Aiming at America
August 6, 2013 by Powell Slaughter in Economic News, Industry
After Losing Luster During the Recession, the U.S. Market Is a Prime Export Target Again.
A recovering U.S. economy is good news for furniture retailers in ways beyond the obvious reasons.
Not only is it good for business, it makes them a lot more attractive as customers in the global marketplace for home furnishings.
With furniture stores closing left and right during and in the wake of the recession, and consumers that worried more about keeping their homes and jobs hardly thinking of buying furniture, manufacturers in source countries looked to spread their eggs beyond the proverbial U.S. basket.
Growing markets such as China got more attention, including furniture makers there that started re-working their goods for appeal in the domestic market.
The tide is swinging back.
"Right now the United States is a growing economy, and Europe is a mess—the U.S. is getting a lot more global attention than it was 18 months ago," said industry analyst Jerry Epperson, managing director of Mann Armistead & Epperson in Richmond, Va. "China's economy grew again last year, but growth slowed faster than what they had planned, so it's my understudying there are some export initiatives being reinstated."
Epperson's of the mind that the Chinese weren't necessarily better manufacturers than U.S. companies, they received a lot of government incentives to. A couple of years ago, those come-ons were drying up for furniture makers as the Chinese government shifted its emphasis to "cleaner" industries.
"I'm hearing those incentives are coming back," Epperson said. "Now, some of these manufacturers who said six months ago that we won't be around, are saying this could be good business."
It might be too late for some, though, as bedroom furniture production in particular has headed farther south to Vietnam and Indonesia. Labor rates continue to rise in China, and are creeping up in Vietnam as well, though the latter remains cost-competitive relative to its northern neighbor.
"We here some of the Chinese manufacturers aren't making any money," Epperson said. "There's no question they're still dominant, especially in upholstery. "Vietnam's grown, but it's not even a third of China. The capacity just doesn't exist anywhere else. Indonesia's still relatively small compared with China."
With a 7 percent increase to $11.7 billion in household furniture exports to the U.S. market last year (out of total imports of $19.5 billion), per International Trade Commission numbers, China remains source country king. Second-place Vietnam grew at a much faster pace, 32.5 percent, but even at that rate it faces a lot of catching up, totaling just under $2 billion in shipments to the U.S. last year.
MOVING THE PIECES
Even if China re-instates export incentives, antidumping duties on many manufacturers will keep wood bedroom capacity that left in other countries, which are developing their chops in other wood categories as well. That, plus the fact that manufacturers have spent the past 10 years making investments elsewhere they don't want to give up on.
"I don't see it going back," said Jack Hawn, president and CEO, Zenith Global Logistics, Conover, N.C. "When you're talking about moving production, it's very, very painful.
"What we're seeing is most of the case goods product we get in our warehouses for our clients is coming out of Vietnam. We're seeing a decent amount coming out of Indonesia. Most of that's because of pricing."
At City Furniture in Tamarac, Fla., Vietnam is on the rise.
"We have developed an important relationship with a great factory that should be a win-win for us both," said Keith Koenig, president. "Quality and value and receptivity are all aligned for success."
City is doing full collections at Kaiser, the Vietnam plant Koenig mentioned.
"We have an important, growing relationship with them," he said.
Looking at the current Asian scene, Ray Johnson, senior vice president, global supply chain, Furniture Brands International, St. Louis, also cited Vietnam as the place to watch, as well as Indonesia.
"These countries are growing because local materials and labor are more easily controlled, with less turnover," he said. "Chinese sourcing has been a little difficult because of labor costs and availability.
"Consumers are interested in mixed media pieces … ones that combine stone, metal and wood. China is still the number one producer of those types of products and simply is the best at that … but Vietnam and Indonesia are trying to catch up."
While China still dominates, it's starting to run out of category targets.
"It's a question of at what point is low-hanging fruit taken," Epperson noted. "They first started with occasional tables and dinettes that could be re-assembled over here. There was nothing with a drawer. Then they got into more case goods. Fabric upholstery didn't really get started till 2002.
"There are certain products they can't do that we can do over here. Those require a certain amount of customization. In every category they tried, they looked for the low-hanging fruit, those product increments where they could win on cost. At some point in time … the increments get harder to find."
Retailers got into the habit of looking to order smaller and get the product quicker during the recession, and that was good news for source countries closer by, as well as domestic producers.
"The return of a version of the 'Rustico' look could really help Mexico," Koenig said. "A lot of the hand-made, one-of-a-kind, reclaimed wood tables and consoles and accent chests that are coming from India are selling well, and Mexico is starting to make some similar items that would be easier to flow."
U.S. manufacturing is coming back, as well Koenig added.
"Just look at what Ron and Todd Wanek (at Ashley) are doing," he said. "If our government would get off their back and out of their way, they would make even more furniture here."
FBI's Johnson said that Mexico's cost structure is getting closer to China's, which is building interest south of the border.
"Add in lead times like one week versus 45 to 60 days in China, and Mexico becomes even more appealing," he said. "Our Mexican cut/sew operation (producing kits for Lane and Broyhill) is equal or better in costs to China and lead times are significantly less. We've seen that Ethan Allen and La-Z-Boy have expanded in Mexico in the last few years too.
"We believe we will see fabric mills start to grow in Latin America, too. There are lots of leather goods and tanneries in Mexico and Central and South America now. These facilities make these areas more appealing. We are even sourcing some occasional case goods out of Mexico now. You'll see more companies get interested in Mexico in the future."
Hawn said he's noted customers bringing in LTL shipments from Mexico to Zenith's distribution hubs in the past six months.
"It's not a lot, maybe a load a month, but it wasn't there last year," he said. "Most of what we're getting is in the occasional table category."
U.S. manufacturers are increasingly competitive with their global counterparts, according to Johnson, if not from a cost, then at least from a service standpoint.
"Consumers want products as soon as they can get them—more people want things faster instead of waiting for months," he said. "One of our brands, Hickory Chair, produces custom furniture domestically and we believe this brand is growing every year because of short lead times compared to international orders. And, we can control customization and quality much more tightly domestically."
Hawn's also seen an uptick in the domestic product Zenith handles.
"We're seeing a big increase in soft goods, upholstery. It's probably a double-digit increase into our hubs. We're flat or down on case goods," he said. "It's hard to tell sometimes. We may get a domestic vendor who's importing, too, and brings it to our hub. We don't know for certain where it's made unless we go out and look at the box." HFB
Inset Story
Building a Bigger Ditch
Next year, the Panama Canal is set to complete work on a new channel designed to handle larger ships.
So called "Post-Panamax" ships—that is those too large to navigate the mid-Americas link between the Pacific and Atlantic oceans—will have far easier access to Gulf Coast and Atlantic ports after the new lane opens. Container ships in that category can handle up to 12,600 20-foot-equivalent units versus their smaller counterparts' maximum of 4,400, according to a study, "Impact of the Panama Canal Expansion," by Yossi Sheffi, director of the Massachusetts Institute of Technology's Center for Transportation and Logistics; and PhD candidate Liliana Rivera.
City Furniture, Tamarac, Fla., receives some of its containers at the port of Miami. President Keith Koenig said the opening of the channel has the potential to "change our world."
"Right now the (Post-)Panamax vessels are running between Asia and LA/Long Beach—certain ports in the U.S. are getting modified to accommodate their deeper draft, and that includes Miami, where we receive our international shipments," he said. "The assumption is you can negotiate better rates if the ship's carrying 4,000 containers versus 2,000."
Koenig isn't counting on anything just yet, but he is hopeful. So is Zenith Global Logistics CEO Jack Hawn, but he said the jury's still out on whether the canal upgrade will affect cost-to-market for Asian goods.
"I've asked 100 people that question, people in the shipping business, and they don't know yet," Hawn said. They point out that with the new ships and more port charges, there will be some other costs. If you're in Chicago, it probably won't make too much difference.
"We have a South Florida hub, so we hope it's cheaper, too, but right now we just don't know."
AN ACADEMIC TAKE
The MIT study found the fastest way for goods shipped from Shanghai to reach the U.S. East Coast is a 12- to 14-day ocean voyage, followed by seven to eight days by rail to New York—19 to 22 days.
The same cargo through the Panama Canal takes 25 to 26 days (fewer days, obviously, to Gulf Coast and South Atlantic Seaboard ports); and 27 to 28 days through the Suez Canal.
The study determined the Panama route cost $600 per container less than the West Coast/overland route.
Ports carrying on major projects will want to recoup those costs with fees, and the Panama Canal already charges per container, so retailers and their transportation partners will have to crunch their own numbers.
The MIT study also suggested that environmental issues and the potential for emission pricing "could favor the West Coast route" since carbon dioxide emissions for the West Coast-to-overland route are 2/3 of a trip through the Canal to New York.
In addition, the study noted that some West Coast ports have teamed with Burlington Northern Santa Fe and Union Pacific railroads in the U.S. West Coast Collaboration, which looks to guarantee competitive costs and service for shipping containers.
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