DAY 2 Global issues

Global markets reshaping furniture world

By Gary Perilloux

Daily Journal

The United States boasts the single biggest market for furniture in the world. But collectively Europe is bigger. And Asia is an awakening giant.

How well U.S. furniture makers capture emerging global markets could be crucial to their survival, their well-being and the well-being of their employees.

Cynthia West, head of the Department of Forest Products at Mississippi State University, attended furniture markets in the last decade in such far-flung places as Kuala Lumpur, Malaysia, and Santiago, Chile.

One phenomenon stood out in both places.

“The Italians were there in full force,” West said. “They’re out in force because what they want to do is sell their furniture to these evolving markets. … They’re there at the very beginning because they’re trying to influence preferences through these retail buyers. The Italians are there because they see economic development coming in these countries.”

Thus far, U.S. manufacturers have been slower to pursue foreign markets because of built-in barriers and a large, readily available domestic market.

Furniture Brands International, for instance, is the parent of Action Industries and the largest U.S. residential furniture manufacturer with $2.1 billion in annual sales. But it did 95 percent of its business domestically in 1999.

Also, Northeast Mississippi manufacturers are almost exclusively upholstery producers. Unlike table, cabinet and bed producers who can break down and reassemble their case goods overseas, most upholstered furniture cannot be easily “knocked down” and reassembled. Hence, it costs more to ship the larger assembled products.

Shipping costs present just one barrier to U.S. manufacturers. Language and cultural divides represent other barriers, as does the limited buying power of overseas shoppers in many markets.

Meanwhile, Baby Boomers in the United States stand to inherit $11 trillion in the next decade, West said, producing a likely additional upturn in furniture purchases even after a record economic expansion throughout the 1990s.

The import challenge

A problem for U.S. manufacturers, though, will emerge with growing offshore competition.

“Forty-five percent of furniture products purchased (in the United States) originated as a product outside this country,” West said of 1999 figures. “Last year China emerged for the first time to actually export more furniture to the U.S. than Canada (exported to the U.S.)”

With favored nation trade status achieved in Congress this year, China could explode as a furniture competitor, even in the tougher upholstery market.

Hugh McLarty, a principal in Albany Industries and former BenchCraft president, sees the Asian competition as a real factor, even in the realm of upholstery furniture.

Leather furniture is pouring out of China now, McLarty said, and fabric operations are forming now in mainland China, where labor is much cheaper than in Taiwan, a dominant Asian furniture center until recently.

“I think the people who are protected the most over the next five to 10 years as far as (upholstery imports) is low- to middle-priced furniture,” he said. “But I think leather furniture is in the process of being dominated by China. I think it’s a real challenge for the leather category.”

McLarty said one Italian concern has established a leather upholstery operation in China, importing leather from Europe or Latin America and building dormitories for its workers. The incentive? Labor costs are as low as $1 a day per worker.

“Once they get their raw materials (produced in China), it’s going to be difficult to compete,” McLarty said of the challenge facing U.S. manufacturers. “The only deterrent (in China) is the cost of the freight coming over here.”

American consumers likely will snap up the furniture, regardless of its origin, he said.

“If it sits well, looks good and fits well in the den and with the drapes that’s more of a consideration, unfortunately, than where it’s made,” McLarty said.

Still, the rising import challenge may not mean an exodus of American furniture manufacturers to set up production in China.

The Broyhill model

Broyhill Furniture Industries president Dennis Burgette questions the wisdom of such a competitive strategy.

Broyhill’s products sell at the medium price range and below, and Burgette, whose company is based in Lenoir, N.C., believes imports will be hard-pressed to make a sizable dent in that sector.

“It’s all on the more expensive or heavily carved, labor-intensive products where imports are most competitive,” said Burgette, a former Action Industries executive in Northeast Mississippi. “The freight factor doesn’t affect it so much.”

Even at the higher costs levels, buyers can be skeptical of imports.

“You can just about walk into any furniture floor and pick out the imported items,” Burgette said. “You look at the price and you look at the quality.”

Leather likely will be hit hardest first by imported upholstery furniture, he said, followed by reclining chairs. But selling imported fabric upholstery, particularly sofas, and competing on service, quality and price will be a monumental challenge for any overseas manufacturing facility, he said.

Still, Broyhill can’t afford to spurn imported products. The company works to bring in select items from overseas in as seamless a fashion as possible to maximize efficiencies.

“You have to recognize we’re in a global economy today,” Burgette said. “You can choose to let the world pass you by. We desire to participate in it.

“At the same time, we’re looking to expand our domestic capacity,” he said, adding with a laugh: “We want it all.”

Broyhill now is building a 200,000-square-foot logistics facility in Lenoir that will double its import business.

“But even looking at the next three, four, five, six years, if we maximize the output of that facility, the maximum that facility would be is 9 percent of our business,” Burgette said.

Rather than direct ownership of manufacturing facilities in Asia, another scenario is more likely, he said.

“I see more alliances and partnerships,” Burgette said. “I think you see hesitancy, particularly in the Far East, for American companies to go into ownership at this stage in a Communistic country. I think there’s a reluctance there.”

Trade imbalance

Fabric mills, long the province of New England and the Carolinas, are popping up with greater frequency in Mexico, making that nation and Latin America a rising competitor in the manufacture of furniture.

In the future, that arena may pose a bigger opportunity for manufacturers looking to produce upholstery at lower labor costs while limiting overseas freight rates.

So far, Mexico has been riding a wave of garment growth, from $4 billion in exports to the United States in 1996 to projections of nearly $10 billion in 2000.

Upholstery furniture exports from Mexico are growing, although on a much smaller scale.

“Right now the fastest growth is coming from China,” said Jerry Epperson, a Richmond, Va., furniture analyst for the investment banking firm of Mann, Armistead & Epperson. “(But) we’re bringing a fair amount of upholstery from Mexico.”

Italy, the historical import leader in upholstery, shipped $413 million into the United States in 1999, followed by Mexico at $139 million (up 24 percent), Canada at $123 million and China at $84 million.

Although total upholstery imports this year are expected to approach $1 billion for the first time, U.S. exports of the same kind of furniture to other markets was only $190 million in 1999.

Nevertheless, those markets do represent opportunities to Northeast Mississippi manufacturers.

Franklin strategies

Franklin Corp. of Houston, Miss., sells about $150 million a year worth of reclining chairs and motion furniture. About 5 percent of its total product goes overseas, though the company wants to boost that figure to 10 percent.

A key customer is Sweden-based IKEA, the world leader in recliners.

To cement its reputation with international customers, Franklin Corp. met ISO 9001 standards that require strictly followed financial audit and quality control standards companywide.

Founder and CEO Hassell Franklin said the International Organization for Standardization rating was one way his company could boost sales without trying to beat bigger manufacturers at the advertising and brand recognition game.

ISO standards open doors globally, he said.

“We have to level the playing field by being the low-cost provider and making the best product on the market,” Franklin said.

One way Franklin Corp. competes is by importing Russian birch. The overseas wood product actually is more cost-effective much of the time for fabricating furniture frames than domestically harvested wood stocks.

Dan Seale, a forest products marketing professor at Mississippi State University, said economics and environmental restrictions caused many mill operations on the Pacific Coast to shut down, with international operations able to buy equipment at bargain salvage rates.

International standards differ as well.

“Our local plywood plants are making what would be called APA-rated products,” Seale said of American Plywood Association standards. “They’re making construction-grade products for the most part and they’ll set up and do runs for the furniture industry on the side.”

Products such as Russian birch aren’t under the same burden to meet construction standards for flooring and roofing, giving that product another competitive advantage, Seale said.

Competition

Where to buy raw materials represents just one microcosm of the challenge for manufacturers in Northeast Mississippi to stay on top of the competition for furniture dollars.

“There will be tremendous pressure for them to become more effective to get their production per man hours up,” Seale said.

Low overhead helps Gerald Washington.

The Pontotoc resident still buys all fabrics for his company, American Furniture, the second startup Washington has built into a multimillion-dollar furniture business in Northeast Mississippi.

A quick-shipping program lies at the heart of his building the new business. It moves furniture out of his warehouse within eight hours of a call order.

“We think we have brought a change to the (industry’s) production (method) the way we schedule our work and what we do inside the plant,” he said.

Washington pledges to ship furniture within eight hours in most cases by keeping ample inventory of a streamlined product mix. The only time of the year his quick-shipping program is delayed February through April is a result of huge demand from consumers cashing in tax refunds to buy furniture.

Though he won’t elaborate further on his competitive production edge, it’s that edge and his 500-member work force that make him confident he’ll survive any threats to the upholstery industry from overseas.

“I’ve got no concerns of people coming in here with upholstered furniture,” Washington said. “I’ll just tighten the process more. There’s always a better way to do it. If they come in here with upholstery, I’ll just find a better way of doing it here.”

Other Northeast Mississippi furniture companies who don’t tighten the reins and squeeze value out of every piece of furniture could be vulnerable to imported upholstery, Washington said.

“I think if they don’t stay on top of all the right things to do to get the most out of their people yes (jobs could be lost),” he said. “But I think the north Mississippi people are just better than overseas people as far as productivity, enough to make up for the money (saved overseas in lower wages). In my situation, I know that’s true.”

American Furniture has a limited export business, mostly to the Caribbean and Latin America. But should U.S. companies overcome the same cost barriers limiting their overseas shipping, ample opportunity awaits.

“Globalization is occuring and, for our producers, one way of expanding is to export more,” MSU’s West said. “We’re now seeing some interest from manufacturers in companies that produce upholstery frame products and steel mechanisms overseas economically. One of the the big problems they’re going to run into is quality control … but that’s a solvable problem.”

And, West said, there’s a built-in advantage for American products competing overseas, particularly in Asia.

“Status is gained by having U.S. furniture,” she said. “So then that’s our greatest opportunity.”