Winter 2003 Volume 12, Number 3
The State of Indiana Hardwood
By Ray Moistner, Executive Director Indiana Hardwood Lumbermen’s Association with information supplemented by Weekly Hardwood Review
The Indiana Hardwood Lumbermen's Association represents nearly 300 wood products manufacturers and affiliates, and IHLA also manages the Indiana Forest Industry Council, which has another 160 members, mostly logging firms.
IHLA has members in 24 states and 4 Canadian provinces. The name has become somewhat of a misnomer, in that only 51% of our members are from Indiana, with another 23% being from Kentucky, Michigan, or Ohio. We are also well represented in North Carolina, Minnesota, Wisconsin, Tennessee, Missouri, and Pennsylvania.
Our mission is simple: "Working to ensure a sustainable, affordable supply of quality North American hardwoods for the public good.'
In accomplishing that mission, IHLA undertakes many activities. First, we are the only organization in the state who is registered to lobby on behalf of the wood products industry. We are active and visible at the statehouse, and have been influential on many forestry issues. We also have IHLA PAC, with which we seek to even the playing field and support those candidates who further our causes.
Next, we are proud to host the largest regional convention in the industry, with the IHLA Convention and annual meeting, held in late January. The convention has grown into a must-attend event, and includes attendees from all over North America.
We also foster and nurture partnerships with Purdue University and the Department of Natural Resources, partners in the forestry business. We are proud of our close working relationships with both government and academia in Indiana, and representatives of those entities serve on our Board and committees.
IHLA assists members with regulatory information and compliance, while providing many forums for members to train employees, network, and improve their businesses. We are currently working to enhance the economic development opportunities for the industry.
As Woodland Steward readers and timber landowners, it is important to clearly understand the current state of the hardwood industry, as well as the challenges and opportunities manufacturers face today. What's good for the industry is good for all who care about maintaining the forest base and its value.
Taking a big-picture look at the current state of our industry, it is still safe to say that 2003 represented a third straight year of an economic slump, although there are signs of recovery.
The industry still consists of many, small mills operating independently. In tough times, the need for cash flow or to recoup lost profits might cause mills to jump at any indicator to increase production, which has traditionally led to supply gluts. This is a necessary and cyclical "shooting itself in the foot' that the industry has always experienced, and understandable because you can't expect independents to voluntarily curb production and forego potential profits.
To digress for a moment, the industry removes about 480 mbf annually, while growing 641 mbf. There are over 1100 primary and secondary firms, most of which are small companies important to their local communities. We represent over 50,000 jobs, and over $3 billion to the economy, as the state's sixth largest industry. Indiana is third in the notion in hardwood production. 69 of the 300 largest furniture companies have plants in Indiana, including 19 headquarters.
Back to the state of the industry, competitive restraints and weather help keep supplies low, which offsets somewhat our propensity to over-produce. There are also those who believe that our industry tends to 'cocoon' or interact mostly among themselves, which leads to a void in new ideas and slowness in accepting new technology. The industry also tends to avoid promoting itself in the public eye, counting on others to stress their scope and importance to the economic vitality of the state.
To illustrate how the industry has evolved to its current state, let's look at a few key watermarks in time. * (information supplemented by Weekly Hardwood Review).
Between 1960 and 1980, there was adequate supply and production. Small mills dominated the landscape. The furniture industry was at the top of the food chain, and faced little if any competition from imports. They mostly demanded green lumber. The furniture buyers set price standards, and there was little variation among them. Exports were slow but highly profitable.
Right around 1987, a lot began to change. The introduction of fax machines improved communications and opened global markets, stimulating exports. The overseas markets craved the superior quality of North American hardwoods. An explosion of dry kilns and concentration yards (to capture export profits) led to a decline in green lumber supply, and timber supply tightened with restrictions on public lands. There was a spike in non-industrial owners' purchases of forestland for non-timber uses. So timber supplies shrank while the mills were producing higher yields.
This brings us to the post 8 or so years. In the mid-nineties, the Japanese demand declined as the Asian currency crisis devastated many U.S. markets. North American hardwood businesses cruised with few changes, although timber supplies continued to tighten, partly because of increased production capabilities. In the last five years, the exodus of furniture manufacturers hit quick and hard, first to Mexico, then to China, mainly due to low labor and environmental costs. The exodus turned into a stampede. North American production peaked about 1999.
The China situation deserves its own chapter here, but first we must also point out another trend from the last decade. Vastly increased attention has been paid to forest management, which is a silver lining. There are several reasons for the emphasis, although we like to think organizations like IHLA, IFWOA and IFIC played integral roles.
Government and private incentive programs become abundant, most requiring written forest management plans. Many green certification groups also come to the surface, each with their own requirements as well. Add to that the increased involvement of consultants and industry experts, and required logger training, and you can see the net impact of a much broader swath of managed forests.
Back to the topic of the declining domestic furniture market, let's take a look at the 'China Syndrome.' Here's what we are competing against: China has some of the newest, most modern furniture plants in the world. They are producing high-quality furniture that can compete with the best the U.S. has to offer. China also has 100 million rural unemployed people and another 12 million urban unemployed. They have a government mandate to increase jobs by eight million per year.
Their Communist government operates China's central bank. They provide interest-free loans to new or expanding businesses, exert tremendous control over those businesses, and allegedly manipulate the value of their currency.
Workers sign contracts (usually two years) to work at the plants. They live in dorms at the factory and work 12-hour days, 6-7 days a week. China went from less than 3% of U.S. imports in 1990 to 27% in 2001, and over 40% today. Meanwhile, Indiana's furniture employment has declined 12% between 2000 and 2002.
While companies like La-Z-Boy (150), Broyhill (506), Hooker (270) and FBI(5,000) were closing plants and laying off workers in North Carolina this spring, a new plant opened in China. The 2.8 million square feet factory employs 2800 people working 60 hour weeks. They produce 80 containers per day, 126 chairs per container, and 72% of which is headed to the U.S. North Carolina has lost12,500 furniture jobs since 2000.
A large part of the profits in China go right back to the government to finance (you guessed it) the growing military might and the preservation of the current regime. Throwing in the towel is not the only option, but U.S. manufacturers have had to make choices about how to stay in businesses or diversify. If they become importers, they face higher inventory costs, shipping delays, and competing with their own direct sales. If they become retailers, they compete with former customers and manufacturers who sell direct.
Another challenge to our production will come from the outside, although its impact today is still negligible. As global trade expands, more countries will seek lucrative U.S. customers. As these companies increase market share, it will fuel their growth to compete in other parts of the world, or to grow militarily.
The domestic economy itself has been a challenge to our industry. Possibly the biggest, because it affects consumer spending. Low interest rates have kept the housing market strong, but there has to be a slowdown ahead. However, strong housing starts are not nearly as relevant for the domestic furniture industry as they used to be.
In 2002, 5.6 million existing homes sold and .97 million new sold, both records. There is a five-month supply of unsold new homes, hinting of the forseen slow down. As the economy rebounds, interest rates ratchet up, and any slow down in home sales still directly affects the cabinets and flooring sectors of our industry.
On a broader economic plane, there are more causes for concern. The trade deficit is at $500 billion, and that includes a positive balance for services! If we are to balance the trade deficit, it has to happen while we still have manufacturing in the U.S.
Although we have heard about productivity gains in the U.S. recently, a closer look shows that many of them have come from: cutting wages and pensions; reducing capacity; laying workers off, and bankruptcy (see Conseco and WorldCom). Indiana fortunately, has not suffered nearly as bad as most other states, but it is still limping, buoyed only by it’s only two growth industries gambling and prisons. Indiana's legislature took bold steps to promote economic growth, including business tax relief, and raising revenues from gambling and a sales tax increase. We have a manufacturing-friendly tax climate and a strategic central location with many highways for easy distribution.
We still face a significant net loss of manufacturing jobs and a low-ranked educational system. While our state looks to grow in high-tech areas, we must realize that manufacturing is the driving force in technological advancement and productivity growth. We also still face a budget deficit and are waiting to see the fallout of the new property tax reassessments.
What lies ahead for the industry? It starts with realizing that how we split the pie is irrelevant if there is no pie to split. The industry, and all those who depend on it, including landowners, need to be concerned enough with the future to do something about it today. Competition and loss of markets will force producers out of business. For furniture, retail sales are down and the growth of imports plows on.
On the optimistic side, with the closures, existing plants can produce at capacity when consumers start spending. Spring of 2002 saw the largest jump in consumer confidence since 1991, and the third quarter of 2003 was the best quarter of growth in the nation's economy since 1984.
Timber prices remain high, but manufacturers will not be able to raise their prices amid the global competition. As we've noted before, the industry remains prone to cyclical over-production and correlating price declines.
Looking ahead to species demand in the coming years, it helps to start by illustrating the evolution of species demand over the century and a half. The post-civil war clearing of land and clearcuts allowed regeneration of shade-intolerant oak and cherry. Much of the timber harvested over the lost 30years regenerated during this era.
In the 30's, the depression occurred as supplies began to be exhausted, and farmland abandonment promoted the regeneration of poplar. The furniture industry demanded long, wide lumber of specific species (but not oak), and the resulting selective cutting produced uneven-age stands where shade tolerant maples could flourish.
In the 60's and 70's, hardwood flooring demand declined, and maple demand spiked to build things like bowling alleys in Japan. The 70's also brought furniture experimentation with plastic, wage and price controls, and floating exchange rates, all contributing to declines in demand.
In the last 20 years, international markets have opened, red oak has become a furniture species, and there has been a greater demand for high-quality timber. With the situation in China and other challenges, we might expect to see a greater demand for fixed-width lumber, defect-free cutting, and color sorts as more manufacturers look to high-end, quick delivery and customization niches. The problem with this is that hardwood products originate from logs of variable quality, and are hard to buy in quantity.
Manufacturers may also look to lower grade lumber to compete, and the over-seas competitors would likely follow suit. While there are still vast supplies of large-diameter oak and poplar, we will see greater volumes of maple grow to commercial size in the next ten years. Equipment and procedures used to optimally cut oak may be less suited to optimally cut maple for the new markets. Better scanning equipment technology will likely trickle down from 9/11 airport safety initiatives and could change mills buying habits on logs, allowing them to be more picky about what they buy. The greater separation of products would figure to increase stumpage prices, especially in mid-value timber, but price increases will likely be offset greatly by the supply competition.
With all these changes looming on the horizon, what can we do today to ensure the viability of Indiana's hardwood industry for years to come? I could spend another issue of Leaves and Limbs telling you why it is important to be involved at the policy-making level, but before we are effective as lobbyists, we first have got to find ways to unify the different factions of the forest products world.
Independent businesses must work together for the benefit of the industry as a whole. 'Co-opetition' is a word I have used to describe the phenomenon of competitors pulling together for the common good. Once established, the members witness the awesome potential of combining forces. Associations can serve as the necessary vehicles to foster this cooperation. From there, we can develop the legislative partnerships with all groups who are interested in managing the forest resource.
In other industries, we see competition at work. How about the corner gas stations, where we can daily witness price conformity with no suggestion of collusion. You can bet that if one goes up a penny a gallon, his neighbors across the street will follow suit. Co-opetition can happen in other ways, when like-minded people pool resources of time and talent.
In the end, we need to realize that the world has changed. Manufacturers need to learn to sell themselves to the public, which is sensitive to environmental issues. For decades, manufacturers have worked quietly behind the scenes, while the retail world influenced the public through advertising. Global competition has upset the apple cart, and manufacturers now need to launch an offensive on behalf of American products and American jobs.
Although long-range planning today maxes out at 1-2 years, we still work with a product that takes decades to grow, so we must always be thinking 20-25 years ahead. Our industry needs to take advantage of the proliferation of state and federal programs made available for manufacturing companies who will invest in new workers, technology, employee education and training.
Over the next twelve months, IHLA hopes to build a program called 'Hardwood Vision,' which will create a public/private venture to maintain the viability of Indiana's wood products industry while restoring our industry to its rightful place on the state's economic development agenda. Our partners in this effort include Senator Lugar's office, the Business and Modernization Technology Corporation, the US Forest Service, IDNR, Purdue, and the Hudson Institute.
We will work towards influencing policy-makers with statistics and facts to explain the importance of the industry to the state. We will educate the public about the wisdom in using a renewable resource to meet so many of our future needs. We will expand industry training opportunities, improve manufacturing technology, and protect the state's resource base. Network groups will be established to promote competition.
In politics as in business, you are either a player or a victim. Those who standby and do nothing are left to live with the rules made by those who play. IHLA is working today to develop a broad and effective gross roots network of legislative contacts, who will be armed with information about the size and scope of our industry in their districts and throughout the state.
We implore the members of IFWOA and private woodland owners to work with us in a spirit of cooperation to affect public policy and to promote and protect Indiana's wood products industry.