WHY SLOVENIAN WOOD PRODUCTS LOST GLOBAL MARKET: ENHANCING COMPETITIVENES OF SLOVENIAN TIMBER VALUE CHAIN* Assist. dr. Barbara Mörec, University of Ljubljana, Faculty of Economics Slovenia barbara.moerec@ef.uni-lj.si Strokovni članek Abstract: Slovenia has always been among the most forested countries in Europe and even today has one of the fastest growing stocks of wood (Slovenia Forest Service, 2011a). Yet, just ten years ago Slovenia was among top 15 global exporters of wooden furniture (Kaplinsky et al., 2003), while today, production of wooden furniture - the main value added wooden product - barely reaches 40% of its 2008 production level (Ministry of Agriculture, Forestry and Food of the Republic of Slovenia, 2011). Some of this downturn is clearly attributed to the decline of the construction industry due to economic crisis. However, inefficiencies in wood supply chain management as well as overly fragmented forest property, combined with inadequate market awareness or even the lack of interest by 450,000 Slovenian private forest owners, bears most of the fault. It seems that the only way to improve competitiveness of Slovenian wooden products is to encourage market cooperation not only among forest owners, but also with other links of wood products value chain in order not only to develop new wood products, but also to market the existing ones properly. Related to the supply chain side of the story, associations of small forest property owners can assist forest owners in a joint appearance on the market and facilitate access to financial means for the forestry management. A joint ownership of sawmills and other wood-products facilities can improve market access, as it establishes a direct link between a forest owner and wood products manufacture. Such integration however requires financial resources not easily available in the current financial crisis. On the other hand, by employing relationship marketing to increase relationship commitment and trust forest owners can quickly benefit in terms of reduced relationship costs. Small forest properties will need to be certified for sustainable production too, since nowadays certification is seen as a ticket to enter and stay on the global timber market. Finally, linking Slovenian wood products to a country brand as well as employing relationship marketing along the whole distribution channel might help improve competitiveness of Slovenian timber value chain. Keywords: Slovenia, small scale forestry, value chain, timber production ZAKAJ JE SLOVENSKA LESNOPREDELOVALNA INDUSTRIJA IZGUBILA SVETOVNI TRG: KAKO IZBOLJŠATI KONKURENČNOST SLOVENSKE LESNOPREDELOVALNE VERIGE Povzetek: Slovenija je ena najbolj gozdnatih držav v Evropi z izjemno hitro rastjo zaloge lesa (Zavod za gozdove Slovenije, 2011a). še pred desetimi leti je bila tudi med največjimi globalnimi izvozniki pohištva iz lesa (Kaplinsky idr., 2003), danes pa proizvodnja pohištva, kjer se dosega največja dodana vrednost med izdelki iz lesa, komaj doseže 40 odstotkov ravni iz leta 2008 (Ministrstvo za kmetijstvo, gozdarstvo in prehrano, 2011). Nekaj krivde za ta upad je vsekakor mogoče pripisati trenutni gospodarski in finančni krizi, glavni razlogi pa so neučinkovito upravljanje dobavne verige, razdrobljena lastnina gozdnih površin, pomanjkljivo trženjsko znanje 450.000 slovenskih lastnikov zasebnih gozdnih površin in celo njihova popolna brezbrižnost za trženje lesa. Za povečanje konkurenčnosti slovenskih lesnih proizvodov je zato nujno potrebno spodbuditi sodelovanje lastnikov gozdnih površin z drugimi deležniki v lesnopredelovalni verigi, pa ne samo zato, da bi razvili nove izdelke iz lesa, ampak tudi zaradi ustreznejšega trženja obstoječih lesnih izdelkov. Združenja malih lastnikov gozdnih površin bi tako pomagala lastnikom s skupnim nastopom na trgu, pa tudi s finančno pomočjo za upravljanje malih površin gozdov. Malim lastnikom gozdnih površin lahko dostop do trga olajša tudi skupna lastnina žag in drugih lesnopredelovalnih obratov, saj vzpostavlja neposredno povezavo med lastnikom gozda in proizvajalcem izdelkov iz lesa, vendar taka integracija zahteva velika finančna sredstva, ki so v trenutnih kriznih razmerah težko dosegljiva. Po drugi strani pa bi lahko lastniki gozdov z uporabo trženja na podlagi odnosov (angl. relationship marketing) povečali medsebojno zaupanje in zvestobo ter tako znižali stroške odnosov s preostalimi deležniki v lesnopredelovalni verigi. Prav tako bodo tudi male gozdne posesti potrebovale certifikat za trajnostno proizvodnjo, saj je ta danes nujen za obstoj na globalnem lesnopredelovalnem trgu. Nenazadnje bi prav povezava znamke države s slovenskimi izdelki iz lesa kakor tudi uporaba trženja na podlagi odnosov vzdolž celotnega distribucijskega kanala povečala konkurenčnost slovenske lesnopredelovalne verige. Ključne besede: Slovenija, malo gozdarstvo, veriga, lesnopredelovalna proizvodnja * A working version of this paper was presented at the 8th Economic integrations, competition and cooperation conference in 2011 in Opatija, Croatia. The author wishes to thank the session chair and the conference reviewers for their comments and suggestions on how to advance the paper. Special thanks go to Matevž Raškovič (University of Ljubljana, Faculty of Economics) and two anonymous reviewers at MM Akademija, whose comments greatly contributed to the improvement of this paper. 1. INTRODUCTION Although the timber industry is not a 'traditional' marketing domain, concepts like relationship marketing, supply and value chain management and branding hold in this setting today more than ever. Even more specifically, Brodrechtova (2008, p. 450) on the example of export marketing strategies of the Slovak timber industry highlights the lack of holistic export-oriented marketing strategies in transition markets and emphasizes a balanced importance of both, "physical and relational resources", to accelerate access into the timber market, along not just the entire supply chain, but also the entire value chain to final customers. According to Elyakime & Cabanettes (2009, p. 169), who studied (domestic) marketing strategies of timber in France, the long-term oriented management of "commercial relationships", in particular between "forest owners and wood industrialists", is integral part of wood marketing. Their view directly relates to Morgan & Hunt's (1994) perspective on long-term and value-adding relationship orientation within marketing (e.g. relationship marketing), which is related not only to recent strategic marketing focus within supply chain management (Flint, 2004), but also to the tendencies towards a more balanced integration of logistic and marketing dimensions within supply chain management (Alvarado & Kotzab, 2001). Adding to these recent developments within the value and supply chain management's literature, Peppard & Rylander (2006, p. 128) point to the emergence of a "network perspective" within these fields, which have led to the transformation "from a value chain to a value network". This can be usefully applied when analysing the deficiencies of supply chain management and marketing strategies of highly fragmented value networks, like timber value chain in Slovenia, since poor market performance of Slovenian timber products originates at the supply side of the value chain and is further exacerbated by a lack of a holistic export marketing strategy. This paper builds on Elyakime & Cabanettes's (2009) analysis of timber marketing strategies in the case of highly fragmented private forest estates (following Balkyte & Peleckis, 2010) and Brodrechtova's (2008) analysis of timber marketing strategies in transitional countries. In general, the paper focuses on the value creating relationships between forest owners and wood products manufacturers. Based on this supply chain perspective the main research proposition of this paper is that highly fragmented supply chain relationships within Slovenian timber industry is the main cause for Slovenia's poor export performance in the international timber market and this is further exacerbated by the lack of marketing export strategy. Only by understanding deficiency of the existing supply chain can we explain why Slovenian timber industry does not have a unified and focused export marketing strategy. This topic has been often analysed from a supply chain perspective only, however, nowadays it is unavoidable to view it in terms of network perspective as value creating relationships seems to be a corner stone of market competitiveness. Namely, in order for a supply chain, as defined by Menzer et al. (2001), to develop into the chain that delivers an added value to customers, every part of the chain should be strong and effectively connected to each other (Ross, 1998; Stevens, 1989; Tyndall et al. 1998; Ellram & Cooper, 1990). Especially related to forestry, Elyakime & Ca-banettes (2009) point out that "cooperation is rare [in timber industry] and the confrontation of conflicting interests is unavoidable", which calls for "integrated management of the marketing of timber". This paper is also motivated by the EU Forestry Strategy (2005); its main purpose is simultaneous improvement of global competitiveness of the European forestry and preservation of natural resources of the European Union. In order to achieve this goal, several measures are necessary, including ones aimed at increasing added value to all links in the forestry value chain and consequently improving the long-term competitiveness of wooden products. The paper employs a qualitative mapping approach to the Slovenian timber market to identify key supply chain actors (forest owners, logging companies, sawmills and value added wood product manufacturers), their roles and goals, to determine the nature of relations among them and identify policy issues that influence their performance. The main purpose of the timber market map is to examine factors that have the greatest impact on the Slovenian wood-product value chain, and consequently on the competitiveness of wood products. In this regard and following Hellin et al. (2005), this paper, therefore, analyses timber value chain and the environment (e.g. infrastructure, institutions, policies, processes etc.), in which this value chain operates and is therefore integral part of such a market map. The paper pays special attention to connections between small forest property owners and logging companies (usually "forest concessionaires"), as this causes most concern when implement- AKADEMIJA ing value creating relationship and consequently impacts competitiveness of the Slovenian forestry and related industries (see Ministry of Agriculture, Forestry and Food of the Republic of Slovenia, 2010; Chamber of Agriculture and Forestry of Slovenia, 2011; Slovenian Forest Service, 2011b; Schmithüsen & Hirsch, 2010). This paper is mainly aimed at finding important implications for the marketing theory and practice based on the Slovenian timber industry, which is non-competitive on the global wood products' market despite the country's enormous natural resources of wood. Furthermore, its conclusions may not only stimulate a long-overdue research interest of marketers for this industry, but also help solve the following dilemma: why Slovenia has not been able to adequately capitalize on its huge timber (export market) potential. The remainder of the paper is organized as follows. Section 2 gives a general overview of the environment, in which the Slovenian timber value chain operates. It briefly discusses Slovenian forests, their management and basic economic indicators of Slovenian forestry and wood products industries. Section 3 focuses on the Slovenian timber value chain, with particular emphasis on major market actors (private forest owners and forest concessionaires), and the nature of relations between them. Creating value added re- lationships is a key to competitiveness, therefore, section 4 offers suggestions how to use relationship marketing to boost the value creating relationship not only between small forest property owners and timber buyers, but also among small forest owners themselves, and it proposes the use of country brand to improve the competitiveness on foreign markets. Section 5 is a summary of our conclusions. 2. THE ENVIRONMENT OF SLOVENIAN TIMBER VALUE CHAIN 2.1 SLOVENIAN FORESTS AS A NATURAL RESOURCE FOR TIMBER INDUSTRY Slovenia is, after Finland and Sweden, the third most densely forested country in Europe; almost 60 per cent (1,185,145 ha) of its entire territory is covered with forests (Slovenia Forest Service, 2011a). In order to protect ecosystems and biodiversity Slovenia encourages "close-to-nature" forestry, thus approximately 90 per cent of Slovenian forests regenerate naturally (European average is 40%), the rest is regenerated by planting and seeding (MCPFE, 2007). As a result, Slovenia is dominated by mixed forests: 70 per cent of forests are covered with beech, fir-beech and beech-oak, which have a high production and market Figure 1: Slovenian wood increment compared to wood extraction from 2000 until 2009 8 o 8 CO 8 o (D 8 o CN O - I I I I I I I I I lllllllll M^lllll 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Annual increment of wood Annual removal of wood Data source: Slovenia Forest Service (2010). capacity and can be used as a source for a wide variety of wood products1. With over 270 m3 of wood per hectare of forest (Gale, Lešic & Kutin Slatnar, 2011) Slovenia also has one of the fastest growing stocks of wood in Europe, preceded only by Austria, Switzerland, Luxemburg and the Czech Republic. A main cause for this growth can be attributed to the fact that annual wood increment in Slovenian forests goes far beyond annual wood removal as indicated in Figure 1. Mirko Medved, director of the Slovenian Forestry Institute, warns how longstanding insufficient timber extraction leads to forest aging (šoštarič, 2011), which yet again reduces forest productivity and timber value (Murty, McMurtrie & Ryan, 1996). 2.2 SLOVENIA'S FORESTS MANAGEMENT Almost 75 per cent of Slovenian forests are privately owned, the remainder are public and owned by the state and local communities (Slovenia Forest Service, 2011a). Austria, France, Sweden and Norway have a similar share of private forests (Schmithüsen & Hirsch, 2010). However, Slovenia is different in terms of the size of average private forest property. Due to more than 450,000 private forest owners more than 40 per cent of Slovenian forest properties are smaller than 6 ha, usually split in different locations (Schmithüsen & Hirsch, 2010), which precludes cost efficient production and marketing of timber on the individual private forest property basis. Not surprisingly, only public forests (roughly 25 per cent of all forests) are considered to be systematically managed (e.g. maintained and utilized). Slovenia public forests' management is based on a strict separation of collective and commercial activities (Matjašič, 2006). Collective activities are carried out by publicly financed Slovenia Forest Service - SFS (Zavod za gozdove Slovenije). Commercial activities are carried out by forestry companies, which have acquired forest concessions (so called "forest concessionaires"). Therefore, in Slovenia three actors are involved in public forest management (Matjašič, 2006): ■ Farmland and Forest Fund of the Republic of Slovenia (Sklad kmetijskih zemljišč in gozdov Republike Slovenije) manages publicly owned farmland, farms and forests. ■ Slovenia Forest Service is responsible for sustainable management of Slovenian forests regardless of their ownership. ■ Forest concessionaires carry out forestry work 1 For an overview of commercial usability of each wood type see Wiemann (2010). in public and privately owned forests (in agreement with private owners only). Slovenia started granting concessions for public forests' management in 1996. A concession, awarded without public tender by Farmland and Forest Fund of the Republic of Slovenia on behalf of the state to forest companies for 20 years, includes logging and harvesting of timber, timber sales, restoration, conservation and silvicultural work, as well as the construction and maintenance of the forest infrastructure (National Farm Land and Forest Fund Act, article 10a). A concessionaire may only be an individual or a legal entity that is registered to practice forestry in Slovenia (National Farm Land and Forest Fund Act, Article 2). The concessionaire exploits public forest according to the annual program set by Farmland and Forest Fund of the Republic of Slovenia. Forest concessionaire's overall financial performance is therefore determined by a concession fee for use of public forests (prescribed by National Farm Land and Forest Fund Act, Article 10a), standard costs of public forest exploitation (defined by Ministry of Agriculture, Forestry and Food), its technical and cost efficiency (Li, 2006) and revenue generated from other non-regulated activities, including logging in private forests. According to Kavčič & Slapničar (2008), the majority of forest concessionaires generate more than 60 per cent of revenue from other activities (data for 2005); therefore their financial performance may be closely related to added value generated by logging in private forests. In 2009, the cut in Slovenian forests amounted to 3,374,191 m3 (a decline of 1.6 per cent compared to 2008): 1,853,772 m3 coniferous and 1,520,419 m3 deciduous trees (Slovenia Forest Service, 2010). The cut in public forests was carried out according to forest management plans; however cut in private forests fell well behind, hence the total cut in 2008 fell 34 per cent short of plans. In 2009 (as in 2008), logging was carried out by over 70 forest companies, however majority of work was done by 14 forest concessionaires (AJPES database, 2010). Overall financial performance of concessionaires is the key to success of Slovenian forestry in both, the economic and ecological terms. 2.3 ECONOMIC INDICATORS OF SLOVENIAN FORESTRY AND WOOD PRODUCTS INDUSTRIES Given the high volume and quality of Slovenian forests, Slovenian forestry and wood products industries should be a vital driver of Slovenian economy, although vast majority of logging is AKADEMIJA Figure 2: Slovenian timber production and added value of Slovenian forestry from 2000 until 2009 o m cc D LU n O ■= O E c o m o - Mil 11 1 1 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Timber production Added value Data source: Statistical office of the Republic of Slovenia (2011a). done in public forests (less than 25 per cent of all forests). However, contribution of forestry to Slovenia's gross national product is barely around 0.2 per cent, same as in neighbouring Croatia, which has half as much forests (The World Bank, 2010). Moreover, as Figure 2 indicates, even though wood removal remained at the approximately same level from 2007 until 2009, added value of Slovenian forestry declined heavily. Given the fact the number of the employees decreased by more than 10 per cent during the same period (Statistical Office of the Republic of Slovenia, 2011a), the decline in added value is directly attributed to lost value in the eyes of a timber customer. Certainly, part of the problems of Slovenian forestry can be attributed to current economic crisis. Yet, Figure 2 shows how growth of added value in Slovenian forestry severely dropped in 2009, when Slovenian construction industry was still reasonably active2. Since 2010 performance of the wood processing industry was negative again and Slovenian furniture manufacturers' profits dropped too, it is not surprising that Ministry of Agriculture, Forestry and Food of Republic of Slovenia (2011) finds that Slovenian forestry and forestry-related industries are still in deep crisis. Despite of huge stock of wood and the urgency to increase logging to preserve quality of wood, timber customers are frequently rejected in Slovenia. Anica Zavrl Bogataj, director of the Forestry, 2 For detailed data on added value in Slovenian construction see Statistical Office of the Republic of Slovenia (2011a). Hunting and Fishing Directorate within Slovenian Ministry of Agriculture, Forestry and Food, points out a case of IKEA-Austria; the company was willing to invest in Slovenian timber industry "if Slovenia can provide at least several hundred thousand cubic meters of wood per year" (šoštarič, 2011). Regrettably, as noted by Zavrl Bogataj, Slovenia is currently unable to comply with such requests due to "discontinuities in wood-products production chain" (šoštarič, 2011). Nevertheless, Slovenian timber exports are increasing: 26 per cent of round wood was exported in 2009 (Statistical Office of the Republic of Slovenia, 2011a). Majority of exports go to Austria and Italy due to their higher purchase prices compared to domestic market (Kmetijski inštitut Slovenije, 2011). Austria has regionally highly competitive sawmill industry with large and modern sawmills, which enables them to offer higher purchase prices. Exports to Austria follow timber price growth: since 2004, when export was negligible, the share of exported round wood grew to 17.2 per cent of Slovenian annual wood harvest in 2009 (Piškur, 2010). Current financial crisis may be another reason for export to Austria: namely, Austrian buyers are more regular payers compared to domestic buyers. 3. THE SLOVENIAN TIMBER VALUE CHAIN The flow of various wood products can be plotted as a modified Porter's value chain (1985). Figure 3 gives an insight into the flow of Slovenian wood AKADEMIJA Figure 3: Simplified value chain of Slovenian forestry and wood related industries End User Source: Choen & Kozak, 2006 and author's analysis products: from small private forest owners and public forests to final customer(s), which can buy timber, paper or wooden house furniture. Wood products include timber (focus of our analysis) as well as lumber, paper and furniture. Following Vandermerwe (2000), every "link" in the value chain - from a forest owner to a retailer -should add value to the final customer (end user), including a link between forest owners, logging companies (mostly forest concessionaires) and sawmills. Added value arises when perceived value of a product exceeds a product price in the eyes of a customer (Day, 1990). A value chain's link adds value to the whole value chain if it manages to increase perceived value of the product in the eyes of a customer more than it increases the product price (influenced by costs of value chain link's operation). Products with lower or no added value are not competitive and can be quickly squeezed from the market by more successful competitors. The Slovenian Ministry of Agriculture, Forestry and Food (2010) sees a number of factors that has a devastating impact on the non-competitiveness of Slovenian wood-product value chain on the global market, namely: ■ private owners of overly fragmented forest property, ■ disorganization of forest owners in terms of forest management and marketing, ■ heterogeneous forest industry. Wood supply is determined by private owners' capabilities and willingness to enter the wood market. On the other hand, wood demand is determined by capabilities of wood buyers (mostly forest concessionaires as they buy most of the wood and timber in Slovenia) to get a wood of higher quality and process it cost effectively in order to achieve added value for their customers (producers of furniture, pulp and paper industry, constructors and end users); therefore, value creating relationship among private forest owners and forest concessionaires is crucial for the competitiveness of wood products. 3.1 PRIVATE FOREST OWNERS In Slovenia, there are more than 450,000 private forest owners (compared to 145,000 entities in Austria (Weiss et al., 2010). Although they hold almost 75 per cent of Slovenian forests, the average private forest property is only 2.5 ha (compared to average size of 13 ha in the EU) (Slovenia Forest Service, 2011a). More than 40 per cent of Slovenian forest properties are smaller than 6 ha (compared to less than 10 per cent of forest properties in Austria) and they are usually split in three different locations (Schmithüsen & Hirsch, 2010). Majority of Slovenian private forest properties is thus well below the 10 ha limit used to distinguish small-scale forestry from industrial one (Russell & Mortimer, 2005), which inevitably leads to costly production and marketing of timber on the individual owner basis. Such a severely fragmented forest property makes it almost impossible to use forest cost efficiently on the individual owner basis due to lack of economy of scale, even though quite a number AKADEMIJA Figure 4: Relative cost efficiency of Slovenian concessionaires 1,2 1 0,8 0,6 0,4 0,2 0 # Co ' 0 &