Sector Export Strategy
Final Report
July 1, 2003
Table of Contents
GLOSSARY OF TERMS
INTRODUCTION
SCOPE & METHODOLOGY
GLOBAL ANALYSIS & TRENDS
NOVA SCOTIA SWPI - ANALYSIS
GLOSSARY OF TERMS
Branding
As used in this report, branding refers to a perception or image created by the purposeful promotion of an identifiable name and/or trademark that is attached to a product and that is recognizable by the general buying public. Successful branding motivates consumers to consider the products caring that brand.
Certified Wood Products or (CWP)
As used in this report, Certified Wood Products are value-added wood products made from lumber that is from trees that have been harvested in an environmentally, economically, and socially responsible manner. It also suggests a maximum yield and responsible utilization of these materials. It does not refer to any specific or existing standard or method of verifying this process. However, it does suggest that the process has been verified and “certified” by an independent party.
Global
Global is used throughout this report to include “local and around the world”.
SWPI
Secondary (or Value Added) Wood Products Industry. Any industry that adds value to primary wood products that is generally defined as beyond the manufacturing of lumber.
Secondary Wood Products
Secondary Wood Products are products made from lumber after value has been added by expending labor and other resources to raise the value of a product or service. For the purpose of this report, this term is interchangeable with Value-Added wood products.
Value-Added
Expending labor and other resources to raise the value of a product or service. In the wood products industry this means producing a product from lumber. For example – moldings, wood windows, furniture, wood toys. For the purpose of this report, this term is interchangeable with Secondary Wood Products.
NSCC
The Nova Scotia Community College – Marconi Campus, Cape Breton
NSSWPI
The Nova Scotia Secondary (or Value Added) Wood Products Industry. Any industry that adds value to primary wood products that is generally defined as beyond the manufacturing of lumber in the province of Nova Scotia.
WPG
The Wood Products Group (or Association) membership consisting of companies from the value-added wood products industry from New Brunswick, Nova Scotia, Newfoundland, and Prince Edward Island as well as some from primary processing companies.
INTRODUCTION
Purpose of Project
The purpose of this project was to focus on the opportunities and challenges facing the upper tiers of the value-added wood products industry in Nova Scotia and to develop a strategy to maximize the benefits of its forest resources, and to increase opportunities for sustainable economic development in rural communities throughout the province. The emphasis was to be on strategies to promote export opportunities. (Excerpt from RFP#2002-19)
In keeping with this purpose published in the RFP for this project, the results of our work is presented here to provide guidelines (or a blueprint) for the Province of Nova Scotia and the Nova Scotia Secondary (or Value-Added) Wood Products Industry to give clear direction for the development and long-term viability and sustainability of the industry. The protection of existing jobs and the creation of new jobs in the value-added sector of the wood products industry in Nova Scotia through export development within the industry is one of the main objectives of this study.
Our Mission
In these times of rapid change in the secondary wood products industry, the only way to survive - and indeed prosper - will be to employ breakthrough thinking with enlightened vision and creativity.
This report reflects the results of our efforts in light of our project mission statement below.
Project Mission Statement
“We will conduct a detailed study of the secondary (value-added) wood products industry in the province of Nova Scotia and develop a comprehensive plan that will promote its sustainable growth and viability as a vital contributor to the provincial economy.
We will apply creative and innovative thinking – global in scope – in developing the most effective strategies for the industry.”
New Vision
We began this project with the confidence that we would find the proper mix of strategies that could propel the NSSWPI forward. That confidence was well placed.
This project has resulted in a very strong vision cast for the Nova Scotia Secondary Wood Products Industry. This vision – stated below – can be realized with widespread cooperation within the industry and through the implementation of the strategies presented later in this report.
Vision for the NSSWPI
The Nova Scotia Secondary Wood Products Industry will be recognized internationally as a premiere rapid response supplier of environmentally friendly wood products of excellent workmanship and high quality.
The Nova Scotia (Atlantic Canada) brand will represent world-class secondary wood products and service excellence.
This vision is unique to Nova Scotia because of its global geographic positioning and its current positive image. The long-term viability of the sector is an achievable goal. Nova Scotia can develop its own identity and reputation of excellence much like the Udine, Italy cluster is now recognized as the chair capital of the world.
We would like to sincerely thank the hundreds of individuals we interacted with during the process of conducting the research for this project and during the formulation of the strategies contained in this report. Without their honest and diverse input, this project could not have been completed. We especially want to recognize the assistance of the Nova Scotia Community College, the department of Natural Resources, and the Wood Products Group. No input – positive or negative – was ignored! We valued all information equally as we attempted to formulate the building blocks for a strategic plan for the industry. The industry members’ interest in the future of the industry and their and willingness to participate was the single most important factor in the successful completion of this project.
Project funding was provided by ACOA and ECBC through the Atlantic Trade and Investment Partnership (ATIP). The ATIP project focuses on developing a coordinated approach to helping business take advantage of export and growth opportunities.
SCOPE & METHODOLOGY
SCOPE
This project was conducted during the period between March – June, 2003. During this time all research was conducted and strategy formulation completed. The following outline of the project scope and the methodology used are not all-inclusive but serve as a summary.
We first met with the Nova Scotia Community College (Marconi Campus), ECBC, and ACOA as well as other stakeholders to cast a clear vision of the intended purpose and focus of this project summarized in Section II above.
Industry Diversity
The NSSWPI is comprised of many small diverse manufacturers of value-added products. One of the challenges of this project was to arrive at strategic initiatives that would transcend this diversity and be of benefit to all.
The following is a summary of some of the major value-added product categories represented in Nova Scotia. (Source: Nova Scotia Department of Finance, Nova Scotia Manufacturers – 1998)
- Architectural Millwork
- Bentwood
- Boats
- Buildings, Prefabricated
- Carvings/ Sculpture
- Caskets
- Clocks
- Commercial Cabinets
- Crates, wooden
- Crafts, wood
- Custom Cabinets
- Doors
- Fencing
- Flooring
- Furniture, Chairs
- Furniture, Custom
- Furniture, Household
- Furniture, Office
- Furniture, Outdoor
- Furniture, Parts
- Furniture Reproductions
- Kitchen Cabinets
- Kitchen accessories
- Millwork
- Mouldings
- Picture Frames
- Siding
- Toys
- Turnings
- Windows
- Woodenware
It was our objective to obtain as much valuable input for this project as possible. We felt it very important to interact with a large, diverse population of stakeholders throughout Nova Scotia. We traveled throughout the province in an attempt to obtain an understanding of the social and economic environment by region.
We met with over a hundred stakeholders representing industry, associations, provincial and federal government agencies, provincial and local economic development agencies, educational institutions, environmental advocates, and others in order to obtain their perspective on the issues facing the NSSWPI.
We also made an attempt to identify any special needs by industry sector. During this process we visited over 20 Nova Scotia value-added wood manufacturers representing a variety of sectors.
Global Issues
The issues facing the NSSWPI are global in scope. We have, therefore, incorporated our international experience in the secondary wood products industry in the execution of this project and have interwoven the global implications into our strategic planning. We feel strongly that the issue of rapid globalization in the secondary wood products industry is the paramount threat to the long-term viability of the industry in Nova Scotia.
Prior Research
Many research projects have been conducted during the past decade directly or indirectly involving the value-added wood products industry in Nova Scotia and Atlantic Canada. We reviewed much of this prior research in the early phase of this project. We used all of this as a framework for further study and analysis. An attempt was made to NOT duplicate previous studies. However, an objective review of conclusions and recommendations was made and exceptions noted in this report in general terms.
Analysis of NSSWPI
We have completed our own in-depth analysis of the Nova Scotia Secondary Wood Products Industry. We looked at the strengths, weaknesses, opportunities, and threats (SWOT) as we traveled the province and summarize the findings in section V of this report.
Markets
We have evaluated the NSSWPI regional, national, and global market opportunities and the competition for these markets.
Trends
The project included the identification and evaluation of relevant regional, national, and global trends within the value-added wood products industry. The areas of interest include:
- Markets – current and future
- Sales and Marketing
- Manufacturing Methodologies
- Education and Training
- Employee recruitment and retention
- Globalization
Other Initiatives
An analysis of the initiatives undertaken in other regions to strengthen sectors within the value-added wood products industry was conducted in an effort to identify any relevant programs that might serve as a guide for Nova Scotia.
METHODOLOGY
We utilized both primary and secondary research in the development of the recommendations and strategies included in this report. As mentioned above, we took advantage of previous work in the wood products industry in Nova Scotia including published statistical data from Nova Scotia Natural Resources and Economic Development.
Secondary Research
We reviewed many of the most recent studies conducted in Nova Scotia and Atlantic Canada as part of our research. We have footnoted any direct references within this report. The reports reviewed are listed below. We conducted additional secondary research in an effort to incorporate global issues and trends into our strategy formulation.
- The Economic Impact of the Forest Industry on the Nova Scotia Economy [2000]
- The Forest Industry in the Nova Scotia Economy [2003]
- Nova Scotia Wood Supply 1996-2070
- WMC/CFB Situational Analysis of the Advanced Wood Products Mfg. Industry [2002]
- Review and Recommendations on the Valuation, Allocation and Sale of Crown Timber Resources in Nova Scotia [2000]
- Cape Breton Industry Targeting Assessment [2003]
- Nova Scotia’s Western Valley Hardwood opportunities
- ACOA Value-Added Wood Products Study (O’Halloran Campbell) [2003]
- The Atlantic Canada Advantage: A Comparison of Business Costs …. Abstract
- Adding Value to Wood Products in Atlantic Canada; A Stakeholders View … [2001]
- The GPI Atlantic (The Nova Scotia Genuine Progress Index Forest Accounts) [2001]
- The Wood Industry in Atlantic Canada: A Focus on Value-Added [1998]
- Nova Scotia Forest Inventory [2001]
- Registry of Buyers (Forest Products) [2002]
- Atlantic Canada Business Environment Profile [2003]
- Nova Scotia Business Climate Index [2002]
Primary Research
As is evident throughout this report, we relied heavily on personal contact and discussions as the preferred method of primary research. Two-way dialogue was the best way for us to gain meaningful input from the diverse group of stakeholders we interviewed and to assist us in formulating the strategies herein.
Symposium
On April 11, 2003 we held a symposium in Truro. Invitations were sent to stakeholders all over Atlantic Canada. This forum was used to solicit input from anyone interested in the value-added (secondary) wood products industry – focusing on Nova Scotia. The symposium was well attended by a variety of stakeholders throughout the region. Mid-way through this project, several major issues had surfaced. The symposium format was structured in three phases to cover these and other issues.
First, the consultant presented a global overview of the value-added wood products industry and the critical ingredients for a company to successfully compete. The second session gave the participants the opportunity to form their own discussion groups. Each of the three groups developed and prioritized their own issues, suggestions, and solutions to challenges. Again, these were recorded and considered when formulating strategies contained herein and are summarized in Chapter VI.
Finally, the NSCC held a two-way discussion of education and training issues in the province.
The symposium was a tremendous success and achieved an effective exchange of ideas between stakeholders across a broad spectrum of the industry.
GLOBAL ANALYSIS & TRENDS
1. Globalization
The value-added wood products industry – especially furniture manufacturing – is undergoing an unprecedented surge in globalization. The figures for the past ten years show a trend of increasing international trade across much of the secondary wood products spectrum that is phenomenal to say the least.
We expect this trend to continue during this decade as larger US, Canadian, and European manufacturers continue to outsource globally in an effort to meet competition with lower-cost quality products. There are powerful global social and economic forces in play that will not permit a reversal of this trend.
Poor countries around the world are struggling to pull themselves out of extreme poverty and provide their populations with an ever-increasing standard of living. Foreign governments of underdeveloped and developing countries are focusing on creating wealth within their own borders. Indeed, even the US, through USAID (United States Agency for International Development), as well as The World Bank, and the UN are all assisting in the development of industrial sectors within these poor countries so that they can export products to lucrative markets such as Europe and the United States and bring in foreign currency.
Woodworking is one of the oldest handcrafts in the world with paintings in ancient Egyptian tombs dating back to 2500 B.C. depicting woodworkers using sand to smooth the surface of wood. History has shown that in developing countries industrialization usually begins with a labor pool drawn from the fields and farmlands where the poor have been used to working with their hands.
Woodworking - and specifically furniture manufacturing – has been and will continue to be one of the first industrial sectors to emerge in many third-world countries. Globalization will be an integral part of the value-added wood products industry during good economic times and even during times of recession such as being experienced at this time (2001-2003).
This all translates into a very competitive environment for the Canadian value-added wood products industry and specifically the industry in Nova Scotia. As more companies in developing countries vie for a share of lucrative global markets – Nova Scotia will find it more difficult to compete.
2. Global (off shore) Competition
Competition to the Canadian and the NSSWPI
The U.S. furniture market is a good benchmark to observe with regard to the globalization of the value-added wood products industry. This market reflects the trends in Europe and other mature consumer markets for value-added wood products.
As Figure IV-1 below shows, the trade deficit for the US furniture manufacturing industry began widening during the last decade. During the early part of the last decade, US Exports showed signs of growth with respect to imports. However, by 1994 this trend had evaporated and reversed as developing countries began to enter the US market with better quality, low cost furniture and as Canada and other suppliers began aggressively expanding lower cost exports to the lucrative US.
Total U.S. Furniture Imports vs. Exports ($ million) (2)
2000 1998 1996 1994 1992 1990
Imports 10,370 6,870 4,969 4,050 2,884 2,854
Exports 1,352 1,165 1,005 1,007 923 598
The total amount of furniture exports to the US have grown at an increased rate during the past few years – a trend that is likely to continue during the next five years. This illustrates one market opportunity for a growing NSSWPI.
During 2002 40% of all furniture consumed in the United States was made abroad- up from 33% the previous year (2). An analysis of Figure IV-3 below shows how the major source of those imports has shifted from Taiwan in the early ‘90s to Canada in the mid 1990s and then to China. China overtook Canada as the #1 exporter of furniture to the US as Chinese furniture and wood component imports narrowly past product shipments entering the United States from Canada for the year 2001.
The United States imported $2.817 billion worth of wood furniture from China during 2001. This, when compared to $2.487 billion worth from Canada, puts China at the top of the exporter list to the US furniture market. Combined, the two countries accounted for almost 50% of U.S. furniture and component imports, according to data released by the U.S. Department of Commerce in March 2002.
There is no dispute - China has emerged as the leading low-cost producer of wood products in the world and is taking market share from US manufacturers as well as Canada and other exporting countries in the value-added wood products market. Italy holds firm to the high-end leather upholstery market as well as other high styled furniture import niches – at least for now.
Trend to Value-Added
Countries such as Indonesia are mandating that any wood products that are to be exported must be value-added. This reflects good economic planning on their part to maximize the revenue from the products exported by incorporating as many value-added activities as possible. One of these of course is labor – low cost labor by US standards.
Thus, the predominant strategy of developing countries in Asia - as well as those in South and Central America and all over the globe - is to export value-added wood products rather than primary products such as logs, lumber, or wood chips as is prominent in Nova Scotia. Some of these products may be machined furniture parts but many more will be finished furniture or other upper tier value-added items.
China
As stated above, China has emerged as the low-cost producer of choice not only for furniture but also for many other products. During the past five years their market share has been growing rapidly. There are many reasons for this and those listed below are but a few.
- China has an abundance of cheap labor and is shifting over 30,000 workers each day from the public sector to the private sector. (3) This is a tremendous number of people eager to find work.
- These workers are quick to acquire the skills of the woodworking business.
- There are reported to be over 50,000 furniture factories in China (4)
- There are 6 million students studying engineering in China (3)
- An increasing number of Chinese manufacturers are incorporating modern manufacturing technologies in large new automated factories including the latest machinery and operating systems in every phase of the manufacturing process from cutting lumber to finishing and packaging.
- The Chinese are increasingly responsive to customer requirements and demands.
- They are utilizing existing distribution channels in the United States – primarily by selling directly to manufactures who have their own established and proven customer base.
- Some have begun selling directly to retailers.
A common mistake many observers of the global value-added wood products industry make is that they believe that because China is a “low-cost” producer, they make only inexpensive furniture that is sold into the low-end market and further believe that these wood products are of inferior quality. This is a serious error that could cause a false sense of security for Nova Scotia manufacturers.
Many manufacturers around the world are under the mistaken impression that quality and price are synonymous. A universally accepted definition of quality is that a quality product meets the expectations of the customer. Thus, the buyer of a Saturn automobile can be completely satisfied with the quality even though the price paid was relatively low. On the other hand, the owner of a BMW can have a “lemon” of poor quality.
In the secondary wood products industry it is also important to note that quality is not represented by the amount of work that goes into the product but rather the workmanship employed.
China can be a low-cost producer at any price point! They have skilled employees, modern equipment and technology, and can produce very high quality products with a lower selling price because their overall manufacturing costs are less. This is true in companies in most developing countries that have the means and are willing to make the necessary investments. Furniture manufacturers in Canada, the U.S., and Europe are having high-end furniture manufactured for them in overseas factories to their high quality standards and then selling under their brand.
It has been estimated that even if US manufacturers cut their labor costs by 95%, they could still not lower costs to the level of Chinese furniture delivered to into that country. The same goes for Canadian manufacturers.
Effects on the Nova Scotia furniture industry
This rapid globalization has begun to have a negative impact on the Canadian Secondary Wood Products Industry. While the Canadian industry still enjoys a strong competitive position, it is rapidly being diminished from lower cost Asian competition.
Nova Scotia manufacturers will have to develop competitive strategies other than lower costs in order to remain viable for the long-term.
3. Global Markets
When looking at today’s marketplace for value-added wood products, we seldom think truly “global”.
- Local
Some small Nova Scotia manufactures have found the local market to be their niche. This market, however, is insufficient to support any but the smallest who have limited manufacturing capacity and marketing resources. The local market is not immune to imports if the consumer has reason to buy comparable product elsewhere. Thus, even the smallest manufacturers will have to learn to become more competitive in order to survive imports.
- Regional
Some Nova Scotia manufactures are successfully marketing on a regional basis into other provinces and into the Northeastern U.S. market. The regional markets offer potential for small manufacturers who are currently relying on local markets and want to expand. The regional marketers can begin looking to the broader U.S. and European marketplace.
- International
There are markets for secondary wood products around the globe. Innovative manufacturers of consumer products have found markets in Europe, the Middle East, Russia, Asia, Central and South America, and Mexico. Several Nova Scotia manufacturers are shipping to international markets – mainly England, Germany, and the U.S.
Developing countries around the globe are in various stages of economic growth. With the passage of time, each of these countries will see a middle class emerge - eager, willing, and capable of buying goods manufactured locally as well as those imported into their country from abroad.
China, with a population of 1.3 billion, will see the emergence of a huge middle-class eager to buy “western products” during the first 25 years of this century. Even now, 10 million couples get married each year and set up households.
Globalization (two-way trade) offers opportunities now and in the future for Nova Scotia manufacturers. The key is for manufacturers in the various sectors to find niches that give them a competitive advantage.
4. Global ‘Green’ Trend
The “Green” Issue
During the past forty years or so, there has been a slow but steadily growing environmental awareness around the world. From keeping our highways and byways clean of litter to protecting the environment from excessive greenhouse gases – we have all become more aware of what we are doing and how it affects our environment.
The “Green” issues are global by their very nature. Mankind has come to the realization that environmental concerns in one region of the world can have a profound affect on regions on another continent.
This issue has become a global trend and offers Nova Scotia manufacturers tremendous opportunities given the Sustainable Forestry Policy adopted by the Coalition of Nova Scotia Forest Interests in 1996.
One common example we have used is the broad based support of the hospitality industry and hotel guests for such programs as “Project Planet” that discourage the daily changing and cleaning of bed linens and towels. From London to New York to San Francisco to Seoul to Cairo, this has become a standard choice given guests in even the nicest hotels. The typical logo above reminds the guests that they are helping keep the earth “green”. Of course one of the advantages in the hospitality industry of embracing “green” is that it saves the hotels money.
Waste reduction and recycling have become a part of our daily routines and serves as a final example that there is a general and diverse acceptance of a variety of “green” movements.
Everyone is not in favor of “certification” and it is not a trend “sweeping the globe”. However, while this movement is in its infancy - the following global overview serves to highlight its unmistakable forward momentum.
European Consumer Initiatives –
Many EU buyers of Nova Scotia secondary wood products have indicated they will require some type of ‘certification’ by the year 2005. In addition, our research has shown that Belgium, Denmark, France, Germany, Sweden, and Spain all have movements and/or policies at government or local levels that are emphasizing the use of certified wood products.
South American Competitive Producer Initiatives –
Bolivia, Brazil, Columbia, and Ecuador all have modern forest management legislation enacted to assure sustainable use of the forest resources in each country. Many of these forests are certified by FSC - SmartWood.
Asian Competitive Producer Initiatives –
Indonesia (with 10% of the world’s tropical forests) and Malaysia have been systematically managing their forests and have a National Forest Policy supporting sustainability of their forest resources. They have done this in response to the outcry from the world consumers of wood products.
US initiatives –
- The Home Depot: August 26, 1999 – The world’s largest home improvement retailer, pledged to stop selling wood products from environmentally sensitive areas by the end of 2002 and give preference to certified wood. This applies to primary and secondary wood products sold in their stores.
- Lowe’s Home Centers, Inc: August 2000 – The nations second-largest home improvement retailer made similar commitment and preference to certified wood sources.
- Anderson Corporation: This manufacturer of value-added wood products including windows and doors announced in September 2000 that it would not source wood from endangered forests and that it will give preference to certified wood supplies for its secondary wood products.
- Centex Homes: This national leader in home building in the US announced on March 28, 2000 that it intends to eliminate the use of wood originating from endangered forests in its home building operations.
Summary – the trend to “Green”
For value-added wood products to be certified, a chain-of-custody must be maintained from the sustainably managed forest to the manufacturer of the product – be it lumber, wood doors, or furniture. When a company owns concessions for timber on certified forests, the task is relatively easy. As long as they use only their own lumber from their own certified forests, documenting and certifying that all the lumber used in their products came from that source is relatively easy.
However, when the manufacturer obtains lumber from many suppliers in many regions, the task is more difficult.
Since the province of Nova Scotia has a sustainable forest management policy, it should be easier for manufacturers in the province using lumber produced from provincial forests to be “certified”.
We have used the following quote many times to express our own assessment of the future of “Green” value-added wood products:
“The issue is not whether demand for sustainable forest products will develop, but rather how fast and in which markets sustainable forestry will become an important variable.” (5)
The chart at the right illustrates the momentum in the number of COCs (Chain of Custody Certificates) issued in recent years.
5. Future Manufacturing & Marketing Trends
Export Marketing – Companies that export value-added wood products will increasingly forward integrate into the distribution channel to get closer to the consumer. History has demonstrated that whether it is flowers from Columbia or automobiles from Japan, the closer an overseas manufacturer gets to the customer the more profitable and secure the market becomes.
Most exporters of value-added wood products to the US are currently selling to other manufacturers or to wholesalers. Some are attempting to go directly to the retailer or end-user. This is a trend that Nova Scotia manufactures should watch closely and learn from.
An example is a millwork manufacturer in Bolivia. This company is vertically integrated with its own certified forests, sawmills, and value-added factories to manufacture doors, flooring, moldings, and other products. The company currently sells to the building supply trade through distributors and agents in the US. They have found weaknesses in this distribution chain in some large markets. They have now opened their own processing and distribution company and are in a position to sell directly to national homebuilders in those markets.
Strategic Alliances – Many manufacturers will form strategic alliances with overseas companies as opposed to just using them as suppliers. A strategic alliance benefits both parties in a long-term profitable partnership. Two examples of bold initiatives that were used during the year 2001 are briefly mentioned below. These (while large in scope as compared to what may be available in Nova Scotia) represent different strategies and serve to further identify major globalization trends in the industry.
- Ethan-Allan
A good example of a true strategic alliance is that that has occurred between Ethan-Allan and Makor – the largest furniture manufacturer in China.
Ethan-Allan has a very strong distribution channel with its own manufacturing facilities in the U.S. and retail stores throughout the U.S. and abroad. Heretofore, their products were manufactured largely in their own plants in this country. With the rapid globalization of the furniture industry and the competitive pressures of imports, the company had to find a way to remain competitive.
Rather than just look for a way to outsource products at a lower cost as many manufacturers have done, Ethan-Allan has combined its sales and marketing might with the largest low-cost furniture manufacturer in China – Makor. That manufacturer is capable of manufacturing the same quality furniture made in Nova Scotia plants at a much lower cost. Thus, they strengthen the competitive position of Ethan-Allan in the U.S. market.
Meanwhile, China has a huge emerging middle class that will be eager to purchase furniture (see: International, page 15). Ethan-Allan will open retail stores in China to market their products to this market and also to lend their marketing expertise to Makor. The more Ethan-Allan furniture is sold in China, the more production through the Makor plants.
In this scenario, both companies derive long-term benefits from their “strategic partnership”.
- Lacquer Craft (China)
During the summer of 2001, China-based Lacquer Craft bought the Universal Furniture division from Lifestyle Furnishings International – the third largest US furniture manufacturer with 2000 sales estimated to be $2 billion. (1)
This Chinese furniture manufacturer (a leading Asian manufacturer of dining room and occasional furniture with operations in Dong Guan City and Canton, China) will likely close most or all of the U.S. factories and manufacturer the Universal products in their plants in China. Universal already has brand recognition in the U.S. marketplace and a well-established distribution channel with a retail dealer network selling their casegoods products all over the country. In essence, this overseas manufacturer has purchased the brand and sales and marketing expertise of Universal to obtain immediate and sustainable sales in the U.S. market.
This strategy also illustrates the importance of branding to the success of one company who has chosen to enter the U.S. furniture market – noteworthy to those in Nova Scotia who desire to export to this market.
Off Shore Investment – While most large manufacturers of value-added wood products will form global strategic alliances as mentioned above, others will invest in overseas ventures and move their manufacturing overseas to capitalize on the lower labor and overhead costs in those manufacturing facilities and/or to manufacture products closer to the marketplace. Some will invest heavily in state-of-the-art technology and technical assistance in these plants. In addition, they will position themselves to enter that market as it develops. Nova Scotia can position itself to capitalize on this trend.
Brand Identity and Marketing – Manufacturers of consumer goods – such as furniture - will continue to promote brand identity in an attempt to gain market share as well as maintain loyalty of existing customers. The American Furniture Manufacturers Association is undertaking a 50-60 million dollar marketing campaign to lure consumers into spending more of their disposable income on furniture. Individual manufacturers will continue to promote their brands to capitalize on this movement.
Export to Emerging Markets – As mentioned above, there are middle-class consumer populations emerging around the globe in developing countries. This trend will continue and will offer opportunities for Nova Scotia companies that decide to pursue them.
Mega Factories in China – Very large furniture factories and woodworking industrial parks will spring up in China similar to the Dalian Huafeng factory in Zhuanghe City, Dalian, China that boasts projected shipments of 5,000 containers per month from their factory complex. These factories will dominate the large volume producers around the globe.
Niche Manufacturing – Most of the large manufactures will maintain some of their well equipped manufacturing plants in the US and Canada to fill the needs of niche markets that demand low-volume and semi-custom products and/or require quick turnaround from order to delivery.
Niche markets will also be served by smaller efficiently run and smartly focused lean manufacturers. Small value-added manufacturers – like those in Nova Scotia – will shift their emphasis to meet these unique market requirements. Entrepreneurs will form new wood products companies to fill specific niche requirements that large or offshore companies cannot serve as efficiently. Successful manufacturers will find innovative and creative ways to differentiate their products from those of their competition. It will no longer be acceptable to be the mega supplier of all things to all customers!
Employee Recruitment and Retention – While developing countries do not have difficulty in filling woodworking jobs due to the huge demand for jobs for the unemployed, mature value-added wood product sectors in developed countries are finding it more difficult to recruit and retain workers. This is due to the perception that the industry is an old, outdated, dirty and dangerous industry. Rather than enter this sector, young people opt to try computer science or other ‘high-tech’ industries when in fact the secondary wood products industry is full of high-tech processes from CNC work centers that do the work of several older machines to robots that spray finish on furniture.
Education and Training – Every successful value-added wood products cluster has had strong support in education and training. This is evidenced in Canada, Italy, and throughout the United States. Emerging clusters in Romania and elsewhere in Eastern Europe, Cebu, Philippines, and China are aggressively establishing state-of-the-art education and training centers to promote the industry and train managers and machine operators. In addition, many will provide testing facilities to help manufacturers design and produce products suitable for the global marketplace. This trend will continue as clusters try to compete in an industry that has turned global in the last decade.
Shorter Lead Times – The traditional distribution channels in the furniture and other value-added wood products industries included large inventories of product in producer and retail warehouses in order to compensate for the lengthy manufacturing cycle times associated with the industry. This is no longer acceptable. Customers want immediate delivery and sellers do not want to loose them by offering unacceptable lead times and do not want to be forced to keep large inventories to avoid this. Therefore they are demanding four or five-week lead times at the longest. Many producers are now offering one to two-week lead times. Even a large China manufacturer is promising five-week lead times. The trend will be toward shorter and shorter manufacturing cycle times in all sectors of the SWPI.
Lean Manufacturing – Mature clusters - and companies within – are scrambling to become competitive with the low cost producers in Asia and Eastern Europe. They have recognized that lower costs and shorter lead times are essential for survival. Lean manufacturing is the means to this end and many companies and broad manufacturing sectors are embracing this as a strategy for survival. Thus, a tremendous global surge in education and training in the principals of lean manufacturing is underway. The Australian government just completed lean manufacturing training and technical assistance in the SWPI in all six states.
Outsourcing – Small manufacturers will outsource parts and finished goods from smaller manufacturers overseas to compete with the larger companies who have gone offshore. Supplying these companies that choose to outsource will offer opportunities to Nova Scotia manufacturers.
Overseas competition will accelerate the need for domestic outsourcing, as smaller companies look for ways to facilitate small orders quickly – something that most foreign manufacturers will be unable to do. More secondary wood products companies will become assemblers – much as the automobile industry – relying on strong, agile supply chains to support them.
Those manufacturers in the NSSWPI who have the capabilities, can capitalize on this trend to specialize in supplying products or parts with quick turnaround.
(1) Furniture Today
(2) Wood & Wood Products
(3) Wellington Management
(4) Furnitureworld.com
(5) Jenkins, Michael and E.T. Smith, The Business of Sustainable Forestry
(6) Forest Stewart Council
(7) Natverket WWF Skog 2000. www.wwf.se
(8) Dixon, Audry. Beauty and the Beasts. Timber and Wood Products International. 3 July 1999
(9) Forestworld.com
(10) American Furniture Manufactures Association
NOVA SCOTIA SWPI – SWOT ANALYSIS
1. Industry Status
In order to fulfill the mission and goals of this study, we needed to clearly understand the Nova Scotia business environment and its value-added wood products industry - its strengths, weaknesses, opportunities, and threats. Any strategic initiative to strengthen an individual company or an industry sector (as is the case here) must look critically at these factors. This analysis – due to the diverse nature of the industry – must be a general evaluation of the industry as a whole.
Strengths
- Halifax Port – One of the powerful advantages that Nova Scotia has over other Canadian Provinces is a deep-water port with easy access to European markets and emerging markets in the Middle East and elsewhere. There is a continual flow of containers through the port and the accessibility to any marketplace on the globe.
- Business Climate – Nova Scotia has a good business climate as compared with other Atlantic Canada provinces as well as several other Canadian provinces. The overall ranking of the Business Climate Index (12) places Nova Scotia ahead of the other provinces of Atlantic Canada behind Alberta, Ontario, and British Columbia – in 4th place. The province ranks 5th in Development Capacity, 3rd in Tax & Fiscal Environment, 3rd in Economic Performance, and 2nd in Atlantic Canada in the strength of the business sector. Nova Scotia has the 4th lowest manufacturing wage structure behind Newfoundland, Prince Edward Island, and Manitoba. Another positive indication for the potential of new investments in the NSSWPI is the Business Immigration index where Nova Scotia is second only to British Columbia. Finally, Nova Scotia ranks 2nd in a favorable corporate tax rate per GDP. (12)
- Small Companies – Some have suggested that because the NSSWPI is small in size as compared to those in many other provinces and because the industry is composed primarily of small companies, it begins in a very weak position. We disagree and feel that taken in the correct context of today’s global environment this is a positive attribute of the sector and thus a source of strength. Small companies can be more flexible and responsive to changing market conditions, provide shorter lead times, as well as be change agents themselves. In today’s competitive environment, this is very important.
One or two individuals who possess entrepreneurial skills generally start small companies. These few individuals are likely to decide to expand given the opportunity.
In addition, small companies (with vision and innovation) can become the growth engines of the sector providing increased demand for a host of support industries including hardwood sawmills, kiln drying facilities, finishing materials, cartons, etc.
- Successful Industry Leaders – There are a few large and very successful businesses in the sector. A few are on the cutting edge of innovative product development in their sector. Others have a clear vision of what is needed to assure the future of the industry. Success is contagious and if an effort is made to learn from these successful industry leaders, the whole NSSWPI will be strengthened.
- WPG - Many companies have seen the advantage of close collaboration among this diverse industry and have joined the Wood Products Group. The membership consists of firms from the primary and secondary wood products industry. The association has regular meetings with an exchange of ideas and technology – some of the time through plant tours of members. This industry association has proven its value to the sector and as a strength of the NSSWPI. The WPG plays a vital role in the strategies in Chapter VIII and recommendations in Chapter IX.
- Location – There are several reasons why Nova Scotia’s location is a strength of the sector.
- The fact that the NSSWPI is located near the prized northern hardwood forest is a strength and as long as the industry tries to utilize species from these forestlands, they (and their neighbors in Canada and the U.S.) will have a unique marketing opportunity to those who prize the species.
- The location of the industry near the Northeastern U.S. market (NY, PA, NJ, ME, MA, NH, CT, VT, RI) places it in close proximity to a $13 billion (retail) regional furniture market alone. The kitchen cabinet market as well as commercial markets in retail store fixtures and the hospitality industry offer tremendous market opportunities for Nova Scotia producers. In addition, the United States Northeast Coastal region down to Washington, D.C. represents a US 250 million dollar wood office furniture market opportunity. (11)
- Often overlooked is the proximity of Nova Scotia to the rest of the US market. The province is closer to the market than any other producer except in Mexico or other Canadian provinces. Being close to these markets also offers opportunities for the NSSWPI to be more responsive to the shifting demands than those in Eastern Europe, Asia, or South America.
- The proximity of Nova Scotia to Western Europe is an important factor to consider as strength to the sector in its efforts to increase exports. While not as close as the U.S., Europe is the second largest consuming market and is easily accessed by container freight from Halifax to Western European ports.
- Favorable Exchange Rate – Canada has enjoyed a favorable exchange rate during recent years that has served as a growth engine into the U.S. market. How long this will last remains to be seen but is a strength of the sector.
- Positive Nova Scotia Image- Nova Scotia is noted by North Americans as a great place to visit or to vacation. The province has a positive, even romantic image among tourists who are generally affluent and thus potential consumers of Nova Scotia Secondary Wood Products. This image is a strength of the NSSWPI if used in a branding strategy.
- Stakeholder Support - The NSSWPI has several strong advocates in the public agencies such as ACOA, ECBC, Natural Resources, and the Nova Scotia Community College that understand the importance of the industry to the Nova Scotia economy. This continuing support is a decided strength of the industry because it will perpetuate the development efforts of the industry.
Weaknesses
- Lack of Vision – There is a lack of vision within the NSSWPI. With only a few exceptions, none of those interviewed expressed a positive outlook for the industry. Without a positive vision for an individual company or the industry as a whole, there is no mission – no reason for growth – only daily existence. This is very serious and adversely affects the industry and those within. There is the perception that the industry is drifting and the age-old saying – “If you don’t know where you are going, any road will get you there” – applies to most in the NSSWPI.
Many secondary wood products companies in Nova Scotia will close in the next few years because they did not have a vision for the future of their company and/or remained unfocused on their core competency.
Likewise, the NSSWPI will largely disappear within five years if a new vision is not cast and all efforts are made to adopt bold strategies. The industry must develop a positive vision and work together diligently to bring it to fruition. This is a key to a successful future for the sector.
- Education and Training – Specific education and training for the upper tier value-added wood products industry is seriously limited in the province of Nova Scotia at this time. The only programs available are offered by the Nova Scotia Community College system in Pictou and on Cape Breton Island at the Marconi Campus where there has been an attempt to offer training in the furniture and other higher tier sectors of the industry. However, this program is inadequate in its current state to provide the assistance necessary to develop a viable cluster that can become a world-class supplier in the global marketplace. There is an obvious absence of education and training for top and middle management in global sales and marketing methods and in manufacturing technologies in the province. There is no education in the field of manufacturing (or industrial) engineering.
The program located in Campbellton, New Brunswick is better structured but is too remote to satisfy the needs of a vibrant and growing Nova Scotia industry cluster and lacks any focus on manufacturing management. A further indication of a lack of emphasis on technical training is the fact that Nova Scotia ranks 8th in the Canadian Provinces in Science/Engineering graduates. (12)
This area of weakness is the most critically deficient area observed in this SWOT analysis!
- Lack of Depth in Diversity - The value-added wood products industry in Nova Scotia does not have a lot depth in its diversity mentioned in Chapter II. The sector consists of a weak, loose cluster without a provincial ‘champion’ to lead the industry forward.
- Inefficient Plant Facilities – While there are some fine exceptions, many value-added factory facilities are old and outdated and necessitate unnecessary materials handling due to their rambling and obsolete layouts. This and other non value-added activities add to production costs and thus to diminished competitiveness. In addition some of these plant’s construction and lighting do not promote quality workmanship.
- Old Machinery and Technology – While there are solid signs of upgrading to CNC equipment, the older plants in Nova Scotia generally have older machinery and equipment with the newer ones having a mixture. The older machinery is not a negative if used properly – such as in a work cell. However, much of this machinery is used as the primary equipment for the plant and is a constraint to growth and productivity improvement. Generally, there is a low awareness of current technology and manufacturing methodologies such as cellular manufacturing.
- Absence of Lean - Very few manufacturers know what Lean Manufacturing or Continuous Improvement mean – much less how to embark on these programs in a time when they are necessary to compete globally. The purposeful elimination of all waste is generally lacking throughout the industry. This in itself results in higher costs and longer lead times – both serious impediments to a viable export program. Every factory we visited would benefit from a formal Continuous Improvement program that included Lean Manufacturing.
- Industrial Engineering – Since most of the manufacturers in the NSSWPI are small, they do not have the resources to hire a full-time industrial engineer to assist them in any efforts to improve manufacturing efficiency and quality control. Thus, much in these areas (such as lean manufacturing) is left undone.
- Strategic Planning - Many company owners do not have a strategic plan and cannot tell where they want to be three years from now. They are bogged down with day-to-day operations. They admit they do not know how to go about developing such a plan. By contrast, those who have a strategic vision and plan are growing.
- Export Marketing – While some companies have effective marketing programs, the majority of the owners and managers of the NSSSWPI manufacturers lack adequate skills in this vital area to meet today’s market demands. Many admit their programs are ineffective or totally dependent on an agent. Again, since most companies are small in size, they do not have a trained individual dedicated to marketing their products.
- Employee Recruitment and Retention – While there are exceptions, most companies in the NSSWPI are experiencing difficulty in recruiting labor into their factories. In addition, constant employee turnover is a challenge for many. The inability to attract and maintain an effective workforce is a detriment to the NSSWPI as it competes with other industries for good employees eager and willing to learn.
- Pessimistic Sector Outlook – Real or perceived, there is an overall negative view of the potential for growth within the NSSWPI by its members. This is based largely on the perception that there are no raw material resources available in the Province and therefore no room for growth. While there is a definite limit to the material available from the forests in Nova Scotia, (see: Threats below) there is little or no innovative thinking to maximize the material that is available nor to examine alternatives. In addition, many companies are undercapitalized and unprepared for growth and feel they cannot get the capital needed for growth into export markets.
A pessimistic view of the future of the NSSWPI by its members is a weakness within the industry that is stymieing innovation and creativity in looking to the future.
Opportunities
- Strengths – Every area of strength listed above represents an opportunity for the NSSWPI to leverage for the benefit of the industry as a whole. In addition, each individual company must look at these and combine them with their own unique strengths to forge a stronger vision and mission for their company.
- Weaknesses – Every weakness in the sector or in individual companies represents an opportunity for positive change. Every value-added manufacturer of wood products should continually look within for opportunities for improvement in areas of weakness. The Wood Products Group, The Nova Scotia Community College, and the Province of Nova Scotia should act as change agents for the industry and strive to help eliminate common areas of weakness. The recommendations of this study address all of the weaknesses mentioned above.
- Education and Training – The Marconi Campus of the Nova Scotia Community College has envisioned and developed an excellent new program to support the NSSWPI. Without such a program as is under consideration now, it is our opinion the sector has little or no chance to expand into a viable exporting industry within the province. This opportunity is exciting and must be capitalized on and is included in the strategies and recommendations chapters of this report.
[Note: To ensure objectivity, the consultant specifically delayed discussions about and investigation into proposed plans at the Marconi campus until late in the project after existing programs were investigated and our conclusions and judgments were made with regard to the needs in this vital support segment for the industry. Only then did we analyze the plans for future programs in Nova Scotia including those at the Pictou and Marconi campuses of the NSCC.]
- WPG – The Wood Products Group is in the unique position to serve as an agent for continuous improvement in the industry. Their successes to date should serve to motivate an ever-increasing effort to strengthen the industry. The strength in numbers cannot be overstated in implementing the strategies within this report. Without a clear unified voice, the NSSWPI will not be able to implement the recommendations within this report. However, the NSSWPI needs its own cluster group to foster growth and innovation within Nova Scotia.
- Globalization – The NSSWPI can capitalize on the rapid globalization of the industry by looking for ways to offer an attractive alternative to imported goods in the U.S. and Europe as well as in Canada. The creative elimination of weaknesses and the exploitation of their strengths and opportunities - can help manufacturers carve niches in the marketplace. Each manufacturer needs to look at what it can do better than those currently exporting to the potential markets mentioned in this report.
- Cluster Strategic Alliances – Nova Scotia manufacturers need to look at forming strategic alliances within their ranks to compliment each other. There are many markets that require more resources than any single NSSWPI manufacturer can provide. By collaboration of several companies, a broader choice of markets will open. Strategic partnerships with foreign manufacturers should be considered if that best serves the long-term vision and goals of a company.
- Expanded Markets – The manufacturers of value-added wood products in Nova Scotia can expand their markets if they look beyond the arbitrary boundaries they have set in their vision and sales and marketing efforts.
- Unique Products – The industry is positioned to produce unique products by leveraging its strengths including the reputation for being a high quality producer of hard maple wood products. Red (or soft) Maple and White Pine are underutilized species in Nova Scotia and offer opportunities for creative product development. Creativity is the key to innovative product development and can be implemented by educated and informed producers in the NSSWPI.
Threats
- Lower Cost Imports – The trend to lower cost imports in the U.S. and European markets represents a serious threat to the future of the NSSWPI. To ignore this threat or to take no proactive action to counter it will result in rapidly diminishing sales at best.
- Inaction – For the industry to take no action to remove the negatives – perceived or real - and capitalize on the positives will result in the rapid erosion of the NSSWPI and the resulting loss of jobs. To ignore the recommendations herein will preclude any significant growth in the NSSWPI.
- Provincial Focus on Primary Manufacturing – The growth of the NSSWPI has been hindered by the past policies of the province with regard to the use of Crown Land and this policy now threatens any significant growth in the sector. It has been pointed out in earlier studies that the NSSWPI generates higher revenues and provides more jobs per ton of wood fiber than the primary sector but his has failed to drive any change initiatives to promote higher value-added conversion of wood resources.
- Inadequate Education and Training – Nova Scotia does not currently have a center for training and innovation nor for technical assistance for its value-added wood products industry other than the programs offered through the Nova Scotia Community College system as pointed out in the Weakness and Opportunities sections above. This issue has been mentioned in all but the strength area of our SWOT analysis due to its critical nature. Left as is, this issue will be the greatest threat to a viable exporting NSSWPI that can contribute to increased employment and GDP in the province!
It has been correctly reported that: “Atlantic Canada is an academic hotbed. With 19 universities and 27 community colleges, the region has more post secondary institutions per capita than anywhere else in Canada. Canada is recognized as one of the most progressive countries in the world when it comes to education.” However, the NSSWPI of today has been left out in these efforts.
- Limited Natural Resources – Contrary to the results of some SWOT analysis conducted and reported in previous Nova Scotia studies, we believe the forests have reached their limit in sustainable harvest levels for both softwoods and hardwoods. Our conclusion is based on lengthy discussions with the Natural Resources department of Nova Scotia and other stakeholders in the primary and secondary sectors of the industry and a review of available data. We therefore place natural resource availability as a threat instead of a strength of the NSSWPI due to these discussions and the uncertainty of the limited quantitative and qualitative data available and the vague conclusions drawn (even though the industry can likely survive with utilization of raw material from outside the province).
- Limited East to West roads from Cape Breton – the movement of raw materials and containers for export in and out of Cape Breton is hampered by deficient roadways (Routes 4 and 105 and part of 104) connecting the eastern tip of Cape Breton to the 104 – 102 corridor to the Halifax port. The quick and efficient movement of raw materials and finished goods within the province is important to promote low costs and shorter times from order to shipment of finished goods in the NSSWPI and therefore to make cluster development more viable.