C
I N T R A F O R
Working Paper 102
Distribution Systems for Value-added Wood Products
in China
Jeff Cao
Rose Braden
Ivan Eastin
May 2006
EXECUTIVE SUMMARY
In recent years, China has become a vital market for many US
wood exporters. Now the fourth largest
export destination for US wood products, exports from the US to China have increased an average of
30 percent per year over the past 10 years.
From 1999-2004, US exports of softwood lumber increased from $1.2
million to $27.5 million and exports of hardwood lumber increased from $29.9
million to $150.8 million. While China
predominately imports raw materials, exports of value-added products are
increasing. For example, in 2004, US
suppliers exported almost $4 million in builders’ joinery to China, replacing Canada as the leading
supplier. Sales of wood furniture from
the US
are also increasing. Between 1999 and
2005, wood furniture exports from the US increased from $1 million to $6.8
million.
China’s plentiful supply of cheap labor and comparatively
low capital costs have made it arguably, the world’s workshop. China consumes billions of dollars
in raw materials and re-exports even more in value-added wood products. As the world’s third leading importer of
forest products, China has
inevitably drawn the attention of the supplying nations and competition for China’s
business has become intense. Russian and
Canadian suppliers dominate China’s
softwood lumber market and Southeast Asian suppliers are extremely competitive
in China’s
hardwood market. US companies, however,
are competitive suppliers of high quality raw and finished building materials.
For US suppliers to maintain
and improve their competitiveness in China however, they must understand
what US products are in demand, the sales process, the distribution system, and
their competition.
While raw materials, such as
logs and lumber used in China’s
furniture factories, remain China’s
leading wood imports, the country is rapidly transitioning from a raw materials
market to a diversified market with rising demand for value-added imports. Locally produced building materials dominate
the regionally fragmented and price-sensitive market, yet US building materials
are making inroads into certain niche markets.
Yet, China
remains a challenging market that can easily consume exporters’ time and
money. In order to improve their
competitiveness, US suppliers must identify appropriate niches for their
products, navigate through thousands of specifiers,
and negotiate a fair contract. In
addition to understanding market opportunities and competition, exporters must
understand the markets for US products and how to introduce products into these
markets.
This report presents
information about opportunities, market size, factors affecting
competitiveness, and makes recommendations for improving competitiveness and
product positioning. These issues will be discussed throughout this paper and
suggestions will be made to help US
suppliers enter the Chinese market and increase their sales in China. Distribution systems for raw materials and
value-added building materials will be presented and the purchasing process
used by developers and contractors will be discussed. The information used for this report is a
combination of secondary trade data and primary information derived through
in-person interviews with knowledgeable industry professional in China.
Conclusions and
Recommendations
Understanding government
policy and directions of investments is critical for firms with long-term
resource commitments in China. Although the Chinese government readily
embraces the capitalist ideology, a number of housing developments are
controlled by local government agencies and China has yet to develop an open
exchange of information. Therefore, good
relations with government officials and large real estate companies are
extremely helpful for firms in obtaining project and bidding information. Most, if not all of the successful US
building materials exporters spend a great deal of time developing contacts in
government offices to learn about new government housing development contracts.
Over the past decade, China
has invested heavily in fixed assets to maintain the country’s recent level of
economic growth. According to the
Eleventh Five-Year Blueprint (2005-2010), the central government will recommit
investments to “building a harmonious society” by improving people’s living
standards, particularly those of rural and low-income individuals. Therefore, analysts expect housing
developments for middle- and upper-income consumers will gradually slow and
subsidized affordable housing projects will increase. Land use restrictions for single family
developments were expected to limit the number of luxury developments, but most
of the large builders have already secured enough land with permits to enable
them to continue to build.
Maintaining market presence
is critical. Most US firms don’t have inventory capacity in China
and are selling their products via a variety of intermediaries such as: trading companies, sales offices, timber
markets, distributors and home centers
Key
findings of this report include: 1) policies
enacted to achieve an economic “soft-landing” after years of double digit
economic growth could curtail demand for housing and wood-based building
materials, 2) distribution channels
vary greatly depending upon the product and region, 3) distribution channels for value-added
products are more complicated than those for raw materials, 4) long lead times and high prices hinder US suppliers’
ability to compete with domestically produced building materials, 5) locating an aggressive local partner has
an important influence on export success, particularly for technical products
(e.g., treated lumber and wood windows) where technology transfer programs are
required to educate builders, developers and architects, and 6) although competition from domestically
produced building materials is intense, there are niche-market opportunities
for hardwood lumber, hardwood veneer, windows, engineered roof truss systems, glulam bridges, treated lumber and naturally durable
species, and high-end fine furniture from the US.
Hardwood lumber and hardwood veneer
While wages in China are increasing, China still has
an ample supply of low-cost labor to fuel its value-added wood manufacturing
plants, which will continue to drive demand for US hardwood and softwood lumber.
US
red oak, cherry, alder, maple, and walnut are among the most popular species
for furniture manufacturing in China. Yellow poplar lumber and cherry veneer are
also in high demand, due to an increasing shortage of supply. The American Hardwood Export Council (AHEC)
has predicted double-digit export sales growth in the Chinese non-structural markets
over the next few years.
Wood Windows
US wood windows have many advantages over their
competitors in China,
including high energy efficiency. As the
Chinese government promotes energy-efficiency in buildings and building
materials, Chinese window manufacturers face rising costs and high market-entry
barriers with respect to window technology, quality and performance. The current market for wood windows is
high-end villa projects located in the major Chinese cities. However, in the future, rapid urbanization is
likely to provide new opportunities in second tier cities such as Chongqing and Nanjing.
Engineered Roof Truss Systems
As a major part of the government’s campaign to renovate
older urban districts, flat roofs of aged residential buildings are to be
replaced with sloped roof systems. Slope
roof modification has many advantages over flat roofs, including
energy-efficiency and visual appeal. For
most Chinese people, it is also a design that provides increased storage and
living space in the house. This
initiative could provide market opportunities for US engineered roof and truss
systems.
Glulam Bridges and Beams
Outdoor applications such as bridges may be an
opportunity since local wood is generally of lower quality compared to
imports. Current uses for glulam timbers include bridges and clubhouses in upscale
golf course developments as well as structural components in the outdoor
walkways built around the water features that are becoming more prevalent in
upscale residential developments.
Treated SYP and naturally durable
species
Although competition is
intense in the treated lumber market, there is a potential for US treated
softwood lumber if the market is well educated and US standards are well
recognized. Critical to the success of
this product market is educating Chinese construction professionals about the
importance of proper lumber treatment on the long-term durability and
performance of treated lumber. This is
particularly challenging given the price sensitivity of this market. Another option is the use of naturally
durable wood species such as western red cedar, Alaska yellow cedar, eastern white cedar and
redwood. While these species provide
attractive options for builders, availability and cost can be an issue.
High-end fine furniture
Import tariffs on furniture
imports were totally removed in 2005. US
furniture brands, such as La-Z-Boy and Ethan Allen, can already be found at the
retail level in major Chinese cities.
Buyers of imported furniture are largely limited to overseas expatriates
and upper income Chinese who are pursuing western lifestyles. With China’s increasing integration into
the global economy, and continued economic growth, this high end segment of the
market is expected to increase substantially.