Houston: Direct China importing could kill U.S. producers' distribution systems
By Lee Houston -- Furniture Today, May 26, 2003
I have been involved in import and export for over a quarter of a century. I had just returned from a consulting job in China and stopped by a friend's office for a visit.
He related how he felt his company could no longer compete with Chinese labor costs, and how he had again decided to pare down his manufacturing operations and increase his import program. He was going to continue leading his generations-old company away from manufacturing in America to become a marketer of imports. He said he was going to avoid the larger retailers, as most of them were doing more and more direct importing. He asked what I thought.
I told him that I hated to burst his hopes, but in China I had been asked by a Chinese furniture manufacturer to set up a sales force to call on small to medium-sized retailers in America, the same customers my friend's new strategy was targeting. The Chinese companies were currently selling through manufacturers like him, but felt that their products would be 20% to 25% cheaper in the marketplace if they could sell direct. If many Chinese companies did this, even setting up their own showrooms at the High Point market, it would cut American manufacturers out of the distribution system.
"How long do you think they have been planning this?" my friend asked. I said I thought since shortly after they imported the very first table legs into this country years ago.
The recent slowdown in the American economy, paralleled by an increase in China's manufacturing output, had put more pressure on the Chinese so that they were finally willing to take the chance of being discovered by people like him. He said, "You mean companies like me are dead?" My answer to him and to any company that is simply becoming a marketing front for Asian companies, is that you may well be closed within a few years. Foreign companies have no loyalty to any American manufacturer.
My friend, like many American furniture manufacturers, was in denial. I remember roughly 15 years ago when the first table legs and knocked-down chairs came into this country. The people who sold low-end tables and chairs were the only ones affected. Then the dinette people were put out of business and then, in order, imports attacked higher-end dining, low-end case goods and high-end case goods. Then it was upholstery. Now it is mattresses. The Chinese will do it all.
To stay in business, American factories need to add a lot of value to imported products, or provide exceptional service to dealers, or have a niche market, or manufacture internationally competitive products. If not, they are dead.
Other industries have been in our situation and survived, even grown, as the result of foreign competition. Most people in our industry say our problem is cheap Chinese labor. I say the problem is simply that many leaders in our industry do not know how to tackle this situation effectively.
I once read a study of organizational efficiency done at a business school. A student looked at different kinds of organizations — businesses, sports teams, government agencies and so forth — and concluded that the most inefficient kinds of organizations were armies. One of the committee members reviewing his dissertation asked him, "If armies are so inefficient, how do they win wars?" The student answered, "They fight other armies."
That is how it has been in the furniture industry. We have been competing with other Americans for generations. All American furniture manufacturers deal with similar wage structures, OSHA, pollution laws and fair trade rules. We put our customers' rights high in our agenda. Now, we have been forcibly dragged into an international economy that has few rules. The playing field is not level. Our competitors have no wage, safety or pollution rules, and abide by no universal fair trade agreements.
American industry's first reaction is that everything is stacked against us. That is simply not true. American woodworkers can compete internationally, but will have to start thinking like international businesspeople.
Historically, Americans have been more or less equal in manufacturing ability, and therefore we have concentrated our dollars on sales and marketing. Most of our company presidents have backgrounds in sales, not manufacturing. We have spent our dollars not on manufacturing advancements but on samples and markets. A typical case goods plant changes one third of its line each year. We still concentrate on marketing our way out of problems rather than demanding more from our manufacturing people.
We as an industry have historically thought in terms of a 1% or 2% increase in manufacturing efficiency a year, if that. Along come the Asians, and suddenly we have to think in terms of a 20% decrease in price.
Many companies have tried to compete. Fine old furniture companies that once said they would not import now do. But many of these same companies have not taken the proven routes to improving output — better engineering and programs such as lean manufacturing, which is an approach to identifying and eliminating waste (activities that don't add value) and shortening the time between receiving a customer's order and shipping. Furniture has the fewest engineers per capita of any American industry — less than one truly qualified engineer per 1.4 companies, according to the Department of Labor.
It's worth noting that while labor costs are indeed much lower in China, other costs are often similar. In a cost comparison of product from a Chinese plant and an American plant I worked for, material and overhead costs were similar. Obviously, China's freight cost to U.S. customers is higher. Also, the Chinese overhead would include a broker (whose costs run from as low as 1% to as high as 22%; I used 5% for the example below).
Lumber is costly to the Chinese, with approximately 70% of it imported from the United States and New Zealand. (I have seen three Chinese engineers spend most of one day figuring how to make a pilaster out of chip core covered with a 3/8-inch piece of solid just to get a few bucks of material out of a suite.) This obviously does not apply when one uses Asian woods.
We can draw a number of conclusions from a table (above right) that compares the costs of Chinese and American-made products. First, it pays to buy items rather than groups. Second, the Chinese do not merchandise — taking a lower markup on beds, for instance, and selling accompanying products at higher margins. Also, it's clear the Chinese advantage is greatest on products requiring labor-intensive operations such as hand carving, and lowest on goods produced largely by machines.
One advantage we should be jumping to achieve is reduced shipping time. The Chinese company I used in my cost comparison typically can get product through their plants in three weeks. Many American manufactures still try to have the luxury of six to eight weeks manufacturing time. Therefore, the disadvantage the Chinese have in spending three to four weeks to get across the Pacific is lost. Some retailers will pay more for quick ship and the lower inventory that will give them. Most American manufacturers cannot provide that advantage as they are currently structured.
My final point has to do with a U.S. company for whom I had the pleasure of working. This company went from $7.7 million in sales in 1997 to $22.5 million last year. In 1996–97, this company's executives realized they were in a drastic situation and had to make drastic changes. They decided their furniture was way overbuilt — with the same basic construction as was used in colonial Williamsburg. They removed nonessential materials and simplified their construction techniques. They reduced their part count from 14% to 18% and their material costs by an average of 12%.
This company went to build-to-order. They reduced the time from order entry to the shipping dock to two weeks. An order received this Monday is processed in one hour, and suppliers are notified of what they need to make, and told to deliver it Thursday or Friday. The following Monday, workers start assembling case goods to order. This company has less than two weeks of inventory and over 20 turns on that inventory a year. They have nothing other than this week's shipment in stock. They have quick assembly and less machining than anyone I have ever seen.
We are a capital-intensive industry. Business school textbooks all say that capital-intensive businesses should use their investment to the fullest. For years we have avoided the advice of accountants to run all of our expensive equipment three shifts a day. Our excuse was that labor and supervision were not available. With all the plant closures we have had, that has changed.
Further, we can rethink the way we manage our companies. It is time for the designers to work with the manufacturing people and the people on our production floors to learn to make things better and cheaper. We need to involve furniture retailers in the process also — make them a part of what they sell.
We can find ways to cut selling and administrative expenses. And it is time to quit complaining about the fact that Asian companies do not have OSHA or EPA regulations to impede them, and admit that we would not want to work in the dangerous, polluted conditions of some of the near-sweatshops we are competing against. Maybe some of us should be as bold as to point out some of these working conditions to Mrs. America. It might help change her buying habits.
Teamwork can be another American advantage. Teams are good at solving problems and great for getting buy-in for good ideas. Most Chinese leadership is autocratic, from the top down. Autocratic leadership makes fast decisions, but a 300-person factory can have 300 times the "brain power" if led properly as a team, and can come up with better ideas to remain competitive.
We must face the facts. We are destroying our own economy. We are moving our manufacturing jobs overseas and our talent is following. No jobs here; jobs there. I wonder if a brain drain has started.
We can compete internationally, but we must re-think our direction. We must not try to market our way out of problems, but must instead embrace modern manufacturing techniques. No group of people on earth can out-produce American workers when we are led properly. If we are going to compete in the 21st century's world economy, it is time to think seriously about radical change.
| Wood furniture cost comparison | |||
|---|---|---|---|
| American made* | Chinese made* | % difference | |
| *Costs are as if the product were in a U.S. warehouse, ready to ship to retailers. For the Chinese, shipping is included. | |||
| Bed headboard | $100 | $89 | 11% |
| Nightstand | 95 | 80.22 | 16 |
| Chest | 109 | 88.76 | 19 |
| Entertainment center | 211 | 159.54 | 24 |
| Armoire | 474 | 330 | 30 |
| Rolltop desk | 275 | 181.50 | 34 |
