APA - The Engineered Wood Association

Dave Rogoway, President
APA—The Engineered Wood Association
Presented at the Forest Products Society Annual Meeting
June 22, 2003 / Bellevue, Washington

Thank you and good morning.
Discussing the Asian market and the role of technology in helping the North American wood products industry gain a larger share of it is a little like peering through the looking glass. What appears to be opportunity may not be so, and what appears to offer little potential may in fact offer the best return.

Before I lay out my views on what seems more and more to be an upside down world, let me first briefly review who I represent. APA—The Engineered Wood Association is a nonprofit association of engineered wood product manufacturers in the U.S. and Canada. We were founded as the Douglas Fir Plywood Association in 1933 in Tacoma, just down the road from here. We became the American Plywood Association, or APA, in the mid 60s after southern pine plywood was introduced. Our name changed again in 1994 to APA—The Engineered Wood Association to better reflect the wider product mix and geographic range of our members. Today, our members in the U.S. and Canada produce structural plywood, oriented strand board, glulam timber, wood I-joists, and laminated veneer lumber.

APA has three primary mandates: quality assurance, to help our members verify that their products meet the quality and performance provisions of industry standards, applied research, to establish the design and engineering foundation for the construction and industrial applications of those products, and finally, market support and development, both domestically and abroad.

APA has been involved in international market development efforts since the 1960s, and has had offices and/or representatives at various times in several European countries, as well as in Mexico, the Caribbean and Japan. As someone who has been involved in those international marketing efforts for more years than I like to remember—or acknowledge—I was tempted to entitle my presentation today: Observations from the International School of Hard Knocks. It hasn’t always been easy.

The actual title—“The Asian Market: Illusion or Opportunity?”—reflects what I think is a reasonable question at this juncture: What can the North American wood products industry realistically expect to achieve in the Japanese, Chinese and other Asian markets? We must start, I think, by considering the Asian market in the context of what is happening globally. And what is happening globally is that traditional production and trade patterns are changing at mach speed. We are all aware of this. Consider a few numbers that have many of our APA members especially concerned.

U.S. plywood exports totaled a record 1.7 billion square feet in 1997, or about 9.5 percent of U.S. plywood production. Last year, shipments had fallen by 74 percent to just 443 million square feet, or less than three percent of U.S. plywood production.

The most dramatic decline by volume and percentage has been in Europe, a market where both the U.S. and Canadian plywood industries have invested heavily over the years. U.S. plywood shipments to Europe topped one billion square feet in 1997. Last year, by contrast, they fell to just 12 million feet, a drop of almost 99 percent.

The European market, in short, has virtually disappeared for U.S. plywood producers, and it is much the same for the Canadian plywood industry as well. This has been due in large measure to rising imports from South America…and to substantial increases in plywood and OSB production capacity within Europe itself, and most recently Eastern Europe.

Looking more closely at Asia, U.S. and Canadian shipments of plywood and OSB to Asian countries are forecast this year to be just 320 million square feet, down almost 60 percent since 1997, when the Asian financial crisis began.

Declines of exports to some countries around the world have been within their historical rise-and-fall ranges, a function largely of the strength or weakness of the North American market at any given time. But overall the numbers suggest that basic international supply and demand mechanisms are changing. That change is further underscored by U.S. plywood imports, which have been rising. In the five years from 1997 to 2002, they climbed 714 percent. And although the volume is still relatively small as a percentage of total U.S. market demand, a trend is clearly at work.

What’s going on here, why, and what does it mean for North American prospects in the Asian market?

Two obvious factors underlie these trends. First, the high value of the dollar. As you can see in this measurement of the dollar’s real exchange value against the currencies of our 36 most important trading partners, the U.S. dollar value rose dramatically from the mid 90s up through the middle of last year. Although it has moderated recently, the dollar at its peak last year was higher than at any time since the 1980s. That served in effect as a 25 percent tariff on U.S. producers selling into foreign markets.

The second factor, aided and abetted by the first, has been the substantial rise in the production capacity of wood product industries around the world. With the U.S. and to some degree Canada as well finding it difficult to compete on a cost basis, other industries quickly stepped in to fill the supply gap. And while U.S. and Canadian structural wood panel production, for example, is expected to rise 31 percent for the 10-year period 1995-2005, production by the rest of the world also is forecast to jump substantially—21 percent during the same 10-year period.

Let me give you a few examples of where that new production is coming from:

In Europe, plywood production has risen dramatically over the last decade, to about five billion square feet. Most of that is in Scandinavia.
Oriented strand board is now manufactured in seven European countries, with total production about 1.7 billion feet. Production is expected to more than double by 2005 to almost four billion feet. And two-thirds of that will likely find its way to offshore markets, including the U.S., Japan and elsewhere in Asia. European OSB is generally of excellent quality and produced to a graded standard.
Scandinavian investment in Russia and the Baltics is expected to improve the efficiency of that region’s plywood industry. Although production is expected to rise only modestly in the short term—to about two billion feet by 2005—Russia’s vast wood fiber resources, under-employed workforce, and industrial policy needs should give us pause in the long term.
Brazil has some 300 plywood mills, 40 percent of them drawing fiber from softwood plantations. Production is forecast to exceed three billion square feet by 2005. Two-thirds of Brazilian production is exported, and although little of it is yet certified to the standards of importing countries, we should expect that to change. In fact, the Brazilian industry announced recently through its trade association that it would achieve equivalence with the new European standard covering construction-use panels scheduled to take effect next year.
And then there’s China. The world’s most populous country also has the largest number of plywood mills—something on the order of 2000. Most of these, of course, are small and not especially efficient by our standards, but the country’s plywood output is forecast to rise from about two billion square feet 10 years ago to more than 13 billion feet by 2005. Production has been switching from decorative furniture grades to structural concrete form grades.

There are other long-standing and emerging players on the world stage as well, including, for example, New Zealand and Chile. So, despite our being as technologically advanced as any industry in the world, I believe it is safe to say that new production capacity will continue to evolve adjacent to cheap fiber resources, and in countries where lower labor costs permit finished products to be sold competitively both domestically and abroad.

Let’s look now a little more closely at the positives and negatives in Asia, especially Japan and China. U.S. and Canadian wood product manufacturers have had long-standing trade relations with Japan, and there are a number of things that seem to suggest a promising future.

Japan is the second largest housing market in the world, with about 1.2 million unit starts last year. Wooden housing starts remain in excess of half a million, with about 15 percent of that number 2x4 frame construction.
Japan has been adopting housing laws and policies, such as the Housing Quality Assurance Law of 2000, that encourage the use of high quality products like those the U.S. and Canada produce.
Japan has been shifting toward performance-based as opposed to proprietary standards, and that too works in our favor. The North American industry has taken advantage of this process to successfully implement a series of proposals that more closely harmonize Japanese and North American standards. Since 2000, we have reviewed more than 100 drafts of Ministry of Construction Building Standards Law Notifications.
Japan’s experiences with earthquakes, such as the one in Kobe in 1995, have generated increased interest in the seismic safety benefits of North American diaphragm and shear wall panels in traditional post-and-beam construction.
Japan’s forest management policy now focuses more on preservation than production, and domestic production of most wood product categories is in decline.
And as I mentioned, we have a long-standing history of doing business in Japan, so we know our way around the political and regulatory landscape.

Those are some of the positives. What about the negatives?

Japan’s economy remains anemic. And although a host of banking, regulatory, distribution, foreign investment and other reforms are being initiated, the process is very slow.
Japan continues to maintain tariffs of around 4-6 percent on most categories of value-added wood products and its insistence on maintaining those tariff levels undermines efforts to achieve a critical mass of countries to agree to move forward with an advanced tariff liberalization package in the World Trade Organization. Japan as recently as 2001 initiated a safeguard investigation encompassing several categories of wood products, including lumber, glued laminated timber and three types of plywood. Although safeguard action does not appear likely, the matter remains unresolved.
And finally, we face stiff competition in the Japanese market from other producing nations and, in some cases from Japan’s own domestic industries—glulam and plywood, for example. Domestic production of glulam timber has increased fourfold in the last 10 years and is forecast to continue rising in response to a dramatic increase in demand. And although Japan’s plywood industry is declining, it is still the single largest supplier, and it is fighting hard to maintain its position.

So how have all of these factors translated into actual business for North American structural wood panel producers in Japan? In 1997, U.S. and Canadian manufacturers shipped approximately 680 million square feet to Japan. Last year, that volume had fallen by 57 percent, to about 290 million feet. The biggest hit was taken by Canadian plywood, which fell 242 million feet, or 68 percent.

Let’s take a look now at China. Again, many things suggest a substantial long-term opportunity there:

The sheer size of the country, the housing needs of its huge population, and its tremendous infrastructure needs all suggest a potential market of vast proportions.
China has the fastest growing economy in the world, and the country has committed itself to economic reform and to opening itself to the outside world. Hosting the Olympic Games in 2008 and gaining full membership in the World Trade Organization last year are tangible examples of that commitment. The country’s transition to a market-based economy, after decades of rigid state control, is creating new demand and opening new doors.
The government has announced it plans to build between five and six six billion square feet of new residential living space every year for the next twenty years. That would mean 5 to 6 million units of 1,000 square feet each annually. Chinese banks are now also providing long-term mortgage financing at affordable rates, and the Chinese people are becoming avid homebuyers.
And as middle class incomes rise, housing quality expectations also are rising, and this would seem to bode well for high quality wood product imports.

On the other side of the coin, however, China, as I said earlier, is itself a significant potential player in international wood products trade. In fact, it is already a significant player.

China’s wood products exports in 2001 were greater than Malaysia’s or Brazil’s, and were double the export value of Chile’s wood products exports. Ranked by value, China is the fourth largest supplier of softwood plywood to the U.S., and the sixth largest hardwood supplier. In the five years between 1997 and 2002, the value of Chinese hardwood plywood exports to the U.S. rose approximately 500 percent, making the country by far the fastest growing supplier of hardwood plywood to the United States. Chinese wood product exports to Japan have also risen dramatically.

So the often-asked question of whether China is more likely to become a customer or a competitor may already have been answered. There are other obstacles to China becoming an export market for North American wood products. For example:

The traditional construction technology in China is concrete based, and its plywood industry, as I mentioned, is increasing its output of concrete form panels made with domestic poplar cores and imported face plies from Russia and Southeast Asia. The country lacks a national building code that addresses light frame construction options for structural wood products, an inspection system for providing compliance to codes, or a harmonized system for recognizing products manufactured to international standards. All of which translates to a tremendous need for wood design and construction technology transfer.
China has preferential tax and trade policies with neighboring countries. A Sino-Russian agreement, for example, allows Chinese logging companies to move their people and equipment into Russia. In return, Chinese import policy provides a favorable tax treatment, charging only half the normal value-added tax on imported Russian material.
China needs to employ millions upon millions of people, and developing its own wood products industry is one means to that end. The country is already the second largest plywood producer in the world, second only to the United States.
China’s record on intellectual property rights has not always been the best. In the case of wood products, failure to police illegal or counterfeit trademarking jeopardizes the product quality assurance programs necessary to advance confidence in and demand for wood frame construction.
China lacks an integrated distribution system to deliver foreign manufactured goods to construction sites.
Chinese currency is not directly convertible outside of China, so foreign exchange arrangements must be negotiated, and almost always at a cost to the foreign supplier.
Although tariffs on primary wood products such as lumber and logs are now at zero, excluding VATs, tariffs on value-added products such as plywood and glulam remain in the 8-10 percent range.
And finally, the sheer size of the Chinese market is drawing every competitive producer in the world.

We don’t have time this morning to review other Asian markets, such as South Korea, Vietnam or Taiwan. But many of the same pro and con points can be made for those countries as well. Significant infrastructure, multifamily housing and nonresidential construction needs exist in those markets, making them especially attractive for concrete form panel and engineered wood framing manufacturers. But regulatory obstacles and keen competition from lower-cost suppliers make those markets difficult to penetrate.

Here’s another problem North American producers must consider, one that our members experienced very acutely in Europe: our successful efforts over several years to gain market access and to increase wood product demand also, unfortunately, aided the rising ranks of other foreign and domestic suppliers. Eventually we had to ask ourselves whether the market development investment we were making in Europe was proportionate to the return on that investment, or whether we were simply helping our competitors displace us in that market. It may sound to you that, on balance, I think the international market—and the Asian market in particular—are more illusion than opportunity. But I don’t want to leave you with the impression that it is quite that simple. I believe there will always be a good argument for keeping a hand in foreign markets. For one thing, by helping to create demand abroad—whether it is for our products or others’—we help protect our own domestic marketplace from becoming a dumping ground for industries hungry for new customers. If we give up entirely on offshore markets, we will find ourselves all the more quickly fighting a pitched battle to defend our own domestic share against foreign competitors.

Secondly, circumstances change, and we shouldn’t ever close the door to future possibilities. We must remain positioned to take advantage of changing circumstances.

If we are to exploit future opportunities abroad, however, we must do two things. First, we must maintain our commitment to technology advancement because that is our obvious strong suit. And second, we must operate internationally as we have learned to operate domestically—we must develop and market products for what is now a customer-driven and special needs marketplace.

In the case of technology advancement, I mean both product and processing technology…and also wood systems construction technology. We are world leaders in both areas and we must maintain that edge if we are to remain a world player in this age of globalization.

The incredible rise of the oriented strand board industry over the past two decades is an excellent example of our world-leading technology expertise. Initial uses of OSB included packaging and other applications where building codes did not apply. It was clear early on, however, that if the product were to compete in regulated construction markets, significant product performance and processing advances would be required.

Today’s oriented strand board owes its phenomenal marketplace success as a construction panel to the continuous research and development investments of manufacturers, their product and equipment suppliers, and, if I may so, APA, which led development of the performance standard for OSB. OSB process improvements over the past two decades have catapulted the industry beyond the expectations of most early observers and even enthusiasts. Those improvements are testimony to the importance and rewards of innovation and continuous process improvement, not just in the domestic market, but internationally.

Although the long-term outlook is for OSB to remain primarily a structural sheathing, ongoing research and processing improvements—in short, technology—will likely lead to the product’s increased acceptance and use in specialty and value-added markets. Much the same can be said about the improvements already achieved and ongoing with respect to other structural engineered wood products, including plywood, glulam timber, structural composite lumber, and wood I-joists.

Equally important, as I said, is the transference internationally of our wood systems construction technology, which is without equal anywhere in the world. Wood frame construction offers a long list of performance advantages. Unfortunately, lack of familiarity in much of Asia with our wood design and construction methods—and with the tremendous performance benefits of those methods—remains a major impediment to increased market share abroad. We must continue to invest in wood construction research and technology, and to promote the practical benefits of that technology in Asian markets.

The second prerequisite to creating new customers in Asia is adoption of a more customer-driven marketing approach—precisely what we have had to do here at home in the face of an increasingly demanding marketplace. This means identifying niche market needs, understanding the motivations of our international customers, and tailoring our products and support services to the specific requirements of end-use applications.

It also means being able to respond more quickly to windows of opportunity. Here’s one example: Provisions of the Japanese Building Standards Law scheduled to be adopted July 1 prohibit the interior use of products not labeled as meeting formaldehyde emissions limits. As a Registered Foreign Certification Organization, APA is authorized to qualify and certify our members’ products under these new emissions rules. And several of our members are now so qualified. There are very few other recognized suppliers of these certified products at present, so we have a significant opportunity to expand our market share in Japan.

Another window of opportunity in Japan is represented by potential changes to regulations that encourage hybrid construction, or the use of wood in combination with steel, concrete and masonry. This could lead to substantial increases in the number of buildings with multistory timber frame construction atop multiple floors of reinforced concrete.

Still another special opportunity, although not in Asia, underscores the need to be ready to act when opportunities present themselves. I’m referring to the reconstruction effort in Iraq, which represents substantial potential demand for concrete form and possibly other grades of plywood and OSB. Summing up then, I would leave you with these observations:

North American wood product exports to Asia, as elsewhere around the world, are in no small measure dependent on the value of the dollar.
Engineered wood production capacity has been rising around the world, and can be expected to continue rising in many countries with access to low cost fiber and low cost labor. That does not bode especially well for North American producers.
In the case of Japan and China specifically, the former currently is in decline as an importer of North American engineered wood products…and the latter appears as likely to become an international competitor as it does a customer.
Having said that, I believe it would be a mistake to concede the Japanese, Chinese or other Asian markets entirely. Provided currency exchange rates give us a fighting chance to compete, and provided technology continues to improve our products, we should keep our hand in the international ring.
And finally, to the extent that opportunities will exist, we must recognize that they will not be wholesale, but rather opportunities for products more carefully tailored to specific market and customer needs.

All of which returns us, I think, to the bottomline question: what return can the industry expect from a given level of investment? That’s the multi-million dollar question. I hope I’ve offered you a few ideas.

Thank you.