WoodPro 2004 Conference Highlights
The conference was designed to focus on the issues that currently impact the ability of US hardwood producers to compete in the global marketplace. Leading industry and management researchers analyzed for the audience the current management, investment, and technology issues that are changing the face of the industry.
The conference was officially opened with a welcome and statement of purpose from 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. Dr. McPheron illustrated Penn State's role in advancing several agriculturally-based industries, and focused on the College's current initiative to develop resources to support the important hardwood forestry and manufacturing sector in the state. Dr. McPheron's comments were seconded by the official host of the conference, Dr. Charles Strauss, Director of the School of Forest Resources at Penn State, who pointed out that the WoodPro 2004 conference itself was one of those commitments of resources that Dr. McPheron had alluded to, and that the intention of the School was to develop one of the finest ongoing conferences for the Hardwood Industry anywhere in the world.
Session One: Global Competitiveness
The first session of the conference was keynoted by Mr, Clarence Kwan, the Deputy Managing Partner of the Deloitte-Touche China Services Group. Mr. Kwan gave the group a close insiders view of how business is executed in China and how many US corporations are adapting to the game. In order to underscore the significance of Chinese-American business relations, he shared that the high-tech 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. According to Mr. Kwan, that two such well known names of American industry should be the largest investor and exporter from China should give us a clear indication of how intertwined the two countries' economies are.
As for wood industry opportunities in China, Mr. Kwan 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 the potential Chinese partner. For instance, manufacturing is clearly a Chinese strength, whereas marketing, distribution, and retailing are American strengths. Mr. Kwan's point here has been well illustrated by the several large US 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.
A second less obvious opportunity for U.S. hardwood companies was shared with the audience by Mr. Kwan. Even though we generally think of China as a vast country with relatively little buying power, Mr. Kwan pointed out that the small percentage of wealthy Chinese still represents a large market, and is growing. As a measure of their purchasing power, 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 these opportunities in China may 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, responded the conference's next speaker, Mr. Paul Lyskava, Executive Director of the Pennsylvania Forest Products Association. Mr. Lyskava, citing an extensive study by the National Association of Manufacturers, confirmed Mr. Kwan's note that U.S. companies are at a significant overhead cost disadvantage, and he detailed the following recommended policy changes to reduce U.S manufacturing overhead costs.
Tax Policy Changes –
· Reduce the corporate income tax
· Repeal the corporate alternative minimum tax
· Eliminate the tax on dividends
· Reform the international tax code
Health Reform –
· encourage greater individual responsibility for reducing preventable and chronic health conditions
· reform medical liability laws
· improve affordability of insurance through tax credits and group purchasing
Pension Reform –
· Institute proportionate liability
· Implement a statute of repose
· Set national standards and limits for punitive damages
· Refer all class action lawsuits to Federal courts
Regulatory Reform –
· Perform an objective cost-benefit review of new and existing regulations
· Implement results-based regulations in the place of current process-based regulations
Energy Policy Initiatives –
· Enable access of all natural gas resources
· Encourage broader development of energy sources
Progress on these issues, Mr. Lyskava claimed, will help level the playing field for U.S. manufacturers attempting to compete in global markets.
Mr. John Bassett, President and CEO of Vaughn-Bassett Furniture Company, continued on the theme of creating a level-playing field for U.S. manufacturers. Mr. Bassett, who is heading up a group of U.S. furniture company petitioners in a pending anti-dumping petition, presented the group's case as one of simple fair application of international trade laws. "We simply want the trade laws enforced," claimed Mr. Bassett. And thus far, U.S. courts have agreed with that position. Less than a month after Mr. Basset addressed the WoodPro 2004 Conference, the U.S. imposed tariffs of 6% to 198% on Chinese producers of wooden bedroom furniture.
Mr. Bassett illustrated the complex issue with a simple but effective story from his childhood. "When I was growing up in Virginia," Mr. Bassett related, "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." Mr. Bassett and the supporters of the anti-dumping petition maintain that, by international law, Chinese wooden bedroom furniture is being imported to the United States illegally, and that the tariffs are necessary to offset the illegal (cost) advantage the Chinese are exploiting to increase their market share in the U. S. And he threw out a further ominous warning to American producers (and consumers): while the American petitioners have one law firm working on their behalf to file and support their claim, the Chinese producers currently have 21 law firms working in Washington in their attempt to eventually defeat the tariffs.
The concept that a country's official government policies can have significant impact on other countries economics was supported by Mr. Mark Conolly, President of Bradford Lumber. Mr. Conolly shared the figures that approximately 60% of American log exports go to Canada, and that about 40% of all the logs harvested from New England and New York are shipped into Canada for value-added processing there. This impact, stated Mr. Conolly, is largely explained by the tough management laws enforced by the Canadian government on Canada's crown 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 transportation costs built in.
Concerning hardwood market opportunities around the world, Mr. Greg Lottes, President of Interforest, Inc., and Mr. Michael Buckley, of World Hardwoods, London, England, presented much interesting and useful information on where the business is at, and where it isn't. Mr. Lottes 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," said Mr. Lottes. As an example, he mentioned that Interforest had received significant business from the small Arab country of Dubai, where American-style equipping of hotels for tourists has begun to translate into a taste for Western-style construction and furnishings among the people of Dubai.
Mr. Buckley concurred with Mr. Lottes' viewpoints, and he predicted a similar phenomenon in India, where he foresees a huge potential market. He concluded his talk of many interesting observations with the following points:
· There is and will continue to be a significant decline in "old" European Union mass production furniture as the companies move their operations to Eastern Europe and Asia.
· Temperate hardwood species will continue to be preferred in much of the world.
· Oak is likely to remain the number one species in European demand.
Session Two: Management and Marketing Strategies
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, Dr. Michael 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.
Drs. Harrison and Jablonksy from Penn State's Smeal College of Business explored management opportunities that world-class companies exploit that are usually overlooked by most other companies. Dr. Harrison demonstrated a fascinating piece of software developed at Penn State that optimizes company facility locations and logistics and displays the results visually for companies to analyze. He stated that using this type of computer tool often makes the difference in whether companies profit or loss on their strategic plans…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.
Dr. Jablonsky, a specialist in taxation and international finance, predicted that the furniture anti-dumping tariffs will only remain in effect for 18-24 months. He also made an interesting comment on the corporate culture at Wal-Mart with respect to inventory management: that Wal-Mart started up its business in 1970 with two weeks worth of inventory, and that they have maintained that maximum two weeks worth of inventory ever since. This point supported Dr. Harrison's comment that "Wal-Mart isn't a merchandiser; it's a supply chain management company." The implication for wood producers: it's not what we make, it's how we manage its production and distribution that ultimately determines our profitability.
Dr. Bob Smith of Virginia Tech closed the conference's second session with comments from his experiences helping hardwood producers market their products both in the US and overseas. Dr. Smith 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 as all reasons making exporting attractive in the long run. New markets don't come cheaply, he warned, stating that 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 this investment time, successful companies tailor their products and services to individual customer's needs. Finally, when questioned on the value of environmental certification of hardwood products, Dr. Smith flatly stated that there will probably never be a price premium in the marketplace for environmentally-certified hardwood products.
Session Three: Technological Competitiveness
The final session of the WoodPro 2004 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 US Forest Service's recently-released annual inventory report for Pennsylvania's forests, he noted that 9 of the 10 most abundant species in the forest are on the increase, with the lone exception being sugar maple. He also pointed out that Pennsylvania contains more timber volume today than any time since the late 1800's.
Dr. Blankenhorn went into great detail on both ecological and regulatory issues facing the industry. The interest in his speech was made apparent by the post-conference evaluation of the attendee surveys. This 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 how that stellar university views industry progress and support in issues of technological competitiveness. Dr. Paul Winistorfer, Professor and Department Head of Wood Science and Forest Products, led a group-think session on how education fits into the "supply chain" of technological competitiveness, and concluded that the high level of fragmentation in the hardwood industry has prevented the industry from establishing a focused educational agenda for global competitiveness.
Phil Araman of the US Forest Service and Virginia Tech covered a range of "Next Generation Processing Technologies that Will Keep You in the Game." As covered by Mr. Araman, 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
Mr. Araman cited a study that estimated at least 20% of the potential value of all Southern Appalachian hardwood was lost through improper and inefficient processing, and his presentation of these technologies demonstrated how this loss can be greatly decreased through proper technological development and investment.
Dr. Gene Bryan of Best Possible Solutions, Inc., of Bend, Oregon, concurred with Mr. Araman's estimate of value loss to the industry, but added another dimension beyond yield loss – that is, loss through improper selection of management options. Stating that "profit optimization is all about planning and coordinating for the best possible big-picture results," Dr. Bryan proceeded to explain the concept of using a computerized optimization tool called "linear programming" to ensure a company's best allocation of resources to achieve it's profit objectives. He explained that 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 traditional profit analyses afforded by traditional cost accounting, Dr. Bryan explained, because "cost accounting is merely a defensive mechanism to make sure you don't sell a product for less than you make it for." In contrast, profit optimization, he explained, yields both a product cost analysis and quantitative tactics to make more on every dollar invested.
Dr. Bryan's discussion of linear programming and optimization was a perfect introduction to the even deeper hidden value contained in a company's computerized information system. Leading "A Conversation on the Future of Information Technology," Mr. Jim Kohlhaas of the Lockheed-Martin Corporation explained how leading companies capitalize on technology advances to enable growth of their companies. 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. Leading the WoodPro 2004 group through a fascinating look at how computer technology increases the utilization of resources on the battlefield, Mr. Kohlhaas related his comments to the hardwood industry in conclusion by demonstrating the dynamic relationship between a company's investment in developing technological capabilities and that same companies ability to capitalize on growth opportunities.
The final speaker of Session Three was Mr. Art Raymond, President of A.G. Raymond & Company. In his presentation, Mr. Raymond explained what has happened to the U.S. wood furniture industry, 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 US wood furniture industry had be closed down in the last five years, most in the last eighteen 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 the upgrade of their manufacturing processes. 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.
In contrast, Mr. Raymond explained, cabinet companies, buoyed by the new model of marketing their products through the 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 United States, he maintained.
Mr. Raymond concluded that the lessons that hardwood companies must learn from these two different stories, include:
· "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 Conference Highlights
In addition to the scheduled conference sessions, attendees
· participated in a sunny but breezy golf tournament on one of the toughest courses in Pennsylvania;
· heard Dr. Harry Wiant of Penn State reminisce on the "good old days" of harvesting redwoods (1/2 log to a truck!) while stating a well-considered case for a return to common sense in national forest policy making;
· and witnessed Penn State wood products faculty awards presented to York Casket Company (Research Partner of the Year), Conestoga Wood Specialties (Excellence in Management), and Yorktowne Cabinets (Excellence in Manufacturing).
After the conference, Mr. Ira Lauer of Catawissa Lumber & Specialty stated, "I think this was the best conference I have ever gone to in my professional career." And Mr. Keith Atherholt of Lewis Lumber Products concurred: "Great Conference! I took 11 pages of notes. So it was definitely a learning experience for me."
Based on feedback like that, Penn State will be looking for more opportunities to contribute to the hardwood industry with future conferences.
Chuck Ray, Ph.D.
Penn State Wood Products Operations Specialist