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Lloyd C. Irland, President, The Irland Group*
Secondary wood-processing is usually considered to be the adding
of value to wood beyond the stage of boards or veneer. From this
comes the commonly used term "value added" for these sectors.
Secondary processing is also important in paper, but in this
article we will consider only solid wood products.
Maine has an unusually well-developed secondary wood sector
(Irland and Murdoch, 1992), whose product value and employment
the table below outlines. Within SIC 24 (Lumber and Wood
Products, except Furniture) about half of the 10,204 jobs are in
logging and sawmills, and half are in secondary processing.
Maine is especially prominent in the area of turnery products,
including dowels, toothpicks, balls, and related items.
(Ranked in Order of Product's Value)
Total | |||
SOURCE: Census of Maine Manufacturers (1993).
The diversity of the sector is suggested by the huge size of "miscellaneous," a category covering many small industries difficult to classify. Microbusinesses are common. In a recent survey (MFPM, 1995), 45% of a sample of 577 secondary wood products firms had one employee. Yet 30 firms had 50 employees or more.
To generalize about a collection of industries so diverse in their material uses, processes, end-use markets, and market outlook is risky. Although Maine secondary processing companies share a number of traits, conspicuous exceptions exist. At all levels, markets are diverse, complex, and fragmented. Data on market conditions and trends is virtually absent. Many companies operate at a number of market levels. It is not uncommon for sawmills to be heavily integrated forward into paneling, pallets, furniture parts, or furniture. At the same time, many secondary processors outsource their lumber or components. A few sawmills not only produce value-added items, but also operate small chains of retail stores through which they market their high-grade production. Maine companies produce both consumer goods, such as toys, novelties, and toothpicks, as well as producer goods like furniture parts and pallets. Many makers of dimension and components provide a strong service element to their product, working closely with customers to solve problems.
Lumber yields from sawmills cover a wide range of quality. The topmost grades are generally sold to retail markets or industrial users who need high grades, such as millwork producers. The lowest grades often go for pallets or packaging. Many secondary processors purchase wood from out of state, to obtain grades or species not available in Maine.
Speaking very generally, the end-use markets for wood products are mature or nearly so. Home furnishings, for example, take a slightly smaller share of consumer budgets now than 30 years ago. But this does not mean that conditions are static. Consumer tastes are turning to wood as the premium furnishing item. This is apparent, for instance, in the strong rebound in the hardwood flooring business in recent years. Moreover, many changes in distribution have occurred, such as increased use of mail order by home woodworkers and small shops. My firm once identified a listing of 70 companies selling lumber and other items by mail.
Furthermore, patterns of subcontracting are changing. Many furniture makers now purchase machined parts or even components rather than produce them on their own. This is becoming important in world trade. Many overseas users are starting to buy parts, instead of dry lumber, from their U.S. suppliers. This saves significantly on freight because the yield from rough lumber is often only 50 or 60%.
In many lines, wood remains competitive for products using small production runs, because it is cheaper to tool up for wood than for plastics. On large runs, however, many wood products are vulnerable to competition from plastics and engineered wood substitutes.
The rising cost of wood has placed the entire industry at a disadvantage relative to its competitors using other materials (Figure 1). Secondary processing, being labor intensive (Maxcy, 1990), is especially vulnerable to competition from low-wage areas.
Another dynamic force regarding lumber and wood is world trade. The appearance of Asian rubberwood furniture in Maine stores illustrates the increasing use of tropical secondary species. Abundant wood resources and low labor costs provide potent advantages for tropical producers of many wood products. They are trying strenuously to move up the value-added chain and end their role as exporters of cheap logs to wealthy industrial nations. This has produced an intense threat for U.S. producers in many lines. The import statistics do not do justice to the diversity of this sector, but clearly imports of furniture and other wood products are increasing. On the other hand, for aggressive producers, export markets have been improving since the mid-1980s, with the decline of the dollar and the increasing costs of tropical woods. The hardwood exports are concentrated in furniture and lumber (Figure 2).
When we look at both paper and lumber, we see that secondary processing jobs (those beyond logging and sawmilling) do not always come to the trees (Figure 3). Many reasons account for this phenomenon, including labor and freight costs, high market-orientation in many of the secondary industries, and traditional location patterns.
Implications for Maine Companies
Looking at this situation from Maine's perspective, a number of important implications emerge for Maine companies:
In mature markets, normal growth is not sufficient to ensure survival, much less prosperity, for Maine's industry. Maine will lose even more competitiveness in high-volume commodity lines because of factors such as distance from markets and energy costs. Since the market for these products is mature, Maine's competitive position will weaken even more as better-situated firms fight to retain or expand their share of these commodity markets.
Competitive pressures will intensify as wood becomes more costly and as tropical nations increase their muscle in exporting wood products.
Market development and positioning will play an increasing role in the success of Maine firms. As imports expand into ever-larger high volume markets, U.S. producers will have to gain skill in seeking out and developing niches where their species, location, service capabilities, and small-production-run flexibility will provide defensible competitive advantages. Also, they will need to develop markets in which wood is viewed as the premium product.
Some of these niches will be in the export market.
Making the most of the potential for serving Mexican and Canadian markets should be a priority, as NAFTA and other arrangements have improved access to those markets.
New distribution practices and strategies will become critical survival tools.
Implications for Maine Public Policies
Expanding value-added employment is an old saw in the economic development field, and has become a standard cliché for campaign speeches. Expanded value-added employment is widely touted as the cure-all for job losses caused by falling timber production. Clearly potential opportunities in the value-added field cannot be ignored. The issue is to place them in a realistic perspective.
The above analysis suggests a few thoughts.
First, adaptability will be the key skill. Any public programs that can enhance the spread of new technology, improve worker training, and support the re-adjustment of import-affected firms will be important. Helping firms adjust to emerging competitive advantages in new products will be an ongoing concern.
Second, information will play an increasing role. A strong public role should be maintained for programs that increase the supply and flow of information about emerging threats, new technologies, improved distribution methods, and domestic and export market opportunities. In the current atmosphere of fiscal stress, maintaining support for existing programs will be problematic, since their results are diffuse and visible only over time.
Third, many parts of the world are competing for value-added jobs. In this regard, many locations have advantages superior to those in Maine. Thus, a selective and careful assessment of future market potential and competitive opportunities is critical.
Fourth, strategies driven by raw materials are not likely to succeed. Only strategies inspired by market needs, skill in distribution, and cost competitiveness will work. Just because volumes of low-value, underutilized wood are standing in the forest does not mean that a sound business can be created based on that raw material. First and foremost, the focus must be on the market and the business. If out-of-state wood best serves business, then unrealistic expectations about local raw-material sourcing should not become an obstacle at the outset.
Finally, one emerging area that has received insufficient attention is the potential for cooperation between firms in developing new markets. A good deal of informal cooperation now exists in the marketplace. In Europe, various kinds of networks assist small firms enter and compete in export markets, and build production volumes and product lines that can grow into large corporate markets. Whether innovations like these will work among Maine's individualistic small companies remains to be seen. But we should be looking at ways to find out.
References
Costello, K., P. Duschesneau, S. D. Harriman, and A. G. Cahill. Survey of Secondary Wood Products Assistance Programs. Orono: Univ. of Maine, Dept. of Public Administration, n.d. (ca. 1995).
Irland, L. C., and C. W. Murdoch. Value-added Processing in Maine's Wood Industry: An Overview. Orono: Univ. of Maine Agricultural Experiment Station Miscellaneous Report 364, 1992.
Maxcy, J. "Employment Trends in Maine's Manufacturing Sector: The Relationship to Value Added." Maine Business Indicators 35:4 (Fall 1990): 6-7.
Maine Forest Products Marketing. A Profile of the Secondary Wood Products Industry of Maine, 1995. N.p., 1995.
*The Irland Group, based in Winthrop, Maine, is a forestry consulting organization.
A number of efforts are underway to provide improved information to the secondary products sector in Maine (Costello, et al., n.d.). These include,
Maine Wood Products Marketing, an undertaking of the Heart of Maine RC&D;
NEPEX, a federally funded research and information transfer project at the University of Maine at Orono. Among other things, NEPEX researchers are exploring western European markets for northeastern wood products;
The University's professional development program offers short courses in marketing and other relevant technical areas;
SBDCs and other programs offer business information and counseling;
The Governor's advisory council on world trade has recommended a reorganization and strengthening of the state's export development programs.
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