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Oregon company tries to grow its timber business in China

Mon, 02/23/2009

February 23, 2009: DONG’E, China

Distant Neighbors, Common Interests

Table-flat plains stretch as far as the eye can see in this rugged eastern outpost. Across the flood plains of the Yellow River, Jake Eaton is on a hunt for trees.

On a November day, the 50-year-old inspects a plot of poplars, planted by hundreds of Chinese families. The trees are on the sickly side: insect-infested, felled for firewood, blemished by frostbite. Not something the managing director of global acquisitions for an Oregon timber company would normally find appealing.

But in a place where forestry remains decades behind the world, Eaton is searching for the future.

Portland-based GreenWood Resources is about to wager up to $300 million on China, where soaring demand for cabinets, paper and furniture makes wood a hot commodity. Poised to become one of the first U.S. companies to invest in Chinese timberland, GreenWood seeks fortune by taking Oregon expertise offshore.

But in China, Communist politics still command the countryside. Up against long-held views on land rights, GreenWood will own all the trees that will grow here in 70 years, but it will never own the land. Its long-term contracts could be left to local officials, who in the past and in other areas have taken a Wild West approach to ruling rural China.

“What GreenWood is up to for the U.S. is pretty unique,” says Hakan Ekstrom, president of Wood Resources International, an industry consulting firm. “But you really need to know what you are doing and have some luck there.”

In Oregon, timber is still king, but the forests drift farther away. Once the bedrock of the state’s rural communities, timber companies now lease land in Canada and buy tracts in South America, while closing mills and idling factories at home. Going global is survival for an industry bruised by environmental regulations and a sinking housing market.

Still, few have ventured to China’s hinterlands, with their daunting challenges to Western businesses.

Surveying a 10,000-acre parcel of land, Eaton and his convoy of financial analysts rely on ancient hand-drawn maps in a language they can’t read. They have spent years trying to build bridges with Dong’e officials, who represent hundreds of Chinese families with rights to the land.

Then there’s the matter of the trees. To Eaton, most look better suited for paper than for office furniture.

“But there are some things we can teach them,” Eaton says. “This kind of damage would mean a lower-value product, like pulp. That could be improved under the right conditions.”

Booming domestic market

Today, China is the world’s largest maker of almost every imaginable wood product, from flooring to picture frames. But the country has little wood of its own.

Land is one of the scarcest — and most valuable — resources in the world’s most populous nation. Food crops take topsoil. What’s left for growing trees has been mostly deforested by clear-cutting.

That leaves China chasing wood from across the globe. The nation is the world’s No. 1 importer of logs, mostly from Russia and some from illegal sources, industry watchdog groups suggest.

GreenWood’s shot at opportunity comes with a cost: For the price of leasing land in China, GreenWood will pay as much as in the U.S., says Brian Liu, vice president of GreenWood’s China headquarters in Beijing, a five-hour train ride from Dong’e.

“But we’ll be closer to a very fast-growing, potential market,” Liu says.

Being in the center of the world’s manufacturing heartland is worth paying a premium. Next year, Chinese furniture exports alone are expected to top $48 billion, according to the China Building Decoration Association.

Americans’ voracious appetite for wood products feeds cities such as Jiangshan, several hours south of Dong’e and known as the “Capital of China’s Wooden Doors.” In Jiangshan alone, 60 wooden door manufacturers churn out 4 million doors each year.

But American consumers are a blip compared with what the Chinese are expected to devour. The average Chinese spends just $1 on wood products for every $5 spent by consumers worldwide, according to the State Forestry Administration.

“The Chinese have rising incomes, and they’ll be buying wood products more and more,” Liu says. “There are so many Chinese, they could buy half of what Americans buy, and they would double worldwide sales.”

Oregon’s timber struggles

While China’s explodes, Oregon’s timber industry slides. The state is the nation’s No. 1 producer of softwood lumber, used primarily in home construction. A ruptured housing bubble and other forces hammer timber companies.

For one, the U.S. government controls more than half of all forested land in Oregon, making the state’s timber companies especially vulnerable to federal logging bans. And high labor costs and hilly terrain make it hard for Oregon to compete against flat states such as Louisiana and North Carolina, let alone other countries.

“Oregon is one of the highest-cost places to go for trees,” says Hal Salwasser, dean of Oregon State University’s College of Forestry. “To stay competitive, Oregon companies have to work harder.”

GreenWood is a different kind of timber company, one that invests in tree plantations rather than forests. But it hasn’t been spared from a bad economy. Its main products — cabinets and millwork — depend on home construction.

“Anyone that’s in the forest industries is impacted by the downtrends in the market,” says Jeff Nuss, GreenWood’s CEO. “They haven’t seen them this bad, and a good part of that has been in the U.S.”

Oregon timber experts say the industry will bounce back when the housing market rebounds. And trees rarely lose value.

“The nice thing about this type of investment is you don’t have to cut them to get a biological return,” Nuss says.

But there’s little question that Oregon’s timber industry is losing ground. Since 1990, employment in logging and wood products manufacturing in Oregon has fallen about 41 percent, to 33,600 jobs last year. Across the state, mill closures devastate rural towns.

“It has a significant impact on these small towns,” Salwasser says. “You go to these places, and they’re like ghost towns.”

Expansion overseas

Oregon companies head across the oceans for new opportunities. Ochoco Lumber Co., based in Prineville, bought a planing mill in Lithuania in 1994. Tree giant Weyerhaeuser owns forests in Uruguay and has an agreement to lease land in Canada, similar to GreenWood’s pact in China.

Looking offshore is part of a long-term trend for the industry, says Matt Donegan, co-president of Forest Capital Partners, an Oregon investment firm that manages large forests across North America.

“If there’s any new impetus, it’s just that there’s tremendous growth opportunities in the Asian market,” Donegan says. “It doesn’t come as a loss for Oregon.”

For GreenWood’s Nuss, China is part gold mine, part humanitarian effort. The company, with 60 employees, has raised $200 million from private investors to plug into several regions across China — and is on its way to an additional $100 million.

Nuss started working with poplar trees in the late 1980s, after graduating from Oregon State University with two engineering degrees. He helped Potlatch Corp. start an industrial poplar plantation, which led him to start GreenWood in 1998. GreenWood acquired the tree farm in 2007.

Today, Nuss’ 29,000-acre tree farm near Boardman is an oasis sprouting from the unyielding high desert. The company has an additional 6,000 acres of trees near Clatskanie. GreenWood’s plantations, a rarity in Oregon and the U.S., account for 75 percent of the state’s poplar production.

Nuss, 44, has reasons beyond profit for wanting to put down roots here. GreenWood’s poplars are being tested to combat desertification in China’s northern Korqin Desert, where once-pristine grasslands turn to dust. By government estimates, desertification now spreads over one-third of China, leading to a loss of 5 billion tons of topsoil a year.

GreenWood’s land investments also will mean jobs for Chinese farmers, left behind in the country’s race forward, while growing desperately needed timberlands. The investment will mean employment opportunities in his home state, Nuss says, as the company grows worldwide.

“We’re creating a global entity, but we’re a U.S.-based company,” he says. “We’re also hoping to develop tree farms in the U.S. and going to create jobs in the U.S.”

Foreign investment

But GreenWood faces the challenge of China’s collective land system, born of Mao Zedong’s peasant revolution in 1949. Today, more than 55 percent of Chinese — estimates run as high as 850 million people — live in the countryside, where they work small, state-allocated plots.

The system has been blamed for rural impoverishment, putting China’s urban-rural divide in stark relief, says Keliang Zhu, a lawyer with the Seattle-based Rural Development Institute. In Dong’e, the average farmer makes 800 yuan a year, or $117. For urbanites, the average climbs to 13,000 yuan a year, or $1,900.

Last year, Chinese leaders extended land contracts from 30 years to 70, a step toward privatization they hope will encourage greater investment by farmers. “If your land rights are not secure, you’ll never invest in the land,” Zhu says.

Chinese leaders want foreign dollars to build roads and rural schools, and now companies such as GreenWood can negotiate long-term leases on land. But ownership, as it exists in the U.S., is still a distant dream. Land rights here are viewed as a form of social security. The unemployed can always return to till the land if factory work dries up.

But China’s weak contract laws carry a risk for leaseholders.

In several instances, unhappy farmers have waged protests against foreign companies when they felt they didn’t get a fair shake on the lease. Usually, government officials struck the deal.

“There’s a cautionary point to be made,” Zhu says. “Dealing with the government is much more efficient, but at the same time you need safeguards. You might get a good deal today, but tomorrow, those farmers will be protesting in front of your headquarters building.”

In Dong’e, local officials are eager for GreenWood’s investment — and its expertise. The region, known as China’s vegetable basket, lags Oregon by decades when it comes to forestry.

Many farmers don’t water their trees. Their poplars, a European species imported 40 years ago, may no longer be suited to the region’s climate. Between each row, farmers grow vegetables for food and cotton for cash.

With the economy ailing, Du Jili, chief of the Dong’e Forestry Bureau and the police department, can’t afford a peasant uprising.

“These trees have a lot of opportunity to open this area up,” Du says. “America’s forest areas are much better than here. GreenWood can teach us how to prosper.”

Back at the Dong’e plantation, Eaton measures the diameter of a tree that looks in fairly good shape: 5.6 inches. The average size of a poplar on GreenWood’s Boardman farm is 15.

But Eaton is thinking about the next generation of trees, and the next.

“We’re experts at growing trees,” Eaton says. “We can teach them how to do it. But we’re also pioneering something new.”

By Amy Hsuan, for the Oregonian

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