CHAPTER 5
Market Forces Inside and Outside the Industry
Structural forces shaping production and market-oriented considerations are discussed in separate sections of this chapter. Several were mentioned previously, but their importance and consequences are highlighted in greater detail below.
Supply Factors
Rapid construction in developing countries throughout Asia, driven in large part by China and Chinese led projects abroad, fuel demand for inputs such as steel and other materials used in furniture production. Offshore manufacturing requires good infrastructure facilities to handle the importing of production parts not obtainable domestically, their conveyance via road or rail to the factory, and the means to export the full or partially finished product. Lumber for wooden furniture is globally sourced at the quality and quantity desired by the market for the finished product. The United States., for example, supplies large quantities of lumber for case goods made in China. Other types of wood are imported to that country from neighboring Russia and Myanmar since China has much more abundant labor than lumber. As furniture manufacturing declined in the United States, suppliers also went out of business, further raising the cost of U.S. made products as parts had to be sourced elsewhere.1
Fuel and Shipping Costs
The steady, if uneven, and relentless rise in fuel-driven shipping costs since the mid-1970s ensures that this will remain an integral part of the friction of distance and calculations as to the relative affordability of outsourced products. The backhaul rate for sending relatively empty containers on the return trip to Asia also accentuates the affordability problem, as shipping contractors must cover the round trip cost with far fewer goods on the way back to spread the cost of transport. This rate virtually tripled from 2000 to 2008. The confluence of higher shipping costs, rising wage rates (along with associated labor amelioration costs), and government-imposed costs such as taxes combined as major considerations stemming the rush to offshore manufacturing. Containerization revolutionized the ability of distant manufacturers to ship large volume products such as furniture over long distances. This was particularly practical when it was possible to send single containers to large volume purchasers/retailers. Smaller volume destinations became proportionally problematic and involved third party logistics (3PL) managers to a much greater extent and expense.2
Intellectual Property Issues
Legal structures to protect intellectual property (IP), particularly in design features that created a market for fashionable items, are notably lacking in many developing countries where furniture manufacturing moved primarily in order to cut production costs. IP issues take several forms including:
•laws to prohibit IP infringements that reward intellectual product piracy may or may not be in place;
•enforcement of these laws in a fair application that does not distinguish between perpetrators who are natives or foreigners;
•transparency of the regulations so they and their enforcement are known clearly rather than handled through less visible channels or subject to conditions that do not involve being clearly written and disseminated;
•punishment that fits the crime enough to deter further commission, rather than a trifling amount that is easily met or avoided.
The competitive cost of loss of IP protection can be considerable, and is heightened when various foreign as well as domestic brands are produced in nearby facilities. Suspect visitors may be dissuaded from entering or prohibited from sketching or taking photographs. More difficulties involve former employees who change jobs for higher pay and bring replicable knowledge with them, or are in a position to divert proprietary product from its intended recipient.
Quality Control Considerations
Numerous issues involving dangerous quality gaps in products produced in offshore locations have led to lawsuits and market loss. Problems can be attributed to the difficulties and cost of supervising the manufacturing plant at great distances. Some issues arose when foreign supervisors were shown products and factories that were not the ones that were, in fact, used to produce the items agreed to contractually. Inferior or contaminated materials, lack of coordination among suppliers, substitution of parts, and hidden insufficiencies of material, machinery, or manpower skill are all part of the problem when supervision is not in-house, onsite and frequent.
Warehouse Time and Storage Cost
Global 3PL providers are major players in managing warehouse and storage costs incurred when distance leads to delay. These companies handle orders placed for production is one country and delivery to customers in another country. “Inventory is the enemy” in that warehousing rather than rapid delivery delays customer satisfaction and profit realization. Consolidating shipments within a container and using a port with computerized tracking capacity helps to reduce time overall, but distance still comes at a cost to both manufacturer and consumer (see discussion on Meridien). Some have suggested that hemispherization, the shifting of manufacturing to the southern American tier, would assist this problem, but infrastructure issues remain.
Concern with the competitive dampening factor of lengthy warehouse processing time reflects the complicated coordination of logistics relating to managing different product inventory. This includes picking up furniture in various locations around a single or multiple countries, or picking up mixed amounts of furniture, shoes, and toys going to different locations. These may be shipped in mixed or separate containers, followed upon docking in the destination country by re-routing along various domestic networks depending on the destinations of different types of products. This procedure varies by companies according to their customer location concentrations and established national nodes.3
The Need for Speed
Speed can become a critical issue in both furniture manufacturing and purchasing. It has been calculated that for an average container size of 130 seats (1 per chair, 2 for a loveseat, 3 per average sofa), shipping and handling transit represents approximately one quarter of the final price of the furniture piece. The average overseas production requires a 60 day lead time, 5 weeks on the water, and an additional 3–4 months to stock it in the store. The time spent in storage varies with the turnover speed of sales of that item, along with other considerations such as the number of items consolidated in any one warehouse location. Just-in-time delivery of supplies at the time when they are needed in the production process—stuffing for pillows, mattresses for bedding, and so forth—is an important part of the lean manufacturing system that reduces space needed to store parts and the cost of delay prior to sale. Distance, lack of coordination and communication, inadequate infrastructure or supply systems can all cause problems in a sophisticated but dependent manufacturing process such as used for furniture. The longer the supply chain and slower the speed of delivery, usually, comes at a cost to consumer and producer. Although this is not a direct correspondence, a greater differential in other costs (e.g., wages, quality) is needed to compensate for the price of distance delays.
Décor purchases involving furniture tend to be tied to particular occasions, for example, holidays, weddings, house purchases or moving events. Customers like to see and sample in a showroom what are usually large dollar purchases. They want to actualize this purchase in as short a time as possible, and may defer it or switch suppliers if the time gap is too great. Buying a domestic product is part of the trade-off in price when speed is a major consideration, and one that companies such as Ashley and Klaussner seek to combine with affordability and swiftness. Bringing down the time involved in all parts of the process, from ordering to manufacture, distribution and delivery, remains a major marketing consideration.
Changes in the Economy
A series of shifts since 2010 indicated that recovery from the global recession was underway. Twenty years earlier marked the beginning of a stampede out of U.S.-based furniture manufacturing and investment in largely Chinese or other Asian offshore facilities. In the interim U.S. buying power dipped as a Chinese middle class rose on (albeit low) factory pay and the Chinese yuan strengthened. Inexpensive foreign-made furniture seemed to be the future for U.S. consumers but other costs intervened. These were principally, a sharp rise in the cost of fuel and a decreasing wage differential between Chinese laborers in factories concentrated near its east coast ports, while the American wage rate dipped in a population impacted by immigration and unemployment. Wealthier customers less impacted by the recession continued to pay for the customized, high skill small batch work done in streamlined, reorganized U.S. factories.
New overseas locations, from Saudi Arabia to Russia, India, and China grew a market flush with new wealth and a corresponding demand for fashionable, quality foreign goods. Concerns (not unfounded) with the safety of locally produced medicine, contaminated food (for humans and their pets), children’s toys, and other consumer products led to interest in acquiring nondomestic made products among the more well-heeled and middle class aspirants. Large furniture showrooms, built in newly available warehouse space vacated by factories moved out of inner city areas now proximate to newly built apartments. These feature a dizzying array of side-by-side choices: simple European furniture such as Ikea or florid Italianate or Philippine styles, “American” Ethan Allen or “English” furniture (owned by Chinese parent companies), all competing for brand recognition and identifiable qualities that foreign consumers might seek to identify with, in addition to traditional offerings such as prestigious rosewood and (Myanmar) mahogany or mid-level (Taiwan) teak. While incomes and commodity purchases in the large middle class segments of the developed world froze or declined, developing world citizens in cities such as China’s went shopping to fill new spacious apartments in tall towers and walled communities with names like “Orange County” and “Silicon Valley.” From Baker shoes to Johnson and Johnson pharmaceuticals and Bassett furniture, a new constituency sought prestige in purchases with recognizable quality names.
For foreign direct investment companies operating abroad the costs of IP and time loss mounted, the U.S. housing market returned to life. Mergers led to global consolidation of furniture companies and a new spatial differentiation of where the best places were for what type and stage of manufacturing. Furniture work expanded both offshore and, in a new turn, re-shored as well in areas such as upholstery that had maintained skilled customization and speed advantages. Furniture specialties such as institutional (government, hospitals, hospitality) markets that weathered the recession were predicted to take a hit during upcoming cost-cutting uncertainties. As in the past, the furniture industry promised to fluctuate along with the economic future.