4.0 MARKETING PLAN

ASFI will market its products and services to Northern California builders and will rapidly expand into Southern California, throughout the United States, and internationally. As ASFI expands domestically and internationally, strategic decisions will be made about where to expand based in part on data gathered about local competition. This section of the plan primarily focuses on the Northern California market.

4.1 Market Opportunity

According to the National Association of Home Builders (NAHB), there were 1,271,000 new single family home starts in the United States in 1998.¹ U.S. Census figures show that the number of housing starts in 1999 have increased by approximately 3 percent over 1998 figures.² In California, the number of single family housing starts has increased 18 percent to approximately 150,000. This rate of increase is expected to continue through the year 2000.³ The increase is needed to accommodate the rapidly growing population of California. Projections show the state's population reaching 40 million by 2010, and according to the State’s Department of Finance, builders must produce 250,000 new housing units per year for the next decade just to meet new demand for housing.  However, in the past ten years, California has fallen far short of achieving that goal, resulting in a serious and growing housing crisis.⁴

In addition, while the number of new homes being built has been increasing, albeit at a sub-optimum rate in California, lumber prices have also increased dramatically this decade, making new homes less affordable. Wood prices averaged $200 per 1,000 board feet during the 1980s, but during the 1990s prices have averaged almost $400 per 1,000 board feet.⁵ With wood and lumber costs account for one-third of the total materials costs used to build a home, the effect of increasing wood prices on home affordability and builder profitability becomes apparent. The increased price has primarily been a result of environmental restrictions on timber harvesting in the forests of the Pacific Northwest.

Since 1982, dimensional lumber experienced the fastest price increase among 13 common building materials while steel’s price has remained relatively stable according to the Bureau of Labor Statistics.⁶ Because of fluctuating and ever rising prices, builders are increasingly turning to alternative materials and building systems. In recent years, there has been a rise in the use of engineered lumber, insulated concrete forms (ICFs), and plastic composites; however, steel is a major alternative among the array of available options. The benefits of steel construction were described in Section 3.4; however, several key advantages give steel framing an edge over alternative building systems:

1. There is a long and successful track record of using cold-formed steel in the commercial building industry. This helps to provide builders confidence that steel frames can evolve for residential construction.

2. The anatomy or structure of a steel frame is remarkably similar and adaptable to the load bearing skeleton of a wood-framed building. This can contribute to reduced initial barriers to adoption among builders.

3. Steel frames include pre-punched framing members which facilitate the installation of electrical wires and other utilities.

Advances in steel tools and manufacturing technology allow ASFI to produce and erect a typical 2,000 square foot home at a significant discount to traditional wood frames. More specifically, ASFI can produce what it considers to be a better quality house frame (including framing, decking, and cornice, up to siding), 70 percent faster than wood framing subcontractors and approximately 15 percent cheaper. This is primarily due to the panelizing procedure (described in detail in Section 5.0) which puts steel frame components (i.e., walls, roof trusses, and floor trusses) together in the factory prior to on-site house frame construction. Wood components weigh about 3 times more than similar steel components. The increased shipping costs along with the difficulty construction crews would have handling such heavy panelized components do not make it financially or practically feasible to panelize wood off-site.

Therefore, economic and environmental factors are making steel more attractive than wood and ASFI has the required technical expertise to capitalize on the growing demand. However, the company also has strong marketing capabilities that further solidify the business opportunity. Gary Ryness, President of the Ryness Company, serves as ASFI’s Vice Chairman of the Board. The Ryness Company conducts market research, performs feasibility studies, identify buyer profiles, and makes pricing recommendations to the largest builders in Northern California. The firm represents more new housing than any other marketing organization in the United States. The firm is now responsible for selling 1 out of every 12 homes in Northern California. ASFI immediately benefits from the personal relationships Mr. Ryness has with top decision makers of Northern California’s home builders and ASFI expects to secure orders immediately.

Finally, there are currently a limited number of steel frame suppliers throughout the country. In our primary target market of Northern California, there is only one steel frame manufacturer and construction service provider, Innovative Steel Systems (ISS) in Lathrop, California. The firm is currently over-extended and cannot fill all of its orders. ASFI believes that the market for steel frames is growing rapidly and will continue to grow. ISS is not viewed as a direct competitor at the current time because the market is currently large enough to support two steel framing firms. In fact, with two suppliers of steel frames (ASFI and ISS), ASFI believes that the market will grow at a more rapid rate because more houses will be built using steel frames which will further legitimate the steel framing industry.

The growing housing crisis in California, the increasing cost of wood framing, the technological benefits and cost effectiveness of steel, the ability of ASFI to manufacture high quality steel frames quickly and efficiently, and the in-house marketing expertise of the firm combined represent the significant market opportunity for ASFI in Northern California.

It should also be noted that ASFI’s technology and services are replicable in other geographic regions throughout the United States and the world. Following the successful development and delivery of steel frame products and construction services in Northern California, ASFI will strategically examine other locations throughout the United States and begin domestic expansion. At the same time, based on the experience of key personnel in international markets, ASFI believes it can capitalize on the enormous opportunity of building single family homes throughout the world to help solve the housing shortage that is growing as a result of the global population explosion.

4.2 Market Research and Competitive Influences

To conduct market research, ASFI has partnered with the Ryness Company. Gary Ryness, Vice Chairman of the Board of ASFI, founded the Ryness Company in 1975 when he began a marketing program for Crow Canyon Country Club. Since its founding, the company has marketed over 500 new home communities representing 40,000 individual transactions, and sales of these homes have exceeded $7 billion. The Ryness Company now represents more builders and new housing than any other marketing organization in the United States.

Based on the years of experience and knowledge gained by Mr. Ryness as well as that of the other founders of ASFI, there is a growing market for steel framing systems. Home buyers in California are particularly impressed with steel’s strength which can better withstand termites, fires, and earthquakes. In addition , home insurance rates are much lower for homeowners with steel framing than those with wood framing. But there are numerous builder benefits that have been discussed in detail. Builders have strongly indicated that they are willing to work with us in order to control rising costs and meet the growing housing market needs. The size of the overall homebuilding market grew by 12.66% due to increases in the number of units built in both the single- and multi-family segments. The Ryness Company’s 1998 statistics for net subdivision sales showed that home sales in the Greater Bay Area fell 18 percent from 1997 figures, which translates to 3,000 homes. At the same time over 3,000 additional new homes were sold in the Central Valley and in Sacramento. In fact, there was a 35% increase in home sales in the Central Valley and a 22 percent increase in Sacramento. This dramatic increase reflects demographic changes that have caused buyers to move farther from the job centers and toward the lower cost housing markets to the north and east of the Silicon Valley. These figures highlight the growing market opportunity for builders in and around Stockton.

With respect to light gauge steel home framing around the country, the National Association of Home Builders⁷ has reported that:

• Total shipments of light gauge steel used in residential construction (for all site built housing) grew in 1998 by 43.68%.

• Total shipments of light gauge steel framing grew by more than 52% for single-family and 13.22% for multi-family.

According to our research, these figures are consistent with growth rates in California.

The steel framing industry is growing; but there remains conflicting data regarding the actual number of current new home starts that use steel framing. The National Association of Home Builders reports the number to be about 1 percent nationally,⁸ but the steel industry claims it is as high as 6 percent.⁹ This number has remained relatively constant and low over the last few years because most prior cost studies showed that steel-framed homes generally cost more than wood-framed homes. However, things are changing and steel is becoming more cost effective.

Drawing general conclusions from studies comparing the cost of steel framing to wood framing is difficult because of the variations in builders’ cost structures, home plans, regional cost of materials, and level of local labor skills and wages. While different studies vary in their estimates, most research has shown that the cost of materials required for steel framing is about the same or less than that of an equivalent wood-frame home. The difference in costs is usually a result of increased labor costs involved in framing with steel. Most builders do not know how to work with steel and only recently have tools been developed to productively and cost-effectively fasten steel pieces together.

Another factor that has kept the home building industry from adopting steel framing on a widespread basis is the traditionally complex approval process. The regulatory code process is already difficult for home builders using traditional materials, but can be far more complex for builders using unconventional materials such as steel. Local code officials and inspectors are often unfamiliar with the use of steel in residential construction. As a result, many times they require builders to go through the expensive process of obtaining an approved design with stamped engineering drawings. Builders using wood can design directly using tables and charts in the code, while builders using steel incur the extra engineering costs ranging from $ 0.25 to $2.75 a square foot. The prospect of extra cost and complicated dealings with code officials has discouraged builders from using steel in residential buildings.

In California, steel framing is more established than in other parts of the country. Approximately 3 percent of new homes in the state are built with steel frames. Thus, there is a level of acceptance of the product in the market. The real benefit of using ASFI’s products and services is that the firm will take the majority of the risk out of the builders’ hands. The cold-formed steel manufacturing and panelizing processes provide consistently high quality steel frame components and ASFI will provide frame construction services through its well-trained construction teams. To avoid issues related to failed city/county inspections, as part of its frame construction service offered to builders, ASFI will schedule all city/county inspections and will guarantee approval.

Finally, in order to increase the number of available steel framing crews in Northern California and throughout the country, ASFI will conduct training seminars to introduce the use of steel in residential construction. Messrs. John McDonald, ASFI President, and Ray Grage, ASFI Engineering Vice President, have conducted dozens of such educational training seminars throughout the country, and will continue to do so to increase the number of high quality labor crews who will both work directly for ASFI as well as be subcontracted by ASFI to erect the steel frames. The increase in the number of available steel framing crews will facilitate the rapid growth of ASFI.

4.3 Competition

ASFI views its primary competition as the hundreds of wood frame subcontractors who work in Northern California. Wood is currently used on 97 percent of the houses built in the region. Typically, a wood frame subcontractor will purchase lumber from suppliers, transport the wood to the job site and then build the frame on site (or “put the sticks together,” as it is referred to in the industry). After the frame has been built and approved by city/county inspectors the subcontractor is paid and the builder finishes construction on the house. ASFI will essentially provide the same service. The North American Steel Framing Alliance is aggressively marketing steel as an alternative to wood and believes that as much as 25 percent of the new homes built in the country will use steel frames by 2002.¹⁰ This increase in market share will come at the expense of wood frames. More specifically, ASFI believes that builders will increasingly choose our steel frames and construction services over wood subcontractors as long as the firm maintains high quality standards and construction service schedules.

ASFI’s only direct steel competitor is Innovative Steel Systems (ISS) in Lathrop, California. ISS is located approximately 5 miles south of ASFI and is currently the only steel frame supplier in Northern California. Since its founding in 1994, the firm has grown and now produces over 1,200 steel frame units per year. However, because of the rapid growth in housing starts and the increasing demand for steel framing, ISS has not been able to keep up with orders. Thus, while ASFI recognizes ISS as a competitor, the fim’s management believes that the market will easily support a second steel framing company. The steel framing industry is in its infancy and ASFI believes the industry is entering a period of explosive growth worldwide.

In addition, the firm is confident that the market can bear additional steel framing competitors and welcomes additional manufacturers/frame contractors because it will serve to further legitimate the industry. Many builders may be wary of depending on sole-source or limited source suppliers of frames because of the risk of potential work stoppages. Builders with wood framing subcontractors can rest assured that if one subcontractor does not meet production schedule obligations, another one can be hired. However, currently there are not enough steel framing companies in Northern California (and the nation) to have the luxury of replacing a poorly performing steel framing subcontractor. With the growth of the industry and increasing competition, ASFI believes that all steel framing companies will benefit. At the same time, as the number of qualified manufacturers and contractors increase, ASFI will be able to forge partnership agreements and/or acquire companies to further increase production and delivery of steel framing systems.

4.4 Marketing Strategy

4.4.1 Initial Strategy: Benefiting from the Experience of the Ryness Company

ASFI plans to target its sales efforts to firms associated with the Ryness Company. As discussed earlier, the Ryness Company has excellent relationships with the home building community. Through these relationships the company has been able to hold tentative discussions with a number of Northern California Builders and has received tentative commitments from Schuler Homes and Shea Communities for as many as 1,000 homes over the next two years. We are confident that a significant number of home framing orders will be secured through the Ryness network of builders.

In order to facilitate successful marketing through the Ryness network, Mike Serpa will be detailed to ASFI’s corporate headquarters. Mr. Serpa has worked in real estate sales and marketing and as a corporate broker for seven years and has extensive experience working with Northern California’s builders. He will be fully dedicated to marketing ASFI’s products and services to the region’s builders.

The start-up marketing campaign, Year 2000, is one that leverages the market presence and name recognition of The Ryness Company and targets their client base in Northern California in an attempt to take an early market share of that region. Currently, ASFI is developing a corporate logo and an effective Internet web site that will endure on a National and International basis. We believe that our logo and website are critical for future success. The corporate logo will represent the American Standard of Quality as well as the enduring properties of steel. Property featured on a professionally designed web site, the logo and web site will provide a level of presence and professionalism builders and buyers will expect. We expect our website to be up by the end of the first quarter of 2000

To effectively enter the residential home building market, a "Pull" strategy will be used. If the homebuying public demonstrates to builders that they "want' steel as opposed to wood, ASFI believes that builders will build with steel. To achieve this end, the goal is to get builders to allow ASFI to build one house for them using light gauge steel so they can experience what building with light gauge steel and ASFI is like. If they have a good experience and believe that offering "more" selection and choices to their buyers is what they would like to do, then they will continue building with steel. Builders that will be targeted are those associated with The Ryness Company that are particularly progressive builders and market leaders. If the market leaders make the move to steel ASFI believes the others will follow.

The primary objective to achieve the level of sales, production, and market awareness that ASFI desires is to achieve "Buyer Demand" - both builder and homebuyer. If builders will allow their buyers to "choose" between steel and wood, we believe the properties of steel will gain more popularity among the home buying public and they will drive more builders to using steel as their framing material. By gaining the trust of our builder clients and convincing them to offer a "Choice" to their buyers, ASFI will be able to achieve unprecedented levels of success.

4.4.2 Price

By our calculations, we believe that our high-quality steel frame manufacturing and panelization will significantly reduce the time required for on-site frame construction. ASFI expects the time savings to be between 2 and 3 weeks per house. Our material costs are roughly the same as wood; however, the labor cost savings resulting from the faster house frame construction are significant. The price for our service will depend on a number of factors (volume/number of house frames ordered, transportation costs, size of house, etc.); however, in every case the firm will be able to beat our competitors prices (see Table 4-1).

FRAMING COMPANY/COMPETITORS	CENTRAL VALLEY	S.F. BAY AREA
American Steel Frame, Inc. (ASFI)	$12.00 - $13.00 / sq. ft.	$15.00 - $20.00 / sq. ft.
Innovative Steel Systems	$14.00 - $15.00 / sq. ft.	$19.00 - $24.00 / sq. ft.
Wood Subcontractors	$12.75 - $13.35 / sq. ft.	$17.00 - $22.00 / sq. ft.

TABLE 4-1: AVERAGE COST PER SQUARE FOOT FOR FRAMING

The figures shown in Table 4-1 highlight the significant cost benefit of choosing ASFI over our competitors. Our steel framing system represents a major cost savings to builders. For a typical 1,800 square foot house built in the Central Valley, we will save the builder anywhere from approximately $900 to $3,600.

4.4.3 Promotion

ASFI will set aside 2 percent of total gross sales for the marketing budget. This money will primarily be spent on customer materials. Through the Ryness Company, ASFI will be educating both home buyers and builders on the benefits detailed in Section 3.4 of this business plan. Currently, Mr. Ryness has been able to successfully approach builders to secure orders for ASFI and home buyers are also being given information brochures and handouts about the significant benefits of steel framing.¹¹ These brochures are provided by the Steel Industry and are currently free of charge and readily available for distribution. Using their expansive network of builders and realtors, the Ryness Company will oversee the distribution of this information to home buyers.

During the start up campaign, Year 2000, primary advertising efforts will be limited to infrequent print advertising in magazines such as Builder Magazine, Builder Digest, and Professional Builder Magazine, which are the trade publications most read by residential builders. Initially, more focus will be on grass roots efforts to gain builder and homebuyer recognition and trust with personal presentations and meetings. ASFI will engage the print sources mentioned above more aggressively during 2001 and 2002 to gain a more statewide, national, and international exposure.

Both trade shows and on-site (building sites) builder events will be engaged in during both the start up and the following years for ASFI. Trade shows such as the Pacific Coast Builders Conference, held annually in June, at the Moscone Center in San Francisco are important venues to reach California and more particularly, Northern California builders. The National Home Builders Show which occurs at the end of January each year will also be targeted as an opportunity to gain national and international recognition as well. The NAHB show is held in various major cities (Year 2000 is in Dallas, Texas) for a 2 year stay and then moves to another city. Builder events, such as the "Grand Opening" of communities and community preview marketing events, such as "buyer fairs" are specific grass roots type of marketing opportunities that provide direct access to the end user, the buyer.

These marketing efforts through magazine ads and trade shows will help to make our products, services, and technology more familiar to industry insiders, which will help us develop expansion partners and potential licensees of our technology. We are also currently in the process of developing our own brochures and website which will detail the key benefits of using our services to both builders and home buyers. We expect our website to be up by the end of the first quarter of 2000 and for our brochures to be available for distribution by the second quarter of 2000.

Finally, ASFI is benefiting from the parallel promotional efforts of Steel Industry trade organizations such as Team Steel and the North American Steel Framing Alliance, that are promoting light gauge steel framing as an option for new homes. The NASFA recently began a $100 million advertising campaign to educate the home-buying public and builders about the benefits of steel framing in an effort to grow the national market share of steel frames to 25 percent. Team Steel is a proactive organization established in Southern California in 1997. It is a coalition of steel manufacturers, roll formers, tool and fastener suppliers, distributors, builders and tradesmen, focused on creating a viable market environment for residential home building using light-gauge steel. The organization is active in Los Angles County, Orange County, Riverside County, San Bernardino County, San Diego County and Ventura County building markets and is striving to grow the steel framing industry’s market share of housing starts in Southern California to 25% by the year 2002. ASFI can only benefit from these marketing efforts.

4.4.4 Growth and Promotion within the United States

As we demonstrate the value of our product and service and further establish our reputation in California, we will expand into other parts of the country. Once again, the Ryness Company will be used to perform market analyses and feasibility studies in order to identify expansion markets. The Ryness Company has network contacts throughout the country and will coordinate with local marketing firms in other regions to promote steel framing to builders and home buyers.

4.5 Sales Forecasts

AFSI will begin fulfilling builder orders for steel frames in February 2000. We expect to manufacture, deliver, and erect 22 steel frame units in February (1 unit/day). Output will increase to 2 units/day in March and 3 units/day in April. After April, our forecasts are for manufacture and delivery of 3 units/day through the end of the year. For the 2000 calendar year, ASFI will complete 660 homes at the average unit price of $21.600 per home (a conservative estimate based on 1,800 square foot home at $12.00 square foot). Production will increase to 1,056 home frames in the year 2001 and 1,320 in the year 2002. Table 4-2 summarizes the projected gross revenues from home frame sales over the next three years and details can be found in Section 8.2 which provides the full cash flow projections for ASFI.

	2000	2001	2002
UNITS SOLD	440	1056	1320
GROSS SALES	$10,886,400	$24,235,200	$32,076,000

TABLE 4-2: SUMMARY OF ASFI PROJECTED ANNUAL SALES

4.6 Support Materials

Support materials for the facts and figures provided and discussed throughout Section 4.0 can be found in Appendix A. The materials in Appendix A are summarized as follows:

SECTION NOTE #	DESCRIPTION	SOURCE	# OF PAGES
1	Housing Starts from 1978 – 1999	National Association of Home Builders	1
2	October 1999 Press Release Showing Housing Starts in 1999	U.S. Census Bureau	1
3	Housing Starts in California from 1980 to 2000 (projected)	California Building Industry Association	1
4	California Housing Crisis	California Building Industry Association	1
5	The Effect of Rising Lumber Prices on the Cost of Housing	National Association of Home Builders	1
6	Benefits/Costs of Steel Framing	National Association of Home Builders	2
7	Market Trends with Respect to Shipment of Steel Frame Units	National Association of Home Builders	1
8	Steel: Home Builders Try Alternative	L.A. Times/National Assoc. of Home Builders	6
9	Current Steel Market Share of U.S. Housing Market	North American Steel Framing Alliance	1
10	Steel Market Share of U.S. Housing Market by 2002	North American Steel Framing Alliance	1
11	Promotional Brochures of Steel House Framing	U.S. Steel	6

TABLE 4-3: SUMMARY OF SUPPORT MATERIAL IN APPENDIX A