1. Globalization_and_Hardwood_Marke ts_WERC_June 2 2008 Globalization and Hardwood Markets - - The Future Offers Opportunities and Challenges Northeast Utilization & Marketing Council Annual Meeting & Training Session WERC – Princeton, WV Blacksburg, VA June 2, 2008 Al Schuler - USDA Forest Service, WV Urs Buehlmann - VT ( aschuler@fs.fed.us )aschuler@fs.fed.us

2. We are evolving toward a single world market For labor, capital, goods, and services – why – communication and transportation technologies Have lowered the cost of moving information, goods, and services across distance Significance: Distance is less of an obstacle to competing – e.g., promotes outsourcing and other competitive strategies that were not previously Feasible Your dilemma – figure out a good competitive strategy – vertical integration; cluster strategy; consolidation/cost cutting; strategic alliances,and fragmented companies and value chains (outsourcing, in sourcing, etc.) – your strategy should be based on Your comparative advantage – what you do better than anyone else

3. One of the flatteners - Transportation Economics In 1956, it cost $5.86/ton to load and unload a cargo ship by hand – today, using containers, it cost 16 cents/ton Railroads can move a ton of freight 423 miles On a single gallon of gas

5. Multi Modal Transportation

6. Some Global Trends Facing U.S. Forest Products Industry Competition – U.S. is losing market share in many commodity markets Fiber & Forestry - structural changes in world log and fiber markets: (1) Demand for U.S. fiber is changing from pulp & paper to composite/engineered wood products & biofules?? (2) plantations are growing source of industrial roundwood (3) industry forest ownership is being transferred to TIMOS/REITS & others; (4) Russia, the worlds largest log trader, is increasing log export taxes to encourage domestic production & discourage illegal logging. Economic activity - Center of Economic activity shifting to Asia

7. (1) Healthy Forest Products Industry Requires Viable Markets (2) Healthy Forests (Sustainability) Require Management (3) Management ( road building ( for logging & fire mgt. ), silvicultural, treatments, health/disease/herbicides, and deer management is expensive - Stewardship comes at a price Bottom Line – Landowners need strong log markets as incentives to actively manage their forests – log markets are usually driven by product markets Key to Healthy Forest Products Industry and healthy forests is viable markets – globalization is making it Tougher to find and hold onto viable markets SAF has identified "global competitiveness" as one of the top five threats to forest sustainability Key Tenets or Beliefs

8. Some Stats on the U.S. Hardwood Industry Solid Wood Products 2006 data* - domestic shipments Hardwood Lumber ( 3211131) - $5.28 Billion H. Veneer/plywood - $3.00 Billion H. Flooring - $2.25 Billion Wood Kitchen cabinets & counter tops (337110) - $19.40 billion Wood furniture ( upholstered, non upholstered, and wood office furniture) - $20.53 billion Hardwood Industry is Substantial!!!! Source: *U.S. Census, ASM

9. I. Competition – U.S. losing Market Share in Many Forest Product Markets

10. *These market shares are conservative because some imported components and finished furniture is included in the domestic shipments Consumption = shipments + imports – exports. Import share = imports/consumption Source: Census, ASM; ITA (www.ita.doc.gov) U.S. Import Market Shares Secondary Industry - Hardwood market trends – Why alternatives to traditional markets are critical

11. Wood household furniture, non-upholstered – NAICS 337122 Source: U.S. International Trade Association Wood Household Furniture Trade Deficit 2007 Imports $10.6 billion Exports 1.0 billion Deficit $ 9.6 billion

12. Wood Household Furniture Imports (Billion US$) Sources: U.S. Commerce, Bur. Census, Intl. Trade Adm., Wash., DC $10.6 billion

13. Employment Trends Source: BLS http://data.bls.gov/cgi-bin/srgate Thousand Furniture includes kitchen cabinets and all types of furniture – NAICS 337 Wood products (hwd & sft) includes lumber, veneer, millwork, windows & doors, containers & pallets, & mobile homes - NAICS 321

14. U.S. Employment Trends Decline of Manufacturing Employment Sector Employment ( million)MFG Share Source: BLS - http://data.bls.gov/cgi-bin/srgate 1960 MFG share 30% 2007 MFG share 10%

16. New LacquerCraft Furniture Factory near Shanghai, China 12,000 employees Every month: Import over 1,000 containers of US lumber & veneer Export over 4,000 containers of bedroom furniture back to U.S. Universal & Legacy Classic brands sold directly to retailers Also produce for U.S. furniture companies in Dongguan plant

17. U.S. Hardwood Flooring Imports Housings Impact is Huge Customs value (million $) Source: USDA, FAS 2007 Imports $143 million Exports 92 million Deficit $ 51 million U.S. Housing Decline

18. U.S. Hardwood Molding Imports Million $ Source: USDA FAS Imports $395 million Exports 24 million Deficit $371 million

19. U.S. Hardwood Lumber Consumption Trends See feature article FPJ May 2008 BBF Source: Bill Luppold, USDA FS * flooring, millwork, trusses, cabinets, & fabricated wood members Residential markets are now 2.5 times the size of furniture markets

20. U.S. Graded Hardwood Lumber Consumption Trends (BBF) 19622005 Source: Bill Luppold, USDA Total : 4.60 BBFTotal: 6.6 BBF Total consumption up 2 BBF between 1962 and 2005 - - 44% But dramatic changes in where the lumber is consumed

21. Changes in U.S. Graded Hardwood Lumber Consumption Trends over the past four decades ( 1962 – 2005 ) BBF

22. Forest Products* Trade World Export Trade (Billion US$) * Round wood, fuel wood, sawn wood, wood based panels, pulp and paperboard Source: FAOSTAT ( http://faostat.fao.org/DesktopDefault.aspx?PageID=381&lang=en U.S. Share World trade increasing while U.S. share drops

23. U.S. Forest Products Trade Imbalance Imports $31.5 billion Exports 18.5 billion Deficit $13.0 billion Billion $ 2006

24. U.S. Imports of Timber Products* as a percent of Consumption and Exports as a percent of Production Source; USDA, Interim Update of 2000 RPA Assessment, FS – 874, April 2007 U.S. is losing the trade battle *Primary products – lumber, roundwood, But excluding furniture

25. The U.S. Trade Dilemma… We are exporting raw materials and importing finished goods… The U.S. is a major exporter of hardwood lumber and logs… And we are the major importer of finished hardwood products like furniture, flooring, molding & millwork … This needs to change if the U.S. secondary hardwood processing industry is to survive – think about it - what happens to the primary industry if the secondary industry keeps shrinking???? Exports cant take up all of the slack because the U.S. has lots of competition in international log and lumber markets

26. II. Fiber & Forestry Issues Demand for fiber is changing – from pulp & paper to engineered wood products Plantation acreage increasing - Lots of wood becoming available world wide - With more EWPs, fiber requirements are less quality based and more quantity based Bioenergy – opportunity for low grade hardwood fiber?? Timberland ownership changes – impact on future log supply and sustainable forestry???? Russian log export duty to increase dramatically by 2009

27. U.S. Industrial Hardwood Roundwood* Usage Billion cubic feet Sources: Forest Resources Assoc., APA, USDA Forest Service * Pulp industry totals exclude residue chips, but include whole tree chips Future - Biomass power & Biofuels????

30. Source: FAO – State of Words Forests - 2007 Plantations contribution to global industrial* wood Production Is approaching 50% according to FAO * Excludes firewood

31. Source: Klabin Fiber grows faster outside North America

32. U.S. Timberland Ownership by Integrated* Companies Company20002002200420062007p LP945 Boise Cascade2,340 2,240 Bowater1,800490370250 MeadWestvaco3,4003,1402,1501,118<1000?? Temple-Inland2,200 2,0501,9900 IP12,0259,1856,800600200 Potlatch1,5451,1501,4551,4601,500 Rayonier2,1002,0502,0302,1802,400 Weyerhaeuser5,7007,3006,4005,640 GPsTimber Co.*4,000 Total36,05528,80023,49513,238~10,000 * I included GPs Timber Co. as an integrated Co. ( A. Schuler – USDA) Source: RISI (000 acres)

33. Structural change in international log markets (1) Russia is worlds largest exporter ( volume basis) of both hardwood and softwood logs (2) Softwood tax increases from 6.5% today to 80% by Jan 2009 (3) Hardwood sawlogs (Oak, Beech, Ash) tax increases from 20% today to 40% by Jan 2009

34. Temperate Hardwood Logs World Share (Value) of top importers and exporters - - $4.54 Billion - 2006 Importers Exporters Source: Global Trade Atlas

35. U.S. Hardwood Log Exports Million $ Export trends for 2007 World + 30% Europe + 72% China + 35%

36. U.S. Hardwood Lumber Exports Billion $ World exports drop 12% in 2007

37. U.S. Hardwood Lumber and Log Exports to China : a Comparison Million $ Source: FAS Log exports increase 35% in 2007 Lumber exports decrease 19% in 2007

38. Recent China World Import Trends Hardwood Log Imports up 32% Lumber Imports Flat Source; GTA $1.64 billion $1.03 billion $2.17 billion

39. III. Economic Activity Shifting to Asia – creates export opportunities for U.S. Hardwood industry (if were competitive)

40. How will Changing Global Economy Impact Wood Products Industry? Percentage of World GDP Source: Business Week August 22, 2005 China and Indias economy could rival U.S. in less than 20 years??

41. GDP at Market Exchange Rates and PPP Billion US$ Source: IMF PPP* Market Exchange Rate PPP – exchange rates adjusted to equalize cost of goods in different countries

42. Per Capita Wood Consumption Source: China Timber Import Export Co/Hardwoodmarkets.com 2003 cubic meters per capita Lots of potential to export more wood products to China Affluent population today ~13 million ~$40,000 income (PPP) By 2011, lower middle class ~ 290 million people with income ~ $16,000 By 2025, upper middle class ~ 520 million people ~ $25,000

43. China and US Consumption of Wood Products – What will Chinas Share be in the Future and where will it come from? World Consumption Share Source: FAO

44. Chinas Hunger for Raw Materials Chinas Share of global consumption (2006) Source: FAOSTAT Chinas business model – import raw materials and re-export finished goods

45. IV.Opportunity – Domestic Construction Markets Residential Construction Markets ( new and remodeling) are Critical for the Softwood Industry - - primarily structural Applications as 75% of softwood lumber and OSB/plywood consumed there Construction markets ( new and remodeling markets in both residential and commercial buildings) are becoming increasingly important to the hardwood industry – examples include decorative/interior (non structural) applications such as flooring, cabinetry, interior trim, moldings, millwork, staircases, and closets

46. Residential Construction – not much improvement until 2010? Multi family Forecast – NAHB May 2008 60% drop 2005 - 2008 Problems: New Homes - High Inventories, tighter lending standards, Higher mortgage rates, and weak job growth Existing homes – Same as above plus falling prices and rising foreclosures Solution - Better demand / supply balance - - address foreclosure problem, & better demand from lower prices

47. Market size - New Construction vs Remodeling Remodeling becoming increasingly important & is the key market for hardwood components Billions 2005 dollars Source: Harvard JCHS 2007 Remodeling share of residential investment

48. Hardwood Lumber Consumption Trends BBF Source: Bill Luppold, USDA FS * flooring, millwork, trusses, cabinets, & fabricated wood members Residential markets are now 2.5 times the size of furniture markets

49. Changing Hardwood Component Markets 19842008 Furniture65%22% Cabinetry16%27% Building Products * 10%42% Decorative/Specialty 4% 7% Industrial Products5%3% Source: 2008 WCMA Market Study * residential and commercial, both new construction and remodeling

50. Components in building materials interior trim, moldings, stair parts, flooring blanks Source: WCMA

51. Components in cabinetry cabinet doors, and parts Source: WCMA

52. Components in in furniture parts Source: WCMA

53. V. Opportunity – adding value, customization, market focus U.S. is a high wage country and Globalization is making it increasingly difficult to make money selling only product – have to add value via customization, services, installation – goal is happy (and profitable) customers Many wood product industries are production oriented – we produce what is right for the plant – domestic auto industry is perfect example of what can go wrong when you forget the customer Future for hardwood industry is adding value/customization? – Porters Centers of Excellence – e.g., Amish Furniture Industry

54. Strategies for Success in High-Wage Economies ( there is no silver bullet) Produce innovative, customized products Focus on product design, finishing, marketing & distribution – the entire supply chain Automate production to reduce labor Focus on cost reduction Adopt new technologies & lean manufacturing techniques Invest more in education and R&D – continuous learning and innovation Attract & hold onto skilled workers Keep your customers and your suppliers happy!!!!!!!!!!!!!!! Add value (products and/or services) by exploiting your comparative advantage ( what you can do better than anyone else) Strategic alliances – ex. - Weyco and Chevron with biofuels

55. Service sector provides bulk of employment in high wage countries – cant make money selling only product – selling service means installation & more!! Share of employment by sector (2003) Source: McKinsey & Co, Emerging Global Labor Market, 2005 $GDP per capita

56. High end U.S. made furniture sold to Affluent customers in China, India, UAR, & Russia is a growing opportunity – they want to showcase Their new status – Jerry Epperson, furniture analyst

57. International sales at Henredon, an American Company, are now over 8%, up from 5% two years ago

58. 10% of Century Furniture sales, based in Hickory, NC, are now international

59. Dealing with the Impacts of Global Competition on the Appalachian Hardwood Industry A survey(2006) of Appalachian sawmilling industry by the Appalachian Hardwood Manufacture's Association and USDA Forest Service Conclusion: Pay more attention to the customer!!!

60. Actions taken ( to date) to deal with globalization – be more responsive to customer needs Proportion of Respondents Future successful companies will provide value (as seen by customer) in the form of quality product & services focusing on customer needs - - flexibility is a Key strategy !!!

61. Future Capital Improvements – where will you spend significant $ in next 3 years focus on efficiency/cost issues and customer needs Percentage of respondents 50% of respondents plan to spend Over $1 million on capital improvements Over the next 3 years

62. Ohios Amish Furniture Cluster* A Hardwood Success Story Matt Bumgardner U.S. Forest Service *See Michael Porters homepage (http://www.isc.hbs.edu/ )http://www.isc.hbs.edu/

66. Fashion for Computers to Add Value Apple added Fashion long before Dell & HP – see results below Higher Margins = more profits Can Wood Products Industry do Same????

67. Fashion for Computers to ADD Value – How Can You ( wood products) add Value?

68. Touch Screen Model for the Kitchen

69. Leather covered Case Targeted for Women

70. Designed for Young men – makes an engine Sound when you boot up

71. Hospital Furniture designed to make patients And caregivers more relaxed and comfortable

72. Bariatric seating is for obese people Waiting room furniture designed For different patient (and visitor) needs

73. Friendly Furniture

74. Furniture hides medical utilities ( equipment, electrical outlets) – friendly furniture

75. Toyota Prius sales pass Ford Explorer in US Detroit Free Press - Jan 2008 Americans bought more Toyota Prius hybrid in 2007ToyotaPrius than Ford Explorer sports utilityFord vehicles, the top-selling SUV for more than a decade. The Importance of Sound Strategic Planning Toyota saw higher gasoline prices – Ford & GM had access To the same information, but drew the wrong conclusions What trend, already out there, will impact wood use Over the next decade??? – Green Building - - Certification - - Climate change? – Wood based Biofuels? – How can your business benefit??

76. Concluding thoughts Globalization factors forcing U.S. to rethink competitive strategies – move up food chain - add value throughout the supply chain – personalized products at commodity prices; after sales services; installation; find new markets; think outside the box!! Center of Economic activity moving to Asia – China can be an opportunity if you are competitive Skilled workforce becoming critical to remain competitive, but chronic labor shortages presents challenges Get closer to key customers – focus on customer needs and not simply selling what you produce – be innovative! Produce what the customer ( domestic and export) will pay for!!!!!!!!!! Competitive strategies – no silver bullet – different strokes for different folks (1) vertical integration; (2) fragmented companies and value chains ; (3) consolidation/cost cutting for the commodity crowd ( 4) strategic alliances – Weyco & Chevron for biofuels Your strategy should be based on what you can do better than anyone else!!!!!