The Cutting Edge™ June 2005
This month Business Briefing reports a flurry of business and economic stories that will impact your customer base in the wood products industry...
Ocean Shipping Rates Rise; Port Congestion Eases
The cost of importing from Asian sources is going up. Increases scheduled for May 1 include:
+$285 on 40-foot containers to the U.S. West Coast.
+$430 on 40-foot containers to the U.S. East Coast via the Panama Canal.
+$400 peak season surcharge for containers shipped from June 15 through November 30.
These charges result in an 11% to 12% increase over prior costs not including the peak season surcharge. The average cost of a container is now about $2,800 to the West Coast and $3,900 to the East Coast, again excluding the peak season surcharge.
In the face of higher oil prices, experts attribute these relatively small rate increases to the increase in container ship capacity due to a wave of shipbuilding.
In the meantime, lower ship calls and cargo volumes at the huge port complex at Los Angeles-Long Beach, CA, have resulted in less congestion. Vessels are moving quickly into assigned berths without delay. Diversions of vessels to Seattle, Tacoma, and Oakland contributed to this situation.
Business Must Be Good...
One thing is certain about taxes. Businesses and people pay taxes on income that is earned, not on money they think will be received.
High tax receipts, therefore, indicate that business is good...Chinese Revaluation: In Time...
U.S. Senators, Cabinet officials, and leading business groups are increasing calls for the Chinese to revalue their currency. A recent issue of Forbes contained these interesting words on this subject...
China's official exchange rate is about three Yuan to the dollar, but what if Peking lets the Yuan float freely? That might just happen, says Yin Yi, head of China's Printing & Mint Bureau. What will it take? "Economic development," he replies. "Up to now we didn't consider it, but that is a question we do need to study." Peking may allow only 10% or 20% flexibility, not a freely-floating currency in the Western sense, warns one outside observer. But any flexibility would mean a devalued Yuan and a potential boost to Chinese exports. Chinese officials have been denying rumors that they plan to remove the Yuan's link to the dollar.
This quote was taken from the November 18, 1985 issue of Forbes! Seems the Oriental mind moves to a different drum beat than does ours.
Oil: From Whence It Comes
The average American, indeed most of the world, believes that the U.S. is totally dependent on Middle Eastern oil and, therefore, subject to blackmail of the highest order and ill-taken foreign policy decisions.
The facts are otherwise. First, the largest supplier of crude oil to the U.S. is our neighbor, Canada. Second, Saudi Arabia supplies only 1.5 million barrels of crude daily out of a total consumption of 20 million barrels.
Furthermore, the world is not running out of oil. Petro-pessimists insist that a fixed amount of oil is in the ground, we have found it all, and the world is running down its stock of "found" oil. But a recent issue of The Economist pointed out that innovation and technology have always resulted in more oil.
Estimates of the ultimate recoverable amount of oil have indeed consistently grown over the past few decades. Since 1971 over 1,500 billion barrels have been added to reserves while under 800 million barrels were consumed. On that basis the world is running into oil, not out of it.
This growth in reserves is resulting from technological advances. Not too long ago the average recovery rate from an oil field was 20%. Today that rate is 35%. That leaves nearly two-thirds of the known oil under ground available for tomorrow's innovations in recovery.
What's needed is more capital investment in research, the development of killer applications that will raise more oil from the ground. And more capital is what higher oil prices are providing. Exxon Mobil alone recently earned nearly $8 billion in a single quarter.
Economic Factoid
The median price of existing homes in the U.S. rose by 15.1% during the last twelve months. In the last five years average property values have risen 50%. Home equity now represents 38% of the average household's net worth vs. 27% in 2000. More worrying, a National Association of Realtors survey found that 23% of all homes purchased in 2004 were for investment and another 13% were vacation homes. Sound a little like stock market speculation during the dot.com boom in the late 1990's.
Kitchen Cabinets
Cabinet sales rose 13.6% in April vs. the same month in 2004 according to the KCMA's Trend of Business Survey. For the first four months of 2005 sales were up 14.1%.
Down at the company level...
Home Furniture
Retail sales of home furniture were up 7.8% in 2004. Domestically-made wood furniture shipments also grew by 4.2%, the first gain in that category since 2000. Imports continued their strong showing with 2004 growth of 13.6% from all source countries combined. Chinese-made shipments of wood furniture to the U.S. were up 16.3%.
While 2004 was a good year for U.S. producers, a little reality must be poured over any optimism. During the last ten years shipments by domestic producers grew by 15.7%. By comparison imports increased by nearly 270%, and shipments from China jumped an amazing 1,630%.
Chinese furniture makers continue to expand. On a China trip Business Briefing visited two new factories of over one million square feet. If the Chinese industry operated their plants efficiently, no need would remain for furniture plants anywhere in the rest of the world.
The Chinese industry is dealing with the fallout from the recently-assessed anti-dumping duties on wood bedroom products. According to Samuel Kuo, chairman of Lacquer Craft, the larger producers who received duties of 6.65% or less will remain viable sources for wood bedroom. Those companies assessed at higher rates are shifting to other product categories. Kuo's company has ownership stakes in Universal and Legacy Classic, two U.S. brand names well known to retailers. Vertical integration via the acquisition of U.S. distribution and retail stores is seen as a natural move for large Chinese producers.
Not surprisingly, a new wave of plant closures has begun:
In spite of these closures, global capacity remains high.
On the brighter side, furniture maker University Loft has acquired the former Universal Furniture plant in Morristown, TN, from Masco. The 635,000 ft2 plant will enable consolidation of five facilities. The company produces upholstery for the youth, institutional, and contract markets.
Financial results for U. S. furniture makers include...
Office Furniture
BIFMA reported that March orders increased by 12% year and shipments grew 14%. This performance substantiates the opinion of many industry observers and analysts that contract furniture is experiencing a solid rebound.
Producer level reports support this conclusion...
Wood Flooring
March 2005 shipments of strip flooring declined 11% over the same month in 2004. For the first three months of 2005, shipments are down 6%. As predicted in the April Business Briefing, the flood of flooring imports is adversely impacting domestic producers. Strong consumer demand in the U.S. will not absorb the worldwide capacity of flooring manufacturers.
Anybody who has spent some time with me knows that I think the estate tax is a dumb idea. The American dream is to work hard and be successful--then we take it all way with a tax! As we have been reporting, it does appear as though the Senate may be inclined to do something less than full repeal. I have been asked many times about the various options: increase the basic exemption, lower the estate tax rates, or create a small business asset exemption. Without going into the partisan politics of it, let me offer my personal observations about each option.
When it comes to the basic exemption, my belief is that it has to be higher than what some would consider reasonable in order to give you some estate tax planning peace of mind. Some folks on Capitol Hill are talking about a $5 million exemption. Based on statistics, they argue that takes care of nearly 98 percent of small businesses. However, experience suggests that is cutting it too close for anybody to attain estate tax planning piece of mind. There are advocates who argue that $10 million per individual ($20 million per couple) would allow you to attain estate tax planning peace of mind.
Some are advocating the adoption of a family or small business "carve out" based on an expired "QFOBI" provision. Enacted in 1997, the qualified family-owned business interest (QFOBI) deduction expired at the end of 2003. It protected $1.3 million in assets from the estate tax for farms and closely held businesses. The requirements for businesses to qualify for this exemption included: the family business must comprise at least half of the estate; the business must be passed to qualified heirs defined as family members or people employed by the business for at least 10 years prior to death; the business must be 50 percent owned by one family, 70 percent owned by two families, or 90 percent owned by three families, as long as the decedent's family owns 30 percent of the business; (Family is defined as the spouse, ancestors, lineal descendants of the individual, the individual's spouse, parents, and the spouses of the lineal descendants.) the decedent or a member of his family must have owned and materially participated in the business for a least five of the last eight years preceding death; and each qualified heir, or a member of their family, must materially participate in the business for at least five of eight years after the decedent's death. Publicly traded companies did not qualify.
Although QFOBI may look reasonable on paper, in practice it was a failure. Because it is so complex and vague less than three percent of family-owned businesses were able to take advantage of QFOBI. In 1998, only 173 of 97,856 estate tax returns used QFOBI. In 1999, only 889 of 103,979 estate tax returns used QFOBI. In 2000, only 1,470 of 108,322 estate tax returns used QFOBI.
My observation on this option is that it has been tried before, and it is too difficult from a technical standpoint to craft language that accommodates the diverse business structures found in the small business community. Hardly anybody used the family business exemption because of its complexity and it was allowed to expire. Having spent many years working with various definitions of small and family business in many different contexts, we don't think it is possible to develop a provision that is easy to use for this purpose.
There is also another school of thought that advocates a dramatic reduction in the estate tax rates. A rate reduction does not eliminate the need for estate tax planning and, if one does the arithmetic, it is quickly clear that such a provision benefits the super wealthy. Given the choice between a very high exemption versus a rate reduction, it would appear the high exemption would yield estate tax planning peace of mind for more business owners.
There is one last anomaly in the equation. If the goal is to maintain more independent businesses, that are not necessarily retained by the founding family, full repeal may not be the best option. This is because of the impact of the carry-over basis.
Basis is the amount of investment in property for tax purposes. It is used to estimate gains or losses when property is sold. The basis also determines capital gains taxes, depreciation, amortization, and many other tax computations. Stepped-up basis has been in the tax code for the past 80 years. Traditionally, when property was inherited its basis is stepped-up to current market value for the new owner, which has the effect of adjusting the value of the property for inflation. If the property were later sold, the person inheriting the property would pay capital gains taxes on the amount the property increased in value during their ownership.
The alternative to stepped-up basis is carry-over basis. Under carry-over basis, when property is inherited, the new owner also inherits the decedent's basis. In this situation, he or she would pay capital gains taxes on the amount the property increased in value during the combined time that he or she and the previous owner possessed the property.
If the estate tax is repealed, the carry-over basis regime would be in place. If just the exemption is increased permanently, stepped-up basis would remain the rule. If the business is not retained by the family, stepped-up basis might reduce the tax liability upon sale enough so it could remain an independent business.
Whatever the outcome, it has to meet two litmus tests for me. It has to give you estate tax planning peace of mind--permanently.
The WMMA now has access to the official import and export statistics of 47 of our major trading partners. The 47 countries I estimate account for over 90% of trade in wood products to include, furniture, rough wood, planned sawn wood, mouldings as well as doors and windows. This article will highlight some of the trends in wood products trade. For a complete set of tables, go to http://www.wmma.org/members/secureDocument.cfm?docID=296. You will need your user name and password to access the linked tables. If you don't have one or forgot it, contact WMMA Headquarters at 215-564-3484 or email wmma@fernley.com).
If you want statistics for a specific country and/or region and a specific product or range of products, please contact Harold Zassenhaus, 215 564 3484; email: hzassenhaus@fernley.com. The service is free or at minimal cost for WMMA members.
The following are a few explanations to assist you in interpreting the trends:
Rough Wood
Imports from the 47 reporting countries were $8.4 billion in 2004, a 14.4% increase over 2003. Russia supplied 34% of the total ($2.9 billion) a 32% increase over 2003, followed by the US, Canada, New Zealand and Germany, respectively. Some of the fastest growing suppliers of rough wood (shipments greater than $25 million) include:
Sawn Wood
Total sawn wood imports from the reporting countries equaled $26.7 billion in 2004, a 20% increase over 2003. Canada, Sweden, US, Finland and Germany were the top suppliers accounting for about 62% of total shipments. Canada itself shipped $9 billion or 36% of the total. Some of the fastest growing supplier nations were:
Continuously Shaped Wood, Moulded, Tongued, Grooved, etc.
Total imports by the 47 reporting countries reached $4.3 billion in 2004, a 28% increase over 2003. China was the largest supplier nation shipping over $600 million to the group, a 71% increase over 2003. The other countries that rounded out the top 5 were Brazil, Indonesia, Chile and Canada. The fastest growing suppliers were:
Builders' Joinery
Total imports were $8 billion in 2004, a 19% increase over 2003. Canada provided 21% of the total with China, Germany, Austria and Denmark rounding out the top 5 supplier nations. The fastest growing markets included:
Wood Furniture
Total wood furniture imports reached $37.9 billion, a 16% increase over 2003. China led other supplier countries by shipping $9 billion, a 28% increase over 2003 and almost double the 2nd largest supplier, Italy. Other suppler nations rounding out the top 5 were Canada, Poland and Germany. The largest and fastest growing supplier nations were:
The following is a summary of major trends of US exports and imports for the first quarter of 2005. Statistics are reported for all woodworking equipment and its three component parts: machines, cutting tools and, accessories and parts.
(WMMA members: to view detailed tables on US imports and exports of machinery, cutting tools and parts and accessories, by country click here http://www.wmma.org/members/secureDocument.cfm?docID=298). You will need your user name and password. If you don't have one or forgot it, contact WMMA Headquarters at 215-564-3484 or email wmma@fernley.com). Harold Zassenhaus is available to provide US export and import data on specific product categories. For more information, contact him at (215) 564 3484, x2226; fax (215) 963 9785 or email:hzassenhaus@fernley.com)
Total Woodworking Equipment Market
Imports of woodworking equipment (machinery, cutting tools and parts and accessories) increased 17% over the 1st quarter of 2004 to $409 million. Imports from Taiwan and China accounted for slightly over 43% of the total with imports from China growing by 23% (mostly due to increased cutting tool and accessory shipments) and those from Taiwan decreasing by 9%. As mentioned in previous export and import trade reports, by the end of the year China will likely be the largest supplier nation of woodworking equipment.
The major surprise in the first quarter was that imports from our leading European suppliers, Germany and Italy, actually increased and at healthy rates in spite of or because of the US dollar/euro exchange rate. Another surprise was the leap in imports from the Czech Republic, largely due to a $19 million surge in veneer knives. However, this could be an anomaly or a miscoding by US Customs.
Exports slowed to a 5% increase compared to 7% in all of 2004. Canada continues to purchase over 40% of our exports, although this percentage is slowly decreasing. Mexico, Germany, Belgium and Australia rounded out the top five markets in the first quarter.
Machinery Trade
Imports of machinery totaled $226 million, a 9% increase over the same period in 2004. Surprisingly, imports from both Taiwan and China slowed dramatically while imports from our other major suppliers like Germany, Italy, Canada, Austria, Japan, Finland, and Spain increased.
Exports increased by 7% less than the rate in 2004 as a whole. The 1st quarter showed some major shipment swings compared to the same period last year. While shipments to our 1st and 2nd largest markets, Canada and Mexico, showed healthy increases, exports to Australia (our 3rd) suffered. Again, Germany was a surprise market with a 71% increase.
Cutting Tools
Cutting tools imports continued to increase by double digits, rising 30% over 2004 to $125 million. Shipments from China increased 39% to $20 million. As mentioned above shipments of veneer knives from the Czech Republic topped $19 million for the quarter. Finally, also for unknown reasons Germany dramatically increased shipments by 32% to $16 million.
Exports inched up 5% to $24 million. Canada still accounts for over 50% of shipments, however its influence is falling as exports to Germany and Belgium racked up gains.
Parts & Accessories
Exports remained steady at $11 million with shipments to Canada accounting for 73% of the total or $8 million.
Imports continued the 2004 trend of recording double digit growth as they rose 27% to $57 million. Imports from China continued to outpace all other major suppliers increasing 176% to $12 million. Imports from Germany, our 3rd largest supplier rose 22% to $9 while imports from Israel, always a major supplier, rose dramatically by 34% to $7 million.
Tim Horn was an enthusiastic WMMA Scholarship recipient from 2002 to 2004, as a student at North Carolina State University (NC State). He continues to be involved with WMMA member companies through their affiliation with NC State, where Tim recently received his Bachelors Degree in Wood Products, and is beginning the Masters program for manufacturing engineering. We are pleased to be able to keep tabs on Tim and update our members on this eager young man progressing through his career.
Upon completion of his scholarship term, WMMA asked Tim what he thought of the entire experience, and what he envisions for the future:
The most productive part of my WMMA scholarship experience has been simply to gain so much experience in a short period of time. I was able to learn a great deal from real experts in the field.
The project that I worked on while at Newman's was the highlight of the internship experience. Newman-Whitney Machine as you know produces a wide variety of quality woodworking machines including but not limited to planer-matchers, ripsaws and double-sided planers. The project I worked on involved the improvement of the surfaces generated by planing. To do this, it was necessary for me to learn about a subject for which I had no prior experience (and to re-learn what I thought I knew). I can't say too much about the project at this point because it is still under development, but hopefully it will help this part of the industry in some small way.
The WMMA Scholarship program has been a wonderful experience for me. I have learned more in one summer than I have in most of my college career. It is hard to suggest improvement when I have had such a good experience. I think that what made my experience particularly good was the help and support of my mentor, Jim Laster. I can't speak for the other students, but if every student worked with someone like Jim, the scholarship program would certainly be approaching a level of excellence that would be difficult to match.
I would like to continue to pursue work in the research, design and/or manufacture of woodworking machines. I plan to graduate within the next year.
Yes, however, location is not important.
Spring 2005 Update with Tim:
You have attained a Bachelor's degree in Wood Products, and are entering the Masters program for manufacturing engineering, both at NC State.
What do you love about this field, and how did you decide that you want to make a career out of it?
For the most part I enjoy working with the people that I have had the opportunity to meet in this field. So far it has been an exciting and rewarding experience. Pursuing a higher degree in manufacturing engineering will, I hope, be more valuable for the woodworking machinery manufacturing industry.
As younger college students try to narrow their focus, what interests and personal goals could they pay attention to that may lead them into the wood technology field, based on your experience?
As far as the interests of younger students that may be thinking about coming into the woodworking machinery manufacturing industry are concerned, I believe that this industry offers a great deal to potential engineers who would like a different atmosphere than what is offered by other engineering fields. Many aspects of the woodworking machinery manufacturing industry are both high tech and fast paced but also allow engineers to interact throughout the manufacturing process, making this ideal for engineers who do not want to be tied to a desk.
Since 2003, WMMA has offered members Quarterly Economic Outlook Reports through a partnership with a leading economic forecasting firm - the Institute for Trend Research (ITR). These services provide members with valuable tools that assist them with making important business planning decisions.
To view the June 2005 Report, members can click here
The Quarterly Economic Outlook Report is distributed quarterly to members through this forum, The Cutting Edge, and via email. The Report enables you to stay at least one-half business cycle ahead in the business planning process allowing you to appropriately plan for the ups and downs in the marketplace.
Based on feedback from the membership, the Reports have recently been modified in an effort to make them even more user-friendly and easier to understand.
Alan Beaulieu, the leading economist from ITR, presented for the second year in a row at the WMMA Business Session at the WIC. Members continue to be impressed with his skill in interpreting data, and realize more and more how he and his colleagues can offer customized services to them.
To view all previous reports, members can visit http://www.wmma.org/members/efreports.cfm.
As a part of WMMA's partnership with ITR, members are eligible to receive a Company Specific Analysis for a special negotiated rate for WMMA members only - $400. For this price, a professional economist will provide you with forecasting information that matches up with your unique business. WMMA members testify that they have been able to make important planning decisions resulting in increased sales or saved overhead costs due to the information gained by their Company Specific Analysis. If you would like to speak with a member who is already using this service, contact Bill Norton at 215-564-3484, ext 2235.
Members can also contact ITR at (603) 226-9331 and identify yourself as a WMMA member. Their representatives will be happy to walk you through the simple process.
Act now and arm yourself with the tools that will strengthen your company and prepare it for the future.
WMMA members: Have your customers told you of their dissatisfaction with like-products they purchased from foreign companies? You are not alone! Share your proud "Buy U.S.-Made" story with WMMA, and we will show you the competitive advantage American products have over foreign competitors. Simply submit the account of your customer's praise to Jean Coney at jconey@fernley.com.
When MultiCam first began to build CNC routers almost 20 years ago, our main focus was to help small shops become competitive through automation. To accomplish this, we had to design a system that was reliable, easy to use, and cost effective. As MultiCam's success grew, automation soon became one of the main ingredients allowing us to compete in the world market...
Today MultiCam builds machines for every budget from entry level shops to some of the world's largest manufacturers. Our machines help automate a diverse variety of industries including woodworking, sign making, aerospace, metal and plastic fabrication to dozens of others. Our expert staff offers state-of-the-art training and support that is unrivalled in the CNC industry. MultiCam CNC machines are built in the United States and shipped worldwide through our global network of over 50 distributors and technology centers.
Thanks to automation, today's MultiCam is faster, more accurate, and easier to use than ever before. Automation has also proven that a US manufacturer can build products that are very price competitive in today's world economy. Visit us online to learn more about how adding a MultiCam CNC machine to your company's arsenal can make a dramatic difference in your profits and productivity.
WMMA reminds members two enhancements to the WMMA website introduced in Spring 2005, and available to Members only.
The Bulletin Board and Career Center are designed to:
These two member benefits open up the communication among the entire WMMA community, providing you even more value through your membership.
How to use these features to your company's advantage:
Do you have a current job posting in your company? Go to http://www.wmma.org, and click on "Career Center" along the left hand navigation bar. The next steps are explained on the web pages to follow.
Do you want to solicit the feedback of all members about an item of interest to your company? Go to http://www.wmma.org, click "Members Only" and select the last option, "Member Bulletin Board." You will be asked to accept a disclaimer about the content permitted on the site. PLEASE READ THIS DISCLAIMER every time you go to post. You can then simply post your message as indicated.
These new member benefits were built to increase the knowledge sharing among all members.
Please contact Headquarters with any questions of comments.