Chapter 1 INTRODUCTION

Contents

1.1 Wood Industry –World Scenario

1.1.1 Furniture Industry

1.2 Wood Based Industry-Indian Scenario

1.3 Wood Based Industry-Kerala Scenario

1.4. Rubber Wood Industry in Kerala

1.5 Studies on Rubber Wood Industry

1.6 Research Gap

1.7 Selected Studies on Value Chain

1.8 Statement of the Problem

1.9 Objectives of the Study

1.10 Hypotheses

1.11 Theoretical Framework

1.12 Methodology

1.13 Limitations of the Study

1.14 Chapter Scheme

Introduction

2

INTRODUCTION

Spectacular development in the construction sector during the recent

decades has driven the demand for timber upward. The shrinkage and

depletion of forest wealth, serious restrictions on harvest of notified forest,

weak private plantation sector and the growing concern about the

conservation of environment necessitated the development of alternative

but renewable sources of traditional timber. This led to the identification of

rubber wood as an alternative source. Though the scope for value addition

of rubber wood industry is high, it has not yet been adequately utilized.

Barring other factors, the absence of a well developed value chain of

rubber wood is the main reason for this. No doubt, if it is given proper and

necessary thrust, a good portion of the growing demand for wood can be

met with rubber wood.

1.1. Wood Industry -World Scenario

The wood industry plays a dynamic role in the world in terms of

production, demand and export. There has been continuous increase in

the production of wood in the world, particularly for industrial purposes.

The global round wood (fuel wood and industrial wood) production

increased from 1466 million m3 in 1953 to 3400 million m3 in 1996.

Forty five per cent of it is industrial wood (lumber, plywood and veneer,

pulp wood, and others.) Diagram 1.1 shows the trends in industrial

wood production.

Introduction

3

796

1647 1580 1645.68

0

200

400

600

800

1000

1200

1400

1600

1800

1953 1998 2002 2004

Year

Diagram 1.1 World Industrial Round Wood Production (Million m3) Source: FAO, FAOSTAT, various years

Even in the midst of growing production of wood, the demand for it

is greater than that of its supply. Although consumption is leveling in

developed economies, demand for timber is rising fastest in the rapidly

growing economies of Asia and Latin America (Matthews, 2000).The

growing demand for wood in the world market is evident from the increase

in the weighted index of world timber price as against the decline in the

price of other agricultural raw-materials during 1980 – 1999. Timber price

index increased from 79 to 118, whereas the index of other agricultural

raw-materials decreased from 122 to 72.7 during the same period (World

Bank, 2000). Prices of most primary timber products kept rising from

2005 onwards as supply of raw materials tightened (World Resource,

2007). In the early 1990s, production and manufacture of industrial wood

products contributed US $400 billion annually to world economy or about

two per cent of Global GDP (Matthews, 2000).

Mill

ion m

3

Introduction

4

The increase in the demand for industrial wood is not only from

domestic sources but also from foreign countries and hence the export of

wood has correspondingly gone up. In the last 30 years, international trade

in timber has increased three fold in terms of value adjusted for inflation,

and now it accounts for three per cent of total world trade (Matthews,

2000). It takes place in the primary (log, sawn, veneer, plywood) and

secondary processed wood sector (furniture, toys, mouldings etc). While

the primary processed industrial wood export of major exporting countries

was US $ 42.9 billion in 2005, the secondary processed wood export of

major exporting countries was US $ 68.35 billion in the same year. The

most noteworthy feature is that wooden furniture occupied a major share in

the export. Out of the total export of Secondary Processed Wood Products

(SPWP), wooden furniture contributed 61.55 per cent, builder’s wood work

1.63 per cent, mouldings 6.19 per cent and the remaining by all others

together (ITTO, 2006).The export details of SPWP are given in table 1.1

Table 1.1 SPWP Export in 2005

Country Export (US $ billion)

ITTO producer countries 10.30

China 11.40

EU 25.80

Others 20.88

Total 68.38

Source: Annual Review, ITTO 2006

Introduction

5

In International Tropical Timber Organisation (ITTO), producer

countries like Indonesia, Malaysia, Brazil, Thailand and Mexico accounts

for 89 per cent of the exports of SPWP. In Asian countries the share of

SPWP in total wood export was only 30 per cent in 1995, but it increased

to 55 per cent in 2005. In Latin America the share of SPWP increased from

60 to 70 per cent, while in Africa the increase was merely one to five per

cent during the same period.

Since it has already been mentioned that wood furniture occupies a

major share in the export, the ensuing section discusses the details of

furniture industry.

1.1.1 Furniture Industry

Among the various wood-based products, furniture has the highest

business in the world at present. The firms in the developing countries have

abundant opportunities for effective participation in global economy on

account of the resource availability and labour intensity prevailing in the

wood furniture sector. With the advent of flat-pack or ready to assemble

design furniture, mass producing furniture has become a viable

manufacturing strategy. The US, Italy, Germany, Japan, the U.K, Canada

and France are the seven largest furniture producers in the world and these

countries account for 61 per cent of the world’s total furniture production.

In Asia, China is the largest manufacturer, accounting for nine per cent of

world production. Diagram 1.2 depicts the global trade in furniture.

Introduction

6

237.5

243.7246.1

234

245

252.3

265

220

225

230

235

240

245

250

255

260

265

270

1998 1999 2000 2001 2002 2003 2005

Year

Diagram 1.2 Global Furniture Production (US $ billion)

Source: ITTO, 2006

It is clear from diagram 1.2 that the world furniture production

increased from US $ 237.2 billion in 1999 to US $ 265 billion in 2005. The

growth in world trade of furniture is shown in diagram 1.3

1

3032

26.5

0

5

10

15

20

25

30

35

Foot w ear Furniture Apparel World Merchandise

Perc

enta

ge

Diagram 1.3 Growth in World Trade 1995 – 2000 (Percentage)

Source: Kaplinsky, 2003

It is evident from diagram 1.3 that between 1995 and 2000, world trade

in furniture grew by 30 per cent faster than world merchandise trade as a

US

$ b

illio

n

Introduction

7

whole (26.5%). Next to apparel (32%), furniture occupies the largest share in

world trade. By 2000 furniture became the largest low-tech sector with total

global trade worth US $ 57.5 billion (Kaplinsky, 2003) exceeding apparel (US

$ 51 billion) and footwear (US $ 36.5 billion). In the case of furniture export,

the details of top 15 countries are given in table 1.2

Table 1.2 Global Furniture* Trade-Top 15 Net Exporting Countries (US $ billion)

Country Gross

exports2000

Net

exports1995

Net

exports

2000

Net exports

% change

19 95 to 2000

Italy 8.359 7.595 7.395 -3

China 4.582 1.671 4.412 164

Canada 5.719 0.685 2.044 198

Poland 2.191 1.18 1.815 54

Malaysia 1.596 0.826 1.491 80

Indonesia 1.518 0.819 1.498 83

Denmark 1.9 1.687 1.209 -28

Mexico 3.315 0.468 1.173 151

Thailand 0.949 0.712 0.909 28

Spain 1.453 0.523 0.531 2

Slovenia 0.586 0.409 0.461 13

Czech rep 0.78 0.148 0.445 201

Romania 0.445 0.472 0.377 -20

Sweden 1.298 0.51 0.338 -34

Brazil 0.496 0.212 0.333 57

Rest of the countries 22.742 na na na

Total 57.338 na na na

Source :ITC, cited in Kaplinsky, 2003 *includes wood, metal, plastic

Introduction

8

It can be gathered from table 1.2 that out of the 15 major exporters of

furniture in the world six are developing countries (Brazil, China, Indonesia,

Malaysia, Mexico and Thailand), and four are transition economies (Czech

Republic, Poland, Romania, Slovenia). These ten countries tend to be large

volume exporters and low volume importers of furniture (thereby being large

net exporters). Industrialized countries on the whole export and import large

volume of furniture with Italy (US $ 8359 million) by far the largest net

exporter. Canada, Denmark, Spain and Sweden occupy the third, seventh,

tenth and fourteenth positions respectively. The top six leading importers of

furniture are the US, Germany, the UK, France, Japan and Canada. The total

import of furniture by EU was US $ 4.89 billion out of which 62 per cent were

wood furniture products in 2000 (Kaplinsky, 2003).

The export of wooden furniture and plywood from Asia rose by 39

per cent to U.S $ 8.78 billion in 2000.The export earnings of Malaysia rose

to 1.9 billion from the export of all types of furniture in 2005 out of which

80 per cent was rubber wood (Killman and Hong, 2005). China’s furniture

production was US $ 55 billion and exports 12 billion in 2005-06 (Tissari,

2006). Indonesia’s export of furniture was worth US $1.65 billion in 2005

out of which 75 per cent was wooden furniture.

1.2. Wood Based Industry – Indian Scenario

The industrial wood production in the primary processed sector

in India increased from 21.4 million m3 in 2002 to 33.85 million m3 in

Introduction

9

2005 and the industrial wood demand in India is likely to grow from 58

million m3 in 2005 to 153 million m3 in 2020 (ITTO, 2005). Hence, it

is found at the outset that there is mismatch between demand and

supply.

In this context, it is worthwhile to look into the scenario of wood

based industry in the country. The wood based industries1 occupied

22nd rank in terms of net value added by various industries. The trends

in the wood and wood products in the factory sector is given in

table 1.3

Table 1.3 Trends in Wood and wood products in all- India factory sector (values in Rs. lakh )

Particulars 2001-02 2002-03 2003-04 2004-05

No. of factories 3162 2985 3042 3053

Fixed capital 84823 91535 96332 98469

Total employees 52866 50023 50211 50618

Total emoluments 18028 16923 18553 18910

Total input 298472 244315 309595 368879

Gross output 343377 294245 361596 418736

Net value added 35141 38902 41418 39015

Source: ASI , various years

1 The national industrial classification 1998 put wood based industries in two digit

division code 20 and three digit group code 201(saw milling and planing) and

202 (plywood, block board, treated timber, windows, doors, plywood chests etc)

Introduction

10

It is inferred from table 1.3 that during 2001-02 to 2004-05 the

number of wood based units in India in the factory sector decreased by

109 units, while the gross output increased by 21.9 per cent during the

same period at current prices. The increase in gross output calculated at

constant prices (using the wholesale price index for the wood sector)

was 21.19 per cent during the same period. The net value added in the

wood sector increased by 11.02 per cent during the same period at

current prices, where as the employment decreased by 4.25 per cent.

When compared with all- India factory sector, the wood industry

has low employment per unit (16.57 as against 61.99), low fixed

capital per unit (Rs. 35.8 lakh as against Rs. 412.21 lakh) and low

output per employee (Rs 8.27 lakh as against Rs.19.78 lakh). But the

employment per one lakh rupee investment is higher in the wood sector

(0.51) compared to all the industries (0.16). The capital output ratio is

0.26 in the wood sector whereas it is 0.34 for all the industries

(computed from ASI, 2004-05).

It would be worthwhile to see the position of furniture industry

in India in the global context. In value added the share of Indian

furniture was 1.4 percent in 1995 but it declined to 1.1 per cent in 2005

(International Year Book of Industrial Statistics, 2007). The share of

India in world export of furniture is given in diagram 1.4.

Introduction

11

0.17 1.51 1.64.58

8.4

57.34

0

5

10

15

20

25

30

35

40

45

50

55

60

65

India Indonesia Malaysia China Italy World

US

$ b

illio

n

Diagram 1.4 Share of India in World Export of Furniture in 2000

Source: Kasplinsky, 2003

It is evident from diagram 1.4 that the furniture export of India is

less than one per cent.

The trends in output and value added in the furniture factory sector

is given in table 1.4

Table 1.4 Trends in Furniture* Sector in India ( Rs. million)

Particulars 2001-02 2002-03 2003-04 2004-05

No. of factories 2207 1986 2198 2686

Fixed Capital 42044 27866 30339 33417

Total employees 126058 133787 147682 176214

Total emoluments 7724 9235 10682 13377

Gross output 202798 183013 245665 322621

Net Value added 26179 22211 27229 38170

Source: ASI, various years * NIC code 36

It is evident from table 1.4 that the number of units, the gross output and

net value added have increased over the years in the furniture factory sector. In

the all India registered SSI sector, wood based furniture units had second rank

Introduction

12

in the case of number of units (65007 or 4.72%), fourth rank for employment

per one lakh rupee investment (1.48) and fifth rank for total employment

(183322 or 2.97%) in 2001-02.

1.3. Wood Based Industry: Kerala Scenario

The wood based industries in the state can be analysed in terms of

location quotient, gross value added, employment etc. The location quotient

(relative concentration of the industry in the state) was the highest with four per

cent for this sector during 1981–1991, but it declined to 2.3 per cent in the post

reform period. The share of wood and wood products was 2.8 per cent and 0.9

per cent in gross value added in Kerala during the same period. But it has been

accommodating 2.6 per cent of the total employees in the factory sector of

Kerala manufacturing (K.P. Rajesh, 2004). The position of wood based

industries in Kerala in the factory sector is shown in table 1.5.

Table 1.5 Position of Wood Based Industries in Kerala against all- India Wood-based Industries in 2001-02 (Rs. lakh )

Particulars

Wood and wood

products in Kerala

Share of Kerala in

Indian wood based

factory sector ( %)

No of factories 679 21.47

Invested capital 19183 11.45

Total employment 7573 14.32

Total emoluments 2533 14.0

Gross output 19452 6.5

Net value added 3242 9.22

Income 1932 8.14

Profit -601 -

Source: ASI, 2001-02

Introduction

13

It is evident from table 1.5 that while in the case of number of

factories the share of Kerala is high, yet in all other variables the state does

not have a proportionate share. The labour cost in gross output is 13.02 per

cent in Kerala while it is 5.25 per cent in all- India wood sector. The wood

based industries in Kerala in the factory sector in three digit classification

are compared with all India figures in table 1.6

Table 1.6 Wood- based Industries in India and Kerala (2001-02, excluding furniture)

Particulars

Saw milling and

planing

Share of

Kerala

in all-

India

(%)

Plywood, block board,

flush door, treated

timber, windows,

door, etc

Share of

Kerala

in all-

India

(%) India Kerala India Kerala

No. of factories 1373 403 29.35 1784 276 15.4

Factories in operation 1194 312 26.13 1623 230 14.17

Invested capital in Rs. lakh 14824 2477 16.7 152587 16706 10.94

Total output in Rs. lakh 44353 5599 12.6 298984 13853 4.63

Net value added in Rs. lakh 5682 697 12.2 29443 2545 8.64

Income in Rs. lakh 4498 545 12.11 19230 1387 7.21

Profit in Rs. lakh 2195 -53 0 494 -548 0

No.of persons employed 11201 3436 30.6 38199 4137 10.8

Total man days 2747000 754000 27.44 11748000 1061000 9.03

Wages and salaries in Rs. lakh

2304 599 25.99 18737 1934 10.32

Source: ASI, 2001-02

Table 1.6 shows that in Kerala for most variables the saw mill sector is

better placed than plywood compared to all India wood sector. The

classification of industries on the basis of scale does not give the same

Introduction

14

conclusion .The state level report on the all India census of SSI 2001-02

shows that the total number of wood based units in the registered SSI sector in

Kerala comes to12.83 per cent of the total number of SSI units in the state,

and it is 0.32 per cent of SSI units in India. The rank and other details of the

wood based industries in Kerala in the SSI sector are given in table 1.7

Table1.7 Position of Wood-based Industries* in Comparison with all the registered SSI in Kerala up to March 2002

Variables

Rank of

furniture

made of

wood, reed

and cane

Rank of

sawing

and

planing

Rank of

plywood

and veneer

Rank of

structural

goods

including

treated timber

Number of units 2 (7824) 11 (2502) na (474) na(642)

Market value of fixed assets in Rs. crore

1(209 ) 2 (178.23) 17 (80.77) na(22.2)

Original value of plant and machinery in Rs. crore

1 (67 ) 5 (50 ) 14 (28.58) Na

Gross output in Rs. crore

5 (193.76 ) 16 (108.65) 15 (110.49) na(15.97)

Total employment 1 (2448) 11(10902) na(4700) na(2289)

Employment per rupees one lakh in vestment

7 (1.23) (0.61) 17 (.59) Na

Number of units managed by ST 3 (44) Na na Na

Number of units managed by SC 6 (184) Na na Na

Number of units managed by OBC 2 (5284) 10 (1492) na Na

Units using technical know-how from abroad

2 (22) 19 (7) na Na

Source: State Level Report on Third all India Census of SSI’s-2003-04(Kerala)

(Actual values are given in parenthesis), *NIC 5digit code

Introduction

15

Table 1.7 shows that furniture industry occupies a good position in

terms of total employment, value of plant and machinery and number of

units. In the case of sawing and planing, its position is comparatively good

for fixed assets alone. Plywood and structural goods are in a

disadvantageous position for most of the variables. The trend in the wood

based industries in Kerala in the SSI sector is shown in table 1.8.

Table 1.8 Trends in Wood- based Industries in Kerala from 2002 to 2006 in the registered SSI Sector

Particulars

Furniture* Structural wooden

goods

Plywood and

others

Up to

2002

up to

2006

up to

2002

up to

2006

up to

2002

up to

2006

Total no. of units 7824 9894 642 750 608 755

Employment 25448 34292 2289 2687 5891 6369

Market value of fixed assets (Rs. lakh)

20756.6 - 2350.21 - 9167.36 -

Net output (Rs. lakh)

23390.73 - 2220.51 - 8620.78 -

Employment per unit 3.25 3.46 3.56 4.13 9.6 8.43

Source: State Level Report on Third all India Census of SSIs 2003-04(Kerala) and

Industries Department, Tvm, 2007 *NIC code 36101

It is inferred from table 1.8 that the units making wooden furniture in

the registered SSI sector have increased by 21.07 per cent and the

employment in the sector has increased by 34.75 per cent during 2002 -

2006. Structural wooden goods manufacturing units in Kerala have

increased by 16.8 per cent and the employment in that sector has increased

by 11.18 per cent during 2002 to 2006. The total number of plywood, block

Introduction

16

board, flush door, particle board, densified wood, fiber board and veneer

units has increased by 24.17 per cent during 2002 to 2006, and the

employment in these units has increased by 8.11 per cent. The sector has

17th rank in gross value of output in the state. But the Industries

Department does not record the number of units using rubber wood as core

veneer.( The list of activity /industry code in NIC is given in appendix 8).

Altogether around three lakh people survive directly or indirectly

depending on the wood based industry (including wooden furniture) in

Kerala (Ramanathan, 2004).

1.4. Rubber Wood Industry in Kerala

The emergence of the rubber wood as an eco-friendly source of

timber and the scope for high value addition is bringing the wood sector

back into prominence. India is the fourth largest natural rubber (NR)

producing country in the world and the area under NR crop has been

exhibiting a steady increase from 4.75 lakh hectares in 1991 to 5.84 lack

hectares in 2004-05 (IRS 2006). Though production of rubber wood per

unit of area declined, the total production of rubber wood increased from

1.2 million m3 in 1990 to 1.6 million m3 in 2001 (logs 0.96 m3). The world

availability of rubber wood in 1998 – 2003 was estimated to be 41.34

million m3 per year, of which 11million m3 was logs (George and Joseph,

2002). The details about the consumption pattern of rubber wood in India is

given in table 1.9

Introduction

17

Table 1.9 Consumption Pattern of Stem Wood (Percentage)

Consuming sector 1984-85 1993-94 1999-2000

Packing cases 69.0 54.1 56.5

Safety matches 13.3 9.4 3.0

Plywood 13.3. 24.01 26.5

Processed wood 2.2 10.5 12.0

Others 2.2 2.0 2.0

Total 100 10 100

Source: Estimate of RRII (George and Joseph, 2002)

It is evident from table1.9 that though the share of secondary

processing units2 in rubber wood consumption increased from 2.2 per cent

in 1984-85 to 12 per cent in 1999-2000, and that primary processing sector

has a predominant position. The production and export of secondary

processing units exhibits an increasing trend as shown in diagram 1.5.

32.6

150

21.5

32.9

0

20

40

60

80

100

120

140

160

1997 2001

Production

Export

Diagram 1.5 Production and Export of SPRWP Units (Rs. Million) Source: Rubber, February 2004

2. Secondary processing represents processing the sawn timber by chemically

treating and seasoning the sawn planks in to RSKD (rough sawn kiln dried),and

then to four side surface plained sawn planks(S4S).Some firms use the S4S

directly to manufacture value added products like furniture .Some other firms use

S4S to produce edge glued panel boards ( EGP board),and these boards are used

to produce furniture, building materials, components etc.

Rs. M

illio

n

Introduction

18

As per diagram 1.5 the gross value of output of 21 secondary

processing units increased from Rs. 32.6million in 1997 to 150 million in

2001 and exports increased from Rs. 21.45 million to 32.91 million in 2001

(Viswanathan, 2004).

1.5. Studies on Rubber Wood Industry

The studies carried out in this area generally touch upon the profile

and dynamics of rubber wood ranging from the status and exploitation of

rubber wood to problems in processing. Grant (1952) was one of the

earliest scientists who discussed exploitation of timber from rubber trees. A

Manual of Rubber Planting prepared by Edgar (1958) is one of the earliest

publications giving information regarding general timber utilization

practices in Malaysia including grading, seasoning and preservation. The

Forest Research Institute of Kepong, Malaysia (1980), Forestry

Department of Sri Lanka (1971), the Rubber Research Institutes of

Malaysia and Sri Lanka have carried out some studies on sawing,

seasoning, preservative treatment of rubber wood, and also its usefulness

for plywood and particle boards.

Gnanaharan (1984) made an attempt to see the utilization of rubber

wood in India. The use of rubber wood in other countries is discussed by

Hanif (1968). The papers presented in the Second Rubber Wood Seminar,

Kualalampur throws much insight into the different aspects of rubber wood

utilization. Seng (1985) highlighted the processing techniques of

Introduction

19

conversion and seasoning of rubber wood. He also highlighted the

problems arising due to warp, raised grain, insect and fungal infestations.

Singh et al.(1985) have pointed out a great potential for rubber wood

in the manufacture of glue laminated products, various structural and non-

structural housing components and even wood polymer composites (WPC).

In India, rubber wood after appropriate treatment has been successfully

tried for furniture, window and door shutters and frames, cabinet ware,

plywood, splints, match box etc. Compressed rubber wood has also been

used for shuttles, bobbins and such other textile accessories as a substitute

for maple and imported hornbeam (Sharma, et al. 1977).

Ipe et al. (1987) reveal the uses of rubber wood in Kerala for

packing cases, veneers, splints, plywood, tea chests, seats and backs etc.

But the study has not estimated the gross value added, capacity utilization,

employment generation, value of export etc. The secondary processing

sector has also not been included in the purview of the study. The study

conducted by Haridasan (1985-86) by visiting 273 units in Kerala and

Tamil Nadu reveals the district-wise classification of rubber wood

consumption, and analyses rubber wood market for plywood, splints and

veneers. But the study has not estimated the gross value added, the

employment generation, the value addition by each node etc.

Sekhar (1989) covers in detail the different aspects of rubber wood

like mechanical properties, treatment and seasoning methods and different

Introduction

20

products of rubber wood. The average production of rubber wood/hectare

is 150 and 180 m3 in the rubber wood holdings and estates respectively.

The most distinctive feature of rubber wood is that it is a renewable

byproduct of rubber plantations. The supply of rubber wood is

inexhaustible as the plantations are maintained on a sustainable yield

rotation of 25-30 years. Moreover, the development of appropriate

processing technologies capable of improving the inherent properties of

rubber wood made it a sustainable substitute for conventional hardwood

species on a variety of end uses and contributes to the environmental

conservation. The study further reveals that appropriate preservative

treatment before utilization will prevent degradation and will enhance its

service life. Rubber wood even after chemical treatment costs much less

than other timbers and will have a service life ranging from 25 to 100 years

depending on the method of treatment.

It was for the first time in India that scientists and industrialists

met in a common forum at the National Seminar on Rubber Wood held

at Kottayam (1989) to discuss the importance of rubber wood. The

papers dealt with importance, treatment, seasoning, mechanical

properties of rubber wood and its scope for using it as an alternative to

traditional timbers. But none of the papers dealt with issues like

marketing problems, technical and economic viability, the role of

various actors etc.

Introduction

21

Sundararajan (1989) pointed out that 70 lakh cubic feet per year of

worth size rubber wood can contribute Rs 2380 million to GNP per annum

if converted to commercial grade i.e., for door frames, sofas, flush doors

etc. and can generate employment worth 17 million man days per annum.

This is a projective study and the projections are not proved with empirical

analysis.

Zachariah (1992) made a study about the economics of rubber wood

industry in Kerala. It was the first of its kind on the economics of SPRWP

sector by surveying all the 11 treated rubber wood units in Kerala in

1991.The study looked into the economics of packing case, veneer,

plywood, and secondary processing units and found the breakeven point of

the units and also calculated the capacity utilization, treatment methods,

gross value added, employment, profitability and export. The study found

that the secondary processing sector has medium capacity utilization, high

employment and value addition per unit and moderate profits compared to

packing case units. Though value addition was low in packing cases and

veneer, they were more profitable than treated wood units. But the share of

various actors in the chain and the product- wise extent of value addition

were not estimated.

Viswanathan et al. (1998) conducted a field survey in 1995-96

covering Kerala, Karnataka and Tamil Nadu to document the performance

of the processing units in terms of scale of operation, procurement and

Introduction

22

processing, capacity utilization, range of products manufactured, and

market orientation. Accordingly, information on the above aspects was

collected from 42 SPRWP units. The results indicated that only 43 per cent

have downstream manufacturing facilities. Sixty six per cent of the logs

and 82 per cent of the sawn timber were procured indirectly. Seventy six

per cent of the units have saw mills attached to them. The annual installed

capacity was 46844 m3, and the sawn timber processed was 24070 m3 and

the capacity utilization was 51 per cent. The study further showed that 40

percent of the units produced furniture and furniture components; 30 per

cent produced paneling shutters, doors, windows, and door frames; 26 per

cent produced flooring tiles, brush backs, handles, block boards and table

tops, 21 per cent produced surface planed sawn planks (S4S). Only 13 units

reported to have exports. The industry is oriented towards internal market

however; lack of acceptance is a major hurdle. The limitation of the study

is that it has not estimated the gross output, the value addition, profitability,

and the role of various actors in the sector and the extent of export.

George and Joseph (2002) narrate the production and utilization of

rubber wood in India and estimated the current and potential value addition

in Indian rubber wood sector. The study has projected the availability of

rubber wood in India. The projection is that the availability of all types of

rubber wood will increase from 1.6million m3 in 2000-01 to 4.23million in

2009-10. The study has also shown that 88 per cent is utilized in low value

added products. Thus the stem wood consumption in India, particularly in

Introduction

23

Kerala, is highly skewed in the manufacture of low valued products such as

packing cases and inferior quality plywood. It is further showed that the

middlemen pocketed a major portion of the share of rubber wood price

paid by the actual buyers. But the study has not estimated the gross value

of output of the sector, product- wise extent of value addition, the total

value addition in the primary and secondary processing, the value addition

in different stages, and the relative share of various actors.

George and Joseph (2002) have shown that imperfections in the

primary market for rubber wood logs are leading to the inability of the

secondary processing units to control the price and quality of the raw

material. The relatively higher price of rubber wood logs in India results in

an inbuilt disadvantage for the processing industry compared to its

counterparts in other NR producing countries. There are marketing

problems arising from the non-acceptability of finished products both in

the domestic and world markets as there are no statutory authority to

implement and monitor the standards for processing and quality control.

Gnanaharan et al.(2002) covers all aspects of rubber wood

processing like production and utilization, structural features of rubber

wood, drying of rubber wood, preservative treatment, finger jointing,

machining and downstream processing, manufacture of plywood, block

boards, shutters, marketing aspects of processing industry etc. But these

studies do not deal with the technical and economic viability of the sector,

Introduction

24

the income and employment generated, gross value of each output, the

value of export etc.

Viswanathan and George (2004) made a study about 21 SPRWP

units and collected data for 1997-2001 and this is the first estimate by RRII

about the gross value of output of the secondary processing sector. The

gross value of output increased from Rs 32.6 million in 1997 to Rs150

million in 2001. The share of export in value of output declined from 66 to

22 per cent during the same period. The study reveals that 54 per cent of

the output of secondary processing is still not utilized for further value

addition like furniture, door, EGP etc. The extent of value addition in farm

is 100 per cent but a major portion of this goes to middlemen and only 50

per cent of the price of rubber wood in Weigh Bridge goes to farmers. The

extent of value addition from round log to end product is estimated to be

700 per cent but in Malaysia the same value addition is 2000 per cent. This

points to the inadequate use of modern technology. Moreover, less than 50

per cent of the capacity of existing plants is utilized. The study reveals that

44 per cent of the total cost is for rubber wood, 15 per cent for interest

payment, 13 per cent for depreciation and 10 per cent for wages and

salaries. The study also analyses the future prospects and problems of the

sector. The study however, does not show the detailed estimates of costs,

probably due to the non availability of information .The product wise

extent of value addition and the relative share of other actors are also not

Introduction

25

given. The study states that there were 84 registered units in the secondary

processing sector and only 50 per cent of them are operational.

Ramanathan et al. (2004) analysed the existing scenario, problems

and future trends in the wood industry of Kerala. They classify the wood

sector in Kerala into three: i) Treated wood ii) Furniture iii) Panel,

plywood, block board and particle board. SWOT analysis was made for

each of the sectors. The study shows that there are 439 rubber wood based

units in and around Perumbavoor (plywood units 65, veneer 250, and saw

mills 115). Out of the 40 SPRWP units, 9 units were given loan by KSIDC.

The five units with new generation plant and machinery for furniture

production are Rubco (annual installed capacity of 21500 m3), Borax

Morarji (20000 m3), Rubber Wood India (8250 m3), Andamans (4728 m3),

and V.R Treat woods (4500 m3). The study, however, does not give a

detailed picture of the SPRWP sector and plywood sector, especially the

gross value added, profitability, value addition, role of actors etc.

The studies reviewed so far have made clear that no concrete

conclusions can be drawn about all variables like profit, value addition etc.

since most of the studies concentrated on features like the consumption and

utilization of rubber wood and processing technology. However, it can be

deduced from these studies that the industry has moderate profit, medium

capacity utilization, low value addition, apart from the problems like

Introduction

26

inward oriented marketing, high price of raw materials, technological

difficulties, lack of diversification and upgrading etc

The main limitation of all these studies is that none of them have

made use of any theoretical framework for the detailed analysis.

1.6. Research Gap

Though the various studies touched upon several issues of rubber

wood industry, no single study has been carried out with an appropriate

framework. The value chain analysis is identified as a powerful framework

for analyzing the various aspects of rubber wood industry. To put it

differently, none of the studies mentioned above covers the different

aspects of value chain of the rubber wood industry i.e. the dynamics of the

chain, its linkages, governance, spatial aspects and institutional support.

The present study fills this gap.

At this juncture, certain studies on value chain are reviewed and it is

given in section 1.7.

1.7 Selected Studies on Value Chain

There are attempts in different parts of the world to study many

commodities in this framework. Gereffi (1994) examines the impact of

backward and forward linkages in garment manufacturing and reveals that

many apparel makers had little choice but to accede to the demands of their

main domestic suppliers. They also face pressure from merchandisers to

lower their prices and improve their performance. In buyer driven

Introduction

27

consumer good industries, there are high barriers to entry at the level of

brand named companies and retailers that invest considerable sums in

product development, advertising and computerized store networks to

create and sell these products. The main economic agents in the chain are

retailers, traders, overseas buyers and factories. In fashion oriented apparel

goods, the consumer price is three times the overseas factory cost for

imported clothing. The study covers the organizational structure, location

aspects and the role of institutions in the chain. The study also analyses the

implications of triangular manufacturing from a commodity chain

perspective.

Avdasheva et al. (2005) in their study analyses the competitiveness

of Russian enterprises for the first time from the perspective of value chain.

The study shows that any nonselective methods of supporting enterprises

(such as tax reductions) exert extremely limited influence on the status of

players. The study also suggests several policy measures to improve the

ability of producers to reposition themselves along the chain or to modify

the chain itself. Vangstrup (1997) analyses the potential of commercial

subcontracting in Mexico by focusing on a particular segment of textile

industry.

Kaplinsky et al. (2003) in their study highlight the importance of

exporting wood furniture products of developing countries and then map

the wood furniture value chain. A co-operative national net work of

Introduction

28

stakeholders spread through out the chain coordinated by the Industrial

Research Project (IRP) known as Saligne Value Chain group (SVC group)

was set up and the co-operation among the members (timber growers, saw

mills, product manufacturers, government departments, consultancy and

research assistants, members of IRP etc.) led to upgrading in the production

processes. The study suggests a sequential pattern of upgrading, that is, a

transition from Original Equipment Manufacturing (OEM) to Original

Design Manufacturing (ODM) and Original Brand Manufacturing (OBM).

The study concentrates on upgrading but does not analyse the relative share

of actors.

Gibbon (2002) examined South African clothing commodity chain

and the industry’s recent export performance in the light of new trade

arrangements with the USA and the EU. The performance has been

modest, especially in the domestically owned part of the sector. But the

foreign owned firms have performed well. The domestic firms have to

adopt certain elements from these firms to improve their performance.

Rammohan and Sundaresan (2003) expose that most of the available

studies on commodity chains and upgrading pursue a narrow economic

view. They point out the following defects of Global Commodity Chain

(GCC). The concept may be used merely to trace the physical movement of

a commodity, with no acknowledgement of the social relations of

production and exchange and their crucial bearing on the commodity chain.

Introduction

29

Raviraman (2003) explains the intricacies of the social dimension of

the commodity chain analysis of tea plantation in Kerala in connection with

the onslaught of globalization and liberalization, especially on petty

producers and labourers. He shows with analytical rigour the

transformation of a commodity chain into a ‘commodity chain trap’ and the

precarious predicament of small growers and workers who are being

enmeshed in it. Finally he summarises the study with certain suggestions

for the formation of a ‘new web of life’ for the downtrodden.

Sukumarannair (2003) tried to test the hypothesis that the

governance of primary commodities is largely demand driven and GCC is a

powerful tool for economic upgrading of primary commodities in

developing countries. He tested the hypothesis using the coconut oil

industry in Kerala. The two nodes identified in the chain are copra making

and oil extraction. The conclusion of the study is that given the scenario,

the prospects of upgrading in any of the node of coconut oil commodity

chain is bleak, unless the government steps in with a highly protectionist

policy.

Rajasenan (2003) examines the ‘commodity chain trap’ of the

marine fishery in Kerala at both material and value terms and its

ramifications within globalised fishery chain framework. The study points

out the need and requirement for a Fishery Export Processing Zone in

Introduction

30

Kerala to meet the perils of the recent quality assurance standards

stipulated by the importing countries.

The study conducted by Patrick (2003) analyses the dynamics of

grain mill products in Kerala by identifying the various actors in the value

chain and linkage between them in a commodity chain frame work.

Subsequently he also focuses on the process of competition and innovation

within the chain. He concludes the study by giving a well-knitted treatment

of the possible consequences of the business strategies and government

policies on grain mill chain in Kerala. Another merit is that the study has

estimated the relative share of various actors and the extent of value

addition. It made the conclusion that value chain of grain mill products is

producer driven.

The above studies arrive at the conclusion that there are various

players in the different nodes of value chain of a commodity. There exist

strong linkage, a positive role played by institutions in upgrading

technology and product, and the chain is largely buyer driven.

Disaggregated analysis show that while capital intensive commodities

present a producer driven chain, labour intensive products are buyer driven.

1.8. The Statement of the Problem

The demand for timber and timber products has increased

considerably due to the increase in population and industrialization. The

depletion of forest wealth has been causing great concern among the

Introduction

31

planners for a long time. Substitutes to wood have their limits as far as the

practical applications are concerned. In this context the importance of

rubber wood is to be seen as a reasonable alternative raw material for wood

based industries. The ban imposed by the state government in the transport

of 48 varieties of wood logs outside Kerala also led to the wider use of

rubber wood for industrial purposes. The increased use of rubber wood for

industrial purposes has resulted in the rise in the price of rubber wood. But

an important problem located in this context is that a major part of the

increase in price of rubber wood is shared by middlemen. Another major

problem of the industry is the skewness in the consumption of rubber wood

in the manufacture of low value added products. Certain other pertinent

issues emerged are the inward oriented market for finished products with

less exports, absence of diversification, less acceptability of finished

products, absence of a statutory authority to monitor and implement quality

control etc. Developing a value chain will help to overcome these problems

as it provides strong linkage, a positive role to be played by institutions in

upgrading process and products, particularly in the midst of buyer driven

value chain. At this juncture a number of research questions come up.

What is the exact nature of value chain of rubber wood industry?

Who are the active players in the rubber wood value chain? How far such a

value chain benefits the various actors like farmers, manufacturers, traders

etc in the chain? What is the performance level of rubber wood industry

and whether there are any changes in performance across sub-sectors like

Introduction

32

SPRWP, plywood etc.? Will the value chain help solve the issues like

exploitation by middlemen, and low value addition by applying strategies

like diversification, upgrading etc? Is there any linkage? If yes, what is its

extent? Whether value chain is buyer driven or producer driven? and How

does it help to upgrade?

To analyse these issues, an in-depth research is required. The

present study is an attempt to analyse the rubber wood industry in an

intensive way with the help of value chain analysis.

1.9. Objectives of the Study

The broad objective of the study is to see the structure and dynamics of

the value chain of rubber wood industry in Kerala. The sub-objectives of the

study are:

a. To identify the various actors in the value chain of rubber wood

products and examine their relative contribution in the chain.

b. To analyse the performance of the industrial units in the SPRWP

in relation to plywood industry in the value chain.

c. To analyse the linkages, governance, and the role of institutions

in upgrading and promoting linkages.

d. To examine the problems of the industry and to make suggestions

for policy makers.

Introduction

33

1.10. Hypotheses

a. There exists high relative share of retailers in value added as compared

to other actors, leading to a buyer driven value chain.

b. There exist inter and intra industrial linkages, both backward and

forward.

c. Upgrading is closely associated with the role of institutions and buyers

in value chain.

1.11. Theoretical Framework

Value chain analysis has a relatively short history and it has different

research approaches. Michael Porter (1985), Gereffi and Korzeniewsz

(1994), Hopkins and Wallerstein (1986), Philip Raikes (2000), Kaplinsky

(2001) etc have developed value chain frameworks. The study makes use

of the framework developed by Kaplinsky.

The three important aspects of value chain study as cited by

Kaplinsky are:

a. Value chain analysis plays a key role in understanding the need and

scope for systemic competitiveness i.e not just intra plant efficiency

and intra firm efficiency but inter firm efficiency. Firms should

concentrate on those resources which they possessed, which were

relatively unique, provided valuable service to customers and which

were difficult to copy, and that they should outsource the remaining

competencies to other firms in the value chain.

Introduction

34

b. Value chain considers not just the efficiency of the production link

in the chain, but also those factors which determine the participation

of particular groups of producers in the final market i.e. trade

policies, strategic decision regarding the location of their activity in

particular region or country etc.

c. Value chain helps to explain the distribution of benefits, particularly

income to those participating in the global economy.

The main elements based on the work done by Kaplinsky can be

summarized as follows:

a. Deciding the point of entry in the chain for special enquiry

b. Mapping value chains, the share of various actors in the chain.

c. Identification of key buyers

d. Identifying the chain governance and the role of institutions.

e. Upgrading in value chains.

1.12. Methodology

The research is both exploratory and analytical. The study depends

on both primary and secondary data. For secondary source, data available

in Economic Review, Annual Survey of Industries (ASI), Rubber Research

Institute of India (RRII), Indian Rubber Statistics (IRS), ITTO, FAO,

journals, books and publications have been used. The primary data have

Introduction

35

been collected through a sample survey on the Perumbavoor plywood industry

and a census survey of SPRWP units in Kerala.

The list of secondary processing units was collected from the Rubber

Board, which is the authentic source of the same in Kerala. As per the list,

38 units manufacturing SPRWP were reported in Kerala (45 units all-

India). But it was found that there were only 31 units operating in Kerala

during the data collection period (2006) and hence all the units were

surveyed.

Primary data for plywood was collected from Perumbavoor in

Ernakulam district since it has the highest concentration of plywood units

(51%) using rubber wood exclusively (Thomas, 2003). The sampling frame

was obtained from District Industries Centre, Ernakulam which consisted

of 65 plywood units in 2003. Thirty units were selected by systematic

random sampling starting with first unit in the list. Ten packing case units

and 15 peeling units from Kottayam, Ernakulam and Pathanamthitta

districts have also been selected for a comparative analysis with plywood

and SPRWP. The packing and peeling units are those which have linkage

with the manufacturers surveyed. Ten wholesalers and 40 retailers who

bought the products from the sample manufacturers and sold it to the

consumers were selected from Kerala, Tamil Nadu and Karnataka. Data

regarding export have been collected from 16 exporters (11 SPRWP and 5

plywood) belonging to the surveyed units.

Introduction

36

Five trading centres, which sold rubber wood to manufacturers, have

been selected for collecting data regarding rubber wood prices. The

criterion used for selecting the trading centres is the volume of trade

carried out by them with the manufacturers. Using judgment sampling

method, data have also been collected from 100 farmers and 30 traders of

rubber wood who sold rubber wood to the trading centres, which in turn

sold it to the sample manufacturers.

The statistical techniques used for analysing data are arithmetic

mean, standard deviation, coefficient of variation, correlation coefficient

and coefficient of determination. The linkage aspect is analysed in terms of

percentages.

1.13. Limitations of the Study

The major limitation of the present study is that secondary data is

not available regarding the rubber wood primary processing industry in

Kerala or India. Regarding the secondary processing sector, the available

secondary data is weak. Another limitation of the study was the difficulty

to collect data from the retailers of foreign countries to whom domestic

exporters sell the products.

1.14. Chapter Scheme

The first chapter is the introduction which includes the literature

survey, theoretical framework, objectives of the study, hypotheses,

methodology, importance and limitation. The second chapter portrays an

Introduction

37

analysis of value chain in comparison with supply chain, commodity chain

and also explains the concepts used in the study. The third chapter presents

an overview of rubber industry and rubber wood industry in India and

Kerala. The fourth chapter analyses the various actors in the chain and their

relative position. The fifth chapter deals with the performance of the

plywood and secondary processing units in Kerala. The sixth chapter

analyses the linkage and the governance structure, role of institutions in

upgrading and the problems in the industry. The last chapter gives a

summary along with the suggestions.