Plywood exports fall in wake of Apkindo tug of war with Korea

By Vincent Lingga

SEOUL (JP): Provoking buyers into a tug of war amid a market slump not only runs against marketing common sense but also is completely counterproductive.

That, however, is what the Indonesian Wood Panel Association (Apkindo) has been doing towards the Korean Imported Plywood Association (Kipa) since early this year.

The preliminary result is quite predictable: A sharp decrease in Indonesian plywood exports to South Korea during the first eight months of this year to 436,000 cubic meters (m3) from more than one million m3 in the same period last year.

The issue that pits Apkindo against Kipa is a new export policy for Indonesian plywood which is seen by most importers and buyers here as insensible and irrational.

Under the new marketing policy, Apkindo has appointed Sesil Industries Co. Ltd. here, which has never before traded in wood products, as the sole importer of Indonesian plywood.

Since Sesil Industries knew nothing about plywood it assigned Sesil Trading Co. Ltd. to execute the sole importer function.

The two companies, though bearing the same name Sesil, have no relation whatsoever, except for the fact that they once happened to be headquartered in the same office building in downtown Seoul.

Sesil Trading itself, apparently feeling unable to manage the domestic distribution networks by itself, then appointed five other companies as its distributors.

The other former importers were forced to become just sub- distributors who have to file their orders through the Sesil- appointed distributors or to import directly from other countries.

Sesil Trading extends the orders from its distributors to Apkindo, the sole exporter agent for all plywood mills in Indonesia, and allegedly charges a 1.5 percent commission for that service.

The complexity of the marketing policy does not end here.

Since Apkindo earlier set up Indo Kor Panels Co. Ltd. in Hong Kong as its marketing arm for Korea, the marketing chains of plywood to Korea became very long: Indo Kor, Sesil, Sesil- appointed distributors, sub-distributors and end-users, each with its own price markup.

In Jakarta, Apkindo executives, however, blamed the steep fall in Indonesian plywood exports entirely on the depressed market demand in Korea due to the government's tight money policy.

"When the market demand is weak, the buyers (importers) always make up things to attack our policy," Apkindo's Chairman Mohammad (Bob) Hasan contended.

In Bob's views, if the buyers complain a lot that means "our policy is effective in protecting the interests of Indonesian exporters".

Kang Soo-hee, Chairman of the Korea Imported Plywood Association (Kipa), while admitting the weakening demand and plentiful stocks as a cause of the decline, cited the uncertainty caused by the Apkindo marketing policy as a major factor.

"We now buy Indonesian plywood only whenever we can't get supply from other sources," said Kang, the President of Houshin International Co. Ltd. which has imported wood materials from Indonesia since 1974.

The uncertainty, Kang added, has prompted many users to shift to substitute materials such as medium-density fiber made from local wood.

He said the installed capacity of the medium-density fiber industry here has increased significantly from only 390,000 m3 last year to 520,000 m3 this year. Several new plants under construction will further expand the capacity to almost one million m3 next year," he pointed out.

"We don't understand why we should pay a 1.5 percent commission (of the import value) to Sesil Trading for doing virtually nothing," said Kang, who also owns a furniture factory.

What makes the new system seemingly more difficult to understand is that distributors or sub-distributors cannot know which Indonesian mills will fulfill their plywood orders as everything is decided by Sesil Trading and Indo Kor.

"I have heard many complaints from plywood companies in Indonesia which are being hurt badly by the new marketing policy. But they understandably dare not speak up for the risk of upsetting Apkindo's Chairman Bob Hasan," Kang said.

"But since my intention is good I should not worry about speaking up. If Apkindo does not want to sell to me because of this well-meaning criticism, I can simply buy from suppliers in other countries, such as Malaysia and Brazil," he said.

Kang, who worked in forest concessions in South Kalimantan in the late 1960s and early l970s, said he had visited almost all timber producing provinces in Indonesia.

Until the end of last year, he said, his imports from Indonesia annually amounted to $50 million.

Apkindo's Executive Director Tjipto Wignjoprajitno, however, argued, that the ban on direct contacts between importers and plywood companies in Indonesia is aimed at preventing direct competition between mills and at enabling Apkindo to distribute import orders fairly among the mills based on their previous export performance.

"Under our system, small mills get a fair chance to export their plywood," Tjipto said, pointing out that the same system has also been applied to other importing countries such as Japan, China, Hong Kong, Taiwan, Singapore, the Middle East and Europe.

Chong Jung-ho, President of Samkyung Co. Ltd., conceded that it is entirely the right of Apkindo to set up a marketing arm for its designated export market.

"What I don't understand is why Apkindo created another marketing chain by appointing a sole importer in Korea whose function has actually been done by Indo Kor Panels in Hong Kong," Cho contended.

Kang said a Kipa delegation visited Malaysia in the second week of October to seek new sources of plywood and the prospects for imports from that country are very good as its plywood manufacturing capacity has increased to almost five million cubic meters a year.

"We just concluded an import deal for 30,000 m3 with suppliers in Sabah and Sarawak," added Cho, who joined the delegation.

Cho said Korean plywood imports from Malaysia, which amounted only to 42,000 m3 throughout last year, already exceeded 46,000 m3 in the first eight months of this year.

As we develop more ties with Malaysian suppliers we will buy more from them, he said.

"Malaysian export prices actually are pegged to Indonesia. But since the marketing chains of Apkindo cause so many markups, the Malaysian prices could be 4.5 percent lower," Cho added.

According to Cho, China also has been importing more from Malaysia. In the first eight months of this year, China has bought 830,000 m3 from Malaysia, but only about 300,000 m3 from Indonesia.

"Even the small figure for Indonesia was based only on import orders and not on shipments," he added.

The importers feel especially burned by what they perceive as Apkindo's heavy-handed treatment because they claim a great contribution to promoting Indonesian plywood in Korea since 1985 when Indonesia began prohibiting log exports.

Moreover, many of the importing companies are owned by businessmen who formerly worked in forest-based companies in Indonesia, or in the Seoul offices of Korean wood companies in Indonesia.

"My children still speak Indonesian," said Kim Byung Heum, Vice President of Houshin International, in fluent Indonesian, while recalling the nice memories that many importers here still have about their working experiences in Indonesia.

Cho, said Korean importers actually still prefer Indonesian plywood for its good quality and the excellent cooperation they have had for many years with Indonesian plywood companies and Apkindo since the mid-1980s.

"In the past, we always had good consultations with Apkindo about the Korean plywood market trends, prices etc. We even formulated a common strategy to make Indonesian plywood out- compete Korean plywood," another importer added.

But Apkindo has stopped such periodical consultations since early 1993, Cho said.

"That is because the importers always tried to dictate their interests upon us," Tjipto argued.

The result of the good cooperation, Cho said, could bee seen in the steady increase in Korean plywood imports from Indonesia from a mere 25,000 cubic meters in 1986 to 1.2 million cubic meters valued at US$515 million in 1993 or more than 95 percent of Korean total imports.

"Apkindo may consider our imports insignificant as they represent only about 10 percent of Indonesia's total exports. But in fact, we were the second largest single importer from Indonesia last year after Japan, Cho added.

Tjipto simply discarded the importers' claim, contending that even without their cooperation "we could have sold a lot to the Korean market".

"You should realize that in the business scheme of things, today's friends could become tomorrow's enemies."

Korean importers, however, are insisting on mutual trust and mutually beneficial deals as the main foundation of sustainable business relationships.

Until last year, Cho said, Korean importers competed against each other to procure as much plywood as possible from Indonesia at the check prices set quarterly by Apkindo after considering the market information provided by the importers.

"I think, the previous system was very good and mutually beneficial because the consultations made us in a better position to make market forecasts and calculate our costs."

Under the previous system, importers were required to import according to the quota and check prices set by Apkindo and if they failed their quotas would be reduced for next quarter. If their performance was too poor they would be excluded from Apkindo's list of Recommended Korean Buyers. This list stipulated the companies permitted to import plywood.

Importers were allowed to communicate with Indonesian plywood companies (though not about the prices as they are set by Apkindo) regarding technical specifications, quality, deliveries, etc.

In fact, Apkindo introduced an incentive system in early 1992 whereby importers who could buy between 15,000 and 24,999 cubic meters were given a discount of $1/cubic meter, between 30,000 and 39,999 cubic meters $3/cubic meter and in excess of 40,000 cubic meters $5/cubic meter.

"But now distributors who file orders through Sesil are completely in the dark about from which Indonesian firms they will get their plywood. They also have no way of knowing what the prices will be that they will have to pay until the plywood arrives in Korea," Cho lamented.

Kang said since the appointment of Indo Kor as the marketing arm to Korea in February, 1994, importers have encountered delays in shipment, letter of credit (l/c) transfer and settlements of claims.

"You can easily imagine how chaotic the system is, as Indo Kor has to handle all plywood import orders for so many technical specifications and convey them to more than 100 mills in Indonesia," Kang said.

Eddy Budiono, an executive of Indo Kor in Jakarta, said the company has four staff members in Jakarta and another four in Hong Kong.

But Tjipto rejected the importers' complaints, saying that Apkindo has hired a professional surveyor company, PT Mutu Agung Lestari, to survey the quantity and quality of plywood exports from Indonesia.

Importers complained the uncertainty makes the plywood business like gambling. Distributors cannot inform their sub- distributors or end-users what their coming deliveries will. End- users, who have known or have been accustomed to using particular brands, do not want to make orders before the plywood arrives.

"What makes things more painful is that Apkindo has never explicitly announced Sesil's appointment, nor explained the reasons behind the introduction of the new system," he said.

Indo Kor simply notified importers here in late August that the marketing system was changed as of Aug. 29. And from that day Sesil Industries Co. became the sole importer for Korea, added Cho, who formerly worked for Korindo, a Korean wood company in Indonesia.

According to Cho, the problem actually started in October, 1993, when Apkindo reduced the number of Recommended Korean Buyers (recognized importers) from 19 to only four -- Sesil Trading Co., Korin Trading Co., Korea Development Company (Kodeco) and Sunkyung Co. Ltd.

"We reduced the number of importers because many of them simply did not buy at that time, citing the weak market demand as the excuse," Tjipto said.

Apkindo's erratic decision to change its marketing system so many times within so short a period of time (Oct.1993-Aug.1994) strengthened the suspicions among importers that Apkindo executives in Jakarta had been receiving misleading information on the Korean market.

"Since the stoppage of regular consultations in 1993, Apkindo might have relied only on one or two vested-interest importers for information on the latest market developments in Korea," Kang said.

Importers claimed, however, that in October, 1993, Apkindo began using a new criterion -- investing in Indonesia -- for qualifying to become importers.

"We know that three of the appointed importers do invest in Indonesia. But we are not aware of Sesil Trading Co. making any investments in Indonesia," Kang argued.

But Sesil Trading's President Lee Won-kyu claimed that the October, 1993, assessment by Apkindo ranked his company as the second best performer (importer).

Then last February, Apkindo set up Indo Kor Panels Ltd. in Hong Kong as its marketing arm for Korea and completely banned the four Korean importers from communicating directly with Indonesian plywood companies.

The four importers were appointed as the agents in Korea for Indo Kor. But pending the completion of the incorporation process of Indo Kor, the marketing function was executed by Albacette, another affiliate of Apkindo in Hong Kong. This lasted until August.

Late in August, Apkindo suddenly dismissed the four agents/importers and appointed Sesil Industries Co. Ltd. as the sole importer.

"Apkindo summoned the four importers to Jakarta in August and asked them how much they could import for September. But since none of them could give an affirmative answer, Apkindo sent an investigation team to Korea," Tjipto said.

But most importers here said the dismissal was actually caused by cheating practices, whereby some importers colluded with plywood mills to make transactions at prices lower than Apkindo's check prices.

"The invoices did stipulate the Apkindo check prices, but the importers later got back a portion of the payments from the plywood companies," an importer disclosed.

But another importer argued, "If your friends are in financial distress, won't you help them?."

He said many plywood companies in Indonesia suffered from cash flow problems between November, 1993, and January, 1994, due to the weakening market demand.

After all, he contended, Apkindo stubbornly maintained its check prices way above what the market could bear.

Plywood prices did increase sharply from the second half of 1993, immediately after Sabah stopped log exports and Sarawak and Papua New Guinea cut their log harvests.

Apkindo consequently raised its check prices steadily from US$425/m3 in March, 1993, to as high as $650 in January, 1994, even though the prices in Korea began to tumble down in October, 1993, to as low as $450 due to an oversupply and weakening demand.

Apkindo began to lower its check prices steadily in February, 1994, to as low as $460 last July, but the damage had been done and many importers got "burned".

Most importers acknowledged that Sesil Trading did well in the November, 1993-January, 1994 period by buying a lot at Apkindo's check prices.

But they were suspicious that Sesil Trading provided Apkindo with misleading information on the Korean market because since January, 1993, the trading firm has acted as the spokesman for Apkindo in Seoul.

According to Tjipto, the Apkindo investigation team which visited Seoul in late August found a financially strong company, Sesil Industries Co., which was willing to buy a lot from Indonesia.

"We checked their bank and found out they really had the money," he said.

"So Apkindo and Sesil Industries set up a 50-50 joint venture, Sesil Forest Products Co., with a paid up capital of $1.5 million, which became the sole importer of Indonesian plywood," Tjipto added.

However, records in Seoul showed that until the last week of October, Sesil Forest Products Co. was still in the process of incorporation under Korean law.

Tjipto confirmed that the new joint venture was still in the final process of incorporation.

The intriguing question to most importers here was why Apkindo made a deal with Sesil Industries, which has never traded wood products, and appointed it as the sole importer to defend Indonesia's share of the Korean market.

"Our main objective was to get a company willing to import as much as possible. Sesil Industries has the money and is willing to import plywood according to the quota we set," Tjipto pointed out.

"Marketing is not simply a matter of putting up trade financing. Knowing the distribution networks is most crucial," Cho argued.

According to Tjipto, Sesil Industries (pending the incorporation of Sesil Forest Products Co.) acts as the sole importer and stockholder, which is responsible for marketing Indonesian plywood in Korea.

"It is their own risk if they cannot sell what they have imported," Tjipto said.

But a copy of the draft distributor's agreement formulated in the name of Sesil Forest Products Co., but signed by Lee Won-kyu of Sesil Trading Co., shows that Sesil will make imports only after getting firm orders from its five distributors. The distributors should pay in cash four days after receiving the notice of shipping documents from the bank.

The next development seemed even more puzzling: Sesil Industries immediately gave power of attorney to Sesil Trading Co. (there is no relation between the two) to execute the sole- importer function.

In September, Sesil Trading appointed five former importers -- Samsung, Sunkyung, Hyosung, Eagon and Hyundai Wood -- as its main distributors.

"We don't care who Sesil Industries assigned to do the sole importer function. Of most importance to us is that they have committed to importing 89,000 m3 in September and another 120,000 m3 in the last quarter of this year."

But importers here said Sesil Industries was not as financially strong as Apkindo claimed. It does have a textile plant in Korea which, according to a local credit information agency, lost 13 million won ($16,250) in 1992 and another 41 million won in 1993.

Lee Won-kyu of Sesil Trading defended the Apkindo decision, saying that Sesil Industries also owns two 10-story buildings in downtown Seoul and is a co-owner of a leasing company.

Calls to Sesil Industries Co. were not returned.

The re-emergence of Sesil Trading, which together with the other three importers, was dismissed in August, strengthened the suspicions among importers here about some kind of cronyism scheme on the part of some Apkindo executives.

Lee Won-kyu happens to be the brother-in-law of Gerald William White, a Canadian adviser to Bob Hasan. The 1992 Apkindo Directory listed Gerald White as the marketing director of PT Kalimanis Plywood Industries which is controlled by Bob Hasan.

Jerry White visited Seoul in August as a representative of Apkindo.

Lee said his company had been the exclusive agent for handling the import needs (industrial materials, machinery parts etc.) of several Indonesian plywood firms for years.

Importers here said one of the plywood companies was Kalimanis Plywood Industries.

Kang and Cho said Sesil and its distributors would not be able to defend the Indonesian share of the Korean market because except for Eagon and Hyundai Wood, the other three distributors are general trading companies which do not specialize in wood product trading.

"They can say whatever they want," Tjipto retorted.

Indonesian firms also resented the sole importer agent policy and the establishment of a sole marketing arm for a designated export market because that system made 120 marketing managers at plywood companies practically inactive.

The managers now simply function as clerks to periodically notify Indo Kor on the volume and qualities of plywood they have for exports.

"The problem is Indo Kor is staffed almost entirely by foreigners. That means we surrender the marketing of our plywood to foreigners," the marketing director of a major plywood company in Jakarta said.

That is really damaging as marketing should be the spearhead of a manufacturing company, contended the director who preferred anonymity.

Most plywood companies declined to be interviewed about this issue and the two which were willing to talk insisted on anonymity.

"Why we should pay $5 per cubic meter to Indo Kor as we already pay $10/cubic meter of our exports to Apkindo. Moreover, we don't know who owns Indo Kor and we never see its financial reports," the executive of another plywood firm added.

He said he is worried about the next generation of marketing executives of plywood companies as under the present system they will never learn anything about the international market.

Almost all Indonesian plywood companies hailed and highly appreciated the coordinated marketing system implemented by Apkindo's joint marketing boards for the various markets since the mid-1980s as that system prevented a price war.

"But I don't understand why our association went that far without any clear purpose, except for rent seeking. Indonesia, with a total capacity of more than 10 million m3, dominated the international hardwood plywood market with exports of more than $5 billion last year," he argued.

Yes, why indeed.

Window A: Apkindo's marketing system makes the marketing managers at all plywood companies inactive.

Window B: "We now buy Indonesian plywood only whenever we can't get supply from other sources."