Globalization and the US wood manufacturing sector

slide 1Globalization and the US wood manufacturing sector: Adapting to change File: pr-041005-UN market com.pptBuehlmann&Schuler


Globalization… CHANGE!HH Furniture: Affecting theentire value chainCompetitive advantageAll building blocks existEducation: Problem or solution"There is nothing permanentexcept change" - summaryAcknowledgementsQuestions - discussion

OVERVIEW


GLOBALIZATON = GLOBALIZATON = ……


Manufacturing’s Share of GDP in U.S.

12

13

14

15

16

17

18

19

20

198719881989199019911992199319941995199619971998199920002001

Source: Bureau of Economic Analysis

Share %

18.7%

14%


Dollar value of manufactured imports as percentageof domestic manufacturing income

Source: Bureau of Economic Analysis

Share %

0%

10%

20%

30%

40%

50%

60%

70%

80%1956

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

75%


US imports from China

Wood Household Furniture 41% and growing!


Competitive in Commodities?

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Paper &Board

OSB &Plywood

SoftwoodLumber

HH Furniture

1990

2002

Domestic Share of U.S. Wood Products Consumption Dropping


Furniture imports to U.S.

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Kit Cabinets Upholstered Office HH Furniture

Import market share (%)

Sources: U.S. Commerce, Bur. Census, Intl. Trade Div., Wash., DC*These market share percentages are conservative becauseconsumption is overstated as some imported componentsand finished furniture is included in the domestic shipments


13,000

14,000

15,000

16,000

17,000

18,000

19,000

1987 1989 1991 1993 1995 1997 1999 2001 2003

mfg employment shrinking…

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

1930

1935

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2001

2002

Agriculture Manufacturing

Services Mining and Construction

following agriculture…

Manufacturing employment

source: BLS, Goetzl 2003

source: Census, BLS


Tremendous local impact…NC Furniture Industry Employment Trend

1980-2003

source: U. Nwagbare, NC Dept. of Commerce, NC Employment Security Commission

55,000

60,000

65,000

70,000

75,000

80,000

85,000

90,000

95,000

# of

Job

s

Jobs 82015 83909 79319 80768 85639 84563 84823 87684 90183 86273 85178 78884 78092 79206 79878 78808 76775 75757 75801 77235 76220 72395 66341 59662

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003*


Globalization - economic integration

China’s entrance into WTO - China needsto create 17 million new jobs annually!

Strong North American economy -mainstay for world economyContainerized shipment - loweringtransportation costsU.S. economy investing capital in higherprofit businesses than furniture making

Increasing costs for skilled laborshortages

Exchange rates

Globalization


Significance:Business environment has changedWe can't compete on priceWe have to change our businessmodel(s)

Globalization (cont.)

Global duty free tradeis objective of WTO…



Origins of Imports to U.S.

Source: U.S. Commerce, Bur. Census,Intl. Trade Div., Wash., DC

* SIC 2511 - excl. wood office, upholstered, and kitchen cabinets

$0

$2

$4

$6

$8

$10

$12

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

CHINA Taiwan Malaysia Canada

Indonesia Mexico Total

Billion of U.S. dollars

Canada loosing market share -relative and absolute

China now accounts for 41 %of the imports


High cost countries loosing the competition

Source: U.S. Commerce, Bur. Census,Intl. Trade Div., Wash., DC

* SIC 2511 - excl. wood office, upholstered, and kitchen cabinets

$0

$2

$4

$6

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 20030

2

4

6

8

10

12

CHINA Canada Total Poly. (Canada) Poly. (CHINA)

Billion of U.S. dollars Billion of U.S. dollarsTotal imports - right axis

Canada:+ 450% 1992-2003- 31% 2000-2003

P.R. China:+ 2500% 1992-2003+ 195% 2000-2003


Canada lost exchange rate advantage -China didn't

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

199019911992199319941995199619971998199920002001

$0.50

$0.55

$0.60

$0.65

$0.70

$0.75

$0.80

$0.85

$0.90

Million, US$ US$/C$

US$/C$

Exportations aux É.U.

Source: U.S. Dept Commerce, Bur. Census


Not Dependent on China

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

19891991

19931995

19971999

20012003

0

50

100

150

200

250

300

350

400

450

China (left axis) Vietnam (right axis)

Billion of U.S. dollars Billion of U.S. dollars

P.R. China:+ 195% 2000-2003

Vietnam:+ 1778% 2000-2003


Not Dependent on China

Taiwanese entrepreneurs running theVietnamese industry (same as P.R.C.)Stickley investing $6 mill. in Vietnam

Vietnamese wood furniture industryexport target for 2005 is $1 billion!(Forestweb, May 2005)

Vietnam's production cost about 10%less than ChinaSkirting the import tariffs sought by U.S.furniture manufacturers


Overseas labor too cheap… Domestic Import (from China)

Material (1) 30% 30%

Labor (2) 15% 2%

Overhead (3) 30% 5%

Transportation 0% 16%

Selling/General (4) 15% 5%

Profit 10% 42%

(1) This is a global product sourced and sold in dollars

(2) Assumes U.S. worker at $15/hr, assumes 4 import workers at $0.50/hour

(3) Domestic includes wage taxes, Medicare taxes, business insurance, workers’ compinsurance, plant management and government compliance. Import includes plantmanagement.

(4) Domestic includes commission, showroom and accounting expenses.

With roughly 30% production costadvantages in China, mainly dueto labor costs, there is littlechance that productivity gains willallow U.S. producers to “catch up”,but a ~30% revaluation of theChinese currency could make thedifference.

* From presentation by Dan Masters at Lake States Lumber Association (LSLA) “Global Competition” Conference, Wausau, Wisconsin, February 24, 2004


Different story in the US

30%

40%

50%

60%

70%

1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000

16-34 year old

35-64 year old

Share of employedcivilian labor force

Source: www.economagic.com/em-cgi/data.exe


Imports - impacting theentire wood value chain

As the furniture industry shrinks,other industries are impacted

Lumber/dimension industry Furniture components Veneer Particleboard and MDF Stumpage/timber markets Land values …….


U.S. Hardwood Lumber Consumptionby U.S. Furniture Manufacturers

0%

5%

10%

15%

20%

25%

1991 1997 1999 2000 2001 20020

0.5

1

1.5

2

2.5

3

% Total Lumber Consumption Source: Hardwood MarketReport, January 2004

Percentages are percent of total NA hardwood lumber consumption(Includes lumber equivalent volumes in components) BBF


U.S. Lumber Exports

0

20

40

60

80

100

120

140

160

180

200

81 83 85 87 89 91 93 95 97 99 01

Japan Taiwan China/HKSource: U.S.D.C. and Bumgardner

MMBF


Av. Price of U.S. Lumber Exported

800

900

1000

1100

1200

1300

1400

1500

1600

94 95 96 97 98 99 00 01 02

Europe AsiaSource: U.S.D.C. and Bumgardner


Lumber Premiums Shrinking Due toHigher Demand for Lower Grades

30%

40%

50%

60%

70%

80%

90%

1992

1995

1998

2001

2004

Red oak 2C/1C Red oak 3C/1C

White Oak 2C/1C White Oak 3C/1C

Ratio of 2C and 3C to 1C( green , 4/4)

Source: HMR


Timber prices & Timberland values

Source: Jack Lutz, James Sewell Company, National Council of Real Estate Investment Fiduciaries



Success comes from a varietyof approaches:

Starbucks product&package

Kleenex branding

G E financial services

Harley Davidson retro-feeling

SUCCESS STORIES


Sell innovations forhome/officeProvide ongoing services inrecurring cyclesAdapt solutions to individualcustomers' needs/facilityUse local dealer (franchising)Employ state-of-the-arttechnology

FURNITURE - RESPONSES


Are we in the business ofproviding solutions to sitting/lying/storage needs?

o rARE WE IN THE BUSINESS OFBEAUTIFICATION ANDENHANCEMENT OF HUMANHOMES AND WORKSPACES - EVENIN THE BUSINESS OF MAKINGDREAMS COME TRUE?

WHAT BUSINESS?


THE TOTAL PRODUCT(T. Levitt, HBR, 1980)

Product

Materials

Service

Speed

Knowledge

Guarantees

Advertising

Promises

Brand

People

Location

After sales

Support

Customization

WHAT IS YOURCOMPETITIVEADVANTAGE?

PRICE?FORGET IT, THERE WILLALWAYS BE SOMEBODY

CHEAPER, ALWAYS!


WHAT SUITS ONECUSTOMER MIGHT NOT

SUIT THE NEXT…

source: Jim Davis, 1990 United Feature Syndicate, Inc.

LAND’S END+ 72 percent sales growthin the clothing business!

MASSCUSTOMIZATION

SEEMS TO WORK FOROTHER INDUSTRIES -

WHY NOT FORFURNITURE?



PROCESSES


PRODUCT CONFIGURATION


HOLISTICMANUFACTURING

ALL THE BUILDINGBLOCKS EXIST -

BUT…



…our economy is best served by full andvigorous engagement in the global economy…it is the knowledge and the skill of ourpopulation interacting under our rule of lawthat determine our real incomes… oursystem of higher education bears animportant responsibility for ensuring thatour workforce is prepared for the demands ofeconomic change. …these versatileinstitutions to serve the practical needs ofthe economy by teaching and training and,more significantly, by unleashing the creativethinking that moves our economy forward…

Greenspan on education

source: A. Greenspan, 2004, http://www.federalreserve.gov/boarddocs/testimony/2004/20040311/default.htm


factory applicants - skills lacking

QUALITY WORKFORCE?

77%

51%

40%

24%

15%

0% 20% 40% 60% 80% 100%

Use of production Tools

System Operator skills

Three R's

Mgt. skills

Englishsource: USA Today,

April 15, 2004


WOOD SCIENCE

NCSU-WP:693 degrees since 1950357 we can locate

323 (91%) in industry

NCSU-WP Faculty (5):153 years Professional Experience

138 years University Experience 15 years Industry Experience

DO WE TEACHTOO MUCHSCIENCE?TOO MUCH

WOOD?


Industry recognizes value oftraining (65% find paybackpositive)List better product quality,cost reductions and long-termincreases as most significantbenefitsList difficulty to find fittingcourses as the #1 barrier!

IN ANY CASE

source: Buehlmann et al. Modern Woodworking, June 2004


Heraclitus, 500 B.C.


Interconnectedness of the woodvalue chain - from forest tocustomerImportance of wood to theeconomy - everywhere (almost)Policy in one sector ripplesthrough entire value chainWestern wood products industriescannot compete on cost aloneStrategic renewal needed - newbusiness models

SUMMARY


Industry clusters need to bemaintained and strengthenedSupply chains need to becomemore efficientTechnical solutions (investments)need to be taken advantage ofInnovation has to become thenorm and not be the exceptionEducation has to become alignedwith industry needs

SUMMARY


Always keep in mind:

SUMMARY

Global duty free tradeis objective of WTO…

source: Jim Rider, South Bend Times


ACKNOWLEDGEMENTSDaniel Merz, Dept. of WPS, NCSU

Steffen Schairer, Heidi Jakobi-Blickle, Russ Kahn & KlausGueniker, Virtual SystemsInternational

Eduard Bachmann - SWOOD

Wood Products and FurnitureSteering Committee

USDA FS - Princeton Station


source: Uli Stein & Gerd Koch Cartoon Edition GmbH, Isernhagen

THANK YOU!"Remember… nothing that's goodworks by itself just to please you.You've got to make the damn thingwork."

Thomas A. Edison

(1847-1931)

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Globalization and the US wood manufacturing sector