12 November 2008

China furniture industry outlook and predictions for 2009

Posted by Roger under: Industry Trends; Style & Design .

China Furniture Manufacturing: What next?

A wave of consolidation and shutdowns.

Here is a dead-on quote from a Furniture today article in which Glenn Wakefield, president of case goods importer Largo International, seemed to share the same viewpoint.

“You will see more consolidations or more people going out of business the next three to five years before things settle out,” he said. “There are too many factories over there with excess production capacity and they need an outlet. Only the strong will survive.”

If you had to pick one word to describe manufacturing in China, overcapacity would definitely be in the top ten. It seems almost every industry in China is overpopulated with brothers, uncles, friends etc. The furniture industry is no exception. On the street which our office is located, one family selling ceramics has six shops on the same strip - each operated by a different cousin, uncle or a brother.

In the past, many smaller importers shared responsibility for this, encouraging it by failing to be selective in their choice of partners. Particularly notorious were smaller direct importers who were happy to work closely with a single small manufacturer. Personally I know of myriads of low quality workshops running the majority of their business off of a single customer. Unfortunately this discourages innovation or improvement, as as long as the customer is happy there is no motivation for the business to develop further.

A quick look at the headlines as well as word on the ground confirms consolidations and closings across all kinds of manufacturing are happening as we speak:

• • China Stuns Bath Accessories Makers: The rash of factory closings in China over the past several month….
  • Biggest Christmas tree producer shut down: Disadvantages such as fierce competition, the appreciation of the RMB, soaring prices of raw materials and labor costs have contributed to the factory’s decline..
  • Rising costs forcing some South Korean factory owners to flee … Scores of South Korean-owned factories are closing …

For most smaller manufacturers, orders are traditionally slow during December, January and February and many will regardless of the new, continue to attribute slowdowns as seasonal. Throw in a month of Chinese New year holiday and this puts you into March. Expect that for some manufactures who have been hanging on, a lot of the pain won’t be fully felt until early next year (Spring & Summer 2009).

An very slow recovery for an industry, which may not recover at all.

According to an article on a Chinese language furniture industry website, furniture exports leaving Zhong Shan (located in the pearl river delta) are down 30% -40% from last year. Weixin chen, vice president of the Zhongshan Chamber of Commerce and General Manager of Zhongshan Full house Furniture Co., Ltd. has been in the furniture business for the past 20 years. He says this is the second largest disasters in furniture industry after the 1997 Asian financial crisis.

Customers who normally order ten containers at once now order two (if you are lucky). Trade show attendance is down dramatically. And while much of this can be attributed to the global economic crisis, I think there is also a different underlying story here.

In the same way furniture manufacturing moved to China over a 20 year period, the furniture industry in China probably peaked in 2006 and may slowly move onward from China as well. According to a report by Chaina magazine entitled “Still made in China?,” Vietnam is rapidly replacing China as a manufacturing destination. Visa restrictions resulting from the Beijing olympics, endless quality scares from tires to melamine milk to toys and a combined overall rise in awareness of China business issues have all taken their toll.  Did we mention an appreciating RMB? While there is much talk of “who will be the next China” the reality is there will probably never be another China and furniture manufacturing will likely fragment into unique products in unique locations. Mexico, Vietnam, Brazil and even the middle east will all pick up the slack each producing their own look based on their own unique strenghts. Some items will remain in China, some will move on.

Raw materials costs will continue to rise due to a number of factors.

A recent spate of articles makes no secret that China’s newest export of inflation and there is much talk of the fact that China not so cheap anymore. Inflation, rising raw materials costs, pollution and in some cases simply greed have all begun to add up.

China has massive problems with deforestation which the central government is keenly aware of. In 2001 it was estimated that each year up to 900 square miles (2,330 square kilometers) of ariable land become desert. For the furniture industry, this has special meaning. According to a Chinese language website discussing the furniture industry, an upcoming processing trade ban on domestic wood being used as raw materials in wood furniture will mean that domestic woods will for the first time increase in price over imported woods (imported wood used for furniture production will not be effected).

The China manufacturing landscape will (hopefully) mature.

In the past ten or twenty years, businesses flocked to China where labor was cheap. It was commonly remarked that Chinese themselves will not invest in software or machinery as workers were cheaper and easier to operate then machines. With the arrival in January of 2008 of China’s new labor law, in addition to with huge wage increases and many other factors, China is no longer inexpensive. This in turn forces businesses to become more efficient in order to survive. According to this CNN article, Ted Hornbein, at a company called Richco, replaced 20 of his employees with an machine costing $85,000.

“We were running two, 12-hour shifts every day, but the new labor law restricted how long the temp workers could be on the job,” says Hornbein. “It was difficult to find enough workers to cover six, four-hour shifts. Now I have a machine to do the work, which has increased my capital expenditure.”

Expect to see more of this as pressure to operate like “a normal businesses” will continue to increase. Fly by night will become much less viable. Concepts such as sales force, design and customer service will suddenly become relevant. Those who have the skills and the capital will have a chance at climbing up though this will require change and innovation - something the Chinese are not known for. Those that do not, will quickly reach a new glass ceiling that previously did not exist. Expect the multitude of low skilled workshops run by China’s millions of “wai di ren” (non-city major city dwellers) to be hit the hardest.

HaoHao This

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