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Volume 13

Number 1

Spring 1998

CENTER FOR INTERNATIONAL TRADE IN FOREST PRODUCTS AAAAA

ATechnical Assessment of North American-style2x4 Construction in Japan

Probably the single most important areaof concern noted was the lack ofunderstanding of the North American2x4 construction management process.

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Construction Management

Probably the single most important area of concern notedwas the lack of understanding of the North American 2x4construction management process. Building lot sizes aretypically quite small in urban japan As a result, mostmaterial storage and material preparation occurs on thework platform increases site congestion and reducescarpenter's productivity. In addition, cultural normsrequire that builders and contractors employ intricate andexpensive scaffolding and tarp systems to minimize thevisual and noise impacts of the construction process onnearby neighbors. However, these scaffolding systemsimpede workers movement around the construction site,restrict their access to the work platform during theconstruction process, and complicate the handling and

increased interest in the US lifestyle on the part of manyjapanese. Only after the collapse of the Bubble Economy,did japanese builders and contractors look to importedhousing to provide a combination of affordability andvolue as an answer to the high cost of housing in Japan.The relatively short history of 2x4 housing in Japan meansthat most japanese architects have had little opportunityto learn the design detailing that has contributed to thesuccess of 2x4 construction in North America. Perhapsmore importantly, the emphasis of builders and contrac­tors during the 1980's was on designing and building 2x4homes based on the concept of "Americana" and theAmerican life style.

During the assessment of I orth American style 2x4housing projects in Japan it often appeared that architec-tural design was driven by -1- _

product selection,availability and westernimage rather than bydesign concepts, functions,and details. As a result, thelink between architecturaldesign and constructiontechnology was oftenlacking, contributing to a loss of design continuity withinthe home and reducing the inherent cost efficiencies of 2x4construction technology. In addition, it appeared thatsome Japanese architects and builders lack understandingof imported building materials and the process ofspecifying these products. Not only did this adverselyimpact the aesthetics of many of the projects but it alsoaffected the functionality of the designs

Results of the Assessment of 2x4Technology Transfer in Japan

Dr. Ivnll Enslin, Associnle Direclor, CINTRAFOR

The results of the CINTRAFOR/CTED technical assess­ment identified a number of areas where a betterunderstanding of the North American style 2x4 technol­ogy would lead to improved cost efficiencies whileincreasing the quality and long-term performance of 2x4homes. In general these areas can be categorized into twogroups: project planning and management and designdetailing and construction techniques. Project planningand management problems included items such as theconstruction management system, labor specialization,the construction inspection system, and architecturaldesign concepts. While these areas impact the coststructure of a residential construction project and itsoverall aesthetic appeal, the second category of problems,construction techniques, has a direct impact on the long­term performance of 2x4 homes built in Japan. Thesecond category generally included items associated withspecific 2x4 construction components such as thefoundation system, wall and floor framing, interiorfinishing, exterior finishing, ventilation, and insulation.The following discussion provides further detail about theareas identified by the team of construction experts.

It should be noted that there is a japanese version of 2x4construction technology that co-exists with the NorthAmerican style. The primary difference between the twosystems relates to the size of the basic wall panel used inthe construction process. TIle japanese 2x4 systemutilizes a 3'x6' panel size, which is based on the size of atraditional tatami mat, while the North American style2x4 system uses 4'x8' panels in the construction process.Other differences between the two systems include thestud spacing (17.8 inches versus 16 inches on center) andthe greater integration of domestic building materials intothe Japanese system. Finally, the japanese system tendsto use more wood in the construction process and thus isJess cost effective. This research project focused exclu­sively on projects utilizing the North American style 2x4construction system.

The differences between the traditional post and beamconstruction method and the North American style 2x4construction method are a reflection of the culturaldifferences that exist between the countries. The Japaneseinterest in North American style 2x4 homes, which wereintroduced into japan in 1974, is in part a reflection of theincreased standard of living associated with the BubbleEconomy of the mid to late 1980's and partly due to an

Director's Notes:by Bruce Lippke

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C1NTRAFOR

University of Washing tallCollege vf Forest ResourcesBox 352100Seatlle, Washing tail 98195­2100Phone: (206) 543-8684Fax: (206) 685-0790

TI,e Center for 1I1tematioutllTrade ill Forest Productsaddresses opportllnities andproblems related to theintmmtional trade ofwoodand fiber prodllcts.Emphasizingforest ecollomicsalld policy impacts,illtemational marketillg,techllology developments, alldmille-added forest products,CINTRAFOR's work resilltsiu avariety ofpllblications,professional gatllerings, alldconsllilations with pllblicpolicymakers, illdllstryrepresenlatives, andCOIlllllllllitl/ members.

Located in the PacificNorthwest, CfNTRAFOR isadministered through theCollege of Forest Resourcesat the University ofWashington under theguidance of an ExecutiveBoard representing bothlarge and small companies,agencies, and academics. Itis supported by state,federal, and private grants.The Center's interdiscipli­nary research is carried outby university faculty andgraduate students, internalstaff, and throughcoop€rative arrangementswith professional groupsand individuals.

ClNTRAFOR ews Editor:Rosemarie Braden

What a difference il year can make 1997 began as theseventh consecutive year of high timber prices, largely aconsequence of reduced hilrvests resulting from environ­mental constrilints that began in 1989. By the end of theyear timber export price premiums hild dropped to levelsnot experienced since the international recession in theearly 1980's Timber export revenues in Washington Statealone have declined by $600 million or more annually, or30% of the villue of recent harvests. This raises severalquestions. Was this price drop a direct consequence of therecent Asian economic crisis? When will the market beginto recover? How long will it take to return to previousactivity levels? Unfortunately, there are no easy answersto these questions, even though they are of the utmostimportance to the region.

1997 also started as the third year of strong growth insecondary manufactured building material exports toJapan as deregulation in Japan's housing market contin­ues. The year ended with building material markets indisarray. Even when the statistics for the year are releasedthey will offer little insight for the future except thatchanges are inevitable. The question remains, willderegulation and secondary export growth get back ontrack or will protectionism rise again and block USimports? We provide a brief summary of the Asianfinancial crisis and what it might mean to the forest sectoron page 4.

There are several new CINTRAFOR publications availablethis month. "}ilarketing Strategy Effects on Contractor

"Technical Assessment" continnedfiolll page I

movement of building materials on site.

It was also noted that specific construction tasks appearedto be scheduled with little consideration of their relation­ship with other tasks occurring in the constructionprocess. Poor scheduling means that critical tasks are notstaged in the proper order and contributes to a lack ofoverall coordination that adversely impacts productionefficiency and increases total construction costs. Forexample, stairways are often left to be completed until latein the project which forces workers to use ladders to movebetween floors, greatly hindering their movement and themovement of construction materiills withm the job site. Inmost of the projects under construction it was observedthat hardwood floors and interior moulding wereinstalled after the installation of wallboard but prior to themudding, taping and finishing of the wall board. Thismeans that extra time and care must be taken to finishinterior wall surfaces in order to ensure that the floor andinterior trim is not damaged. Finally, the majority ofbuilding materials used in North American style 2x4projects is imported and carpenters are often required toperform tasks where they are not particularly proficient(i.e., hanging and taping wa IIboard, installing flooring,

putting up moulding, and hanging doors andwindows. This problem can be attributed to thefact that the network of skilled workers thatperforms these tasks using domestic Japaneseproducts is reluctant to work with importedproducts with which they have little experience.

Perceptions of Residential Siding Materials" (WP64) is thesecond CINTRAFOR study completed for the WesternRed Cedar Lumber Association (WRCLA). The study,combined with data from the first study, "North AmericanResidential Decking and Siding Market", (WP56) providesinformation on: 1) residential siding use patterns overtime, 2) consumer perceptions of residential sidingmaterials before and after WRCLA promotional campaign,and 3) consumer exposure to the WRCLA promotionalcampaign and the effects of exposure. Another paper"The Forest Sector in the Russian Far East: Status andNear-Term Development" (WP63) is an assessment ofRussian Far East timber holdings and their developmentpotential. Two articles appearing in other publications areavailable through CINTRAFOR. Financial Performallce,Capital Expense, and International Activities of the NorthAlnerimn Pilip and Paper Industry, at Mid-Decade, (RE45)appeared in the October issue of the TAPP! Journal, andNew Growth, (RE44) an analysis of China's domestic timberproduction and import potential, appeared in the ChinaBusiness Review. Finally, "Reviews and Errilta Report onForest Health of the United States by the Forest HealthScience Panel" (RE43B) is a peer review by independentscientists as well as errata and corrections to syntax andanalysis in the earlier report.

In addition, over the last 18 months a consortium of USand Canadian research scientists has developed acomprehensive research plan to charactenze the environ­mental performance of wood products through the lifecycle stages of forest regeneration, processing, woodconstruction, building use, and final disposal, i.e., fromcradle to grave. The report and research plan entitled"Environmental-Performance Research Priorities: WoodProducts" was reprinted for the Consortium for Researchon Renewable Industrial Materials (CORRIM), anorganization crNTRAFOR helped establish, and isavailable as RE46. A one-page fact sheet on the project isalso available. !

As described earlier, Japanese concrete foundations areoverly expensive, complicated, and subject to constructiondeficiencies The typical process employed by Japanesecontractors in buildi.ng a foundation consists of six steps:soil preparation, spreading of a rock base, pouringconcrete for the perimeter and interior foundation walls toa sub-grade level, pouring a mud or "rat" slab, pouring athin mortar cap on top of the foundation walls to bringthem to fi.nal grade level, and applying a smooth mortarfinish to the exterior walls. One problem noted wasrelated to the fact that foundation walls are not initiallypoured to the final grade level. In order to bring thefoundation to the finished grade level, concrete forms arelater nailed to the foundation walls and a thin mortar cap(15-30 mm.) is poured. This practice results in pooradhesion between the thin top layer of mortar and thefoundation wall, often resulting in the separation andcracking of the mortar cap. Given the frequency withwhich this was observed, the instability of the mortar capcan adversely impact the structural performance of thehouse and could result in wall cracks as the house settles.

In addition, it was observed that foundation waJls aregenerally placed under interior walls, both load bearingand non-load bearing. Foundation piers are also placedunder long floor span and adjustable support columnsare often placed on the foundation piers to provide

"Tecl1l1icaJ Assess1l1el/t" cOl/til/lied fro1I1 page 2

intermediate support for floor joists to reduce sag andstiffen floors. The adjustable support columns observedwere not fastened to either the floor Joist or the founda­tion piers and are subject to failure if a lateral or upliftingforce were to be applied to the house as in the case of anearthquake. While these adjustable coluuu1s areunnecessary, expensive, and most likely ineffective, theyalso compromise the structural integrity of the floorsystem.

It was observed that there appears to be a lack ofunderstanding of some technical details of NorthAmerican style 2x4 construction technology This wasobserved to some degree on almost all of the constructionsites visited. In most cases this lack of understandingresulted i.n higher construction costs without adverselyaffecting the structural performance of the home In somecases, a lack of understanding of the proper constructiontedu1iques could very well adversely impact thestructural performance of the home. For example, onseveral projects the exterior sheathing for the shear wallswas not extended down to the sill plate on the founda­tion In the absence of adequately engineered andinstalled tie-downs, failure to tie the shear walls to thefoundation means that the house has minimal resistanceto lateral forces and is subject to shifting on the founda­tion (eg, for example in the event of an earthquake)

The excessive use of lumber during the rough framing ofa 2x4 hOLlse was frequently observed in wall, floor,ceiling, and roof construction. For example, the teamobserved instances where wall studs were doubled in anapparent effort to simulate the 4x4 posts used intraditional post and beam construction They also notedinstance where floor Joists were doubled to increase thestiffness of the floor and other cases where droppedceilings were employed to reduce noise transmissionbetween upper floor and lower floor Both of thesepractices require an increased use of lumber and result inhigher material and labor costs. The use of blocking inwalls was often observed in areas outside of shear wallapplications where it serves no structural purpose and isnot required by US building codes For example,blocking was often used behind the ends of adjacentsheets of plywood and drywall for nailing, behi.nd wallmounted cabinets in kitchens and bathrooms, and insideclosets where shelvi.ng will be installed. The installationof blocking is very labor and time intensive, does notincrease structural performance, and results in increasedlabor costs while slowing down the construction process.It was also observed that the grade of lumber specified forrough framing was often much higher than required,further increasing material costs during the roughframing process. A number of US contractors involved in2x4 projects in Japan have estimated that the increaseduse of lumber during the framing process results in a 20­35% increase in framing material costs.

Another area of concern relates to exterior finish detailsthat influence the ability of exterior walls to resist air andwater infiltration. In many instances, gaps were observedin the areas where exterior siding butted up to doors andwindows as well as at the corners of the house. Inaddition, flashing above doors and windows wasfrequently deficient or missing completely. Theseproblems provide an opportunity for water to penetrateinto the walls of the house, establishing an opportunityfor decay and degradation in the wall system, windows,and doors to occur in the future.

One of the advantages of the 2x4 construction system isimproved energy efficiency, a feature that makes 2x4homes attractive to Japanese consumers given thetemperature and humidity extremes experienced in winterand summer. The evaluation team observed a generallack of understanding regarding the installation ofinsulation They observed cases where undersized battsof insulation were used as well as instances whereoversized batts of insulation were compressed into wallsand ceilings, reducing the loft of the insulation as well asits insulating ability. They also found that walls andceilings were under insulated (e.g., Rl1 and R19 insulationwas usually used in walls and ceilings when US buildingcodes generally specify R19 and R30 insulation in theseapplications) In addition, the tcam reported that many ofthe houses visited did not have adequate venting in thesoffits and attics and non-functional vents were oftenlocated on the peaks of homes solely for aestheticpurposes. The failure to adequately vent these roof spacescan result in moisture buildup which, when combinedwith high humidity and high temperatures, can lead to thedegradation and premature failure of the roof system.

Recommendations

Given Japanese consumers expectation of quality, thelong-term growth potential of the 2x4 residential housingmarket is dependent on ensuring the quality of 2x4 housesbuilt in Japan, particularly given the strong associationbetween this type of construction technology and USbuilding materials. From a marketing perspective, therole of quality is more important than low price in Japanand every effort should be made to ensure that the NorthAmerican style 2x4 consh'uction teclmology is imple­mented correctly by Japanese contractors and carpenters.Failure to ensure the efficient transfer of North American2x4 technology will contribute to a perception by Japanesehome buyers that 2x4 housing is poor quality and couldundermine efforts by US and Japanese companies andassociations to further develop this growing segment ofthe Japanese housing market. '

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Asian Economic Flu: Causes, Impacts, and Projections for Recovety

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The viability of thePNW forest sectorwill be tested evenwith strongdomestic demand,since much of thesuccess of thePNW forestindustry isdetermmed by thePacific Rim exportmarket.

Brllce Lippke, Director, CINTRAFOR

Asia's strong economic growth began to slow down inearly 1998, resulting in a growing volume of defaultedbank loans as a consequence of poor lending practices. Toomany loans were granted on the basis of state support orpersonal relationships instead of collateral and risk.

vVhen speculative investments made by large corporationsbegan to fail, a crisis of confidence contributed to a flight ofcapital and overall financial devastation for the regionWhile these poor inveshnent decisions may have been atrademark of Asia's less than open market system, manycountries including the US have experienced financialdisruptions as a consequence of excess lending on theirway to a long period of economic growth The robustAsian economic development of the past twenty-five yearsmay be restored if the integrity of financial marketsimproves and the lending process becomes open andcompetitive.

The US has experienced several periods of fmancial excessincluding recent periods of bad energy loans, excessiveinvestment in urban real estate, and deregulation of thesavings and loan industry. Mexico and other LatinAmerican countries have also experienced several periodsof debt repayment problems, which as contrasted withAsia's excessive private debt, were largely due to excessivegovernment debt.

The magnitude of the Asian debt problem was firstestimated to be less severe than the Mexican debt problemof 1994. However, similar to the Mexican debt situation,the Asian crisis in confidence has lead to large capitaloutflows starting in Thailand and spreading quickly toMalaysia, the Philippines, Indonesia and Korea. Theseflows were exacerbated by the reaction of several Asianleaders who blamed speculators and threatened retaliationinstead of taking actions that would restore confidence inthe ability of markets to solve their financial problems.

The result so far has been a substantia I decline is stockvalues (typically -30 to -50%) and currency rates (-30% to60% and more) with the expectation of some decline ineconomic growth in contrast to their recent history of highgrowth. Consequentially, companies with foreigndenominated debt will have great difficulty repaying loanswith their deflated currencies At the same time, theregion's exports have become extremely competitive inglobal markets. When their production is priced competi­tively in consuming countries like the US, Asian productswill still provide very large profit margins in their localcurrencies This will allow the Asian countries to restoregrowth through exports once they get past the crisis infinancial confidence and can restore their production ofexport goods

Domestic Impacts

The US, Europe and other countries whose currencies havenot devalued will begin to lose their share in exportmarkets and experience a decline in their trade balance.These consuming countries will also experience deflation­ary price pressures as Asian products relieve capacity

shortages, with products priced low enough to move theirvolume. The US and other developed countries willexperience extended economic growth without capacityshortages or an inflation ind uced recession. Oncestabilized, the economic recovery of the depressedcountries should be fairly rapid given their super­competitive exports Countries with strong currencies \villhave the opportunity to make investments and assetpurchases in these devalued countries at bargain prices Amore diverse group of investors in these markets will alsoprovide greater financial transparency, improving theconfidence in the market. Several of the Asian stockmarkets already show substantial investors anticipate therestoration of some financial stability

The problem for US building material exports is thatJapan, which has been facing a bubble economy problemover the last six years, has done relatively little to restoreliquidity in its banking system. Bad loans stif1e thelending of credit resulting in a stand-still economyAttempts to stimulate the economy have been too littleand too late given the increase in their non-performingloans with the rest of Asia and loss m exports Japan'seconomic stimulus plans that were announced for FY98are largely offset by the worsening condition in the rest ofAsia

Despite pressure from the US and Europe, the Japanesegovernment has been relatively complacent aboutrepackaging bad loans or providing economic stimulus tocreate an engine economy as a means to achieve a broadbased economic recovery. Complacency in dealing withthese problems is perhaps not as bad as a return toprotectionism, which could easily trigger furtherretrenchment and a global def1ation similar to theproblems experienced during the 1930's. Unlike thesma Iler Asian countries that are in trouble, Japan is toolarge to re-stimulate its economy with exports alone andhas therefore become the key in determining the terms ofAsia's recovery Until Japan become more aggressiveabout stimulating its economy and restructuring thebanking system to absorb bad loans in order to be able tolend again, the best the country can produce is continuedstagnation. If the def1ationary consequences worsen,Japan may be prompted to adopt new economic pro­grams, but the country's current administration does notappear to be able to agree on more than cosmetic fixes,which are insufficient to offset the negative impacts fromother Asian countries' financial problems.

The impact on Japanese housing is particularly importantto US exporters Japan's housing market has fairedremarkably well for an economy suffering six years ofstagnant growth Unemployment rates however, arerising, meaning fewer new households and moredoubling up of existing households, a clear sign ofweakening housing demand. While deflation in real estatehas made housing more affordable to new buyers, thedeflation cycle seems to be leveling off and the housingmarket will likely become more sensitive to income andlob gro\Nth. A rebound in the Japanese housing marketduring 1998-1999 is still possible, but seems to be stalledby Japanese complacency about the economy.

The excess US forest products inventory that accumulatedin Japan over the summer was reduced by the pricecollapse, with North American producers shipping moreproduct to the stronger US and European markets.However, without a Japanese market recovery, USmarkets will receive enough surplus product from otherregions to keep US prices low, despite higher domestichousing prices and a strong US economy. . i r

(Olltlllliel 011 page J

Timber sale transactions in PNW reached record highprices over recent years supported by the high prices inexport markets. Now these timber prices are contributingto such a high cost structure that products from the salesare uncompetitive even in US markets, resulting in moremill downtime and closures. Production capacity in thePNW has never fully adjusted down to the environmen­tally constrained harvest levels, and the internationalmarket decline will cause another round of shutdowns.The viability of the PNlJ\/ forest sector will be tested evenwith strong domestic demand, since much of the successof the Pf\!W forest ind ustry is determined by the PacificRim export market. At the same time however, the USSouth has apparently expanded its processing capacity tothe limits of timber availability, evident by periods ofsouthern lumber prices exceeding western prices incontrast with the opposite behavior just two years ago.This tightening in southern supply will likely drive USprices up and provide an opportunity to shlft more PNlJ\/export product back to the US market.

Predictions for Recovery

The most likely future scenario seems to be for a recoveryin the Asian markets However, Asia's weakenedcurrencies will work against them importing from the USbut it will encourage investment in their currencies.Continued stagnation in the japan economy wiJl postponethe timing of US export growth into a more deregulatedjapanese housing market. The deflationary aspects of theAsian crisis have helped extend the US economic growthcycle as any shortage in capacity can be met withincreased imports at a low price. The dollar will eventu­ally weaken with the increased consumption of foreigngoods (a dollar outflow), and as the opportunity to investoverseas increases (increasing the outflow), and as therecent flight of capit4 out of Asia returns to Asia (notflowing into a US safe-haven). The reduction in UScompetitiveness will over time, begin to be self-colTectingwith a declining currency.

There is still a significant risk that a few more bad policydecisions could keep the fragile Asian financial system inturmoil. There has been too much tending with too littletransparency, leading to excessive speculation before theeconomic bubble burst. Short-term solutions that havebeen suggested, such as currency controls and reducedlending requirements to increase liquidity may onlyworsen the transpilfency problem by bailing out badinvestors without creating a higher fiduciary standilfd.

South Korea, Thailand, and the Philippines appear to beon the path to corrective actions while the signals forIndonesia and Malaysia are stiJl mixed. Japan has stalledtaking direct action on its huge portfolio of bad loans.Unfortunately their growth has been so slow that theyhave made little progress in paying the bad debts whichhave grown larger with deflation, and the compoundingeffects of their Asian lending

111e International Monetary Fund (IMF) has become thelender of last resort when the international communityrecognized that lack of a solution would have negativeimpacts on everyone. US leadership in resolving theMexican government debt crisis was much easier torationalize than taking the same steps for secretive Asiimcapitalists, given our closer trading relationship withMexico. Lack of political support for the IMF effort couldresult in an even more severe backlash. The questionshould not be why should we bailout foreign speculators,but how can we restore a climate for healthy investmentsin a democratizing world?

One of the remaining wildcards is China with its manyl<lfge uncompetitive government business enterprises.Early currency devaluation by China, as a means toprevent further erosion of their competitiveness, couldtrigger devaluation by other countries. Such a move woulddo little to solve their internal problems. A smallercurrency devaluation following an improvement in the restof the region's economic situation seems more likely. Asianeeds engine economies to restore growth and repairfinanciaJ integrity. The size of the Chinese economy makesit an important player in this scenario even though itremains less open to outside trade and investment than itsneighbors.

Another wildcard may be the political backlash associatedwith the financiaJ crisis. Support for the [MF may be aprimary issue, but internal eth.nic unrest is a consequenceof reduced standards of living can also be critical torestoring stability. Since no two cOLUltries have similarpolitical support issues, umest should be contained so Itdoes not become a regional problem.

The decisions that lead to this latest Asian economic slumphave had potentially long-terrn and far-reaching effects.From these mistakes however, there is a high probabilitythat Asian leaders will support democratic market orientedinstitutions with an open and transparent financial systemthat will stimulate another round of growth and improvedstandard of living for the Asian region . .I

1998 GraduatesRecent Graduates

Steve Shook and Weihuan Xu, two students who worked on ClNTRAFOR fundedprojects, received their doctoral degrees this year. Steve received his degree in forestproducts marketing and completed his thesis titled "Innovation in the S ResidentialConstruction Industry: An Integrated Model of Determinants of Firm Innovativenessfor Engineered Wood Products" which based on a survey of US residential builders,analyzed the adoption process for new wood-based building materials. rvl.r, Xureceived his Ph.D. in forest economics and authored the thesis "Experimental ChoiceAnalysis of Non-Market Values for Ecosystem Management with PreferenceHeterogeneity." This study sought to address the issue of urban versus rural forestland management opinions by using contingent valuation to determine publicpreferences and the marginal cost individuals would be wiJling to pay to preservenon-monetary forest vaJues such as aesthetics, jobs, and biodiversity.

Upcoming Graduates

Tlu'ee students who work for Cl TRAFOR wilJ receive their graduate degrees inforest products marketing this quarter. David Wright researched new markets forsmall diameter timber for the US Forest Service and completed a market survey todetermine lumber wholesalers' attitudes for an analysis of the intt'oduction andmarketing of lesser-used timber species. Amy Bjorkman focused on the pulp andpaper industry during her degree program and co-authored the paper "FinancialPerformance, CapitaJ Expense, and International Activities of the orth AmericanPulp and Paper lndustty at Mid-Decade" which appeared in the TAPPI journal.Amy also completed a survey and professional paper on buyer and seller relation­ships in the newsprint industry. Robert Hashizume focused on the Japanese 2x4construction market and completed a market survey and evaluation of strategiesaffecting technology transfer in the this market. Robert also researched smalldiameter timber market opportlUlities for the US Forest Service. .I

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Canadian Competition in the Japanese Wood Products MarketThe imported housing and building products market in Japan has undergone a difficult year. The devalued yen coupled with a new consumption taximposed in April 1997, has had a profound impact on the wooden housing industry. For the month of September, the number of wooden housing startsin Japan declined 41 % compared with the previous year Experts predict that the market will rebound, however the resulting market will most likely bemore competitive. Not only are more importers from the US involved in this market, but more countries are also focusing on developing their value­added export markets in Japan. Canada in particular is making gains in the Japanese housing market.

Table 1. Canadian, U.S, and Pacific Northwest exports to Japan, 1992-1996.

PNW Share PNW SharePNW PNW Canada Canada US US of of PNW

Exports Exports Exports Exports Exports Exports US/Canada US/Canada Share1992 1996 1992 1996 1992 1996 1992 Total 1996 Total Change

Primary ProductsSoftwood logs $1,246.5 $1,320.5 $83.1 $14.2 $1,503.2 $1,640.2 79% 80% 1%Softwood lumber $417.2 $599.6 $930.5 $1,717.7 $498.4 $649.5 29% 25% -4%Chips $2465 $180.1 $151.6 $37.5 $418.1 $499.6 43% 34% -9%Hardwood lumber $59.7 $64.2 $5.1 $17.5 $132.8 $136.3 43% 42% -2%Oriented strand board $005 $6.2 $4.6 $46.4 $0.05 $7.0 1% 21% 20%Softwood veneer $8.6 $12.4 $0.1 $92 $8.8 $12.5 97% 57% -39%Plywood $2.4 $70 $14.4 $117.2 $51 $12.7 12% 5% -7%Seven Leading Primary Exports Total $1,981.0 $2,190.0 $1,212.4 $1,959.8 $2,566.3 $2962.8 52% 60% -8%

Secondary ProductsWooden prefab buildings $11.1 $60.9 $7.3 $63.4 $14.6 $70.8 51% 45% -5%Structural members & builders' joinery $21.8 $76.8 $1 1 $21.8 $279 $100.9 75% 63% 1%Doors $6.0 $35.9 $0.5 $6.1 $90 $47.1 63% 68% 4%Windows $4.5 $19.8 $0.2 $5.0 $5.7 $21.7 76% 74% -1%Home & office furniture $3.8 $11.9 $1.1 $6.8 $36.0 $59.1 IO~~ 15% 5%Kitchen cabinets $1.0 $9.9 $0.2 $31 $15 $13.4 59% 58% -1%Hard & soflwood moulding $1.8 $3.5 $02 $07 $37 $7.9 46% 68% 22%Seven Leading Secondary Exports Total $50.0 $218.8 $10.6 $106.9 $98.4 $273.8 46% 52% 6%

Source: Statistics Canada and US Department of Commerce

These data illustrate that Canada has quite a way to gobefore it surpasses the US and PNW in many productsectors. However, the US and the PNW are losing marketshare to Canada in many areas. As more countriescompete for this market it is important for US and PNWfirms to concentrate on productivity gains, promotionalwork, translated technical support and installationmaterials, and timely customer service, in order tomaintain and expand business in Asia. ~

lumber market. This is almost three times the US andPNW share. Canada's share of the non-tropical plywoodmarket is also substantial. Since 1992, Canadian revenuesfrom pl)"vood exports to Japan have increased 52%annually, resulting in a 10% increase in market share.Comparatively, the pNW exported $7 million in plywoodin 1996, representing a 9% market share decline from1992-1996. Approximately 84% ofJapan's OSB isimported from Canada, although the US is increasing itsmarket share. Between 1992 and 1996, US exports of OSBincreased 161% annually. OSB exports from the PNWnow total $6.2 million

In the primary product sector, the PNW lost 8% of itsshare of the Japanese market relative to total US andCanadian exports. Only softwood log and OSB exportsfrom the pNW have increased since 1992. Secondaryproduct market shares have also declined for the region'stwo leading export products; prefabricated homes andfabricated structural wood members and builders' joinery.The PNW's share of the prefabricated wooden buildingmarket in Japan declined 5% while its share of thefabricated structural wood member and joinery marketdeclined 13%. Despite losing market share in a number ofsecondary product categories, the total market share ofpNW secondary wood products in Japan increased by 5%.While the PI\TW has lost market share in certain sectors,total US and Canadian exports to Japan have increasedsince 1992. Therefore, this gain can be explained as alarger share the increasing North American exportmarket.

In addition to gains in the secondary buildingproducts market, Canada consistently maintains alarge share of the Japanese market for primaryproducts used in the construction industry. In1996, Canada exported $1.7 billion in lumber toJapan, capturing 38% of the Japanese imported

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Between 1992 &1996 Canadianexports ofprefabricatedhomes to Japanincreased by 71 %annually and nowtotal $63.4 million.

vVhile primary products still make up the bulk of wood products exported from the USand Canada, secondary products are increasing. As Canada's government focuses ondeveloping the country's secondary manufacturing sector, Canada is becoming a moresignificant source of competition. Increased stumpage costs and the Forest Practices Codehave contributed to a decline in timber harvests. Canadian companies have responded tothis raw material supply shortage in the same way PNW companies responded to the 1989log export ban - by shifting toward value-added manufacturing. Since Canada entered thesecondary product market, the country has greatly increased its exports. In Japan,promotional efforts such as model home projects, trade-show exhibits, and trade missionshave increased demand for Canadian products. For the second year in a row, Canadasurpassed PNvV prefabricated home exports to Japan, and the gap between other US andCanadian exports is narrowing. Between 1992 and 1996 Canadian exports of prefabricatedhomes to Japan increased by 71 % annually and now total $63.4 million (Table 1)

Prefabricated homes are not the only success story forCanada. While income from secondary products is stillconsiderably lower than exports from the US and PNW, itis important to note the steady and substantial growth thatis occurring. Fabricated structural wood members andbuilders' joinery, (partitions, panels, and formwork) thecountry's second leading building product exported toJapan, increased 109% annually between 1992 and 1996.Wooden doors and windows have also exhibited stronggrowth. In 1996, Canada exported $6 million in doors toJapan, a $5.6 million increase since 1992. During the sametime period, window exports increased 135% annually.Overall, the US and pNW still earn more from the sevenleading products than Canada, however Canadian exportgrowth is double the rate of the US. Over the past fouryears Canada's revenues from its seven leading secondaryproducts has increased 68% annually compared to 34%annual growth in the US exports, and 45% PNW exportgrowth.

Product Life Cycles in the North American Wood Panel Market

The North American panelindustry is historically highlycompetitive. Productinnovation is ongoing,spurring continuouscompetition between productsand new product adoption.The fol!owing is an historicalview of innovation and newproduct adoption in the panelindustry excerpted{J'OIn theupcomillg paper "Adoption,Dffusion, and SubstituliO/1 ofStructural I/l/ood Panels" byDr. Steven Shook, WilliamTumn, and Dr. Ivan Eastin.

25,000

Western Plywood

The growth of western plywood in the US was quite stableup to World War II, as evidenced in Figure 1. After the warhowever, western plywood production increased at a veryhigh rate until it reached its peak production output of7.899 billion square feet (1/2" thickness basis) in 1965. Infact, the western plY'vood industry led all other individualindustrial sectors in growth in the US on an annual basisfrom 1950 to 1965. During this time, the industry grew atan average annual rate of 14%.

Total production of western plywood began a steadydecline starting in 1965, and has yet to stilbilize. Westernplywood's market share of the US structural wood panelmarket, as displayed in Figure 2, declined from 100'10 in1963, to 50% in 1978, to slightly over 10% in 1995 One ofseveral factors contributing to western plywood's milrketshare decline in the structural wood panel market was theintroduction of a competing product - southern pineplywood

Southern Pine Plywood

The initial speed at which the southern pine plywoodindustry grew is evident in the dramatic increase in thenumber of production plants operating commerciallybetween 1963 and 1967 Only one of the 156 structuralplywood plants (less than 1%) operating in the UnitedStates in 1963 was producing southern pine plywood. By

1967, southern pine plywood plants represented 34 of the184 American structural plywood-producing plants(18.5%). Substantial credit to southern pine plywood'srapid market acceptance can be attributed to the DouglasFir Plywood Association (DFPA), which changed its nameto the American Plywood Association in 1964 to betterreflect the introduction of a new species being used incommercial structural plywood production. The DFPAbegan certifying southern pine plywood equally withwestern plywood in the early 1960s. As a result, Americanconsumers (ie., designers, specifiers, builders,homebuyers) of structural plywood were assured ofsouthern pine plywood's quality from its initial introduc­tion into the market.

As Figure 1 indicates, it took less than 16 years forsouthern pine plywood to surpass western plywood as thestructural wood panel market share leader in the UnitedStates (market share being based on square feet ofproduction on a l/2-inch thickness basis). Southern pineplywood maintained the top market share position in theUnited States h·om 1979 to 1995, when itwas surpassed bythe fourth generation structural wood panel product­oriented strandboard. It is interesting to note that at thetime of southern pine plywood's introduction into thestructural wood panel market, some industry experts werepredicting that it would not pose a serious threat to thewestern plywood industry's future growth. These expertsreasoned that the South could not supply enough southernpine peeler logs to meet the growing market demand forstructural wood panels. These forecasts, however, failed

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- Southern Pine Plywood

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to consider the technological advances that would bemade in the production of southern pine veneer andplywood (e.g, spindleless lathes, veneer drying systems,high moisture resin technology), as well as a developingtrend toward higher value lumber and peeler logproduction rather than pulpwood production

Waferboard

Waferboard was first produced on a very small commer­cial scale in 1955 by the Pack Rjver lumber Company inSand Point, Idaho. This venture was short-lived, however,and no commercial waferboard production occurred againin the United States until 1971. Only one waferboardproducer existed in the United States between the years of1971 and J979. After 1979, considerable expansionoccurred in the nonveneered structural wood panelindustry, and this expansion had a significant impact onthe entire structural wood panel industry. Waferboardproduction in the United States peaked in 1982, beforedeclining to the point where no waferboard was producedin the United States after 1990

Although waferboard as a product was relatively short­lived and never represented a substantiill share of theUnited States structural wood panel market, as evidencedin Figure 2, its importance in influencing market accep­tance for the fourth generation of structural wood panels­oriented strandboard - should not be overlooked.Waferboard provided consumers with a knowledge baseconcerning the attributes that structural non veneeredwood panels possessed relative to western and southernpine plywood.

Oriented Strandboard

In less than 17 years, OSB has become the market shareleader in the United States sh·uctural wood panel market,as evidenced in Figure 2. In 1995, OSB represented amarket share in the structural wood panel market of45.4%, as compared to southern pine plywood's 44.0% andwestern plY""ood's 10.5%. OSB took one year longer tobecome the structural wood panel market share leaderthan it took southern pine plywood to overtake westernplywood. Note, however, that southern pine plywood isnot nearly as radical in appearance and production fromwestern plywood as OSB is from western and southernpine plywood. nlerefore, the ability of southern pineplywood producers to piggy-back on consumer percep­tions of western plywood were probably much greaterthan those of OSB prod ucers.

The relative success of OSB over waferboard in thestructural wood panel market can be attributed to superiorproduct attributes and a similar method of production,including economies of scale. The average price of OSBhas been lower than that of both western and southernpine plywood since 1980 (given equivalent thickness).While the average price of OSB has always been greaterthan that of waferboard, this difference has been marginal.Furthermore, comparing the price differential betweenOSB and waferboard fails to account for the value, orutility, thilt consumers receive from each of the products'attributes; the value that consumers receive from nearlyevery OSB product attribute generally exceeds thatreceived for waferboard. t

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Figure 2. Structural wood panel market shares by panel type based on 1924-1995 United States production data.

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