Regional Trends (C) JETRO Japan Economic Monthly, February 2006

Akita Prefecture Timber Businesses Expanding into China Kuniya Asamoto JETRO Akita

Summary Akita Prefecture in northern Japan is blessed with abundant timber resources. But with Japan having grown heavily reliant on imported timber, the Akita government and local firms began to focus on the Chinese market as a destination for timber products, notably Akita cedar. One Akita company built a Japanese-style model home in China using Akita cedar, and other companies have established bases in China to process timber. Interest in China as a source of long-term growth is becoming keen among the timber companies of Akita.

Akita Prefecture Exports Cedar to China

Akita Prefecture is situated in the northwest corner of Japan’s Tohoku region. Its beautiful environment is rich in natural resources, typified by forests of Akita cedar. The mountainous Shirakami area has been designated as a Natural Heritage Site for having the world’s largest virgin beech forest. Local industries include electronic parts manufacturing, food processing and timber and wood products. The Port of Akita on the Sea of Japan is a regional hub for trade with China, the Russian Far East and South Korea. Akita has prospered as a trading center for Akita cedar since the 17th century, and is the home of many companies in the timber industry. Originally, the mainstay of timber processing was Akita cedar and other local varieties. In recent years, however, imported timber has consistently outpaced local timber in processing volume. According to the Report on Timber Supply and Demand by the Ministry of Agriculture, Forestry and Fisheries, imported timber has accounted for the largest share of finished timber products in the prefecture since 1995. By volume, imports doubled local timber in 2003 (graph).

Sources of Timber Processed in Akita Prefecture

（1,000m3） 1600 Imported timber Domestic timber Timber from Akita Prefecture Timber from other prefectures 1400

1200

1000

800

600

400

200

0 1982 1990 2000 Note: Figures include plywood, pulp and other materials. Source: Ministry of Agriculture, Forestry and Fisheries

Because of the declining demand for local timber, the industry is seeking markets abroad. One of the most promising markets is China, which is experiencing a construction boom due to its fast-growing economy and preparation for major events, including the 2008 Beijing Olympics and the 2010 International Expo. In response, the government and timber industry in Akita established an organization to develop overseas demand for local timber, including Akita cedar exports to China. With the organization’s support, timber companies are now exploring opportunities in China. Matsumi, a homebuilder in Akita City, built a Japanese-style model home using Akita cedar during a promotional project organized by the State Forestry Administration, PR China, which is

Regional Trends (C) JETRO Japan Economic Monthly, February 2006 under Chinese Academy of Forestry, in Anhui Province in 2005. Another homebuilder, Itokenyu of Yurihonjo City, established a joint venture with a Chinese lighting fixtures maker in Zhe Jiang Province in July 2004. They built a Japanese-style model home with a Japanese garden on the premises of the joint venture’s factory, using Akita cedar for the ceiling, the main pillar in the living room and the frames for shoji paper screens. The model home was opened to the public in July 2005, and real estate agents and key local figures were invited to preview the home the following month, the aim being to win orders for Japanese-style homes from high-income Chinese.

Making Inroads into Foreign Markets

Maruishi Meiboku in Noshiro City, Akita Prefecture produces timber products for interior use, such as finishing wood for ceilings in traditional Japanese-style rooms. The company also specializes in non-flammable plywood. Declining demand in Japan for traditional homes has caused a drop in sales, so Senior Managing Director Noriyasu Fukai explained, “After thinking about the future and our growth potential over the next 20 to 30 years, I decided we had to enter the Chinese market.” Besides the shrinking domestic market, Fukai was concerned about an upcoming peak in company retirements, as well as pressure to reduce production costs. The company began procuring raw materials overseas from around 2000, which broadened its perspective of foreign business. Maruishi began considering a move into China in 2003, and less than a year later it had established Qingdao Wanshi Wood Ltd., a wholly-owned subsidiary, in the Qingdao special economic zone. Explaining why such prompt action was possible, Fukai said his company started by developing good connections with the the Chinese government, building a relationship based on mutual trust. The company received comprehensive support from Qingdao’s local investment promotion organization. This included finding a factory site, help with hiring and procedural support, and various other advice, such as recommending that Maruishi set up a wholly-owned company. The company received strong support not only because of good connections, but also because of the Chinese officials’ interest in its original technology for processing nonflammable materials. Fukai said that they highly appraised Maruishi’s capabilities, despite its small size. Maruishi finally decided on setting up in Qingdao, in part because local prices are more stable than those in big cities such as Beijing and Shanghai, and because the area is a resort where vacation cottages are being constructed, so the company intends to supply materials for their interiors. Qingdao, which is well-known overseas for a local brand of beer bearing the same name, is one of China’s most famous tourist spots. It has many attractions, including a swimming beach and German-style urban architecture. In 2004, Qingdao drew 21.57 million domestic tourists and 520,000 from abroad, according to the city.

Dividing Operations between Japan and China

In the year prior to opening its factory, Maruishi carefully studied the local market, infrastructure, competition and other key factors. Preparations for operating the factory included an internship program, wherein employees were sent to the factory in Noshiro, Japan to study the company’s technology. The Qingdao factory, completed in March 2005, is a 2,500 m2 single-story building with 20 workers. It processes plywood from Malaysia and adhesive agents and Akita cedar from Japan. Oak and Japanese ash are procured locally and turned into semi-processed nonflammable plywood, then exported to Japan for final processing. The factory began operating full scale in July. Fukai has become chairman and president of the subsidiary, but continues to reside in Japan, while the vice-president in charge of day-to-day operations is a Chinese man who attended university in Japan. An employee from Japan inspects products before shipment. Fukai plans to periodically visit China to supervise management and production. He also plans to gradually shift to a system under which the Chinese subsidiary produces standardized goods and the Japanese side makes custom-order products and nonflammable materials. Everything produced at the Quindao factory is exported to Japan, but the company is considering selling in China, as well as exporting to other countries someday. Maruishi also remains strongly committed to training Chinese interns in processing technology and management. A dormitory and dining facilities are also provided during the training.

Regional Trends (C) JETRO Japan Economic Monthly, February 2006

Operating within the Company’s Limitations

“Our annual sales today are about half of what they were 10 years ago, but I feel that this is the optimal size for our company right now. We are doing everything we can within our limits, including advancing overseas,” says Fukai, taking an objective view of where his company is, and where it is heading. Despite the difficulties confronting many timber-processing companies, Fukai holds out hope for small and midsize firms such as his, saying that they can uncover business opportunities if they remain forward thinking. He believes that with motivation, skill and good products, even small companies can survive in international business. Although he must work within the limitations of his company, he remains quite positive. Fukai has great hopes for expanding the Qingdao factory once business in China gets fully underway, and he is enthusiastic about prospects for business abroad.