural wood panel products act as complements rather than as substitutes to one another. Caution should be used, however, in interpreting these results since we evaluate the structural wood panel market in the aggregate rather than evaluating specific end-use markets. Nevertheless, market aggregate complementarity has been found in other research examining the market share competition between structural wood panel products. In the near-term, the multigeneration diffusion model suggests that the southern pine plywood market has reached its peak production level over the past five years, with production forecast to decline slowly but steadily over the next decade. Western plywood is forecast to continue its downward production and market share trand. Oriented strandboard is expected to remain entrenched in a growth phase over the next five to ten years. We explore several managerial implications of the model results and suggest alternative multigeneration diffusion models that could be developed for structural wood panel products. Keywords: adoption, diffusion, substitution, market share competition, forecasting, technological progress, industry evolution, product life cycle, plywood, oriented strandboard, waferboard ![]()
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Authors: Ivan L. Eastin and Anne RahikainenExecutive Summary Introduction The Japanese market for prefabricated homes and wooden building materials has tremendous potential for US firms, particularly those located in the Pacific Northwest. For example, exports of prefabricated housing to Japan increased by 51% from 1994 to 1995, with 81% of these exports originating from the Pacific Northwest. Despite this success, Japan is a relatively new market to most US firms and more information is required before US firms can fully take advantage of the opportunities that exist. This research project was developed to provide a broader understanding of the Japanese market for prefabricated homes and wooden building materials, and to identify the problems that exporters must overcome in order to compete effectively in Japan. The objectives of this project were: (a) to perform a competitive assessment of the Japanese market for imported prefabricated housing and wooden building materials, (b) to identify those marketing strategies that are being employed by US manufacturers to compete successfully in Japan, and (c) to identify the tariff and non-tariff barriers that are perceived to adversely impact the competitiveness of US firms in Japan. The results of this research study were derived from a census of prefabricated housing manufacturers, export consolidators, and Japanese trading companies currently exporting their products to the Japanese market. The final sample frame included sixty-six firms: fifty-one in Washington and fifteen in Oregon. Sixteen of the companies manufactured prefabricated housing, while thirty-four were export consolidators, and sixteen were subsidiaries of Japanese trading companies. The final response rate for the survey was 70%, with responses being received from 75% of the prefabricated housing manufacturers, and 79% of the export consolidators, but just 47% of the Japanese trading companies. Results Prefabricated housing exporters in Washington and Oregon can be characterized as being small to medium-sized firms with annual sales of less than $10 million and employing less than 25 employees. Most of the firms have been exporting to Japan for a relatively short time, usually less than five years. However, prefabricated housing manufacturers appear to be highly involved in the Japanese market, as indicated by the fact that approximately half of the respondents generated more than 50% of their annual sales revenue from exporting to Japan. The promotional strategies used by the survey respondents were fairly limited, a fact which might be attributed to the small size of the respondents and their limited financial resources. A majority of the respondents indicated that they relied on product brochures, word-of-mouth referrals, and trade shows to promote their products. Promotional strategies that required a higher commitment of financial resources, such as establishing a model home or product showroom in Japan, were employed less frequently than the other strategies. In general, the distribution channels for wood products exports in Japan are complex, consisting of several layers of intermediaries. However, the results of this research indicate that many of the prefabricated housing manufacturers and export consolidators have been successful in bypassing the traditional Japanese distribution channels. Approximately half of the respondents indicated that their primary channel of distribution involves selling their products directly to Japanese home builders. This strategy provides these firms with substantial cost savings, helping to increase the competitiveness of US prefabricated homes and building materials in the Japanese market. Most respondents considered the establishment of a strong personal relationship with their Japanese customers as one of the most important factors for succeeding in the Japanese market. This factor was rated as being more important than any other single marketing factor by each of the three groups of respondents included in the study. Other marketing factors that were perceived to be important included providing after-sales service, short delivery times, and technical assistance to the customer. Product adaptation was also considered to be an important factor for succeeding in Japan. In fact, all of the prefabricated housing manufacturers and 88% of the export consolidators reported that they modify their product to some extent for their Japanese customers. The most common types of product adaptation included changing the design of the home to include a tatami room and/or a genkan (Japanese-style entryway), utilizing higher quality materials in those products exported to Japan, and translating product brochures, installation instructions, and technical information into Japanese. JAS and JIS product certification of building materials and the Japanese building code were perceived to be non-tariff trade barriers that had a substantial negative impact on the competitiveness of US prefabricated houses and building materials in Japan. Two other factors, the difference between US/Japan construction technology and inefficient transfer of US construction technology, were also perceived to be non-tariff barriers that restricted the competitiveness of US firms in Japan. It is interesting to note that in many cases the US subsidiaries of Japanese trading companies perceived the various trade barriers as having a greater impact on competitiveness than did the US firms. This was particularly true with respect to the complexity of the distribution channels in Japan and the import tariffs for prefabricated houses and building materials. The vast majority of the prefabricated housing units exported from the US to Japan are manufactured using 2x4 construction technology. This poses a problem given the fact that most of the survey respondents reported that Japanese architects, contractors, and carpenters do not possess a strong understanding of 2x4 technology. In addition, many respondents stressed the fact that Japanese residential contractors seldom utilize the construction management techniques that are widely used in the US residential construction industry. As a result, construction costs are more than twice as high in Japan as in the US. But perhaps more important from a long-term strategic market development perspective is the fact that this basic lack of understanding regarding 2x4 construction technology can adversely impact the quality of 2x4 homes built in Japan and reduce their long-term performance. Either of these factors could potentially erode the competitive position of US prefabricated housing and wooden building materials in the event that substandard products and/or product performance adversely affect Japanese consumer perception of US products. Not surprisingly, survey respondents indicated that the efficient transfer of 2x4 construction technology was an important component of their marketing mix, with approximately 85% of the respondents utilizing some type of strategy to address the issue of technology transfer. The three most widely employed types of technical assistance were: providing customers with installation instructions and/or product brochures, providing customers with seminars and/or on-site technical training, and sending over carpenters and/or construction site supervisors to ensure the quality of the construction work. Unfortunately, current Japanese immigration law makes it very difficult for US contractors and carpenters to obtain the work visas that are required to work in Japan. When asked to indicate what strategy would be most effective in transferring 2x4 construction technology to Japan, almost half of the respondents indicated that they favored providing training for Japanese construction professionals. The results of this study indicate that prefabricated housing manufacturers and export consolidators in the Pacific Northwest are strategically poised to take advantage of current housing policies in Japan that promote imported housing and building materials. Despite the fact that many of the participants in these industries are relatively new to the Japanese market, a large number are already experiencing success. In particular, these firms have demonstrated the ability to take advantage of the new competitive environment in Japan by developing strong business relationships with their customers and partners and developing distribution channels that bypass the traditional extended and costly distribution system. Given the strengthening Japanese economy, the opportunities for imported housing and building materials in Japan appear to be bright. ![]()
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Authors: Ekaterina Gataulina and Thomas R. WaggenerExecutive Summary Following implementation of Russian Federation political and economic reforms, the Russian Far East (RFE) and its forests became a focal point of international attention. The Forest Industry Complex (FIC) can be considered as one of the most interesting sectors of the region due to its importance for business, international trade, tourism and the environment. This study reviews the current state of the FIC in the RFE region, recent trends of development, and the outlook for the near future. Economic Development in the Russian Far East
Tundra grows further south, forming a thin belt in Yakutia, covering most of Chukotka and northern Kamchatka, portions of Magadanskaya Oblast and northern Khabarovskiy Kray. Taiga, the largest mass of boreal forest, forms the third zone that is the heart of the RFE. Further south, this forest gradually becomes more complex, although tundra can still be found along the mountain ranges. The forests of this zone provide a main base for the FIC. Korean-pine-broad-leaved forests grow below the taiga zone in Primorskiy Kray and southern Khabarovskiy Kray. The conifer broad-leaved forests in these regions are called Ussuri taiga. This forest supports the majority of the RFE’s endangered species. Ussuri taiga also is a productive source of timber.
Group II includes forests in areas with a high density of population, a developed transport network, and both protective and limited-use functions (1 % of the Forest Fund). Principal cutting (commercial harvests) should be carried out in a way to preserve the nature-conservancy functions of these forests. Group III forests (85.8% of Forest Fund) are forests allocated primarily for commercial exploitation. They are specified by legislation as developed and to-be-developed forests. The forest resource base which is potentially available for logging and for support of the FIC is mainly the group III forests.
been carried out on a limited, enterprise basis and has largely depended upon funding by foreign capital investments.
intermediary firms and associations have tried to unite small exporters in order to maintain the previously prevailing price levels. About 20% of timber is exported directly by independent exporters, mainly exports of logs by truck and railroad to China.
changed in significant ways over the last three forest inventory periods. However, conditions for the economic utilization of the resources as well as introduction of sustainable forest management and environmental regulations will be critical to the future. This group of factors includes overall land use, classification of forest resources for non-timber and protective uses, conditions of forest resources and the economic accessibility, forest management (including reforestation), forest-linked environmental policies and requirements.
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Authors: Thomas R. Waggener, Charles A. Backman and Ekaterina GataulinaSummary Both China and Russia are and have gone through unprecedented change as both of their societies adjust away from the centrally planned approach and begin to adopt a mixed system incorporating facets characteristic of both private and public sectors. However, while Russia’s economy has collapsed following the demise of the centrally planned system, GDP falling nearly 40 percent between 1990 and 1994 (25 percent between 1990 and 1993), China’s economy has grown with GDP rising by 55 percent (40 percent by 1993). While the activity of the forest sector in Russia has fallen more steeply to a level of only 45 percent that existing in 1990 (63 percent 1993), being somewhat lower in Siberia and Russian Far East, China’s forest sector has expanded though it is facing constraints imposed by the forest resource (27 percent between 1990 and 1993). Ongoing growth linked to evolution of the Chinese system will translate into higher demand for forest products than can be met in the short to medium term by domestic sources. The looming shortages present emerging opportunities for regions rich in forest resources which must seek export opportunities abroad. Nowhere does this opportunity beckon more than in the relatively less developed forests of Siberia and the Far East. By the year 2025 under a low growth assumption, China could face a deficit in industrial wood of some 200 million cubic meters annually, equal to slightly more than two times the domestic production of industrial roundwood in 1992. Outside of Siberia and the Russian Far East, very few regions have the ability to service this looming deficit. Furthermore, even the Russian region will seemingly be able to meet only up one-half of the short fall and only under conditions which promote capital investment in the Russian forest sector and development of the forest resource which is available subject to development of the infrastructure. While on the surface conditions seem to be emerging which will favor increased trade activity between Russia and China in forest products beyond current levels of nearly one million cubic meters annually, much uncertainty remains regarding the longer-term outcome of reform and restructuring in both countries. Future China trade in forest products with Russia will depend on many factors on both sides – many of which are political in nature of speculative regarding future course of economic and market reforms. There is no doubt that in the near term China will experience increasing demand for all forest products and that the domestic supply will be insufficient to satisfy consumption a prevailing prices. Increased trade, including trade with Russia, is one of the several policy tools available to China to deal with this reality. Whether this will be selected as a major or significant element of overall timber strategies remains to be seen. Russia, the potential trading partner, will almost certainly seek nuw and expanded markets for timber from Eastern Russia (East Siberia and the Far East regions). The future status of economic reform and transition to markets will dictate outcomes with respect to Russian forests and potential for trade. International markets will grow in importance as traditional markets in European Russia and former Soviet Republics become increasingly economically inaccessible. What is certain, however, that the People’s Republic of China will increasingly play a major role in Asia and the Pacific Rim forestry, both as a producer and consumer market. Likewise, it is certain that Russia, particularly Siberia and the Far East, will impact the overall equation for Forest products trade in the Pacific region, with important linkages to China. It is certain that China will need to compete with other Pacific Rim consumer countries in order to obtain timber. It is unlikely that Russia will offer substantial concessions I order to sell to China. Barter trade may persist (currently denominated in Swiss francs) but will be more difficult given competition from hard currency buyers for the available timber from Russia. The willingness to pay international prices for specific species and quality of timber will largely determine the competitiveness of China. Japan, as the major log importer in the Pacific Tim, is increasing seeking timber supplies worldwide, including from the Russian Far East, to offset declines from traditional sources including the West Coast of North America. It is also certain that Russia will seek expanded international market outlets for timber and forest products. The level and mix of timber for export will in turn depend critically on development strategies for the forests in East Siberia and the Far East. The lack of capital for investment I new and modern capacity and technology will slow the development of competitive processing, largely indicating future trade will continue to emphasize unprocessed roundwood in the near term. The near term outlook for unprocessed roundwood exports from Russia is not materially affected by the import tariff structure imposed by China, though there appear to be inconsistencies in how tariffs are applied to Russia. China has historically had preferential tariff structures favoring the import of unprocessed timber with increasingly higher tariff rates for semi-processed and finished products, thus favoring domestic manufacture of the wood raw resource. Although ‘special arrangements’ can often prevail for trade with Russia, importers of Russian timber in the Northeast of China complain that they must pay full duties on wood imported uven under barter arrangements or from labor-export agreements. Government officials indicated that this could be ‘resolved’ in the case of trade with Russia, although no clear policy appears to exist dealing with such issues. China’s future policies with regard to timber substitution and regulations to enforce limitations on timber in many end uses (including construction) will be important with regard to meeting pressures for increased consumption as well as the future role of trade and import of timber from Russia or elsewhere. The role of finance and credit arrangements will perhaps be most significant for China’s importers. Russian enterprises have virtually no working capital and little possibility of credit. In many cases, supplies must be paid for in advance, in some cases including timber. Production is impossible without adequate credit or advance payment from buyers of timber products. Given the financial situation of many forest products enterprises with China, it is unlikely that advance payment for imported timber can be feasible any time soon. Greater roles for banking institutions, including letters of credit and foreign exchange accounts will be required if timber trade with Russia is to expand. Improved infrastructure, including rail, port and other transportation services for Russian trade remain critical, and although agreements in principle have been announced for cooperation on infrastructure development much remains to be accomplished. From the perspective of China, timber from Russia has both advantages and disadvantages. Advantages for trade with Russia include the possibility of ‘trade deals’ as both countries seek to minimize the use of scarce foreign exchange in trade. Border trade, including barter trade, expanded between China and Russia from 1990-93 following some 20 years of closed borders. Various agreements were negotiated for the import of goods from Russia by China, including timber. In exchange China offered consumer goods, textiles, electronic goods, and a variety of other light industrial and agricultural products. Border trade declined during 1993-95, due to many perceived problems on both sides. The changing nature of policies and regulations in both countries contributed to charges of “difficulty” in reaching agreements that could be honored and enforced. In 1993, China also tightened credit in its efforts to control inflation, resulting in a drop in demand for imported products including timber. Tax regulations, trade policies including quotas and licenses, and foreign exchange restrictions also impacted trade. The ‘political situation’ in Russia was frequently mentioned as causing many difficulties for Chinese importers. This was noted particularly with regard to ‘labor contracts’ whereby China has sought to use Chinese labor to supplement Russian workers in exchange for both wages and timber which can be brought back to China. Closeness to Russian timber is a considerable advantage for China importers. Access by rail or water is relatively low cost considering alternative timber supply sources, including North America. Trade with Russia also has the advantage of species familiarity. The common forests of NE China and the Russian Far East reinforce the dominant role of China’s NE as a supplier of timber throughout China. Enterprises and users of timber are generally quite familiar with the attributes and characteristics of the Russian timbers and can easily substitute supply sources. Siberian larch, Korean (red) pine, spruce, and “white pines” (whitewoods) are all acceptable I the China market. Larch, a relatively abundant species in Easter Russia, is commonly used for railroad ties, construction, vehicle floor boards, etc. and can substitute for Douglas-fir and hemlock in these and other lower-valued markets such as packaging. Internal river ports and coastal shipping compliment rail connections directly linking China and Russian or passing through Mongolia. Improved infrastructures in the Far East and in China ease the problems of transportation and distribution. Although rail connections still require changing of rail car wheels, plans have been put forward to eliminate this difficulty in the near future. Coastal shipments (up to 40 percent of Russian timber imports) are by comparatively small ships, handling about 5,000 cubic meters. Most China buyers do not need (or cannot finance) larger shipload purchases, hence favor smaller and faster transport by smaller vessels. Shipments to Shanghai, Jiangsu, and Shejiang have increased as wholesale markets have evolved, allowing brokerage of relatively small volumes to individual enterprises and other purchasers. While having some advantages over competitors brought on by proximity and familiarity with species, China buyers and processing enterprises prefer North American timber to Russian timber. While technical characteristics are noted (for example strength), log size is the most common difference identified as leading to this preference. Russian timber is generally smaller diameter, normally less than 25-30 cm, and often 12-16 cm. China prefers larger timber, preferable over 30 cm diameter at a minimum. China imports also complain that Russian timber is ‘old’, having spent considerable time in storage or transit following harvesting, resulting in considerable drying and cracking, thus degrading product yields. China importers also feel that Russia trade is not ‘dependable’ in terms of quality per orders, timely delivery, and other details of trade agreements. Contract disputes are difficult to resolve, as are questions of financing and credit. Quality of timber had declined, according to China importers, and comparisons were made to radiata pine from New Zealand which was considered much better and quite suitable for pulping. ![]()
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Authors: Charles A. Backman and Thomas R. WaggenerExecutive Summary Forestry Developments in Russia
Recent Industry Performance
International Trade in Forest Products
Forest Resources - Area and Volume
Privatization
Development Outlook for Eastern Russia’s Trade
Economic Implications- Near Term Projections
Projected Domestic Consumption and Trade
Conclusions
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Authors: Steven R. Shook and Ivan L. EastinExecutive Summary The market for residential decking and siding products in North America has become increasingly competitive over the past two decades. Given an increasing assortment of substitute materials, coupled with aggressive promotional and product-service campaigns of competitors, the market share for western red cedar residential decking and siding products has become stagnant. To determine those factors that influence the selection and utilization of western red cedar as a residential decking and siding material relative to substitute products, the Western Red Cedar Lumber Association (WRCLA) commissioned the Center for International Trade in Forest Products (CINTRAFOR) to conduct an in-depth analysis of the market for western red cedar residential decking and siding products in North America. This study brings together all available secondary sources of information known to exist for these two classes of products. Furthermore, this study reports the results of a mail survey regarding the Puget Sound residential siding market. The mail survey provides the WRCLA with baseline data on a potential test market. Residential Decking Market Treated lumber, western red cedar, redwood, and a wood-polymer composite (Trex™) manufactured by Mobil Chemical Company clearly dominate the residential decking market. Extremely aggressive price competition, modest product differentiation, economies of scale, and well-developed marketing and distribution systems characterize the residential decking industry. All four major residential decking materials are essentially marketed and distributed in a similar fashion. The residential decking market in the United States is extremely large. Government statistics reveal that over 85 percent of all single family homes include either a deck or deck-like structure (e.g., porch, balcony). Annually, over 4 percent of all households either add a deck or replace an existing deck, leading to more than 3.5 million new decks being constructed onto existing single family structures. Deck construction activity should increase substantially in the deck replacement market given that economic conditions are anticipated to improve or remain stable. Unfortunately, no accurate market share estimates exist for the various decking materials available on the market. One source estimates that treated lumber commands 82.5 percent of the residential decking market on a board foot basis, with redwood at 11.5 percent, western red cedar at 3.2 percent, and other deck materials at 2.8 percent. This same source, however, also estimates in a different study that western red cedar controls 23.3 percent of the residential decking market. Regardless of the estimates, it can be concluded from this source that the market share of western red cedar decking materials has been eroded by treated lumber and redwood substitutes, especially in regions of the US where western red cedar materials once dominated the market (e.g., US West). Furthermore, the western red cedar market share is likely to continue to decline as Mobil Chemical Company increases promotional campaigns for its Trex™ wood fiber-plastic composite decking material. The relative difference between the various products in material, installation, and maintenance costs has become the primary basis for product differentiation in the residential decking market. After cost considerations, the choice of decking material individuals utilize when constructing a deck is mostly dependent on product quality factors (e.g., structural properties, durability, susceptibility to wear) and manufacturer and retailer service factors (e.g., product availability, price incentives, moisture content). Unlike the residential siding market, image, beauty, and social status factors are not seen as fundamental determinants in consumer choice for decking materials. Western red cedar does not “sell itself” on its image and beauty characteristics alone since consumers generally perceive all residential decking materials to be about the same (i.e., commodity products). If the past holds true, marketing efforts designed to promote only image and beauty characteristics of western red cedar residential decks will likely have a limited impact on changing consumer perceptions. Firms producing residential decking materials can implement several strategies in order to create product differentiation for materials that consumers perceive as commodities. For instance, western red cedar producers could physically differentiate their decking products by making them easier to use, improving product quality, grade consistency, and durability characteristics, providing additional accessories, or providing additional elements of service (e.g., improved packaging, installation instructions). Western red cedar producers could also differentiate their product through properly designed marketing efforts. Changing price, providing discounts, offering guarantees or warranties, improving service levels, changing advertising strategy, devising promotions, and changing the image of the product are several market-oriented strategies that could be utilized to increase sales and market share of western red cedar decking materials. The treated lumber industry has successfully used a branding strategy to create consumer awareness and knowledge of their products. This branding strategy transformed the image of a product once viewed as substandard to that of a naturally decay-resistant product. The result of the treated lumber industry’s branding strategy has been a decline in the use of western red cedar as a residential decking material. The lack of a well-formulated, market-oriented strategy in the western red cedar residential decking industry will likely lead to further decline. Residential Siding Market Fifteen different materials have a considerable impact in the residential siding market. Vinyl, structural panels (i.e., OSB and plywood), brick, and hardboard, however, are the dominant residential siding materials installed. Aggressive price competition, low product differentiation despite significant contrasts between the physical attributes of the products available, economies of scale, well-developed marketing and distribution systems, and an intensification of competition among manufacturers and distributors characterize the residential siding industry. Demand for residential siding materials is a function of two factors; namely, the level of new residential home construction starts and the level of replacement, repair, remodeling, and addition activity taking place on existing residential housing units. While residential siding demand increases and declines with changes in the cycle of residential home building, it is relatively stable compared to many other building products. This stability is an outcome of the size of the replacement and remodeling markets, which have accounted for anywhere from 25 to 33 percent of all residential siding use (square foot basis) during the past decade. Despite the replacement and remodeling markets’ impressive and growing size, vinyl siding firms have been the only residential siding material manufacturers to target this market successfully. According to market share estimates prepared exclusively for this study, vinyl siding products control 36.7 percent of the residential siding market. Trailing vinyl siding in market share are structural panels (27.9 percent), brick (17.2 percent), hardboard (13.2 percent), western red cedar (2.5 percent), and aluminum (2.4 percent). In the past eight years, the total residential siding market has grown at an average annual rate of 0.46 percent. Vinyl siding use has grown at an average annual rate of 10.25 percent. The only other residential siding material to experience growth in this same period has been western red cedar, which has grown at an average annual rate of 3.52 percent. The market share growth of vinyl siding has come at great expense to the producers of aluminum siding, as well as to hardboard and structural panel siding producers. Relative differences in material and installation costs typically establish the competitive relationships between the materials used in the residential siding market. Unlike decking materials, however, products in the residential siding market, especially brick and western red cedar, are differentiated to a much greater degree by the image that they project. Past research has shown that consumers perceive vinyl, aluminum, hardboard, and plywood residential siding materials to be close substitutes for one another. Therefore, these four residential siding materials compete primarily on price and installation cost. Relative to competing residential siding materials, consumers tend to see western red cedar as being expensive and time-consuming to install. Western red cedar residential siding material is also seen as possessing price instability and poor grade consistency. However, consumers believe that western red cedar has a tremendous curb appeal and a high status image, being nearly equal to that of brick. Unfortunately, the image and beauty characteristics of western red cedar residential siding are neutralized by consumer perception of western red cedar’s high cost. It appears that the competitive position of western red cedar is not optimal relative to other residential siding materials. Promotional literature for western red cedar siding stresses heavily its quality image, while other important characteristics such as price and durability tend to be mentioned infrequently. While the actual cost of installation for western red cedar siding is greater than that of competing residential siding materials, there is speculation that most consumers perceive the cost as being substantially more than it actually is. Survey of Puget Sound Residential Siding Market The demand for residential siding in the Puget Sound market should increase over 1994 and 1995 levels since, according to survey respondents, there is an expectation for new home construction to increase substantially. Survey results clearly reveal that the 8.9 percent market share for western red cedar in the Puget Sound residential siding market has declined over the past five years. Unfortunately, this study cannot determine at what rate the market share has declined or what factor(s) triggered the decline (e.g., higher prices, lower quality of material, lack of product availability). The following four residential siding materials have a significant presence in the Puget Sound market: OSB, hardboard, plywood, and western red cedar. Builders indicate that their use of wood fiber-cement residential siding has increased substantially over the past five years. This may be the result of the increased promotional effort on the part of a major producer of wood fiber-cement siding (Hardi Plank) in the US West. The Puget Sound market represents a disproportionately large share of the national market for OSB residential siding. Two factors may be working either independently or together in creating this disproportionate market. First, OSB residential siding manufacturers (namely, Louisiana-Pacific) may be specifically targeting the Puget Sound market through promotional efforts due to distribution advantages associated with the market and its port access. Second, builders may simply have a preference for OSB residential siding due to its ease of installation and their preference for a material that has the “curb appearance” of real wood. While installation of western red cedar siding occurs more often as new home prices increased, the effect was found to be not significant. In fact, installation of western red cedar siding occurs in nearly equal proportions (square foot basis) on new homes across all price ranges. This suggests that western red cedar is being accepted more readily as a siding material for new lower-end-priced homes. If this is the case, then builder perceptions of western red cedar’s high status/quality image and beautiful appearance may be eroding. Analysis of the survey data reveals that western red cedar siding’s very low rating in product consistency and uniformity, as well as its low rating along the easy/low cost maintenance attribute, is disturbing. However, it offers western red cedar siding manufacturers, wholesalers, and retailers considerable opportunity, since alterations in these perceptions can be made with relative ease with changes in manufacturing methods, quality control practices, and distribution. Western red cedar manufacturers should make a concerted effort to change the quality of their shipped product. In particular, the survey results suggest that manufacturers address issues dealing with product consistency and uniformity. The WRCLA should actively manufacture and promote high-grade western red cedar residential siding products in such a manner that the product consistency and uniformity perceptions of their products are nearly equal among builders to that of brick, hardboard, stucco, and OSB residential siding materials. Improving western red cedar siding’s product consistency and uniformity, or creating a high-grade branded western red cedar residential siding product, will at the same time improve the perception that builders have of western red cedar’s image status and beautiful appearance. As such, an improved, high-end western red cedar residential siding product may warrant a premium price. A promotional effort should be made to address western red cedar siding’s poor perceptual rating on the low cost and easy maintenance attribute. How can the perception of this attribute be improved? First, the material can be prefinished using a high grade stain or primer and a reliable and consistent application process. In addition, the material should be grade-consistent and not placed on the market in green condition. Third, promotional literature addressing long-term maintenance issues should be considered. This literature should accompany every lift of western red cedar sold, and it should also address the proper method of installing western red cedar residential siding. Finally, western red cedar siding manufacturers, wholesalers, and retailers should make a strong attempt to avoid price competition. The results of this study indicate that price competition conflicts with builders’ perception of a residential siding product’s high status/quality image and beautiful appearance attributes. Creating a conflicting image of western red cedar siding has likely decreased its demand among high-end home builders while at the same time increased demand among lower-end home builders. This shift in the market, however, has not been substantial enough for western red cedar siding manufacturers, wholesalers, and retailers to recoup profits that have historically been made in the high-end market. ![]()
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Authors: Guy C. Robertson and Bruce R. LippkeExecutive Summary Harvest Declines and Revenue Growth In spite of sharp declines in harvest volumes in the 1990s, Washington State’s forest products sector continues to generate substantial income for the state and its inhabitants. At approximately 4.1 billion board feet, Washington State’s 1994 timber harvest was 33% lower than the 1965-94 annual average of 6.1 billion board feet and was the lowest level reported during the 1965-94 time period. Total business revenue generated by the state’s wood products sector in 1994 was approximately $9.1 billion (revenues reported in real 1994 dollars). In contrast to the harvest volume, this revenue figure exceeded the 1960-94 annual average of $8.3 billion by 9%. The state’s forest products sector generated, on average, a total of $2,196 revenue per thousand board feet (Mbf) harvested in 1994--the highest figure ever recorded. While this record level is the partial result of sharp increases in real wood product prices due to recent supply constraints, trend analysis shows that growth in revenues per harvest volume prior to 1990 was also relatively robust. While yearly growth for the 1965-94 period was estimated to be 2%, that for the 1965-89 period was estimated at 1.7%. Washington State forest product firms have been successful at garnering increased revenues using fewer raw material inputs. This has been very important in mitigating at least some of the impact of recent harvest declines in the region. Increases in the Real Price of Wood Products The purpose of this report is to identify the primary sources of revenue growth for the Washington State wood products sector. While increases in the real price of wood products has certainly been important in the last few years, they should not be overemphasized in the explanation of long-term revenue growth. Indeed, the trendline for Washington wood products prices (weighted by 1965 product shares) is essentially flat, and, in spite of sharp price increases since 1991, current levels are well below peaks occurring in the late 1970s. Structural change, particularly a shift to greater secondary manufacturing, and increases in product recovery from log inputs are more important in explaining increases in revenue generated per unit volume of harvest. Secondary Manufacturing Total revenue from secondary manufacturing was $2.6 billion in 1994, 142% higher than the 1965 level, with much of the increase occurring in the last ten years. Similarly, secondary manufacturing’s share of total wood product sector revenues increased from 17% to 29% over this same 29-year period. While many secondary manufactured products require clear wood or other high quality characteristics, raw material inputs comprise a relatively smaller proportion of total product value, and the industry is less dependent upon the gross volume of harvest than lumber, paper or log exports. As a result, the strong performance of secondary manufacturing in both domestic and export markets represents a particularly promising adaptation to decreased harvests. Exports Another source from which Washington State producers have been able to generate increasing returns from a declining raw material base is the increase of exports, thus taking advantage of the export premiums associated with the trade in logs, lumber and other wood products. Log exports have constituted a major business since the early 1970s, fluctuating between $1.0 and $2.5 billion since that time. 1994 log exports totaled $1.4 billion, a level slightly higher than the 1965-94 average but significantly less than the $2.5 billion record high in 1979 or the recent peak of $1.7 billion in 1988. Lumber exports were slower to develop and remain less significant than log exports. The record level of $494 million was reached in 1988. Since that time, the percentage decline in lumber exports has exceeded that in log exports, with 1994 lumber export revenues falling to $365 million. Japan remains the most important foreign consumer of Washington State wood products. The Japan wood trade began with a heavy emphasis on high-quality old-growth logs but, more recently, has shifted to mostly second-growth products. Given that recent harvest restrictions fall most heavily upon these higher log grades, it is not surprising that exports of both logs and lumber have been in decline since 1990 in spite of rising prices. In contrast to log and lumber exports, exports of secondary manufactured goods have more than doubled since 1989, and, at $232 million, 1994 revenues for this group of products are rapidly approaching those of lumber exports. Efficiency Gains in Raw Material Conversion Efficiency gains in the conversion of wood raw materials to final products has been another important contributor to Washington wood products manufacturers’ increasing revenues in spite of declining wood inputs. Lumber overrun (a measure of the amount of lumber produced from a given unit of log input) is estimated to have increased approximately 27% since 1960, and the increase in the amount of pulp produced from a unit of log input is estimated to have increased 35% since 1970. Likewise, efficiencies in plywood production (a significantly reduced part of Washington State’s wood product mix) are estimated at 40% since 1960. Taken together, this means that the wood products sector requires approximately one third fewer logs to produce the same volume of output relative to the 1960s. Timber Prices Declining supply, increasing conversion efficiency, and greater export premiums could all be cited as reasons for rising timber prices (or “stumpage prices”). At $441/Mbf, 1994 stumpage prices were over four times the 1965 level and close to three times the 1986 level. The price that log buyers can pay for timber reflects the price they receive for products sold less processing costs--a residual price. Due to the nature of the stumpage price as a residual price and the volatility of wood products markets in general, the high variance in stumpage prices is not surprising. In particular, the sharp increases in stumpage prices since the late 1980s provide ample evidence of increasing supply constraints and conform with general observations about recent market developments. Prior to 1989, the positive trend in the price of timber was more directly related to other value increases in the use of wood. Employment and Productivity Direct employment in the wood products sector peaked at 72 thousand workers in 1978. Since that time employment has declined to 54 thousand workers, with most of this fall occurring during the severe recession in the wood products industries in the early to mid 1980s. Though falling employment is expected from declining harvests and from increased labor productivity, shrinkage in the labor force was significantly less than the fall in harvest. Contrary to expectations given productivity increases, the total number of employees per Mbf of timber harvested shows no discernible trend. The most important factor underlying this is the increase in secondary manufacturing and similar value-added activities which use more labor per unit volume of log input. Total 1994 Washington State employment (direct, indirect and induced) generated by the wood products sector is estimated at 194 thousand employees. Technology gains are usually associated with increased capital intensity (i.e., more machinery per employee) and thereby more purchases of outside goods and services. This will result in increased indirect employment partially offsetting losses in direct employment. Evidence suggests that the ratio of total employment to direct employment in the wood products sector has increased approximately 6% over the last decade. Conclusion Washington State wood products producers have made steady gains over the last three decades in the amount of revenue generated per unit of resource harvested. These gains have helped to mitigate the impacts of recent harvest declines and belie the image of the wood products sector as an overly mature or dying industry. While real price increases in wood products have been partially responsible for revenue increases, especially in the last few years, increases in secondary manufacturing and exports have been more important in the long run. Because secondary manufacturing is both more labor intensive and less reliant upon gross volumes of timber harvest, expansion in this product category represents a particularly promising development. The traditional export categories of logs and lumber have relied more heavily upon the availability of high quality stumpage, particularly old-growth. The maintenance and further expansion of revenues in these categories will depend upon the management of the state’s second-growth forests and marketing efforts to gain increased foreign acceptance of products produced from them. ![]()
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Executive Summary Material substitution in the residential construction industry is driven by a variety of factors including product availability, product performance, price, price stability, and in-place costs. As competition between softwood lumber and substitute products increases, managers need to understand end-users’ changing perceptions of softwood lumber and the competitive position of softwood lumber vis a vis substitute products. Despite the relative availability of product literature describing substitute building materials, the extent of substitute product diffusion remains unclear. Perhaps more importantly, virtually no information exists regarding the diffusion process for substitute products in the residential construction industry, including the impact of specific product attributes and end-user characteristics in promoting the diffusion process. This exploratory study was developed to the competitive relationship between softwood lumber and substitute products in structural end-use applications in the US residential construction industry. In particular, the study was designed to identify those product attributes that are perceived by residential contractors to be important in influencing the substitution process. Empirical data for this exploratory study was obtained from a cross-sectional mail survey of 1,500 residential contractors in the United States. The sample frame for the study was derived from the membership of the National Association of Home Builders (NAHB). In order to obtain a uniform geographical representation, equal numbers of participants were randomly selected from the northeast, southeast, southwest, and northwest regions of the US. 176 usable questionnaires were returned, providing an effective response rate of 11.7%. Over 90% of the respondents indicated that they had used at least one substitute product for softwood lumber in a structural end-use application. The use of specific substitute products varied considerable, with 72.2% of respondents reporting that they had used glulam beams while none of the respondents reported using plastic lumber. Only two products (glulam beams and wooden I-beams) were use by more than half of the respondents. Adoption/trial curves for several substitute products show a rapid increase in their use, particularly over the past five years. Despite this, respondents indicated that their use of structural softwood lumber is changing only moderately. Respondents were asked to rate the importance of various product attributes in influencing their purchase decision regarding structural building materials. The analysis of the data indicates that product strength and straightness were rated the most important factors. Price and price stability were also rated highly, while environmental factors generally received the lowest importance ratings. A principal components factor analysis of the twelve product attributes indentified three underlying factors that influence the material substitution process: the physical characteristics of the product, the technical characteristics of the product, and economic/supply characteristics of the product. When asked to rate their satisfaction with softwood lumber, respondents indicated that they were satisfied with only two product attributes: lumber strength and lumber availability. Of the remaining product attributes, respondents were neutral regarding three and were dissatisfied with the remaining five product attributes. Lumber attributes with which respondents expressed dissatisfaction included: lumber straightness, number of defects, overall lumber quality, price, and price stability. To explore the impact of environmental issues on the substitution process, respondents were asked to compare the perceived environmental impact of substitute building materials with that of softwood lumber. Surprisingly, almost all of the substitute products were perceived to produce a lower environmental impact than softwood lumber. No product was perceived to have a greater environmental impact than softwood lumber and only two products, plastic lumber and plastic/fiber composite lumber, were perceived to have a similar environmental impact. Finally, a statistical analysis of the research data indicated little variation in the responses based on the geographic location of the firm or the size of the firm. The residential construction industry is extremely fragmented and competitive and the results of this research indicate that residential contractors are quite willing to experiment with new substitute products. To counter the competitive threat posed by aggressively promoted substitutes, softwood lumber manufacturers must become market-oriented. Only by adopting a strong market orientation can they hope to place themselves in a position to understand the needs of residential contractors and develop marketing strategies to meet those needs, thereby increasing customer satisfaction. It is only by thoroughly understanding and responding to residential contractors needs that the softwood lumber industry can effectively reduce market penetration by the wide range of substitute products currently by offered in the marketplace. ![]()
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Authors: Ivan L. Eastin, Chris Lane, Tom Waggener, Roger Fight and Jamie BarbourExecutive Summary The purpose of this project was to assess market opportunities for second-growth clearwood lumber by identifying industry segments that currently utilize clearwood lumber and determining whether alternative markets will continue to exist for clearwood lumber produced from intensively-managed forests in the Pacific Northwest. The historical lumber price data was analyzed and industry segments that have traditionally utilized clearwood lumber were surveyed. Survey Results Of survey respondents 33% were moulding manufacturers, 14% were millwork manufacturers, 10% produced doors, 8% made windows and 23% made other products such as furniture, cabinets, crafts, paneling, stair parts, and other specialty products. The use of individual species was often associated with specific industry segments. Approximately 81% of the ponderosa pine was used in the production of mouldings and windows. Douglas-fir was primarily utilized in the manufacture of doors (49%) and other products (29%). Southern pine was used primarily in structural products, although 15% was used for mouldings and 11% was used for doors. Approximately 87% of the radiata pine was used for the production of moulding and millwork. The geographic location of the survey respondents was: 33% from the northeast, 26% from the Pacific Northwest, 25% from the southwest, and 16% from the southeast. On average, most of the firms that participated in the survey could be classified as small- to medium-sized. While respondents’ average annual purchase of softwood lumber was reported to be 5,800,000 board feet, the median volume purchased was just 700,000 board feet. Similarly, while the median sales revenue reported by respondents was $2.8 million, average sales revenue was more than three times that amount. Roughly 50% of the respondents reported total sales revenue of less than $2.5 million. Concerns regarding the ability of plantation-grown timber to substitute for old-growth lumber products may be exaggerated. The study found that the two most important lumber attributes were reliability of supply and price. The least important attributes were identified as being mechanical strength and vertical grain. Based on a factor analysis, the original sixteen lumber attributes were reduced to four factors: timber quality, manufacturing properties, mechanical properties, and price/supply. The results of the survey suggest that many manufacturers in industry segments that have traditionally relied on clearwood lumber as a raw material input have successfully substituted lower-grade lumber (e.g., shop grade lumber), non-traditional species, and non-wood products to offset reduced supplies and price increases. In 1989, 58% of respondents indicated that raw material substitutes had replaced 31% of the softwood lumber volume previously used in their production process, although the median volume was only 5%. By 1994 however, 83% of respondents reported that they were substituting 36% (median of 24%) of their softwood lumber with other raw materials. This is a statistically significant increase. The top three reasons that respondents indicated were important considerations in their decision to utilize a substitute product were the price of the substitute, product availability, and reliability of supply. Reduced environmental impact was reported to be the least influential attribute. Those manufacturers who did use substitute products in their manufacturing process tended to have higher sales revenue and employed twice as many people as firms that did not use substitute products. Approximately 60% of moulding manufacturers indicated that they used a raw material substitute for softwood lumber, while 77% of millwork manufacturers, 83% of window manufacturers, 62% of door manufacturers, and all of the structural product manufacturers reported using some raw material substitutes in their manufacturing processes. Price Trends Analysis of prices for softwood lumber products at the producer wholesale level (based on bi-weekly spot prices) indicate that, while lumber is a semi-homogeneous product, there are important and persistent differences in value based on species and grade. The user survey results suggest that price is an important variable in the purchase decision and likewise in decisions to utilize substitute raw materials, including non-wood materials. There is a definite structure of nominal and real (inflation-adjusted) prices in the softwood lumber market, indicating that buyers purposefully differentiate lumber on the basis of perceived attributes associated with the intended end use. Lumber grades, which seek to specify broad groups of product attributes, are imperfect. Lumber products can frequently be downgraded to lower end uses and potentially upgraded through reprocessing, for example, by removing knots to produce short clear pieces of lumber. However, price trends indicate that lumber grades are a useful basis for differentiating products and to measure how prices perform in both a relative and absolute sense over time. Relative price analysis indicates that clearwood grades of softwood lumber command a significant premium relative to the overall market, as indexed using Douglas-fir Standard & Better 2x4’s as the baseline commodity index. The aggregate softwood lumber market is sensitive to macro-economic factors linked to business cycles, particularly to residential construction. As such, considerable fluctuation in aggregate lumber prices can be expected, with the overall vector of product prices moving somewhat in tandem. Nevertheless, movements in relative prices can and do occur, leading to potential substitution between clearwood lumber grades and other, less expensive lumber grades and non-wood substitutes. The price analysis confirmed that Shop, C & Better selects, and Moulding & Better grades of Douglas-fir, ponderosa pine, and southern pine lumber command significant relative price premiums over the common and structural softwood lumber grades. Shop grades of Douglas-fir commanded an average premium of 43% while ponderosa pine #3 Shop commanded a premium of 85% relative to the baseline commodity index. C & Better Select lumber exhibited an even larger relative premium, 125% for southern pine and 474% for ponderosa pine. Moulding and Better lumber demonstrated relative premiums of 214% for Douglas-fir and 356% for ponderosa pine. These relative price premiums were quite stable over the 1989-1995 data period, with long-term trends slightly upward with respect to the relative prices for ponderosa pine C & Better Selects and Moulding & Better grades. Increasing relative prices, however, provide incentives for buyers to consider substitute products. While the trends estimated in this study are not strongly upward, taken together with the results of the industry survey, the producers of clearwood lumber grades should be aware of the growing potential for substitute products capable of meeting end user demand and which are price competitive. In the short-term, considerable relative price instability was evident in response to business cycles, with the consequences being that end users frequently experience rapid increases and decreases in the relative prices of clearwood lumber grades which do not reflect longer-term trends but are perceived as indicators of significant market shifts. As measured by the standard deviation of relative prices around the long-term price trend, clearwood grades of lumber typically had variations three to eight times greater than commodity structural lumber grades. Markets respond to changes in perceived relative prices, whether generated by a change in the product’s own price or from a change in the price of a competitive product. The analysis of price elasticities (own-price and cross-price) was limited by the availability of relevant price and consumption information at a disaggregated level. The review of the economic literature indicates that softwood lumber is generally price inelastic in both the short- and long-run. Given the niche nature of markets for clearwood lumber grades, it might be expected that the demand will be somewhat more inelastic, indicating that the quantity of clearwood consumed is less responsive to relative price changes in the short-term, but also that prices will be more sensitive to structural market shifts. Timber supply shifts likely account for much of the relative price instability observed for the higher-valued clearwood lumber products. In addition to the movements of relative prices, this study found that the price premiums paid for clearwood grades of lumber (in 1995 dollar terms) were substantial and quite stable when measured as the prevailing differences from the overall softwood lumber market. In real terms, average price premiums for #3 Shop grade lumber over the baseline product ranged from $159/mbf for southern pine and $166/mbf for Douglas-fir to $280/mbf for ponderosa pine. Real price premiums for C & Better Select lumber averaged $405/mbf for southern pine and $1,563/mbf for ponderosa pine. Finally, real price premiums for Moulding grade lumber were $692/mbf for southern pine and $1,196/mbf for ponderosa pine. For all the clearwood lumber species/grades combinations with sufficient price data, the real price differences were found to increase modestly over time, with the exception of Douglas-fir Moulding and Better grade lumber, where a slight downward trend in real price difference was observed for a shorter, three-year data period. The persistence of these price differences over the 1989-95 market cycles and abnormal supply disruptions would indicate that clearwood grades of softwood lumber are effectively differentiated in the perception of end users and the price differences are not a simple result of transient market disruptions. The analysis also determined the spread of real prices between commodity and clearwood lumber grades within individual species of lumber. Where it is possible to alter the grade yields through intensive forest management, the spread of real prices is highly relevant as more clearwood replaces lower-valued grades in the total lumber recovery volume. Real price spreads remained stable during the 1989-95 period for the clearwood grades, with slightly positive trends observed for all products with the exception of Douglas-fir Moulding & Better grade lumber. Conclusions This study found that clearwood lumber is a differentiated product for which end users are willing to pay a substantial premium. Those respondents who utilize clearwood lumber as a raw material input in their manufacturing process indicated that they value reliability of supply, price, and price stability over timber quality. This would seem to indicate that manufacturers cannot, or will not, continue to accept higher relative prices and rapid price fluctuations. The lumber price trend data indicate that softwood lumber products are highly differentiated in terms of perceived market value, reflecting the unique attributes of specific lumber grades that are valued by end users. The price analysis supports the conclusion that price-induced substitution is an important driver behind the convergence in relative prices between the higher grade ponderosa pine lumber products and the overall softwood lumber market, but that clearwood grades of lumber have generally maintained their relative price differentials. However, the price analysis and industrial survey results suggest that, for more and more manufacturers, clearwood lumber attributes may be available from lower grade lumber products and substitute products. The survey results clearly indicate that many manufacturers are switching to substitute products to meet their raw material needs and provide price stability for their manufacturing operation. Based on these results, lumber producers and plantation managers can better assess whether to adopt management practices that emphasize the production of clearwood lumber for high-value niche markets, or whether they might be better off focusing on the production of commodity grade products. Given the significantly different cost structure associated with each of these production strategies, the results of this study can help managers determine which strategy is the most cost effective based on the characteristics of the market segments they are serving. ![]()
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Authors: Dorothy A. Paun & Wendy SammarcoExecutive Summary Smart marketers build long-term, trusting, “win-win” relationships with valued customers, distributors, dealers, and suppliers. This research effort explores the specific factors, conditions, and activities that contribute to building successful supplier-distributor relationships in the forest products industry. We sought to answer the question, “What spells success in business-to-business relationships between forest products suppliers and distributors?” Utilizing comparative analyses of best business-to-business relationships, in-depth interviews were conducted with executives at five forest products firms. The structured interviews profiled business dimensions consistently present in outstanding business-to-business relationships. The results reveal that successful relationships involve: frequent communication; extensive joint marketing planning and performance reviews; the exchange of customized products; promotional efforts that are a joint activity; delivery systems that are reliable and dependable; and pricing practices that foster few problems and quick resolutions, to name a few. In an effort to make the research findings more practical and useful, a worksheet exercise that incorporates these principles has been designed to help you analy ![]()
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Authors: Guy Robertson and Thomas R. WaggenerExecutive Summary Japan has long been Asia's largest importer of softwood sawlogs and lumber and is the major destination for U.S- Pacific Northwest wood product exports. In the period lasting from 1980 to 1993, 3apan imported an annual average of 15.2 million CUM of softwood sawlogs and 5.4 million CUM of softwood lumber. The country's major softwood suppliers are the Pacific Northwest states of the U.S., British Columbia in Canada, and the Russian Far East and Siberia. In recent years, New Zealand and Chile have also supplied increasing volumes of softwood products to Japan, mostly in the form of Radiata pine flowing from these countries' expanding conifer plantations. Recent changes in the supply structure within Japan's foreign supplier countries promise to significantly 'impact the Japanese softwood market In particular, reductions in North American harvests related to conservation and a general depletion of old-growth stock will increasingly limit the availability of high quality Douglas fir and Western hemlock sawlogs and lumber, products which have long been the mainstay of Japan's softwood import market. Similarly, moves to restrict exports of raw logs from North America, Southeast Asia and elsewhere have increasingly threatened the supply of both softwood sawlogs and hardwood peelers to Japan's lumber and plywood mills. At the same time, growing quantities of lower quality Radiata pine from New Zealand and Chile, as well as potential increases in medium quality Russian spruce and larch, will likely be available to the Japanese in the near future. While no shortage of softwoods is predicted, higher quality softwood products are expected to be increasingly scarce. The Japanese softwood market is, in reality, a highly differentiated market where different species and grades of softwood meet specific end market requirements. Prices for different softwood products vary greatly, and substitution between sources and types of wood is often restricted. Japan has long paid significant price premiums for old-growth and higher quality second-growth Douglas fir and Western hemlock products. In view of impending supply restrictions for high quality softwoods, these premiums. can be expected to persist Firms wishing to take advantage of these premiums, either through forest management practices designed to increase quality, or through the export of processed lumber, need to consider not only the nature of their targeted market, but also the strengths and weaknesses of potential competitors. if national concerns over log exports results in a reduction of softwood roundwood exports, it cannot automatically be assumed that standard U.S. grades of commodity lumber can replace or substitute for the decrease. Rather, a more complete understanding of specific Japanese market requirements is needed to best exploit the comparative advantage of higher valued North American wood products. Japanese Housing Market The bulk of Japanese softwood swag and lumber imports is used in residential housing construction. Due to demographic factors, increasing income, and a comparatively rapid turnover in housing stock, Japan has one of the highest residential construction rates in the world both in gross and in per capita terms. Over the last decade, new housing starts in Japan have averaged over 1.4 million units per year. Predictions for 2000-2010 likewise foresee a level of around 1.3 million units per year. while in the two decades leading up to 1980 the share of non-wooden housing starts prim ferro-concrete multiple unit dwellings) increased substantially, shares of wood and non-wood starts have stabilized over the last decade with each commanding approximately half of the total market for housing units. This combined with predictions of stable overall demand for housing leads to the expectation of continued strong Japanese demand for softwood lumber. Wooden housing styles and construction techniques in Japan can be divided into two general categories: traditional post and beam" housing, and Western "2x49' platform housing as well as related prefabricated construction techniques. Traditional post & beam housing currently accounts for over 85 percent of Japan's wood housing market. Since this construction style features a great deal of exposed wood particularly the posts and beams which constitute the major structural elements of the house), aesthetic as well as structural lumber characteristics are extremely important Pacific Northwest Douglas fir and Western hemlock have been used extensively in Japanese traditional housing construction, and it is this market, more than any other, which has supported the price premiums enjoyed by North American timber exporters in the past. Since its introduction to Japan in 1974, Western style 2x4 housing construction has made steady gains. At approximately 56 thousand units in 1993, 2x4 housing now commands 8 percent of Japan's total wood housing market In addition to its cost advantage over traditional methods, 2x4 housing has enjoyed. substantial promotion from North American governments, industrial associations and other organizations. Though the market penetration of 2x4 housing has been less than originally hoped for by its promoters, its progress has been consistent, and continued increases in market share should be expected. As North American suppliers have virtually monopolized the supply of dimension lumber to this market, benefits of the expansion of 2x4 housing in Japan to U.S. Pacific Northwest producers have been immediate. There is, however, no reason to believe that other producers will not begin to supply this market in the medium-term, North American suppliers to the 2x4 market can expect to face increasing competition from mills in Japan and elsewhere cutting lower priced Russian species and perhaps Radiata pine. Due to its demand for higher quality lumber, the traditional housing market will be more insulated from increasing competition from these other suppliers. In 1992, wooden prefabricated housing stood at 15 thousand starts, accounting for about 5 percent of the total market for wooden units. This represents a strong increase over 1980 levels. Japanese prefabricated housing is generally associated with Japan's major home-building corporations, and it often incorporates factory pre-construction with modular building techniques using "unit-bathrooms" and similar products. Some of the firms engaged in this form of housing construction have developed their own proprietary standards, and foreign firms wishing to export to this market will have to work in close cooperation with their Japanese customers. Japan's Major Softwood Sawlog and Lumber Suppliers Japanese Domestic Production Japan itself is the single largest supplier of softwood logs to its own domestic market In 1993, Japanese domestic production supplied 15.9 million CUM of softwood sawlogs to Japan’s. sawmills. This represents a slight decline from the 17.7 million CUM supplied in 1980. For many years the Japanese have predicted an increase in domestic roundwood production based on the over 10 million hectares of maturing conifer plantations possessed by the country. Economic factors, however, have mitigated against any substantial expansion in domestic harvest The most pressing problem is the high labor intensity of Japanese forestry combined with a chronic shortage of forest labor and a more than fourteen-fold increase in wages since 1960. In light of these and other problems, predictions of domestic harvest increases are becoming less common, and it is assumed that Japanese softwood production will continue at current or slightly lower levels well into the next century. The Japanese domestic sawmiling industry is likewise in decline. Between 1980 and 1992, the number of sawmills in Japan fell by 28 percent to approximately 15 thousand mills. Gross material inputs for sawmills likewise fell by 25 percent, though much of this decline has been in the last few years. Currently, Japanese mills are struggling under increased prices for their mainstay Douglas fir and Western hemlock sawlogs as well as increased lumber imports from abroad. Continuing declines in domestic sawmills and production capacity are predicted, and this, in turn, will yield greater opportunities to foreign producers interested in exporting lumber products to Japan. The United States The U.S., and particularly the Pacific Northwest states of Oregon and Washington, are Japan's largest foreign supplier of softwood logs. The U.S. has long maintained over half of the total market share of Japanese softwood log imports. Since 1990, however, U.S. export volumes have fallen sharply from 10.9 million CUM to 7.6 million CUM, with market share declining from 63 percent to 52 percent. After making steady gains throughout most of the 1980s, U.S. softwood lumber exports to Japan have experienced similar declines since 1990. In the case of lumber, gross export volumes (2 million CUM in 1993) and market share (24 percent in 1993) are considerably lower those for logs. Continuing harvest restrictions related to the Spotted owl and other conservation issues promise to further limit harvests in the Pacific Northwest region and thereby reduce the amount of U.S. timber available for export to Japan. Likewise, calls for increased restrictions on raw log exports in the hopes of increasing domestic U.S. processing could further decrease the availability of softwood sawlogs to Japanese mills. In the fixture, U.S. exporters to Japan will face increased competition for raw materials and, perhaps, increased pressure to raise the value added content of their exports. This, in turn, will give added incentives to producers to find the highest value Japanese market niches for their products.. Siberia and the Russian Far East Siberia and the Russian Far East constitute the second largest softwood log supplier to Japan. After declining throughout much of the 1980s and early 1990s log exports from these regions showed their first signs of recovery in 1993. In that year Japanese log imports from Russia increased to 4.5 million CUM, a gain of 26 percent over the previous year. Russian market share of Japanese log imports likewise increased from 24 percent in 1992 to 31 percent in 1993. Much of this is seen as a response to resource constraints in the United States. Russian productive capacity and the ability of Russian species (mostly larch, spruce and fir) to substitute for Pacific Northwest Doug]as fir and Western Hemlock however, is limited. Inadequate infrastructure and a chronic shortage of capital currently restricts increases in production, and the quality of Russian timber generally does not meet Japanese specifications for the main structural components used in traditional housing. Japanese imports of lumber from Russia have been relatively insignificant The same sort of processing capacity and quality constraints pertaining to logs apply to lumber as well. Canada Except for a brief period in the mid to late 1980s, Canadian exports of softwood logs to Japan have remained well under 1 million CUM. For the most part, this is due to long-standing restrictions on raw log exports from British Columbia (the province supplying the overwhelming majority of Canadian wood product exports to Japan). Canadian exports of softwood lumber to Japan, on the other hand, comprise well over half of the total share of Japanese softwood lumber imports. In 1993, Japan imported 5.4 million CUM of softwood lumber from Canada, representing a 65 percent market share and a 23 percent increase in volume over 1992 levels. Strong increases in Canadian lumber exports to Japan are evident throughout the late 1980s and early 1990s, but continued expansion is limited by resource constraints and conservation issues similar to those in the U.S. Pacific Northwest British Columbia does have a large available forest resource, but much of this is in the interior where lodgepole pine and other lower valued species predominate. Though this wood may be suitable for the production of dimension lumber, it is doubtful that much of it will find its way into Japan's traditional housing sector. New Zealand In 1993 New Zealand softwood log exports to Japan stood at 1.7 million CUM, accounting for a 12 percent share of Japan's softwood log import market and making New Zealand Japan's third largest softwood log supplier. This 1993 volume was nearly seven times greater than New Zealand's log export volume to Japan for 1986, reflecting strong annual in creases from 1987 to 1992 followed by a 7 percent decline in 1993. Over 85 percent of 1993 exports were Radiata pine. Given the species composition of New Zealand’s forest resource, this percentage is expected to continue or even increase. Total New Zealand sawlog production is predicted to increase to approximately 16 million CUM in the first decade of the next century (as compared to a 1986-1992 average of roughly 6 million CUM of softwood sawlogs). New Zealand has devoted a great deal of effort to increasing the quality of Radiata pine products through intensive forest management and new lumber production techniques To date, however, Radiata pine is used in Japan primarily for packaging materials and other lower valued end-uses (this provides an explanation for the volume decline in 1993, as the Japanese recession impacted the packaging industry more than the relatively robust housing construction industry). New Zealand lumber exports to Japan in 1993 stood at 235 thousand CUM and were likewise dominated by Radiata pine Chile Chile also has a large plantation resource planted predominantly in Radiata pine Significant increases in Chile's softwood production are predicted beginning in the late 1990s, with total production expected to reach a level of between 21 and 27 million CUM by the turn of the century. The majority of this wood is also expected to be Radiata pine. In 1993 Chile exported 201 thousand CUM of softwood logs to Japan for a market share of only 1.5 percent Softwood lumber exports to Japan, however, stood at 398 thousand ~UM for a share of 4.7 percent of Japan' S softwood lumber import market This reflects strong increases in Chilean lumber exports to Japan throughout most of the 1980s. Most of these exports are thought to be in the form of cants and flitches for remanufacture in Japan into the same sort of products for which New Zealand Radiata pine is used (i.e. packaging materials and other low priced end-uses). In the case of both New Zealand and Chile, increased exports of Radiata pine are expected to. continue to supply the packaging materials market as well as compete with lower-valued products in the residential construction market However, the species is not thought to be an adequate substitute in the higher-valued end-uses, which Pacific Northwest and Japanese domestic species have dominated in the past Other Factors Affecting Softwood Supply Other factors affecting future softwood supplies available to Japan include rapid economic growth in China and other Asian nations, export restrictions and supply constraints for Southeast Asian hardwoods, and technological innovations in softwood lumber production. Cross border trade in softwood logs from the Russian Far East to China has been substantial, and New Zealand has reported sharply increased exports to China and Korea in the last few years In general, China and Korea do not possess the same preference for high quality lumber products (residential housing in both Korea and China is constructed manly of brick and stone), and continued economic growth in these countries is expected to most strongly impact the lower end of the softwood market Similarly, export restrictions of Indonesian and, more recently, Malaysian hardwood logs have led to rapid price gains in Japan for Lauan logs used in plywood manufacture. Increasingly, the Japanese have substituted softwood plywood in uses previously dominated by hardwoods. With expected technological improvements, this substitution will continue to expand, thus increasing demand for softwood plywood, veneers and other softwood panel products. While the previous two factors will tend to increase demand for softwood products, technological innovations in the production of lumber will extend softwood supplies through greater efficiencies or, perhaps more importantly in the context of this report, allow for the substitution of lower-priced species in end-uses currently demanding higher priced softwoods. New laminating technologies that allow for the production of the larger squares commonly used in Japanese traditional housing is one prominent example. Here, clear veneers may be attached to cores produced from lower priced softwoods or composite materials. Conclusion and Recommendations In light of supply constraints, it is important that U.S. Pacific Northwest producers locate and fully exploit the best market opportunities for their products. Japan has long provided such an opportunity in the past, but primarily in the form of unprocessed log exports. Given Japan's strong economy (and Yen),stable demand for new housing and well defined preference for quality softwood products, it will continue to provide substantial market opportunities to Pacific Northwest producers in the future. To realize this potential, Northwest producers will increasingly need to understand the characteristics of Japan's differentiated market for processed timber and devise strategies to best exploit the comparative advantage of Pacific Northwest species in higher valued Japanese market niches. As in the past, the highest premiums will go to those suppliers who can provide the Japanese market with high quality Douglas fir and Western hemlock logs and sawnwood. These premiums, in turn, may justify increased forest management efforts aimed at the production of clearwood and other quality characteristics. Likewise, they may help ameliorate some of the costs entailed in longer rotation lengths and intensive thinnings called for in new forest management regimes designed to produce environmental benefits as well as timber. While benefits to U.S. Pacific Northwest lumber mills and value-added product exporters from the expansion of 2x4 construction in Japan have been considerable, the current marketing and policy emphasis on expanding the use of western 2x4 construction in tat country should be reexamined to include traditional post and beam market niches. A 2x4-only strategy virtually ignores the lion's share of the Japanese wooden residential construction market, and most 2x4 applications do not necessarily highlight the aesthetic and structural characteristics of Pacific Northwest Douglas fir and Western hemlock Traditional post and beam housing, on the other hand, has resulted in a strong Japanese preference for high quality North American softwoods and has been the driving force behind U.S. softwood exports to Japan and the price premiums associated with this trade. Moreover, in that it allows for increased substitution using lower priced softwoods, 2x4 construction in Japan will, in the future, be more open to competition from the other Pacific Rim producers considered in this study. This is not to argue that the promotion of 2x4 construction in Japan should be abandoned altogether, but rather that greater marketing efforts aimed at expanding lumber and value-added product exports to the Japanese traditional housing market are also called for. ![]()
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Authors: Lee Bialozynski, David BriggsExecutive Summary A national survey of US millwork producers was conducted during late 1991. Exactly 500 respondents, an 18.2% response rate, provided data on 1990 characteristics of their establishments. The survey differs from the US Department of Commerce Census of Manufacturers by including all producers of millwork, not just those for which millwork is the principal activity. Establishments are relatively small.
$2.99 sales per dollar of replacement cost
25.8% participate in national markets 10.8% participate in international markets Projections from responses to estimates of national totals for all millwork producers Survey (1990) US Dept of Commerce (1990)
Millwork only $ 9.9 billion $9.4 billion
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A Comparative Assessment of the North American and Japanese 2 x 4 Residential Construction Systems1/1/1995 Authors: Ivan Eastin, Kweku Bentil and Gerald BeltranAbstract Despite Japan’s relatively small size, residential housing starts have exceeded those in the US throughout the 1990s, totaling 1.57 million units in 1994. However, the cost of residential housing in Japan is substantially higher than in other developed countries. In an effort to address this problem, the Japanese Ministry of Construction (JMOC) recently announced an action program to reduce the cost of residential housing 33% by the end of the century. Numerous factors have been cited as contributing to the high cost of residential housing in Japan, including high labor costs and low labor productivity, a lack of skilled carpenters familiar with the 2x4 system, non-standardized building materials, a lack of competition in the construction industry, restrictive building regulations, high building material costs, inadequate construction management systems, and an inefficient and extended distribution system from imported building materials. Many industry observers in both the US and Japan feel that one way to reduce residential construction costs would be through the adoption of North American 2x4 construction technology as an alternative to the more traditional but less efficient post-and beam construction technology. US construction professionals familiar with the Japanese construction industry indicate that the small segment of Japanese contractors currently building 2x4 houses have modified the 2x4 system to fit their traditional construction system. These modifications have resulted in a hybrid construction technology that fails to achieve the production and cost efficiencies inherent in the North American system. Exploratory interviews with building professionals who have worked on residential construction projects in both the US and Japan identified a number of areas where the Japanese 2x4 construction system differs from its US counterpart in terms of these efficiencies. The primary areas where significant differences were noted included foundations, interior wall finishing, ceiling framing techniques, finish carpentry, labor specialization, and project management skills. In order to take full advantage of the efficiencies inherent in the North American 2x4 construction system, it is important that Japanese designers, contractors, and carpenters develop a basic understanding of the North American 2x4 system. This implies that the transfer of 2x4 technology should occur at a variety of skill levels within the Japanese residential housing industry. At a minimum it is important that four groups be included in a any 2x4 technology transfer programs: designers/architects, carpenters, construction site supervisors, and project managers. The process of effectively transferring 2x4 construction technology requires that US contractors and carpenters be allowed to work with their Japanese counterparts. However, the perceived and real difficulties involved in obtaining work visas for US construction professionals in Japan have effectively restricted this component of technology transfer. A review of existing policies related to the issuance of work visas for US construction professionals and skilled workers would support total technology transfer and provide benefits for both the residential construction industry and home buyers in Japan. This strategy would provide the basis for rationalizing construction costs and management systems within the Japanese residential construction industry. ![]()
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Authors: Anne Rahikainen, Dorothy Paun, Lynn CatlettIntroduction The pulp and paper industry ended its four-year slump and enjoyed record-breaking profits in 1994. The unprecedented magnitude and speed of this recovery was due to the timely confluence of many factors: improving economies in Europe and North America resulted in a large increase in consumption of pulp and associated products such as newsprint and packaging; imports of European pulp and paper products into the US market leveled off in response to greater demand in European markets; substantial amounts of marginal capacity were removed from the North American market; international fiber shortages occurred; recyclable materials like old newsprint and corrugated containers were in short supply; weak US and Canadian dollars made North American pulp and paper exports more price-competitive in the international marketplace, thus driving up demand; and low customer inventories resulted in demand exceeding supply. The outlook remains rosy, as only limited additional capacity has been added or is scheduled to come on line in the next couple of years. This project was undertaken to obtain an overview of the United States pulp and paper industry. First, all publicly-traded pulp and paper firms were examined in terms of principal products sold. The second objective was to identify the extent of international operations by these firms, using as a proxy percentage of annual sales from exports and the degree and number of international manufacturing plants, sales offices, and subsidiaries. The third objective was to evaluate the performance of the firms and to create an industry-based financial performance ranking based on net sales, return on equity, and earnings per share. ![]()
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Authors: John Perez-Garcia, Holly Lippke Fretwell, Bruce Lippke and Xiaoming YuExecutive Summary A ban on the export of privately-grown logs has been proposed by s6me domestic log purchasers, environmental groups and congressional representatives td relieve the timber shortage caused by court injunctions and state and private land regulations in the Pacific Northwest (PNW). The assumptions behind this proposal are that: (1) log markets require some form of policy intervention--such as a log ban--to divert export logs to domestic mills; and (2) the benefits from added domestic log processing and export of finished products will outweigh the losses incurred by private timber growers? log exporters and consumers. Previous economic studies have generally shown that restricting open markets may benefit s6me processors, but these benefits come at the expense of others and with a substantial net cost to consumers. This study presents results which support the finding from previous studies that restricting open markets leads to higher costs with negative economic impacts in the restricted region, within the U.S. and across the globe. This study examines the assumptions behind a log export ban proposal. First, it draws attention to recent data on log export declines as evidence supporting the contention that open markets provide an efficient response to timber supply shortages. It then addresses the factors needed to determine the benefits and costs of a log export ban on global and regional markets: (1) how log and lumber trade flows are redirected and at what costs; (2) who is impacted regionally; and (3) who benefits and who pays at the log and lumber levels. The question of how an export tax differs from a log ban is also considered since log export taxes have been proposed as an alternative to a log export ban. This raises the general question of whether there are other forms of market interventions rather than a log ban that might relieve the log shortage for mills with less negative impacts on other producers. Implications of the impacts of a log ban on job markets and forest management are discussed briefly. The CINTRAFOR Global Trade Model (CGTM)--a product of over ten years of research by a number of international experts--characterizes regional timber, processor and consumer markets, and simulates the international flow of logs and products from wood surplus regions to wood deficit regions. The model is used in this study to analyze the global and between-region trade flow response to log export ban and tax policy proposals. This modeling exercise provides a first approximation of the proposals' impacts. Potentially important within-region issues--such as the location of timber relative to mill capabilities, and the many different categories of jobs that are impacted by changes in trade flows--are important areas of further research work. Open market forces divert export logs for domestic processing: Data on log exports from Washington and Oregon indicate a 40% declined since 1989 as a consequence of higher regional timber and log prices that have been caused by the timber shortage. These data suggest that higher log prices under open market conditions have already redirected a substantial. amount of previously-exported logs to domestic processors. if logs were banned from exports--i.e., if closed-market conditions were to exist--the price conditions forcing the diversion of export logs to domestic markets would not exist. In economic jargon, open markets are more efficient than restricted or closed markets since open markets allow prices to stimulate the next lowest cost suppliers to replace the timber harvest reduced by policy constraints. Open markets faced with a timber supply shortage allow the price for timber--the product in shortage--to rise, coaxing out the next least costly increment in supply from around the globe. In contrast, a log ban supplements the wood available to processors in the log-deficient region by diverting logs from export markets. This form of market intervention prevents logs from reaching their highest valued markets. Log prices in the restricted region will then be lower even though timber harvest restrictions have reduced timber supply. Log prices will be higher in the alternative, unrestricted markets where timber supply was not reduced. Deviations from an open market response caused by interventions impose higher costs on consumers and a large number of processors. Only those processors within the restricted timber market will see lower log costs. Transportation costs to move the resources to global markets will also be greater under a ban or tax. Lower prices reduce the supply in the timber short region: The COTM estimates by 1995 a $48 per mbf decline in the PNW real domestic log price from a private log ban and a $150 per mbf increase in real log prices in Chile and New Zealand, two regions representative of remaining ½en market log suppliers. A similar $150 growth in real log prices is estimated by the model for Japan, the major log importing country. Real price increases are estimated to be much smaller in other markets that are not directly linked through trade to the Pacific Rim log flow. Price increases are measured as the difference between simulations ~f all regional markets after the imposition of a private log export ban from the PNW and baseline market conditions without a ban. The lower real domestic price results in an annual 500 million bd ft reduction by 1995 in private timber harvest in the U.S. West region. The redirection amounts to 21 percent of logs previously exported under baseline conditions. The countries previously importing U.S. logs are only partially successful in offsetting their lower log trade volumes with the U.S. by increasing their domestic log production and log imports from other regions. In this manner the previously importing countries offset only 15 percent of the log trade volume lost through the imposition of a ban. There do not appear to be enough open market log suppliers to offset the loss in Asia's softwood log imports from the U.S. outside of Russia. While Russia may respond to this shortage, there is no economic history to characterize such a response, which in any case appears plausible only in the long term, given their current political problems. Log importing country losses are much greater than PNW processor gains: The lumber volume reductions by overseas log-importing mills is far greater than the gains in log consumption by U.S. firms. Lumber shutdowns in log-importing countries are 70 percent greater than additional processing in the U.S. West Higher log prices, the loss of higher-yielding lumber mills, and the decline in Western harvest levels all contribute to the greater decline in processing capacity in these regions. the large decline in overseas processing capacity implies significant reductions in their associated labor markets. Canadians gain the comparative advantage in lumber markets: The volume loss in lumber production in log-importing countries is made up by greater amounts of lumber imports, almost totally from Canada. While the Canadian log export ban has shifted the comparative advantage to the U.S. PNW in the Pacific Rim log markets, the Jog ban simulation indicates that a U.S. log export ban will shift the comparative advantage in Pacific Rim lumber markets to Canada, and the comparative advantage in logs to New Zealand, Chile and perhaps even to Russia. Consumers pay higher lumber prices even in the U.S.: While the price of logs declines in the expon4estricted supply market, other regions see log prices row. The log price increase becomes an additional cost to lumber producers. U.S. lumber prices rise 1.2 percent relative to the baseline. Other markets respond similarly with the exception of New Zealand and Chile. Lumber prices increase in these two markets as much as 30 percent due to a high growth in log prices. Who gains and who loses: From an economic and social welfare standpoint the beneficiaries of habitat preservation--the policy action resulting in the log supply shortages--should pay for the cost of a program aimed at reducing the negative economic impacts on domestic mills from mandated timber harvest reductions. As a measure of a more equitable program, the U.S. public should pay for the costs to offset the impacts of these constraints on timber supply since the beneficiary of federal habitat preservation policies is the U.S. public. Instead, under a log ban proposal, the model estimates an annual $395 million decline in timber value in 1995 for timber producers in the restricted region due to lower domestic log prices. This value declines further when the price premium for quality timber currently paid in foreign markets and not contained in timber received for domestic processing is included in the above loss. The log price premium is estimated to be $262 million, raising the total estimated loss to almost $658 million annually. The model estimates that the region's lumber producers will gain almost as much, as they see their log costs decline. According to the results, they also see a lift in national lumber market prices and their production volumes increase. However, it is the consumer that ultimately pays the bill. Since the model predicts that PNW log and limber producers direct a high percentage of their production to the U.S. national market, consumer costs in the western region are much tess than lumber producers gain. However, the region still suffers a net loss when timber producer losses which include the export price premium are considered. U.S. lumber consumer cost grows by an annual $218 million. Therefore, in the U.S., the consumer and PNW timber producer pay for implementing a federal policy to ban private log exports. M important implication from these results is that one can expect less investment in timber management which, over several decades, would result in sustainable harvests of lower volume and quality, forcing consumer costs to grow further as a result of the current timber producer's losses. Since the model suggests that overseas log processing mill closures are greater than U.S. production gains, it is not surprising that the international consumer pays even more than the U.S. consumer according to the study results. Around 70 percent of the total annual $733 million increment in lumber consumer cost is outside of the U.S.. The total global lumber consumer cost per volume of logs banned is almost $280 per mbf. The loss of higher-yielding processors and the use of more costly substitute timber causes the growth in global consumer cost to be large. The modeling results indicate that while the principles of free trade offer global savings, a log export ban is a restriction to trade which adds to global costs, reduces global efficiency, and lowers the world's welfare. It also produces negative economic impacts in the log ban region greater than gains to lumber producers. Preliminary economic and job loss estimates: The model characterizes the price and cost changes in lumber and log product flows at the regional level. Neither the within-region transportation costs nor job sensitivities to revenue impacts is directly modeled. Instead, the study uses changes in revenues provided by the model to arrive at preliminary measures of job market impacts. Revenues determine both the number of jobs and wage levels that can be supported, hence revenue impacts are the better measure of economic policy effects. Using a national average job cost in relation to the total value of gross domestic product, the U.S. consumers' lumber cost increase of $218 million from a log export ban might result in a loss of about 5000 jobs annually across the nation. The PNW regional loss of more than $50 million would imply annual regional job losses of 1200 more than those gained by processors. In the longer term, regional losses would be larger as the harvest level declines with less investment in timber. In the short term, a poor distribution of mill capacities relative to the location of the timber currently being exported would also raise these job loss estimates. Since the revenue estimates only included the impact on lumber consumers, a full accounting for all forest products including panels and fiber products as was the loss in port activities, could increase these job loss estimates significantly. A log export tax as an alternative to a log ban raises revenues but with additional risks: A log export tax has the potential to collect monopoly rents for timber in shortage rather than to give the region's .comparative advantage to other timber suppliers without any compensation. Global trade model simulations with an incremental tax on log exports indicated that the tax revenue declines rapidly with any log export tax greater than 13 percent. A 13 percent tax is equivalent to a $66 per mbf tariff on log exports, roughly 62 percent of the premium estimated for log export prices over logs for domestic processing in 1991. Results from the tax simulation indicate a 35 percent reduction in PNW log export volume, corresponding to a 19 percent decline in Japanese log imports. Under a tax scenario, revenue losses by western timber producers are predicted slightly less than the proportionate impact of a log ban, processor losses increase, especially in log-importing countries, and the consumer costs are nearly proportionate to the costs under the log ban scenario. The modeling results indicate that the export tax, similar to the export ban, reduces timber prices. Hence, timber managers effectively pay for the tax. In theory, the collected tax may be used to offset the negative impact of the tax on timber management However, the results suggest that the tax revenue would not fully compensate for the timber producers' losses, even if it was allocated to them. Similar to a log ban, an important implication of the tax scenario results is that there will be a reduction in timber investments and harvests in the longer term. Since a tax is collected from foreign buyers it poses both new legal and retaliation risks. Several conditions should exist in order to minimize the losses in the PNW region. It would be necessary (1) to channel the tax revenues to timberland owners to reduce their loss and maintain their investment, (2) for log export purchasers not to retaliate, and (3) for potential new suppliers like the Russian Far East not to receive an infusion of investment needed to increased exports. These are difficult conditions to control by the tax imposing regions hence an export tax policy incurs additional risks beyond those associated with a log export ban. Other alternatives should also be considered: Open markets provide the most efficient avenue for response by timber producers and processors to alleviate timber supply shortages. Hence open markets are the best economic solution to timber shortage problems. Either a log ban or tax causes large welfare losses in the restricted region, the nation, and the globe. Therefore either would be less efficient than allowing the open market to guide the diversion of export logs to domestic mills. Since both a ban and tax penalize timber--the commodity for which supply has been reduced--any preferred alternative should insure that the benefits which are directed to those mills being impacted by log shortages do not exacerbate the timber supply problem. Furthermore, a tax, as is the case in a ban, does not reduce the cost to foreign buyers of timber and lumber who do not benefit from U.S. preservation programs. The preferred economic alternative would be for the U.S. general public--as the beneficiary of the habitat preservation--to bear the costs imposed by a policy to direct more logs to PNW mills. A credit given to affected mills may provide these aspects of a more effective intervention program. Tax credits for processing wood will improve the domestic processor's ability to compete with foreign processors for logs, without negatively impacting the timber producer. A tax credit program would benefit domestic processors who could then bid pan of the credit back to timber when making bids to purchase timber. This approach would reduce the negative impacts on timber producers and increase the management and the output of timber, two large negative outcomes of either a log ban or tax policy. U.S. taxpayers who benefit from timber preservation might then pay for a larger share of the global cost through higher lumber prices, and the cost would be directly invested. in making U.S. processors more competitive; Such a program can be considered economically efficient relative to the intended goals--such as reducing job market and investment behavior impacts--even though its costs would be absorbed by the U.S. consumer with associated job losses nationally rather than regionally. ![]()
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Authors: Anne Ilinitch, Ivan Eastin, Mike Peng, Dorothy PaunExecutive Summary Existing models of internationalization have failed to address adequately the important question of why some firms succeed in exporting while others fail. Using interviews with twenty-five export managers and fourteen industry experts associated with the forest products industry, this research develops a resource-based model that examines the impact of the firm's intangible resources on export performance. In developing the model, we studied the U.S. wood products industry, a domestically-focused, commodity-oriented industry in which exporting has been the almost exclusive entry mode for small- and medium-sized firms entering foreign markets. Many researchers have hypothesized that a firm's tangible resources are the primary determinant of export performance. However, tangible resources such as raw material supplies, financial assets, manufacturing facilities and sophisticated technology do not guarantee export success although they can provide a firm with a competitive advantage over their competitors. Rather, there appears to be some evidence that intangible resources may play a key role in the export performance of the firm. Intangible resources might be described as those resources within the firm that are difficult to quantify. For example, managerial innovativeness, managerial attitudes towards risk, managerial commitment to exporting and the firm's reputation all represent intangible resources. The preceding examples highlight an interesting factor of intangible resources. That is, intangible resources are very often related to the quality of the human resources employed by the firm. What differentiates this research effort from previous work in this area is that firm size was not found to be directly correlated with export performance. While size may provide a firm with a comparative advantage in tangible resources and a competitive advantage in the domestic marketplace, these advantages do not necessarily translate over to foreign markets. In fact, the increased bureaucracy and conservative management practices associated with larger firms may adversely impact the export performance of those firms. In contrast, this research has indicated that the specific competitive advantages associated with successful exporters were related to the development of intangible resources within the firm that are independent of firm size. The intangible resources that appear to be most important in contributing to export performance are managerial innovativeness, managerial commitment to exporting, the ability to manufacture high quality products, and knowledge of foreign markets. ![]()
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Authors: Jeffrey L. Moffett and Bruce R. Lippke.Executive Summary Economic incentives and regulations are two means of achieving environmental outputs from managed forest lands. While regulations generally create disincentives for resource managers by increasing costs and reducing output, incentive mechanism may allow forest managers the flexibility and creativity to find the lowest cost means of providing environmental outputs. If properly formulated, incentives will equitably distribute the costs of increased environmental outputs. This paper discusses the need to measure the costs and benefits associated with alternative management policies as prerequisite for an effective incentive system. Measuring the costs and benefits in a systematic manner will allow public officials and resource managers to agree upon realistic levels of compensation and expected benefits. An illustrative model has been developed to demonstrate how a measurement system could work. The model uses a spreadsheet to project forest growth through time under different management scenarios. The data represents western Washington even aged commercial timberland for all owners in terms of age class by acres. The present distribution is skewed towards younger age classes as the result of past timber production policies. Alternative management scenarios are examined for environmental benefits and costs. Management scenarios illustrated include combinations of: (a) wildlife thinning (thinning with extended rotation) for the 3Q-39 year age class; (b) a variable percentage of the area clear cut in the 60-69 year age class; and (c) and a variable percentage of the area clear cut in the 100-109 year age class. Scenarios are input as proportions of acres in the age class to receive each treatment. These combinations illustrate the relative impact of thinnings, short rotations, long rotations and set asides. In each decade a marginal cost is measured as the difference in net revenue between the scenario being projected and an assumed profit maximizing scenario. These costs are summed and discounted over a 150 year (15 decade) planning horizon. As such only direct operating costs are measured. An incentive mechanism could also consider indirect costs. An environmental index is calculated on the basis of stand structure distribution. Revenue loss for management alternatives are compared to progress in shifting the stand structure from the present distribution towards a target distribution over the 150 horizon. Restoration of a target stand structure distribution is used as proxy for the potential environmental benefits. Alternative indexes or variable(s) could also be used to measure environmental output. For each forest management alternative considered, the marginal cost and stand structure shift are calculated and shown in Figure 3. Results show that a level of wildlife thinning from 20 to 60 percent combined with a modest reduction in the acres clearcut at 60 years characterize the more efficient solutions. Extending the rotation age or increasing the amount of set asides are extremely costly. The cost effectiveness of the solution is also shown to depend on the rate of the shift towards the target stand distribution; a greater rate will increase costs while a slower rate will reduce costs. The limitations and assumptions of this model include the impact of a discount rate, which is assumed to be a real rate of 5 percent. The model is not spatially explicit This paper demonstrates an approach to measure both the incremental costs and benefits that could be tied to environmental targets and linked to an economic incentive approach for increasing environmental outputs for managed forest lands. An effective system must identify management alternatives that impact forest dynamics in ways that contribute the most to both timber and environmental goals. ![]()
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