April 2002 - Logging and Sawmilling Journal -

Through subsidiary Spruce Capital Homes, BC's The Pas Lumber is helping to further pioneer wood frame house construction in China.

British Columbia's The Pas Lumber Company Ltd is helping pioneer the use of wood frame construction housing in China, a project which is turning out to be a challenging enterprise with an upside of beguiling potential. Through its Spruce Capital Homes subsidiary, The Pas has learned it needs to be actively involved in and committed to the Chinese market for the best chances of success. You have to be in China to do business with China and that's why The Pas recently formed Spruce Capital Homes China Ltd. "We have to position ourselves in China for the rapidly developing and evolving Chinese economy," says Oscar Faoro, president of Spruce Capital Homes and vice-president of marketing for The Pas.

The Prince George-based company has made significant inroads to the emerging niche market for wood frame housing units in China. It has completed 42 units since 1997, using primary and specialty wood products and expertise from British Columbia. It's now embarking on even more ambitious projects. Spruce Capital Homes has an interesting history.

China being transformed

Everything about China is on a grand scale, and that includes change. Dramatic political and social changes are underway, transforming the world's most populous country. In short order, China has shifted from revolution and Mao quotes to evolution and Internet communications. The process is encouraging further trade liberalization and a new era of potential for Canadian wood products and wood use technologies. Domestic demand is the driving force of growth.

The size of the middle class in China-a prime market for housing-is expected to double to 500 million people by 2010, says Howard Balloch, Canada's ambassador to China since 1996. He estimates the GDP will grow by seven per cent annually in each of the next 10 years. The currency remains stable, inflation is low and tariffs are falling to the three to seven per cent range.

The new half-a-billion-strong middle class will have real disposable income and choices in how to spend it, adds Balloch, noting that policy changes in China are contributing to a more open housing market. He foresees a million square feet of housing and re-construction annually for the next 10 years. But Balloch is careful to insert caution and context. There are challenges ahead, such as the establishment of building codes to accommodate wood frame construction methods and products. And there's the Chinese languages, cultures and traditions to learn. It's not a US market, points out Balloch. "It will not be a quick market development. It's an exciting market, but tough, and it will take time."

It was active in the northern BC home package market for 18 years prior to being acquired by The Pas. It designs homes and builds trusses and wall systems, supplies windows, doors, cabinets and installs plumbing and heating. Spruce Capital successfully ventured offshore, selling housing units in Japan, Russia and Korea. The company had also established contacts with a Chinese company by 1996. Spruce Capital's four previous owners-Dean Ward, Gordon Biddle, Ed Labas and Mike Warawa-were looking to retire from the business.

To The Pas, Spruce Capital represented a range of assets that would complement and diversify its core business of lumber manufacturing. Faoro says the attractions included Spruce Capital's category two status under the BC Ministry of Forests classification; its involvement in value-added business through its truss and wall systems; its experience working with First Nations in wood frame construction; its business success offshore; its presence as a lumber consumer in the domestic market and, by no means least, the company's profitability.

Spruce Capital provides custom design services, site services, materials and components for its Chinese developer partners. The company's first 42 units were for different phases of one customer's development at Suzhou, near Shanghai. Spruce Capital provided supervisory crews for the projects. "The Chinese are very capable but need to be exposed to the products, process and technologies of wood frame construction," says Faoro.

Spruce Capital has used a wide variety of British Columbia sources for the primary and secondary wood products required in its projects. These include: MSR lumber from Weldwood; grade two and better lumber from The Pas; studs from Nechako Lumber and Clear Lake; plywood from Tolko; OSB from Slocan; Canfor's low grade stock re-manufactured into studs by Brink Forest Products; preserved wood foundations from Canfor's PG Wood; Parallam from Weyerhaeuser; kitchen cabinets from Vanway; mouldings from Sauder Industries and interior railing from B & H Woodturning. Spruce Capital is targeting wood frame housing units in China that include villa type developments valued up to US$2 million. Contributing to the demand is the expatriate market.

"These are foreigners working for foreign-based companies with branches in China," explains Faoro. He estimates there are 30,000 expatriate families in the Shanghai area alone. A half million dollar housing unit might contain anything from $100,000 to $250,000 worth of lumber, wood building products and services supplied from North America. Spruce Capital is working with a Chinese developer on a 100 unit project in Chengdu and on Beijing Nova, a site that will eventually contain about 600 housing units.

Beijing Nova is a new community, 20 minutes from Beijing's international airport and 45 minutes from downtown. The existence of Beijing Nova helps illustrate the dynamic changes occurring within Chinese society. The Chinese government has traditionally funded predominantly apartment style housing for its workers. The emphasis is more on function than quality.

But there's a wealthy upper class in China and a middle class that is expected to mushroom to half a billion people by 2010 (see sidebar story on page 15). "A lot of individuals have the income to upgrade their housing and as more people can afford it and policies change in the country, people will take greater pride in their housing and the market will evolve," says Faoro.

"The infrastructure in major cities is changing. There are huge amounts of civil engineering, sewer, water, transportation systems. These capital investments open greater opportunities for this type of housing development. Housing can be located further out of the city. It's the very early stages of suburbanization," he explains. The potential for BC lumber suppliers is considerable, to put it mildly. Faoro says a single-family, 250-square-metre home consumes about 10,000 board feet of lumber and panel product equivalents.

The market is evolving rapidly with predictions of many tens of thousands of annual housing starts. Take a conservative 10,000 units and do the math-that's a cool 100 million board feet of lumber. Faoro is confident platform frame wood construction's share of the emerging market will be considerable. But the market is segmented and wood faces competition from other building products, as it does in North America.

A wood culture does exist in China, as 15th century timber temples in Beijing's Forbidden City attest. But there's also an over-capacity in the Chinese steel industry and the government is encouraging lightweight steel use in the villa housing market, says Faoro. But steel structures will still require plywood, OSB and other wood products from North America, he adds.

"The market is extremely competitive in all areas." Some of that comes from domestic sources. China is undergoing a massive re-planting program to counter heavy wood consumption and restricting log supplies. But softwood volumes are being imported from Siberia while tropical hardwoods find their way into the country from places like Burma (Myanmar). Standards of wood construction do not always jibe with North America.

"We produce a certified product under NLGA rules to established design criteria," says Faoro. The situation underscores the problems of establishing and monitoring building codes for wood frame construction in China. "Spruce Capital Homes has been working with Chinese developers and organizations to improve the awareness levels of platform frame construction in the market place," continues Faoro. This has meant tackling the problem at basic levels. People have to understand the terminology. They need to know what a stud, a joist and a truss is and why they will work in that application, he explains.

It took four years just to get basic handbooks about the construction materials and methods translated for the market. (Forest Renewal BC, through the SPF Marketing Group, initiated the translation of CMHC documents. Forintek and the Council of Forest Industries of BC are other organizations helping to promote wood product use). "We have to make sure that everyone in the industry has the right knowledge for the tasks they're asked to perform," adds Faoro.

China is very different from Japan in that there is no one dominant player in wood frame construction development. Faoro expects the compilation of a National Building Code establishing wood construction standards and regional codes reflecting climatic variables within the vast country. "Over time, I suspect we will drift back to supplying primary wood products from North America, although a small market segment in China will require manufactured products," predicts Faoro. National and regional building codes will encourage the manufacture in China of certified structural products like trusses and high quality finished products like windows and cabinets.

A new Chinese pool of qualified site trades and supervisors will emerge. That will create greater choice, value, service and warranties to Chinese consumers. And that, in turn, will enhance the product, stimulating demand for more Canadian 2x4s and primary wood products.

Faoro says developing a business plan for the Chinese villa housing industry is like any other. You ask a range of questions: is the market accessible, defined, large and profitable? If the answers are positive, you pursue it, he says. For The Pas and Spruce Capital Homes, the answers have been positive. "We're in the very early stages of development of a wood frame construction industry in China. But I fully believe the opportunity is there, with consumer demand and sophistication, for the industry to blossom," concludes Faoro.

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