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Fall 2000
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Volume 16 Number 2
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Contents
- New Director's Notes
- Regulatory Change in the Japanese Residential Construction Industry
- Economic Impacts Resulting From Riparian Buffers
First Week Impressions
At the time of this writing I have been at CINTRAFOR for a little over a week. One week can greatly illuminate the workings of an organization. I have spent much of my first week asking the most basic of questions; What really is the Center for International Trade in Forest Products (CINTRAFOR), College of Forest Resources, University of Washington? Are we carrying out all that our stakeholders expect us to be implementing? In our daily work are we living up to the goals set forth in the CINTRAFOR charter? The light that one week sheds on what workaday CINTRAFOR looks like is considerable. Clearly, CINTRAFOR is vigorously working out in its daily organizational life the following three main charges of its mandate.
1. Education: There is impressive study and learning going on at the College of Forest Resources. CINTRAFOR not only funds forest products marketing graduate students but helps to guide their research. In turn, the graduate students contribute greatly to CINTRAFOR's research and work. This relationship is seldom seen by many in the industry, but it was invigorating to observe in my first week three masters students vigorously defending their thesis and offer their eager support on CINTRAFOR research topics: Factors Important to Export Success of PNW Firms During the Japanese Market Recession, Economic Impact of Alternative Management Schemes on a given forest in the PNW, Trends in the Utilization of Clearwood Lumber, all in one week's span. My impression is that the resource of our students and the training that we offer is undersold to the industry. Clearly, CINTRAFOR and the College of Forest Resources is an excellent training ground for forest products professionals.
2. Research: This week I have begun review of some of the many research papers published by CINTRAFOR. There is so much excellent content in the working papers that we decided to pick out a few facts and add them under a new newsletter section called The CINTRAFOR INDEX. We hope that these facts and figures produce enough mystery and amazement on their own to motivate readers to secure the entire working papers. Please refer to our website for a complete list of our publications.
3. Outreach: Finally, this week we have put the finishing touches on The International Forest Products Marketing Conference 2000 coming up November 13 and 14. The conference will introduce some very exciting and timely topics. In addition to our many North American speakers we are inviting several overseas visitors this year. Lawrie Halkett, President of the New Zealand Pine Council will speak on what is driving change in the New Zealand forest products industry. Alan Knight from B&Q, the UK's largest building products retailer, will talk about their policy of sourcing products from independently certified forests and how this impacts marketing and sales. Jan Hagstedt, Nordic Timber Council, will present an overview of the pressing industry issues in Scandinavia. In addition, presentations will be made on financial trends and e-commerce in the wood products industry. A Canadian perspective on the Softwood Lumber Agreement is also on the program. Sign up early.
My first week leaves me impressed. CINTRAFOR is clearly thriving.
The Japanese housing market has rivaled the US in terms of total annual housing starts since the early 1970s (Figure 1). There are two main types of home construction in Japan: wooden and non-wooden. Residential housing was dominated by wooden construction well into the mid-1970s, accounting for almost two-thirds of all housing in 1976. However, sustained growth in multi-family housing and prefabricated single family housing has contributed to the declining share of wooden housing and the increase in non-wooden housing. In 1999, wooden housing represented just 46.6% of all housing starts in Japan.
Despite the gradual decline in wooden housing, the Japanese market represents a tremendous opportunity for wooden building materials from the US. Strong Japanese demand has not only stimulated exports of US primary wood products, but it has boosted exports of secondary wood products as well. While exports of secondary products have not approached the level of primary wood products, secondary wood product exports to Japan experienced phenomenal growth over the period 1989-1996, increasing by 245% to $388 million (Figure 2).
Despite the gradual decline in wooden housing, the Japanese market represents a tremendous opportunity for wooden building materials from the US. Strong Japanese demand has not only stimulated exports of US primary wood products, but it has boosted exports of secondary wood products as well. While exports of secondary products have not approached the level of primary wood products, secondary wood product exports to Japan experienced phenomenal growth over the period 1989-1996, increasing by 245% to $388 million (Figure 2).
Figure 1. Wooden homes represent a declining share of
total Japanese housing starts.
Figure 2. The relationship between the exchange rate and US exports of wood products to Japan.
The strength of the yen and the relative weakness of the Canadian dollar and the Euro have compounded the impact of the economic recession and the decline in housing starts. These currency changes have reduced the competitiveness of US wood products at a time when Japanese home builders are trying to increase their imports of wooden building materials. As a result, European exports of softwood lumber to Japan have increased dramatically, largely at the expense of US hemlock exports. Since 1989, US market share for softwood lumber has declined from 48.3% to 10.7% while European market share has increased from 0% to 16.4% and Canadian market share has increased from 50.9% to 59%.
As US manufacturers and exporters of wood products struggle to adjust to changes in the competitive environment in Japan, two regulatory changes that directly affect the Japanese residential construction industry present new challenges. The revised Building Standard Law of Japan and the Housing Quality Assurance Law will significantly impact the structure of the residential construction industry in Japan, the mix of products that builders will use, and the range of services that they will require from suppliers over the longer-term. The following paragraphs will describe these regulatory changes, and explain their implications and the impact that they might have on the competitiveness of US wooden building materials in Japan.
Regulatory Changes In Japan
In May 1998, the Building Standard Law of Japan (BSL) received its first major revision since 1950. The major revisions of the BSL consist of: (1) specification of interim and final building inspections and (2) transformation of the BSL from a specification-based building code to a performance-based building code. The first revision of the BSL requires that all residential housing units undergo interim and final inspections. The interim inspection must be completed before a building is eligible to receive its final inspection. Since there are only approximately 1,800 building inspectors in Japan, the BSL revisions provide for the establishment of private construction inspection firms. To provide guidance to private inspection firms, a qualification system and standards have been established within the revised BSL. In the future, both private construction inspectors and inspectors from local government agencies will be able to perform inspections. Although the BSL revisions went into effect in May 1999, there is a shortage of building inspectors in Japan and many municipalities have not yet adopted the new inspection procedures. Industry experts anticipate that it will take some time before this revision is fully phased in.
The second revision transformed the BSL from a specification-based standard to a performance-based standard. It is expected that a provision will be included in the BSL to allow any material that meets the performance standards to be used in residential construction. However, there is no mention about whether there will be reciprocity on testing standards. Reciprocity would allow US firms to use the results of product tests conducted in the US to meet the performance standards in Japan to gain acceptance of their products. It is also unclear how this change in the BSL will impact firms who have already gained code approval for their products under the previous version of the BSL. Firms who currently hold Article 38 special approvals for products or systems from the Minister of Construction will be granted a two-year grace period. All firms who hold an Article 38 special approval will be notified directly by the Ministry of Construction through the Building Center of Japan.
In addition to revising the BSL, the Housing Quality Assurance Law (HQAL) was developed to provide home buyers with specific safeguards to resolve disputes with building contractors. The four objectives of the HQAL are to: (1) improve the quality and performance of residential homes, (2) provide home buyers with a mechanism for resolving disputes with building contractors, (3) establish a set of "Housing Performance Indication Standards" against which specific houses can be compared, and (4) establish a housing completion guarantee system. The HQAL, which went into effect in April 2000, will significantly change the nature and structure of the residential construction industry in Japan, including the specification and use of wooden building materials. A more detailed assessment of the individual components of the HQAL is presented below.
The first objective of the HQAL is to improve the quality and performance of new homes by requiring home builders to provide home buyers with a 10 year warranty against structural defects and low durability (e.g., water infiltration into the structure). Under the guidelines of the HQAL, home buyers may make claims against home builders if the structural performance or durability of a home is judged to be sub-standard relative to a specific set of judgement criteria (which have yet to be published). These judgement criteria, which are expected to be published soon as a set of "Judgement Standards for Defects", will be prescriptive in nature and likely very detailed. For example, it is expected that a floor found to have a slope exceeding 6/1000 would require the contractor to level the floor.
Since 1982, the Organization for Housing Warranty (OHW) (affiliated with the Ministry of Construction) has provided 10 year warranties for registered builders. Builders seeking to become registered with OHW pay a modest registration fee. As members of OHW, builders must cover all warranty costs during the first two years of the warranty period. However, during the remaining eight years of the warranty the builder is responsible for only a set amount of a warranty claim, with the remaining amount covered by OHW. The two year exemption period may be removed in the future since OHW has only paid out approximately ¥50 million in claims, yet it has taken in registration fees exceeding ¥12 billion. Since the 10 year housing warranty guarantee is now mandatory, it will be interesting to see if OHW continues to register all builders, regardless of size, financial stability, or qualifications.
There are a number of implications associated with this first component of the HQAL that are important to US manufacturers and exporters of wooden building materials. First, some small Japanese home builders will not be able to provide the requisite 10 year warranty and they will be forced to either go out of business or become subcontractors for larger more financially stable firms. Second, most builders will try to use higher quality materials in their homes. This trend is already reflected in the fact that the use of dimensionally stable kiln dried lumber in home construction has increased dramatically as has the volume of dry kiln capacity in Japan. The use of glulam posts and beams has also increased significantly and provided a tremendous opportunity for European lamstock. Finally, Japanese home builders will look to the manufacturers and exporters of wooden building materials to provide extended warranties for their products and in essence try to push the warranty responsibility back down the distribution channel to export consolidators and manufacturers.
The second objective of the HQAL is to establish a mechanism for resolving disputes between home buyers and builders. To accomplish this, the HQAL mandates that Alternative Dispute Resolution (ADR) bodies be established in each prefecture in Japan. Each ADR will be staffed by a lawyer who will reconcile disagreements between builders and their customers during the 10 year warranty period. Using the "Judgement Standards for Defects" as a guide, the lawyer will judge the severity of the defect against the standard to determine if the defect exceeds the allowable guidelines. If a defect is judged to be in excess of the allowable standard, then the builder will have to correct the defect or compensate the homeowner.
The third objective of the HQAL is to establish a voluntary set of "Housing Performance Indication Standards" against which the performance of individual houses can be compared. The specific types of performance characteristics in this provision include: (1) structural performance, (2) fire safety, (3) durability, (4) ease of maintenance and management, (5) energy efficiency, (6) air quality, (7) ratio of exterior openings to total wall area, (8) noise transmission, and (9) barrier free design. The performance of individual houses will be judged by a "Designated Evaluation Body" using the criteria established in the "Japanese Housing Performance Indication Standards". These evaluation bodies will be responsible for not only approving the architectural design of the house, but they will also inspect the home during the construction process, including the foundation process, the structural framing process, and the interior finishing phases of the project. Houses that meet or exceed the performance standards will receive certification as a "Performance Recognized House", which will provide the builder with a way to differentiate their home from homes built by competitors.
This section of the HQAL also includes a provision for manufacturers of building components that meet the performance standards to become certified as "Authorized Manufacturers of Performance Components", which provides them with some advantage in supplying their products to builders. Japanese industry associations can also help domestic manufacturers with their performance rating schemes that are linked to the HQAL, such as the 2x4 Home Builders 'Handy Book' of performance approved building materials. While the performance indication system is voluntary and can be viewed as something similar to the Good Housekeeping Seal of Approval, once the Performance Indication Standards have been published, prospective home buyers may begin to require builders to show how their homes compare to the performance standards. If this happens, the Performance Indication Standards may become an informal requirement in the marketplace. To the extent that domestic manufacturers have an advantage over foreign manufacturers in gaining recognition and approval as "Authorized Manufacturers of Performance Components", this system has the potential to exclude foreign manufacturers and their products from a growing segment of the market.
Finally, the HQAL includes a provision called the Completion Guarantee System to protect home buyers against default by, or the bankruptcy of, their contractor prior to completing the home. This provision of the HQAL was necessary for two reasons. It is typical in Japan for the home buyer to provide up front financing to the contractor during the construction process. For example, it is not unusual for the home buyer to pay the contractor one-third of the price of the home before construction begins, with an additional third due after the house has been framed in and the remaining funds due upon completion of the house. This system may have worked well in the past, but given the current economic recession in Japan, a large number of contractors have gone bankrupt, leaving home buyers with partially completed homes and outstanding payments due on building materials. The aim of the Completion Guarantee System is to insure home buyers so that if their builder goes bankrupt, funds will be available to complete construction.
Two organizations have been established to provide completion assurance guarantees. The first organization, Jutaku Anshin Assurance Company, is a privately funded organization between 52 national building material retailers (each of whom contributed ¥5 million) with substantial support from four major Japanese insurance companies. The second organization, the Organization for Housing Warranty, is a publicly funded organization.
Home builders seeking to become a member of these organizations must submit a financial statement of their company for examination. Builders that are not judged to be financially stable will be unable to join either organization, and therefore, will be unable to provide their customers with a completion guarantee. It is estimated that there are approximately 160,000 contractors in Japan and less than 50,000 of them build more than ten homes per year. The remaining contractors tend to be very small, building 1-2 homes per year. Given this industry structure, it is expected that many small firms will not have the financial resources to join one of the Completion Assurance organizations. This will place small firms in an extremely weak position when trying to establish contracts with new customers. Analysts speculate that in the future any new home construction financed by the GHLC will require a Completion Assurance Guarantee prior to the signing the contract.
This system of providing home buyers with Completion Assurance Guarantees, particularly the privately funded Jutaku Anshin Assurance Company, has significant implications for manufacturers and exporters of wooden building materials. Jutaku Anshin will likely try to recruit larger, more financially stable, builders. This relationship could encourage member builders to purchase products through member building material retailers, while discouraging relationships with non-member retailers or direct purchases from US manufacturers and consolidators, which could effectively restrict market access for US firms. The direct relationship between Japanese builders and US manufacturers and consolidators, which in the past had become an increasingly important distribution channel, could be phased out in favor of keiretsu-like relationships within the assurance group.
Conclusions
A number of factors have caused substantial restructuring of the building code and regulations that affect the residential construction industry in Japan. The primary objective of the changes has been to increase the quality, performance, and durability of residential homes, while providing home buyers with increased protection. A number of these changes, however, have the potential to reduce the competitiveness of imported wooden building materials in Japan and to restrict the ability of US manufacturers and exporters to sell directly to Japanese home builders. There is also a strong likelihood that Japanese home builders (and wholesalers) will work to require that US manufacturers and/or exporters of wooden building materials provide ten-year product warranties. All of these factors are matters of concern for US manufacturers and exporters of wooden building materials who could see their position in the Japanese market undermined by what some have characterized as 're-regulation' in the new building code revisions and regulations.
In Washington, regulations intended to recover declining salmon populations are imposing new management requirements in forested riparian management zones (RMZ) to reach desirable future biological conditions. These social goals are not reflected in market values, inherently increasing costs to some while providing benefits to others. Economic impacts include the net present value loss to the landowner, the employment and economic activity loss to rural communities, tax receipts to governments, economic gains by other interests such as fishing, and the broader non-market social values placed on salmon abundance by a society that is numerically dominated by the urban public. Equity considerations are created, but legislation only requires disproportionate impacts across landowners to be accessed. Economists generally argue for greater efficiency and equity, which means finding ways to reach desirable goals with lower losses while also distributing the costs to those benefiting.
To estimate these impacts, simulations of a range of management alternatives have been developed. This requires projecting biological conditions and economic outputs for a broad array of management alternatives and finding a desirable harvest schedule from the alternatives. Such simulations still leave out potentially important impacts such as the cost increase from handling more fragmented stands, increased road costs, accessibility constraints, planning and operational costs, conversion options, and uncertainties in biological measures such as stream typing. To bound some of these potential sources of error, case studies of on-the-ground conditions and surveys of management intentions are also being evaluated.
Our simulation of Washington's new Forest and Fish Regulations for the Westside characterized the impact of a three zone management scheme, using a 50-foot no-touch buffer for the inner zone on fish bearing streams, minimal thinning from 50 feet out to two-thirds of the site potential tree height (SPTH), and leaving 10-20 trees per acre in the outer riparian zone up to the SPTH. For non-perennial streams, 50-foot no-touch buffers were assumed for one-half the headwater stream length, and 30-foot no-equipment zones for seasonal streams. Applying these assumptions on non-federal lands in Lewis County, almost 10% of the land was designated as no management buffers. Losses in harvest, in landowner net present value, and in rural jobs, for the first two decades, compared to a pre-regulation base were closer to 18%, a reflection of the increasing harvest scheduling difficulty when mature acres become in short supply. Long-term sustained losses were comparable to the acreage impacted. Using the measure of late seral (LS) acres in the RMZ as a proxy for a set of riparian habitat indices, the new rules increase the percentage of LS in the RMZ to 15% in 55 years and 38% in 105 years. More active management restoration treatments in the RMZ, such as periodic thinning to accelerate growth of large trees and to restore understory vegetation in dense young stands, cut the economic losses almost in half while increasing the LS in the RMZ to over 50% beyond 55 years. This alternative approach, which might be possible with a Habitat Conservation Plan, infers more than a four-fold improvement in economic efficiency to reach the same biological goals.
Using case studies to better understand the limitations of simulations shows a large variation of impacts across small ownerships with impacts of near zero to 65% for owners in the 100-acre range. Some small owners have the immediate option of conversion to other uses, some have already harvested their timber postponing the impact for decades, and others are immediately impacted. In addition, the size of harvestable plots are substantially reduced by stream buffers, with some portion of the acres no longer economically accessible. The cost of upgrading roads and culverts is still being evaluated. Unstable slopes may also induce substantial impacts. Some 15% of the industry lands in Lewis County could be considered unstable, potentially restricting management. Non-industrial lands are concentrated in the lower elevations with a relatively smaller portion of their acres potentially unstable. Another large uncertainty is stream typing, with many streams either unclassified or mis-classified. Some believe many of the unclassified and seasonal streams will be reclassified to potential fish bearing headwaters, greatly increasing the acres in stream buffers.
The timber restricted by buffer areas appears to average in the 10-20% range but may exceed 50% for many owners, the likely range of asset losses. To lower the small landowner losses and reduce the disparity, Washington will offer market value compensation in exchange for conservation easement to small owners for 50% of these losses up to a threshold level of about 25% and 100% compensation above this threshold. The buffer regulations and easement, however, would appear to reduce any motivation for small owners to continue investing in restoration and thinning operations to grow larger trees. The increased cost reduced the profit margin for the next crop by more than twice the percentage loss in acres impacted in the cases we analyzed. Declining financial returns to forestry investments relative to conversion or sale alternatives calls into question the future viability of small owner management.
One estimate of the potential increase in market value for fishing interests showed the timber losses in buffers to be almost an order of magnitude larger than the fishery gains and the gap widened with buffer width. This suggests that the important benefits are non-market social values, not non-timber market values. Survey analysis of the values placed on forests and fish by the general public suggests that net social welfare gains are possible, but this would likely require more active management alternatives to reduce the economic losses. These alternatives are not the norm under current regulations that are still predicated largely on no-management reserve strategies instead of incentives that could encourage active restoration-management strategies.
Tentative conclusions would include:
Bruce Lippke, former director of CINTRAFOR is now the director of the Rural Technology Initiative, College of Forest Resources, University of Washington. This abridged article first appeared in the July/August issue of Western Forester.