Latin American sourcing

With a growing industrial base and huge supply of raw materials such as pine, Latin America has emerged as a growing player in furniture

By Thomas Russell -- Furniture Today, March 6, 2005

High Point — When industry officials talk about China, they often speak with a sense of awe at its sudden emergence as a furniture producer.

The growth has taken the industry by storm over the past 10 years with products that often match the quality of furniture once made in the United States. The difference is that China's cheap labor has lowered the price for many goods.

But China is not alone in chasing the U.S. consumer. With a growing industrial base and huge supply of raw materials such as pine, Latin America also has emerged as a growing player.

Brazil and Mexico are the major producers with a combined $685.5 million in exports during the first six months of 2004.

China eclipsed that figure with $4.5 billion in exports during the same period. But other smaller producers in the region are adding to Latin America's strength as a furniture exporter.

Based on the most recent import figures, countries such as Costa Rica, Honduras, Argentina, Bolivia, Chile, Columbia and Uruguay exported $142.4 million during the first six months of 2004, up 19.7% from $118.94 million for the same period in 2003.

When you add Brazil and Mexico, the total shipment volume was $827.9 million during the first six months of 2004, up 25.8% from $657.9 million during the same period in 2003.

That increase is well below China's 45% increase year-over-year, a much more meaningful figure given the total dollar volume. However, it still outpaces a 16% increase worldwide.

From 1999 to 2003, the latest full-year figure available, Mexico's furniture exports to the United States rose from $707.5 million to $836.7 million. Brazil's furniture exports nearly tripled, from $111.2 million to $321.6 million.

This business did not grow overnight. In some cases, companies have imported furniture from Latin America for a lot longer than others have from China.

Pine power

Linon Home Décor Products has been sourcing furniture from Brazil for 20 years. It started out with outdoor furniture, and then added RTA products such as bedroom, entertainment and dining furniture it previously sourced in eastern Europe.

When that area experienced political upheaval in the late 1980s and early '90s, Brazil was the logical alternative, said Linon President Jim Ziozis.

Logistics and proximity to the U.S. market were an obvious advantage. So was the plentiful supply of raw materials.

"One big strength is that it is not China," Ziozis said. "That's not a negative to China. It's just that they (Latin America) are heavy in pine. In China, most of the good pine is imported from New Zealand, Australia, Russia and North America. Your woods there (in Brazil) are just a few miles from the factory."

He also said Brazil has a very good work force and a number of modernized factories, most of which are in the southern Brazil states of Parana, Santa Catarina and Rio Grande do Sul.

Linon deals with 14 Brazilian factories that produce just over half its volume. It also has a warehouse and showroom in southern Brazil.

Case goods, occasional and youth furniture importer Primex has been sourcing in Brazil since the company was incorporated in 1972, said President Stewart Paul. Today, Brazil represents 55% of Primex's business. The rest comes from Argentina, Chile, Peru, Mexico and Columbia.

With a network of more than 100 source factories and 100 employees on the ground in those areas, Primex is as entrenched in Latin America as any single company in the business.

"We don't work anywhere else in the world," Paul said. "We felt there are opportunities there that were being ignored. Everyone was looking to the Far East, and no one was looking at Latin America."

Raw materials such as pine remain a key advantage, Paul said. Another is a very strong work ethic and the industry's experience in serving the European market. That experience, he said, is evident in companies' management style and dealings with customers.

Tailoring product

"I think there are a variety of retailers at different price points interested in Latin America," Paul said, noting the producers have a willingness to produce exclusive products. "But the strongest area for Latin America is the middle of the market. They are able to produce solid-wood product at prices that are affordable."

For instance, Paul said, bunk beds typically retail from $299 to $499, while four-piece bedrooms retail from $499 to $1,999. A dining table and four chairs would range from $399 to $999 and armoires retail from $299 to $1,199.

Kemp Enterprises President William Kemp III also is a strong proponent of Latin America. He has imported parts from Brazil since the 1970s and early '80s and has imported fully assembled furniture from Mexico since 1984. His company has imported fully assembled product from Chile since the early 1990s and from Brazil since the late '90s.

In Kemp's view, one of Mexico's key advantages is logistics. Goods can be shipped from there to U.S. retailers in less than a week. In China, goods are often on the water for at least three weeks.

Mexico also has a highly skilled work force that can produce rustic styles popular among consumers, particularly those in the Southwest and West.

Rustic furniture has been a strong niche for case goods and occasional importer Gonzalez & Associates. The company gets nearly 100% of its product mix out of Mexico.

At one time, Mexican factories used a lot of indigenous Ponderosa pine, a material that helped create the rustic look. In some cases they still do.

But now, more often than not, some use woods imported from the United States, including oak and poplar. Others use Chilean or Brazilian pine.

That is partly because Mexico does not have as good dry kiln capabilities as Brazil and the U.S., said Gus Gonzalez, whose company has its own manufacturing facilities in Mexico.

"We have to bring in pine from Brazil to maintain that consistency," he said.

Mexico's proximity to the U.S. and other Latin American countries also helps ease the flow of those raw materials.

The styles in Mexico and other parts of South America stray toward simpler forms. That trend likely evolved from manufacturers' experience producing bunk beds and youth bedrooms and more contemporary style furniture for the European market.

As a result, products tend to fall within promotional and middle price points. However, as Kemp notes, each factory has very individualized strengths. In some cases, these strengths diversify the mix and place the goods in a higher price point.

Some plants in Mexico also have extensive metal-working capabilities that allow them to produce mixed-media designs.

"We don't do any carving elements at all," said Jeff Winans, president of case goods importer Wood Traditions, which imports 100% of its product from Mexico. "But they do very nice veneer work, bringing a better quality look to a product. Their metal work and veneer work are very strong."

Other plants have strong finishing skills that allow them to produce multi-step and rub-through finishes as well as hand-painted motifs.

Such capabilities are seen at case goods importer Colonial Brazil, which has established a niche in high-end, hand-painted, 18th-century Brazilian and Portuguese reproductions.

Materials are again indigenous to the region, but tend to be in the form of recycled Brazilian walnut and other native hardwoods.

"We are in a unique position because we don't have any competition," said President Luiz Begazo. "What we do is very specific. It can be knocked off, but it can never be the same."

But even with such niches, importers agree that Latin America still faces challenges. In some cases, such as Bolivia, governments have been unstable. In others, including Brazil, currencies have strengthened against the dollar, making exports more expensive. In others, logistics have been a struggle as the shipping industry balances the demand for goods from both China and Latin America.

For Gonzalez, maintaining consistency in finishing remains a headache.

"I have to hand it to the Chinese with regard to what they have been able to do in such a short period of time," he said. "It is amazing. They are formidable competitors."

Building a base

Some successes have occurred thanks to government or federal legislation such as NAFTA, an agreement in the mid-1990s that eliminated duties between North American countries. In the mid-1960s, the maquiladora program was created to attract investment into Mexico.

In Brazil, the government has lessened duties on machinery imported from places like Italy and Germany. That has helped encourage further capital investment in furniture plants, said Eduardo Herscovitz, president of International Furniture Agenciamentos Export, a sourcing agency and case goods importer.

But experts say more must be done to keep these countries competitive.

In Mexico's case, officials say it will need to specialize by finding a niche that is less labor-intensive.

"They need to address the areas they are strongest in and push that product harder into the U.S. market," said Winans, of Wood Traditions. "They can't do things that are as labor-intensive as China can do, but they can ship quality product to the market here on time. They will never dominate China, but they still can grow their business."

The same philosophy holds true for Brazil, which also will never be able to compete with China's low labor costs. In Brazil, for instance, a furniture worker makes between $240 and $350 a month or more.

A U.S. Bureau of Labor of Statistics report estimates that Chinese factory workers average 64 cents an hour. That translates to $112 a month, based on a 44-hour week.

In Mexico, the BLS reports, the average hourly manufacturing wage is $2.48 per hour, or $436 a month. But observers say Mexican pay rates in furniture run higher than that, about half the typical rate earned in the United States.

"The difference between China and Brazil is because of labor costs, but (in Brazil's case) you are paying for qualified, experienced labor," said Larry Geller, president of case goods importer Brazil Furniture. "China advantages if there is a lot of labor involved, but if there is not a lot of labor involved, it (Brazil) can definitely compete."

Others say that Brazil needs to keep current with styles demanded by the U.S. market and continue investing in plant improvements that will help produce those designs.

"They are not as adept at making changes to their factories, mainly because of the lack of capital," said Jeff Holmes, a furniture industry consultant who has been traveling to Mexico since the 1970s and who first went to Brazil in the mid-'80s.

Holmes also believes that Brazil and others should keep an eye on the export of raw materials such as pine to places like China. By keeping a firm hold on those goods, Latin American producers will be able to supply their own plants and remain competitive from a materials cost standpoint.

"Labor as a component of cost is not anywhere near the cost of the materials," Holmes said. "To some degree, Latin America is mortgaging its future by shipping their raw materials out, whether it be wood or hides."

Despite the challenges, importers seem to agree that Latin America remains a viable sourcing location for the foreseeable future.

"In the long term, I don't have any doubt that we are going to become a very important partner with the U.S., not only in furniture, but also business in general," said Herscovitz, of International Furniture.

Importers note it's important for retailers to maintain a diverse sourcing network. For many, Latin America helps accomplish that.

"If you can stay diversified and not have all your eggs in one basket, that's a smart position to be in," said Kemp.