The Rail Log Network
Paneltech International LLC
Volume 89 October, 2005
After All the NewAfter the “Crunch” Equipment Bets Have Been Placed
Our pulp and paper industry hasn’t from substitutes. This continues until been reluctant to invest capital in the all of the economic profits are driven past. The industry has become, in out of the industry- either through this fact, one of our nation’s most capitalexpanded supply or through a shift intensive industries. Unfortunately, as back in the industry’s demand curve. the green insert indicates, this massive investment A firm’s position ‘’One of the fundamental mistakes paper comhas generally on its industry failed to produce panies have made is turning over all their technology development to suppliers. While this has supply curve is acceptable ecodetermined by lowered their costs in the short term, it also nomic returns means that the same technology is available to its relative ecofor investors. anyone...Producing more (pulp and paper) tons nomic costs. PNW wood prod- at lower costs clearly has been a huge bust. As These include ucts producers Roger Stone once noted, being the low cost pro- not only its variare also embark- ducer just makes you the healthiest leper in the able costs but leper colony.’ ing now on very also the opporambitious capitunity costs of Alan Rooks tal spending interest on the TAPPI Solutions! (Editorial) sprees. Could assets the firm September, 2005 they one day find employs. As themselves simifixed costs increase and as the correlarly disillusioned with all of these new sponding requirement for larger input equipment ‘bets’? and output buffers grows, asset reIn the taxonomy of industries, our forest products industry fits researcher Keith Pavitt’s (Research Policy, 13, 1984) ’supplier-driven’ categorization. Our producers are all small relative to the size of their markets, they ’take’ factor prices and they compete based upon efficiency-oriented technologies that are primarily sourced from independent suppliers. Competition, in an industry such as ours, comes very close to that labeled ’perfect competition’ in elementary microeconomics. When the demand curves shift outward– as ours recently have– supranormal profits promote industry capacity expansion and new competition quirements increase dramatically driving up these economic costs. The opportunity interest costs on these assets are not on the costs of acquisition but on the assets’ market values. Therefore, as new equipment becomes more specialized and as its market value (relative to its acquisition cost) declines more and more rapidly, this cost of economic depreciation must also be considered. This obviously creates an opportunity for the industry’s ‘early followers’. Efficiency is a necessary but insufficient condition for economic success.
See Page No. 2 PANELTECH RAIL LOG NETWORK
BUSINESS GUIDELINES
• Learn all we can about what our
customers need so we can do everything in our power to provide it operation so we can pass cost savings on to our customers our customers entrust us with
• Continuously reduce our costs of
• Safeguard the assets (logs) that • While protecting genuinely
proprietary information, serve as our customers’ “eyes and ears” where we operate
• Reward loyalty with loyalty • Grow the rail log network to
improve network efficiencies, to enhance customer market power
“...the capitalist innovation engine...define(s) one viable way of assuring multiple sources of initiative, with real competition among those who place their bets on different ideas. And it does so in a context where there is widespread access to the basic...knowledge one needs to intelligently consider the alternatives, strong incentives to heed market signals, and to cut losses when it is clear one is a loser.” Richard R. Nelson 1996
The Sources of Economic Growth
Unless a firm has defensible ‘factor’ cost advantages more volatile in the future. The globalization of sup(e.g. a wood drainage that a mill can ‘dominate’), a ply and demand, shorter and shorter product life firm must also be effective. ’Effectiveness refers to cycles– these are just two of the contributing facan actor’s ability to invent and produce solutions that tors. This has important implications for the firm, provide more value to marnot just in its new equipkets (customers) than exment investment consid“...we believe that the information revolution has made isting offers.’ (Moller & Tor- ‘that which is known’ more evenly distributed around the erations but also in its deronen, Industrial Marketing world and closer to real time. There will be precious little cision to further centralize and diminishing differentiation available in access to Management, February, production and distribu‘that which is known’. This, of course, means that the 2003) A firm cannot be tion to capture greater effective if it simply ‘takes’ ‘unknown’ or at least the ‘uncertain’ will become increas- economies of scale. Such ingly important as a source of competitive advantage.” output or input prices. To decisions put more ’chips’ be effective, it must proon fewer ’squares’. ConKelly and Weber duce offerings that are nections to the broader ‘Mastering Risk’ more valuable in the eyes network of suppliers and The Financial Times September 9, 2005 of the customer and it customers can also signifimust actively manage its cantly impact the firm’s ability to sense changes in and respond flexibly to portfolio of raw material opportunities. increasingly uncertain markets. Even if a firm is very efficient and effective, it still may not succeed. Firms aren’t really– as elementary economics texts imply- autonomous economic entities. They are embedded in networks of suppliers, customers and competitors. To what extent do firms need to rely upon networks for economic success? This depends upon the firm’s transactions costs. Jarillo (Strategic Management Journal, 9, 1988) notes that there are two types of transactions costs: 1) operational transactions costs– the costs of establishing and running customer-supplier relationships and 2) strategic transactions costs– these include two types of costs: a) the costs of the risks that the firm’s suppliers will lose their competitiveness and b) the costs of the risks that the firm’s suppliers will behave opportunistically if the firm becomes too reliant upon them. The extent of network embeddedness that is best for the firm is usually a ’make versus buy’ decision that considers these costs. We say ’usually’ because the provision of some supply– rail transportation is an example– is clearly beyond the firm’s ability to economically provide internally. Jarillo doesn’t include an important third category of strategic transactions costs– the costs of inflexibility. Needless to say, our markets are volatile and there are good reasons to believe that they will be even
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Walter and Gemunden (International Marketing Management, 2001) suggest that suppliers provide value to their customers in two ways– directly and indirectly. They provide value directly by providing lower cost inputs (the ’profit function’), by providing more volume (the ’volume’ function) and by assuring reliability of supply ( the ‘safeguard’ function). They indirectly provide value by assisting with process and product innovation (the ’innovation’ function), by helping the firm expand its input portfolio (the ’market’ function), by improving the firm’s market knowledge base (the ’scout’ function) and by improving the firm’s access to other valuable network connections (the ’access’ function). Note that these indirect value enhancement functions are also Paneltech’s focus as a supplier and (hopefully) valuable network member. Within the next couple of years we’ll know whose equipment bets have paid off. The ‘winners’ won’t likely be those who just confine their bets to new equipment. Winners will also ’invest’ in efforts to improve their effectiveness within their companies and within the networks they are embedded in. They will deliberately work to improve their flexibility and market responsiveness. They will work to make market volatility their friend, not their adversary.
Volume 89
A Changing View of the World
We tend to assume that transportation costs vary throughout Asia for just a fraction of this cost. A linearly with distance. The further a destination is plywood mill in Southern China could (if they didn’t away, the more costly we anticipate that it will be to have such a good supply of higher quality Russian reach it. The rise of China as a world economic and more affordable, fast-growth plantation logs) force– more and more tightly integrated with the not only pay a lower transportation cost for these United States, declining trade barriers PNW logs than many U.S. producers, they could also (notwithstanding– see insert- Canada!) , the more afford to ship their finished products to some of our universal biggest global and Modern Economic Geography accepmost tance of impormarkettant U.S. based wood ecoproducts nomic markets princiat lower ples, the costs. increasing use Where of larger will this and larall end? ger conWith all tainer of the ships, new, higher ’postand Panahigher max’ fuel concosts tainer and the ships incoming creased off the willing‘ways’ ness of over the our railnext few roads to years exercising their pricing power have all changed what (bigger ships have serious economies of scale) and our country’s increasing reliance on cheap Chinese we have labeled on this exhibit to be modern ecogoods, a challenging petroleum outlook and rail innomic geography. This is (crudely) what the world– frastructure constraints, it is hard to imagine a sudadjusted for transportation costs- currently looks like. den change in this converging economic geography. Ironically, we may be evolving toward an economic Three or four years ago we could rail logs completely geography that closely resembles the physical geogacross the United States for $3,000 to $4,000. We raphy geologists tell us existed before all of these now have comparable rail rates to move logs across continents started drifting apart. Envision a world just a few states. An entrepreneur who stuffs logs in where surface transportation costs are decisive! a container in the PNW can reach all of the key ports
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2999 John Stevens Way Hoquiam, Washington 98550 Phone: 360-538-1480 Fax: 360-538-1510
Recent Paneltech Developments
“Success not only narrows the focus of management, it also affects its attitudes. The admiration and power that success brings can give leaders the impression that the strategies they developed and promoted are unassailable. The more successful the strategy, the more deeply ingrained it becomes in mutually reinforcing structures and processes, the more unreflectively it is implemented, and the more limited is management’s capacity to evaluate its choices.” Joel Baum ‘The Value of a Failing Grade’ The Financial Times
According to ForestWeb, 4.3 million acres of timberland have been impacted by Katrina and, as this is being written, Hurricane Rita is just coming ashore. Not surprisingly, we have been asked by several parties whether we would be willing to route log cars to the region. Roy will be in the area the first week in October. These hurricanes will have a significant impact on our industry, especially the structural panels segment. Paul Quinn (Salman Partners) suggest that Katrina alone could increase OSB demand by 2.5 BSF!
LOGS
This month we plan to initiate 7 day per week, 24 hour per day operations for webs and, perhaps soon, for resins. As those of you who have run continuous operations are well aware, this is a big step for Paneltech and we are working hard to get ourselves as prepared as we can be. We are actually gearing back our composite panel business development between now and yearend to accommodate this major transition in operations. On Friday, September 16th we had our first FSC audit. We should soon have offerings in both overlays and composites that are FSC certified. We have a booth at the GreenBuild Show in Atlanta in November and we plan to show off some of our new FSC products there.
WEBS
The 5th Annual LOGS Seminar
Those of you who have not yet signed up for our 5th annual LOGS seminar in Portland on November 3rd need to call Lynne (360-538-1480) and sign up soon. We have two successive days of seminars scheduled for this year, the first day on November 3rd with an agenda focused on log supply logistics and the second day, November 4th, with an agenda focused on overlaid panels. Our LOGS seminar agenda will have three phases. The first phase will involve brief presentations on our industry outlook. This will be followed by a more lengthy panel presentation on transportation cost and service trends. We have invited a distinguished group of experts with rail, truck and barging backgrounds for this panel. The second half of the day will be devoted to another log buying and selling simulation exercise. Once we have pretty well identified all of the attendees, we will divide them up into timber seller and mill teams. We will try, once again, to have a little fun with the simulation exercise. Tough old log buyers might very well end up on timber seller teams just as tough old timber sellers may very well end up on mill teams. Jon Tweedale of the Washington DNR has agreed to help Roy run this exercise and there will be both recognition and awards for the winning teams. Hopefully learning from our previous exercise in Spokane a couple of years ago where several shrewd actors quickly figured out how to exploit the ‘holes’ in the exercise, this is a brand new simulation. As always, we will provide notebooks to all attendees and we will hand out some modest gifts. We will also schedule plenty of time to give the seminar attendees ample time to network with each other. Already signed up are timber sellers and buyers from as far south as California and as far east as Idaho. Tom Owen, Sr VP of RailAmerica, also plans to attend from Florida.
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