Impacts of China on the Global Value (Supply) Chain: The wood sector June 2005 Dr. David Cohen University of British Columbia Prepared by Dr. David Cohen – June 2005
Summary Global (Supply) Value Chain (GVC) Wood exports from Chinese production Raw Material Supply Markets & Marketing Current & Future Impacts on GVC Prepared by Dr. David Cohen – June 2005
Global Value (Supply) Chain (GVC) � Increasingly connected world “value chains” are global Raw Material Procurement Processing V A L U E Markets and A D D E Marketing D P A E T R E C A E C I H V E S D T A B G Y E A S Customers � Start with focus on Processing – China’s forte Prepared by Dr. David Cohen – June 2005
GVC for Wood Products Processing - China � Large increases in investment in primary (MDF, plywood, pulp, sawmills, etc.) � Large investment in secondary (furniture, moulding, flooring, doors, etc.) Investment continues today! � Investment based on “network capitalism” i.e. connections – more later � Some examples follow with all data from: Eurostat, US Dept. of Commerce, US Bureau of Census and World Trade Atlas Source: ITTO Monthly Reports Prepared by Dr. David Cohen – June 2005
HS 4403, Chinese Imports of Logs (value) � This includes logs 3,000 legally imported from both illegal and legal 2,500 sources but not logs M illions of U S $ 2,000 smuggled into China � Share from Russia � 1,500 from 22% (00) to 1,000 47% (04) � Increased value from 500 all regions but EC 0 due to currency 2000 2001 2002 2003 2004 � Infrastructure development to � Coniferous Non coniferous vol. & value from Russia Source: China Customs and WTA Prepared by Dr. David Cohen – June 2005
HS 4412, Plywood and Veneer � China increased exports 60% each 1,400 year since 2000 1,200 � Uses imported logs 1,000 M illions of U S $ � >1/3 of US imports 800 (double share 2000) 600 � ~ equal amounts 400 hardwood & softwood � SW -- Russian logs 200 � HW – Russian, 0 2000 2001 2002 2003 2004 European, + SE Asian logs China exports US imports EU (15) imports � Uses legal & illegal logs Prepared by Dr. David Cohen – June 2005
Chinese exports of furniture (office, kitchen, bedroom, other) 4,500 4,000 � Exports � >37% each year 3,500 Millions of US $ � US imports >> than Chinese 3,000 2,500 total exports � DATA 2,000 SUSPECT 1,500 1,000 500 0 US Imports of furniture 2000 2001 2002 2003 2004 (office, kitchen, bedroom, other) Office Kitchen Bedroom Other 4,500 4,000 3,500 � Wooden seats (upholstered Millions of US $ 3,000 2,500 and not) add >$1 billion more 2,000 to US imports 1,500 1,000 � Factories in China still 500 expanding 0 2000 2001 2002 2003 2004 Office Kitchen Bedroom Other Prepared by Dr. David Cohen – June 2005
US & EC imports of 4 furniture segments 4,500 � Increased 4,000 competition from Viet 3,500 Nam millions of US$ 3,000 � Increased US 2,500 resistance to China imports (battle royale 2,000 between domestic 1,500 producers and 1,000 outsourcing mnfctr & distributors) 500 � Mix of very poor and 0 very high quality 2000 2001 2002 2003 2004 US imports EU (15) imports Prepared by Dr. David Cohen – June 2005
Source: Kent Wheiler Weyerhaeuser Prepared by Dr. David Cohen – June 2005
HS 440920, HW tongue & � 80% of China exports to US grooved lumber (flooring) � Exports � >35% each year 300 � US + EU imports > 250 China exports (??) M illions of U S $ 200 � US accounts for >1/3 of all imports 150 � Often OEM eg Bruce 100 HW Floors � Expansion in China 50 continues unabated 0 � Pressure on 2000 2001 2002 2003 2004 suppliers = � costs China exports US Imports EU (15) Imports for RM, power & transport BUT no � in selling price Prepared by Dr. David Cohen – June 2005
Prepared by Dr. David Cohen – June 2005
HS 441820, Doors, frames & thresholds 300 � Exports double each year 250 � Expected to continue M illions of U S $ 200 for 2005 (plant coming on stream for 150 2 million/year) 100 � US & EC recent target, following SE 50 Asia 0 � Pressure on 2000 2001 2002 2003 2004 suppliers = � costs for RM, power & China exports US imports EU (15) imports transport BUT no � in selling price Prepared by Dr. David Cohen – June 2005
HS 441890, Other builders joinery and carpentry 180 � Exports � >33% 160 each year 140 M illions of U S $ � US export target 120 (63% of Chinese 100 exports) 80 � Chinese production 60 continues to � 40 � Raw material supply 20 from Russia, MDF 0 plants, NZ, SE Asia 2000 2001 2002 2003 2004 � Pressure on China exports US imports E (15) imports suppliers = � costs for RM, power & transport BUT no � in selling price Prepared by Dr. David Cohen – June 2005
Prepared by Dr. David Cohen – June 2005
Chinese Investment Wood Manufacturing Plants � Investment based on “network capitalism” loans based on connections (cronyism, NOT corruption, � based on Confucian hierarchical rules of relationships) “Guanxi” is foundation of getting loans from banks, � permission from government agencies, consistent power supply, environmental approvals, export permits, etc. � SOE’s replaced by proliferation of Township and Village Enterprises (TVEs) shift from central control of business to regional control � � Gov’t still controls business through loans, appointing Directors, permitting, power allotment, TVE’s, etc. indirect control of ALL businesses by communist party � Prepared by Dr. David Cohen – June 2005
Chinese Investment Wood Manufacturing Plants � Economic growth drives all decisions creating 15-20 million jobs a year is priority � little regard for profit, competitiveness, strategy, planning � beyond the short term, environmental concerns, impact on raw material supply or markets (ie rest of value chain), etc. employment, increasing production, exporting, are all more important than PROFITS � Many hollow businesses will eventually fail Rationalization, Restructuring & Reform will transform Chinese wood sector within five years Prepared by Dr. David Cohen – June 2005
Chinese Investment Rationalization, Restructuring & Reform � Some sectors will thrive due to comparative advantages eg furniture, solid & eng. wood flooring, doors � � Some sectors will wither eg laminate flooring, MDF, HDF, � � in each sector there will be winners based on cost controls, basic business knowledge, � business ethics, planning skills, profit potential � and losers due to poor business skills and ethics, little planning, no � strategy, Prepared by Dr. David Cohen – June 2005
Restructuring Will be triggered by impacts to neglected parts of global value chain Raw material supply & Markets Prepared by Dr. David Cohen – June 2005
Summary Global (Supply) Value Chain (GVC) Wood exports from Chinese production � Raw Material Supply Markets & Marketing Current & Future Impacts on GVC Prepared by Dr. David Cohen – June 2005
Global Value (Supply) Chain (GVC) � Processing shifting to China � Raw Material Procurement for China is Going Global Raw Material Procurement Processing V A L U E Markets and A D D E Marketing D P A E T R E C A E C I H V E S D T A B G Y E A S Customers Prepared by Dr. David Cohen – June 2005
China importing logs and lumber globally � Logs/lumber Africa (eg Gabon), Asia (eg Indonesia), Oceana (NZ), S. America (Brazil), N. America (USA), Europe (Germany), Russia (RFE), � Illegal logs & lumber (Myanmar, PNG, Indonesia, RFE, Vietnam, etc. Prepared by Dr. David Cohen – June 2005
GVC for Wood Products Raw Material Procurement � separate (but overlapping) supply for HW & SW Prices in US$/cum fob � global prices for both legal & Brazil illegal wood � � continuous expansion in China 100 � � shortages of HW & SW 90 logs � � prices – highly 80 competitive sourcing 70 � � energy costs � � operating & transport 60 cost 4 4 5 4 4 5 5 � � price to China 0 0 0 0 0 0 0 y n l t n l y i i p l a � pressure on RMB exchange rate r r a a u e p p M J J J S A A � � cost pressures Ipe (Brazil) Pine (Indonesia) Source: ITTO Monthly Reports Prepared by Dr. David Cohen – June 2005
GVC for Wood Products Raw Material Procurement � no more cheap illegal hardwood illegal wood will provide supply BUT at global prices due to � shortage of hardwood logs and lumber � limits to illegal wood unsustainable ecologically and practically � increased market pressure (see new certification in � markets section) China WILL run out of illegal wood as plantations continue � to be degraded � flood will continue but the growth in quantity has peaked (this may be wishful thinking) and will decline erratically over next 5 years Prepared by Dr. David Cohen – June 2005
Prepared by Dr. David Cohen – June 2005
Prepared by Dr. David Cohen – June 2005
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