The Cutting Edge™December 2004

Business Briefing

How Are Our Hardwood Forests Doing?
By Art Raymond, A.G. Raymond & Co., Inc., araymond@raymondnet.com

The North American wood products industry is the largest in the world. The industry manufactures over one-third of global production while servicing domestic markets that consume over one-half of all non-fuel wood products. Hardwood inventories on the stump are rising in spite of increases in harvests. Consumers around the world demand products made from U.S. hardwoods like maple, oak, and cherry.

However, challenging times lie ahead. According to Dr. Jim Bowyer of the University of Minnesota in a presentation to the National Hardwood Lumber Association, five major trends are changing the competitive environment for the forestry sector:

Increased Globalization - Many low-labor cost countries are rapidly growing their wood products industries especially for high labor content products. For example, China's burgeoning furniture industry has displaced much of the wood furniture production in the U.S. The result has been a 16 percent decline in hardwood lumber consumption here. Other products like mouldings and flooring are suffering similar fates. The end of this trend is nowhere in sight.

The U.S. Trade Deficit with China - This new dynamic is also resulting in large exports of U.S. logs and lumber to China. China is now the second largest destination for U.S. hardwood exports. This flow is benefiting from the low cost backhaul of containers that first crossed the Pacific full of Chinese-built TV's, furniture, toys, and other consumer goods.

Growth of Third World Forest Industries - While China has few native forest resources, other developing countries are now leveraging their timber assets. Russia, for example, holds more than 50 percent of world softwood resources and a hardwood forest slightly larger than that in the U.S. Investment for new mills is flowing into Russia particularly along the Sino-Russian border. Brazil and Chile continue development of their forests and wood products industries.

Development of Tree Plantations - In 2000 plantations covered an estimated 462 million acres around the globe, an area equivalent to the forestland in the U.S. These tree farms produce about 35 percent of the roundwood harvested in the world while accounting for only 5 percent of the total forestland. The conversion of land for plantations as well as for urbanization, agriculture, and road building in the U.S. is decreasing the loss of hardwood forests here. Also investment in wood processing facilities follows the supply of low cost wood fiber found in plantations. This fact will lead to more industrial capacity in competing countries.

Use of Hardwoods in Composites and Paper - More small diameter hardwood trees are being harvested for paper and composite products like laminated veneer lumber and MDF. This trend is leaving fewer trees in the woods to reach sawtimber size.

These trends are changing the economics of forest products firms founded on the U.S. hardwood resource. Only those companies who react intelligently and creatively in their plans for the future will survive.

These plans must include capital investment in new facilities designed to leverage the advantages that arise from (i) our hardwood resource and (ii) the proximity to the world's largest market. These investments must feature new technologies in plant, process equipment, and information systems. Like never before, the wood products industry is dependent upon innovation by its managers and its suppliers.

Jobs, Jobs, Jobs...

As reported in the last Business Briefing, the employment picture in the U.S. is rebounding strongly. The November jobs report showed 337,000 new jobs. Revisions to August and September data added another 113,000 jobs meaning the economy created about 2.1 million jobs in the past twelve months.

The strength of the job market is confirmed by the Monster Employment Index. The MEI rose to a new high in November. The Index is now at 117 vs. 114 in October. In the last twelve months the Index has moved from just 88.

What Happened to Capital Investment?

The tax incentive for business investment has generated little in the way of increased capital spending. Last year Congress gave companies a bonus 50 percent first-year depreciation allowance on equipment purchased before the end of 2004. However, through September orders for capital goods excluding airplanes was up 12.3 percent from last year. That performance is normal for today's level of economic activity.

Economic Factoid

How good were the 'good old days' in the U.S.? At the turn of the 20th century, the average wage was 22¢ per hour. Few could afford what we now call essentials. Only 8% of the nation's homes had electricity. That measure is now 99.8%. Less than 10% had telephones. Only 200 miles of paved roads existed for 8,000 cars. Less than 8% of Americans had finished high school; only 2% had attended college. Life expectancy was 47 years for men. It's now 74 and rising. Paying homage to the past is reasonable. Longing for the past is indeed crazy.

Sector Situation Report
Latest news from the wood products industry by sector...

Office Furniture - BIFMA reported that September 2004 orders increased by 3% year over year marking the second month in a row of order growth. Shipments also grew by 6%, the seventh month of increases. The association's latest forecast shows 2004 shipments up 4.8% followed by an 8.1% rise in 2005.

Kitchen Cabinets - Cabinet sales rose 10.1% in October vs. the same month in 2003 according to the KCMA's Trend of Business Survey. For the first ten months of 2004 cabinet sales were up 18%.

Strong sales of semi-custom cabinets, a category that is difficult to produce overseas and requires flexible manufacturing processes, is driving industry growth.

A recent forecast by the Freedonia Group projects that cabinet demand will rise by 6 percent annually through 2008. Drivers of this growth are (i) strong repair and improvement expenditures and (ii) a trend toward more cabinets per residence in kitchens, baths, and other living areas, and (iii) more cabinet use in non-residential construction.

Keep your eyes on the numbers for the cabinet industry. This sector is more critical than ever to machinery builders.

Home Furniture - On November 9 the Department of Commerce reduced six of the nine antidumping tariff rates announced in June. The proposed rate for 115 Chinese bedroom manufacturers, who account for about 65% of bedroom imports from China, dropped from 12.91% to 8.64%. A group of Chinese furniture makers who produce about 5% of bedroom imports were assessed a tariff of 198%. The latter group was found to operate under Chinese government control. Effectively driven out of the bedroom segment, these most-penalized manufacturers are moving to other product categories like home office furniture.

The seven large Chinese producers who were mandatory respondents to the U.S. investigation received rates ranging from zero to 16.7%. Markor, the largest Chinese furniture maker, had its rate lowered to zero while the second largest, Lacquer Craft, saw its rate rise to 6.95%.

The International Trade Commission will have the final say-so on the DOC's tariffs on December 23. Given the low average rate, the ITC may determine that no material injury has occurred to U.S. producers and decide to suspend the case.

As noted in the last Business Briefing, any tariff less than 30% will not level the playing field for U.S. furniture makers. Thus the Furniture Civil War created between importers and U.S. producers by this tariff petition may end up a non-event.

Shipments of Chinese furniture to the U.S. continues. In the first half of 2004 imports of Chinese-made furniture rose by 45% over last year. In fact, with $4.5 billion of shipments, China accounted for nearly half of the $9.2 billion in furniture imports. This year has also seen the emergence of Vietnam as a Top 10 source country.

The result of Chinese competition, however, is evident in the state of the U.S. industry. In its October 29 issue, Hardwood Review reported that 225 plant closures and mass layoff events have occurred in the U.S. furniture industry since January 2000. Job losses totaled about 61,000. North Carolina experienced the most closures (71) followed by Mississippi with 24 and California with 23. In our opinion, the shakeout of excess capacity is not over.

Recent closures and sales include:

With domestic production on the wane, the American Furniture Manufacturers Association has opened its membership to furniture importers. The new association will go by the name American Home Furnishings Alliance.

Meanwhile results at U.S. producers are mixed...

Wood Flooring - October shipments of strip flooring decreased 8% over the same month in 2003. This performance followed September's 5% decline. For the first ten months of 2004, shipments were up 7% over last year. Beware of a new, downward trend in flooring demand.

Wood Components- Sales of furniture parts drove a 9% growth in U.S. furniture exports in the first half of 2004. The primary markets are Mexico and Canada. The latter has benefited recently from a stronger Canadian dollar

Public Policy

Tort Reform
By John Satagaj, WMMA Legislative Counsel, email@jsatlaw.com

Say what you want about the elections, whether you are happy with the outcome or not, it definitely improved the prospects for tort reform. Not only did the Republicans increase their overall majority to a 55 to 45 ratio, but two trial lawyers, Senators Fritz Hollings (D-SC) and John Edwards (D-NC) won't be back for the 109th Congress. Now, it does not mean we will get all 55 Republicans to vote with us (more on that in a moment) but it puts us very close to the 60 votes we need to break a filibuster.

The other potential complicating factor is that Senator Arlen Specter (R-PA) is in line to be the chairman of the Senate Judiciary Committee. He has never been a friend of tort reform, so not only can we not count him among the 55 votes, but he will hold considerable influence over the process for consideration of tort reform measures.

The WMMA Public Policy Committee and the Board of Directors already had decided that lining up sponsors and co-sponsors for a bill to set a federal statute-of-repose will be one of our top five priorities for our legislative day in February. We will probably use as our model the legislation introduced by Representative Steve Cabot (R-OH) two congresses ago.

The bill in the 107th Congress would have prohibited the filing of any civil action against the manufacturer or seller of a durable good for damage to property arising from an accident involving that durable good if the accident occurred more than 18 years after the date on which the durable good was delivered to its first purchaser or lessee. No civil action could be filed against the manufacturer or seller of a durable good for damages for death or personal injury arising out of an accident involving that durable good if the accident occurred more than 18 years after the date on which the durable good was delivered to its first purchaser or lessee and if the claimant has received or is eligible to receive worker compensation.

The bill would not bar a civil action against a defendant who made an express warranty in writing as to the safety or life expectancy of a specific product which was longer than 18years, except that this bill shall apply at the expiration of that warranty. The bill would have preempted and superseded any state law that establishes a statute-of-repose to the extent such law applies to actions covered by this bill. Any action not specifically covered by the bill would be governed by applicable state law. The term "durable good" means any product, or any component of any such product, which has a normal life expectancy of three or more years; or is of a character subject to allowance for depreciation under the Internal Revenue Code of 1986; and issued in a trade or business; held for the production of income; or sold or donated to a governmental or private entity for the production of goods, training, demonstration, or any other similar purpose.

In 2001, twenty states had some type of product liability statute-of-repose legislation on their books. For 13 of these states, the 18-year statute-of-repose contained in the last version of the bill would have been longer than their existing law. However, the bill would have established a statute-of-repose in 30 states that do not have any statute-of-repose. It would have also clarified ambiguities in several state statute-of-repose laws. Some states use what is referred to as a "soft" statute-of-repose approach, whereby the length of the statute-of-repose is defined by the "useful safe life" of the durable good. The term "useful safe life" is ambiguous and often times has to be litigated, resulting in costly legal fees for defendants. A federal "bright line," fixed-time limit would avoid these costs.

We will be competing with other tort reform measures. High on the President's list is medical malpractice reform. High on the list of U.S. Chamber of Commerce is class-action reform. High on the list of Senator Bill Frist (R-TN), majority leader of the Senate, is asbestos litigation reform. High on the small business community's list is a general cap on damages and limitations on the exposure of product sellers in product liability cases.

If there was ever time for us to be successful, this is the time. Hope you will help us help you by letting your Senators and Representative know you expect action on a statute-of-repose bill in the 109th Congress!

International Business Development

The Dollar is Dropping!
By Harold Zassenhaus, WMMA Export Director, zemg@erols.com

It's the flavor of the month whether you subscribe to The Economist, read the Wall Street Journal, watch CNN or subscribe to any number of economic/business newsletters. The EU and bankers in Germany and France, among others, have hinted that something must be done to prop up the value of the US dollar or at least weaken the value of the euro. The WMMA, through the Sound Dollar Coalition, has been lobbying the administration hard to caution our allies not to intercede, but to allow supply and demand forces deal with currency values. I urge each WMMA member to contact their Congressional Representative as well as administration officials to do likewise.

It's important to understand that the decline in the dollar's value (9% since August) is not the problem. In fact, the dollar has more to go if it is to reflect trends of the past 14 years.



"Most press reports and commentaries simply don't reflect reality, ignoring broader historical context and focusing only on the dollar's recent movement," stated Pat Mears, NAM's Director of International Commercial Affairs. "Analyzing the dollar's recent decline¯ is like evaluating the stock market with the tech-bubble peak of the late 90s as a benchmark." From 1997 to 2002 the dollar soared 25 percent against a basket of currencies the Federal Reserve Board uses to assess its relative value. "That surge was largely responsible for a sharp decline in U.S. exports and a skyrocketing U.S. trade deficit -- from $180 billion to $600 billion in only seven years," states Mears. The dollar is still valued 7% higher than it was in the 1990's.

The problem, as the WSJ stated recently, is "the world economy is out of whack". The US has found a way to live way beyond its means. Interest rates have remained low because overseas governments and institutional investors have been happy to purchase our government debt as well as substantial amounts of corporate equity. Asian central banks in particular have been buying our debt. It is now edging close to the $2 trillion level. The demand for the US dollar has partially resulted in low domestic interest rates which in turn have meant US consumers can borrow more, thereby increasing their debt. The US government, as you know, has been acting in the same manner.

Low interest rates and a historically high dollar value have fueled large and growing imports. The trade deficit is estimated to reach $670 billion in 2004 or 5.7% of GDP. According to many economists, the current account deficit is at a level which is unsustainable, especially in this environment in which foreign owned assets in the US far outweigh US assets abroad.

Other countries have gained from our actions as well. The European economies have been racking up current account surpluses, compensating for lackluster domestic consumer spending. And Latin American and Asian economies have jump kicked their economies by relying on exports. In fact China, Japan and Korea have gone farther by either pegging their currencies to the US dollar or by interceding in currency exchange markets to ensure their currencies remain weak so low export prices to US consumers can remain.

For awhile, everyone seemed to be content, except of course those Americans who lost their manufacturing jobs to countries which could offer their employers a low wage cost alternative, and the US manufacturer which found itself unable to compete with low cost products entering the US.

At some point the pendulum had to move to a more balanced global economy. Fed Chairman Greenspan noted recently, "A diminished appetite for adding to dollar balances must occur sometime." We are now seeing the beginning of an adjustment through the value of the US dollar. Given our huge current account deficit and our inability to effectively address it through asset holdings abroad, my guess is that the dollar will continue to fall at least to historical levels. It will not be a quick decline otherwise it would wreak havoc in the world market; but decline it should.

In addition, the US government and some of our allies are beginning to pressure China to ease their control over the US dollar/China yuan exchange rate. The WMMA has been a forceful player in the push to get the administration to deal with the issue and will continue to do so. Likewise, there is pressure being applied to the Japanese and other Asian nations to cease their intervention in currency markets designed to keep the value of their currencies low.

Dipping Dollar Provides WMMA Member Potential
In this environment, WMMA members have an opportunity to expand sales abroad. WMMA members that have been active in the international market should be able to capitalize on this powerful ally of a declining dollar. Those that have stayed away from developing an international marketing plan now have a window of opportunity. Otherwise they run the risk of being shut out.

The WMMA's International Business Development Committee (IBDC) has developed an expanded trade program to assist members develop a marketing plan and effectively enter promising foreign markets. By the end of the year, we will launch an "Exporters Manual" full of information and relevant tips geared to assist members in navigating international waters. In addition, we are updating our International Distributors Directory, a listing of over 400 international woodworking equipment and cutting tools dealers in over 48 countries. The Directory includes contact information as well as a listing of lines carried, where known.

Furthermore, we have recently expanded our subscription to a very powerful database of trade statistics. An expanded report on trade flow was the subject of last month's Cutting Edge article. On the committee page, http://www.wmma.org/members/inter_bus.cfm, scroll down to "Global Trade in Woodworking Machinery and Wood Products" for a series of tables on woodworking equipment and wood product trade flows. We have access to the latest import and export statistics of 47 of our major trading partners. The 47 countries account for virtually all trade in woodworking machinery and over 90% of trade in furniture, wood products, lumber and veneer. As an example, say you are a manufacturer of tenoning equipment and you want to know which countries are major producers of doors, windows and kitchen cabinets. The WMMA can now provide you in a matter of hours a list of the world's largest exporters of windows, doors and kitchen cabinets through the 3rd quarter of 2004 AND give you growth rates for the past 5 years. Want to know which countries are the fastest growing suppliers of wood furniture? No problem. Want to know where Germany is sending its machining centers? Again, no problem.

The WMMA is also expanding its participation in important international trade fairs. We will have a booth on the exhibit floor of Ligna, the world's largest woodworking industry trade fair being held next year in Hanover, Germany. For only $200, you can share the booth, gain exposure to the world's buyers and dealers, hold meetings, have access to translators and, through our network and the experience of your colleagues, we are able to easily reserve accommodations. To learn more about Ligna, click http://www.wmma.org/members/secureDocument.cfm?docID=221 We are trying to organize pavilions in 4 additional trade fairs which means that with minimal hassle, you can begin marketing in some very promising markets. To learn more see the related article in this month's issue entitled "2005 International Trade Opportunities" or contact me for additional information.

Finally, members of the IBDC as well as me are available to assist you with your international marketing program. Go to http://www.wmma.org/members/inter_bus.cfm
for a listing of IBDC members. Give anyone of us a call for advice. Now is the time for you to increase your efforts to increase sales overseas, broaden your revenue stream, flatten out your business cycle and learn more about industry trends.

If you haven't witnessed it yet, you will see that your foreign competitors will be squeezed due to higher importing costs resulting from a drop in the US dollar's value. This may happen in the US as well as third countries. You may see your domestic sales increase. But, I urge you not to continue to be dependent upon the US market; not to be content with growing domestic sales or even a growing US market share. You have an opportunity to capitalize on this dollar trend; it may not come again for a long, long time. Laying the groundwork now could pay handsome and growing dividends in the future

International Business Development

The New EU - 28 Countries, 22 Languages, 445 Million Consumers
By Yvonne Halpaus & Geoff Oliver, QNET LLC, (qnet@ce-mark.com)

Manufacturers of CE-marked machines are aware that instructions must be drawn up in one of the Community languages by the manufacturer or his authorized representative established in the Community. This has become a very important issue that can turn into a real hurdle and consequently, manufacturers must weigh the cost of translating installation, operation and maintenance manuals, while assessing if it is worth entering into these new markets...

EU Report
http://www.wmma.org/members/secureDocument.cfm?docID=230

Education & Scholarship

Mechanical Engineering Graduate Available for Full-Time Work, December 2005 (http://www.wmma.org/members/edu_comm.cfm)
Phil Huss is graduating this month from Tennessee Tech, with an M.E. degree and a real-world experience. He is ready for full time work at a WMMA member company. He completed a summer internship at Accu-Router in 2004, and represented the WMMA Scholarship Program at the 2004 WIC in a panel discussion. He has expertise in mechanical engineering and is currently part of a group of Tennessee Tech students working on a senior design project for Accu-Router. Access the Scholarship Committee page and scroll to the middle of the page for resume and more…


Product Liability Workshop

PLP&D Winter Workshop, Hyatt Regency, Orlando International Airport Orlando, Florida, January 20-21, 2005

Sessions include basics for prevention & defense; when products harm; legal standards; the culture of safety; the safety committee; hazard identification and risk analysisØ

Workshop Program - http://www.wmma.org/pdf/Winter 2005 Program.pdf
Workshop Registration Form - http://www.wmma.org/pdf/REGFORMWinter.pdf

Woodworking Industry Conference 2005

WIC 2005 to Offer Outstanding Industry Education, Networking Opportunities

"The Changing Tides of Running Your Business" is the theme for the 14th annual Woodworking Industry Conference, April 20-23, 2005 at the Hilton Sandestin Beach Golf Resort & Spa in Destin, Florida, sponsored by AWFS® (Assn. of Woodworking & Furnishings Suppliers®), WMIA (Woodworking Machinery Industry Assn.) and WMMA® (Wood Machinery Manufacturers of America®. WIC 2005 promises attendees an exciting combination of outstanding industry education, information-packed business sessions and social events at Northwest Florida's premier luxury Gulf-front hotel.

The conference begins on Thursday, April 21 at the Opening Session and Luncheon, featuring a powerful message of inspiration and motivation from Olympic medal winner, Silken Lauman. "Blazing a Trail to Success" is Silken's own story of success in the face of the most severe adversity. A world champion rower, Laumann was a major contender for Olympic glory at the 1992 Summer Olympics in Barcelona until she sustained a leg injury in a boat accident one month prior.? Just 27 days after her Olympic career ending accident, Silken was back in her rowing shell and focused on Barcelona, where she won the Bronze medal for Canada in the women's 2000 meter single event.

A series of workshops will be presented by industry experts, aimed at helping attendees manage their companies better in today's ever-changing business environment. Topics will include:

LEAN MANUFACTURING: A detailed look at how industry companies are using leading edge woodworking techniques and procedures to maximize productivity and profits.
Presented by:

TRADE SHOWS AS A BUSINESS TOOL: Including separate sessions for manufacturers and end user/distributors packed with insights, practical tips and ideas to enhance the trade show experience for both exhibitor and attendee.

Speaker: Scott Korzen is a professional communication facilitator and sales trainer who has worked with leading companies that include Kohler, Bayer, Dow Chemical, Sony, AT&T, Panasonic, Ericsson, and General Motors to help them maximize their effectiveness at trade shows.

DEMYSTIFYING PRICE OBJECTIONS: A special workshop that will give participants the tools to go far beyond price objections and build a long-term relationship with customers built on clear market differentiation and value.

Speaker: Jack Warkenthien is the owner and founder of NextStep Solutions, a consulting organization that helps clients in sales, service and leadership to improve their relationship-building and communications skills. His regular clients include the Architectural Woodwork Institute (AWI), for whom he presents annual marketing and sales workshops to members across the country.

A COMPLAINT IS A GIFT: Powerful new insights on why people behave the way they do when they give a complaint, how to prevent complaints from happening, and words to say and avoid.

Speaker: Suzanne Gust is a nationally recognized speaker; author and founder of Not So Basic Training & Consulting, one of the biggest training consultancies in the Midwest. She is also a Professional Member of the National Speakers Association and holds an MBA from Eastern Michigan University in Marketing and a BBA in Advertising/Management from Western Michigan University.

FUTURE OF THE ECONOMY, WHERE IS YOUR BUSINESS GOING? An in-depth analysis of the forces shaping the industry's new business realities and their implications for key management priorities and strategies in 2005 and beyond.

Speaker: For more than 25 years as an economic consultant, Larry Chimerine has lent his advice and council to Fortune 500 companies, financial institutions and government agencies. He has been frequently called upon to testify on key economic issues before congressional committees and appears regularly on the Lehrer News Hour, Adam Smith's "Money World", Wall Street Week, Today, Good Morning America, Crossfire, C-Span, CNBC, This Week, ABC Evening News, NBC Nightly News, and other popular television programs.

Featured again in 2005, the WIC Contact Table Program provides manufacturers, distributors and importers with an outstanding opportunity to meet and do business in a highly productive, cost-effective setting. WIC 2005 also includes scheduled association meetings as well as various business and social networking opportunities for attendees. The annual WIC golf and tennis tournaments are part of an exciting schedule of group leisure and social events balanced with the strong business focus of the conference.

WIC 2005 sponsoring associations, AWFS®, WMMA® and WMIA will be joined again by The Architectural Woodwork Institute (AWI) as a participating association. Attendance at WIC is open to members and prospective members of these four associations, as well as association seeking to partner and participate in WIC.

Early Bird registration fees for WIC (prior to March 4, 2005) are $595 for members and $395 for spouses, companions and children 12 and over. After March 4, 2005, registration fees will increase by $100 in every category. Educators can attend for a flat fee of $200, regardless of date of registration.

WIC 2005 adds up to an information-rich event that will give attendees a unique perspective on the challenges and opportunities of our rapidly changing industry. For more information or to register, check your mail after January 1st for a full brochure and registration forms!

Association News

Calling for 2005 Baldwin Award Nominations

It is time to start thinking about the industry mentor you would like to nominate for the 2005 Ralph B. Baldwin Award of Excellence. Wouldn't you like to honor the person who has guided your career by nominating him or her for the Award that recognizes outstanding contributions in the woodworking equipment, cutting tool, and supply industry? More information to come...

Association News

Share Your Photos from Association Gatherings

WMMA's Leadership Development Committee is preparing the slate of Directors for the Board term expiring in 2008. Kenny Moffatt, Chairman of the Leadership Development Committee, is open to your suggestions on whom the committee should consider for these openings. Your suggestions should include members who have been active in the Association and its activities.

These individuals should be known for their character, strength and integrity. They must also embrace change, while maintaining the strengths of the existing organization and identifying the key challenges facing the Association and industry. Nominations should be sent immediately to:

Mr. Moffatt
c/o Unique Machine & Tool Co., 4232 E. Magnolia Street, Phoenix, AZ? 85034
fax: 602-470-1916: email: moffy@uniquemachine.com