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Authors: Daisuke Sasatani, Ivan Eastin and Joseph Roos
This study presents exploratory research about the transitional Japanese home building industry. The Japanese housing industry changed significantly during and since the “lost decade” of the 1990s because the business environment changed dramatically. The main goal of this study is to classify Japanese builders by their business strategies and business behaviors in order to provide a useful market segmentation strategy for forest products exporters targeting Japanese markets. In order to do so, we first collected extensive secondary information on the background of the Japanese housing industry. Then we surveyed Japanese large builders and analyzed the data.
After its bubble economy burst in the early 1990s, Japan experienced a serious economic slump that lasted over a decade. This period is called the “lost decade” in Japan. During the lost decade, Japan experienced deflationary pressure on land prices, securities, and consumer goods. The Bank of Japan set the interest rate essentially to zero in order to stimulate the economy, and the overnight call rate is still very low. In the past, Japan practiced unique business customs including keiretsu and interdependent collusion between politicians and business, which undermined competition. In order to recover from the economic slump, it was necessary to reform inefficient business practices in Japan. Although political uncertainty between reformists and anti- reformists within and outside the Liberal Democratic Party remains, Prime Minister Koizumi was able to reform some business practices and influence the vertical keiretsu structure, which has been weakening. As the market continues to liberalize, there should be fair competition for all participants, including small- to mid- size enterprises and foreigners, in the Japanese market. These socio-economic changes have contributed to the reform of the Japanese building industry and, as a result, some small- to mid-size builders have grown quickly.
The Japanese residential housing market underwent substantial change during the lost decade as well. The Kobe Earthquake in 1995 led to major changes in the Building Standards Law (BSL), which accelerated the adoption of pre-cut lumber. Pre-cut lumber allowed mid-size builders to lower the cost of post and beam (P&B) construction through labor efficiencies and reduced waste. Many mid-size builders contracted with komuten (small builders) or independent carpenters to expand their businesses. Demographic changes have also played a huge role in the changing housing market in Japan. For example, Japanese Echo baby boomers started buying their first homes, and some mid-size builders targeted their homes to this large population.
Deflationary pressure on land values allowed builders to acquire large parcels of land in suburban Tokyo. Builders then subdivided these parcels and built tract spec P&B houses. Those builders were called “power builders,” and many small- and mid-size builders all over Japan have adopted their business strategy to survive.
The survey results show that many mid-size builders call themselves power builders, but we failed to find statistical significance of a common business strategy among power builders. Over the last few years, many small- and mid-size builders have tried to imitate the business strategies of the original power builders and to emulate one another in order to survive. However, it is not always possible to copy an entire business strategy from other firms. The power builder strategy is currently little more than a marketing slogan used by many firms to attract price-sensitive customers. Yet builders who build a lot of tract houses and have grown quickly in terms of the number of houses that they build still tend to refer to themselves as power builders.
The most important success factor of builders between 2001 and 2005 in Japan was how many tract houses they built. Interestingly, the prices of the homes were not significantly different from those of fast-growing builders and other builders. Tract house builders service a significantly higher percentage of first-time home buyers and tend to build smaller houses than do custom house builders. Other characteristics of tract house
builders are that most prefer to use glulam lumber, and that they do not have a defined land acquisition strategy, tending to acquire any available land in suburban areas.
Since the original power builders’ success in the industry has attracted many imitators and undermined the old market traditions of the housing industry in Japan, it is not useful to focus on the traditional builders categories when developing a marketing strategy. The traditional categories were: 1) national home builders, 2) regional builders, and 3) komuten. In order to reflect the changing nature of the industry, we propose four new strategic groups of Japanese builders: 1) premium big builders, 2) economy big builders, 3) mid-size regional builders, and 4) komuten (independent carpenters).
Firms in the same strategic groups have similar business models, so their supply channel choices can also be expected to be similar. For example, Komuten or independent builders typically construct only a couple of houses a year, and our survey did not cover them. Mid-size regional builders construct between 25 and 100 houses per year and prefer domestic lumber such as sugi or hinoki. They are focused on a local market and usually build post and beam houses. Economy big builders tend to pursue a low-end pricing strategy and this segment of the market increased at an average annual rate of 10.4% between 2001 and 2005. Economy big builders usually build post and beam houses and tend not to import lumber or building materials directly from foreign countries. Finally, premium big builders tend to build value-added houses; they are interested in adopting a marketing strategy based on design differentiation and prominent advertising. Generally, premium big builders sell their houses at a premium price, although their growth rate is less than that of the economy big builders. Some of the premium big builders directly import lumber and building materials from foreign suppliers.
Currently, economy big builders have a strong market share, and this market has grown very quickly. However, they will face substantial difficulties in the near future. The industry is currently going through a period of consolidation, since many builders have attempted to imitate the power builders’ business models. In addition, many echo baby boomers have already purchased their own houses, so this market segment has begun to shrink. Further, the high volatility of the foreign exchange rate creates uncertainties regarding the supply of raw materials. Builders need to re-create their business strategies and adapt to this changing market environment. Their success in changing their business strategies will depend on their management capabilities. U.S. forest products exporters may be able to inspire them, thus enjoying mutual benefits.
Our exploratory research has derived the following strategies for U.S. forest products and building materials exporters:
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Authors: Juan Luo and John Perez-Garcia
Prior to the 1980’s, the government provided its citizens with public housing. As a consequence, there was a lack of investment in this sector. State-Owned Enterprises (SOEs) were responsible for providing its workers with an apartment or other housing unit. SOEs allocated apartments under a series of rigid administrative regulations that resulted in a rental market with artificially low rents, no home ownership and average living space per capita that was less then 4 m2. These conditions led the Chinese government to consider housing reforms by the end of the decade.
During the 1980's, along with other aspects of their economic system, China started to reform its urban housing sector. The housing reforms increased investment in the private (also know as commercial) and public (also known as non-commercial) housing sectors. As a result of these reforms, there are roughly 1 million annual housing starts today. The average living space is 8-10 m2, with a goal of 12m2 by the year 2010. So far, the housing reforms are focused mainly in the cities of Beijing, Tianjin, Shanghai and those in Guangdong Province.
The introduction of reforms has produced a dual-housing system in China. One segment of this dual system is the SOEs, which continue to provide the majority of housing to its employees. The other segment is the private housing sector, which operates in a more conventional, open housing market. Eventually China hopes to eliminate this dual-housing system. To do so additional market mechanisms must be undertaken to further develop an open, competitive housing market. These mechanisms involve reforms to price setting mechanisms that set current home sale prices and government-set rents.
An important consideration will be a households’ income in establishing market price setting mechanisms. The recent reforms have led to two problems. One is that the price on the ‘open housing market’ is too high to be affordable by average urban residents. As a result there is currently an overstock of newly built housing that was constructed for affluent households. The other problem is that government-set rents can’t be raised to market levels without a significant wage adjustment. Thus wage reform will be just as important for housing reform to be successful.
Housing reforms will need to be monitored along with other economic reforms in China. SOEs still control much of the urban housing stock—i.e. the majority of housing is in the public, non-commercial housing sector. The reliance of employees on their work units for their housing needs has not fundamentally changed under the reforms undertaken to date. Successful housing reforms will depend on the reform of SOEs. Wage and housing reforms, and controlling unemployment are a part of much larger and more complicated SOEs reforms. In large part, SOEs reforms will be key for housing reforms to be successful.
It is estimated that housing reforms generated $80 billion in new household-related spending in 1998 (9% of GDP) and $150 billion in 1999. However, housing reforms are major undertakings, which will gradually, rather than immediately, bring opportunities for foreign firms. Continued success in generating economic activity will promote further reforms.
China’s prediction of 10% annual growth in domestic demand over the next ten years may be over-optimistic, but disposable income has increased by an average of 6% in urban areas over the last five years, and 5.4% in rural areas. A continued growth in income is likely to have a substantial effect on the domestic demand for wood products, hence the outlook for a growing market in China for wood products is optimistic.
Rising incomes among China’s emerging middle class, many of whom still live in accommodations provided by their employer, has also raised spending levels on furniture and interior wood products. Demand will initially depend on affluent families that can afford a home purchase and separation from SOEs housing subsidies. As more middle class families become affluent, they also will likely renovate existing units or move into new apartments. Those dependent on heavily subsidized state housing are not likely to contribute much to any potential increase in wood products demand, however. Hence the transition to a western-style housing market is likely to be slow and intimately coupled with wage reforms and the transformation of SOEs to competitive industries. As this happens, over the next several years, demand will grow for higher quality products such as flooring, molding, windows, doors, cabinets, paneling, wall units and furniture. It is expected that consumption of these products will develop into a significant market following these transitions.
Over the last decade and more, China’s furniture industry has attained unprecedented development; its output during the period 1986-1997 had developed from 120 million pieces to 476 million pieces, with an average annual increase of 39.8%. Total output value of the industry as of 1998 reached 78 billion RMB and then in 1999 with growth rate to an estimation of 12%. Timber is an important raw material for the furniture industry. A large furniture sector will depend more heavily on imports of timber.
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Authors: Robert Y. Hashizume and Ivan L. Eastin
Japan is the largest export destination for the US and the second largest export destination for Canada (after the US). The Japanese residential construction housing industry is the main driver of forest products exports to Japan. There were 1.4 million residential housing starts in Japan compared to 1.5 million starts in the US in 1997. Japan has roughly the same level of housing starts as the US but has only half the population on a land mass the size of California.
North American-style 2x4 housing has grown at double-digit rates over the past 10 years. In 1996, 2x4 houses commanded 13% of the wooden house market share and 6% market share of the overall housing industry. 2x4 housing starts are expected to grow further because of active promotion of imported housing by the Japanese government, deregulation of the industry, and increasing appreciation for western design by Japanese consumers.
2x4 home construction in Japan has been observed to be less efficient and accurate than in North America. The differences in construction techniques increase the cost and tome of construction of the house, and decrease its overall quality. Various strategies are currently used by North American companies to provide technical assistance in 2x4 construction technology to Japanese construction industry professionals. This technical assistance allows Japanese professionals to be more aware of proper construction techniques to reduce costs and increase the overall quality.
This project was undertaken to identify the technology transfer strategies that North American companies use, which of them are most effective, and which parties should be the most important targets of technology transfer training programs. An understanding of the most effective technology transfer methods would allow various parties involved with exporting 2x4 houses to Japan to implement more successful training programs.
Survey of North American companies involved in the 2x4 housing industry in Japan
A census of all companies in the Pacific Northwest involved in North American-style 2x4 construction projects in Japan was conducted. A total of 270 companies based in the US (191 firms) and Canada (79 firms) were mailed a four page survey regarding their delivery of North American 2x4 construction technology transfer to Japanese construction industry professionals. The response rate for US and Canadian companies was 48% and 58%, respectively, with an overall response rate of 52%.
Overall quality of 2x4 housing built by Japanese construction industry professionals
The respondents indicated that the overall quality of 2x4 houses built by Japanese construction industry professionals, relative to North American standards was only average. In addition, respondents reported that the quality of structural framing was also average while the quality of architectural design ranked well below average.
Understanding of 2x4 construction technology
Survey respondents were asked to rank Japanese contractors’ understanding of 14 components of 2x4 construction technology. The components least understood were drywall, ventilation and architectural design. To improve the overall quality of a 2x4 house built in Japan, these three components should have more emphasis during technical transfer training activities. The components of the 2x4 construction system that were best understood included interior carpentry, roofing, flooring, doors, windows, exterior finishing, and weatherproofing. In an open-ended question, the respondents most often identified the structural framing of 2x4 houses as the one area where Japanese construction industry professionals have the weakest understanding, with 19% of all open-ended responses.
Respondents were next asked to rank which components of the 2x4 construction system they emphasize when providing technical assistance to Japanese construction industry professionals. All of the components except foundation and roofing were identified as being important.
Promotion of 2x4 construction technology
Despite the fact that 2x4 houses have been built in Japan for over 25 years, the overwhelming majority of respondents indicated that continued efforts to promote 2x4 construction technology are very important, with 63% indicating that was very important. There were few major differences between US and Canadian companies, and despite the double digit growth rate of 2x4 housing starts over the past 10 years, North American builders and exporters still feel that it is important to continue promoting technical transfer of the North American 2x4 construction system.
Respondents were asked to rank their use of eight different training methods. It was found that hands-on construction in Japan and employing North American site supervisors in Japan were the two methods respondents most frequently use. Instructional videos, hands-on construction training in North America, and classroom seminars in Japan and North America were rarely used. When asked to identify the single most effective strategy for achieving technology transfer, 20% of the respondents identified hands on construction training in Japan.
Respondents felt that North American construction companies and North American building material exporters would be the most effective in promoting technology transfer. North American construction companies were the most frequently cited group, with 27% of the open-ended responses. The organizations that were perceived to be least effective in promoting technology transfer were Japanese building material distributors and both North American and Japanese colleges.
Factors restricting export potential of 2x4 houses
The most important factors restricting the export potential were a lack of builder and carpenter familiarity with imported building materials and 2x4 construction technology. In terms of non-technology transfer related factors, the current severe economic condition was mentioned most often. The idea that “2x4 housing [is] a fad that will fade” was not an important factor restricting exports.
Conclusion and Recommendations
This study suggests that North American builders and building material exporters perceive that many Japanese construction professionals do not have strong technical understanding of the North American-style 2x4 construction technology. The vast majority of respondents indicated that they have developed technical training programs for their Japanese customers. However, several recent technical assessments of 2x4 construction projects in Japan suggest that this lack of technical understanding is much more pervasive and the extent of technical deficiencies in 2x4 homes built in Japan is much greater than exporters are aware. These studies suggest that it is time for North American builders and building materials exporters to work with the Japanese construction associations to develop a comprehensive technical training program to ensure that 2x4 homes are built correctly in Japan. The recently passed Housing Quality Assurance and House Inspection Laws further emphasize the need for a comprehensive and effective 2x4 technology transfer training program. The alternative, sporadic and uncoordinated technical transfer programs provided by individual companies, will not lead to effective and widespread transfer of the North American-style 2x4 construction technology in Japan. Ultimately, it is in the best interest of North American and Japanese companies to ensure that 2x4 homes are built properly in Japan. Otherwise, consumer perceptions that 2x4 homes in Japan are inferior in terms of overall quality or long-term performance, relative to other types of housing technologies, will lead to the decline of this important segment of the residential construction market in Japan.
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The Changing Japanese Housing Market: An Assessment of US Export Strategies for Prefabricated Wooden Housing and Building Materials
Authors: Ivan L. Eastin and Anne Rahikainen
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.
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: W. Ramsay Smith
Japan currently has a very strong residential housing market. To better understand this market it is the purpose of this paper to provide some background information by summarizing the housing trends and financing arrangements in Japan. This will consist of general housing statistics, housing and land costs and major methods of financing.