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Spring 2000
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Volume 15 Number 1
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Contents
- Material Substitution in the
US Residential Construction Industry
- Director's Notes
- CINTRAFOR Wood Products Conference
Tracks Asian Recovery and International Competition
- A Competitive Assessment of
the Hardwood Lumber Industry in the PNW
- CINTRAFOR's 1999 Graduates
To assess the extent of material substitution in structural applications in residential construction and to provide insight into the factors driving these changes, in 1995 researchers from CINTRAFOR surveyed residential homebuilding firms to determine the materials they use, factors affecting material selection, and attitudes about wooden-based building materials. In late 1998, CINTRAFOR conducted a follow up study of 2,500 residential construction firms (100 were ranked the largest in the US by Builder magazine) to characterize how builder behavior and attitudes have changed. The results showed that softwood lumber continues to lose market share and builders remain concerned about softwood lumber quality and price. Findings also revealed that builders are beginning to believe non-wood building materials, including steel and concrete, have less impact on the environment than softwood lumber. A full report is available as WP73.
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 stability, and product quality, combined with technological advances by producers of substitute materials, have contributed to increased use of material substitutes in residential construction.
Of 2,500 builders surveyed, 12.8% responded (12.1% of the random sample and 37.1% of the 100 largest firms). Survey results show that residential builders have substantially increased their use of substitute structural materials since 1995 (Figure 1). Respondents reported increased use of substitute structural materials since 1995. Of all substitute materials included in the survey, almost 99% of respondents used at least one substitute product (compared to 91% in 1995). While use of steel, reinforced concrete and plastic-fiber lumber increased, engineered wood products emerged as the clear winners: over 80% of the respondents reported using glulam beams, wood I-joists, and laminated veneer lumber (LVL). Builders in the western US reported the highest use of 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, and LVL, as well as newer engineered wood products such as parallel strand lumber and laminated strand lumber.
Figure 1. Number of substitute building materials used, 1995-1998.
The 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 framing, finger-jointed lumber, wood trusses, LVL, and wood I-joists.
Wall framing- Softwood lumber dominated wall framing in 1998, with an 83% market share, but it has lost market share since 1995 (down from 93%), particularly among large firms.
Floor framing- 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, the market share of wood I-joists increased from 23% to 39% in the same period.
Roof framing- Softwood lumber framing is no longer the dominant material 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 builder 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 identical to those reported in 1995. Softwood lumber straightness, strength, availability, and lack of defects were rated as the most important attributes. Price appears to be much more important to large firms than small firms. Builders reported that while they were somewhat more satisfied with the price and price stability of softwood lumber in 1998, they were still unhappy with softwood lumber quality, particularly straightness and the overall occurrence of defects.
Figure 2 illustrates 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”). While builders appear to be less concerned with price and price stability than in 1995, they remain very concerned about the perceived decline in softwood lumber quality, expressing the least satisfaction with product attributes they rate as being most important. This suggests that they are dissatisfied with the value (defined as the ratio of quality/price) of softwood lumber.
Figure 2. The gap between importance and satisfaction rankings of thirteen product attributes.
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 attributes that are highly correlated. The results, which were almost identical to results obtained from the 1995 survey, suggest that the 13 product attributes used to describe softwood lumber can be summarized into three factors: performance, economic, and technical attributes.
Finally, the survey assessed builders’ perceptions of the environmental impact associated with using substitute products. 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, the 1998 survey data indicates a definite shift on the part of builders toward a more favorable perception of the environmental impacts associated with using substitutes, including steel and concrete, than in 1995.
Softwood lumber continues to be displaced by substitute materials in segments of the residential construction industry that it has traditionally dominated: wall, floor, and roof framing. 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 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 that can be attributed to technological advances in manufacturing processes driven by the changing forest resource. However, two trends 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. Clearly the forest products industry must be more effective in developing a strategic response to the challenge posed by substitute materials.
This month our featured articles address the topic of competitiveness. Our lead article, Material Substitution in the US Residential Construction Industry (WP73) discusses changing competitiveness between wood and non-wood building materials. Our second article, A Competitive Assessment of the Hardwood Lumber Industry in the PNW (WP72), is the result of two studies that examined factors that improve or detract from firm competitiveness in the international hardwood market. This issue also includes a short synopsis of some of the highlights of the 16th annual International Wood Marketing Conference, held on November 4-5 in Seattle. Much of the discussion at the conference centered around the topic of competitiveness, including the increasing trend toward substitute products, an evaluation of regional timber supplies, and the forest sector’s dismal financial performance. Proceedings will soon be released.
The topic of competitiveness is timely given the recent World Trade Organization (WTO) meeting. A primary agenda item proposed by APEC for the Seattle WTO meeting was accelerated tariff liberalization (ATL). Under ATL, developed countries would remove all tariffs by 2002 and developing countries would remove tariffs by 2004. Forest products were one of eight target areas for tariff reduction. In some countries tariffs are as high as 30% for paper products and 45% for wood and furniture products, whereas tariffs on wood products in the US have already been reduced to single digit levels or removed altogether.
“What was the long term result of the WTO fiasco in Seattle?” is a question that has been addressed by others, but some perspective may be gained by drawing from CINTRAFOR’s trade research.
The Impact of Tariffs: Tariffs are more often than not a detriment to the environmental and economic health of nations. Tariffs on raw materials that are much lower than tariffs for finished products encourage imports of primary products such as logs and chips and discourage imports of processed wood and paper products. Since consumers pay more for domestic products, less money is available to invest in the local economy. Domestic consumers essentially subsidize inefficient local production and enable processors to avoid upgrading their manufacturing systems to become competitive. Inefficient production also uses more energy and raw materials to manufacture the same volume of products, leading to excessive environmental impacts. This is especially true in the forest products industry.
Lower tariffs also make competition between labor groups more equitable as each country’s labor is used to produce that which it does best. Since the US does not have high tariffs, US labor interests would more often than not benefit from trade liberalization. While it has been argued that tariff liberalization will target jobs in developing countries, these jobs are only being maintained by protectionist tactics. Counter to popular belief, tariff liberalization will ultimately produce more jobs: as costs for raw materials fall, savings, investment, and production increase, and the demand for workers rises.
WTO Opposition: Opponents argued that ATL would cause timber harvest volumes to increase 3-4%. However, research using trade model simulations shows very little change in total harvest. The model does show changes in trade flows and some increases in production and consumption of products resulting from improved efficiency. According to the trade model, regions with underutilized plantation timber, like Scandinavia, will increase harvests on a sustainable basis, while harvests in countries that do not have competitive production facilities, such as Russia, will decline. The net result is more acres sustainably managed and more reserves -- both benefits for the environment.
Opponents also charged that the use of trade sanctions to punish countries that do not comply with WTO agreements imposes on country sovereignty. The WTO did rule against discriminatory environmental standards the US applied differentially across countries, yet it did not suggest that environmental standards should not be used. Ironically, WTO opponents wanted environmental and labor standards to be linked to trade and enforced by WTO, which would indeed interfere with country sovereignty. Developing countries opposed such initiatives from developed countries on the basis that it denies their sovereign right to use resources and follow the same growth path developed countries once used. The solution is to find non-discriminatory solutions, which would make the sovereignty claim moot.
PNW producers are at a comparative disadvantage with Canada and the US South in supplying the US market, yet the region’s port access to ocean shipping provides an advantage for supplying Pacific Rim markets. Trade liberalization would reduce raw material exports and increase exports of processed products, especially secondary manufactured products, which have the highest tariff rates. If tariffs are reduced, the PNW will export more engineered wood products produced at facilities with higher environmental standards that use fewer raw materials. Even if developing countries build similar facilities, the environment wins.
The WTO protest produced many hours of media coverage about the protesters and policing methods instead of discussing the merits of the ATL proposals. What was lost? The opportunity to increase economic freedom at the global level, which reduces poverty, raises personal income, increases efficiency, and reduces waste. Satisfying basic necessities more effectively would increase the ability of developing countries to allocate more resources to improving the environment and providing services for local citizens. Reducing poverty leads to a greater willingness to raise environmental standards. As their economic situation improves, regard for the environment in developing countries will more closely mirror that of developed countries. Strangely, these issues are also the ultimate objectives of many of the WTO protesters. Regardless of where the misinformation began, why was it not questioned? That may be the most important loss.
Adam Smith said: “It is the maxim of every prudent…family, never to attempt to make at home what it will cost…more to make than to buy. The tailor does not attempt to make his own shoes, but buys them of the shoemaker...What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom.”
On November 12-14, CINTRAFOR hosted the 16th annual International Wood Products Marketing Conference, formerly sponsored by Jay Gruenfeld and Associates. Attendees heard experts in the areas of processing, international markets, finance, and land management speak about challenges and opportunities for the US forest industry. While the main topic of discussion last year was the impact of Asia’s devalued currencies and the resulting decline in exports from the PNW, speakers this year focused on Asian economic recovery and market potential. David McClain, Director for the East-West Center at the University of Hawaii noted that while Asian economies have recovered more than expected and imports are up, and some governments have taken active steps toward structural reform, Japan still needs substantial financial restructuring to secure long-term economic stability.
Rising competition from international suppliers was another key issue. As domestic timber restrictions become more stringent, prices for US timber have risen, which opened the door for other suppliers to increase their share of international timber markets. Mats Wallgren, Marketing Director for Bergkvist-Insjön in Sweden explained that the price hike for lumber from the US in 1992 opened doors in Japan for European suppliers. European suppliers now supply 27% of the Japanese lumber market. Finnish and Swedish mills, in particular, have increased their share of the Japanese market through their ability to mill logs and products to suit customer requirements. According to Bob Flynn, of Robert Flynn and Associates, South American suppliers are becoming more formidable sources of competition as well. Not only have lumber and moulding exports from Brazil and Chile to the US reached record levels, but several countries are increasing their plantation area and attracting substantial foreign investments.
While the demand for lumber has weakened, demand for OSB has surged. The strong US housing market is the leading driver for the expanding OSB market, consuming 65% of the OSB produced. While market expansion is expected to continue, industry analysts project that Canadian producers will increase their share of the market significantly. According to Gerry Van Leeuwan of R.E. Taylor and Associates, by 2004, Canada is projected to increase production by 70%, reaching 11 billion square feet per year. The US is expected to increase production by 13-15%, producing 13.5 billion square feet per year.
As the Asian economy continues to improve, resource availability shifts, and the use of available timber changes, the forest products industry will continue to evolve. Next year’s conference, scheduled for November, will continue to track these issues and present information about industry innovations, and topics affecting the international forest products market.
CINTRAFOR recently released A Competitive Assessment of the Hardwood Lumber Industry in the Pacific Northwest (WP72), based on a survey of managers of hardwood firms in the PNW. The paper includes information ranging from factors affecting firm competitiveness to challenges and threats specific to the industry. In a separate project, European furniture manufacturers and brokers were interviewed in order to understand end-user perceptions of western red alder.
Hardwood lumber production in the Pacific Northwest (PNW) increased over 200% between 1983 and 1997, with exports of red alder, the region’s most prevalent hardwood species, surpassing $160 million. This is of interest considering commercial hardwood species in the PNW have traditionally been considered a low value byproduct of softwood timber stands, with less than 1% of private and industrial timberlands in the PNW being managed for hardwood production. While PNW hardwoods are finding increased market acceptance, little research has been done to identify factors that contribute to the industry’s success. CINTRAFOR researchers surveyed 13 hardwood lumber producers operating in western Washington, western Oregon, and northern California about their opinions regarding factors that affect their firm’s success. Ten companies responded to surveys, a 76.9% response rate.
The hardwood lumber manufacturers surveyed produced approximately 450 MMBF of lumber, accounting for over 95% of hardwood lumber production in the PNW. Exports totaling approximately 126 MMBF or 28% of total production. (Products include kiln-dried and green lumber, pallets, veneer, plywood, chips, and agricultural boxes and crates.) Both large and small lumber manufacturers sell a substantial percentage of their production direct to the end-user. However, large manufacturers tend to rely on wholesalers to the exclusion of brokers while small manufacturers tend to favor brokers over wholesalers.
Problems and threats confronting manufacturers in the hardwood industry were grouped into three categories: domestic regulatory issues, domestic resource issues, and international regulatory issues. Survey respondents were asked to indicate the impact that each factor had on the competitiveness of their firms using a seven point scale ranging from 1 (Strong Negative Impact) to 7 (Strong Positive Impact).
Domestic Regulatory Factors:
Respondents indicated that all three domestic regulatory factors had a negative
impact on their firm’s competitiveness. The mean score for each factor was:
state taxes (2.6), federal regulations (2.8), and state forest practice regulations
(2.9).
Domestic Resource Factors:
Increasing raw material price (2.8) and price volatility (3.1) were perceived
to have the greatest negative impact on competitiveness. 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 while
resource availability (4.6) had a slightly positive impact on competitiveness.
International Regulatory Factors:
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 non-tariff barriers (3.6) and regional trade agreements (3.7),
although the difference in score was small. Firms exporting primarily to Europe
perceive environmental certification as having a more adverse effect on competitiveness
than do firms selling products primarily to Asia and North America.
Respondents were asked to evaluate the importance of different marketing variables on the competitiveness of their firms using a seven point scale ranging from 1 (Not Important) to 7 (Very Important) . The importance ratings for the individual marketing variables clearly show that reputation is extremely important in the hardwood industry, Figure 1. Communicating regularly with customers, maintaining high quality control standards, and delivering products on time also received relatively high scores. It could be argued that of all the variables included in the survey, these three exert the greatest influence on a firm’s reputation, further emphasizing the fact that reputation has a critical impact on competitiveness. Efficient manufacturing and raw material procurement were also rated as being important.
A qualitative examination of the survey data suggested that the original twenty marketing variables could be segmented into six groups based on the functionality of each variable with respect to the marketing mix (Figure 1). The average importance ratings for each of the six groups were: Group I: Reputation of the Firm (6.4), Group II: Efficient Production (5.6); Group III: Product Differentiation (4.3); Group IV: Distribution (4.0); Group V: Marketing Activities (3.1); and Group VI: Resource Ownership (2.2). In general, survey respondents perceived that Group I variables had a very important impact on firm competitiveness. Group II variables, while still considered to be important, were perceived to be less important than the Group I marketing variables. Variables included in Groups III and IV were perceived to be somewhat important to firm competitiveness, while Groups V and VI were not considered to have an important impact on competitiveness.
Figure 1. Perceived importance of functional groupings of marketing variables.
While respondents reported that product and service attributes affected firm competitiveness, virtually all of the marketing variables associated with innovation received relatively low importance ratings: 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, the question of how a company might successfully brand their products becomes problematic.
In a separate project, interviews with European furniture and panel manufacturers found that the light reddish hue and subdued grain appearance of red alder have made it extremely popular in the European furniture industry where natural looking furniture has been fashionable. Even though red alder constitutes less than 3% of total US hardwood lumber production, it ranks fourth in total volume and third in total export revenue among all hardwood species exported from the US. From 1994 to 1997, red alder lumber exports increased 76%, from 170 MBF to 298 MBF. During this time the value of red alder lumber exports increased from $93 million to $161 million, a 73% increase. Perhaps more significantly, the contribution of western red alder to total US hardwood lumber exports has increased substantially in the past three years, now representing 10.3% of total US hardwood lumber exports, up from 6.8% in 1995. Western red alder exports declined substantially in 1998 however, with the most significant losses in Germany, Italy, Taiwan and Japan. While European manufacturers report that consumer tastes have changed, affecting demand for alder furniture, other factors cited include fluctuations in international exchange rates, consolidation within the hardwood industry in the PNW, rising red alder prices, and competition from European beech.
German and Italian panel and furniture manufacturers report that they have either reduced the volume of alder they use or import small volumes because available supply and delivery time is inconsistent. Manufacturers reported frustration with the fact that they are at the mercy of the US market: when demand in the US low, more wood is available for export, and vice-versa. Red alder use in Europe is also constrained by fluctuating international exchange rates. Respondents stated that it is difficult for furniture manufacturers, who issue annual furniture prices, to maintain a stable profit margin throughout the year when exchange rates and product prices are unstable. It is much more attractive for these manufacturers to source wood domestically or from countries with similar changes in exchange rates.
Table 1. Volume of western red alder lumber exports by country, 1994-1998 (m3).
Companies that offer three-month price contracts with manufacturers can reportedly gain a competitive edge over companies that do not, since longer-term contracts minimize manufacturer exposure to fluctuating exchange rates and lumber prices. In a business where manufacturers must set annual prices, stable raw material pricing is an important factor. However, the ability to set longer-term price guarantees is generally restricted to large companies. Suppliers that do not offer these types of contracts face another challenge in supplying the European market and maintaining customers.
Two other factors threaten future availability of alder. First, spraying practices employed by timber companies in the PNW until the mid-1980’s to remove alder have created a stand structure of predominately mature or young trees, with a lack of medium-aged trees. Some industry experts predict that harvest volumes will decline 25% by 2003 as mature trees are harvested. Second, recent legislation to restrict access to riparian zones, the primary areas where alder thrives, threaten future alder supplies. Since 51% of PNW alder volume is located on federal lands, the volume of hardwood logs harvested from public lands may decline substantially in the future.
Consolidation of the hardwood industry during the past two decades may also have affected demand for red alder. During the mid-1980’s approximately 25 red alder mills operated in Washington and Oregon. Mill consolidation or closure has lead to market dominance by a few producers resulting in a substantial reduction in the number of hardwood firms in the PNW. Manufacturers may be reluctant to rely on fewer sources for raw material supplies. European manufacturers reported that as the number of red alder suppliers declined, remaining suppliers began to set more stringent rules by which they sold products.
The hardwood industry has experienced substantial growth over the past ten years despite timber harvest restrictions in federal and state forests. While harvest restrictions were not perceived to have adversely impacted the industry, riparian zone regulations related to endangered salmon populations could have a severe impact on the resource, particularly if those regulations are vigorously applied to private forests. None of the regulatory factors evaluated in the survey of suppliers were viewed in a positive light, although few were perceived to have a strongly negative impact on the industry. Respondents indicated that the marketing variables that influenced a firm’s reputation and production efficiency were the most important. In contrast, virtually all of the marketing variables associated with acquiring market information and promoting innovation were perceived to be much less important, suggesting that hardwood manufacturers place a low value on product innovation and differentiation.
The shift in demand for western red alder in Europe appears to be largely in response to changes among alder suppliers in the PNW. European manufacturers have reportedly started to find substitutes for alder as alder prices have risen and service attributes have declined. While consumer tastes may have changed, furniture manufacturers’ reluctance to produce and promote alder furniture may influence consumer taste as well. When alder was plentiful and the price was low, manufacturers produced large quantities of alder products. As the price has risen and supply become inconsistent, it has become a less desirable material to use.
Four students graduated from CINTRAFOR this fall. Yetti Rusli, a Ph.D. student from Indonesia, completed her dissertation titled “The Indonesian Plywood Industry, Environmental Conservation Policy, and the Long-Run Market Adjustment”. She has since returned to Indonesia to work with the Ministry of Forestry. Gerard Malcolm received an M.S. in forest economics and focused his thesis research on using dynamic models to forecast prices in the pulp and paper industry. He is currently employed by Jaakko Pöyry in Singapore. Sam Fleishman, the co-author of this month’s lead article, received an M.S. in forest products marketing and now works as a market analyst for the National Association of Home Builders. While a student at CINTRAFOR Sam also co-authored a paper on Argentina’s forest products industry (WP67). Wenji Zheng, also received an M.S. in forest products marketing and completed an assessment of China’s forest products industry as her thesis. This research will soon be released as a CINTRAFOR Working Paper.