A View to the Future of U.S. Pencil Manufacturing

My last post addressed recent news regarding allegations of illegally imported Chinese pencils.  In order to avoid anti-dumping duties these pencils were apparently transshipped via third party countries such as Taiwan, Vietnam and Indonesia and mislabeled as to country of origin.  Today I am addressing the overall U.S. market for pencils and future of U.S. production of pencils relative to how I see this topic coupled with other developing industry trends.

In my view, regardless of the final outcome of this particular legal case I believe this is a positive development for U.S. pencil manufacturers and other established pencil industry participants who are committed to making quality products and playing by the rules when it comes to all manner of international trade, environmental, labor and product safety regulations.  For the past 20 years the trends of globalization, retail channel consolidation and other competitive market forces have contributed to a dramatic shift in our industry structure just as in many other industries.  As a free market thinker I do not believe these are inherently bad trends and they have led to a number of benefits for society as a whole though those benefits may not always be evenly dispersed and has not always resulted in comparable product quality. 

When it comes to pencils, both here in the U.S. and worldwide, we are seeing more pencils sold and consumed at lower average prices than 20 years ago.  Despite the common misconception that pencils are a dying business, pencil consumption generally grows globally at or around the rate of population growth.  Also per capita pencil consumption tends to increase with income growth as well.  Providing we continue our positive immigration trends we should see stable and slowly growing demand for wood-cased pencils over the long term.  Obviously income growth and dispersion is a current concern in light of recent economic developments, but ultimately I still remain optimistic about U.S. potential from the macroeconomic stand point.

The rise of computers, tablets, or smart phones over this period have yet to prove to me that these technologies are going to displace writing instruments and pencils as a whole.  Technology certainly can impact how and where we use pencils at the margins. However, there is a strong emotional and tactile connection people have with their preferred writing tools and the physical act of depositing graphite, ink, paint or color pigments onto paper.  What could impact per capita pencil consumption even more than technology is allowing another generation of kids to be raised without access to and experiencing the use of good quality pencils. This could drive consumption patterns to alternate writing instruments in the long term.  Despite the benefit of ever cheaper wood-cased pencils on household budgets over the past 20 years , one negative byproduct has been exposing children, teachers and other consumers to a general reduction in the quality of the average pencil sold here in the U.S.  At Pencils.com one of our most common consumer questions is: “Where can I find a decent pencil at a reasonable price in which the lead won’t break, the eraser works without smearing and that actually writes well?”  Teachers often report that the simple act of more frequent breakage and sharpening has become a disruption in the classroom.

One complicating factor is the poor state of funding for education in the U.S., especially when it comes to the provision of basic school supplies. As a result the burden of supplying pencils and other suppliesis increasingly pushed onto teachers and families who have their own budgetconcerns.  The drive for ever lower prices has helped, but has also compromised quality and selection.  As a result the assortment of pencils on retailers’ shelves has declined and the mix increased towards imported private label or low price non-manufacturer brands.  Lower space allocation is offered to traditional quality manufacturer brands.

So what do a bunch of economic, social and demographic trends have to do with an illegal transshipment case and whether this helps the U.S. industry or not.  The question lies in part whether the retailers as a group, begin to see that price of pencils cannot be their sole determining factor in the product mix as there are other costs such as the associated anti-dumping duties and penalties.  Also will consumers take a greater interest in the quality and origins of their pencil purchases?  Sure they are still going to want the best price possible.  However, I tend to think that a supplier who is willing to illegally transship pencils is also a supplier who is more likely to cut corners in product safety and quality.. These are all problems the retailers and consumers don’t want to deal with over the long term.  If retailers increasingly find they will be held responsible for penalties, fines and consumer dissatisfaction as a result of the potential negative aspects of their product supply chain then they are going to increase their diligence in vetting and selecting their suppliers.  Certainly they cannot be expert in every product range they sell and as they are importing many products globally, the headache of assuring compliance on products with anti-dumping duties and other safety or regulatory concerns may result in some level of return for advice and supply to known domestic vendors for improved reliability.  This does not necessarily mean an imported pencil will be replaced by a domestically produced one, but the opportunity for engagement on that supply decision will certainly improve for the U.S. producers.

Further there are currently added economic trends that point towards some return to U.S. manufacturing in general.  My belief is this ultimately will have some positive benefits for the U.S. pencil industry also.  Labor costs in China are now increasing dramatically and though still quite low relative to the U.S. are making it difficult for many general manufacturing companies to find and retain qualified employees.  Chinese labor regulations as well as other environmental and bureaucratic regulations are beginning to impact the general cost of doing business in China.  This first impacts those producers in China who play by the rules, but in time the effects should spread further throughout the Chinese economy. Meanwhile, U.S. domestic energy costs are declining with the increase in domestic gas exploration and development.  Long lead times on overseas supply chains complicate planning and inventory investment while domestic producers can often be more flexible with quicker response times. 

Another important concern within the pencil industry is that Chinese basswood and other Chinese woods have come under pressure for use in other domestic purposes.  More wood is coming from Russia which has less stringent regulatory oversight causing more concern with legal wood supply issues.  A resurgence in total Chinese GDP growth from their current slowdown will have further inflationary impact on global wood supply and thus eventually pencil prices as well.  In my personal assessment we’ve seen a low point reached in global wholesale pencil prices that was reached about two or three years ago.  There will always be some other part of the world, the next low cost country, to move on to, but adequate quality wood supply and transportation costs also have an important impact on pencil economics beyond labor costs and regulatory environments.  Overtime, the developing world catches up in relative costs so the U.S. should be able to adapt and innovate to remain competitive.  That is as long as we do not let our current political stagnation and increasingly burdensome regulatory environment overwhelm us over the long term. As the U.S. remains one of the most important global growers of trees this ultimately will have some positive impact on a host of products manufactured from solid wood.  As a result I do predict that we will eventually see at least some small improvement in U.S. production of pencils and other wooden products over time.

In our own business at California Cedar Products Company we are certainly not prepared to return our slat manufacturing operations to the U.S.  However, we are increasing our commitment to U.S. based wood supply with the recent introduction of our Pacific Albus product range.  Eventually we expect this will be an increasingly relevant component of our business displacing Chinese and Russian Basswood and supplementing our premium California Incense-cedar product range. 

Additionally, we have recently made several small movements towards U.S. production regarding our Palomino Brands pencil ranges.  Recently we relocated the final eraser tipping process for our Palomino Blackwing and Blackwing 602 pencils from Japan to our Stockton, CA using a newly developed tipping process.  This should improve tipping quality and responsiveness as demand for Blackwing pencils grows.  Thought the pencils themselves will continue to be produced in Japan.  Also, we are transitioning our Prospector and Golden Bear products from Thailand production to the U.S. where we are working with one of our slat customers Musgrave Pencil Company to produce these items. The new “made in the USA” versions of both pencils will phase out our prior California Republic versions and be available exclusively on Pencils.com in the coming weeks.  These pencil items represent only a very minute segment of the U.S. pencil market, but do expand our commitment to offering a “Made in the U.S.A.” product selection in our Pencils.com store.

Allegations of Illegal Chinese Pencils

U.S. Pencil Anti-Dumping Duties are news once again as a result of new developments with regards to alleged transshipments of pencils produced in China via third countries to avoid these duties.   Despite the imposition of such duties since 1994 there has been a steady increase in imports by retailers and wholesalers most importantly from China, but also Indonesia, and numerous other countries over the past 20 years.  To maintain competitive through out this period much of the traditional volume supplied by U.S. pencil manufacurers has migrated primarily to Mexico and Asia, particularly the largest U.S. producers.

In effect, the large retailers and a new class of importers and distributors have significant increased importance to overall US pencil supply using lower cost imports by bypassing the historical U.S. producers. Today U.S. manufacturers now use a combination of U.S. production, foreign production in their own subsidiary facilities as well as outsourced production from third party foreign suppliers to meet thier customers needs. Only a very few maintain all their production within the U.S.

Today I estimate that less than 10% of U.S. pencil consumption consists of pencils actually manufactured in the United States.  Certainly the actual market share of the traditional U.S. producers is much higher when factoring in production imported from their own facilities in Mexico or China plus what they import from other foreign producers.  Perhaps 50% of the U.S. market today are pencils imported directly from China, despite the anti-dumping duties of 114% levied on Chinese pencils since 1994.  Most of these direct Chinese imports do not pay the full anti-dumping duty given that provisions under the statutes allow for a review process with the U.S. Commerce department that results in reductions in these duties applicable to some Chinese producers/exporters.  However, the review process is expensive and only the largest Chinese producers that export to the US participate.  As a result it has been long suspected that there also have been a substantial number of Chinese produced pencils being illegally transshipped via third countries to avoid these duties.  Suspecting and proving such transshipments however are separate matters. 

Now for the first time since implementation of the duties it was made public in May that there is an active civil case proceeding against several large U.S. retailers and importers for participating in the importation of illegal transshipped Chinese pencils via countries such as Taiwan, Indonesia and Vietnam.  This case was filed in 2008 by the Cullen Law Firm in Washington, D.C. per the this press release published May 17, 2012.  The public docket was made available May 1st.  Note that at this time these remain only allegations, but if the case prevails there are substantive fines and penalties that would be accruing going back to at least 2006 as it’s not just the transshipment to avoid duties that is a potential violation, but also incorrect marking relative to country of origin laws as well. 

I have now had the opportunity to review the actual Docket Report from the U.S. District court which was formally unsealed on May 1^st of this year.  Certainly the details of the allegations in these documents seem well researched and argued and are consistent with rumors of various transshipment practices I’ve heard throughout the years.  The Cullen law firm seems confident in their press release.  In the event the case is successful it appears that the the Cullen firm and their client will benefit financially receiving a share of the duties and penalties collected with the balance returning to the U.S. Government which remains an interested party to this case. 

There is also the matter of whether the defendants were knowingly or unknowingly participating in this practice.  My understanding is that the burden of proof on that point is not as relevant in a civil case vs. a criminal case and that may be the rub.  The plaintiff just has to prove the illegal transshipments occurred.  Whether these companies knew they were illegal transshipments doesn’t really matter.  If proven true, clearly the drive for ever lower procurement costs from these retailers will have played a part in supporting the illegal behavior facilitated by thier suppliers in one way or another.  As the importers of record they are potentially subject to the back duties and penalties and as these appear to be rather substantial I assume this case has definitely got their attention and hopefully the attention of other pencil importers.

Finally, from what I’ve learned about the case to date none of the traditional U.S. pencil producers appears to be actively involved as a plaintiff, nor has any been named or identified as a participant in any of the alleged transshipment activities.  In my experience the U.S. Industry participants have always supported “playing by the rules” and indeed several companies were involved as plaintiffs in the original anti-dumping case.  In that respect they helped set the current rules.  Even if some  of these U.S. producers may have relocated much of their own production overseas, they have long been active in assuring that their own imports of finished goods and raw materials are fully compliant with applicable U.S. trade law as well as all relevant consumer products safety regulations, etc.  While the U.S. Writing Instrument Manufacturers Association and it’s Pencil Section have taken no public position on this case, my personal view is that these member companies (of which ours is one) are watching this case with interest and hope that whatever the final ruling it will have some form of positive impact for all of those companies in our industry, foreign or domestic, that play by the rules.

So what does this all mean for U.S. pencil manufacturing?  If proven true, what changes will these defendants and potentially other retailers and importers make in their practices and supply chain structures to address potential risks brought to light by this alleged activity.  Will it benefit U.S. manufacturing or just redistribute purchasing to other foreign manufacturers?  What other market forces are currently at play that could impact the trends regarding the future of U.S. pencil manufacturing?  I’ll address these questions in my next post in just about two weeks time. In the meantime here's a link to a collection of my past posts on international trade issues related to the pencil Industry.

Guitars, Pencils and Lacey Act Compliance

This photo is of my father back in the 1970s during a visit to Kitaboshi Pencil Company in Tokyo, Japan, where I actually visited today. He is being presented a guitar produced using California Incense-cedar by a member of the Sugitani family who are customers using our pencil slats for their products. This gentleman is now retired, but I happened to see him today, he says he still plays guitar every day and had that guitar specially commissioned for my father as a gift. Look for my upcoming post about the history of Kitaboshi Pencil and their products that we will begin selling on Pencils.com next week. California Incense-cedar used in our pencil slats, our customers’ pencils using our slats (and in this one of a kind guitar) is fully compliant with the US Lacey Act which is the main subject of this post.

The recent news of the US Fish & Wildlife Service raid and seizure of Rosewood and Ebony wood raw materials as well as guitars from Gibson Guitars and subsequent claims by Gibson's CEO that the US government is over reaching in its actions has an interesting relevance to challenges also faced by our company and our customers in the U.S. pencil industry. Here are links to three articles about the Gibson issue over the past month:

• Trade Law Hits Note for Guitar Maker Gibson - September 19, 2011
• Gibson Guitars Wood Imports Case Raises Concerns - September 30, 2011
• Gibson Guitars CEO slams US raids as "Overreach" - October 12, 2011

At issue is the application of the 2008 Amendment to the Lacey Act, a law originally established in 1900 governing the illegal trafficking of hunted wildlife and game across state lines and since inception has continually expanded in scope and breadth to cover fish and plants. The law is administered by the Animal and Plant Health Inspection Service (APHIS) within the U.S. Department of Agriculture and jointly enforced with U.S. Department of Fish & Game which is the lead agency in the case against Gibson Guitars.

Under the 2008 amendment the law was extended to plants, wood and products made from wood and plant materials. The amendment requires importers of applicable products to certify that the wood materials used in their products were not obtained from illegally harvested materials or include any protected or threatened tree species. The amendment implemented a number of documentation and declaration requirements that must now accompany each import shipment with respect to specific species used, country of origin of the trees from which the wood product was produced and statements relative to the legal harvesting of the trees used in the. Knowingly importing wood or wooden products covered by the law is a violation of the law subject to both civil and criminal penalties. Heralded as an improvement in environmental policy the amendment was also supported by the Bush Administration as a protectionist measure for the US timber and wood products industry against lower cost imported woods.

While I have no specific knowledge of and cannot speak to the specific issues involved with Gibson's case I can certainly state that illogical and inconsistent application of the rules process by government agencies responsible for enforcing the Lacey Act is a ripe example of the "law of unintended consequences" as with much government regulation. CalCedar has been deeply involved in addressing the 2008 Lacey Act amendment relative to compliance of our own pencil wood supply as well as understanding the impacts of the law on our company, our customers and the pencil industry supply chain as a whole.

We have long taken an industry leadership position in assuring the wood resources we utilize are harvested from well managed forests according to applicable rules and regulations in any countries we source our wood from. We have and continue to support industry efforts to increase the overall sustainability and have been a pioneer in implementing FSC and SFI third party certification to an increasing proportion of our wood supply. Thus in concept implementation of the Lacey Act amendments in 2008 was a step in a positive direction with a goal of eliminating illegally sourced raw material or utilization of any threatened plant species. Though the standards applied as to what’s illegal or legal or threatened or not can vary from country to country as the Lacey Act simply requires compliance to the applicable laws in the country of harvest. Thus the level of added environmental protection here is inconsistent from country to country.

The Lacey Act requirements added a whole new level of documentation and due diligence required for us to supply slats to our US based pencil manufacturing customers. This included updated investigations and documentation of our wood supply chain and added costs of consulting in the investigation with an accredited third party certification agency as to appropriate precautions including the added burden to segregate and/or eliminate any wood of potential concern and to maintain clear chain of custody of all our through the supply chain. All of this was already occurring with respect to our FSC and SFI material in both Cedar and Basswood, but we felt it important to apply these processes to the balance of our Basswood supply chain. Where we could not clearly document exact origin we sorted out the material to create yet another classification of inventory. Thus with respect to our Basswood pencil slats we now must keep separate inventory and track three different groups of products; FSC certified, Lacey Compliant and standard inventory which we do not believe is a compliance concern but will not take the risk of selling into the US market without clear chain of custody back to the forest.

However, this burden of declaration documentation was not extended to the importers of pencils themselves. Thus wood sold to our customers who produce pencils in the US is subject to the documentation requirements while finished imported pencils are not, placing an added burden on U.S. pencil producers. Given that the majority of pencils consumed in the U.S. today and before the amendment took effect were imported this inconsistent application of the statute to intermediate vs. finished products hardly serves to protect US manufacturing jobs or to ensure that the majority of pencils sold in the US are indeed Lacey Act compliant. This does not mean many or even most pencils are not compliant, just that the chances are higher that they could be. As far as musical instruments are concerned importation of pianos and stringed musical instruments, including guitars, seem to have become subject to the documentation and declaration requirements in April 2010, so in this case it appears the compliance playing field may be a bit more level between US and Foreign producers in that industry.

Next, the rules are not very specific on the level of sufficient due diligence to protect an importer from prosecution and civil and criminal penalties under the act. The "due care" principal is used which is generally contextually applied depending upon the level of organizational expertise and level of involvement in the supply chain of the importer of record. Thus as an experienced wood products manufacturer standards for "due care" applied to our company may be interpreted by the relevant agency differently than that of an importer of finished pencils who tends to rely solely upon the level of documentation they choose to request from their supplier. In many cases such suppliers are simply foreign trading companies, not manufacturers themselves, relying on the say so of their own supplier. With much pressure put on the price of imported pencils and other wood products this provides some level of incentive to less ethical suppliers to fudge in the information provided to their U.S. import customer. If a U.S. importer does not perform an on the ground investigation or use a knowledgeable third party certification agency, which is not specifically required under the statute, and simply relies on the paperwork provided by their supplier, they may be at some elevated risk of exposure to prosecution as to whether they employed “due care” in the event there is ultimately some problem found with the legality of the raw materials. This essentially becomes a risk management exercise for each importer with differing levels of risk tolerance and exposure.

Finally, as a knowledgeable U.S. company operating our own facility in China and selling globally we are more at risk of punishment under this U.S. act than are our foreign competitors. It’s going to be difficult for a U.S. importer penalized under the act to recoup any fines even if they have some form of guarantee. As such we've taken a more conservative approach to managing this issue in our company. This is also more costly than most of our foreign competitors especially those who are exporting finished pencils to the US where no specific requirements for their U.S. import customers to file the import declarations. This does not mean those pencils are not subject to requirement to be legally harvested, but they have less risk of being challenged as to compliance.

As a company we are continually working to insure that an increasing portion of our wood supply to the pencil industry actually is part of one or more accepted third party certification programs, most specifically FSC or SFI, under the PEFC umbrella. Given both inflationary cost and supply developments with respect to Basswood in China resulting from the Chinese government now enforcing greater harvest restrictions we are currently testing and introducing a new 100% FSC certified product line named Pacific Albus. This new product is U.S. plantation grown and fully Lacey Act compliant. We see Pacific Albus becoming increasingly important versus Chinese or Russian grown Basswood in our company’s supply program and is a product that will be proprietary to our company. I expect to post more about this new product range as we move forward with greater adoption and acceptance into the industry by our customers.

Celebrating the Japanese Pencil Industry

Sometime next week, tentatively on November 2^nd, we’ll be introducing a few select items from two Japanese brands on Pencils.com; Kitaboshi Pencil Company and Tombow. The selection includes several great items for the holiday gift giving season. You can learn more about those specific items in an upcoming Studio 602 story early next week.

This expansion of brands at Pencils.com is a part of our continuing effort to introduce more of the products of our pencil slat customers’ from around the world. This allows us to increase the breadth of great high quality pencil offerings on Pencils.com, some of which are not readily available or well known in the U.S. Market. It also helps increase awareness and appreciation of some great pencils and of the wood-cased pencil in general. Given our close relations as a wood slat supplier to many producers around the world, we hope to continue growing our offering mix quite a bit over the next year.

This week also marks my annual visit to Tokyo to visit a number of our pencil slat customers and to work with our Palomino and Blackwing producer about production planning and product development for new pencil items we expect to introduce in 2012. Most notably a Palomino quality, private label pencil program, though we’ll share more about this in the coming months as that program moves closer to launch.

The Japanese Pencil industry is probably one of the most interesting domestic pencil industries in the world. Relatively young by comparison to its European and US counterparts with several brands dating back 100+ years, most Japanese production and development of wood-cased pencils began in the post World War II era. Over the past 20 years the industry has been subject to many of the globalization pressures faced by other developed western markets it also faces an extra challenge of demographic trends; a declining and aging population which means the consumption of pencils in Japan is actually declining year to year and has been for some time. Japan is the highest cost pencil production market in the world which is reflected in their prices. As a result very little exportation of Japanese wood-cased pencils is occurring, so the local market dictates overall production trends domestically. (In fact Pencils.com with our Palomino and Blackwing products and more Japanese pencils coming may be one of the largest volume export distributors to North America already.)

Despite these trends the Japanese production supply chain remains relatively intact and traditional without the degree of radical makeovers of mergers, acquisitions, or the extent of off-shoring production that the industry has witnessed in North America and Europe. Yes, there are certainly fewer producers over time, with several dropping out over the pat few years, but the basic structure has been relatively static. Also taken in context of relative market size vs. Europe and North America there are actually proportionately more Japanese companies actively involved in the production of pencils and pencil components in Japan today than in these other regions.

Why is this? Several factors contribute.

First, Japan is a high quality and brand loyal market with consumers who understand the difference between good and bad pencils and are willing to pay the difference. The 100 yen pencil is quite common and Beyond the major brands, Mitsubishi with its Hi-Uni and Tombow with it’s Mono, there has long been a unique demand for specialty pencils that also give a collectibles status such as “Character Pencils”, popular Disney, Pokemon and Anime characters licensed to either a pencil producer or a marketing company that contracts a local producer to produce their pencils. “Game Pencils” which treat the 6 sides of the pencil as a sort of die which children can roll against one another and win each other’s pencils. And a whole range of designer theme pencils. Such innovations were first made popular in the Japan before being adopted by some US companies focusing on the school pencil market as they attempted. Even if a marketing company has the rights to a character they most generally still use a Japanese sub-contractor for quality reasons and there have been a few lessons learned about the expectations of the Japanese consumer when the quality of an imported character pencil was not up to par. In the US, more and more of such license or designer theme pencils are imported by marketers from lower cost manufacturing, with just a couple companies actively producing such pencils in the US today. In Japan all the companies are involved in this segment of the market.

Second, the unique structure of the Japanese industry involves a variety of specialist subcontractors, some who only specialize in one or two parts of the manufacturing process, such as wood-working, lacquering and finishing, graphite & color core production or packaging. Larger companies such as Mitsubishi and Tombow and mid tier producers such as Sakamoto and Kitaboshi use these often more nimble or uniquely skilled sub-contractors to meet special processing needs, smaller production run sizes and do quicker turnaround on orders. The character pencil marketing companies as well as some branded pens producers such as Pentel rely entirely on sub-contractors for their wood cased pencil needs. Such a structure helps to shorten the supply chain vs. imported pencils in the changing specialty, novelty pencil market.

All of these sub-contractors are small family owned companies operating essentially in a building that co-locates production with their own homes. They are more like traditional artisan workshops than what the average person would picture as a factory. The owners of these businesses are highly skilled and knowledgeable about their business. The extreme care and detail they speak with in discussing the technical aspects of doing this or that operation in the manufacturing process can be a truly amazing experience. Generally their home and factory debt has long been paid off and though their equipment is old and slow they are the best at what they do.

Still this industry structure faces several threats which are a factor of both the demographic and competitive globalization trends over time. As the overall market shrinks and largest producers feel pressure from lower cost pencils they tend to keep more production in house to retain their economies of scale, thus slowly squeezing some of the subcontractors out. Mainly, focused on non-pencil products such as pens, markers, correction tape, etc. these companies still feel their pencil business is important and need remain the most efficient volume producers. Some have set up off-shore production of certain pencil components or assembly operations for some products in Vietnam or China, similar to western producers who have gone multi-national in their operations. Over time the mid-tier companies have adapted by focusing on introducing new products to diversify their business away from pencils into complementary novelty items, by broadening their sales distribution channels or dropping certain manufacturing functions to use subcontractors, etc. Finally, as the business owners’ age in the sub-contractor segment, often the 2^nd or 3^rd generation family members are not interested in continuing with the same passion as their parents, so these businesses also tend to shake out due to lack of management succession or natural selection of a sort.

As a wood supplier to the Japanese Pencil Industry for three generations, our company is always conscious of these challenges. We value the close relationships we’ve built with many of these companies and families and salute their commitment to producing the highest quality wood-cased pencils. Adding and promoting more pencils produced in Japan to our Pencils.com offerings is just one small way of supporting these friends in the industry. They produce some of the most unique and interesting novelty pencils in the world and in time we hope to make this collectable segment a larger part of our offering in addition to some of the branded items we’ll be introducing in the coming weeks and months. We hope you’ll help you’ll join us in our Japanese Pencil Celebration event in November at Pencils.com.

Chinese Pencil Anti-Dumping Duties Revisted

Bloomberg.com published an article on June 27th covering the pencil industry titled "New Jersey Pencil Maker Cedes No. 2's to China". While the title refers specifically to General Pencil Company and quotes it's owner and CEO Jim Weissenborn, the article has a broader focus on U.S. Anti-Dumping as it applies to the pencil industry as a whole. Anti-dumping duties and the Chinese pencil industry is a topic I've commented on in past posts over the years: Pencil Anti Dumping Duties: Primer and Pencil Anti Dumping Duties: Changes in the Air.

The article was prompted by the June 13th decision by the U.S. Trade Commission to extend for another 5 years the countervailing anti-dumping duties against Chinese pencils. In addition to Weissenborn it includes includes quotes from other industry representatives in support of the duties as well as several economists who claim that such duties do little to protect U.S. producers as production just gets shifted to other low cost countries. The article provides several statistics regarding the U.S. Pencil industry gleaned from the associated filings demonstrating that despite the duties (which have been in place about 15-20 years now) imports of Chinese pencils to the US have increased five fold since 1996 with statements that US producers accounted for just 14% of US pencil sales in 2008.

I agree generally with the statistical trends and the views of the economists that the long term impacts of anti-dumping duties don't necessarily protect U.S. Producers from the challenges of global competition. ONe can always nit-pic specific figures and percentages. The fact is in the end you still have to compete on your own innovation, manufacturing and/or purchasing efficiency and ultimately find your proper niche in the market. A point Jim Weissenborn speaks to well in the article with respect to General's market focus.

However, one aspect that is not addressed in the authors argument is that a large portion of the Chinese pencils coming into the US are in fact not paying significant anti-dumping duties relative to the China wide rate of 114%. This is because there is a process of reviewing and applying for producer specific anti-dumping duty rate adjustments with the Commerce Department. As a result the largest Chinese exporters to the U.S. are only subject to anti-dumping duty rates in the range of 1-5%, not 114%. This rate adjustment review process is an expensive and complicated legal and accounting process that makes sense for only the largest suppliers. This itself introduces further inefficiencies and opportunities for gaming the system to avoid duties, including shipping pencils from other suppliers via the favored duties of these larger entities a challenging issue to police. Eliminating such special rate reduction applications might make the system simpler in total. However, it still does not address the fact that such a change would likely spur an increased wave of trans-shipment of Chinese pencils to the US via other countries, an illegal practice, though challenging to police and administer.

Regardless of such inefficiencies in the system many Pencil industry insiders believe the duties are warranted given the "hidden subsidies" received by Chinese producers. One example is the VAT rebates received from the Chinese government on finished pencils exported from China. These are not applicable to slats and other components exported, thus favoring finished production in China itself. Another form of subsidy has been domestic wood costs that has been artificially low due to over harvesting over many years. In fact we are now seeing that China is experiencing dramatic increases in wood costs for all sorts of industries as the Government is curtailing harvest levels on it's forests through out the country. This is currently driving a cycle of inflationary price increases in raw material, slats and ultimate Chinese pencil prices. A subject I'll be addressing in a future post sometime in the next month, but the point here is that Chinese wood supply has been at relative lower costs than other substitute woods for our industry many years and would have been higher if forests were managed more effectively on a sustained. Fortunately the Chinese now seem to be working to correct this, though this has not dimmed their appetite for wood.

In the end the anti-dumping duties have assisted the US industry from being totally decimated by Chinese imports, even though many US Producers have had to become involved in Chinese production or imported pencil supply themselves to competitively serve some share of their US sales. Small private family owned producers such as General's and Musgrave mentioned in the Bloomberg article remain in existence today in part through the benefit of such protective duties, but just as importantly through their own dedication and commitment to producing and marketing quality products. offering superior customer service and valuing the traditions and knowledge developed through several generations involvement in the industry and the contributions to the communities in which they live. Strictly economic arguments on the subject of the good and evil of protective duties to society rarely address these social benefits.

A visit to Beijing Fila Dixon Stationery Company

Typically I visit our pencil slat production facility in Tianjin, China about this time of year for our annual operations review and budget planning sessions. This year I have the added enjoyment of being accompanied by my 23 year old son Philip who is now working full time in the business in our Pencils.com e-commerce division. This trip provides his first real in depth exposure to our core pencil slat business where he'll spend several days in the manufacturing environment.

Normally during these trips I take added time to visit several of our customers in Japan or elesewhere in Asia in addition to our time in Tianjin. This year our first stop was a visit earlier this week to Beijing Fila Dixon Stationery Co., Ltd. Initially named Beijing Dixon Ticonderoga Stationery Co., Ltd., the company was originally established by Dixon Ticonderoga to produce pencil slats of Chinese Basswood for export to Dixon's facilities in Misouri and Mexico and a few pencils from residual slats. Later the facility began producing Incense-cedar pencil slats as well as some cedar pencils and has grown dramatically with steady investment since the acquisition of Dixon Ticonderoga company by FILA Group back in 2004. Today this factory produces both cedar and basswood slats for FILA Group needs around the world as well as manufacturing a broad range of pencils under the FILA brand portfolio, including specifically the Dixon Ticonderoga, Giotto and Lyra brands. In all the factory produces about 1700 different pencil items with about 3/4 of production focusing on color pencils for sales in Europe under Lyra and and the balance in graphite pencils in the Ticonderoga and Temagraph product lines. Most Ticonderoga graphite pencils sold world wide are now produced in the group's Mexico City facility which I also had the opportunity to vist about two weeks ago.

As it turns out Beijing FILA Dixon just recently celebrated it's 10th anniversary in business October prior to our visit. The photos here are of a special commemorative pencil set which we received as a generous gift to honor this anniversary from General Manager Tommy Lin who is shown in the photo with Philip and me. It includes 10 color sample set of jumbo coloring pencils using the formulation of the Giotto BeBe product as well as two Ticonderoga pencils. The pencils and box are imprinted in Chinese only with the inscription "10 Year Anniversary Beijing FILA Dixon Stationery Company, Ltd."

During our visit we were able to give Philip a great first introduction to the entire pencil making process from slat production to finished pencil production and packaging. One of the highlights was seeing the production of another special commemorative pencil FILA is producing to honor the 150th anniversary of the Union of Italy. This Genuine Incense Cedar pencil has some very unique features including one half the pencil being shaped to round while the imprint side is shaped to hexagonal, so it's a "hexi-round". The pencil will also be end dipped in the Green, White and Yellow tri-color of the Italian flag. Production floor samples shown in the photograph here are before end-dipping.

Other interesting products being produced in this facility include the Lyra Groove pencil, an ergonomically designed triangular pencil with gripping grooves cut into the pencil casing. As well as the Giotto Bebe, a special formulation super soft and bright children's jumbo coloring pencil range with a 7mm core. This item is like a wood cased crayon on steroids.

Overall I was impressed with the ongoing development of this facility which plays an important role in the total pencil manufacturing strategy of FILA Group's global operations and has contined to expand capabilities each year over it's ten year history. It was a great initial exposure to pencil manufacturing for Philip. Congratulations to Tommy Lin and his entire team for 10 years of growing accomplishments.