Tag Archive for: Trade and Duties

A View to the Future of U.S. Pencil Manufacturing

My last post addressed recent news regarding allegations of illegally
imported Chinese pencils.  In order to
avoid anti-dumping duties these pencils were apparently transshipped via third party countries such as Taiwan, Vietnam and
Indonesia and mislabeled as to country of origin.  Today I am addressing the
overall U.S. market for pencils and future of U.S. production of pencils relative
to how I see this topic coupled with other developing industry trends.

In my view, regardless of the final outcome of this particular
legal case I believe this is a positive development for U.S. pencil
manufacturers and other established pencil industry participants who are
committed to making quality products and playing by the rules when it comes to
all manner of international trade, environmental, labor and product safety
regulations.  For the past 20 years the
trends of globalization, retail channel consolidation and other competitive market
forces have contributed to a dramatic shift in our industry structure just as
in many other industries.  As a free
market thinker I do not believe these are inherently bad trends and they have
led to a number of benefits for society as a whole though those benefits may
not always be evenly dispersed and has not always resulted in comparable
product quality. 

When it comes to pencils, both here in the U.S. and worldwide,
we are seeing more pencils sold and consumed at lower average prices than 20
years ago.  Despite the common misconception that pencils
are a dying business, pencil consumption generally grows globally at or around
the rate of population growth.  Also per
capita pencil consumption tends to increase with income growth as well.  Providing
we continue our positive immigration trends we should see stable and slowly
growing demand for wood-cased pencils over the long term.  Obviously income growth and dispersion is a current
concern in light of recent economic developments, but ultimately I still remain
optimistic about U.S. potential from the macroeconomic stand point.

The rise of computers, tablets, or smart phones over this
period have yet to prove to me that these technologies are going to displace
writing instruments and pencils as a whole. 
Technology certainly can impact how and where we use pencils at the
margins. However, there is a strong emotional and tactile connection people have with
their preferred writing tools and the physical act of depositing graphite, ink, paint or
color pigments onto paper.  What could
impact per capita pencil consumption even more than technology is allowing
another generation of kids to be raised without access to and experiencing the
use of good quality pencils. This could drive consumption patterns to alternate
writing instruments in the long term.  Despite the benefit of ever cheaper wood-cased pencils on household budgets over the past 20 years , one negative byproduct has been exposing children, teachers
and other consumers to a general reduction in the quality of the average pencil sold here
in the U.S.  At Pencils.com one of our
most common consumer questions is: “Where can I find a decent pencil at a
reasonable price in which the lead won’t break, the eraser works without
smearing and that actually writes well?” 
Teachers often report that the simple act of more frequent breakage and sharpening has become a disruption in the classroom.

One complicating factor is the poor state of funding for
education in the U.S., especially when it comes to the provision of basic
school supplies. As a result the burden of supplying pencils and other suppliesis increasingly pushed onto teachers and families who have their own budgetconcerns.  The drive for ever lower
prices has helped, but has also compromised quality and selection.  As a result the assortment of pencils on retailers’
shelves has declined and the mix increased towards imported private label or
low price non-manufacturer brands.  Lower
space allocation is offered to traditional quality manufacturer brands.

So what do a bunch of economic, social and demographic
trends have to do with an illegal transshipment case and whether this helps the
U.S. industry or not.  The question lies
in part whether the retailers as a group, begin to see that price of pencils
cannot be their sole determining factor in the product mix as there are other
costs such as the associated anti-dumping duties and penalties.  Also will consumers take a greater interest in the quality and origins of their
pencil purchases? 
Sure they are still going to want the best price possible.  However, I tend to think that a supplier who
is willing to illegally transship pencils is also a supplier who is more likely
to cut corners in product safety and quality.. These are all problems the retailers and
consumers don’t want to deal with over the long term.  If retailers increasingly find they will be
held responsible for penalties, fines and consumer dissatisfaction as a result
of the potential negative aspects of their product supply chain then they are
going to increase their diligence in vetting and selecting their
suppliers.  Certainly they cannot be
expert in every product range they sell and as they are importing many products
globally, the headache of assuring compliance on products with anti-dumping
duties and other safety or regulatory concerns may result in some level of
return for advice and supply to known domestic vendors for improved
reliability.  This does not necessarily
mean an imported pencil will be replaced by a domestically produced one, but
the opportunity for engagement on that supply decision will certainly improve
for the U.S. producers.

Further there are currently added economic trends that point
towards some return to U.S. manufacturing in general.  My belief is this ultimately will have some positive
benefits for the U.S. pencil industry also. 
Labor costs in China are now increasing dramatically and though still quite
low relative to the U.S. are making it difficult for many general
manufacturing companies to find and retain qualified employees.  Chinese labor regulations as well as other
environmental and bureaucratic regulations are beginning to impact the general
cost of doing business in China.  This
first impacts those producers in China who play by the rules, but in time the effects should
spread further throughout the Chinese economy. Meanwhile, U.S. domestic energy costs
are declining with the increase in domestic gas exploration and development.  Long lead times on overseas supply chains
complicate planning and inventory investment while domestic producers can often
be more flexible with quicker response times. 

Another important concern within the pencil industry is that
Chinese basswood and other Chinese woods have come under pressure for use in
other domestic purposes.  More wood is
coming from Russia which has less stringent regulatory oversight causing more
concern with legal wood supply issues.  A
resurgence in total Chinese GDP growth from their current slowdown will have
further inflationary impact on global wood supply and thus eventually pencil
prices as well.  In my personal
assessment we’ve seen a low point reached in global wholesale pencil prices
that was reached about two or three years ago. 
There will always be some other part of the world, the next low cost
country, to move on to, but adequate quality wood supply and transportation
costs also have an important impact on pencil economics beyond labor costs and
regulatory environments.  Overtime, the
developing world catches up in relative costs so the U.S. should be able to
adapt and innovate to remain competitive. 
That is as long as we do not let our current political stagnation and
increasingly burdensome regulatory environment overwhelm us over the long term. As the U.S.
remains one of the most important global growers of trees this ultimately will
have some positive impact on a host of products manufactured from solid wood.  As a result I do predict that we will
eventually see at least some small improvement in U.S. production of pencils and other wooden products over
time.

In our own business at California Cedar Products Company we
are certainly not prepared to return our slat manufacturing operations to the
U.S.  However, we are increasing our
commitment to U.S. based wood supply with the recent introduction of our
Pacific Albus product range.  Eventually
we expect this will be an increasingly relevant component of our business displacing Chinese and Russian Basswood and supplementing
our premium California Incense-cedar product range. 

Additionally, we have recently made several small movements towards
U.S. production regarding our Palomino Brands pencil ranges.  Recently we relocated the final eraser
tipping process for our Palomino Blackwing and Blackwing 602 pencils from Japan
to our Stockton, CA using a newly developed tipping process.  This should improve tipping quality and responsiveness as demand for Blackwing pencils grows.  Thought the pencils themselves will continue to be produced in Japan.  Also, we are transitioning our Prospector and
Golden Bear products from Thailand production to the U.S. where we are working
with one of our slat customers Musgrave Pencil Company to produce these items.
The new “made in the USA” versions of both pencils will phase out our prior California Republic
versions and be available exclusively on Pencils.com in the coming weeks.  These pencil items represent only a very minute segment of the U.S. pencil market, but do expand our commitment to
offering a “Made in the U.S.A.” product selection in our Pencils.com store.

/3 Comments/by

Guitars, Pencils and Lacey Act Compliance

This photo is of my father back in the 1970s during a visit to Kitaboshi Pencil Company in Tokyo, Japan, where I actually visited today. He is being presented a guitar produced using California Incense-cedar by a member of the Sugitani family who are customers using our pencil slats for their products. This gentleman is now retired, but I happened to see him today, he says he still plays guitar every day and had that guitar specially commissioned for my father as a gift. Look for my upcoming post about the history of Kitaboshi Pencil and their products that we will begin selling on Pencils.com next week. California Incense-cedar used in our pencil slats, our customers’ pencils using our slats (and in this one of a kind guitar) is fully compliant with the US Lacey Act which is the main subject of this post.

The recent news of the US Fish & Wildlife Service raid and seizure of Rosewood and Ebony wood raw materials as well as guitars from Gibson Guitars and subsequent claims by Gibson’s CEO that the US government is over reaching in its actions has an interesting relevance to challenges also faced by our company and our customers in the U.S. pencil industry. Here are links to three articles about the Gibson issue over the past month:

At issue is the application of the 2008 Amendment to the Lacey Act, a law originally established in 1900 governing the illegal trafficking of hunted wildlife and game across state lines and since inception has continually expanded in scope and breadth to cover fish and plants. The law is administered by the Animal and Plant Health Inspection Service (APHIS) within the U.S. Department of Agriculture and jointly enforced with U.S. Department of Fish & Game which is the lead agency in the case against Gibson Guitars. Under the 2008 amendment the law was extended to plants, wood and products made from wood and plant materials. The amendment requires importers of applicable products to certify that the wood materials used in their products were not obtained from illegally harvested materials or include any protected or threatened tree species. The amendment implemented a number of documentation and declaration requirements that must now accompany each import shipment with respect to specific species used, country of origin of the trees from which the wood product was produced and statements relative to the legal harvesting of the trees used in the. Knowingly importing wood or wooden products covered by the law is a violation of the law subject to both civil and criminal penalties. Heralded as an improvement in environmental policy the amendment was also supported by the Bush Administration as a protectionist measure for the US timber and wood products industry against lower cost imported woods. While I have no specific knowledge of and cannot speak to the specific issues involved with Gibson’s case I can certainly state that illogical and inconsistent application of the rules process by government agencies responsible for enforcing the Lacey Act is a ripe example of the “law of unintended consequences” as with much government regulation. CalCedar has been deeply involved in addressing the 2008 Lacey Act amendment relative to compliance of our own pencil wood supply as well as understanding the impacts of the law on our company, our customers and the pencil industry supply chain as a whole. We have long taken an industry leadership position in assuring the wood resources we utilize are harvested from well managed forests according to applicable rules and regulations in any countries we source our wood from. We have and continue to support industry efforts to increase the overall sustainability and have been a pioneer in implementing FSC and SFI third party certification to an increasing proportion of our wood supply. Thus in concept implementation of the Lacey Act amendments in 2008 was a step in a positive direction with a goal of eliminating illegally sourced raw material or utilization of any threatened plant species. Though the standards applied as to what’s illegal or legal or threatened or not can vary from country to country as the Lacey Act simply requires compliance to the applicable laws in the country of harvest. Thus the level of added environmental protection here is inconsistent from country to country. The Lacey Act requirements added a whole new level of documentation and due diligence required for us to supply slats to our US based pencil manufacturing customers. This included updated investigations and documentation of our wood supply chain and added costs of consulting in the investigation with an accredited third party certification agency as to appropriate precautions including the added burden to segregate and/or eliminate any wood of potential concern and to maintain clear chain of custody of all our through the supply chain. All of this was already occurring with respect to our FSC and SFI material in both Cedar and Basswood, but we felt it important to apply these processes to the balance of our Basswood supply chain. Where we could not clearly document exact origin we sorted out the material to create yet another classification of inventory. Thus with respect to our Basswood pencil slats we now must keep separate inventory and track three different groups of products; FSC certified, Lacey Compliant and standard inventory which we do not believe is a compliance concern but will not take the risk of selling into the US market without clear chain of custody back to the forest. However, this burden of declaration documentation was not extended to the importers of pencils themselves. Thus wood sold to our customers who produce pencils in the US is subject to the documentation requirements while finished imported pencils are not, placing an added burden on U.S. pencil producers. Given that the majority of pencils consumed in the U.S. today and before the amendment took effect were imported this inconsistent application of the statute to intermediate vs. finished products hardly serves to protect US manufacturing jobs or to ensure that the majority of pencils sold in the US are indeed Lacey Act compliant. This does not mean many or even most pencils are not compliant, just that the chances are higher that they could be. As far as musical instruments are concerned importation of pianos and stringed musical instruments, including guitars, seem to have become subject to the documentation and declaration requirements in April 2010, so in this case it appears the compliance playing field may be a bit more level between US and Foreign producers in that industry. Next, the rules are not very specific on the level of sufficient due diligence to protect an importer from prosecution and civil and criminal penalties under the act. The “due care” principal is used which is generally contextually applied depending upon the level of organizational expertise and level of involvement in the supply chain of the importer of record. Thus as an experienced wood products manufacturer standards for “due care” applied to our company may be interpreted by the relevant agency differently than that of an importer of finished pencils who tends to rely solely upon the level of documentation they choose to request from their supplier. In many cases such suppliers are simply foreign trading companies, not manufacturers themselves, relying on the say so of their own supplier. With much pressure put on the price of imported pencils and other wood products this provides some level of incentive to less ethical suppliers to fudge in the information provided to their U.S. import customer. If a U.S. importer does not perform an on the ground investigation or use a knowledgeable third party certification agency, which is not specifically required under the statute, and simply relies on the paperwork provided by their supplier, they may be at some elevated risk of exposure to prosecution as to whether they employed “due care” in the event there is ultimately some problem found with the legality of the raw materials. This essentially becomes a risk management exercise for each importer with differing levels of risk tolerance and exposure. Finally, as a knowledgeable U.S. company operating our own facility in China and selling globally we are more at risk of punishment under this U.S. act than are our foreign competitors. It’s going to be difficult for a U.S. importer penalized under the act to recoup any fines even if they have some form of guarantee. As such we’ve taken a more conservative approach to managing this issue in our company. This is also more costly than most of our foreign competitors especially those who are exporting finished pencils to the US where no specific requirements for their U.S. import customers to file the import declarations. This does not mean those pencils are not subject to requirement to be legally harvested, but they have less risk of being challenged as to compliance.

As a company we are continually working to insure that an increasing portion of our wood supply to the pencil industry actually is part of one or more accepted third party certification programs, most specifically FSC or SFI, under the PEFC umbrella. Given both inflationary cost and supply developments with respect to Basswood in China resulting from the Chinese government now enforcing greater harvest restrictions we are currently testing and introducing a new 100% FSC certified product line named Pacific Albus. This new product is U.S. plantation grown and fully Lacey Act compliant. We see Pacific Albus becoming increasingly important versus Chinese or Russian grown Basswood in our company’s supply program and is a product that will be proprietary to our company. I expect to post more about this new product range as we move forward with greater adoption and acceptance into the industry by our customers.

/1 Comment/by

Maintaining Tradition and Values in the Face of Change

In prior posts I’ve focused on many developments affecting the Pencil industry and how companies have reacted in their business operations and strategies to these external influences. I’ve covered trends such as globalization and growth of imports; consolidation within both manufacturing and distribution channels and the resulting rationalization of brand ranges and manufacturing facilities. I’ve also commented on anti-dumping duties and other trade, environmental and product safety issues. Most of these posts have focused on larger industry players and their adaptation and leadership embracing change to remake their companies (i.e. generally the acquirers and market share leaders) with both positive and negative impacts on quality, customer perceptions, market share, and other typical measures of business and industry success.

This time I provide an alternate view, an example of a family owned and operated business in our industry that stands out for its gritty devotion to a set of traditional values, processes and standards. Historically such family owned and operated companies were the norm in our business. While many companies throughout the world pencil industry remain privately held and controlled by their founding families, quite a few have become actively involved in shaping and driving many of these industry trends. This includes our own business California Cedar Products Company which despite our continued devotion to sourcing US grown Incense-cedar as the raw material for our #1 product line, CalCedar® slats, we relocated slat production to our new Tianjin, China facility in 2001 closing our US based slat and sawmill operations soon thereafter.

General Pencil Company, was originally founded by Edward Weissenborn as the Pencil Exchange in Jersey City, NJ in 1889. The company is devoted to providing sustainably produced products under their General’s® brand range for artists of all ages, skills and abilities; amateur and professional alike. While General has added a range of complementary art supplies to build out the product range through the years its stable of wood cased pencils produced from Genuine Incense-cedar remain as a central foundation of the product quality and performance. The company continues to this day as a fully integrated pencil factory in its original Jersey City location producing its own graphite and other special formulation cores in house.
Proudly made in the USA is a vital principle for General’s® brand pencils. General refuses to import cores and leads or increasing proportions of raw, semi-finished or even finished pencils as opposed to all other US based pencil manufacturers who have long since adopted such practices.

While the CalCedar® slats they use are produced by us in our China operation the wood itself is 100% grown in the USA. General is essentially the only remaining US pencil manufacturer exclusively devoted to a Made in USA and predominant USA component supply strategy. Given the recent relocation of Newell Rubbermaid Lewisburg, TN operations to Mexicali, Mexico, (yet another victim to global manufacturing rationalization) General is now one of 3 remaining US based pencil factories producing for the art and writing pencil market which have vertically integrated processes from wood milling department forward to finish product. The others all import some varying degree of pencils and cores as a relevant part of their supply chain strategy.

Another core value at General Pencil Company is the Weissenborn family’s commitment to consistently producing a high quality product from then best quality sustainable materials. General’s® products are well known by both professional and other devoted artists as being produced to exacting standards to provide reliable performance whatever the application. General’s dedication to traditional internal standards of fine craftsmanship and manufacturing processes assures this result time and again. In addition to its exclusive use of Genuine Incense-cedar slats, General also uses recycled packaging materials in the majority of their products. Additionally General is devoted to producing consumer friendly and safe products which are tested and certified under both the PMA Seal and under the Art & Creative Materials Institute (ACMI) Program.

Certainly many industry participants also produce safe, high quality products with an emphasis on sustainability. Many businesses also have multi-generational family ownership. In my view what is of exceptional note is that General Pencil Company, the Weissenborn family and employees of the company truly live up to these values while continuing to exclusively produce in their original Jersey City factory for over 120 years now. General is a company dedicated to supporting the local workforce (many are also multigenerational employees) in a culture indicative of traditional family values that extend also to the customer service experience. General faces the same competitive pressures all of us face in this industry, but they continue to hold firm and thrive as a result. Speaking from personal experience from a multi-generational family business manager who guided our own company through a challenging manufacturing and market rationalization to off-shore production this commitment and dedication deserves great respect.

As two companies and two families, General Pencil and California Cedar and our respective owners have had a long and positive relationship. I am proud to be associated with this relationship and especially pleased to announce the addition of General’s® products to our Pencils.com Store to further build on this partnership. Indeed with this latest collaboration another generation of both families has worked together on a cooperative industry project. These are represented by Kirstin (5th generation descendant of founder Edward Weissenborn) and my son Philip (a 4th Generation Berolzheimer now helping out at California Cedar Products and 7th generation relative to our family involvement in the pencil industry when consideration of Eagle Pencil Company ). These two focused on setting up the products on the Pencils.com store as well as posting product information pages and developing initial promotional materials for the launch. Thanks for their efforts and here’s a toast to a new generation of promise for the supply of high quality sustainable products from tradition driven family owned pencil industry businesses.
/1 Comment/by

Lieber Philip: A letter lasts 100 years

Lieber Philip –

Recently Luigi has been sifting through and organizing, archival family and company correspondence. (for the uninformed Luigi is a retired employee and protégé of my grandfather Charles). Just a week ago he came up with this gem of a letter from my great-great grandfather Heinrich Berolzheimer to his son, my great grandfather and your great-great grandfather Philip.

The letter was written March 7, 1906 and is 100 years old today and begins Lieber Philip just as I’ve started my letter to you. In addition to the handwritten letter in German using a fountain pen there is a receipt from a factory in Nuremburg, Germany for some item Heinrich seems to have purchased on behalf of Eagle Pencil Company in New York. It also included a handwritten note by Philip on an Eagle Pencil Company envelope indicating that this was among the last letters he received from his father before his death. I have added an Eagle Diagraph pencil from my collection as a finishing touch for the photo.

Here is a bit of background history on your great-great-great Grandfather Heinrich, which even you are probably not very familiar with. Heinrich established Eagle Pencil Company in New York after emigrating from Fuerth near Nuremburg, where his father Daniel Berolzheimer had first entered the pencil industry in 1856 in partnership with Leopold Illfelder under the name of Berolzheimer und Illfelder. This 1856 date is commonly considered the founding date of Eagle Pencil Company though the Berolzheimer-Illfelder partnership did not end until approximately 1861 and Eagle was not actually established in New York in 1856. Here’s a link for some information I found on the history of Eagle Pencil Company. There are a few notable errors here with respect to generational relationships of different Berolzheimers to Heinrich but perhaps you’ll learn something new of interest about the pencils side of the family business background here.

After a number of years in New York Heinrich turned the business over to his sons Philip and Emil and returned to Germany for his retirement where he was involved in a number of philanthropic pursuits. This included the construction of a new library for the city of Fuerth in a building which was and is still named the Berolzheimerianum in his honor. This building has in the recent 10 years found new life as a refurbished dinner theater and comedy club. I have not seen a show there myself, but did visit the building ten year ago in 1996 and met the comedy group leaders as they were completing construction and about to open. I was even interviewed on the local television and newspaper during the visit.

Thanks to your aunt Tanja’s help we have been able to decipher the main content of the letter itself. Of particular note are indications that Heinrich had recently received a letter from Philip’s wife Clara with a note from your own great-Grandfather Charles (not quite 4 years old at the time) and that despite his health he was able to sit outside thanks to unseasonably warm weather for that time of year. The letter also includes a summation of a few financial figures in German Marks. One figure is the amount of 222.20 Deutch Marks from the included receipt from Nurnberger Mettal und Lackierwaarenfabrik, apparently a supplier of metal and lacquer materials to the pencil industry.

Given the 100 year anniversary of this letter today I thought it might be interesting to share with you what I see as a few of the interesting changes and developments in 100 years time that are reflected in the letter. The first is the change in language and handwriting itself. In interpreting the letter Tanja indicated there has been significant change in the meaning of particular words which she refers to as “old German”. Also, the style of handwriting includes a number of letters which appear to be one letter if using current writing style, but were actually read as different letters at that time. This could even change the meaning of some of the words and sentences if interpreted improperly.

The age and somewhat faded nature of the ink complicated Tanja’s task and made at least one sentence totally unclear and she was unable to translate due to a variety of potential meanings of the few legible words. One wonders if this letter had been written with a graphite pencil rather than ink would it be more smudged or would it have stood the test of time. Given the clear legibility of the graphite pencil note by Philip on the back of the letter that indicates the date he answered the letter I could make an argument for pencil over ink. How about this? “Ride the Palomino, the mark that will last over 100 years.“

I was curious what the current value of the receipt for 222.2 Marks would be in US dollars today. With the help of this site I was able to estimate it was worth approximately US$53 in 1906 using the pre-WWI rate of exchange. Using this second site it appears this amount in 1906 would be roughly equivalent to US$1085 today. Just think if you would begin setting aside just $53 per year today for the rest of your life what it might mean for your great-great grandchild in 100 years time.

Unfortunately, the description tied to this amount simply has the title “Brother Bing” so it’s unclear what this receipt is specifically for. I had hoped to estimate what the cost of some parts or equipment would be today. By the way I have no knowledge of any relative named Bing, just in case you were wondering. Of further interest to me is the timeframe involved in trans-Atlantic mail communications 100 years ago. The letter dated March 7, 1906 was received in New York and Philip’s handwritten note indicated he answered back with his own letter on March 20th. So a maximum of 13 days time for delivery. An eternity compared to the near instantaneous responses we expect today using e-mail for business to our factories in China and Thailand and that you and I use for personal communication. I can’t remember the last real hand written letter I sent or received via mail. I’m guessing your wondering when you ever received a written letter of any sort from me. I guess this electronic version will have to suffice.

A final note of interest is the signoff which reads “Your Loving Grandfather”, using the word “Opa”, though we know the relationship was father writing to son. Perhaps the translation and meaning of the word could have simply changed in 100 years time. Whether this is it or this implies some form of senility in Heinrich’s waning years or was simply used as a term of endearment is unclear. I’m sure by now you are wondering about my own state of mind writing an open letter to you my teenage son in a post for the world to see on my blog. In any case the use of this language seems warm and heartfelt though sadly not typical these days of what I would expect to receive in a note or e-mail from my father Philip or I expect what you would anticipate receiving from me. Since I’m feeling nostalgic and perhaps in time you’ll reread this and feel this way too I suppose you’ll eventually forgive me if I follow the example of our forefather Heinrich.

Lour loving father,
Charles

/7 Comments/by

The Chinese Pencil Industry & World Reaction: Part 2


My last post covered some of the competitive developments in our industry as a result of the large growth in the Chinese pencil industry.

While I mentioned that about 52% of the world’s pencils are now produced in China, the reality is that the Chinese share has grown to this level from about 22% in 1990 and 37% in 1995.
When you consider that China also exports pencil slats (including our own company’s product) the Chinese production share of wood or alternate material for pencil casings is much higher than pencils alone. Similar conclusions also apply for other pencil input materials such as graphite cores, ferrules and erasers. To a large degree the US pencil industry (and other countries) itself has become more one of “Assembled in USA” vs. “Made in the USA” although the legal definition of “Made in the USA” as applied to pencils is a technical matter in itself best reserved for a future Timberlines Post.

There are two key trade policies in China that seem to support Chinese producers to achieve their increasing advantage in world pencil industry. The first is the treatment of Value Added Tax (VAT) in terms of a VAT rebate that exported products receive. All goods sold within China are subject to a 17% VAT tax which is not dissimilar to many countries that impose VAT taxes. This applies to raw materials, labor and other services and inputs into the manufactured good. However when these goods are exported into foreign markets, the exporting manufacturer often receives a rebate of up to 13% of the export value. This in essence becomes an export subsidy to the Chinese producer.

In the past two years these VAT rebates have been eliminated on certain intermediate products such as our pencil slats while they have been retained or only slightly reduced for finished goods. In our case it made our pencil slats sales to our customers around the world more expensive due to the elimination of a rebate originally calculated into our cost structure. This simply adds further incentive and competitive pressure for foreign pencil companies to displace manufacturing to China. Unfortunately, such changes have the counter point of demonstrating inconsistent or changing rules that can serve to deter the foreign investment it is designed to attract. Such changes get lumped together with other concerns about unequal application of safety, tax and environmental regulations to foreign owned companies in China vs. local Chinese companies.

Finally, the pegging of the yuan to the dollar previously mentioned in a prior post has made Chinese pencils and other goods increasingly competitive with pencils produced in other parts of the world. This has also contributed to the growing imbalance of trade with China in many products including strengthening the Chinese pencil industry world market position. Recent efforts to begin slowly relaxing these constraints towards a floating currency will increase the relative costs of Chinese exported pencils, but you can be assured this is an issue the Chinese government will manage in a careful controlled fashion for the ultimate benefit of their own country.

Given these many issues, practices and policies I don’t expect an end any time soon to efforts by pencil companies throughout the world to take actions they view as helpful to their ultimate goals. The challenge for the world’s pencil producers, whether Chinese or otherwise country remains how do we continue to evolve our business strategies, products and practices in a profitable manner that works to our own competitive advantage. There certainly may be common issues and industry standards where collaboration is a benefit to the industry as well as to the ultimate consumer as a whole. However competitive differences will likely always exist.

/by

The Chinese Pencil Industry & World Reaction: Part 1



The third in a continuing series of posts on international trade issues affecting the pencil industry.

My earlier posts focusing on pencil Anti-dumping duties provided first, a primer on the purpose and structure of such duties, and next an update on current developments on US anti-dumping duties against Chinese pencils. Anti-dumping duties in the world wide pencil industry are singularly focused on Chinese pencils.

As we’ve seen in order to protect their domestic manufacturing industries from what is perceived as unreasonably low priced and perhaps as unfair competition from China many countries have implemented dumping duties. My own experience is that many producers in the Chinese pencil industry don’t always seem to understand or agree with the justification for such anti-China trade polices. I have spoken with key Chinese managers who reflect a shared point of view that the Chinese pencil industry is not very important in the world picture. They complain that the growing number of small pencil producers who compete only on price, make the Chinese industry as a whole unprofitable in their domestic market.

As a result many Chinese producers look to the export market for higher value added opportunities. However they themselves don’t always feel they get a fair chance to compete with the world’s major brands. They complain they are expected to offer a significant price advantage to branded producers elsewhere in the world. They are left only with lower value OEM sales to existing brands or private label opportunities to foreign retailers for market entry. Some hold the view that to overcome the high import duties on their pencils they must hold their prices down to negligible levels. Thus further perpetuating demands for anti-dumping duties on Chinese pencils by producers in foreign markets.

In response to these pressures a small minority even resort to illegal practices such as counterfeiting western brands in the Chinese home or other third world markets. Some even purposely mislabel country of origin and transship via third countries to avoid these duties. None of these activities reflect positively on the Chinese industry as a whole since it’s often difficult to establish who the manufacturer is when they are producing private label products.

So when both Chinese and foreign pencil manufacturers often cry foul, where does the truth lie. As usual it’s somewhere in the middle.

The Chinese pencil industry currently produces 9.8 trillion pencils per year based upon the 2004 statistical data. Of these pencils about 80% are exported throughout the world with the US being the single largest market and the EU second. By our industry estimates Chinese pencils now represent over 50% of the world’s pencils on a volume basis. So it’s clear that the Chinese Industry is no small, unimportant player when it comes to pencils.

What of Chinese complaints about low price expectations of foreign buyers? It’s true Chinese pencils are on average the lowest priced pencils in the world as is their cost structure. This is why large distributors and retailers like Walmart, Target and others have set up their own purchasing offices in China to play one producer off against the other during their annual purchasing programs. Often Chinese export prices realize just one-fifth of the retail prices ultimately paid by consumers. What Chinese producers fail to realize however is that such practices still provide them access to major world markets as these large retailers’ work to replace or devalue traditional brands in their home markets.

The intensity of such competition for their traditional markets naturally drives a range of reactions from branded producers worldwide who have invested decades and in some cases centuries into building their brands, markets and distribution networks. One reaction is certainly to lobby for protective measures from their local governments, but the majority of reactions are market focused. Pencil manufacturers worldwide have focused on driving their own cost structures down, placing further pressure on their suppliers as well as looking for more value added products to produce and market. Some in the industry (such as our own company) have even taken to eliminating their home market production and have invested in their own Chinese facilities or relocated to other low cost countries. Some simply now buy their pencils produced to their specifications from Asia.

Finally, another problem is that given the common perception that pencils are simple easy products to produce and Chinese pencil manufacturing equipment can be acquired for a relatively low investment there has been significant new entry of capacity in the past ten years. Today there are over 200 pencil manufacturers in China alone, while the rest of the world has perhaps 100. Often local rural government entities in China will support or even participate in such investments hoping to build up their local economy. Local officials in some cases even look the other way when it comes to safety and environmental compliance regulations.

Given inexperienced management or technicians in some such companies producing a good quality product is difficult and differentiating on anything other than price nearly impossible. Some of these companies cannot and may never be profitable, yet somehow they survive from year to year adding capacity onto the market and holding prices down. So though some old large scale state owned pencil factories in China have closed in recent years due to their higher social cost structures, such behaviors do not indicate to many countries that there is a true market economy developing in China or that dumping of pencils is not occurring.

Clearly there are challenges for both Chinese and traditional brand manufacturers around the world. As price competition has intensified due to pressure from increasingly powerful retail distribution channels, pencils have been increasingly commoditized. While consumers may have benefited some from lower prices, the typical Chinese pencil though improving in quality over prior years still represents a step down in quality from the average quality of product previously available in western markets. Those who achieve the best combination of cost control while maintaining and improving quality and finding new value added products and services to differentiate their business from the pack will come out on top.

My next post tomorrow evening will cover the two key trade policies in China that work to support Chinese producers to gain advantage in the world market.

/by

Pencil Anti Dumping Duties: Are Changes in the Air?

This post continues a series of Timberlines articles discussing the impact various world trade issues and practices have upon the Pencil Industry. In my previous Primer on Pencil Anti-Dumping duties I covered the basic aspects and issues involved with Anti-dumping duties here in the U.S. against Chinese pencils. As previously noted pencil imports to the US have steadily increased over the past 15 years despite the anti-dumping duties in place for the past 10 years.

So what’s new afoot in the world of US Pencil anti-dumping Vis a Vis China? In fact there are three main areas of current activity.

First, the U.S. Department of Commerce has just published the amended final results of its 8th review which covers pencil imports from China during the period from December 1, 2002 through November 30, 2003. Most notable in this review was the virtual elimination of anti-dumping duty on imports from China First Pencil Co., Ltd. & Shanghai Three Star Stationary Industry Corp. Previously these companies which share a common dumping margin rate had a 15.2 % dumping margin rate established during the 7th Review. The amended final result now drops this to 0.15%. Meanwhile, Shandong Rongxin Import & Export Co, Ltd. achieved a reduction from 27.87% to 22.63% and Orient International Holding Shanghai Foreign Trade Co., Ltd. has had their dumping margin. The China wide rate for other manufactures/exporters remained at 114.9%.

But is final, final? This result was quickly challenged by a group of US producers who have filed an appeal with the Court of International Trade. As China First and Shanghai Three Star together account for the largest Chinese production and importation of pencils to the US the virtual elimination of anti-dumping duties going forward on their pencils could have a significant impact on US imports. Of course, China First has been increasing export prices over the past few years and as such it’s calculated dumping margins might be expected to come down. Also recent decisions by the Chinese government to move towards floating the Yuan have resulted in a 2% revaluation along with other inflationary factors in the raw materials arena might indicate that at least some of the reduced dumping margins are likely to be offset by further export price increases on Chinese pencils as we look towards 2006 and beyond.

The second important development is that the Anti-Dumping Order against cased pencils from Peoples Republic of China is currently undergoing its 2nd 5 year Sunset review. This review is conducted by the US International Trade Commission (ITC) which originally put the duties in place ever five years to determine the continuing need or not for anti dumping duties. In the recent “Domestic Producers Response to Notification of Institution” of the review the US producers argue the following key effect of imports if the duty were to be revoked.
– material injury would recur if the dumping Order were revoked
– Price effect would be significant
– Post revocation import volumes would be significant
– Claims the domestic industry has contracted since the original order put in place and has become more vulnerable to material injury
– Claims the order has supported the decorator pencil segment as the decorator segment is higher cost pencils
– Revocation would lead to continuance or recurrence of material injury to the US industry within a foreseeable time

The Domestic Industry has asked for an expedited review. The deadline for comments by Chinese or other interests that would wish to see the pencil dumping duty revoked is September 13, 2005. Determination of full or expedited rule is expected by October 3, 2005.

The Final issue currently under consideration by the Department of Commerce for all anti-dumping orders regarding China is whether to change from current Non-Market Economy (NME) treatment on certain value of production factors to Market Economy status. This is essentially a determination of methodology used to value production inputs purchased from a market economy country. Currently, the DOC uses NME methodologies for all inputs on pencils produced in China whether the materials all come from China which is considered a NME or not. The Department now proposes to use market economy prices for all of the input if the existing tests for such use is met and if the majority of the input is purchased from a market economy country. Any comments are due by September 6th.

The next post in this series will cover key trade practices and policies in China that impact the pencil industry globally.

/by

Pencil Anti-Dumping Duties: Primer

The following is the first of a series of Timberlines articles to be posted in the coming weeks discussing the impact various world trade issues and practices have upon the Pencil Industry.

Import and export duties, value added taxes, export credits or export VAT rebates, fixed currency exchange rates are all examples of factors that impact trade flows around the world. Such meddling with what “free market thinkers” would call free and unrestricted trade is a common practice from nation to nation. Certainly the World Trade Organization and other regional trading block agreements such as NAFTA, various EU agreements, APEC, ASEAN and MERCOSUR work to liberalize such trade barriers worldwide. However, there is clearly a level of relative national and regional competitive advantage to be gained when countries set their policies regarding these market influencing instruments. Often the duty policies of one or more countries for given products are set as retaliation for or to correct perceived unfair trade practices of another particular country.

The pencil industry is no exception to this situation and a number of these market “interventions” or “correction factors” (depending upon where you come out on the free trade scale) exist within our industry. Today’s topic of anti-dumping duties is just one such example. Currently, several countries worldwide have implemented incremental Anti-Dumping duties specifically placed upon imported Chinese pencils as a result of lobbying from local pencil manufacturer groups. These anti-dumping duties are imposed over and above any normal import duty pencils may be subject to. Among such countries with Anti-Dumping duties are the United States, Mexico and Turkey. I expect there may be some others of which I am not currently aware. For these three countries, anti-dumping duties range from just over 100% to over 400% of the invoice value of the pencils.

Here in the US the current country wide anti-dumping deposit rate for pencils exported from China to the USA is 114.9%. The importer of record is required to “deposit” funds into an escrow type account upon importation of the pencils. This rate is applicable to all imported Chinese pencils, unless a specific Chinese exporter/producer has gone through an administrative review process with the U.S. Department of Commerce (DOC) to have their company audited for a reduced rate. However, this is an expensive and very complicated audit process and as such not many Chinese companies pursue reduced dumping margin rates. Currently, four Chinese entities or combined manufacturer/export company groups (including our own subsidiary facility) have received reduced dumping deposit rates ranging from 0% (ours) to around 23%. In effect these companies have demonstrated that they are not dumping pencils or should not be at the China-wide rate for the most recently reviewed period. Under DOC rules the country wide rate is set by the highest rate determined for any given Chinese company that ever requested a review by DOC. As such the original rate of around 53% was increased to the current 114.9% level a few years back.

These reviews are conducted annually for a full year of shipments upon the request of the original plaintiffs, a group of US manufacturers. Should the DOC find during a review that the dumping deposit rate should be lower or higher for that period for a given Chinese exporter/producer then deposited funds are either refunded to the importer or additional funds are paid by the importer. As such the importer takes a certain risk when deciding to import from a Chinese supplier as the rate could increase and be left with the requirement to pay additional duties at a later date. Once the rate changes the new rate becomes effective for all future shipments. As it generally takes about 18-22 months to complete the review process and determine and clear the final figures remaining in deposited “escrow” fund, these risks are certainly increased for importers should the rate eventually increase.

Under a U.S. law named the Byrd Amendment, the final amounts in the cleared escrow fund are distributed to the original petitioner companies in the applicable industry. The relative refunds are again determined according to another complicated formula and calculation. In effect, the US pencil industry (and many other industries) is reimbursed for damages resulting from low priced imports that are deemed to have been sold at dumping prices. As such implementing anti-dumping duties has become a bit of a “growth industry” here in the US as more industry groups react to the incursion into the US market by Chinese and other foreign competitors. This is a controversial rule which has been deemed illegal by the WTO, but is fraught with obvious landmines for any politician in the US who would propose repeal of the Byrd Amendment.

Even with these high dumping deposit rates, most low end commodity pencils imported from China are cheaper than US produced products. This is demonstrated by the fact that Chinese pencils imports have continued to grow over the past 9 years that anti-dumping duties have been placed on pencils. Of course in our view you get what you pay for and there is no doubt that the average quality of pencils consumed in the US has declined over the past decade.

Clearly there are a number of market inefficiencies or inappropriate incentives created by implementation of high anti-dumping duties. The Byrd amendment policy previously mentioned. Also some Chinese companies attempt to avoid the dumping duties through the practices of transshipment via a third country not subject to the duties and/or by purposely mis-labeling the country of origin for the pencils. Both are illegal practices under international trade rules, but can be difficult to detect and requires domestic producers to be vigilant as to what’s going on in the market place given all the challenges our Customs and Homeland Security department face from other fronts these days.

So what are the current developments relative to US Anti-dumping duties for pencils that will or may impact our industry in the next several months or years? It turns out there are several important issues today and these will be covered in my next post on this subject entitled:

Pencil Anti-Dumping Duties: Are Changes in the Air?

/2 Comments/by

US Pencil Imports Continue Growth

The latest update to US import statistics for wood cased pencils support the growth trend experienced for some years now. Over the past 5 years through 2004 pencil imports into the US have increased at an average annual rate of 6.0% on a dollar value basis and of 7.8% on a unit volume basis. This is reflects an average annual reduction of 1.8% in import prices over this period. In total 2004 unit volume imports were 17.6 million gross (this 2.5 billion pieces for the year or almost 9 pencils per capita).

Our own estimates indicate that imported pencils now represent approximately two-thirds of the total US annual consumption on a unit volume basis. We estimate that the share of US manufactured pencils has dropped from around 50% of the market just three or four years ago. Given net higher average average wholesale prices of US based production the dollar market share of imports is certainly less than that of import unit volume share. Of course a number of the US producers are also selling imported pencils or also adding further manufactured value to imports of semi-finished product so the US producers total share of US consumption is not quite as bleak as indicated purely by the import statistics. Also total wood cased pencil consumption does seem to be on the rise overall and 2005 is shaping up to be a good year, though the specific growth rate year on year is a bit more of a challenge to accurately analyze. Regardless, the continuing challenges to US based pencil manufacturing remain clear.

Looking at 2005, the Year-to-Date May figures are up just 1.6% on a dollar value basis and an astounding 21.0% in unit volume vs. the same period in 2004. This indicates a significant 12.8% average import price reduction year over year. If sustained through year end the percentage increase in volume would be the largest since 1996 and the reduction in average import prices year on year would be the largest ever. In 1997 there was an 11.3% reduction reflecting the largest single year price deflation of import pencils at the wholesale level.

Another surprising aspect of import figures thus far in 2005 is the indication that the most significant import growth is not coming from China which traditionally has the largest share of imports to the US market. In fact YTD May Chinese pencil imports are off 10.4% on a volume basis. The main growth thus far in 2005 is driven by imports primarily from Costa Rica, Indonesia and Thailand and a few other countries in smaller proportion. Key countries with declining shipments to the US so far this year are China and Brazil.

It is difficult to project such trends through the full year due to seasonal factors, the most notable being that distribution channels load up in the early part of the year to prepare for back-to-school shipments. So the final wood cased pencil import picture and trends by country may yet be different by year end. Other issues that may impact these trends this year or as we look forward to 2006 are the recent decision by China to allow the Yuan to float and changes in relative anti-dumping duty rates on Chinese imports for some manufacturers. See my upcomming discussion and update on anti-dumping and other pencil trade issues next week.

/5 Comments/by

What’s the Value of Pencil Certification?

Today I participated in a conference call of the Pencil Section of the Writing Instruments Manufacturer’s Association (WIMA) of which CalCedar is a member. The purpose of the meeting was to discuss what efforts WIMA should make to increase awareness of the PMA Seal. Pencils that have earned the PMA seal have been independently certified to be non-toxic and conform to the standards of ASTM D4236. This is a voluntary program in which we manufacturers submit our product components and finished products for third party testing to assure conformance to establish safety standards.

Not all pencils sold in the US are PMA certified. In fact, most of the low cost competition from China and Indonesia do not participate in this program, though the Chinese industry does have it’s own quality standards program. Even some US producers have certain items which they do not certify due to the added cost. This doesn’t mean that non-certified pencils are unsafe, it simply means there is more of a possibility that a product may contain materials that could present some safety risk to users.

Other certification schemes are also applied to pencils. The ISO 9000 program is a quality certification that monitors producers manufacturing control systems to assure their products meet their own internal quality standards. Other programs like the Forest Stewardship Council (FSC) certification focus on assuring that the wood used in FSC pencils comes from well managed forests with responsible forest management practices which balance economic, environmental and social issues. (See ForestChoice pencils.)

The pencil industry is highly competitive and there are extra costs to participation in and promotion of such programs. Many manufacturers voluntarily participate in these programs because they view there is some competitive advantage to doing so.

But what do consumers and users of pencils and other products with similar certification programs think? Are you aware of such certifications when you purchase pencils? Are these certifications a factor in your purchase decision? What specific information related to certification of pencils would you consider most relevant to your purchase decision? Let’s hear both from pencil users and industry participants.

/by