The South Korean solid wood products market
Economic Development of South Korea
In the four decades since the end of the Korean conflict, South Korea has evolved from a war-torn, desperately poor agricultural nation into a major economic power. Under strong centralized government leadership, the country’s economic base has been shifted to manufacturing, and it’s gross domestic product (GDP) has grown at or near double digit rates for most of the years from 1961 to the present. While it is not anticipated that past economic growth will be matched over the next decade, expectations are that a healthy average annual growth of 6 or 7 percent will be attained. Over the years, South Korea has become increasingly trade oriented, with imports and exports increasing rapidly. At present, the nation has a small but increasingly worrisome negative trade balance.
In recent years, there has been a quickening trend toward consumerism and toward more rapid increases in wages, as South Koreans begin to enjoy the fruits of their labors. This process of economic maturing has been marked by internally generated inflation, a first for South Korea. In contrast, past inflationary periods were caused by external forces related to escalating oil prices. A result of these recent internal trends has been a loss of market share in labor intensive industries (footwear and textiles), while other sectors (electronics and autos) have grown.
The Republic of Korea (R.O.K.) Government, in response to a well-documented need for additional housing, has announced a major initiative. The goal is to add 500,000 housing units annually during 1989-2000. For the first years of the period housing starts surpassed that total. This assures a growing market for solid wood products.
Government and industry relationships are far different in South Korea than in the United States. Ambitious government-sponsored 5-year programs have generally been attained, frequently through the imposition of measures that U.S. industry might consider extreme, such as targeting certain industries for development and channeling funds in that direction, or encouraging high savings rates by establishing artificially high interest rates.
One result of these governmental actions has been the creation of enormous and very powerful multi-industrial conglomerates called chaebols that are responsible for nearly all of South Korea’s trade. A recent development has been an attempt to curb somewhat the power of these conglomerates by supporting the development of small and midsized businesses. This is, in part, a reflection of the recent trend toward democratization.
South Korea’s Forest Resources and
Wood Products Industries
South Korea has much of the agricultural land of the Korean peninsula, but very little of the natural resources. During the Japanese occupation and the Korean conflict, much of South Korea’s forest land was destroyed. Over the last 30 years or so, a vigorous reforestation program has restored much of the landscape. While about two-thirds of the land is now tree covered, the amount of forested land per capita is relatively low, because most of the timber is young and suitable only for mining supports or wood pulp. In recent years, total harvest has accounted for only about 15 percent of total consumption.
With the growth of South Korea’s concrete and steel industries, wood has become less used as a building material. A partially offsetting trend has been the development of several wood-based industries that have emerged primarily for their export potential. The first of these industries was the plywood industry.
In the 1960s, the South Korean plywood industry expanded rapidly and its products, mostly export items, were a significant part of South Korea’s trade. During the 1980s, increased competition from Indonesia caused a drastic reduction in the plywood industry. Today, most wood production is geared for lumber end uses rather than for plywood. The wood export industries which are flourishing today are furniture and musical instruments, rather than plywood.
South Korea has burgeoning medium density fiberboard (MDF) and particleboard industries. At present, there is insufficient production capacity for particleboard to satisfy domestic needs. Additional capacity is being added. In recent years, U.S. exports of MDF and plywood to South Korea have increased tenfold, although they have increased from a small base. Major end markets are furniture and construction.
South Korean Markets for Wood
Although wood use has declined sharply over the past 30 years in exterior building construction, representing only about 1 percent of the materials currently used (masonry, steel, and concrete are the principal materials consumed), the overall level of South Korean wood consumption is at its highest level since before World War II.
Recent South Korean wood consumption growth has been spurred by increased use in interior construction finishing, temporary supports for public and private sector construction and civil works projects, furniture and musical instruments, packaging, and shipbuilding; as well as raw materials for the fast-growing domestic paper and allied products industry. With the current housing shortage, and recent quality problems with concrete, the government has shown an interest in increasing the amount of structural lumber used in housing construction.
Restrictive government building and fire codes within the large urban areas have effectively limited the widespread use of wood frame construction in favor of high-rise, steel, concrete, and masonry apartment buildings. But there remains strong potential for increased wood use for interior design and for high value or second homes, especially in the suburbs. The government’s exclusionary policy on wood frame construction is now undergoing a fairly comprehensive review that could eventually lead to major changes in building material usage to the advantage of U.S.-style wood frame construction – at least in single-family and small multi-unit apartment buildings. As the country has become more affluent, the size of the average living unit has also increased, although in relation to average U.S. housing, South Korean floor space is considerably smaller – less than one-half the size.
The selling price of these relatively small size units (about 70 percent of all new housing constructed during the 5-year plan will be 650 square feet or less) will continue to be set by the government. For those larger units (exceeding 650 square feet) built by the private sector, selling prices gradually will be liberalized to provide builders with more flexibility in their choice and utilization of construction materials.
The “move-up” market is playing an increasingly important role in Korea’s housing market. As the housing shortage becomes less acute over the next several years, rising incomes should bring with them higher expectations for housing, which should mean more single-family and low-rise development.
Before being accepted as a widespread building material, as it was in pre-war times, wood in South Korea will have to overcome many local stigmas, including the memories of numerous shoddy wooden structures which were built in the aftermath of the Korean conflict. The development, propagation, and dissemination of U.S. fire resistant methodology and western 2×4 prefabrication technology will be necessary to bring about any increased use of wood frame housing in the country over the next few years.
South Korea’s wooden furniture industry increased by fivefold the number of its factories over the 1975-1989 period. With the introduction of modern manufacturing facilities and large-scale housing projects during the 1970s and 1980s, South Korean furniture sales are still directed primarily to the booming domestic market, which absorbed more than 80 percent of the estimated $2 billion in total 1990 shipments, but the export market share has also been rising. The government has targeted furniture exports as an important growth sector and, together with the private sector, views wooden furniture exports as a major foreign currency generator. The government has no restriction on public consumption of wooden furniture, and provides the furniture sector with technical assistance for design, and market information, as well as providing an import tariff rebate system for the reexport of its wood manufactures.
The country’s musical instruments industry is also growing rapidly. It covers a fairly wide spectrum of generally high-quality products (such as pianos and stringed instruments), is the third largest end-use market for wood in South Korea, after construction and furniture. In 1990, musical instrument shipments were valued at about $475 million, of which exports represented slightly more than one-half. Although the industry’s foreign sales have recently been reduced as the result of soaring labor and material costs and sluggish overseas markets, domestic sales have climbed sharply, boosted by buyers from the increasingly affluent local consumer public and by the growing popularity of Western-style music and instruments.
The growing South Korean pulp and paper industry ranks third in production capacity and output in Asia (excluding Russia), after Japan and the People’s Republic of China. Local pulp and paper consumption has had an average annual growth rate in excess of 15 percent over the past 20 years, exceeding the growth of the economy in general and the local wood products industry in particular. Although the industry obtains most of its pulpwood and wastepaper raw materials through local timber harvest and paper recovery programs, the bulk of its papermaking woodpulp supply is imported, mainly from the United States and Canada.
The United States is also South Korea’s principal foreign supplier of wastepaper. Paper manufacturers employ a high percentage of wastepaper in their raw material mix. The wastepaper utilization rate currently is 75 percent, up from 30 percent in 1971. The domestic wastepaper recovery rate of 45 percent in 1991 was low by contrast, but still significantly higher than the 36 percent recovery rate in the United States.
South Korean Wood Products Trade
Domestic production of logs, lumber, and related wood products satisfied less than 15 percent of South Korea’s wood products requirements in 1990. Consequently, South Korea has relied upon imports to meet most of its wood products needs. Imports in 1991 were valued at $1,857 million, of which the United States accounted for $337 million (18 percent). Logs were the leading import commodity, accounting for 56 percent of total imports. Many within the U.S. wood products industry believe U.S. exports to South Korea would be higher were it not for South Korea’s continued restrictions on the import and use of manufactured wood products.
Although there has been a marked improvement in U.S. access to the South Korean wood products market in recent years, U.S. producers and exporters still encounter numerous problems that impede their ability to market their products. Some of the impediments are specific to wood products, such as tariffs and restrictive building codes; others are generic in nature, such as customs and import procedures and restrictions on financing.
Impediments to Trade
The South Korean solid wood products market, presently the fourth largest market for U.S. producers, is increasingly important to U.S. exporters of these items. The relatively strong South Korean economy, together with that nation’s ambitious housing program, augurs well for increased growth in U.S. exports of wood products. While the tariff reductions of recent years have helped to increase exports, there still remain barriers to trade in solid wood products which could be eliminated or lessened to the benefit of U.S. producers and South Korean consumers alike. The aggregate effect of these barriers is to limit exports of value-added solid wood products.
One of the most important of these barriers to trade is the South Korean tariff schedule for wood products. While tariffs are low for raw materials (1.5 percent for logs), they are considerably higher for finished products (15 percent for plywood). A schedule of this type is typical of an emerging nation trying to protect its infant manufacturing industries. Such a schedule, at least for wood products, is not found in any other industrialized nation except Japan. It does provide a considerable cost advantage for South Korean producers of finished and semifinished wood products.
Further, some tariff reductions planned by the South Koreans have been temporarily postponed. It should be be noted that since a relatively small percentage of South Korean tariffs are bound, direct action against perceived inequities cannot be taken.
Since past tariff reductions on solid wood products have been accompanied by greatly increased U.S. exports, there is every reason to expect the same result with further reductions, particularly in view of the price sensitive market for these products.
The National Building Code (NBC) of South Korea is prescriptive rather than performance-based. This means that certain products must be used for specific purposes regardless of the performance of alternative products. For example, only noncombustible materials may be used in roofing for wooden buildings with an area over 1,000 square meters. Several materials are listed as noncombustible, but wood is not among them. Thus, in spite of any testing which might demonstrate that wood performs equally well in any specific application, it cannot be used unless designated as acceptable for that usage.
Another factor which has curtailed wood usage is governmental cost cutting programs. In order to deal with escalating construction costs, the South Korean Government has capped costs on some types of construction. This attempt to control costs has led to less usage of wood as less expensive materials are substituted. In some instances, quality has suffered.
There has been a ban on the importation of larch and pine wood products from the United States and other countries to South Korea since 1986. The reason is infestation by the pine wood nematode. Since studies have shown that kiln drying kills the nematode, this ban should be removed or at least phased out. These types of wood are major export items; consequently, it is important that this ban be reconsidered.
Finally, the lack of sophisticated product standards makes wood product transactions unnecessarily difficult. The South Koreans might want to consider adopting U.S. standards while they are in the process of developing their own.
COPYRIGHT 1993 U.S. Department of Commerce
COPYRIGHT 2004 Gale Group