Hardwood Industry Should Take Cues from Cabinet Makers, Says Consultant

STATE COLLEGE, Penn. — The hardwood segment of the forest products industry should learn from the pro-active approach that cabinet makers have taken to protect their business from foreign competition, according to a consultant.

            Art Raymond, president of A.G. Raymond & Co., discussed the loss of jobs in the U.S. furniture industry to Chinese furniture manufacturers and contrasted it with the success of U.S. cabinet manufacturers.

            He was one of several speakers at WoodPro 2004: The Penn State Hardwood Industries Leadership Conference. The conference focused on issues that currently impact the ability of U.S. hardwood producers to compete in the global marketplace. Leading industry and management researchers spoke about current management, investment, and technology issues that are changing the face of the industry.

            The conference, sponsored by the Pennsylvania Hardwoods Development Council, the Pennsylvania Forest Products Association, the Empire State Forest Products Association and Pennsylvania State University, drew over 70 industry leaders and researchers earlier this year to the Penn State campus.

            The conference was opened with welcoming remarks by Dr. Bruce McPheron, director of the Pennsylvania Agricultural Experiment Station and associate dean for research and graduate education for the College of Agricultural Sciences at Penn State. He discussed Penn State’s role in advancing several agriculturally-based industries and focused on the college’s current initiative to develop resources to support the hardwood forestry and manufacturing sector in the state.

            He was followed by the host of the conference, Dr. Charles Strauss, director of the School of Forest Resources at Penn State. The school intends to develop one of the finest ongoing conferences for the hardwood industry anywhere in the world, he said.

Global Competitiveness

            The keynote speaker of the first session of the conference was Clarence Kwan, deputy managing partner of the Deloitte-Touche China Services Group. He provided a close insider’s view of how business is done in China and how many U.S. corporations are adapting in order to do business with China.

            In illustrating the significance of Chinese-American business relations, Clarence noted that Motorola Company was by far the largest investor in Chinese industry and that the giant retailer Wal-Mart was by far the largest exporter from China. That two such well known names of American industry should be the largest investor and exporter from China should be a clear indication of how intertwined are the two countries’ economies, he said.

            As for opportunities for the forest products industry in China, Clarence pointed out that the most successful American companies in China are those that are able to identify and ‘marry’ their strengths with the strengths of a potential Chinese partner.  For instance, manufacturing is clearly a Chinese strength whereas marketing, distribution, and retailing are American strengths.  This point has been underscored by several large U.S. furniture companies that have identified profitable opportunities to move all or part of their manufacturing operations to China while expanding their marketing efforts here in the U.S.

            Clarence also identified a second, less obvious, opportunity for U.S. hardwood companies. Although China is viewed as a vast country with relatively little buying power, he pointed out that the small percentage of wealthy Chinese still represents a large, growing market. For example, these Chinese consumers were able to spend $9 billion on high-end wood products in 2001 — a market that Italian and other European companies have exploited much more than American companies.

            While opportunities in China exist, until structural changes are made in certain components of U.S. trade policy, many U.S. manufacturers will continue to view foreign trade and manufacturing more as a threat than an opportunity, said Paul Lyskava, executive director of the Pennsylvania Forest Products Association.  Citing an extensive study by the National Association of Manufacturers, he confirmed Clarence’s note that U.S. companies are at a significant overhead cost disadvantage.

            Paul recommended the following policy changes to reduce U.S manufacturing overhead costs: tax cuts, pension reform, regulatory reform, and broader development of energy resources. These public policy initiatives would help ‘level the playing field’ for U.S. manufacturers attempting to compete in global markets, he said.

            John Bassett, president and CEO of Vaughn-Bassett Furniture Company, addressed the trade dispute between Chinese and U.S. furniture manufacturers. He heads a group of U.S. furniture company petitioners in a pending anti-dumping petition against Chinese furniture makers. Advocates of the anti-dumping petition maintain that, by international law, Chinese wooden bedroom furniture is being imported to the U.S. illegally, and the tariffs are necessary to offset the illegal cost advantage the Chinese are exploiting to increase their market share in the U.S.

            The dispute is a matter of fair application of international trade laws, he said. “We simply want the trade laws enforced,” said John. So far, U.S. courts have agreed with the position of the U.S. furniture industry: the U.S. has imposed tariffs of 6% to 198% on Chinese producers of wooden bedroom furniture.

            John illustrated the complex issue with a simple but effective story from his childhood.  “When I was growing up in Virginia,” he recalled, “there were a whole bunch of good old boys up in the hills, producing moonshine whiskey. It was good whiskey. And it was cheap whiskey.  But…it was illegal whiskey.”

            While the American petitioners have one law firm working on their behalf to file and support their claim, the Chinese producers have 21 law firms working in Washington in their attempt to eventually defeat the tariffs, according to John.

            The concept that a country’s official government policies can have significant impact on other countries’ economies was supported by Mark Conolly, president of Bradford Lumber. He noted that about 60% of American log exports go to Canada, and that about 40% of logs harvested from New England and New York are shipped into Canada for value-added processing in that country.

            The reason that Canada imports so many logs from the U.S. is that country’s tough forest management laws on Canada’s government lands, which account for a huge percentage of Canada’s available timber. These extremely tough management laws apparently increase the harvested cost of logs in Eastern Canada to the point that American logs are much more economically attractive, even with the added transportation costs.

            Greg Lottes, president of Interforest, Inc., and Michael Buckley of World Hardwoods in England discussed global market opportunities for the hardwood industry.

            Greg shared with the audience some of Interforest’s export success.  “The sooner low-cost producing nations can develop a viable middle class, the more internal foreign demand for North American products will occur as Western style products become more popular and in fashion,” he said. As an example, he mentioned that Interforest had received significant business from the small Arab country of Dubai, where American-style furnishing of hotels for tourists has begun to translate into a taste for Western-style construction and furnishings among the people of Dubai.

            Michael predicted a similar phenomenon in India, where he foresees a huge potential market. He also said there is — and will continue to be — a significant decline in ‘old’ European Union mass production furniture as companies move operations to Eastern Europe and Asia. Temperate hardwood species will continue to be preferred in much of the world, he added, while oak likely will remain the number one species in European demand.

Management, Marketing

            Four university professors took the spotlight for the marketing and management session:  Drs. Judd Michael, Terry Harrison and Steve Jablonsky of Penn State, and Dr. Bob Smith of Virginia Tech.

            In opening the session with an audience participation exercise, Judd demonstrated the importance of the concept of ‘scanning’ the business horizon for potential influencing factors that are beyond one’s current field of vision, and how management over-confidence based on past experience can lead to mistakes in strategic decision making.

            Terry and Steve explored management opportunities that world-class companies exploit that are usually overlooked by most other companies. Terry demonstrated a software program developed at Penn State that optimizes company facility locations and logistics and displays the results visually for companies to analyze. This type of computer tool often makes the difference in whether companies profit or loss on their strategic plans, he said. For instance, Mobil and Exxon used the model to analyze how best to combine all their refineries and gas stations as they merged into one company.

            Steve, a specialist in taxation and international finance, predicted that the furniture anti-dumping tariffs will only remain in effect for 18-24 months. He made an interesting observation on the corporate culture at Wal-Mart with respect to inventory management: Wal-Mart started up its business in 1970 with two weeks worth of inventory, and it has maintained that maximum two weeks worth of inventory ever since.

            “Wal-Mart isn’t a merchandiser,” said Terry. “It’s a supply chain management company.” The implication for wood producers: it is not what they make, but how they manage production and distribution that ultimately determines profitability.

            Bob closed the conference’s second session with comments from his experiences helping hardwood producers market their products both in the U.S. and overseas. He emphasized the need for U.S. hardwood producers to look overseas for their markets, citing the increasing value of hardwood exports, an international concern for the over-harvesting of tropical hardwoods, a global preference for North American species, the current decline in the U.S. dollar, and an excess supply to the U.S. market — all reasons that make exporting attractive in the long run.

            However, new markets do not come cheaply, Bob warned. Typically, training a salesman for a new market requires a two to three year investment in that person and market before it begins to yield dividends. During that period of developing a new market, successful companies tailor their products and services to individual customer needs. Finally, when questioned on the value of environmental certification of hardwood products, Bob said flatly that there probably will never be a price premium in the marketplace for environmentally certified hardwood products.

Technological Competitiveness  

            The final session of the conference highlighted current technological challenges to the hardwood industry and how to deal with them.

            Dr. Paul Blankenhorn of Penn State began this session by laying out the ecological and regulatory issues facing the industry. Beginning with a review of the U.S. Forest Service’s recently-released annual inventory report for Pennsylvania’s forests, he noted that nine of the 10 most abundant species in the forest are on the increase, with the lone exception being sugar maple. Pennsylvania contains more timber volume today than any time since the late 1800s, he also noted. Paul went into great detail on both ecological and regulatory issues facing the industry.

            The interest in Paul’s remarks was apparent in a survey of the conference participants that was evaluated later. His was the highest rated presentation of the conference, a clear indication that technology issues that are impacted by government policies and regulations are at the top of the list when it comes to industry concerns.

            A pair of faculty members from Virginia Tech provided insight into industry progress and support in issues of technological competitiveness. Dr. Paul Winistorfer, professor and chairman of the department of wood science and forest products, led a group-think session on how education fits into the ‘supply chain’ of technological competitiveness. The high level of fragmentation in the hardwood industry has prevented it from establishing a focused educational agenda for global competitiveness, he suggested.

            Phil Araman of the U.S. Forest Service and Virginia Tech discussed ‘next generation’ wood processing technologies that will enable companies to remain competitive. These technologies include:

·        hardwood tree-length log bucking scanning systems

·        internal log scanning

·        sawmill edging and trimming optimization systems

·        automated rough lumber grading

·        curve sawing for hardwood logs

·        automated pallet cant evaluation

·        automated pallet part scanning and grading

·        automated lumber to parts processing

            Phil cited a study that estimated at least 20% of the potential value of all Southern Appalachian hardwood was lost through improper and inefficient processing. His presentation of these technologies demonstrated how this loss can be greatly reduced through proper technological development and investment.

            Dr. Gene Bryan of Best Possible Solutions Inc., of Bend, Oregon, concurred with Phil’s estimate of value loss to the industry, but he added another dimension beyond yield loss – that is, loss through improper selection of management options. “Profit optimization is all about planning and coordinating for the best possible big-picture results,” said Gene.

            He explained the concept of using a computerized optimization tool called linear programming to ensure a company’s best allocation of resources to achieve profit objectives. Typically, wood products companies can realize a profit improvement equal to 3%-7% of total sales by properly utilizing enterprise optimization models. These models are far superior to profit analyses afforded by traditional cost accounting, Gene said, because “cost accounting is merely a defensive mechanism to make sure you don’t sell a product for less than you make it for.” By contrast, profit optimization yields both a product cost analysis and quantitative tactics to make more on every dollar invested.

            Jim Kohlhaas of Lockheed-Martin Corporation spoke on the topic of the future of information technology. Leading companies capitalize on technology advances to enable growth, he said. The challenge for most companies, as it is in the hardwood industry, is how to direct the integration of company data sources without needlessly wasting significant sources of capital and without negatively impacting company operations. He led the conference through a fascinating look at how computer technology increases the utilization of resources on the battlefield. Jim related his comments to the hardwood industry in conclusion by demonstrating the dynamic relationship between a company’s investment in developing technological capabilities and its ability to capitalize on growth opportunities.

            Art Raymond reviewed what has happened to the U.S. wood furniture industry and discussed what the U.S. kitchen cabinet industry had done to protect its market share — and what lessons can be learned from the comparison.

            By his company’s best estimates, about one-third of the U.S. wood furniture industry had be closed down in the last five years, most in the last 18 months. This has translated into roughly 47,000 jobs lost to foreign competition since the year 2000. Furthermore, the declining price of wood furniture due to pressure from imports has left most U.S. companies with little or no money to invest in upgrading their manufacturing plants. All the while, new plants are being built overseas with all the money flowing back in that direction, both from customers and from U.S. companies looking to invest.

            However, cabinet companies, buoyed by the new model of marketing their products through home centers, adopted different tactics aimed at keeping their product in the U.S. to take advantage of the inherent proximity to markets. By re-engineering their products for ease of manufacture, outsourcing components to supply chain partners, and investing in new production processes and information technology solutions, they enabled themselves to keep a competitive advantage here in the U.S., said Art.

            The lessons that hardwood companies must learn from these two different stories, he said:

·        “You need a process that delivers your product quickly.”

·        “Consumers like a lot of choice – the Chinese cannot give them much customization.”

·        “Process focus – do what you do well and buy the rest.”

·        “Don’t waste time fighting change…companies that understand change are better able to take advantage of it.  Remember that change means opportunity for profit.”

Other Highlights

            Dr. Harry Wiant of Penn State reminisced about the ‘good old days’ of harvesting redwoods (half a log to a truck!) while stating a well-considered case for a return to common sense in national forest policy making.

            Also, Penn State wood products faculty presented awards to York Casket Company (Research Partner of the Year), Conestoga Wood Specialties (Excellence in Management), and Yorktowne Cabinets (Excellence in Manufacturing).

            “I think this was the best conference I have ever gone to in my professional career,” said Ira Lauer of Catawissa Lumber & Specialty.

            Keith Atherholt of Lewis Lumber Products concurred: “Great Conference! I took 11 pages of notes. So it was definitely a learning experience for me.”

            Penn State will be looking for more opportunities to contribute to the hardwood industry with future conferences.

            (Editor’s Note: Chuck Ray is an assistant professor of Wood Products Operations and the Wood Products Extension Specialist for Penn State.)