The New World Market

KOREAN MANUFACTURER SAMSUNG has been in the U.S. white-goods business for 20 years—sort of. The company didn't sell any major appliances of its own, but it was one of the largest manufacturers through “original equipment manufacturer” (OEM) agreements, which means it made appliances for major U.S. brands. Now, Samsung markets its own line of appliances.

Globe Union, also from Korea, has a similar story. An OEM supplier to many prominent U.S. companies—including The Home Depot's Glacier Bay line—the company now markets its own line of faucets, under the Danze brand.

The emergence of foreign brands such as Samsung and Danze has been good news for American consumers, affording them greater product options and competitive prices. American manufacturers, however, may not share the same rosy outlook.

When BUILDER asked a half dozen U.S. building product manufacturers to comment on how upheaval in international trade is affecting their way of doing business, we hit a nerve. At best, their PR firms gave us a polite brush-off. At worst, they wouldn't even return our calls.

That's because domestic makers of vinyl windows, faucets and fixtures, and other labor- and material-intensive building products are facing tremendous (and unfamiliar) pressure from other, growing economies. Why worry? The reasons are many, from uneven tariffs on U.S. imports and exports to a leaner, meaner South American presence to a unified European alliance to Asia's explosive growth.

But, oddly enough, some U.S. manufacturers are losing market share to places like Brazil despite their own success. Ed Elias, director of international marketing for APA - The Engineered Wood Association, based in Tacoma, Wash., says that even with manufacturing plants at full capacity, demand still exceeds supply. That situation has opened U.S. borders to more imports than ever before.

“We've seen significant imports from South America of softwood plywood,” Elias notes. “A lot of these trees were planted by U.S. companies that no longer own the forests. It's the exact same species we use here, but the properties of the wood grown in that climate are different—and [the trees] have to be treated differently from the same trees grown here in order to meet the same standards.” These handling differences cause concern that such imports may not live up to U.S. performance standards.

On the other hand, Elias adds, while U.S. companies have lost some market share to South America, Asian products have yet to make deep inroads into the construction category. That's because China is using most of the building components it manufactures.

Indeed, construction products have become one of China's major manufacturing categories. Log on to Made-in-China.com, and look under “faucets, showers & sinks.” You'll find more than 3,400 product listings. Type in “doors and windows,” and you'll find more than 800.

Despite China's growing products presence, Mike Luzier, president of the NAHB Research Center, in Upper Marlboro, Md., says he thinks American construction product companies—with the possible exception of makers of commodities such as cement—will continue to have an advantage over foreign firms.

“My instincts would be that the more complex systems, like those you find in a high-performance home, will continue to be made here,” Luzier says. “They require more precision in the way they're put together.”

With notable exceptions such as plywood, most U.S. building material manufacturers have so far kept a large part of their manufacturing operations on native soil, in sharp contrast to those in other industries, such as shoe and textile makers.

In fact, says Bob Woods, vice president of sales for Viking, in Greenwood, Miss., only a few of Viking's appliance parts are made overseas. The heavy manufacturing still takes place here. That's generally true for most categories of home building products.

“If you look at the appliance business in the U.S., you really see few foreign brands,” says Woods. “That's because they've reinvested and are staying innovative. If the auto industry would have done the same thing, they might be in a far better position globally.”

Woods adds that recent history has shown that U.S. companies don't need to fear foreign brands; they just need to get tougher.

“In the high-end appliance business, the Europeans came in very strong,” Woods says, “but technologically they weren't much different [from U.S. makers]. They just offered more fit and finish. So [Viking] spent more time, money, and effort on fit and finish.”

That tactic stabilized Viking's market share, Woods notes. And, he adds, our codes and regulations often end up being the U.S. manufacturer's best friend, as they make entry into the market a lot tougher for foreign companies.

But most building product makers haven't faced the same kind of pressure from abroad as their high-end appliance counterparts. At present, China's total exports, for example, account for only 5.5 percent of the world's total trade. But what happens when the Asian market becomes saturated, and those government-subsidized Chinese firms begin to eye the U.S. housing market?

Given the enormity of infrastructure currently under construction in Asia, the specter of Chinese products manufacturers dominating the U.S. market is probably many years off. Instead, a more immediate threat—and one already being felt by builders—is the reverse: the giant sucking sound created by Chinese demand for raw materials.

“It took China about seven years to reach the volume of imported softwood that it took North America 30 years to reach,” APA's Elias notes.

China's demand has driven up the price of everything from wood panels to vinyl windows to gypsum. Already, the country is making deals with Canada and South America for wood fiber, fuel, and other resources.

At an NAHB conference last October, John Mothersole, senior member of consulting firm Global Insight's Industry Practices group, based in Boston, noted that China's rapid growth has caused global demand to exceed capacity, resulting in the current price run-up.

Mothersole noted that part of that price increase relates to global shipping, which can't keep up with the flow of materials. “A year ago, a tanker cost $35,000 a day,” he said. “Today, that cost is $135,000.”

Ken Simonson, chief economist for the Associated General Contractors of America, based in Alexandria, Va., notes that material costs in 2005 “appear to be headed higher.” He cites data from the Institute for Supply Management showing that fuel, PVC resin, and steel have seen especially sharp increases. He adds that the tsunami in Asia last December “could put upward pressure on some construction material costs.”

As for plywood and OSB, Elias says he would rather not comment on whether builders could expect to see prices drop anytime soon. That may indicate that higher prices for many building products are here to stay, although a few optimists think panel prices may fall by 15 percent in a couple of years if the NAFTA-imposed duties on Canadian lumber are rescinded.

Of course, the fact that imported products haven't taken over the U.S. building field doesn't mean they're not part of the production mix. Many appliance firms, HVAC manufacturers, and others already rely on imported parts and accessories to create their products. But as foreign products penetrate the domestic construction industry, do builders need to be wary of quality issues?

According to Viking's Woods, foreign manufacturers still have to meet U.S. standards to import goods here legally, so shoddy workmanship is unlikely. In addition, the Chinese have become much more proactive about product quality. Three years ago, many Chinese companies began to recall substandard products. The government also recognized the importance of quality control and has begun putting in place more regulations governing recalls. While steps like these don't guarantee that imported parts and products will perform flawlessly, they do point toward a general increase in quality among importers.

For builders, fears of “cheap” foreign imports flooding the U.S. market are probably unfounded. The most tangible effects of the new world trade paradigm in coming years will be higher costs for almost everything and occasional shortages as a function of higher demand.

TO LEARN MORE ABOUT THE IMPACT OF GLOBAL TRADE ON PRODUCTS AND MANUFACTURING, VISIT OUR WEB SITE AT WWW.BUILDERONLINE.COM, CLICK ON “THE MAGAZINES” TAB, AND THEN CLICK ON “BUILDER ARTICLE LINKS.”

SOURCE: INTERCONNECTION CONSULTING