EPA-E3D/1-74-D57
OCTOBER 1974
ECONOMIC ANALYSIS
OF
PROPOSED EFFLUENT GUIDELINES
WOODEN FURNITURE & FIXTURE MANUFACTURING
SEGMENT OF TIMBER PRODUCTS PROCESSING INDUSTRY
PHASE II
QUANTITY
U.S. ENVIRONMENTAL PROTECTION AGENCY
Office of Planning and Evaluation
Washington, D.C. 20460
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This document is available in limited quantities through
Ruth Brown at the U.S. Environmental Protection Agency,
Information Center, Room W-327 Waterside Mall, Washinglon,
D.C. 20460
The document will subsequently be available through the
National Technical Information Service. Springfield, Virginia
22151.
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EPA-230/1-74-057
ECONOMIC ANALYSIS
OF
PROPOSED EFFLUENT GUIDELINES
WOODEN FURNITURE & FIXTURE MANUFACTURING
SEGMENT OF
THE TIMBER PRODUCTS PROCESSING INDUSTRY
PHASE II
Report to
U.S. Environmental Protection Agency
Office of Planning and Evaluation
Washington, B.C. 20460
October 1974
U.S. Environmental Protection Agency
Region V, Library
230 South Dearborn Street
100 Illinois 60604
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This report has been reviewed by the
Office of Planning and Evaluation,
EPA, and approved for publication.
Approval does not signify that the
contents necessarily reflect the
views and policies of the Environ-
mental Protection Agency, nor does
mention of trade names or commercial
products constitute endorsement or
recommendation for use.
ii
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PREFACE
The attached document is a contractors' study prepared for the Office
of Planning and Evaluation of the Environmental Protection Agency ("EPA").
The purpose of the study is to analyze the economic impact which could
result from the application of alternative effluent limitation guidelines
and standards of performance to be established under Sections 304(b) and
306 of the Federal Water Pollution Control Act, as amended.
The study supplements the technical study ("EPA Development Document")
supporting the issuance of proposed regulations under Sections 304(b) and
306. The Development Document surveys existing and potential waste treat-
ment control methods and technology within particular industrial source
categories and supports proposal of certain effluent limitation guide-
lines and standards of performance based upon an analysis of the feasibility
of these guidelines and standards in accordar ce with the requirements of
Sections 304(b) and 306 of the Act. Presented in the Development Document
are the investment and operating costs associated with various alternative
control and treatment technologies. The attached document supplements
this analysis by estimating the broader economic effects which might
result from the required application of various control methods and
technologies. This study investigates the effect of alternative approaches
in terms of product price increases, effects upon employment and the
continued viability of affected plants, effects upon foreign trade and
other competitive effects.
The study has been prepared with the supervision and review of the
Office of Planning and Evaluation of EPA. This report was submitted in
fulfillment of Task Order No. 17, Contract 68-01-1541 by Arthur D. Little,
Inc. Work was completed as of October 1974.
This report is being released and circulated at approximately the
same time as publication in the Federal Register of a notice of proposed
rule making under Sections 304(b) and 306 of the Act for the subject
point source category. The study is not an official EPA publication.
It will be considered along with the information contained in the
Development Document and any comments received by EPA on either document
before or during proposed rule making proceedings necessary to establish
final regulations. Prior to final promulgation of regulations, the
accompanying study shall have standing in any EPA proceeding or court
proceeding only to the extent that it represents the views of the
contractor who studied the subject industry. It cannot be cited, refer-
enced, or represented in any respect in any such proceeding as a state-
ment of EPA's views regarding the subject industry.
iii
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TABLE OF CONTENTS
Page
List of Tables vi
I. EXECUTIVE SUMMARY 1
A. SCOPE OF WORK 1
B. CONCLUSIONS 1
1. Industry Segments 1
2. Financial Profiles 2
3. Pricing 2
4. Methodology 3
5. Costs of Compliance 5
6. Economic Impact Analysis 5
7. Limits of the Analysis 7
II. INDUSTRY SEGMENTS 8
A. OVERVIEW OF THE FURNITURE INDUSTRY 8
B. SEGMENTATION . 12
C. NON-UPHOLSTERED FURNITURE 16
1. Types of Firms 29
2. Types of Plants 30
3. Financial Profiles 32
4. Pricing 32
D. UPHOLSTERED FURNITURE 35
1. Type of Firm 37
2. Types of Plants 37
3. Financial Profiles 40
4. Pricing 40
III. METHODOLOGY 42
A. DATA GATHERING 42
B. PRICE EFFECTS 43
C. PLANT CLOSURE EFFECTS 45
D. SEGMENTATION 47
iv
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TABLE OF CONTENTS (Cont.)
Page
IV. COSTS OF COMPLIANCE 48
A. MODEL PLANTS 48
B. ALTERNATIVE CONTROL METHODS 49
C. OPERATING AND INVESTMENT COSTS USING BPT 49
D. COST IMPACT 49
V. ECONOMIC IMPACT ANALYSIS 51
A. INTRODUCTION 51
1. Industry Segments 51
2. Number of Plants Affected 54
3. Minimizing Impact 54
B. PRICE EFFECTS 54
C. FINANCIAL EFFECTS 58
D. SENSITIVITY ANALYSIS 58
1. Large Plants 59
2. Medium Plants 59
3. Small Plants 66
4. Sensitivity - Conclusion 66
E. PRODUCTION EFFECTS . 72
F. EMPLOYMENT EFFECTS 72
G. REGIONAL EFFECTS 72
H. BALANCE OF TRADE EFFECTS 72
I. INDUSTRY GROWTH EFFECTS 72
VI. LIMITS OF THE ANALYSIS 73
A. DATA LIMITATIONS 73
B. NATURE OF THE INDUSTRIES 74
C. MOST SENSITIVE ISSUES 74
APPENDIX 76
v
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LIST OF TABLES (Cont.)
Table No.
V.D.4 Financial Impact - Medium-Size Non-Upholstered
Furniture Plants With Water Wash Spray
Booths 63
V.D.5 Financial Impact - Medium-Size Upholstered
Furniture Plants - Laundry Facilities 64
V.D.6 Financial Impact - Medium-Size Non-Upholstered
Furniture Plants 65
V.D.7 Financial Impact - Small Non-Upholstered Furniture
Plants - Laundry Facilities 67
V.D.8 Financial Impact - Small Non-Upholstered Furniture
Plants 68
V.D.8a. Financial Impact - Small Upholstered Furniture
Plants 69
V.D.Sb. Financial Impact - Small Upholstered Furniture
Plants 70
V.D.9 Sensitivity Analysis - Conclusion Matrix 71
VI.C.I Most Sensitive Issues 75
A-l Industry Summary: Non-Upholstered Wood Furniture
Manufacturers , 77
A-2 Industry Summary: Upholstered Wood Furniture
Manufacturers 78
vi
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I. EXECUTIVE SUMMARY
This report presents the contractor's final analysis of the
economic impact on wood furniture manufacturers to meet 1977 and 1983
proposed effluent guidelines and new source performance standards.
A. SCOPE OF WORK
The industry sectors analyzed are: wood household furniture -
. SIC-2511 - Wood household furniture; includes two newly
established sectors, SIC-2517 - TV, radio, etc.,
cabinets, and 2534 - kitchen cabinets.
SIC-2512 - Upholstered wood household furniture;
. SIC-2521 - Wood office furniture;
. SIC-2531 - Public building furniture;
SIC-2541 - Wood partitions and fixtures.
To accomplish the economic impact analysis we have developed data
on the structure of these industry sectors and an analytical model to
focus on the central issues.
B. CONCLUSIONS
1. Industry Segments
The objective of segmenting the industry was to group plants into
categories which would be affected similarly by effluent control require-
ments. For this industry, the costs of compliance and technologies to
comply can be directly related to the type of process performed. Pro-
cesses performed within plants vary by product mix only to the extent
that upholstered furniture manufacturers do far less finishing and
thereby generate less effluent than do non-upholstered manufacturers.
Therefore, the costs of compliance will fall differently upon plants
in each of these two major categories. Thus, upholstered and non-
upholstered manufacturing operations were grouped into separate primary
segments.
Within each of these two major segments the ability to bear these
costs is directly related to the size of plant. There are many very
small plants in this industry; i.e., more than 6070 of the plants have
less than 20 employees and generate less than $500,000 in annual sales
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revenues. Such plants are sensitive to small cost increments. Thus,
plant size is the second important criterion used to segment the
industry.
Product mix differences do not imply effluent differences.
A small plant manufacturing either TV cabinets (SIC-2517) or kitchen
cabinets (SIC-2534) or case goods (SIC-2511) will have essentially the
same effluent load; the unit manufacturing operations of assembling,
gluing, and finishing are common to each of the plants. Scale (size
of plant) is the primary determinant of effluent load.
2. Financial Profiles
The representative model small plants within the manufacturing
segment have the following characteristics:
Upholstered Non-up>holstered
Annual sales $530,000 $390,000
After-tax net income 9,000 5,000
Cash flow 16,000 13,000
Net assets 140,000 95,000
Number of employees 25 20
These are small plants with modest cash flows and asset bases.
3. Pricing
The success of a piece of furniture is primarily dependent upon
the aesthetic attraction of the piece; that is, consumers are relatively
insensitive to price, within a range of plus/minus 5%, and select a
piece of furniture because of its design, color, etc., rather than
strictly on the basis of price.
Furniture prices vary widely. Consumers shop within fairly broad
bands of prices. For example, the price of a sofa might fall within
the following price ranges:
Low price: $200;
. Middle level: $200-400;
. High price: $400.
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The price sensitivity within the low price category is likely to
be somewhat greater than for the higher price categories. Nonetheless,
aesthetics represent a strong influencing factor in all categories.
This relative price insensitivity is a key factor in determining
if cost increases due to pollution control can be passed on to the
consumer.
4. Methodology
Since there are many small, privately held firms in this industry
which do not generally publish financial data or other statistics on their
operations, data had to be developed on the various industry segments
through Department of Commerce information, surveys of firms in the
industry, surveys of industry associations and others knowledgeable of
industry practice and background data which we have accumulated over
time.
To accomplish the economic impact analysis, tha data on the
structure of this industry was used to develop industry segments of
groups of firms which would be similarly affected by guidelines and
costs, and was applied to an analytical model with the focus on the
following critical issues:
The probability that costs of compliance will be able to be
passed on to consumers via increases in product prices or
will have to be absorbed by operators, resulting in a lower
level of profitability;
If costs cannot be passed through, the extent to which the
resultant effect on financial condition will cause plant
closures, unemployment, and community impacts, and restrict
industry growth; and,
. The extent to which capital availability will be limited for
the numerous small operators, also causing plant closures,
unemployment, and community impacts, and restricting industry
growth.
The analysis of whether prices are likely (or not likely) to be
able to be passed on is a relatively straightforward economic analysis.
Table I.B.I presents the price increase analysis matrix which we used
to derive price increase conclusions.
However, even if prices are not likely to be increased, and costs
are absorbed with relatively well documented financial effects, it is
far more difficult to reach conclusions regarding plant closures. The
plant closure analysis matrix which was used to focus upon the central
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TABLE I.B.I
Factor
PRICE INCREASE ANALYSIS MATRIX
Price Increase Constraints
Condition for
Constraint
Ratio of Before Tax Treatment
Cost to Selling Price
00
Substitute Products
Capacity Utilization
Captive Usage
Demand Growth
Foreign Competition
Abatement Cost
Differences
Price Elasticity
of Demand
Basis for Competition
Market Share Distribution
Number of Producers
High
High occurrence
Low
Low
Low
High
Unequal
High
Price
Fragmented
Many
Source: Arthur D. Little, Inc., estimates.
TABLE I.B.2
PLANT CLOSURE ANALYSIS MATRIX
Plant Shutdown Decision
Factor
Ratio of After Tax Treatment
Cost at After Tax Net
Income (%)
Cash Flow (Including
Treatment Costs)
Ratio of Investment in
Treatment Facilities to
Net Fixed Investment (%)
Integration
Multi-Plant Complex
Other Environmental
Problems (Including OSHA)
Emotional Commitment
Ownership
Condition for
Shutdown
High
Negative
High
Low
Isolated Plant
Multiple
Indifference
Large, Multi-
Industry Company
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issues in these decisions is presented as Table I.E.2. The analysis
is complicated by the fact that small, family-owned and operated, one-
plant firms, tend to show remarkable "staying power" even in the face
of extremely low rates of profitability and other burdens. The extent
of subjective commitment to the business, beyond the point at which
standard financial analysis would suggest shutdown, is an extremely
difficult factor to measure and assess. Thus, subjective e3emev.es must
be used to supplement the objective analysis.
5. Cost of Compliance
Table I.E.3 estimates the costs of compliance for the various
industry sectors. For these firms, the costs represent the probable
technologies firms will elect to institute to comply with 1977 effluent
guidelines. Each subcategory should be able to meet the effluent
limitations with anyone of four technologies: landfill, incineration,
evaporation with spray, arid irrigation. It was assumed for each seg-
ment and subcategory that, at most, the second least expensive option
would be selected. Since these costs were developed for large plants,
the costs for smaller plants are overstated. Even so, no closures are
expected for any segment.
6. Economic Impact Analysis
., Large firms in this industry will feel no noticeable effect due to
effluent guidelines. Costs of compliance to these firms are insignifi-
cant (less than 0.2% added annual cost burden, capital investment less
than 0.2% net fixed assets). Medium-sized plants will also generally
not face significant impact. Again, costs are moderate (less than 1.0%
added annual cost burden, capital investment less ,than 1.5% of
net fixed assets).
Small firms, in both sectors, will face a noticeable effect on
operations; however, even these small firms will not be impacted signi-
ficantly since:
They should be able to pass on any increased costs to consumers
via increased prices of their products, thereby maintaining
profits.
There are technological options available which will allow
almost all firms to avoid the maximum expenditure and enable
them to reach compliance at a modest level of investment.
Finally, more than 90% of the plants in the industry (iicluding
small plants) already meet BPT guidelines; less than 10% of all plants
will be required to make any new investment for abatement.
Thus, while some small firms (2% of industry) may have to change
operations and to raise prices, no closures are expected and there will
be no other noticeable effect on the industry due to the proposed
effluent guidelines. Further, probable costs of abatement c.an be
financed out of cash flow. Capital availability is not a problem.
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TABLE I.E.3
Segment
Non-upholstered mfrs.
Large Plants
Medium Plants
Small Plants
subtotal
Upholstered mfrs.
Large Plants
Medium Plants
Small Plants
subtotal
COSTS OF
Total
Plants
552
1191
2853
4596
233
563
705
1501
COMPLIANCE* -
Number
of Plants
Affected
55
119
285
459
23
56
70
149
FURNITURE
Probable
Capital
Cost
$4,500
4,500
3,200
$3,200
3,200
3,200
MANUFACTURERS
% Probable
Net " Annual
Assets Cost
0.2% $9,300
1.5 9,300
3.4 6,680
.13% $6,680
.9 6,680
2.3 6,680
% Sales
0.15%
0.8
1.7
.1%
.5
i-3
Total 6097 608
*BPT, BAT, NSPS on proposed Guidelines.
Note: Based on 1972 estimated cost and profit profiles.
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7. Limits of the Analysis
The analysis of economic impact is complicated by:
A limited availability of data - the small, privately-held
firms do not publish detailed operating and financial data;
and,
The nature of the industry - the typical, privately-held firm
views a plant closure decision more subjectively than does a
publicly-held firm, requiring that financial analysis of closure
be augmented by subjective considerations.
We dealt with the data limitation problem by developing our own
data through surveys of the industry, collecting information on the
view of the industry as a whole, but focusing on the operations of
those firms and plants most likely to be impacted, i.e., the small
operators. Due to the large number of plants involved (approximately
6000), it was necessary to collect data by representative samples
(a 1% sample size of firms, plus interviews with persons knowledgeable
of the industry, e.g., trade associations) rather than through com-
prehensive (1007») sampling. The consistency of the data suggests that
the analysis is built upon a sound data base.
The second issue, the nature of the industry, makes it difficult
to project plant closures (see I.B.4 above). Since 90% of the firms
in the industry already meet 1977 guidelines and the remaining firms
have low cost compliance options available and can pass on to consumers
any increased cost burden, the problem of projecting plant closures is
ameliorated, the conclusion of no impact is clear. However, if dif-
ferent guidelines were introduced, with attendant higher costs, and
those costs could not be passed on, capital would become limited and
the plant closure decision would be a more sensitive issue.
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II. INDUSTRY SEGMENTS
The following chapter is intended to give a broad perspective on
the dynamics of the wood furniture industry, in addition to providing
detail on individual segments. It contains the following parts:
a) general review of industry dynamics
b) industry segmentation and rationale
c) non-upholstered furniture manufacturing segment:
- overview (basic data for all four component sectors)
- types of firms
- types of plants
- financial profiles
- pricing
d) upholstered furniture manufacturing (single sector)
- overview
(
- types of firms
- types of plants
- financial profile
- pricing
A. OVERVIEW OF THE FURNITURE INDUSTRY
Of the more than 6,000 firms which produce furniture only about
250 can be considered major factors in the industry, with no single
company accounting for more than 3% of industry sales. The 10 largest
producers represent about 207, of industry volume; the top 25 firms
account for less than 30% of industry sales, while the 3,600 smallest
firms (under 20 employees) account for about 8% of industry sales.
Furniture is manufactured in virtually every state, but the prin-
cipal producing areas are the South Atlantic, the Great Lakes, Califor-
nia, New England,, and the Middle Atlantic States. North Carolina is
the leading furniture producing state, accounting for about 22% of the
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industry shipments of all household furniture; Virginia (10%), Cali-
fornia (8%), Indiana (77,), and Tennessee (6%) follow. The production
of metal office furniture is highly concentrated (80%) in the Great
Lakes area. Wood office furniture is manufactured principally in
North Carolina, Virginia, Michigan, and New Yorkfor the most part
by the same firms that produce household furniture.
In the South Atlantic states, primarily North Carolina and Virginia,
furniture manufacturing has grown as a result of both lower labor costs
and widely available raw materials. Production in these states is
principally a veneer construction and includes all levels of quality.
The Great Lakes states (Illinois, Michigan and Indiana) are major
producers of dinette furniture and kitchen cabinets, although they also
manufacture case goods and some upholstered furniture. On the West
Coast, Los Angeles is the largest furniture manufacturing area, pro-
ducing principally upholstered and case goods. Because of the high
labor cost on the West Coast, most case goods are aimed at the lower-
priced furniture markets where competition from North Carolina and
Virginia is not strong due to freight costs. The furniture manufactur-
ers on the West Coast are generally small compared to those on the East
Coast, with few companies having more than $6 million in annual sales
and only two more than $12 million. New England and the Middle Atlantic
States concentrate principally on the production of solid wood furni-
ture in the Early American design. The plants here are typically older,
frequently finding it difficult to compete with the more modern pro-
ducing facilities of the South.
Labor accounts for as much as 35% of the sales dollar in the fur-
niture industry. High-quality furniture (most expensive 10%) generally
requires even greater labor input. The supply of labor in the major
manufacturing areas has become limited, and wages in the household
furniture industry have grown faster than those of all manufacturing
in the major furniture manufacturing states. In 1970 employment in
the furniture industry declined by 15,000 workers to 300,000 as the
industry's shipments dropped along with the general downturn of the
economy in that year. By 1973, employment rose to 350,000. With the
upturn in demand for furniture in 1971, vocational training programs
supported by furniture firms were instituted in high schools to train
future industry workers.
The furniture manufacturers make very small capital expenditures
in proportion to their total sales, often less than 1% or 2% of sales.
Indeed, in 1960 and 1961, the industry's depreciation exceeded irs
capital expenditure programs. Our surveys of the industry suggest
that the industry is currently spending double its depreciation account
for capital expenditure programs. Since capital requirements of the
household furniture industry have traditionally been met out of current
cash flow, the industry has little debt.
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Table II.A.I compares employee productivity (expressed as $ Value
Added/Production Worker and $ Value of Shipments/Production Worker)
among the various furniture sectors covered by this analysis and, as a
point of reference, compares furniture to two capital intensive indus-
try sectors, wood pulp manufacture and petroleum refining. The table
demonstrates that furniture manufacturing sectors are very labor-inten-
sive ($10.9-17.7K Value Added/Production Worker) as contrasted with
wood pulp ($33.3K Value Added) and petroleum refining ($65.2K Value
Added), which are more capital intensive.
Another measure of capital intensitivity is the amount of invest-
ment required to generate a dollar of sales revenue. The ratio of $
total assets to $ total sales revenues ($A/$S) approximates this measure.
The higher the $A/$S ratio, the more capital intensive the business.
Our model wood furniture plant (small size) (see Section II.C.3 and
II.D.3 for details) has the following capital intensivity ratio:
"Furniture" $A/$S: 0.25
In contrast is the same ratio for the following two major manu-
facturers in capital intensive businesses:
Exxon $A/$S = 0.971
U.S.Steel $A/$S = 0.9952
Differences in the profitability of large and small firms are
explained by the nature of the industry. There are some economies of
scale in production, distribution and sales of furniture to favor
larger companies. But the actual profitability among smaller firms
is not always apparent. Many small-to-medium size companies which are
family-owned report low net incomes, though their gross profit is in
many cases equal to or higher than that of the larger firms. These
smaller companies often prefer to take "profits" in the form of salaries
and fringe benefits rather than as corporate income.
The household furniture industry spends about 42% of its sales
dollar for materials. Wood's workability, structural integrity, and
functionality have made it the material of choice for furniture pro-
duction. Currently, wood and wood products account for 3070 of materials
purchased; plastic and plastic products, about half of that. Increased
1Source: Forbes, May 15, 1974, p. 178.
2Ibid., p. 200.
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TABLE II-A-f
EMPLOYEE PRODUCTIVITY, 1972 ($)
SIC Value Added Value of Shipments
Per Production Worker Per Production Worker
2511
2512
2517
2531
2541
2611
2911
1972
13,832
13,992
10,886
14,927
17,765
33,274
65.176
1967 % Chg 1972
n.a. 25,905
10,344 35.3% 26,738
n.a. 20,316
12,869 15.9% 25,843
13,749 29.2% 32,103
33,049 .7% 82,309
62,765 3.8% 364,554
1967
n.a.
19,543,
n.a.
22,942
24,087
59,877
268,438
% Chg
36.8%
12.6%
33.3%
37.5%
35.8
(Petroleum Refining)
Source: 1972 Preliminary Census of Manufactures.
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capital intensiveness will require the use of more homogeneous materials,
of which plastic and reconstituted wood products are the prime choices.
A most critical problem for the furniture industry is the tight market
and higher cost for furniture (hardwood species) woods. Demand for
hardwood lumber from its major consumers--the furniture, hardwood floor-
ing and materials handling (pallets) industries--increased sharply in
1972 and continued at a high level in 1973. Plastics such as high-pres-
sure laminates, coated fabrics, and polyurethane cushioning have reached
positions as accepted materials for construction in the furniture
industry. The use of molded components and vinyl veneers will contri-
bute new growth to the use of plastics in this industry. The transition
to a greater use of plastics will require additional capital because of
the greater cost of equipment to manufacture plastic furniture. A
typical injection molding machine costs approximately five times as
much as a comparable wood manufacturing machine.
Increasing use of plastic in furniture is likely. The use of
plastic has improved productivity and had a restraining effect on
prices. For example, from 1967 to 1971 the value added per production
worker man-hour in the household furniture industry increased 28%
while wholesale furniture prices rose only 15%. At least part of this
increase in production efficiency can be attributed to the use of plas-
tics.
Foreign trade in household furniture was not significant until the
late sixties, when imports began to grow at a rapid pace and now
account for nearly 3% of domestic consumption. Imports for 1973 are
estimated at approximately $240 million, up 18% from the $204 million
of 1972. Major sources of imports include Canada, Italy, Japan, Den-
mark, Yugoslavia and Taiwan. While the large increase in 1972 may be
due more to recent currency realignments, exports should continue to
expand. Exports for 1973 are estimated at $40 million compared with
$23 million in 1972. Although imports are still considerably greater
than exports, U.S. furniture products are becoming more competitive
with those of foreign countries, primarily aided by dollar devaluation.
About 75% of U.S. exports goes to Canada, Mexico and the Bahamas.
B. SEGMENTATION
Our objective was to segment the furniture industry into groups
of plants that would be impacted similarly by pollution abatement guide-
lines. This was done to allow us to analyze each distinct segment in
terms of economic impact and to focus our efforts on those particular
segments that were likely to be most severely affected.
The Development Document subcategorizes the industry for the pur-
pose of developing Effluent Guidelines based on water usage. Other
factors such as process variation, plant size and age, plant location,
and land availability were determined to be of secondary importance.
12
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Four model plants were developed for each of the technological segments
as follows:
. Model 1 - Contains only dry booths (for wood finishing); no
laundry facilities and two glue spreaders.
. Model 2 - Contains dry booths, laundry facilities, and two
glue spreaders.
. Model 3 - Contains water wash (wet finishing), no laundry,
two glue spreaders.
. Model 4 - Contains both water wash, spray booths, and laundry
facilities and two glue spreaders.
This segmentation by unit process performed allows development of
levels of compliance and costs. These variations among models are based
on the particular mix of operations performed, but are not primarily
related to product mix.
Our surveys and analyses have also demonstrated that various unit
operations can be performed by any furniture manufacturing plant with
any product mix, with the exception of manufacturers of upholstered
furniture. Upholstered manufacturers do not utilize water wash spray
booths, since they do not perform enough finishing to justify the
capital investment. Rather they generally hand finish or use other
low-cost methods to finish what little exposed wood appears on an
upholstered furniture piece.
Thus, upholstered furniture manufacturers can be segmented and
studied as a separate group. All of these manufacturers will fit within
technological models 1 and 2.
Within these models, the differences in cost of compliance will
not be related to product mix or other factors; rather, plant size will
be the measure of the ability to bear costs, not product mix. Economic
impact assessment will thus be based on differential impacts depending
upon size of operation.
The rest of the industry cannot be subsegmented by product mix or
other process-related variations. The key to further segmentation is,
again, plant size. For example, small plants in the industry do not
use the water wash spray booths; 50-607, of the largest group of plants
use water wash spray booths. The capital investment required makes it
necessary to process a relatively high volume to justify the investment.
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Table II.B.I compares the remaining non-upholstered furniture
industry sectors on various economic characteristics related to plant
size. As the table indicates, the mean values and distribution of the
various indices for the various plant size categories is quite consis-
tent among the four sectors. For sector 2541, the average plant size
is smaller, and a larger proportion of plants are contained in the
smallest plant size category. However, this further exemplifies the
importance of considering small plants and segmenting to test economic
impact on small operations.
As a point of contrast, similar data are presented for two other
industry sectors, namely, petroleum refining (SIC-2911) and wood pulp
manufacture (SIC-2611). In the case of petroleum refining, the average
plant is more than five times the mean plant size in the furniture in-
dustry sectors; the average plant size for wood pulp manufacture is
about three times larger. These latter two sectors are typified by
large plants, highly capital intensive, with a great deal of automation
and much less reliance on labor. Reliance on labor and lack of auto-
mation more typify the furniture industry,,
Although the data is not as readily available, our review of major
issues with the industry indicate that the sectors are also essentially
homogeneous with respect to:
Price elasticity - See Section II.C.4 for analysis;
Costs - Cost/profit data collected correlates well with plant
size variations;
Profitability - Cost/profit data collected correlates well with
plant size variations;
Capital availability - In this industry and others we have
analyzed (e.g., Economic Analysis of Proposed Effluent Guide-
lines - The Timber Products Processing Indus try. Phase II;
report to EPA, August 1974 -;,-:EPA-230/2-74-029), small firms
have the least leverage in capital markets. The availability
of capital to the small firms is an extremely important issue.
Thus, the segments which can be analyzed chosen to assess economic
impact are two major segments, namely:
. Upholstered furniture manufacturers, and
. All other furniture manufacturers.
Within each of these larger segments the key variable is plant
size, which is used to develop operating and financial profiles for
various plant size categories.
14
-------
TABLE II.B.I
INDUSTRY SECTOR COMPARISON, 1971
Shipments/
Production
Worker
(1000)
$ Fixed $ Fixed Capital Average Plant Size
Assets/ Assets/ Expend. Mean (// of Employees)
$ Sales Employ. /Plant Size 1-19 20-99 100+
2511 22.1
.348 5,561 25,718 61 60.9 25.1 14.0
2521 23.9
.304 6,625 13,191 58 56.6 - 43.4 -
2531 28.9
.228 5,762 21,359 57 54.9 - 45.1 -
2541 31.0
.181 4,654 7,594 22 72.8 - 27.1 -
Ave. 26.2
.312 5,160 16,877
59.9 - 40.1 -
2911 330.9 .579 149,038 3,899,683 318 13.6
(petroleum resining)
- 86.4 -
2611 92.0
(wood pulp
manufacturing)
.355 23,346 2,263,793 181 43.2 - 56.8 -
Source: Census of Manufactures.
15
-------
C. NON-UPHOLSTERED FURNITURE
The ten-year growth in value of shipments for the SIC categories
included in this sector is presented in Table II.C.I. That these are
growth areas is demonstrated by the average annual increase in value
of shipments of nearly 10%, approximately double the U.S. all manufac-
turing industries average and GNP growth rate.
The Wood Household Furniture Industry (SIC-2511), as defined by
the U.S. Department of Commerce, includes establishments primarily
engaged in manufacturing wood household furniture commonly used in
dwellings. The sector includes the manufacture of infants' and child-
ren's wood furniture and wood outdoor furniture.
Table II.C,2 presents basic data for the sector. Two segments have
been separated from 2511 in 1972: establishments primarily engaged in
manufacturing kitchen cabinets are now classified under SIC-2434; and
wood T.V., radio, phonograph and sewing machine cabinets also previously
in this industry are now classified in industry 2517. Information for
2517 and 2434 is also included for comparison.
In household furniture manufacture, goods are generally more
amenable to storage than in the upholstered (2512) furniture manufac-
ture. Inventories of raw materials, primarily wood, are important and the
production process is longer than in the upholstered segment. This
segment represents a production process that requires at present little
fixed outlay compared with that found in most industries. As suggested
earlier in II.A., the introduction of plastics will change this aspect.
In 1972 the value of products shipped of establishments classified
in the Wood Household Furniture Industry amounted to $3,127 million.
In 1967 the value of products shipped was $2,439 million and in 1963
$1,858 million. A comparable figure for 1972; that is, including 2517
and 2434, is $4,267 million, a real increase in this industry of 36.57,,.
Table II-C.3 displays the change in value of shipments and employment
by geographic area between 1967 and 1972. The South Atlantic Region
has come in 1972 to hold 507, of the U.S. industry, as compared to 387=
in 1967 when the figure included the additional industries of 2517,
2434. line West South Central, Mountain and South Atlantic Regions have
experienced the largest average annual change in value of shipments,
though changes in employment ai-e not nearly so great. At the same time,
the Middle Atlantic, East North Central and East South Central Regions
have averaged a negative average annual change in both shipments and
employment.
16
-------
TABLE II-C-l
VALUE OF SHIPMENTS, TOTAL U.S.
1963-1972
($ Millions) N
Average
Annual Change Av Yr
1263 1964 1965 1966 1967 1968 1969 1970 1971 1972 63-70 Chg 70-72
2511* 1858.0 2013.7. 2201.1 2423.4 2438.9 2659.5 2862.6 2684.4 3029.7 3126.8 6.4 8.3
2517***
2521 101.5 109.3 122.9 136.4 158.3 173.9 212.7 197.8 174.8 248.1 13.6 12.7
2531 268.6 284.4 312.8 343.5 421.2 432.3 468.5 562.6 471.8 522.1 10.3 6.4
2541 389.6 389.6 426.6 462.0 498.6 524.7 642.3 622.6 645.3 780.1 8.5 10.7
*Includes SIC 2434 & 2517 in 1963-1971.
**Includes SIC 2426 in 1963-1971
***Part of 2511, 1963-1971.
2434
319.6
2426 558.2
Source: Census of Manufactures.
-------
TABLE II.C.2
EMPLOYEES AND VALUE OF SHIPMENTS BY GEOGRAPHICAL
REGION, SIC-2511*
No. of Employees Value of Shipments
(1000) ($ Million) % of
1967 1972 % Chg. 1967 1972 % Chg. Industry
Total U.S. 151.4 195.7 29.3% 2438.9 4267.4 75.0%
Northeast 27.1 28.8 6.3% 434.0 631.1 45.4% 14.8%
North Central 30.4 33.8 11.2% 489.6 817 66.9% 19.1%
South 88.0 107.4 22.0% 1318.2 2370.4 79.8% 55.5%
West 11.8 25.7 117.8% 197.1 448.9 127.8% 10.6%
*1972 data includes SIC-2517 and 2434, so the values are comparable for a
real % of change. The values below represent 2511 in 1972 without 2517 and
2434.
Total U.S. - 151.4 139.6 -11.3% 2438.9 3126.8 28.2%
Source: 1972 Preliminary Census of Manufacturers.
18
ADl-l16-1173
-------
TABLE II.C.3
1972 EMPLOYMENT PROFILE. SIC-2511
WOOD HOUSEHOLD FURNITURE
% of
Value of Ship.
U.S.
North Carolina 23.4
South Carolina 1.5
Virginia 13.0
Tennessee 4.2
Indiana 3.9
California 6.6
% of
Empl. in 2511
Total fl
of Units
2714
% Units/State: Employee Size
1-19 20-99 100+
60.9
25.1
14
21.7
12.5
10.3
7.1
7.0
5.8
170
412
65
81
114
392
35.2
54.9
38.3
90.1
42.7
67.5
24.7
45.1
16.8
9.9
29.7
26.3
40.1
44.9
27.6
6.2
Source: 1972 Census of Manufactures.
-------
The Wood TV and Radio Cabinets Sector (SIC-2517) includes estab-
lishments primarily engaged in manufacturing wood radio, phonograph,
hi-fi, and television cabinets. This industry also includes establish-
ments primarily engaged in manufacturing sewing machine cabinets. This
industry is included for the first time in the 1972 Census of Manufac-
tures and so no comparable figures are available for 1967. In 1972
the value of shipments for this industry was $321 million; average
employment, 18,000. Cost of materials was $155 million, 42% of which
accounted for wood costs. Tables II.C.4 and II.C.5 show that the
North Central and South Regions hold over 8070 of the industry's value
of shipments and slightly more of the employment. 60% of the plants
in the U.S. have more than 20 employees, the highest concentration of
those plants in the North Central, 56% of the above 20-employee plant
sites are located here. The West, on the other hand, has 35% of the
U.S. total of under 20-employee size plants; and 77% of its own plants
are under 20 employees.
The Wood Office Furniture Sector (SIC-2521) includes establishments
primarily engaged in manufacturing wood office furniture, whether
padded, upholstered, or plain. In 1972 the value of shipments of this
industry amounted to $248 million, a 57% increase over 1967; value
added by manufacture was 61% above 1967, at $143 million in 1972.
Average employment increased by 39% with 11,400 employees in 1972.
Table II.C.6 shows the percentage of industry in each region (the South
holding 42%) and the percentage change from 1967 in shipments and
employment for each region. The West shows the greatest relative change,
with employment up 100% and a 161% increase in the value of shipments,
though actual change was greatest in the South with a 827, increase in
employment to 4.9 thousand employees, and a 113% increase in value of
shipments to $106 million. The employment size unit is fairly evenly
divided in the industry between plants with less than, and those with
greater than, 20 employees (Table II.C.8). Only the West shows a
disproportion with 70% of the smaller size unit.
The wood office furniture industry is about 87= of the size of the
wood non-upholstered furniture industry and 5% of the total household
furniture industry. While the household furniture industry has grown
in value of sales, 41% from 1967, the wood office furniture industry,
however, has grown 57% and the metal office furniture industry, 36.6%.
The other industries under study here have shown fairly similar
increases in value added/production worker and value of shipments/
production worker (Table II.A.2), only wood office furniture shows a
markedly smaller increase. While wood household furniture represents
over 86% of the household furniture industry, wood office furniture
represents about 267., of the total office furniture industry; the bulk
of this industry is metal, with plastics holding a small percentage.
Metal's advantages over wood in office furniture are durability, lower
maintenance cost and the possibility of using modular concepts for
replacement in an easier and more precise manner than can be done with
wood.
20
-------
TABLE II.C.4
EMPLOYEES AND VALUE OF SHIPMENTS
BY GEOGRAPHICAL REGIONS, SIC-2517
WOODEN TV AND RADIO CABINETS
No of Employees (1000) Value of Shipments
($ Million;
1972 % of Ind 1972 2 of Ind
U.S. 18.2 321.0
Northeast 2.2 12.1 52.2 16.3
North Central 7.0 38.5 137.8 42.9
South 8.5 46.7 122.8 33.3
West 0.5 2.7 8.3 2.6
Source: Census of Manufactures.
21
-------
TABLE II.C.5
1972 EMPLOYMENT PROFILE
. % of U.S.
Val. Ship.
U.S.
Northeast 16.3
North Central 42.9
South 38.3
West 2.6
SIC-2517
% of U.S. Total #
Empl. in 2517 Units
94
12.1 27
38.5 38
46.7 12
2.7 17
% Reporting
Units/State
Employee
1-19
39.4
48.1
15.8
41.7
76.5
Size
20+
60.6
51.9
94.2
58.3
23.5
Source: 1972 Census of Manufactures.
22
ADL-116-lin
-------
TABLE II.C.6
U.S.
Northeast
NJ
North Central
South
West
SIC-2521
No. of Employees (1000) Value & Shipments $ Mil
1967 1972 % Chg 1967 1972 % Chg % of
8.2 11.4 39.0 158.3 248.1
2.3 2.3 0 47.9 49.3
2.8 3.0 7.1 49.5 61.2
2.6 4.9 82.1 49.8 106.2
0.6 1.2 100 11.1 29.0
56.7
2.9 19.9
23.6 24.7
113.3 42.8
161.3 11.7
Source: 1972 Census of Manufactures.
-------
TA8LR II.C.7
U.S.
Northwest
North Central
South
West
1972 EMPLOYMENT PROFILE t
WOOD OFFICE FURNITURE
% of U.S. % of U.S. Total //
Val. of Ship. Empl. in 2521 Units
235
19.9
24.7
42.8
11.7
20.2
26.3
43.0
10.5
58
45
68
64
7, Reporting
Units/State:
Empl. Size
1-19 20+
56.6
56.9
54.6
44.1
70.3
43.4
43.1
44.4
55.9
29.7
Source: 1972 Census of Manufactures
24
ADI-II4-II73
-------
Growth of office furniture market depends upon new office con-
struction, replacement demand and style. The market growth has paral-
leled the recent rapid growth in new office construction and numbers
of white collar workers.
The Public Building and Related Furniture Sector (SIC-2531)
includes establishments primarily engaged in manufacturing furniture
for schools, theaters, assembly halls, churches and libraries. Those
establishments primarily engaged in manufacturing seats for public
conveyances, as well as seats for automobiles and aircraft are also
included.
In 1972 the Value of Shipments for this industry was $522.1
million, a 24% increase over 1967. Value added by manufacture also
increased 24% to $289 million, while employment decreased 8% to
approximately 21 thousand employees. Table II.C.8 shows that the
greatest concentration of this industry is in the East North Central,
and the South as a whole is again a major region with 27% of the in-
dustry as compared to 43% for the North Central. Table II.C.9 shows
a profile of the employment and unit-size, the industry favoring the
smaller unit a bit, though in the areas of greatest concentration.
There is a fairly even split between large and small size units.
Many comments applicable to office furniture apply here but
school seating is estimated to be the most important sector of this
market, accounting for about half of total sales. Future growth in
this market, however, is small (2%) with molded plastics the principal
material used. Our surveys show 60% of total classroom seatings are
now made of thermoformed plastic, -15% are fiber glass, 10% are solid
plastic, and about 15% of wood and steel. Only 17% of the materials
consumed were of wood in 1972, 18% of wood in 1967.
The Wood Partitions and Fixtures Sector (SIC-2541) includes estab-
lishments primarily engaged in manufacturing wood shelving, lockers,
office and store fixtures, prefabricated partitions and related fabri-
cated products.
In 1972 the value of products shipped in this industry was $780
million,an increase of 56% compared with 1967. Value added by manu-
facture at $432 million was 52% above 1967, and average employment
showed an increase of 2078.
Table II.C.10 shows that though the concentration of the industry,
close to 60%, is in the Northeast and North Central states, the great-
est increases between 1967 and 1972 have taken place in the South
Atlantic and East South Central States. This industry leans heavily
toward the smaller size plants (Table II.C.ll) with close to 75% of
the industry units having under 20 employees.
25
-------
TABLE II.C.8
EMPLOYEES AND VALUE OF SHIPMENTS BY GEOGRAPHICAL
REGION, SIC-2531~~
No. of Employees (1,000) Val. of Shipments ($ Mil)
1967
1972 % chg.
1967
1972 % chg. % of Ind.
U.S.
22.6
20.7
-8.4
421.2 522.1
24.0
K)
New England 1.0 .8 -20
Middle Atlantic 2.4 1.9 -20.3
18.2
48.8
21.8
51.2
19.8
7.0
4.2
9.8
East North Central 6.9 7.1 2.9
West North Central 1.0 1.2 20.0
136.1
19.2
194.2
31.8
42.7
65.6
37.2
6.1
South Atlantic 2.3
East South Central .9
West South Central 3.7
1.5
1.4
3.5
-34.8
55.6
-5.4
30.3
16.2
64.2
28.8
35.7
76.9
-5.0
120.4
51.1
5.5
6.8
14.7
Mountain
Pacific
.2 .4 100.0
4.2 2.9 31.0
4.3
'83.9
7.7
74.0
79.1
-11.8
1.5
14.2
Source: 1972 Census of Manufactures.
-------
TABLE II.C.9
1972 EMPLOYMENT PROFILE. SIC-2531
% of U.S. % of U.S. Total # % Units/Stats: Empl.
Value of Ship Empl. in 2531 Units Site 1-19 20 +
U.S. 412 54.9 45.1
Northeast 14.0 13.0 78 60.3 39.7
North Central 43.3 40.1 133 51.9 48.1
South 27.1 30.9 124 48.4 51.6
West 15.6 15.9 77 64.9 35.1
Source; 1972 Census of Manufactures.
-------
TABLE II.C.10
*
EMPLOYEE'S AND' VALUE OF SHIPMENTS BY GEOGRAPHICAL
REGION^
No. of Employees
1967
U.S. 25.3
New England 1.6
Middle Atlantic 6.4
East North Central 6.2
West North Central 1.3
South Atlantic 2.9
East South Central .9
West South Central 1.9
West 4.0
1972 %
30.4
1.6
7.2
6.9
1.7
4.5
1.4
2.1
5.0
SIC-2541
(1,000)
chg.
20.2
0
12.5
11.3
30.8
55.2
55.6
10.5
25.0
Value
1967
498.6
30.5
129.1
131.2
25.9
48.6
17.8
30.7
84.9
of Shipments ($ M )
1972 % chg.
780.1 56.5
46.0 50.8 5.9
179.9 39.3 23.1
184.3 40.5 23.6
44.5 63.1 5.7
97.2 100.0 12.5
37.0 107.9 4.7
48.9 58.9 6.3
142.3 67.6 18.2
TABLE II.C.ll
1972 EMPLOYMENT
% of U.S.
Val. of Ship
U.S.
Northeast 29.0
North Central 29.3
South 23.5
West 18.2
% of
Empl .
28
28
26
6
PROFILE
U.S.
in 2541
.9
.3
,3
.0
SIC-2541
Total #
Units
1488
403
401
328
356
%Units/States: Empl. Size
1-19 20+
72.8 27.1
69.7 30.3
74.5 25.4
70.8 29.2
76.4 23.6
Source; Census of Manufactures.
28
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1. Types of Firms
As demonstrated in Section II.A (Overview), the furniture manu-
facturing industry is comprised of firms which are generally small and
privately controlled. No single manufacturer controls more than 37» of
the total market. This is true historically and pertains today,
although there have been acquisitions of large, independent furniture
manufacturers by multi-industry firms, e.g., Champion International
(Drexel and Heritage) and Armstrong Cork (Thomasville). The lack of
concentration in the industry is indicated by the following table:
No. of Firms % of Total Industry Sales
10 largest producers Less than 20%
25 largest producers 25%
3,600 smallest producers Less than 10%
Backward vertical integration of firms in these sectors is possible
only for the largest manufacturers. The firms generally do not own
their own woodlands; rather, they purchase logs and process them for
their own use. Many firms also do not have cutting facilities; rather,
they buy wood and wood products in "cut-to-size" configurations for
assembly and finishing in-house.
Forward vertical integration into the marketplace is also limited.
Firms generally do not own distribution outlets. Rather, they sell
through independent or franchised, local businesses to consumers.
Integration into complementary home furnishings, such as lamps,
draperies, carpets, and other household accessories, is a major goal
for large firms in the furniture industry. Such integration is intended
to improve the marketing effectiveness of such firms as well as to
yield additional avenues for growth. Many acquisitions of furniture
companies have been based on the objective to be a full line home fur-
nishings supplier. However, again, this option is only viable for the
largest 25-50 firms.
Although the industry is fragmented, the large companies do have
the greatest influence on the marketplace. The small, individually
owned and operated firms concentrate on specialty markets or become
supporting suppliers for the largest companies. Other smaller manu-
facturers are considering mergers with other small companies or joint
ventures to insure adequate raw material supplies and to gain greater
market control. As large retail chains capable of merchandising a
broad line of home furnishings through franchise programs gain share
of market, pressures for consolidation will increase.
29
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2. Types of Plants
Plants within the non-upholstered manufacturing sector are quite
small. Table II.C.12 demonstrates that for the entire sector, 607, of
the plants have less than 19 employees. Additionally, approximately
20-257, of the plants have 20-99 employees, indicating that 80-85% of
the plants have fewer than 100 employees. At an average value of
$26,000 per production worker, this suggests that in 60% of the industry
the average plant generates less than $500,000 annual sales.
The plant size pattern is consistent for each of the individual
subsectors covered under Non-upholstered Furniture, with the exception
of SIC-2541, which is represented by even smaller plants. However,
2541 is not a major subsector and only reinforces the fact that the
plants in this industry are indeed small.
The small manufacturer uses the same production process as its
larger counterpart, although it substitutes labor for capital equipment.
Further, while the small manufacturer buys raw materials from the same
suppliers as the larger companies, it may have to sacrifice small
quality increments in order to compensate for the extra cost of small
orders. By doLng this, the small manufacturer is able to main its cost
of gpods sold at approximately the same ratio to sales as for the
larger manufacturers, even though the small manufacturer does not
obtain quantity discounts.
As noted above in Section II.B, our survey of the industry indi-
cates that water wash spray booths are only found in large plants.
During the past 10-15 years the use of water wash spray booths has
increased rapidly; we estimate that about 50-6070 of the larger non-
upholstered furniture plants in the U.S. use this device. However,
due to the relatively high investment costs and relatively low through-
put, such equipment is not generally found in medium-sized plants; it
is never found in small-sized plants. The technological alternatives
to water wash spray booths are hand rubbing or use of filter booths.
Laundry operations are found in all sizes of furniture plants.
However, during the last ten years plants have not expanded laundry
facilities as operations expanded. Rather, they have reduced the
scope of laundry operations or eliminated in-plant laundry facilities
completely. An in-plant laundry represents additional labor charges
and labor recruitment. The cost of and difficulty to find labor has
led companies to contract with suppliers of laundry service to either
supply rags or to launder the firm's rags. The trend away from in-plant
laundries is definitive and will continue, now spurred by the need to
control (laundry) effluent. Our studies have not identified any firms
unable to close in-plant laundries due to unavailability of local
laundry services.
30
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TABLE II.C. 12
PLANT SIZE DISTRIBUTION -
NONUPHOLSTERED FURNITURE MANUFACTURING
SIC
2511
2521
2531
2541
All Sectors
Plant Size - # of Employees
Mean
61
58
57
22
1-19
60.9
56.6
54.9
72.8
59.9
20-99
.25.1
v -" ""NX"-"
^»
43.4
45.1
27.1
40.1
100+
14 .JV
Source; 1972 Preliminary Census of Manufactures.
-------
3. Financial Profiles
Table II.C.13 develops model plants for the non-upholstered
furniture manufacturers. These model plants are intended to focus
upon the sectors of the industry most likely to be affected. That
is, the small-sized plant (eighteen employees, $391,000 annual sales)
is a very small plant; even our medium-sized plant (53 employees,
$1.175 million annual sales) is considered a small plant in the
industry. However, since it is the small plants which are most sensi-
tive to small cost increments and thus are most likely to be affected
by costs to comply with effluent regulations, it is necessary to
emphasize the smaller plants.
The financial condition of the small- and medium-sized plants is
less favorable than that of our large-model plant. Some of this is
due to the effects of economies of scale and forward integration (the
greater ability to control the marketplace on the part of the large
manufacturers). In addition, the net profit figure is reduced further
since the smaller, privately-held firms tend to take income in the
form of salaries and fringe benefits, rather than show the income on
the "bottom line." Nonetheless, our model small firm is not in a
strong positicn, with an annual cash flow of $13,300.
While the financial profiles indicate a slightly higher profit
margin for meoium-sized plants than small-sized plants (2.6% sales
before tax v. 2.2%), and a slightly lower return on net assets (5.0%
x 5.2%), these differences are not significant. Higher profitability
occurs at a much larger size level ($5-6 million sales) as evidenced
by the fact that the large model firm has nearly double the financial
performance (pretax margin 7.37,, return on net assets 9.470) than either
other model plant. Further, capital productivity ($ asset:s/$ sales)
is essentially the same for small and medium plants (0.24, 0.256),
but is much higher (0.374) for the large plant.
A. Pricing
The demand for furniture is relatively inelastic and depends to a
great extent on trends in consumer disposable income, family formations,
population growth and new housing starts. Demand for new furniture
arises primarily from new family formations (which dictate initial pur-
chases); from changes in residence, including moves into newly built
homes; and from wearing-out or style obsolescence of existing furniture.
New family formations account for as much as one-third of the total
demand for new home furnishings, of which furniture is the most impor-
tant single purchase. Some advance in household formations (both
through marriages and the trend to second homes) is expected over the
next few years. Furthermore, with the trend to later marriages and
higher incomes of the new households, furniture purchases per family
can be expected to be at slightly higher levels during the 1970's than
previous decades.
32
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TABLE II.C.13
FINANCIAL PROFILE FOR NONUPHOLSTERED
FURNITURE MANUFACTURE
Small
Net Sales
Cost of Sales
SG&A
Income Before Tax
Net Income
Net Assets
Net Fixed Assets
Return on Net Assets
Cash Flow
# of Employees
$ Assets
$ Sales
$ %
391,000 100.0
299,000 76.6
83,000 21.2
10,000 2.2
5,000 1.1
94,000
34,000
13,300
5.2%"
18
0.240
Medium
$ %
1,175,000 100.0
952,000 81.0
193,000 16.4
30,000 2.6
15,000 1.3
300,000
125,000
Large
$ %
6,274,000 100.0
4,605,000 73.5
230,000 19.2
439,000 7.3
220,000 3.7
2,350,000
930,000
40,500
5.0%
354,500
9.4
53
0.256
295
0.374
Source: Arthur D. Little, Inc., estimates.
-------
The household furniture industry has traditionally used a two-
level marketing system: an exhibit system or "market" to bring together
manufacturers and retailers, and independent retailers to sell the
finished product to consumers. The manufacturers exhibit their offer-
ings to buyers at semi-annual shows in various regions throughout the
United States. This system has done much to foster the inward orienta-
tion of the furniture manufacturers, as the retail store buyers insulate
the manufacturers from the consumer. In their desire to bring new and
exciting products to the retail market, the buyers often demand style,
design, and product changes that result in substantial manufacturing
diseconomies. Although both furniture manufacturers and retailers agree
that too many shows are being held, they demonstrate little inclination
to reduce the number of shows.
Up to this point, while the industry has been comprised of many
small manufacturers and retailers, the exhibit system has been the best
vehicle for their interaction. Now, however, with the evolution of
large furniture marketers (e.g., Wickes) capable of supporting the
direct sales costs of franchise programs or retail outlet ownership,
we expect changes in marketing patterns. Warehouse-showroom retailing
offers large in-depth inventories that permit immediate carry-out or
delivery at substantially reduced prices from normal retail furniture
outlets (10-25%).
Price leadership on an industry-wide bf.sis is not present in the
furniture industry. And,although firms directly competitive watch each
other's prices closely, there is no consistent practice of following one
or a few price leaders. Great variation in the quality levels of the
product, styles and promotional efforts make direct price comparisons
difficult for the majority of firms in the industry. IndLvidual firms
may adopt a policy of following the price pattern of a close competitor,
but there is no industry-wide following of a price leader or leaders
as it occurs in some other industries.
At the consumer level, prices are exceedingly difficult to com-
pare. As noted above, there are nearly an infinite number of varia-
tions in styles, colors, wood used, etc., which virtually eliminates
the ability to make direct price comparisons. A consumer generally
chooses a piece of furniture because it is within his price range,
and is of a style and color to match well with other articles of
furnishings in the home or apartment. A price range in which the
consumer is relatively insensitive to price may be as wide as 5-10%,
that is, a consumer will choose one item over another, even though
it may be 107, more expensive, simply because he likes it. A consumer
does not generally buy a cheaper, less attractive item simply to save
5%. A consumer may defer the purchase until a later time, to await a
period of greater financial capacity, or may wait for the item to go
on sale. However, the consumer will usually not trade-off one piece
34
-------
of furniture versus another strictly based on a 5-10% lower price.
While this conclusion of relative price insensitivity is an important
characteristic of the industry, it is not the critical factor under-
pinning the economic impact analysis (Section V). Rather, such factors
PS levels of costs associated with proposed Guidelines and the avail-
ability of capital and lower-cost compliance technologies are more important.
Prices of wood furniture in general have risen about 3%/year over
the past decade. Furniture prices rose between December 1972 and
December 1973, 5.2 percent at the retail level and 7.3 percent at the
producer level. In addition to the influence of strong consumer demand,
which was spurred by increases in disposable income and home construc-
tion, rising costs for wages and materials exerted persistent upward
pressure on prices. Raw materials and wage costs are likely to rise
and contribute to upward operating costs and higher prices during the
year.
D. UPHOLSTERED FURNITURE
The Upholstered Household Furniture Sector includes establishments
primarily engaged in manufacturing upholster 3d furniture on wood frames.
Those establishments primarily engaged in manufacturing wood frames
for upholstered furniture have been separated from 2512 for 1972 data
and are included under SIC-24266.
To a large extent the small-scale upholstered furniture manufac-
turer performs an assembly type operation. Wood frames, springs, glue,
cotton and fabrics are purchased only as needed. Some capital outlay
is required for factory space, fabric cutting hand tools and a few
small assembly tools. And even the smallest manufacturers carry some
inventory in materials, especially fabrics and frames. Because uphol-
stered goods are manufactured largely to order, inventories and finished
products are virtually nonexistent. Naturally, as output expands, the
desirability of carrying inventories of raw materials and finished
goods increases, and working capital becomes increasingly important.
The value of shipments of establishments classified under 2512
amounted to $2.1 billion, an increase of 667° compared with 1967. With
the inclusion of 24266, for comparative reasons, the figure is $2181MM,
an increase of 72%. While average employment in wood household
furniture, 2511, was down 11% from 1967, in the upholstered furniture
industry employment showed an increase of 23% to 92,000 employees in
1972. The industry more than doubled its value of shipments, from 1967
to 1972, in the West North Central and East South Central Region, while
the South Atlantic and West South Central had over 807=, increases
(Table II.D.I). The South Atlantic, as in sector 2511, holds the
greatest part of the industry shipments, 35%, but this industry is not
35
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TABLE II.D.I
u>
Total U.S.
New England
Middle Atlantic
South Atlantic
Mountain
Pacific
EMPLOYEES AND
VALUE OF SHIPMENTS
BY GEOGRAPHICAL REGION
SIC-2S12
No. of
1967
75.2
3.0
:ic 7.6
^ntral 11.0
sntral 1.9
.c 25.3
sntral 12.5
:ntral 5.4
.7
7.8
Employees
1972 %
92.2'
2.6
6.6
10.5
3.0
32.6
18.8
6.7
1.2
10.2
(1000)
Change
22.6
-13.3
-13.2
-4.5
57.9
28.9
50.4
24.1
71.4
30.8
Value of
1967
1266.4
46.4
132.7
216.5
35.4
416.8
183.4
76.5
12.4
146.2
Shipments
1972 5
2104.3
55.0
151.0
243.1
77.5
751.7
423.9
138.8
20.9
242.4
($ million)
I Change
66.2
18.5
13.8
12.3
118.9
80.4
131.1
81.4
68.5
65.8
% of
Industry
2.6
7.2
11.6
3.9
35.7
20.1
6.6
1.0
11.5
Total U.S.
NA
52.4
76.9
46.8
Source: 1972 Preliminary Source of Manufactures,
-------
quite as unevenly distributed over the states. Table II.D.2 shows
the states which account for over 50% of the employment, with North
Carolina holding the lion's share, 26%, and California and Tennessee
vying for second at 9%.
1. Type of Firm
The fragmentation of this industry sector parallels that of the
non-upholstered sector, described in Section II.C.I. In fact, since
many of the firms manufacture both upholstered and non-upholstered
furniture, it is not always possible to separate the firms' activities into
those two categories. It is only the small firms which specialize entirely to
the extent of being in only one or the other of the businesses. In
fact, many manufacturers of upholstered furniture are major merchandi-
sers which purchase fabric, backing, frames, and produce on a custom
basis a particular chair or sofa to meet a customer order.
2. Type of Plants
As is the case for non-upholstered furniture manufacturers, and
as presented in Table II.D.3, this is an industry of small plants,
i.e., 58% of the plants have 99 or fewer employees and, therefore,
have less than $1.5 million worth of annual sales revenues.
Very few upholstered furniture manufacturers have in-plant
laundry facilities. The cost of the facilities is simply not justified
by the little amount of hand finishing and, therefore, the little
amount of cloths which are needed.
Companies maintain a small inventory of sprung frames and a very
large inventory of fabrics. Most of the business is custom, made-to-
order business.
Typically, the small manufacturer will buy a few standard makeup
frames and will spring them according to standard industry techniques.
The small manufacturer buys cotton backing and foam from the same
suppliers as the larger companies but may sacrifice small quality incre-
ments in order to compensate for the extra cost of small orders.
Manufacturers are able to offer a very large number of patterns and
colors of cloth, perhaps as many as 500 for even a small operation
through the use of "books" supplied by fabric jobbers. By sacrificing
some quality and having the inventory carried by a fabric jobber and
spread over a number of accounts, the small manufacturer is able to
maintain a cost of goods sold at approximately the same percentage of
net sales as that of a large manufacturer.
37
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TABLE II.D.2
U)
oo
U.S.
North Carolina
California
Tennessee
Mississippi
19 72' EMPLOYMENT PROtlLE. SIC-2512
% of U.S. Volume
of Shipments
26.2
10.3
8.1
10.2
% of U.S. Total #
Empl. in 2512 Units
1501
26.6 286
9.3 259
9.2 94
7.3 38
% Reporting Units/State:
Employee Size
1-19 20-99 100+
47.0 37.5 15.5
36.6 38.2 22.2
56.7 37.1 6.2
38.3 61.7
29.0 29.0 42.0
Source: Preliminary Census of Manufactures.
-------
TABLE II.P.?
TYPICAL PLANTS FOR INDUSTRY. SIC 2512
# of Employees Sales (Million $) Plants
Ave. Total % Ave. Total % # %
LJ
Small
Medium
Large
8.3 5863
48.2 27164
258.7 60282
.187 132.2
1.087 623.8
5.834 1359.4
705 47.0%
563 . 37.5%
233 15.5%
*Percentage of Total Industry in this Sector,
Source; 1972 Preliminary Census of Manufactures.
-------
3. Financial Profiles
Table II.D.4 presents the financial profiles for small, medium,
and large-sized companies in this industry sector. Again, we have
stressed smaller plants since they are the most likely to be affected
by abatement costs.
Again, as with non-upholstered plants, profitability is essentially
identical for small- and medium-sized plants, with large plants subr
stantially more profitable.
4. Pricing
The pricing dynamics in the furniture industry are analogous for
either upholstered or non-upholstered household furniture. Thus, the
discussion in Section II.C.4 is relevant for this discussion of uphol-
stered furniture as well.
40
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TABLE II.D.4
FINANCIAL PROFILE FOR MODEL COMPANIES. SIC 2512
Small
Medium
Large
Net Sales
Cost of Sales
Income Before Tax
Net Income
Net Assets
Net Fixed Assets
Return on Net Assets
Cash Flow
# of Employees
$ y
9 _
532,000 100.0
514,000 96.5
18,000 3.5
9,000 1.8
138,000
26,000
$ %
1,386,000 100.0
1,339,000 96.6
45,000 3.4
82,500 1.7
360,000
116,000
i
7,033,000
6,590,000
443,000
221,500
2,415,000
990,000
1
100.0
93.5
6.5
3.3
6.4
16,200
24
6.2
36,700
61
9.2
312,963
312
$ Assets
$ Sales
0.258
0.260
0.348
Source; Arthur D. Little, Inc., estimates.
-------
Ill. METHODOLOGY
Since there are many small, privately held firms in this industry,
which do not generally publish financial or other statistics on their
operations, data had to be developed on the various industry segments
through Department of Commerce information, surveys of firms in the in^
dustry, surveys of industry associations and others knowledgeable of
industry practice and background data which we have accumulated over time,
/
To accomplish the Economic Impact Analysis, the data on the struc-
ture of this industry was used to develop industry segments of groups of
firms which would be differentially affected by guidelines and costs,
and was applied to an analytical model with the focus on the following
critical issues.
The probability that cost of compliance will be able
to be passed on to consumers via increase in product
cost or will have to be absorbed by operators, result-
ing in a lower level of profitability; and,
If costs cannot be passed through, the extent to which
the resultant effect on financial condition and capital
availability will cause plant closures, unemployment,
community impacts, and restrict industry growth.
The extent to which capital availability will be limited for
the numerous small operators, also causing plant closures,
unemployment, and community impacts, and restricting industry
growth.
A. DATA GATHERING
Data available on firms within this industry is fragmented and in-
complete. The Department of Commerce, through its Census of "Manufactures
and other like information, represents a general body of macroeconomic
information applicable to this industry. However, since so many of
these firms are privately held and therefore do not disclose financial or
other operating information in any detail, that information and other
similar publicly-available information represents only a general and
incomplete description of this industry.
Thus, we developed new data which we believe to be an adequate base
for the analysis on industry practices and representative financial data
through:
Interviews of individual companies;
Interviews with trade associations and others knowledgeable
in the industry and;
Reliance on the assignment team's own knowledge of the
industry and relevant experience of colleagues.
42
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B. PRICE EFFECTS
The analysis of whether prices are likely (or not likely) to be
able to be passed on is a relatively straightforward economic analysis.
Table III.B.l^presents the price increase analysis matrix which we used
to derive price increase conclusions.
If the annual treatment cost (before tax) represents a significant
percentage of the selling price, it will be difficult to pass this on to
consumers. This is particularly true in an industry which is character-
ized by a high level of price elasticity of demand. In price insensitive
industries, a 5% price increase can be readily passed on. In other Timber
Products Processing Industry sectors, a before tax treatment cost greater
than 10% of selling price seriously hampers the ability to pass the cost
increase on to consumers.
A high occurrence of readily-substituted products will limit the
ability to pass on cost increases through increased prices. Similarly,
if demand is elastic (sensitive to price), the ability to pass on price
increases is limited.
A uniformly low operating rate within the industry would also con-
strain such increases. Companies with low operating rates are more
likely to absorb cost increases in an attempt to maintain or increase
present operating rates rather than attempting to pass through cost
increases.
/
Typically, a critical factor to analyze is the extent to which plants
within the industry have to absorb comparable abatement costs. If costs
are unequally distributed throughout an industry, producers which do not
have to make an investment or can make less of an investment obtain a
strategic cost advantage. A low-cost producer will tend to. absorb
abatement costs, particularly if the abatement costs to the low-cost
producer are smaller than for the industry as a whole, to put the other
plants in the industry at a cost disadvantage.
If products are sold within an industry on the basis of price
rather than quality, service, etc., then cost increases are likely to be
absorbed rather than passed through. Similarly, if market shares are
generally small for any individual firm or plant, then price competition
is likely to be severe and cost increases are likely to be absorbed.
Table III.B.I and the underlying analysis is applicable to the
furniture industry as a whole. However large firms, while not able to
influence the market and prices dramatically, do have more leverage than
do small firms. Thus, the larger the firm (and the higher its share-of-
market), the greater its ability to pass on cost increases.
-------
TABLE III.B.I
PRICE INCREASE ANALYSIS MATRIX
Price Increase Constraints
Factor
Ratio of Before Tax Treatment Cost
To Selling Price (%)
Substitute Products
Capacity Utilization
Captive Usage
Demand Growth
Foreign Competition
Abatement Cost Differences
Price Elasticity of Demand
Basis for Competition
Market Share Distribution
Number of Producers
Condition for
Constraint
High
High Occurrence
Low
Low
Low
High
Unequal
High
Price
Fragmented
Many
44
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C. PLANT CLOSURE EFFECTS
Even if prices are not likely to be increased, and costs are absorbed
with relatively well-documented financial effects, it is difficult to
reach conclusions regarding plant closures. The plant closure analysis
matrix which was used to focus upon the central issues in these decisions
is presented as Table III.C.I. The analysis is complicated by the fact
that small, family-owned and operated, one-plant firms tend to show
remarkable "staying power" in the face of extremely low rates of profit^
ability and other burdens. The extent of subjective commitment to the
business beyond the point at which standard financial analysis would
suggest shutdown is an extremely difficult factor to measure and assess.
Nonetheless, subjective elements must be necessarily used to supplement
the objective analysis, since objective economic analysis would tend to
overstate the extent of plant closures.
The three fundamental issues to focus upon are:
Extent of integration - If a plant is part of an extensive manu-
facturing operation, it is likely to be kept open even if
financial impacts are relatively severe. For example, an
insulation board manufacturing plant can be an efficient
consumer of otherwise low-value waste product (sawdust,
shavings, etc.) from a sawmill or planing mill located on
a common site.
Other facilities on a common site - An isolated plant is
most vulnerable for the reasons described in the inte-
gration discussion above.
Ownership - A large, multi-industry firm would tend to
make a shutdown decision based on "rational" business
analysis, such as effects on profitability. Such a
firm would likely have specific criteria for each of its
operating facilities to meet. However, a private owner
tends to have greater "staying power," a greater sub-
jective commitment to staying in business even if
profitability is substantially reduced. This is true
for such reasons as the fact that the plant
has been in the family for generations, but also such
specific economic reasons as the fact that this may
be a particular family's sole or primary source of income.
45
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TABLE III.C.I
PLANT CLOSURE ANALYSIS MATRIX
Plant Shutdown Decision
Factor
Condition for
Shutdown
Ration of After Tax Treatment
Cost at After Tax Net Income (%) High
Cash Flow (Including Treat-
ment Costs) Negative
Ratio of Investment in Treat-
ment Facilities to Net Fixed
Investment (%)
Low
Integration
Low
Multi-Plant Complex
Isolated Plant
Other Environmental Problems
(Including OSHA) Multiple
Emotional Commitment
Indifference
Ownership
Large, Multi-
Industry Company
-------
D. SEGMENTATION
The objective of segmenting the industry was to group plants into
categories which might be affected similarly by pollution control require-
ments. For this industry, the costs of compliance and technologies to
comply can be directly related to the type of process performed. Pro-
cesses performed within plants vary by product mix only to the extent
that upholstered furniture manufacturers do far less finishing and
generate less effluent than do non-upholstered manufacturers. Thus, the
cost of compliance will fall differently upon plants in each of these
two primary categories.
Within each of these two primary segments, effects are directly related
to the size of plant. There are many very small plants in this industry;
i.e., more than 60% of the plants have less than 20 employees and generate
less than $500,000 in annual sales revenues. Such plants are quite
sensitive to cost increments which may be small in an absolute sense
($5,000-$10,000) but which represent a relatively large ratio to present
costs (10-20% of revenues). Thus, plant size is the second important
criterion used to segment the industry.
47
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IV. COSTS OF COMPLIANCE
The Development Document concludes that subcategorization of the
furniture industry for developing effluent guidelines and standards
should be based on water usage. Other factors such as process variation,
nature of raw materials, plant size and age, nature of water supply,
plant location and land availability were determined to be of secondary
importance. The volume of waste water generated by the furniture in-
dustry is not very large, although increased usage is shown by plants
which have water wash spray booths and in-plant laundry facilities. Wet
scrubbers as emission control devices in some plants are also a source
of water pollution.
Costs of compliance as reported in the Development Document are based
on the effluent loads of large plants. Thus, those costs overstate the
burden small plants would face. However, since we have no estimates of
the effect of scale, we used these costs and, thus, performed a "worst
case" analysis.*
A. MODEL PLANTS
Model plants were formulated in the Development Document on the
basis of presence of water wash spray booths and in-plant laundry facil-
ities, the two major contributors to wastewaier volume. All plants were
assumed to have two glue spreaders which generate a wastewater volume
from cleanup operations.
Model 1 - Contains only dry booths, no laundry facilities,
two glue spreaders.
Model 2 - Contains dry booths, laundry facilities, two
glue spreaders.
Model 3 - Contains water wash (wet) spray booths, no
laundry, two glue spreaders.
Model 4 - Contains both water wash booths and laundry
facilities, two glue spreaders.
The volume of plant wastewater depends on the size and number of water
wash spray booths and the number of loads of laundry washed each day.
The wastewater from these two sources is generally very concentrated,
alkaline, highly-colored, and with high levels of BOD and COD. At
present, these streams may or may nor, be discharged from a given plant.
*Note: A small plant (less than 20 employees) probably generates less
than 500 gallons of effluent process water daily and as much
as 500-1000 gallons of sanitary waste water daily.
-------
In order to develop investment and operating costs for the model plants,
certain assumptions were necessary regarding the volume of wastewater to
be treated; these were:
Model 1 - 200 gallons/day for glue spreader clean-up.
Model 2 - 1200 gallons/day for clean-up and laundry.
Model 3 - 680 gallons/day for clean-up and water wash
spray booths.
Model 4 - 1680 gallons/day for clean-up, laundry and
water wash spray booths.
B. ALTERNATIVE CONTROL METHODS
The following treatment technologies were considered applicable for
furniture plant effluents:
Alternative B - Trucking from plant to landfill area.
Alternative C - Incineration via spraying on hog fuel.
Alternative D - Evaporation from shallow ponds using
mechanical spray units in some areas where precipi-
tation exceeds evaporation (e.g., North Carolina New
England, Michigan).
Alternative E - Aeration ponds combined with spray
irrigation of settled skimmed and treated wastewater.
This is judged applicable only to Models 2 and 4 which
have laundry facilities.
C. OPERATING AND INVESTMENT COSTS USING BPT
The Development Document concludes that zero discharge for furniture
plants is possible using any of the alternative control technologies.
Table IV.C.I summarizes the estimated investment and operating costs for
BPT. Alternative D includes costs for both shallow ponds and ponds
combined with mechanical spray units.
D. COST IMPACT
Table IV.D.I estimates the costs of compliance for the various in-
dustry sectors. For these firms, the costs represent the probable
technologies firms will elect to institute to comply with 1977 Guidelines.
The small- and medium-sized firms generate less effluent and can more
easily opt for lower cost methods of abatement. All firms are assumed to
choose the land fill alternative.
49
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TABLE IV.D.I
COSTS OF COMPLIANCE* - FURNITURE MANUFACTURERS
Segment
Non-upholstered mfrs.
Large Plants
Medium Plants
Small Plants
subtotal
Total
Plants
552
1191
2853
4596
Number of Probable Probable
Plants Capital % Net Annual
Affected Cost Assets Cost
55
119
285
459
$ 4,500 0.2% $ 9,300
4,500 1.5 9,300
3,200 3.4 6,680
% Sales
0.15%
0.8
1.7
Upholstered mfrs.
Large Plants
Medium Plants
Small Plants
subtotal
233
563
705
1501
23
56
._7Q
149
3,200 0.13
3,200 0.9
3,200 2.3
6,680
6,680
6,680
0.1
0.5
1.3
Total 6097 608
*BPT, BAT, NSPS on proposed Guidelines.
Arthur D. Little, Inc. Estimates: Development Document
-------
V. ECONOMIC IMPACT ANALYSIS
A. INTRODUCTION
This section assesses the economic impact on the furniture industry
to comply with proposed Effluent Guidelines. The investment and operat-
ing costs for the alternative methods of treating plant effluents used
in our analysis are taken from the Development Document.
1. Industry Segments
The furniture industry has many small operations, e.g., about 60%
of the total number of plants have less than 100 employees; many are
privately owned. The ability of the small producer to cope with pollu-*-
tion abatement costs is the central issue to analyze in assessing the
economic impact on the industry. Plants with less than 100 employees are
most vulnerable.
The volume of wood finishing associated with upholstered furniture
plants is very small relative to non-upholstered establishments. The
potential for water pollution by producers in the categories is different.
Thus, they were analyzed separately, i.e., companies in SIC-2512 (upholstered
furniture) were separated from the rest of the industry. Table V.A.I
shows the number of plants and number of employees in these two major
segments of the industry.
It is possible to relate plant size to the use of water wash spray
booths (for wood finishing), which is a significant source of effluent.
In the past 10-15 years the use of water wash spray booths has increased
rapidly; our surveys indicate they are found in about 50-60% of the
larger non-upholstered furniture plants in the U.S. They are not
generally found in medium-sized plants and essentially never in small
plants, because of the relatively high investment cost; there are less
expensive and adequate alternatives available such as hand rubbing or
the use of filter booths. Upholstered furniture plants, with the
exception of a few specialized situations, do not have water wash spray
booths.
Any size plant may have in-plant laundry facilities. There are
fewer laundries in the upholstered furniture segment of the industry
because there are fewer wood finishing operations. Thus, it is not
feasible to relate plant size to laundry facilities.
Thus, the economic impact analysis can be accomplished based on the
operating and investment costs from the Development Document by allocat-
ing small, medium, and large size plants to their treatment model plants
as shown in Table V.A.2.
51
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TABLE V.A.I
. NUMBER OF PLANTS AND EMPLOYEES FOR VARIOUS SIZE FURNITURE PLANTS
SIC No. - 2511, 2517
2521, 2531, 2541 (non-upholstered)
Total
No. Plants
Total
No. Employees
Small
2853
20,280
Medium
1191
50,570
Large
total
_5J!_
4,596
151.713
222,563
SIC No. - 2512 (Upholstered)
Small
Medium
Large
total
GRAND TOTAL
705
563
233
1,501
6,097
5,863
27,164
60,282
93,309
315,872
Source: U.S. Dcpt. o£ Commerce and Arthur D. Little, Inc., estimates,
52
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TABLE V.A.2
NUMBER OF PLANTS AFFECTED BY
EFFLUENT GUIDELINES - WOOD FURNITURE MANUFACTURING
Non-upholstered
Small
Medium
Large
Laundry
Facilities Water Wash Booths
Yes - 50%
Yes - 50%
Yes - 50%
No .
Plants/Model (% of
total)
Model
1234
50 50
Yes - 10% 45 45 5 5
Yes - 50% 25 25 25 25
Upholstered
Small
Medium
Large
Yes - 50%
Yes - 50%
Yes - 50%
No
No
No
50 50
50 50
50 50
Source; Arthur D. Little, Inc., estimates.
53
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2. Number of Plants Affected
Wastewater is not a major problem in the furniture industry. The
Development Document reports that an estimated 95% of all furniture
factories either discharge their wastewaters to municipal sewerage
systems, contract them to be hauled away by commercial disposal companies,
or use a combination of these disposal methods and thus are not affected
by these Effluent Guidelines. In our analysis we assumed that 10% of
the furniture plants would have to face the additional cost of implement-
ing pollution controls.* Table V.A.3 summarizes the number of plants and
number of employees which could be affected by the cost of compliance.
Assignment to the various model plant sectors is based on the percentages
shown in Table V.A.2.
3. Minimizing Impact
While certain effluent abatement technologies presented in the
Development Document are relatively expensive for the small plant, there
are abatement options available which are lower cost and will cause no
impact. The alternatives available as control measures (with the
exception of spray irrigation) can be used by all types of plants. In
addition, there are also changes which can be made in the plant to
reduce the volume of wastewater (for example, eliminating laundry facil-
ities). Finally, pricing strategy can be utilized to pass pollution
costs on to consumers.
B. PRICE EFFECTS
Costs of compliance will be passed on through increased end product
prices. However, since the necessary price increase at maximum is so
small (1.7%)^ and since not all firms in the industry will be required to
make an investment (2.2% of sales volume), this price increase will not
have a noticeable aggregate effect on the furniture industry or on its
prices.
Table V.B.I analyzes the likelihood of a price increase. The
rationale is the same for both upholstered and non-upholstered furniture
manufacturers.
The key issues as identified in the matrix are that:
The ratio of before tax treatment cost to selling price
is very low; a maximum of 1.7%.
Price elasticity of demand is very low; the consumer
is essentially price insensitive within a band of
+/- 5% (see Sections II.C.A and II.D.4 above).
*This yields a somewhat conservative or "worst case" analysis. Thus, a
conclusion of significant impact under the "worst case" assumption would
overstate impact,
54
-------
TABLE V.A.3
NUMBER PLANTS AND
(Present Situation Assumes 90%
Do Not Require
Pollution Controls
Model 1
Type of # // // I
Plant Plants Employ. Plants Employ.
EMPLOYEES IN MODEL PLANTS
Have Disposal Contractor or Are on Sewer)
Require Pollution Controls
Model 2 Model 3 Model 4 Total
***fffff
Plants Employ. Plants Employ. Plants Employ. Plants Employ
Non- Upholstered
Small 2
Medium 1
Large
Total 4
Upholstered
Small
Medium
Large
,568
,072
497
,137
634
507
210
18,252
45,513
136,542
200,307
5,277
24,448
54,254
142
54
14
35
28
12
1,014
2,276
3,793
293
1,358
3,014
142
54
14
35
28
12
1,014
2,276
3,793
293
1,358
3,014
285
6 253 6 253 119
14 3,793 14 3,793 55
459
70
56
23
2,028
5,057
15,171
22,256
586
2,716
6,028
Total
1,351 83,979
149 9,330
Source; Arthur D. Little, Inc., estimates.
-------
TABLE V.B.I
PRICE INCREASE CONSTRAINTS
Condition for
Factor Constraint
Ratio of Before Tax High
Treat. Cost to Selling
Price (%)
Substitute Prod.
Cap. Utilization
Captive Usage
Demand Growth
Foreign Compet.
Abatement Cost
Differences
Price Elasticity
of Demand
Basis for Compet.
Market Share Dist.
Number of Products
High Occurrence
Low
Low
Low
High
Unequal
High
Price
Fragmented
Many
NON-UPHOLSTERED
FURNITURE
Low,<0.8%*
Little
Moderate
Low
Moderate
Low
Unequal
Low-Moderate
Style, Quality
Fragmented
Many
UPHOLSTERED
FURNITURE
Low,
-------
The table also indicates that abatement costs are spread unequally
across the industry. However, in the furniture industry since the
consumer is relatively price insensitive at least within the bounds of
the necessary price increase, the unequal distribution of costs of com-
pliance is not a significant factor.
Specifically, price increases for manufacturers of wood furniture
will be implemented within the following ranges:
Non-Upholstered Upholstered
Small Plant 0-1.7% 0-1.3%
Medium Plant 0-0.8% 0-0.5%
Large Plant < 0.2% 0-<0.1%
These are the price increases necessary for these plants to maintain
the present level of profit generation. For example, the small non-
upholstered furniture manufacturing plant will have to increase its
selling price by 1.7% to maintain its net income after tax.
The aggregate effect on industry prices if the affected plants im-
plemented price increases to cover fully costs of effluent abatement is
small. For example, the share of market of affected upholstered furniture
plants is 2.2%; it is 2.1% for non-upholstered plants. (Only small- and
medium-sized plants would increase prices; abatement costs for large
model plants represent less than 0.1% of the sales revenues, an insignif-
icant effect.) The aggregate effect on industry prices is:
Upholstered Furniture: 0.04% Increase
Non-upholstered Furniture: 0.03% Increase
Small companies can find ways to limit the effect of additional higher
operating costs. For example, most of them will opt for process changes
to give up in-plant laundry facilities and avoid that particular abatement
cost. In addition, alert management could manage the impact of compliance
in several ways, including:
Effective pricing strategy to pass on costs of compliance
selectively;
Reducing materials costs by modestly sacrificing quality
to achieve lower prices;
57
-------
Maintaining good plant housekeeping to reduce wastewater,
including recycling of in-plant and clean-up water;
Selection of the least expensive most compatible method
of wastewater disposable, including analysis of oppor-
tunities for cooperative facilities.
This does not suggest that small plants will not be affected by
these Guidelines. Rather, they have numerous compliance options avail-
able to avoid serious impact and effects on operations.
C. FINANCIAL EFFECTS
Since abatement will be passed through, profitability will be
maintained and financial condition will be unaffected.
Capital availability is not a significant problem. The amount of
capital required is modest, even for the medium- and small-sized plants,
e.g. :
Abatement Investment
Net Cash
Segment Assets Flow
Non-upholstered Furniture
Large Plant 0.2 1. 3
Medium Plant i-5 11.1
Small Plant 3-4 24.0
Upholstered Furniture
Large Plant 0.1 1.0
Medium Plant 0.9 8.7
Small Plant 2.3 19.8
Further, management will not have to resort to equity or debt mar-
kets for capital, since these investment levels can be accomplished out
of cash flow.
D. SENSITIVITY ANALYSIS
Although we conclude that abatement costs will be passed on through
price increases, this section tests the effect on the industry of cost
absorption. In essence, it is a test of the sensitivity of our analysis
to the "cost-pass-through" conclusion.
This analysis concludes:
Large firms would not be affected by full absorption of cost;
Small- and medium-sized firms face potentially severe
effects at maximum levels of cost, but can comply at
lower, manageable levels of cost.
58
-------
Thus, even if costs were absorbed there would be no effect on the
industry.
1. Large Plants
Large plants would not be seriously impacted by the absorption of
the cost of compliance. Tables V.D.I and V.D.2 summarize the financial
impact due to absorption of cost of compliance for large plants with
maximum cost burdens. For example, the net profit margin (net after
tax income - % net sales) decreases by only 0.1% to absorb the maximum
cost burden. Similarly, profitability expressed as return on net assets
decreases by only 0.3% to go from no cost to maximum cost. Treatment
cost represents only a small percentage of net after tax income, 5.4%
as a maximum. Cash flow remains about $354,500 a year for non-upholstered
and $310,000 for upholstered firms. Capital investment in pollution
control facilities is only a small percentage of net fixed assets, 3.5%
at a maximum.
Thus, there would be no financial impact on large furniture producers,
either upholstered or non-upholstered, even if full absorption of costs
occurred.
2. Medium Plants
Tables V.D.3 and V.D.4 show the financial impact of pollution abate-
ment costs on different models within this size range. The net profit
margin (net after tax income - % net sales) decreases from 1.3% to 0.8%
to absorb the maximum cost. Profitability expressed as return on net
assets is reduced from 4.2% to 2.6% to go from no cost to maximum cost.
Treatment cost represents a fairly high percentage of net income after
taxes, 79% as a maximum. Cash flow is reduced from $40 500 to about
$34,500 to absorb maximum cost by non-upholstered plants and from about
$36,700 to $30,900 by upholstered plants. Capital investment in pollution
control facilities is 24% of net assets at the maximum. The maximum
cost burden is shown to be for plants with laundry facilities and wet
spray booths (Model 4) which elect to install aeration ponds with equip-
ment for spray irrigation. However, a significant reduction in the
financial impact can be achieved if the laundry facilities are eliminated
(Model 3). The most expensive control measures then result in a decrease
in net profit margin of only 0.2%; profitability as a percent of net
assets decreases by 0.6% for maximum cost; maximum treatment cost as a
percent of net income is 31% and cash flow is reduced from a level of
$40,500 to $38,200 to absorb maximum cost for non-upholstered firms; and
capital investment in pollution control facilities is a maximum 17% of
net fixed assets.
Tables V.D.5 and V.D.6 summarize the financial impact for plants
having no water wash spray booths, and with and without in-plant laundry
facilities (Models 1 and 2). Profitability is lower for plants with
laundry facilities; the effect is somewhat greater than shown for plants
with water wash spray booths but no laundry. Plants without laundry
59
-------
TABLE V.D.I
FINANCIAL IMPACT
LARGE NON-UPHOLSTERED PLANTS WITH WATER WASH SPRAY BOTTLES & LAUNDRY FACILITIES (Model 4)
No Treatment Landfill
(Total all Models)
#
#
$
$
$
$
$
%
%
%
%
%
$
Plants 50
Employees 136,342
Net Sales 6.27MM
Net Assets 2.34MM
Net Fixed Assets 934K
Total Invested Poll. Control
annual Cost for Poll. Control
Net Income Sales
Return on Net Assets
Return on Fixed Assets
Treatment Invested Fixed
Assets
Annual Treatment Cost
Net Income
Cash Flow
3.5
9.4
23.5
354.481
4,500
9,300
3.4
/\ <*
s * *~
23.0
0.5
4.2
349,831
Burn with
Hog Fuel
3,600
580
3.5
9.4
23.5
0.4
0.3
354,771
Evap. Ponds
with Spray
14
3793
26,200
7,930
3.4
9.2
23.1
2.8
3.6
350,516
Aeration Sewer
Irrigation
32,700
12,030
3.4
9.1
22.9
3.5
5.4
348,466
0
300
3.5
9.4
23.5
' 0.2
354,331
Source: Arthur D. Little, Inc., estimates; costs from Development Document.
-------
TABLE V.D.2
# Plants
# Employees
$ Net Sales
$ Net Assets
$ Net Fixed Assets
$ Total Invested Poll. Control
$ Annual Cost for Poll. Control
% Net Income Sales
% Return on Net Assets
% Return on Fixed Assets
% Treatment Invested Fixed
Assets
% Annual Treatment Cost
Net Income
$ Cash Flow
FINANCIAL
RED FURNITURE PLANTS
No Treatment
(Total all Models)
210
54,254
7.03MM
2.41MM
990K
0
1 0
3.2
9.2
22.4
-
312,963
IMPACT
WITH LAUNDRY
Landfill
3,200
6,680
3.1
9.1
22.0
0.32
3.0
309,623
FACILITIES
Burn with
Hog Fuel
3,400
540
3.2
9.2
22.3
0.34
0.2
312,693
(Model 2)
Evap . Ponds
with Spray
24,500
6,410
3.1
9.1
22.0
2.5
2.9
309,757
Aeration
Irrigation
28,300
11,630
3.1
8.9
21.8
2.9
5.2
307,147
Sewer
0
300
3.2
9.2
22.3
0.1
312,813
Source; Arthur D. Little, Inc., estimates.
-------
TABLE V.D.3
NJ
9 Plants
# Employees
$ Net Sales
$ Net Assets
$ Net Fixed Assets
$ Total Invested Poll. Control
$ Annual Cost for Poll. Control
% Net Income Sales
% Return on Net Assets
% Treatment Invested Fixed
Assets
% Annual Treatment Cost
Net Income
$ Cash Flow
FINANCIAL
IMPACT
NITURE PLANTS-WATER WASH SPRAY BOOTHS & LAUNDRY FACILITIES (Model 4)
No Treatment
(Total all Models)
1072
45,513
1.17MM
300K
125K
»1 0
rol 0
1.3
4.2
11.3
40,530
Landfill Burn with
Hog Fuel
9,300 580
4,500 3,600
0.9 1.3
3.0 4.2
7.9 11.1
3.3 2.7
60.9 3.8
Evap. Ponds
with Spray
6
253
7,930
26,200
1.0
3.2
8.4
0.2
51.9
Aeration
Irrigation
12,030
32,700
0.8
2.6
6.9
24.3
78.8
Sewer
300
1.2
3.8
10.2
2.0
Source; Arthur D. Little, Inc., estimates; costs from Development Document.
-------
TABLE V.D.4
FINANCIAL IMPACT
MEDIUM-SIZE NON-UPHOLSTERED FURNITURE PLANTS WITH WATER WASH SPRAY BOOTHS (Model 3)
No Treatment
(Total all Models)
Landfill Burn with Evap. Ponds Aeration Sewer
Hog Fuel with Spray Irrigation
# Plants
# Employees
$ Net Sales
$ Net Assets
$ Net Fixed Assets
$ Total Invested Poll. Control
$ Annual Cost for Poll. Control
% Net Income Sales
% Return on net Assets
% Return on Fixed Assets
% Treatment Invested Fixed
Assets
% Annual Treatment Cost
Net Income
$ Cash Flow
1072
45,513
1.17MM
300K
125K
.1 - 3,600
ol - 4,040
1.3 1.1
4.2 3.7
11.3 9.8
2.7
26.4
40,530 38,510
6
253
3,200
510
1.3
4.2
11.1
2.4
3.3
40,276
22,700
4,740
1.1
3.6
9.6
16.9
31.0
38,160
0
300
1.3
4.2
11.2
2.0
40,380
Source; Arthur D. Little, Inc., estimates; costs from Development Document,
-------
TABLE V.D.5
FINANCIAL
IMPACT
MEDIUM-SIZE UPHOLSTERED FURNITURE PLANTS-LAUNDRY
#
//
$
$
$
<;
$
%
%
%
%
%
$
Plants
Employees
Net Sales
Net Assets
Net Fixed Assets
Total Invested Poll. Control
No Treatment
(Total all Models)
507
24,448
1.39MM
300K
116K
0
Annual Cost for Poll. Control 0
Net Income Sales
Return on Net Assets
Return on Fixed Assets
Treatment Invested Fixed
Assets
Annual Treatment Cost
Net Income
Cash Flow
1.4
4.7
16.0
-
-
36,729
Landfill
3,200
6,680
1.1
3.9
13.1
2.7
35.7
33,389
FACILITIES (Model 2)
Burn with
Hog Fuel
3,400
540
1.3
4.7
15.8
2.9
2.9
36,459
Evap . Ponds
with Spray
28
1358
24,500
6,410
1.1
3.9
13.3
21.0
34.3
33,524
Aeration
Irrigation
28,300
11,630
0.9
3.3
11.0
24.2
62.2
30,914
Sewer
0
300
1.3
4.7
15.9
-
1.6
36,579
Source: Arthur D. Little, Inc., estimates; costs from Development Document.
-------
TABLE V.D.6
FINANCIAL
IMPACT
MEDIUM SIZE NON-UPHOLSTERED FURNITURE PLANTS - (Model 1)
*
#
$
$
$
$
$
%
%
%
%
%
$
Plants
Employees
Net Sales
Net Assets
Net Fixed Assets
Total Invested Poll. Control
No Treatment
(Total all Models)
1072
45,513
1.17MM
300K
125K
0
Annual Cost for Poll. Control 0
Net Income Sales
Return on Net Assets
Return on Fixed Assets
Treatment Invested Fixed
Assets
Annual Treatment Cost
Net Income
Cash Flow
1.3
4.2
11.3
40,530
Landfill
3,200
. 1,520
1.2
4.0
10.8
2.3
10.0
39,770
Burn with
Hog Fuel
54
2,276
2,300
380
1.3
4.2
11.2
1.7
2.5
40,340
Evap. Ponds
with Spray
20,900
3,330
1.2
3.8
10.1
15.5
21.8
38,866
Aeration Sewer
Irrigation
0
300
1.3
4.2
11.2
- -
2.0
40,380
Source; Arthur D. Little, Inc., estimates; costs from Development Document.
-------
facilities or water wash spray booths show no significant change in
profitability. These plants would not he affected.
Thus, medium-sized furniture producers are not expected to close even if
they absorb the costs of compliance,
3. Small Plants
Sma 11 - s i 2 £« p 1 f> -. t
absorption of tru coat c
the financial cr it-
negative prof:, tab:
following fJnnPc^ ,
upholstered p,fcdr,., .
would decrease1- ftr-
net assets from 5.?t
very high percentage
reduced from $13,000
control facilities Is,
upholstered furniture
:oupi
or ne
i:.' - v i ^
731 '
pi an I
ov
The maximum cost for compl innrp
ities. There Is le.-;K serious f
when there are no laundry f nci i
large volume of wastcwatex ( ro;r.
ing the costs for i''ioclei.,v 1 and
volume of wastewatsr troin ,'J"'e I
from glue spreader .: " car,- \t\: .
For th^ ui-'a-i/
from 1.2 to 0.8% t
absorb maxirauic, cos
furniture planes .t
V.D.Sa. and V. 0,8h
plants. The sccc-n
on upholstered p
sales) would decre
return on net asser. ;
(after tax) rcpra.^ tr
this systEm. Cod!; '. .--
ment in pol Lutio , . .1
maximum cos t.
If COfitJ wJ,r"s L',-.
lower-cost cc<.-p) iatio.-,
otherwise. Aga: n . v ;.
lower cost options ar,
4. Sensitl11 u-;> -
I.e. most severely affected by the
...e. lab Los V.D.7 and V.D.8 summarize
.' ^eti'od >ilh maximum cost results in
i ' :'.f;;.est. e-^st alternative had the
jr.l.p; dL?rc-a producers. For non-
:. ii.jri-ii; (r;et income as a % sales)
pj-:f Ltabij Lty expressed as return on
; f-j.fiit cos*: (after tax) represents a
, ..l}"i nor this system. Cash flow is
r,r -jipi.'.ai investment in pollution
:-'c.; .issets; for maximum cost. Small
Imilar pattern.
tor pJants with laundry facil-
Table V.L',9
strates , or! , SIT-
The primary cor-:
needed.
c in] effect on the small producer
c , The cost of treating the relatively
i'dr/ "acilities is apparent by compar-
f i Li interesting to note that the
fc'eilicies .is five times the volume
profit margin is reduced
, becomes negative to
Small upholstered
'^iis severe impact. Tables
ffects on these furniture
had the following effects
gin (aet income as a %
itability expressed as
r-,^%. T:eaiT-ient cost
f .-c-1- Income, 69% for
1.0 ijK, and capital invest-
'; .1-. r. n---ad assets for
--' ".' "'' n --''."n'r would have to elect the
i.'; > .--J .-ff'-i,': -.".,.'d be. quite severe
: plar : . r- ;>e aole to '.onir-iy through these
i 3 u-..c, .. ' result.
,.aiy,;is- As the 'able demon-
: - "?. '-»f cos'., iacrease/
'.-> .:, r?:i3e capital if
-------
TABLE V.D.7
FINANCIAL IMPACT
# Plants
// Employees
$ Net Sales
$ Net Assets
$ Net Fixed Assets
$ Total Invested Poll. Control
$ Annual Cost for Poll. Control
% Net Income Sales
% Return on Net Assets
% Return on Fixed Assets
% Treatment Invested Fixed
Assets
% Annual Treatment Cost
Net Income
$ Cash Flow
ID FURNITURE PLANTS -
No
(Total
2
18
13
Treatment
all Models)
,568
,252
391K
94K
34K
1.2
5.2
14.6
- -
,304
LAUNDRY FACILITIES (Model 2")
Landfill
3,200
6,680
0.4
1.6
4.6
9.5
69.1
9,964
Burn with
Hog Fuel
3,400
540
1.2
4.9
13.8
10.1
5.8
13,034
^»
Evap . Ponds
with Spray
24,500
6,410
0.4
1.8
5.0
73.1
68.3
10,099
Aeration Sewer
Irrigation
28,300 0
11,640 300
neg 1 . 2
5.0
14.1
6.1
3.2
13,154
Source: Arthur D. Little, Inc., estimates; costs from Development Document.
-------
TABLE V.D.8
oo
// Plants
# Employees
$ Net Sales
$ Net Assets
$ Net Fixed Assets
$ Total Invested Poll. Control
$ Annual Cost for Poll. Control
% Net Income Sales
% Return on New Assets
% Return on Fixed Assets
% Treatment Invested Fixed
Assets
% Annual Treatment Cost
Net Income
$ Cash Flow
FINANCIAL IMPACT
LL NON-UPHOLSTERED
No Treatment
(Total all Models)
2,568
18,252
391K
94K
34K
L 0
Jl 0
1.2
5.2
14.6
13 , 304
FURNITURE PLANTS
Landfill
3,200
1,520
1.0
4.4
12.3
9.5
16.2
12,544
(Model 1)
Burn with
Hog Fuel
142
1014
2,300
380
1.2
5.0
14.0
6.9
4.0
13,114
Evap . Ponds
with Spray
20,900
3,330
0.8
3.4
9.6
62.2
37.6
11 , 639
Aeration Sewer
Irrigation
0
300
1.2
5.0
14.1
3.2
13,154
Source: Arthur D. Little, Inc., estimates; costs from Development Document,
-------
TABLE V.D. 8a
# Plants
# Employees
$ Net Sales
$ Net Assets
$ Net Fixed Assets
$ Total Invested Poll. Control
$ Annual Cost for Poll. Control
% Net Income Sales
% Return on New Assets
% Return on Fixed Assets
% Treatment Invested Fixed
Assets
% Annual Treatment Cost
Net Income
$ Cash Flow
FINANCIAL
IMPACT
1ALL UPHOLSTERED FURNITURE PLANTS (Model 1)
No
(Total
d
ol
Treatment
all Models)
634
5,277
532K
138K
26K
0
0
1.7
6.5
34.6
16,200
Landfill
3,200
1,520
1.6
5.8
31.7
12.3
18.5
15,500
Burn with
Hog Fuel
2,300
380
1.7
6.3
33.9
8.9
4.3
16,000
Evap . Ponds
with Spray
20,900
3,330
1.4
4.6
28.2
80.4
45.4
14,500
Aeration
and Sewer
Irrigation
0
300
1.7
6.6
34.6
3.4
16,100
Source: Arthur D. Little, Inc., estimates; costs from Development Document.
-------
TABLE V.D. 8b
# Plants
# Employees
$ Net Sales
$ Net Assets
Net Fixed Assets
Total Invested Poll. Control
Annual Cost for Poll. Control
% Net Income Sales
% Return on Net Assets
% Return on Fixed Assets
% Treatment Invested Fixed
Assets
% Annual Treatment Cost
Net Income
$ Cash Flow
FINANCIAL
IMPACT
'ERED FURNITURE PLANTS - LAUNDRY FACILITIES (Model 2)
No
(Total
ol
rol
Treatment
all Models)
634
5,277
532K
138K
26K
1.7
6.5
34.6
16,200
Landfill
3,200
6,680
1.1
4.0
21.8
12.3
118.0
12,900
Burn with
Hog Fuel
3,400
540
1.6
6.2
33.6
13.1
6.2
15,900
Evap . Ponds
with Spray
24,500
6,410
1.1
3.6
22.3
94.2
110.6
13,000
Aeration
and
Irrigation
28,300
11,640
6.0
1.9
12.2
108.9
366.0
10,400
Sewer
0
300
1.7
6.4
34.0
3.4
16,100
Source: Arthur D. Little, Inc., estimates; costs from Development Document.
-------
TABLE V.D.9
SENSITIVITY ANALYSIS - CONCLUSION MATRIX
Price Result
Type of Plant - Extent of Effect
Upholstered
Non-Upholstered
Small Medium Large Small Medium Large
Price Increase:
- Probable Tech.
- Highest Cost Tech.
None
None
None
None
None
None
None
None
None
None
None
None
No Price Increase:
- Probable Tech.
- Highest Cost Tech.
Moder. Minor None
High* llinor None
Moder. Minor None
High* ilinor None
*Due to Limited Availability of Capital.
-------
E. PRODUCTION EFFECTS
Based on our preceding analyses which indicate that costs will be
passed on and that companies can elect technological and strategic
options to avoid significant impact, we do not expect any plant closures
to result from the implementation of these effluent guidelines. We only
temper this analysis with the comment that at higher levels of capital
and/or operating costs, the analysis would change. For example, if small
companies were to make capital investments in the §10-15,000 range, and
to bear operating costs in the$10-15,000 range, our analysis would
indicate a significant number of plant closures.
F. EMPLOYMENT EFFECTS
Since no plant closures will result, there will be no attendant un-
employment .
G. REGIONAL EFFECTS
There will be no regional effects resulting from these guidelines.
H. BALANCE OF TRADE EFFECTS
The modest aggregate cost increases we foresee being added onto
furniture prices (*0.05%)wiii not significantly alter the competitive
position of United States furniture in foreign markets, neither will it
cause a dramatic influx of imported furniture. Both Imports and exports
will be influenced more by other factors, such as style changes or raw
material costs and availability.
I. INDUSTRY GROWTH EFFECTS
Industry growth will not be affected by the proposed effluent
guidelines. New plants in this industry tend to be larger than our
model small plant, the only sector of operations at all likely to be
affected. Further, the modest price increases likely to be implemented
will have no effect on furniture purchases in any important market seg-
ment.
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VI. LIMITS OF THE ANALYSIS
The two central problems limiting the accuracy of the present
analysis are:
A limited availability of data in suitable form; and,
The nature of the industry segments.
A. DATA LIMITATIONS
Data on these industry sectors is generally present only in a broad,
descriptive format. What information is available of a detailed nature
tends to focus on the operations and characteristics of larger firms and
their large plants. However, these industry sectors are typified by
small, privately-owned firms which are more likely to be affected by
effluent guidelines than their larger counterparts. Thus, as noted in
Section III on Methodology, it was necessary to gather new data through
a series of interviews to collect information on the industry as a
whole and to focus on the operations of those firms and plants most
likely to be impacted, i.e., the small operators. Due to the large number
of plants involved (approximately 6,000), it was necessary to collect
data by representative samples rather than through comprehensive (100%)
sampling. The consistency of the data suggests that the analysis is
built upon a sound data base.
Excepting the large manufacturers which tend to be publicly-held
corporations, these industries are composed of many small, privately-held
family-managed firms which is an additional data limitation. Due to the
fragmented nature of the industry and the fact that privately-held firms
do not publish as much data as do publicly-held firms, it is difficult
to get accurate financial data. Even where financial data is available,
that data is not always directly comparable to similar data from publicly-
held firms, since-a small firm may choose to pay its principals higher
salaries and fringe benefits, rather than reporting such earnings as net
income, which is the more standard practice for a publicly-held corpora-
tion. As such, net income and, more importantly, annual cash flow may be
understated for these firms.
However, the costs of compliance are relatively modest and the
technological alternatives relatively straightforward. Further, the
consistency of our data within the various industry sectors gives us
confidence that is indeed representative. Thus, the analysis can be
used to judge the economic impact of proposed effluent guidelines on
the industry.
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B. NATURE OF THE INDUSTRIES
The meat difficult ieaue to analyse in these sectors is the likeli-
hood of plant closure. A large, muLti-JndusCry, publicly-held firm
tends to make a shutdown decision based on objective business analysis,
such as effects on profitability or importance of a product line to
overall corporate strategy. Such a firm would lively have specific
criteria for each of its operating facilities to paet.
However, a private ow>dr tends to have A greater subjective commit-
ment to staying in business even if profitability is substantially
reduced. This is true for such factors as copraitjnant to a facility which
has been operated by the family for generations arvd for such specifically
economic reasons as the fact that this may be a particular family's sole
or primary source of income. Further, the privately-held firm considers
the magnitude of cash flow as the important issue, rather than profit-
ability ration The management of such firms is not likely to perform a
discounted cash flow analysis as part of its shutdovm decision-making.
Thus, the factors l.istt.fi in the plant closure analysis matrices
(see Table III.C.I) can be used as a guide and to highlight the central
issues related to plant closure, but must be assigned different weights
when analyzing the. decision-making process and the likelihood of closure
for a publicly-held firm versus a private enterprise. Where costs approach
a leve.1 of significance, such as for small non-upholstered furniture
plants, the rlam c^oauro analyst? becomes more suggestive than definitive.
On balance, however, the costs of compliance are relatively modest, not
relatively high, and the plant, closure decision is ,more straightforward.
C. M0S1_
Tbft ir.ost TCTisi^ive issues of {.his analysis are listed in Table VI-C.I.
In essence, {.he k,vy i.-.auep are the facts that small firms, which arc
numerous In wood furniture rr
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TABLE VI.C.I
MOST SENSITIVE ISSUES
Issue
Effect on Present Analysis
Condition
To Cause Significant Effect
Price Increase Analysis
Capital Availability
Plant Closure Analysis
Moderate
Minimal
Minimal
Higher costs (capital: $5-10,000), and
Larger // of plants affected
Inability to implement low capital
compliance technologies
Higher costs and
Larger # of plants affected
Source: Arthur D. Little, Inc., estimates.
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Appendix
Industry
Impac t
Summaries
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TABLE A-l
INDUSTRY SUMMARY
Industry; Non-Upholstered Wood Furniture Manufacturers
No. of Plants in Segment 4,596
Percent Total Plants in Industry 100%
No. of Plants Direct Discharging 459
Percent Total Plants in Segment 10%
BPT, BAT
No. of Plants with BPT Treatment in Place 4,137
Percent Total Plants in Segment 90%
Cost of Pollution Abatement BPT, BAT
Capital Costs for Segment
Total Capital Cost $1,200,000
Total Capital Expenditures as Percent of Average Annual i. 1%
Investment
Total Capital Expenditures as Percent of Total Capital
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TABLE A-2
INDUSTRY SUMMARY
Industry; Upholstered Wood Furniture Manufacturers
No. of Plants in Segment 1,500
Percent Total Plants in Industry 100%
No. of Plants Direct Discharging 149
Percent Total Plants in Segment 10%
BPT, BAT
No. of Plants with BPT Treatment in Place 1,351
Percent Total Plants in Segment ' 90%
Cost of Pollution Abatement BPT, BAT
Capital Costs for Segment
Total Capital Cost $ 500,000
Total Capital Expenditures as Percent of Average Annual ^-1%
Investment
Total Capital Expenditures as Percent of Total Capital < 0.1%
In Place
Annualized Costs for Segment
Total Incremental Increase Including Capital Charges 1,000,000 '
Total Incremental Increase Excluding Capital Charges 1,000,000
Total Incremental Increase Including Capital Charges ^0.05%
as Percent of Sales
Expected Price Increase
Expected Increase Due to Pollution Control
Plant Closures
Total Closures Anticipated ~
Percent Reduction of Segment Capacity Due to Closures
Employment
Total Number of Employees Affected ~
Percent of Total Employees in Segment ~
Community Effects
Impact on Industry Growth
Balance-of-Trade Effects
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