Why Aren't More Overlaid Structural Wood Panels Being Sold?

Overlaying structural wood panels provides great added value, but market forces have tempered their ascension.

Surfactor Americas

Overlaid structural wood panels often have significant functional advantages over “raw” commodity plywood and OSB in many applications today. And they don’t cost much more. So why aren’t more overlaid structural wood panels being produced and sold? I think there are at least two reasons why.

Path Dependency
Ever wonder why our most modern personal computers still have the old QWERTY keyboard? When personal computers were first introduced, people who were familiar with the old typewriter keyboard layout transitioned most easily to similar keyboards. While these keyboards are no longer optimal today, those past decisions constrained the path of future product development.

Academics call this “path dependency.” In many cases our overlaid, structural wood panel procurement, production and marketing efforts are locked in to old process and business development paths and can’t take full advantage of today’s technological and economic possibilities. There are, for instance, a plethora of largely unexplored overlay business development options for structural wood panel producers.

Overcoming Path Dependency
When I was in college, way back when, we learned to evaluate new process and product investments with the aid of net present value, internal rate of return and payback period calculations. Today college students are also taught to include the value of “real options,” essentially the value of future flexibility. Future flexibility has real economic value that should always be incorporated into new process and product development decisions.  

In addition to path dependency challenges, change is scary and old habits—both individual and organizational habits—are hard to break. One of our industry’s habits is the single-minded, “make the same product cheaper” habit. I believe this habit is, in turn, the result of “the market for lemons” phenomena and individual and institutional habits often formed, out of necessity, during the very difficult times in our highly-cyclical end use markets.   

The Market for Lemons
George Ackerloff, now emeritus professor at Berkley and the husband of Federal Reserve chairman Janet Yellen, won the Nobel Prize in Economics for his paper The Market for Lemons. In its July 23, 2016, issue, the Economist summarized Ackerloff’s famous paper:  
“Suppose buyers in the used-car market value good cars—‘peaches’—at $1,000. A poor quality used car—a ‘lemon’—is worth only $500 to buyers. If buyers can easily tell lemons and peaches apart, trade in both of them will flourish. But, in reality, buyers might struggle to tell the difference between a peach and a lemon: scratches can be touched up, engine problems can be left undisclosed, even odometers may be tampered with.

“To avoid paying for a peach while buying a lemon, buyers cut their offers. They might be willing to pay, say, $750 for a car they perceive as having an even chance of being a lemon or a peach. But the sellers of a peach logically reject such an offer. As a result, the buyers face ‘adverse selection’—the only sellers who will accept $750 are those unloading lemons.

“Smart buyers foresee this problem. Knowing they could be buying a lemon, they offer only $500. Sellers of the lemons end up with the same price they would have received were there no ambiguity. But the peaches all stay in the garage. “Information asymmetry” kills the market for good cars.”

Structural wood panel buyers rely upon qualified inspection and testing agencies like the APA to routinely test and certify the quality of the products they buy. This creates an incentive for individual panel producers to “push” the standard. A passage from Ackerloff’s famous paper:

“There are many markets in which buyers use some market statistic to judge the quality of prospective purchases. In this case there is an incentive for sellers to market poor quality merchandise, since the returns for good quality accrue mainly to the entire group whose statistic is affected rather than to the individual seller. As a result there tends to be a reduction in the average quality of goods and also the size of the market.”

When the industry is young, industry production technologies vary little and raw materials are relatively homogeneous (e.g., OSB), this isn’t a major problem. But it is a serious problem when the inspection and testing agencies find it difficult or impossible to keep up with a very rapidly changing industry. An example would be today’s overlaid Douglas fir plywood industry. There are rapid changes underway on both the demand side (e.g., much higher alkalinity concrete mixes are now essentially “pulping” conform panels) and on the supply side (e.g., much reduced supplies of small-knot, dense, Douglas fir veneers). The “market for lemons” is likely having a major effect on the size of this market today.

Overcoming the Market for Lemons
How can individual panel producers overcome this “lemons market” problem, their industry’s “race to the bottom,” and depressed industry sales levels? They can offer company-specific product performance guarantees.  

Another approach is to more aggressively brand products. In either case, the mill’s products need to be clearly differentiated from their competitors’; as we discovered earlier, industry-wide, third-party quality certification is important but not sufficient. Like car buyers, panel buyers won’t chance paying peach prices when they may actually be buying a “dressed up” lemon.  

For some structural panel producers, product differentiation requires a major change in company culture. For instance, it is very difficult to produce innovative, differentiated products for the end use market if the company doesn’t also adapt a different supplier-buyer mindset. Supplier-partners are often critical to the structural wood panel producer’s differentiation. 

As industry competition comes to focus more and more upon only one of the “4P’s of marketing”—price—“lemons” tend to proliferate and industry sales volume tends to decline.

– Roy Nott is president of Surfactor Americas LLC, Aberdeen, Wa., a German-owned producer of overlays, glue films, and press cleaning films for the global wood panel industry, with manufacturing operations in Finland, Germany and Malaysia. Reach him at roy.nott@surfactor.com.

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