Column - Taking Stock of the Industry and its Uneasy EComm Approach
By John Clarke
It is one of the great ironies of the Canadian forest industry that it can only stand by and watch the New Economy siphoning off much of its stock market value while resisting an Ecommerce solution to the problem. Other businesses are moving steadily on to the Internet. But the forest companies have been holding back, not exactly reluctant but certainly cautious, right there in the middle of the Old Economy. It's a strange departure, though. The industry has eagerly embraced technology on the mill floor and in the woods. But according to a new Statistics Canada survey, forestry is at the bottom of the heap when it comes to adopting Ecommerce as a way of doing business. Only 1.1 per cent of forest companies use the Internet to sell their goods and services. A small number of companies -5.7 per cent -have web sites and only 17 per cent of all employees have access to the Internet.
Being involved with the forest industry is not a very investor friendly pursuit these days, at least not by comparison with the dotcoms. The industry has many other problems on its mind as globalization opens up competition at home and abroad. It's still a basic part of the foundation of the Canadian economy, but it lacks the glamour and sex appeal of the electronic revolution. In the last five years the return on investment has averaged 8.1 per cent. Last year was good for the corporate bottom line. But even then the return was only 9.6 per cent, well below an anticipated 12 per cent. None of these numbers comes close to the high flyers of the Internet. British Columbia, still the biggest producer, has been a sick child of the industry for the last couple of years. It has been labouriously wending its way through a maze of ecologically driven legislation which has hardly modulated the strident voices of the environmental lobbies by one decibel.
Now the national industry is beginning to feel the same kind of pressure from anti old growth environmentalism that BC has been experiencing for years. With more and more home improvement chains embargoing purchases from old growth or "endangered" forests, it may only be a matter of time before the commercial wholesalers join the parade. Growing internal disagreements are starting to weaken the industry's response to the greens' very savvy retail market strategies. Should it try to negotiate a compromise with the Sierra Club and their associate groups to secure its base in the markets? Or should it side with the no surrender companies, the logging and sawmilling communities and native groups, who want nothing to do with a compromise that-to them- is no compromise at all? The price in harvest reductions and logging restrictions is just too steep.
All this, to say nothing of an absent consensus on what to do with the CanadaUS softwood lumber agreement. Forestry would have enough to contend with, even without the black hole attraction of the New Economy for investors. It's not that the industry hasn't been made aware of the potential of Ecommerce to help reverse the trend. Jim Olmeda of TALPX Inc., one of several American Internet companies working with the industry, recently issued a warning about an opportunity being missed. At a technology clinic in Portland, Oregon, he said the Net doesn't make a curve saw work any better but it "helps reduce working capital by reducing inventory and ensuring prompt payment." It opens new markets, allows direct sales to customers and speeds the marketing and shipping status information pipeline. "Our industry," he said, "has a well developed, albeit sometimes inefficient, middle market that has been running much the same way most of the century, all for good reasons.
The technology exists to change that, the simplest examples being inventory and pricing information. "There are billions of dollars of inventory in the distribution system. Daily pricing information is not available. Prices are determined by whom you know, what they know and your last sale.... Internet exchanges deliver both market and price discovery with the click of a mouse." What the Internet does best is cut out the middleman. In forestry that's usually the lumber broker and cutting out the broker is not universally welcomed. Analyst Ross HayRoe of Equity Research Associates believes the broker offers personal services the Internet can't, especially valuable when other countries with which Canada deals are far behind North America in logging onto the Net. The general view is that Ecommerce will prevail-even in the lumber trade-simply because it's unstoppable. In the meantime, it's making the forest companies very nervous.
On the stock exchanges the New Economy is riding a wave of unreality, creating 21yearold billionaires, all too often on imaginative concept stocks that may or may not pan out. Values go up and down like spring temperatures, sometimes on the advice of analysts caught in the adrenaline rush as much as their investor clients. Far from encouraging the movement of money back toward Old Economy industries like forestry and their more tangible assets, the wild ride merely serves to focus more attention on the New Economy game. That means the forest industry can't as readily go to the stock market for capital financing. It must rely more on cash flow for that or go to debt financing. With forestry's history of peaks and valleys neither of those two things is easy to do.
What irks the most is that stock markets can be easily distorted in the whirl of hightech excitement. As HayRoe says, what kind of reading can you get from a Toronto Stock Exchange in which a single Canadian company, Nortel, represents 32 per cent of the index? It can take the TSE up or down in a blink of an eye. Over one month in the summer Nortel rose 20 per cent. In a single day during that period it rose by 2.7 per cent. Last March, a number of large forest companies finally got the message and formally agreed to collaborate in promoting Ecommerce in their industry. It's a start. But it's clear there's a lot of adjusting to be done if the industry is even to hold its own in the New Economy stock markets.
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