July 3, 2003    Volume 10, No. 13

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U.S. Furniture Industry Is Rocked By Chinese Imports

"The United States furniture industry is in trouble," begins a report from the University of North Carolina at Chapel Hill's Kenan-Flagler Business School. "Lower cost structures, improved quality and efficient distribution from overseas producers are forcing U.S. firms to source goods offshore from countries like China. With one-third of the [case goods segment] residing in North Carolina, the local economy is struggling to survive. Unable to compete on a cost basis, companies are closing down their domestic operations and jobs are being lost."

"Case" furniture is made with wood and shipped in "case" crates. The category includes bedroom sets, kitchen and dining room sets, wall units, cabinets and dressers. Imports of case goods from China are increasing rapidly and now account for 40 percent of the U.S. market, says the study by a group of UNC MBA students.

With more than 50,000 furniture manufacturers employing 50 million workers, the Chinese furniture industry has increased exports by 335 percent from 1994 to 2001, replacing Italy as the world's largest furniture exporting country. China is now the largest exporter to the U.S. market, with $2.8 billion in exports in 2001. China's furniture exports to the U.S. have grown at an average annual rate of more than 35 percent.

"Continual pressures of sourcing and direct-to-retailer [sales] make China a real threat to the United States' current market position," says the UNC study, a copy of which was provided to Manufacturing & Technology News by Rep. Don Manzullo (R-Ill.), chairman of the House Small Business Committee. "North Carolina companies and laborers are losing ground quickly."

U.S. case goods manufacturers are responding to lower cost Chinese products by importing them. For instance, La-Z-Boy has cut its domestic production by 45 percent over the last two years, but has increased imports to 21 percent of its case goods sales. Furniture Brands International, the country's only $1-billion producer of case goods with 4.2 percent market share, sources 70 percent of its "Hemingway" line from foreign producers. The largest U.S. companies in the industry -- FBN, Ethan Allen, LifeStyle Furnishing Intl. and Stanley Furniture -- shut down 6.5 million square feet of U.S. factory space in 2001.

At the same time, U.S. companies have been opening new factories in Asia and are entering joint partnerships to outsource additional production. Furniture Brands International has signed a deal with Hong Kong Teakwood to outsource $120 million of its production to their 500,000 square foot plant in China.

"If domestic manufacturers continue to use imported goods, domestic job losses will persist," says the study, written at the request of the North Carolina Department of Commerce under the tutelage of UNC business professor Robert Connolly. "Currently, the majority of Chinese manufacturers producing goods for the United States market are running at full capacity and most are planning to increase capacity" by 25 to 30 percent per year. World markets can absorb most of the production from this capacity, but at some point, there will be a glut. This could lead to further price erosion and even greater pressure on U.S. manufacturers to contain costs.

Chinese labor rates are also holding steady and with a labor pool of 800 million workers wages show no sign of increasing. Even with labor rates of between $0.50 and $0.75 per hour, Chinese producers are investing heavily in new equipment and efficient production processes. They are training and developing a skilled workforce.

"With the help of U.S. producers and different services companies, Chinese manufacturers are improving their quality," says the report. "Import agents, most of whom are former U.S. manufacturers now based overseas, are also helping Chinese manufacturers implement more stringent quality control."

Chinese furniture producers can quickly add capacity because the construction costs of factory space average between $3.00 and $4.00 per square foot, as compared to $15.00 per square foot in the United States.

Shipping costs from China (at $2,800 for a furniture container delivered to a North Carolina warehouse), add 23 percent to the base price of the Chinese products, says the UNC report, citing data provided by Wachovia Securities. "This cost represents an important percentage, but not sufficient enough to close the gap between U.S. production costs and those of China. Even after adding freight costs, the value of the container imported from China is still 20 percent to 30 percent lower than a comparable one produced in the United States."

The North Carolina furniture industry will have to improve productivity in order to survive. Overhead costs represent 33 percent to 37 percent of wholesale revenue for U.S. manufacturers and these costs must come down in order to be competitive. Consolidation within the highly fragmented industry is one way to reduce redundant overhead, say the UNC graduate students. "In addition, consolidation between large retail and manufacturing companies could reduce steps in the supply chain and help manufacturers compete better against low-cost imports. Broad consolidation will help the industry overall, but may accomplish little for North Carolina's income tax base."

What will the industry look like in 10 years? "Even with broad consolidation, it is unlikely that there will be many opportunities for U.S. manufacturers to compete with foreign producers in an industry where profits are dictated by cost," say the UNC report. "However, North Carolina has three advantages that [it] must protect for the future of the state's case goods industry: design, finishing and retail."

Chinese companies have not yet been able to replicate U.S. designs and finishes that are most appealing to U.S. customers. Companies are importing semi-finished products that can be finished in the United States.

The other advantage rests in the retail markets in High Point and Hickory. "By maintaining the mystique of High Point, the state will continue to see tax revenue from furniture laborers, particularly on the retail side," the report concludes. "The battle is not over yet, but North Carolina must fight hard over the next 10 years to continue to be a major player in the case goods manufacturing industry."

For a copy of the study "The Furniture Industry (Case Goods), The Future of the Industry, United States Versus China," go to: http://www.kenan-flagler.unc.edu/Programs/MBA/Academics/stupaper.cfm.

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